UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-K





x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934





For the
fiscal year ended January 31, 2009


OR


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


OF THE
SECURITIES EXCHANGE ACT OF 1934





For the
Transition Period from____________ to _____________





Commission
file number: 0-8858





THE
PENN 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, including zip code)
              (Registrant’s
      Telephone Number)





Securities
registered pursuant to Section 12(b) of the
Act:  None





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





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


YES o          
NO x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.


YES o           NO
x





Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.


YES x           NO
o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the proceeding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


YES x           NO
o





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):


Large
      accelerated filer  o
                  Accelerated
      filer  oNon-accelerated
      filer  o
                    (Do
      not check if a smaller reporting company)
                  Smaller
      reporting company  x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


YES o           
NO x





The
aggregate market value of the registrant’s voting stock held by nonaffiliates of
the registrant was approximately $20,840,480 as of August 2, 2008, the last
business day of the registrant’s most recently completed second fiscal
quarter.





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.


YES x            NO
o





Common Stock, par value $.01
per share 8,641,676 shares outstanding as of
April 21, 2009








FORM 10-K
INDEX





PAGEPART
      I.Item
                                          1.
                                          
                                          Business
                                          4Item
                                          1A.
                                          
                                          Risk
      Factors
                                          10Item
                                          1B.
                                          
                                          Unresolved
      Staff Comments
                                          14Item
                                          2.
                                          
                                          Properties
                                          14Item
                                          3.
                                          
                                          Legal
      Proceedings
                                          14Item
                                          4.
                                          
                                          Submission
      of Matters to a Vote of Security Holders
                                          15PART
      II.Item
                                          5.
                                          
                                          Market
      for Registrant’s Common Equity, Related StockholderMatters
      and Issuer Purchases of Equity Securities
                                          16Item
                                          6.
                                          
                                          Selected
      Financial Data
                                          18Item
                                          7.
                                          
                                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                          21Item
                                          7A.
                                          
                                          Quantitative
      and Qualitative Disclosures About Market Risk
                                          31Item
                                          8.
                                          
                                          Financial
      Statements and Supplementary Data
                                          32Item
                                          9.
                                          
                                          Changes
      in and Disagreements with Accountants on Accountingand
      Financial Disclosure
                                          61Item
                                          9A.
                                          
                                          Controls
      and Procedures
                                          61Item
                                          9B.
                                          
                                          Other
      Information
                                          62PART
      III.Item
                                          10.
                                          
                                          Directors,
      Executive Officers and Corporate Governance
                                          62Item
                                          11.
                                          
                                          Executive
      Compensation
                                          62Item
                                          12.
                                          
                                          Security
      Ownership of Certain Beneficial Owners and Management andRelated
      Stockholder Matters
                                          62Item
                                          13.
                                          
                                          Certain
      Relationships and Related Transactions and Director
      Independence
                                          62Item
                                          14.
                                          
                                          Principal
      Accountant Fees and Services
                                          62PART
      IV.Item
                                          15.
                                          
                                          Exhibits
      and Financial Statement Schedules
                                          63


- 2
-


SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS





Certain
statements included in this Annual Report on Form 10-K, including without
limitation, statements included in Item 2 - “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” which are not
statements of historical fact, are intended to be, and are hereby identified as,
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995, as amended, reflecting management’s current
analysis and expectations, based on what management believes to be reasonable
assumptions.  These forward-looking statements include statements
relating to our anticipated financial performance and business
prospects.  Statements preceded by, followed by or that include words
such as “believe”, “anticipate”, “estimate”, “expect”, “could”, “may”, and other
similar expressions are to be considered such forward-looking
statements.  Forward-looking statements may involve known and unknown
risks, uncertainties and other factors, which may cause the actual results to
differ materially from those projected, stated or implied, depending on such
factors as:  general economic and business conditions, economic and
competitive uncertainties, our ability to improve operating performance and
effectuate business plans; our ability to operate pursuant to the terms of our
credit facilities and to comply with the terms of our lending agreements or to
amend or modify the terms of such agreements as may be needed from time to time;
our ability to generate cash; our ability to attract and maintain adequate
capital; our ability to refinance our indebtedness; increases in prevailing
interest rates; our ability to obtain trade credit, and shipments and terms with
vendors and service providers for current orders; our ability to maintain
contracts that are critical to our operations; potential adverse developments
with respect to our liquidity or results of operations; competition, including
increased capital investment and promotional activity by our competitors;
availability, location and terms of sites for store development; the successful
implementation of our capital expenditure program; labor relations; labor and
employee benefit costs including increases in health care and pension costs and
the level of contributions to our sponsored pension plans; the result of our
pursuit of strategic alternatives; our ability to pursue strategic alternatives;
changes in strategies; changes in generally accepted accounting principles;
adverse changes in economic and political climates around the world, including
terrorist activities and international hostilities; and the outcome of pending,
or the commencement of any new, legal proceedings against, or governmental
investigations of us.  We caution that the foregoing list of important
factors is not exhaustive.  Accordingly, there can be no assurance
that we will meet future results, performance or achievements expressed or
implied by such forward-looking statements, which are generally required to be
publicly revised as circumstances change, and which we do not intend to
update.





EXPLANATORY
NOTE




This
Annual Report on Form 10-K is for the fiscal year ended January 31, 2009, and
except as expressly indicated otherwise, information in this report speaks as of
such date. This report includes audited financial information for the 52-week
periods ended January 31, 2009 and February 2, 2008, the 53-week
period ended February 3, 2007, and the 41-week period ended
January 28, 2006, unaudited financial information for the 11-week
period ended April 16, 2005 and the fiscal year ended
January 29, 2005, as well as management’s discussion of our results of
operations since 2007.  This report does not include, and we have
not otherwise filed or furnished to the SEC, audited financial information for
the 11-week period ended April 16, 2005 or the fiscal year ended
January 29, 2005.  As discussed further in this report, we
emerged from Chapter 11 bankruptcy reorganization effective April 13,
2005.


- 3
-





PART
I





ITEM
1.        BUSINESS





General





We are
one of the leading food retailers in the northeastern United
States.  We operate 83 stores in Pennsylvania, upstate New York,
Vermont, and New Hampshire under the “Bi-Lo” (12 stores), “P&C”
(48 stores), and “Quality” (23 stores) trade names.  We also
operated a Wholesale food distribution business serving over 100 independent
stores and other independent wholesale customers, which was sold in its entirety
on December 21, 2008, to C&S Wholesale Grocers, Incorporated
(“C&S”).  As a result of the sale of our Wholesale food
distribution business during our fiscal year 2009 (the fiscal year ended January
31, 2009), our Retail food business is our sole operating segment as of January
31, 2009.  Our consolidated revenues from continuing operations for
the fiscal year ended January 31, 2009, were approximately $872.3
million.  Our fiscal year ends each year on the Saturday closest to
January 31.





Our
Retail food business currently operates in communities with diverse economies
and demographics.  We seek to generate high sales volume by offering a
wide variety of branded, store-branded, and high-quality fresh products at
competitive prices.  The average per store revenue in our continuing
operations for the fiscal year ended January 31, 2009, was
approximately $9.9 million.  Our stores are generally clustered
geographically within our marketing area to help provide economies of scale in
advertising, distribution and operations management.  We give ongoing
attention to the décor and format of our stores and try to tailor our stores’
product mix to the preferences of the local communities served.  We
have an ongoing remodeling plan in our target markets to modernize the
appearance and layout of our existing stores.





Our
stores offer a wide variety of fresh foods within our meat, seafood, produce,
deli, and bakery departments.  Complementing our grocery, frozen food,
and dairy offerings is a full line of health and beauty care and general
merchandise items.  Many of our locations feature pharmacies and
full-service floral departments which add convenience and value to our
customers’ shopping experience.  Recently renovated stores and stores
that have adopted our new “fresh” concept and décor include a “Wall of Value”
display area featuring high-quality, value-oriented products with price
comparison displays to help customers make informed, money-saving
choices.  Our stores’ strong ties to their local communities, combined
with a full service offering tailored to the local demographics of each store,
help position the stores to meet customers’ needs for high-quality, fresh food
products in a pleasant and clean retail environment.  Our stores have
an average square footage of approximately 35,000 square feet, and are
conveniently located and generally modern.





We
operate four distribution warehouses that are each strategically located in the
vicinity of the Company’s core store portfolio.  We maintain a full
trucking fleet that delivers perishable and non-perishable goods to our
stores.  As a result of an expanded procurement agreement with C&S
beginning on October 12, 2008, substantially all retail inventory is supplied by
C&S to our warehouses for distribution to our retail stores.  The
inventory located in the distribution warehouses is owned by C&S and we do
not take ownership of the inventory until it is shipped to our retail
stores.





The
Wholesale food distribution business, which was sold in December 2008, supplied
independently operated stores with a wide variety of food and non-food products
from our distribution centers in New York and Pennsylvania.  Customers
of the Wholesale food distribution business were primarily located in upstate
New York and western Pennsylvania.  Revenues for the Wholesale food
distribution business during fiscal year 2009, for the period ended December 21,
2008, were approximately $204.3 million, which represented 17.9% of our
revenues for the period, before being reclassified as discontinued operations in
the consolidated financial statements as presented in Item 8.





The Penn
Traffic Company was incorporated in the State of Delaware on April 22,
1992.  Our principal executive offices are at 1200 State Fair
Boulevard, Syracuse, New York, 13221, telephone
(315) 453-7284.


- 4
-


Operating
Segments





Our
business has historically been classified into two operating segments: Retail
food business and Wholesale food distribution business.  On December
21, 2008, the Wholesale food distribution business was sold in its entirety to
C&S, resulting in one remaining operating segment as of January 31,
2009.  As the Wholesale food distribution business was a part of our
business for the majority of the fiscal year ended January 31, 2009, we have
presented our historical operating segments below (in millions):




Fiscal
      Year
                                          
                                          
                                          Fiscal
      Year
                                          
                                          
                                          Fiscal
      Year2009
                                          
                                          
                                          2008
                                          
                                          
                                          2007Revenues:Retail
      food business
                                          
                                          $
                                          926.7
                                          
                                          
                                          $
                                          1,001.0
                                          
                                          
                                          $
                                          1,068.2Wholesale
      food distribution business
                                          
                                          
                                          204.3
                                          
                                          
                                          
                                          210.1
                                          
                                          
                                          
                                          217.3Other
                                          
                                          
                                          9.3
                                          
                                          
                                          
                                          8.4
                                          
                                          
                                          
                                          8.4Less:
      discontinued operations (1)
                                          
                                          
                                          (268.0
                                          )
                                          
                                          
                                          (323.6
                                          )
                                          
                                          
                                          (340.7
                                          )Total
      revenues from continuing operations
                                          
                                          $
                                          872.3
                                          
                                          
                                          $
                                          895.9
                                          
                                          
                                          $
                                          953.2Operating
      income (loss):Retail
      food business
                                          
                                          $
                                          29.6
                                          
                                          
                                          $
                                          32.5
                                          
                                          
                                          $
                                          27.0Wholesale
      food distribution business
                                          
                                          
                                          7.3
                                          
                                          
                                          
                                          6.0
                                          
                                          
                                          
                                          3.6Other
                                          
                                          
                                          (58.8
                                          )
                                          
                                          
                                          (53.7
                                          )
                                          
                                          
                                          (47.4
                                          )Less:
      discontinued operations (1)
                                          
                                          
                                          (0.6
                                          )
                                          
                                          
                                          (2.8
                                          )
                                          
                                          
                                          (1.9
                                          )Total
      operating loss from continuing operations
                                          
                                          $
                                          (22.5
                                          )
                                          
                                          $
                                          (18.0
                                          )
                                          
                                          $
                                          (18.7
                                          )Interest
      expense
                                          
                                          $
                                          6.3
                                          
                                          
                                          $
                                          5.7
                                          
                                          
                                          $
                                          6.2Reorganization
      and other expenses
                                          
                                          
                                          0.5
                                          
                                          
                                          
                                          5.4
                                          
                                          
                                          
                                          1.0Loss
      from continuing operations before income taxes
                                          
                                          $
                                          (29.3
                                          )
                                          
                                          $
                                          (29.1
                                          )
                                          
                                          $
                                          (25.9
                                          )





(1)  Wholesale
food distribution sales and costs are included in discontinued operations with
certain retail stores closed during the fiscal year.  Wholesale food
distribution amounts are presented above for informational purposes only and do
not represent their classification for reporting purposes in the consolidated
financial statements in Item 8.





Retail
Food Business





We have
identified and commenced the implementation of a two-tier strategy across all
three trade names in order to segment our stores into two distinct formats,
Conventional and Fresh, with a strong value orientation.  Our
Conventional format offers many of the conveniences that our customers have
grown to expect within a traditional supermarket.  Our Fresh format
offers all of the features of our Conventional format, as well as an enhanced
array of products, value-added services, and meal solutions that meet the needs
of today’s more time-pressed shopper.





Our Fresh
stores have unique features, including distinctively branded floral shops;
expanded service offerings; cafés offering brick oven pizza; store-made subs,
sandwiches, entrees, side dishes and high quality meal solutions; and expanded
in-store bakeries offering a wide array of artisan breads and
pastries.





We also
offer a variety of our own private-label brands that focus on delivering
exceptional consumer value. These private-label brands bear several labels and
are available across all departments in our stores, from grocery, dairy, and
frozen to health and beauty care and general merchandise.  Our store
brands include Food Club, Full Circle, Valu Time, Top Care, and Paws, which
offer our consumers a choice in value and consistency when compared to the
national brands.  Recently, due in part to the ongoing economic
downturn, we have focused on expanding our private-label offerings to our
customers.  Sales of our private-label products as a percentage of
total sales (“Private Label Penetration”) increased to 18.3% in fiscal year
2009, from 16.7% in fiscal year 2008.





Wholesale
Food Distribution Business





As part
of our Wholesale food distribution business, we licensed on a royalty-free basis
the use of our “Riverside”, “Bi-Lo”, and “Big M” trade names to
independently-owned supermarkets that, in turn, were required to maintain
certain quality and other standards.  These licensed independent
stores used us as their primary wholesaler and also received advertising,
accounting, merchandising, and retail support services from us.  We
also acted as a food distributor to other independent accounts.  We
continue to receive rent from 15 of the licensed independent
operators.  In addition to contributing to our operating results, our
Wholesale food distribution business enabled us to leverage fixed and semi-fixed
procurement and distribution costs over additional sources of
revenue.


- 5
-





Transitional
Services – Asset Purchase Agreement of Wholesale Food Distribution
Business





As part
of the multiple agreements associated with the Asset Purchase Agreement dated
December 21, 2008, we will for a period of time continue to generate cash flows
that are associated with the Wholesale food distribution
business.  Specifically, under a transition services agreement, we
have agreed to provide certain logistical services to the customers of our
former Wholesale food distribution business for a period of one to three years
following the sale.  In addition, under a third-party logistics
agreement, we have agreed to provide certain administrative, transportation,
warehousing, and distribution services to C&S for a period of at least two
years following the transaction.





Store
Operations and Development





During
fiscal year 2009, we continued to focus our strategy on enhancing our
return on net assets, evaluating our portfolio of retail stores and holdings,
and repurposing or eliminating underperforming assets.  During the
first quarter of fiscal year 2009, we sold one location to a non-competing
business and closed five underperforming stores.  In the second
quarter of fiscal year 2009, we sold three locations to independent operators
and closed one underperforming store.  In the fourth quarter, we sold
two locations to a competitor and closed eight underperforming stores. These
disposals were made to eliminate unproductive assets from our store portfolio,
which allows us to reallocate and focus our resources on our remaining
stores.  We continually evaluate individual store performance in order
to determine the appropriate portfolio of operating
stores.


We also
closed or sold 10 pharmacy locations during fiscal year 2009.  As part
of our overall business strategy, we determined that these assets would create
more value to our shareholders through closure or liquidation, by freeing up
capital for other spending or capital structure management efforts.





The
following table sets forth, for the periods indicated, our store dispositions,
store development and remodeling activity and square footage:




Fiscal
      Year
                                
                                
                                Fiscal
      Year
                                
                                
                                Fiscal
      Year
                                
                                
                                Fiscal
      Year2009
                                
                                
                                2008
                                
                                
                                2007
                                
                                
                                2006Number of Stores:Opened
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                2
                                
                                
                                
                                0Closed
                                
                                
                                20
                                
                                
                                
                                3
                                
                                
                                
                                5
                                
                                
                                
                                1Major
      remodels
                                
                                
                                1
                                
                                
                                
                                0
                                
                                
                                
                                12
                                
                                
                                
                                3Minor
      remodels
                                
                                
                                6
                                
                                
                                
                                9
                                
                                
                                
                                5
                                
                                
                                
                                9Stores
      open at year end
                                
                                
                                83
                                
                                
                                
                                103
                                
                                
                                
                                106
                                
                                
                                
                                109Retail Square Footage:Less
      than 30,000 SF
                                
                                
                                56
                                
                                
                                
                                68
                                
                                
                                
                                70
                                
                                
                                
                                7230,000
      up to 41,999 SF
                                
                                
                                22
                                
                                
                                
                                29
                                
                                
                                
                                30
                                
                                
                                
                                3142,000
      up to 51,999 SF
                                
                                
                                4
                                
                                
                                
                                5
                                
                                
                                
                                5
                                
                                
                                
                                4At
      least 52,000 SF
                                
                                
                                1
                                
                                
                                
                                1
                                
                                
                                
                                1
                                
                                
                                
                                2Total
                                
                                
                                83
                                
                                
                                
                                103
                                
                                
                                
                                106
                                
                                
                                
                                109





We own 17
stores and lease the remaining stores through capital and operating
leases.  We also recognized sub-lease rental revenue totaling $2.3
million during fiscal year 2009.





Major
and Minor Store Remodels




During
the first quarter of fiscal year 2009, our senior management enhanced our Fresh
store format concept and completed our newest Fresh store, Cazenovia P&C
Foods.  This Fresh concept is expected to become the basis for our
future Fresh locations.  In addition, during fiscal year 2009 our
senior management determined that certain of our stores would benefit from minor
enhancements to their existing physical structure, enabling us to enhance the
effectiveness of our marketing and merchandising program.  These
enhancement efforts, or minor remodels, can include interior paint, décor, and
other repairs, installation of new or used cases, or in some instances entire
center store resets and refocused store-wide merchandising
plans.


- 6
-





Store
Management





Each of
our stores is managed by a store manager and a co-manager.  Each
receives a base salary and is eligible to receive a bonus based on his or her
individual store’s overall performance and on meeting other established
criteria.  The store manager and co-manager are supported by
department and other store personnel who utilize their skills and training to
provide exceptional customer service.  Each of our stores has
individual department managers for grocery, meat, produce and, where applicable,
bakery, service deli and full-service seafood.  Store managers report
to one of six district managers, each of whom is responsible for an average of
thirteen stores.





Customer
Service





We
consider customer service and customer confidence to be critical to the success
of our business strategy.  Our strategy, to provide courteous and
efficient customer service, is a focus of our senior management team and is
embraced and implemented by employees at all levels of our company.





Restructuring/Re-engineering





Organizational
Effectiveness and Efficiency





In May
2008, we engaged an outside consulting firm, Karabus Management (“Karabus”),
whose expertise is in process re-engineering for the retail grocery industry, to
assist us in re-engineering certain processes in the finance and operational
accounting departments, and ultimately reduce costs.  The
re-engineering performed in these departments resulted in streamlined processes
that led to improved efficiencies through the introduction of technology and
cost savings from a rightsizing of personnel.





The
initial Karabus engagement also identified cost savings and other related
opportunities for financial performance improvement in other departments in the
organization.  As a result, during the summer of 2008 we expanded the
Karabus engagement to include other areas within the organization, including
operations at the store level (marketing/merchandising, supply chain, etc.), in
order to further reduce costs within the organization.  Together, we
have reviewed various costs (such as utilities, labor scheduling, shrink, etc.)
and determined that certain areas of improvement exist.  We expect to
realize additional efficiencies and cost savings during our fiscal year 2010 as
a result of implementing these initiatives.





Merchandising





Our
merchandising strategy is designed to create a comprehensive and satisfying
shopping experience that focuses on customer value and service with a variety of
quality products and conveniences.  Our management believes that this
strategy fosters a loyal customer base and builds a reputation for providing
quality and value across a variety of specialty departments.





Our
stores carry a broad array of quality meats, produce and other
perishables.  Additionally, many of our stores offer fresh fruit cut
on site by an associate available to assist customers.  Our weekly
advertisements, weekly flyers, in-store signage, and radio advertisements all
emphasize the freshness and quality of our perishable products, notably meat,
produce, bakery and deli offerings.  Our management believes today’s
time-constrained customer appreciates the ability to one-stop shop and find a
broad array of products, including time-saving prepared
meals.  Accordingly, a core competency of our merchandising strategy
is to design stores that offer a one-stop shopping experience.  To
pursue this strategy, we include a variety of specialty departments, general
merchandise, and health and beauty care products.


A
selection of prepared foods and home meal solutions are featured at certain
stores throughout the deli, bakery, and meat departments to provide customers
with easy meal alternatives that can be enjoyed at home, at work, or in a
sit-down café that is conveniently located near the deli department in newer
stores.  Many stores offer daily selections of value-added fully
prepared meal items, such as rotisserie chickens, pork, fried chicken, meat
loaf, prepared salads and desserts.  The bakery offers an expanded
selection of fresh baked cakes, pastries and self-serve donut and bagel
selections.  We bake most items, including bread, cakes, donuts, and
other pastries, fresh on site throughout each shopping day.  We also
provide our customers with an expanded selection of frozen foods to meet
increasing demands of convenience-minded shoppers   The floor
plans of some of our newer stores feature a “power aisle” that includes an
impressive run of specialty departments, such as produce, prepared foods,
delicatessen, and bakery.


- 7
-





We intend
to continue to increase sales of our private-label brands, which typically carry
higher margins than comparable branded products.  We believe our
current sales of private-label brand products represent a lower percentage of
national branded sales when compared to some of our competitors.  Our
private labels cover a broad range of products throughout the store, such as
milk, bread, organic products, soft drinks, and canned goods.  The
Company promotes its store brands through print advertisements and by displaying
comparison pricing with national brands in large displays and on store shelf
tags.  In addition to increasing margins, we believe that
private-label brand sales help promote value and loyalty to the
customers.





Our
management seeks to maintain a reputation for providing consistently high levels
of welcoming, friendly service, quality merchandise, savings opportunities,
overall value, and a commitment to the neighborhoods and  communities
we serve.  We employ various advertising and promotional strategies to
reinforce the quality, value, and appeal of our products and
services.  We promote these core values using all of the traditional
advertising vehicles including radio, television, direct mail, newspaper, and
sponsorship.  Further, our Wild Card Loyalty Program provides us with
customer-specific shopping behavior data that enables us to identify,
understand, and efficiently promote to shopper preferences.  This
approach results in enhanced shopper satisfaction and loyalty.  During
fiscal year 2009, we began offering WOW Buys, a controlled markdown program
featuring exceptionally deep cut feature prices available to shoppers each week
with every additional $10 purchase.  Our Top Shopper Rewards direct
mail program introduced this year features a $5 savings reward contingent on a
future $50 single order purchase total. These mailings also include more than a
dozen vendor-funded cents-off coupons.  Both programs are designed to
increase average order size while  rewarding our shoppers for
continuing to choose our stores.   We also aggressively utilize
Electronic Marketing Enterprise (“EME”) front-end technology to offer our own as
well as vendor-funded “Instant Bonus Savings Deals” featuring added value or
savings based on the shoppers’ purchase of bundled, multi-item promotional
offers.  This  is also designed to increase items per basket
and average order size while enhancing our value and savings image.





Purchasing
and Distribution





In fiscal
year 2008, we entered into an agreement with C&S facilitating the
outsourcing of procurement of general merchandise and health and beauty care
products.  Early in fiscal year 2009, we entered into another
agreement with C&S to outsource the procurement of produce.  Later
in fiscal year 2009, we amended the previous agreements and expanded the
outsourcing arrangement to include virtually all procurement of warehouse
product to C&S.  We continue to operate four distribution centers
in New York and Pennsylvania to distribute our product to retail stores, and our
personnel continue to receive, manage and transport
product.  Warehouse inventory is the property of C&S until loaded
and sealed onto delivery trucks.  In December 2008, we announced the
sale of our Wholesale food distribution business to C&S.





These
transactions have enabled us to focus strictly on our retail business, giving us
purchasing power through C&S’s large volume discounts as well as access to
additional variety of products, and provided a stronger financial platform for
our future growth.  C&S will provide substantially all of our
purchasing requirements for fiscal year 2010, with the exception of certain
direct-store-delivery products including national branded beverages, snacks and
bread products.  Historically, TOPCO Associates, Inc. (“TOPCO”), a
national product purchasing cooperative comprised of 62 regional supermarket
chains and other food distributors, has accounted for a large portion of our
purchases; 18.3%, 16.7%, and 15.5% for fiscal years 2009, 2008, and 2007,
respectively, including many of our staple private-label
brands.  C&S now procures our requirements directly from TOPCO,
maintaining continuity for our staple private-label brands.





Approximately
three-fourths of the merchandise offered in our retail stores is distributed
from our warehouses by our fleet of tractors, refrigerated trailers and dry
trailers.  By continuing to utilize our centrally-located distribution
facilities and trucking fleet, we continue to control our supply
chain.  Our primary New York distribution facility is a leased
514,000 square foot dry grocery facility in Syracuse, New
York.  We also lease a 241,000 square foot distribution center
for perishable products in Syracuse.  Our primary Pennsylvania
distribution facility is a leased 390,000 square foot dry grocery facility
in DuBois, Pennsylvania.  We also lease a 195,000 square foot
distribution center for perishable products in DuBois.  Penn Traffic
reduces its overall distribution costs by capitalizing on back-haul
opportunities (i.e., contracting to transport merchandise on return trips on
trucks that would otherwise be empty after initial
delivery).  Merchandise not delivered from our warehouses is delivered
directly to the stores by manufacturers, distributors, vendor drivers, and sales
representatives who deliver products such as beverages, snack foods, and bakery
items.





During
the early portion of fiscal year 2009, our management implemented a rigorous
inventory management program focused on reducing on hand inventory, and
specifically addressing the slower-moving items within our retail
locations.  A detailed implementation plan was presented to our store
management teams and their district managers to help ensure that all locations
were able to meet inventory goals without impacting our ability to drive
profitable sales growth.


- 8
-





Employees





Labor
costs and their impact on product prices are important competitive factors in
the supermarket industry.  As of January 31, 2009, we had
approximately 6,200 total employees, of which approximately 5,800 were hourly
and 400 were salaried.  Our management announced a salary freeze
for all salaried personnel, excluding non-union store management personnel, for
fiscal year 2010 and a mandatory one-week furlough for all non-union
workers.  These measures are intended to better prepare the Company as
the uncertainty surrounding the overall economy continues.  We are
continuing to analyze other alternatives to contain and reduce our costs of
doing business.





Approximately
87.3% of our employees are unionized, with 5,038, or 92.7%, of our unionized
employees being members of the United Food and Commercial Workers (“UFCW”)
union. An additional 7.3% of our union employees belong to the International
Brotherhood of Teamsters (“Teamsters”). Approximately 12.7% of our employees are
not members of a collective bargaining unit.  We are party to fourteen
collective bargaining agreements with locals of the UFCW and
Teamsters.  The Company successfully negotiated four collective
bargaining agreements during fiscal year 2009.  As of January 31,
2009, six bargaining agreements are scheduled to expire during the next 12
months.  We believe our relations with our employees and their unions
are generally good.





Competition





The food
retailing business is highly competitive, generally characterized by narrow
profit margins, and may be affected by general economic conditions and
trends.  The number of competitors and the degree of competition
encountered by our stores vary by location.  Increasingly over the
last few years, competition for consumers’ food dollars has intensified due to
the addition of and increases in food offerings by many types of retailers,
including specialty grocers, drug and convenience stores, gas stations, national
general merchandisers and discount retailers, warehouse stores, and super
centers.  We compete with several multi-regional, regional and local
supermarket chains, convenience stores, stores owned and operated and otherwise
affiliated with large food wholesalers, unaffiliated independent food stores,
warehouse clubs, discount drug store chains, discount general merchandise
chains, “supercenters” (combination supermarket and general merchandise stores),
and other retailers.  We anticipate continued format innovation during
fiscal year 2010.


Seasonality





Our
supermarket business is subject to slight seasonal variances due to the
influence of major holidays as well as winter and summer tourism.  Our
stores near Lakes Erie and Ontario as well as Central New York’s Finger Lakes
region benefit from summer tourism.  Several of our stores located
near ski and winter sports attractions benefit from winter tourism
trade.  Sales are traditionally lower in our first quarter with a
slight lift related to the Easter holiday.  In the second and third
quarters, sales are affected by tourism at certain locations, with Memorial Day
and July Fourth holidays also providing opportunities for sales
increases.  Our fourth quarter sales are typically higher as a result
of Thanksgiving and Christmas.





Government
Regulation





Our food
and drug business requires us to hold various licenses and to register certain
of our facilities with state and federal health, drug and alcoholic beverage
regulatory agencies.  By virtue of these licenses and registration
requirements, we are obligated to observe certain rules and
regulations.  A violation of such rules and regulations could result
in a suspension or revocation of these licenses or registrations, which could
require us to close the affected stores until the violation is
remedied.  Most of our licenses require periodic
renewals.  We have experienced no material difficulties with respect
to obtaining, retaining, or renewing our licenses and
registrations.





Available
Information





We are
required to file annual, quarterly and current reports, proxy statements, and
other information with the Securities and Exchange Commission under the
Securities Exchange Act of 1934.





You may
read and copy our filings at the Public Reference Room of the SEC, Room 1024,
located at 100 F Street NE, Washington, D.C. 20549.  You may obtain
information about the Public Reference Room by calling the SEC at
1-800-SEC-0330.  In addition, the SEC maintains an Internet website
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically through the IDEA (Interactive Data
Electronic Applications) System, available on the SEC’s website (www.sec.gov).


- 9
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ITEM
1A.     RISK FACTORS





The
supermarket industry is highly competitive.  If we are unable to
compete effectively, our financial condition and results of operations could be
materially affected.





The
supermarket industry is highly competitive and characterized by high inventory
turnover, high capital intensity and narrow profit margins.  The
number and type of competitors vary by location and include:





·
            multi-regional
      and regional supermarket chains;


·
            independent
      and specialty grocers;


·
            value-oriented
      stores offering private label goods and other low-cost
      offerings;


·
            drug
      and convenience stores; and


·
            “alternative
      format” food stores, such as specialty food stores, retail drug stores,
      national general merchandisers and discount retailers, membership clubs,
      warehouse stores, and supercenters.





Our
principal competitors include national and regional supermarket chains, which
compete with us on the basis of location, quality of products, service, price,
product variety, and store condition.  Increasingly competitive
markets have generally made it difficult for grocery store operators to achieve
comparable store sales gains, while “Every Day Low Price” (“EDLP”) and other
value-oriented competitors make it difficult to pass along food price increases
as price adjustments.  Because sales growth has been difficult to
attain, our competitors have attempted to maintain market share through
increased levels of promotional activities, discount pricing, and private label
offerings, creating a more difficult environment in which to consistently
increase year-over-year sales gains.





In
addition, most of our “traditional” and "nontraditional" competitors are not
unionized and have lower labor costs, which allow them to take measures that
could adversely affect our competitive position.





We face
increased competitive pressure in a number of our markets from existing
competitors and from the threatened entry by one or more major new
competitors.  Some of our competitors have greater financial resources
and have less indebtedness than we have, and could use these resources to take
measures which could adversely affect our competitive position.





Our
business, financial condition, or results of operations could be adversely
affected by competitive factors, including product mix and pricing changes that
may be made in response to competition from existing or new
competitors.  From time to time, the relative strength of our
competitors can change depending on prevailing market conditions.





Our
business and results of operations may be sensitive to economic conditions that
impact consumer spending.





Our
business and results of operations may be sensitive to changes in overall
economic conditions that impact consumer spending, including discretionary
spending.  Future economic conditions affecting disposable consumer
income such as employment levels, energy prices, business conditions, interest
rates, inflation, and tax rates could reduce consumer spending or cause
consumers to shift their spending away from our product quality and service
offering to a more focused price-based offering.  A general reduction
in the level of discretionary spending or shifts in consumer discretionary
spending to our competitors could adversely affect our growth and
profitability.  We are also subject to increases in interchange fees
charged to us for accepting debit and credit cards.  The increased use
of these forms of payment and increases in the fees charged to us could have an
impact on our earnings.





We
may experience significant fluctuations in our comparable store
sales.





Our
comparable store sales in the future could fluctuate or be lower than our
historical average for many reasons, including general economic trends,
increased competition, price changes in response to competitive factors, shifts
in demographic patterns and local economic conditions, changes in traffic
patterns, and possible supply shortages.  Our results of operations
may be materially impacted by fluctuations in our comparable store sales as it
becomes more difficult to leverage expenses at a lower level of
sales.





Our
stores are concentrated in the Northeastern United States, making us susceptible
to economic downturns, natural disasters and other adverse conditions or
catastrophic events in that region.





Our
stores are located in Pennsylvania, upstate New York, Vermont, and New
Hampshire.  As a result, we are vulnerable to economic downturns in
those areas, in addition to those that may affect the country as a whole, as
well as natural and other catastrophic events that may impact these
regions.  Changes in economic conditions within our operating regions,
including demographics and employment conditions, may adversely affect our sales
and earnings.  We may be adversely affected by these events to a
greater extent than our competitors whose operations extend outside of these
regions.  These events may adversely affect our sales, which may lead
to lower earnings and may also adversely affect our future growth and
expansion.


- 10
-





Changes
in vendor promotions or allowances, including the way vendors target their
promotional spending, and our ability to effectively manage these programs,
could significantly impact our margins and profitability.





We engage
in a wide variety of promotional programs cooperatively with our
vendors.  The nature of these programs and the allocation of funds
among them evolve over time as the parties assess the results of specific
promotions and plan for future promotions.  These programs require
careful management in order for us to maintain or improve margins while at the
same time increasing sales for us and for our participating
vendors.  A reduction in overall promotional spending or a shift in
promotional spending away from certain types of promotions that we have
historically utilized could have a significant impact on our gross profit margin
and profitability.  Our ability to anticipate and react to changes in
promotional spending by, among other things, planning and implementing
alternative programs that are expected to be mutually beneficial to our vendors
and us, will be an important factor in maintaining or improving margins and
profitability.  If we are unable to effectively manage these programs,
it could have a material adverse effect on our results of operations and
financial condition.





Our
debt instruments include financial and other covenants that may limit our
operating flexibility and may affect our future business strategies and
operating results.





Covenants
in the documents governing our outstanding or future debt, including our credit
facilities, or our future debt levels, could limit our operating and financial
flexibility.  Our ability to respond to market conditions and
opportunities as well as capital needs could be constrained by the degree to
which we are leveraged, by changes in our availability or cost of capital, and
by contractual limitations on the degree to which we may, without the consent of
our lenders, take actions such as engaging in mergers, acquisitions or
divestitures, incurring additional debt, making capital expenditures,
rationalizing underperforming assets and making investments, loans or
advances.  If needs or opportunities were identified that would
require additional financial resources, obtaining those additional resources
could increase our borrowing costs, further reduce financial flexibility,
require alterations in our strategies and affect future operating
results.  Additionally, particularly given the current uncertainty in
the credit markets, there is no guarantee that we would be able to acquire
additional financial resources, or to refinance existing debt, on terms that are
acceptable to us.





A
significant portion of our employees are covered under collective bargaining
agreements.  Our relationships with our employees and their unions,
including the possibility of labor disputes or work stoppages in connection with
future negotiations, could have an adverse impact on our financial
results.





Labor
costs, which are largely an extension of the results of collective bargaining
negotiations with our unions, traditionally have had a significant impact upon
the pricing of our products in the highly-competitive supermarket
industry.  Of our hourly workforce, 94% are members of
unions.  All salaried employees and 6% of our hourly workforce are not
members of a collective bargaining unit.





Because
we are party to fourteen collective bargaining agreements, with six collective
bargaining agreements expiring in fiscal year 2010, it is anticipated that
the unions which are parties to these agreements will seek improvements for
their members with respect to, among other things, healthcare benefits, pension
benefits, and wage rates.  As a result, operating costs concerning our
unionized employees may increase over the next several
years.  Further, our ability to control pension costs will be impacted
by the performance of the stock market and the Pension Protection Act
of 2006, which might require additional funding costs into the
multi-employer pension plans into which we contribute.





We
may experience technology failures which could have a material adverse effect on
our business.





We use
large, complex information technology systems that are important to our business
operations.  Although we have a disaster recovery plan and have
installed security programs and procedures, the security of our technology
systems could be compromised and technology failures and system disruptions
could occur.  Any of these events could cause us to incur significant
costs, including payments to third parties for damages.


- 11
-





Losses
as a result of our owning, leasing and developing real estate may impair our
ability to focus on and expand our core business as desired.





As a
result of our real estate holdings and leases, we are subject to varying degrees
of risk and liability generally incident to the ownership, use and development
of real estate.  These risks and liabilities include, among other
things:





·
            fluctuations
      in value caused by adverse changes in national, regional, and local
      economic conditions and local real estate market conditions (such as an
      oversupply of or a reduction in demand for retail space in the
      area);




·
            costs
      of compliance with zoning, environmental, tax, and other laws and
      regulations;




·
            real
      estate development risks, such as incorrect cost and occupancy estimates,
      non-availability of financing and the need for mortgage lender or property
      partner approvals for certain
    expansion  activities;




·
            the
      perceptions of customers and tenants and prospective tenants of the
      safety, convenience, and attractiveness of our
  properties;




·
            the
      lack of liquidity of real estate investments and our ability to sell,
      lease, or sublease any of our properties for cash in a timely
      fashion;




·
            failure
      to promptly renew leases;




·
            competition
      from comparable properties;




·
            the
      occupancy rate of our properties;




·
            tenant
      and subtenant defaults and the costs of enforcing our
    rights;




·
            the
      effects of any bankruptcies or insolvencies of major tenants or
      subtenants;




·
            increasing
      operating costs which may not be passed through fully to tenants or
      subtenants; and




·
            fluctuations
      in mortgage interest and lease
rates.





A failure
to adequately manage these risks and liabilities could adversely affect our
revenues, profits and available cash and could have a material adverse effect on
our business, financial condition, or results of operations.





Several
portions of our properties are mortgaged to secure payment of indebtedness
outstanding under our credit facilities.  If we are unable to meet our
debt obligations, we could sustain losses as a result of foreclosures on the
properties by our lenders.  In addition, if it becomes necessary or
desirable for us to dispose of one or more of the mortgaged properties, we might
not be able to obtain a release of the lien on such mortgaged properties without
payment of the associated debt.  The foreclosure of a mortgage or
default of a loan on a property or the inability to sell a property could
adversely affect our business, financial condition, or results of
operations.  These considerations could make it difficult for us to
sell properties, even if a sale were in our best interests.





We
maintain property insurance, difference in conditions insurance, national flood
insurance (where applicable), general liability insurance, directors’ and
officers’ insurance, and excess insurance coverage.  At leased and
mortgaged locations we maintain any of these lines of coverage that we are
contractually obligated to maintain.  At owned locations, we maintain
all of these lines of coverage.  We maintain large deductibles and/or
large layers of self-insurance on several of these lines of
coverage.





We are
subject to federal, state, and local laws and regulations relating to zoning,
land use, environmental protection, work place safety, public health, beer and
wine sales, and pharmaceutical sales.  A number of states and local
jurisdictions regulate the licensing of stores, including beer license
grants.  In addition, under certain local regulations, we are
prohibited from selling beer in certain of our stores.





We
are affected by fluctuating utility, fuel, and other operating
costs.





Fluctuating
fuel costs can adversely affect the operating costs for our fleet of tractors
and trailers that distribute goods from our warehouses and distribution
facilities to all of our stores and can adversely affect our monthly store
utility expenses.  We may not be able to recover these rising utility
and fuel costs through increased prices charged to our customers.  In
fiscal year 2010, we entered into agreements to fix the costs of a significant
portion of certain of our utility and fuel costs.


- 12
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We
may be held liable for environmental damages with regard to our current and
former properties, regardless of the lawfulness of our activities on such
properties.





Our
operations subject us to various laws and regulations relating to the protection
of the environment, including those governing the management and disposal of
hazardous materials and the cleanup of contaminated sites.  Under
certain environmental laws, such as the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, also known as CERCLA or the Superfund
law, and similar state statutes, responsibility for the entire cost of cleanup
of a contaminated site can be imposed upon any current or former site owners or
operators, or upon any party who sent waste to the site, regardless of the
lawfulness of the original activities that led to the
contamination.  From time to time we have been named as one of many
potentially responsible parties at Superfund sites, although to date our share
of liability has typically been small.  We believe we are currently in
substantial compliance with applicable environmental
requirements.  However, future developments such as more aggressive
enforcement policies, new laws or discovery of unknown conditions may require
expenditures that may have a material adverse effect on our business and
financial condition.





Customer
concerns regarding food safety may adversely affect our business.





We could
be adversely affected if our customers lose confidence in the quality and safety
of certain products in our stores.  Negative publicity regarding these
concerns, whether valid or not, may discourage customers from buying our
products.  Any loss of confidence on the part of our customers would
be difficult and costly to re-establish.  As such, any issue regarding
the safety of our products could have a substantial and adverse effect on our
operations.





Our
operating results may be impacted by variability in self-insurance liability
estimates.





We are
self-insured for workers’ compensation and general liability claims up to set
retention amounts, after which we maintain excess insurance
coverage.  Liabilities are maintained based on independent actuarial
estimates of aggregate liability claims incurred and an estimate for incurred
but not reported claims.  Our insurance accruals reflect certain
actuarial assumptions and management judgments that are made based on factors
that are subject to change.  Any significant variation in these
factors could cause a material change in our self-insurance liabilities and our
operating results.





There
is no existing trading market for our common stock.





Our
common stock is currently quoted on an over-the-counter (“OTC”) exchange, and
there is no assurance that an active trading market for our common stock will
develop.  We are not currently applying for a listing on any national
securities exchange.  Accordingly, no assurance can be given that a
holder of our common stock will be able to sell such securities in the future or
as to the price at which any such sale would occur.  If a trading
market were to develop, the liquidity of the market for such securities, and the
prices at which such securities would trade, will depend upon many factors,
including the number of holders, investor expectations, and other factors beyond
our control.  In addition, shares of our common stock were issued to
certain pre-petition creditors as part of our plan of
reorganization.  Some of these holders may prefer to liquidate their
investment rather than hold it on a long-term basis, which may create an initial
imbalance in the market if and when one was to develop.


Our
estimates and measurement of pension obligations, net periodic benefit cost and
minimum funding requirements for defined benefit plans are subject to market
volatility that can result in significant variances between estimated and actual
results.





The
determination of our single-employer noncontributory defined benefit pension
plans’ pension obligation and net periodic benefit cost is dependent, in part,
on our selection of certain assumptions used by our actuaries in calculating
these amounts on an annual basis.  These assumptions include the
weighted-average discount rate at which obligations can effectively be settled,
the expected long-term rate of return on assets, and certain employee related
factors, such as retirement age and mortality.





We
believe that our current assumptions used to estimate plan obligations and
annual expense are appropriate; however, as current economic conditions have
been and continue to be volatile, with the recent months reaching unprecedented
levels, differences between actual results and expected results based on certain
of our previous assumptions could lead to changes that materially affect our
pension obligations and adversely affect our future pension
expense.  Actual results that differ from our assumptions are
accumulated in stockholders’ equity and amortized over future periods into the
Consolidated Statement of Operations.  Also, the amount of
contributions made to our single-employer noncontributory benefit plans will be
affected by the performance of investments made by the plans, the extent to
which trustees of the plans reduce the costs of future service benefits, minimum
funding requirements required by ERISA and the Pension Protection Act of
2006.


- 13
-





The
results of the ongoing governmental investigations arising out of certain of our
accounting practices prior to our emergence from bankruptcy in 2005 may have an
adverse effect on us.





The
United States Attorney Office for the Northern District of New York (the “USAO”)
and the Securities and Exchange Commission (“SEC”) have been conducting
investigations relating to certain of the Company’s accounting practices and
policies prior to the Company’s emergence from bankruptcy in April
2005.  The Company has been cooperating with these investigations and
has produced documents and made Company employees available for interviews as
requested.  On September 30, 2008 and October 28, 2008, the Company
reached agreements with the SEC and USAO, respectively, resolving these parallel
investigations. Each agreement requires the Company to continue to cooperate in
these ongoing investigations, and places certain affirmative obligations on the
Company, as described in Item 3.  If the Company fails to satisfy its
ongoing obligations under these agreements, the SEC and/or the USAO may decide
to initiate civil and criminal actions against the Company, which could lead to
penalties, sanctions, and increased legal expense.





Our
purchases are concentrated primarily with one vendor.





We
purchase substantially all of our retail merchandise from a single vendor,
C&S.  Any material change in C&S’s method of operation or a
termination or material modification of our contractual relationships with
C&S could have an adverse impact on our supply chain, sales, and
earnings.  Additionally, an adverse change in C&S’s results of
operations could have an adverse affect on our results of
operations.  If our procurement arrangement with C&S is
terminated, we may be unable to locate alternative, comparable sources from
which to purchase our retail merchandise, which could increase our costs and
adversely affect our results of operations.





ITEM
1B.     UNRESOLVED STAFF COMMENTS





None





ITEM
2.        PROPERTIES





We follow
the general industry practice of leasing the majority of our retail store
locations.  We own 17 and lease 66 of the stores that we
operate.  The leased stores are held under leases expiring from
calendar years 2009 to 2020, excluding option periods.  In
addition, we sublease 15 stores to independent operators and sublease all or a
portion of 18 of our current and closed retail locations.  During the
upcoming fiscal year 2010, the leases on fourteen of our retail stores will
expire; thirteen of these lease agreements have renewal options.  The
Company expects that it will renew the leases associated with stores that are
currently operating.


We own
two shopping centers that contain company-owned or independent
stores.  We lease operating distribution centers in Syracuse, New York
and DuBois, Pennsylvania, and a closed distribution facility in Jamestown, New
York.





Also see
Item 1 - “Business - Store Operations and Development” for additional
information concerning our properties.





ITEM
3.        LEGAL PROCEEDINGS





The
United States Attorney Office for the Northern District of New York (the “USAO”)
and the Securities and Exchange Commission (“SEC”) have been conducting
investigations relating to certain of the Company’s accounting practices and
policies prior to the Company’s emergence from bankruptcy in April
2005.  The Company has been cooperating with these investigations and
has produced documents and made Company employees available for interviews as
requested.





On
September 17, 2007, the SEC filed civil fraud charges against the Company’s
former Chief Marketing Officer and former Vice President, Non-Perishables
Marketing alleging that such individuals orchestrated a scheme to inflate the
Company’s income and other financial results by prematurely recognizing
promotional allowances received from vendors from approximately the second
quarter of fiscal year 2001 through at least the fourth quarter of fiscal year
2003. These officers had been terminated by the Company in February
2006.  The SEC's complaint further alleges that the individuals
deceived the Company’s accounting personnel to carry out their fraudulent scheme
and aided and abetted the Company’s violations of the Securities Exchange Act of
1934 and rules thereunder.  In addition, on the same date, the USAO
announced that a federal grand jury has returned an indictment against the
above-mentioned individuals on related criminal charges.


- 14
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On
September 30, 2008, the Company reached a settlement with the SEC with respect
to its ongoing investigation.  Without admitting or denying the
allegations in the SEC’s complaint, the Company agreed to settle the charges by
consenting to a permanent injunction against any future violations of the
federal securities laws. The SEC imposed no fines or monetary penalties on the
Company. As part of the settlement, the Company has hired an independent
examiner who will provide annual reports to the SEC, the USAO and the Company’s
board on, among other things, the Company’s promotional-allowance internal
controls and financial reporting. The examiner will serve for three
years.  Other settlement terms included the Company’s consent to
reform its internal controls and policies and procedures related to promotional
allowances, as well as implementation of a telephone hotline for associates and
vendors to anonymously notify the company of misconduct related to promotional
allowances.





On
October 28, 2008, the Company entered into a non-prosecution agreement with the
USAO.  Under the agreement, the USAO has agreed not to prosecute the
Company for any crimes committed by its employees between 2001 and 2004 relating
to the matters that were the subject of the USAO’s previously announced
investigation of, among other things, the Company’s accounting policies,
practices and related conduct.  The USAO’s obligations under the
agreement are subject to a number of conditions, including the
Company’s:





·acceptance of
responsibility for the conduct of its employees between 2001 and
2004;


·adoption of
the remedial measures required under, and compliance with the terms of, the
previously announced settlement of the SEC’s investigation of the Company,
including its compliance with specified federal securities laws;
and


·provision of
full cooperation to the USAO and Federal Bureau of Investigation with respect to
their ongoing investigations through the conclusion of any and all related
criminal trials.





If
the USAO determines that the Company has deliberately given false, incomplete or
misleading information under the agreement, or if the Company commits a crime or
otherwise knowingly, intentionally and materially violates any provision of the
agreement, then the Company may be subject to prosecution for any federal
criminal violation of which the USAO has knowledge, including any federal
criminal violation relating to the matters subject to the USAO’s investigation.
The Company agreed that any such prosecutions that are not time-barred by the
applicable statute of limitations on the date of the agreement may be commenced
against the Company notwithstanding the expiration of the statute of limitations
after the date of the agreement.





The
Company has incurred significant legal costs associated with these matters to
date and may continue to do so.  These costs are recorded in selling
and administrative expenses as incurred.





On March
12, 2008, the Company commenced an action in the Supreme Court for the State of
New York for the County of Onondaga seeking declaratory judgment to resolve a
dispute over the lease term for commercial property pertaining to a store that
was closed in 2007.  The Company is seeking an order declaring the
proper and effective lease termination date to be November 30, 2009, rather than
June 30, 2017, the date asserted by the landlord.  The Company
estimates that the increased rent expense for the additional lease term asserted
by the landlord to be approximately $2.8 million.  At present, the
Company is unable to estimate the likelihood of an unfavorable outcome and
accordingly, no liability has been recorded for this contingency.





ITEM
4.        SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS





No matter
was submitted to a vote of security holders during the fourth quarter of fiscal
year 2009.


- 15
-





PART
II





ITEM
      5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY
SECURITIES


Since
August 23, 2005, our common stock has been quoted on an unsolicited basis on the
Pink Sheets under the symbol “PTFC.PK.”  All shares of our common
stock that were outstanding prior to April 13, 2005, the effective date of
our plan of reorganization, were cancelled as part of our emergence from Chapter
11 bankruptcy protection.





The
following table sets forth the quarterly high and low bid information for our
common stock for the two most recently completed fiscal years.  Such
over-the-counter market quotations reflect inter-dealer prices, without retail
markup, mark-down, or commission, and may not necessarily represent actual
transactions.




High
                    
                    
                    LowQuarter
      Ended January 31, 2009
                    
                    $
                    1.51
                    
                    
                    $
                    0.10Quarter
      Ended November 1, 2008
                    
                    
                    3.00
                    
                    
                    
                    0.50Quarter
      Ended August 2, 2008
                    
                    
                    7.20
                    
                    
                    
                    2.50Quarter
      Ended May 3, 2008
                    
                    
                    10.00
                    
                    
                    
                    5.00Quarter
      Ended February 2, 2008
                    
                    
                    17.00
                    
                    
                    
                    5.25Quarter
      Ended November 3, 2007
                    
                    
                    23.00
                    
                    
                    
                    15.00Quarter
      Ended August 4, 2007
                    
                    
                    24.25
                    
                    
                    
                    21.00Quarter
      Ended May 5, 2007
                    
                    
                    21.00
                    
                    
                    
                    15.00Quarter
      Ended February 3, 2007
                    
                    
                    15.50
                    
                    
                    
                    11.50





Shares of
our common stock were held by 676 stockholders of record on January
31, 2009.





There
have been no repurchases of shares of our common stock during the fiscal
year.





We have
not paid a cash dividend to common stockholders since we emerged from bankruptcy
and we do not anticipate paying a cash dividend in the foreseeable
future.





On
December 13, 2007, we issued 10,000 shares of Series A Convertible
Preferred Stock, par value $0.01 per share, to entities affiliated with three of
our common stockholders for an aggregate purchase price of
$10 million.  The preferred shares accrue dividends at a rate of
8% per annum and are convertible into shares of our common stock at a conversion
price of $16.12 per share.  As of January 31, 2009, no preferred stock
shares had been converted.  The preferred stock is redeemable at the
Company’s option after December 13, 2009, provided the market price of our
common stock exceeds $20.96 per share for 20 consecutive days.  See
Note 13 to our consolidated financial statements for further
information.


- 16
-





PERFORMANCE
GRAPH





The
following graph compares the cumulative total stockholder return of our common
stock, the cumulative total return of the Standard & Poor’s 500 Stock
Index (“S&P 500 Index”) and the cumulative total return of the
Standard & Poor’s Retail Food Index (“S&P Food Index”) for the
period from April 16, 2005 through January 31, 2009.










4/16/2005
                      
                      
                      1/28/2006
                      
                      
                      2/3/2007
                      
                      
                      2/2/2008
                      
                      
                      1/31/2009Penn
      Traffic
                      
                      $
                      100
                      
                      
                      $
                      100
                      
                      
                      $
                      100
                      
                      
                      $
                      47
                      
                      
                      $
                      5S&P
      500 Index
                      
                      
                      100
                      
                      
                      
                      112
                      
                      
                      
                      127
                      
                      
                      
                      122
                      
                      
                      
                      61S&P
      Food Index
                      
                      
                      100
                      
                      
                      
                      114
                      
                      
                      
                      138
                      
                      
                      
                      126
                      
                      
                      
                      39


Assumes
$100 invested on April 16, 2005, in Penn Traffic Stock, the S&P 500 Index,
and the S&P Food Index (also assumes reinvestment of
dividends).





- 17
-





ITEM
6.    SELECTED FINANCIAL DATA





Consolidated
Five-Year Financial Summary





Set forth
below is our selected historical consolidated financial data for the five fiscal
years ended January 31, 2009.  As a result of the consummation of
our plan of reorganization, we adopted fresh-start reporting as of
April 16, 2005.  The accounting periods ended on or prior to
April 16, 2005, have been designated “Predecessor Company” and the
periods subsequent to April 16, 2005, have been designated “Successor
Company”.





In
accordance with the implementation of fresh-start reporting, our assets,
liabilities, and stockholders’ equity have been revalued as of
April 16, 2005.  In addition, as a result of the
consummation of our plan of reorganization, the amount of our indebtedness was
substantially reduced.  Accordingly, our financial statements for
periods after April 16, 2005, are not comparable to our financial
statements for periods ended on or prior to such date.





The
selected historical consolidated financial data for the 52-week periods ended
January 31, 2009 and February 2, 2008, the 53-week period ended
February 3, 2007, and the 41-week period ended
January 28, 2006, are derived from our consolidated financial
statements, which have been audited by Eisner LLP, independent
accountants.  The Predecessor Company’s selected historical
consolidated financial data for the 11-week period ended
April 16, 2005, and the 52-week period ended January 29, 2005,
are derived from our unaudited consolidated financial statements.  The
selected historical consolidated financial data for the Successor Company should
be read in conjunction with our consolidated financial statements and related
notes included within Item 8.




(Audited)
                                      
                                      
                                      (Unaudited)Successor
      Company
                                      
                                      
                                      Predecessor
      Company52
      Weeks
                                      
                                      
                                      52
      Weeks
                                      
                                      
                                      53
      Weeks
                                      
                                      
                                      41
      Weeks
                                      
                                      
                                      11
      Weeks
                                      
                                      
                                      52
      WeeksEnded
                                      
                                      
                                      Ended
                                      
                                      
                                      Ended
                                      
                                      
                                      Ended
                                      
                                      
                                      Ended
                                      
                                      
                                      Ended(In
      thousands of dollars,
                                      
                                      January
      31,
                                      
                                      
                                      February
      2,
                                      
                                      
                                      February
      3,
                                      
                                      
                                      January
      28,
                                      
                                      
                                      April
      16,
                                      
                                      
                                      January
      29,except
      per share data)
                                      
                                      2009
                                      
                                      
                                      2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006
                                      
                                      
                                      2005
                                      
                                      
                                      2005Revenues
                                      
                                      $
                                      872,302
                                      
                                      
                                      $
                                      895,948
                                      
                                      
                                      $
                                      953,196
                                      
                                      
                                      $
                                      741,835
                                      
                                      
                                      $
                                      262,647
                                      
                                      
                                      $
                                      1,270,290Costs
      and operating expensesCost
      of sales
                                      
                                      
                                      605,315
                                      
                                      
                                      
                                      617,149
                                      
                                      
                                      
                                      671,345
                                      
                                      
                                      
                                      521,521
                                      
                                      
                                      
                                      192,000
                                      
                                      
                                      
                                      942,021Selling
      and administrative expenses
                                      
                                      
                                      286,022
                                      
                                      
                                      
                                      295,955
                                      
                                      
                                      
                                      299,991
                                      
                                      
                                      
                                      221,249
                                      
                                      
                                      
                                      71,121
                                      
                                      
                                      
                                      310,781Gain
      on sale of assets
                                      
                                      
                                      (1,970
                                      )
                                      
                                      
                                      (1,689
                                      )
                                      
                                      
                                      (2,158
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Loss
      on store and distribution center closings (1)
                                      
                                      
                                      420
                                      
                                      
                                      
                                      2,029
                                      
                                      
                                      
                                      2,700
                                      
                                      
                                      
                                      520
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Asset
      impairment charge (2)
                                      
                                      
                                      5,081
                                      
                                      
                                      
                                      547
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Operating
      (loss) income
                                      
                                      
                                      (22,566
                                      )
                                      
                                      
                                      (18,043
                                      )
                                      
                                      
                                      (18,682
                                      )
                                      
                                      
                                      (1,455
                                      )
                                      
                                      
                                      (474
                                      )
                                      
                                      
                                      17,488Interest
      expense (3)
                                      
                                      
                                      6,259
                                      
                                      
                                      
                                      5,705
                                      
                                      
                                      
                                      6,243
                                      
                                      
                                      
                                      6,515
                                      
                                      
                                      
                                      1,755
                                      
                                      
                                      
                                      12,144Gain
      on extinguishment of debt (4)
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (182,831
                                      )
                                      
                                      
                                      -Reorganization
      and other expenses (5)
                                      
                                      
                                      500
                                      
                                      
                                      
                                      5,365
                                      
                                      
                                      
                                      1,020
                                      
                                      
                                      
                                      1,023
                                      
                                      
                                      
                                      71,117
                                      
                                      
                                      
                                      17,134(Loss)
      income from continuingoperations
      before income taxes
                                      
                                      
                                      (29,325
                                      )
                                      
                                      
                                      (29,113
                                      )
                                      
                                      
                                      (25,945
                                      )
                                      
                                      
                                      (8,993
                                      )
                                      
                                      
                                      109,485
                                      
                                      
                                      
                                      (11,790
                                      )Income
      tax expense (benefit) (6)
                                      
                                      
                                      4,745
                                      
                                      
                                      
                                      114
                                      
                                      
                                      
                                      128
                                      
                                      
                                      
                                      200
                                      
                                      
                                      
                                      (23,945
                                      )
                                      
                                      
                                      251(Loss)
      income from continuingoperations
                                      
                                      
                                      (34,070
                                      )
                                      
                                      
                                      (29,227
                                      )
                                      
                                      
                                      (26,073
                                      )
                                      
                                      
                                      (9,193
                                      )
                                      
                                      
                                      133,430
                                      
                                      
                                      
                                      (12,041
                                      )Gain
      (loss) from discontinuedoperations,
      net of taxes (7)
                                      
                                      
                                      16,473
                                      
                                      
                                      
                                      (12,481
                                      )
                                      
                                      
                                      (1,877
                                      )
                                      
                                      
                                      4,495
                                      
                                      
                                      
                                      (4,346
                                      )
                                      
                                      
                                      (11,916
                                      )Net
      (loss) income
                                      
                                      $
                                      (17,597
                                      )
                                      
                                      $
                                      (41,708
                                      )
                                      
                                      $
                                      (27,950
                                      )
                                      
                                      $
                                      (4,698
                                      )
                                      
                                      $
                                      129,084
                                      
                                      
                                      $
                                      (23,957
                                      )Net
      loss per share - basic and diluted (8)
                                      
                                      $
                                      (2.13
                                      )
                                      
                                      $
                                      (4.92
                                      )
                                      
                                      $
                                      (3.29
                                      )
                                      
                                      $
                                      (0.55
                                      )
  No
      dividends on common stock have been paid during the past five fiscal
      years.  Per share data is not presented for the periods ended
      on or prior to April 16, 2005 because of a general lack of comparability
      as a result of fresh start reporting and our significantly
      different capital structure after emergence from
      bankruptcy.
  Balance
      sheet data:Total
      assets
                        
                        $
                        193,714
                        
                        
                        $
                        262,449
                        
                        
                        $
                        307,467
                        
                        
                        $
                        325,391
                        
                        
                        $
                        414,579
                        
                        
                        $
                        394,225Total
      debt (including capital leases)
                        
                        
                        45,596
                        
                        
                        
                        60,817
                        
                        
                        
                        65,154
                        
                        
                        
                        51,252
                        
                        
                        
                        67,473
                        
                        
                        
                        156,201Stockholders'
      equity (deficit) (9)
                        
                        
                        36,087
                        
                        
                        
                        69,175
                        
                        
                        
                        92,725
                        
                        
                        
                        118,799
                        
                        
                        
                        -
                        
                        
                        
                        (133,606
                        )Other
      data:EBITDA
      (10)
                        
                        
                        3,788
                        
                        
                        
                        3,058
                        
                        
                        
                        4,897
                        
                        
                        
                        15,796
                        
                        
                        
                        (66,804
                        )
                        
                        
                        23,152Adjusted
      EBITDA (11)
                        
                        
                        11,736
                        
                        
                        
                        22,668
                        
                        
                        
                        18,633
                        
                        
                        
                        18,871
                        
                        
                        
                        N/A
                        
                        
                        
                        N/ADepreciation
      and amortization (12)
                        
                        
                        22,829
                        
                        
                        
                        26,242
                        
                        
                        
                        25,925
                        
                        
                        
                        18,112
                        
                        
                        
                        4,712
                        
                        
                        
                        21,985LIFO
      provision
                        
                        
                        585
                        
                        
                        
                        2,719
                        
                        
                        
                        1,528
                        
                        
                        
                        1,457
                        
                        
                        
                        75
                        
                        
                        
                        813Capital
      expenditures
                        
                        $
                        5,653
                        
                        
                        $
                        7,879
                        
                        
                        $
                        22,926
                        
                        
                        $
                        20,533
                        
                        
                        $
                        4,148
                        
                        
                        $
                        21,244


- 18
-





Notes





(1)
            Loss
      on store and distribution center closings represents costs required to be
      accrued under SFAS 146, “Accounting for Costs Associated with Exit or
      Disposal Activities”, and primarily represents the present value of future
      operating lease payments we are contractually required to make that relate
      to stores and distribution centers we have ceased using in our continuing
      operations.




(2)
            Statement
      of Financial Accounting Standard No. 144 requires 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 fiscal year 2009, we recorded an asset
      impairment charge of $5.1 million, related primarily to write-downs of
      certain assets of closed stores included within continuing
      operations.




(3)
            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 $2.3 million and $11.0 million for the
      11-week period ended April 16, 2005, and fiscal year 2005,
      respectively.




(4)
            The
      gain on extinguishment of debt for the 11-week period ended April 16,
      2005 consists of our extinguishment of the (i) allowed claims of our
      unsecured creditors, including trade claims, and (ii) Cash Balance Pension
      Plan assumed by the Pension Benefit Guaranty Corporation (“PBGC”) and the
      former senior notes, which were exchanged primarily for shares of our
      common stock.




(5)
            During
      fiscal year 2008, reorganization expense consisted of
      $ 0.5 million of professional fees and $4.8 million
      associated with a proposed acquisition that was not
      consummated.  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 accumulated other comprehensive loss related to the Cash
      Balance Pension Plan, which was recognized in income on termination of the
      plan upon assumption thereof by the PBGC.  For fiscal year 2005,
      the reorganization expenses consisted of professional fees related to the
      bankruptcy filing, loss on asset disposals, and severance paid in
      connection with the reorganization.




(6)
            For fiscal year
      2009,income
      tax expense from continuing operations includes a reclassification of $9.5
      million of deferred tax expense related to prior year unrecognized
      actuarial gains.  We had a net
      operating loss carryforward for federal and state income tax purposes of
      approximately $68.7million
      available to offset future taxable income
      through 2028.In providing the
      valuation allowance, no reversal of the taxable temporary difference
      arising from a portion of LIFO inventory was considered to occur during
      such period as the period in which such reversal may occur is not
      presently determinable.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
      accumulated other comprehensive loss.  The tax provisions for
      fiscal years 2008 and 2007, the 41-week period ended January 28, 2006, and
      fiscal year 2005 were 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.




(7)
            The
      gain from discontinued operations of $16.5 million, net of tax expense of
      $10.6 million, in fiscal year 2009 reflects the operating results and gain
      on disposal related to the sale of the Wholesale food distribution
      business segment, as well as the results of operations, loss on disposal,
      and asset impairments related to the closure or sale of certain retail
      stores.  The loss from discontinued operations of $12.5 million
      in fiscal year 2008 reflects the operating results and loss on disposal
      related to the closure of Penny Curtiss Bakery, as well as
      reclassification items identified as discontinued operations during fiscal
      year 2009.  Discontinued operations for fiscal year 2007 and the
      41-week period ended January 28, 2006, consists of reclassifications for
      the items noted above.  For the 11-week period ended
      April 16, 2005, and the fiscal year 2005, the loss from
      discontinued operations reflects operating results and (gains) losses on
      disposals of Big Bear Stores and other stores, which were closed or sold
      in connection with our
reorganization.




(8)
            Net
      loss per share for fiscal years 2009 and 2008 is based on the loss
      available to common stockholders after adjusting for preferred stock
      dividends.




(9)
            As
      of April 16, 2005, stockholders’ equity was zero upon our emergence
      from bankruptcy.




- 19
-





(10)
            EBITDA
      is operating (loss) income from continuing operations less reorganization
      and other expenses, and before interest, taxes, depreciation and
      amortization, asset 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 our 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 our 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 (loss) income to
      EBITDA:




(Audited)
                    
                    
                    (Unaudited)Successor Company
                    
                    
                    Predecessor Company52 Weeks
                    
                    
                    52 Weeks
                    
                    
                    53 Weeks
                    
                    
                    41 Weeks
                    
                    
                    11 Weeks
                    
                    
                    52 WeeksEnded
                    
                    
                    Ended
                    
                    
                    Ended
                    
                    
                    Ended
                    
                    
                    Ended
                    
                    
                    Ended(In thousands of dollars)
                    
                    January 31,
                    
                    
                    February 2,
                    
                    
                    February 3,
                    
                    
                    January 28,
                    
                    
                    April 16,
                    
                    
                    January 29,2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2005Operating
      (loss) income
                    
                    $
                    (22,566
                    )
                    
                    $
                    (18,043
                    )
                    
                    $
                    (18,682
                    )
                    
                    $
                    (1,455
                    )
                    
                    $
                    (474
                    )
                    
                    $
                    17,488Reorganization
      and other expenses
                    
                    
                    (500
                    )
                    
                    
                    (5,365
                    )
                    
                    
                    (1,020
                    )
                    
                    
                    (1,023
                    )
                    
                    
                    (71,117
                    )
                    
                    
                    (17,134
                    )Depreciation
      and amortization (12)
                    
                    
                    21,188
                    
                    
                    
                    23,200
                    
                    
                    
                    23,071
                    
                    
                    
                    16,817
                    
                    
                    
                    4,712
                    
                    
                    
                    21,985Asset
      impairment charge
                    
                    
                    5,081
                    
                    
                    
                    547
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -LIFO
      provision
                    
                    
                    585
                    
                    
                    
                    2,719
                    
                    
                    
                    1,528
                    
                    
                    
                    1,457
                    
                    
                    
                    75
                    
                    
                    
                    813EBITDA
                    
                    $
                    3,788
                    
                    
                    $
                    3,058
                    
                    
                    $
                    4,897
                    
                    
                    $
                    15,796
                    
                    
                    $
                    (66,804
                    )
                    
                    $
                    23,152




(11)
            Adjusted
      EBITDA is EBITDA before certain expenses considered non-recurring and
      transitional in nature.  They include a) reorganization
      expenses; b) a proposed acquisition that was not consummated;
      c) substantial catch-up and start-up Sarbanes-Oxley compliance costs,
      audit and other one-time professional fees; d) legal fees associated with
      the previously disclosed investigations by the SEC and the USAO which
      began prior to our emergence from bankruptcy; e) net (gain) loss on
      asset sales and f) certain other expenses.  Below is a detailed
      table that sets forth the reconciliation of EBITDA to Adjusted
      EBITDA.




(Unaudited)52 Weeks
                  
                  
                  52 Weeks
                  
                  
                  53 Weeks
                  
                  
                  41 WeeksEnded
                  
                  
                  Ended
                  
                  
                  Ended
                  
                  
                  Ended(In thousands of dollars)
                  
                  January 31,
                  
                  
                  February 2,
                  
                  
                  February 3,
                  
                  
                  January 28,2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006EBITDA
                  
                  $
                  3,788
                  
                  
                  $
                  3,058
                  
                  
                  $
                  4,897
                  
                  
                  $
                  15,796Reorganization
      and other expenses:Proposed
      acquisition that was not consummated in fiscal year 2008
                  
                  
                  48
                  
                  
                  
                  4,796
                  
                  
                  
                  -
                  
                  
                  
                  -Chapter
      11 reorganization costs
                  
                  
                  452
                  
                  
                  
                  569
                  
                  
                  
                  1,020
                  
                  
                  
                  1,049500
                  
                  
                  
                  5,365
                  
                  
                  
                  1,020
                  
                  
                  
                  1,049Selling
      and administrative expenses:Professional
      fees
                  
                  
                  5,202
                  
                  
                  
                  7,029
                  
                  
                  
                  1,546
                  
                  
                  
                  -Closed
      store reserve set-up
                  
                  
                  420
                  
                  
                  
                  2,030
                  
                  
                  
                  2,536
                  
                  
                  
                  520Fixed
      asset policy change
                  
                  
                  -
                  
                  
                  
                  1,354
                  
                  
                  
                  -
                  
                  
                  
                  -SEC
      legal costs
                  
                  
                  2,702
                  
                  
                  
                  1,240
                  
                  
                  
                  4,122
                  
                  
                  
                  2,111Engagement
      costs
                  
                  
                  -
                  
                  
                  
                  962
                  
                  
                  
                  819
                  
                  
                  
                  -(Gain)
      loss on asset disposals
                  
                  
                  (1,970
                  )
                  
                  
                  781
                  
                  
                  
                  263
                  
                  
                  
                  (605
                  )Severance
                  
                  
                  1,363
                  
                  
                  
                  537
                  
                  
                  
                  1,600
                  
                  
                  
                  -Other
                  
                  
                  (269
                  )
                  
                  
                  312
                  
                  
                  
                  1,830
                  
                  
                  
                  -7,448
                  
                  
                  
                  14,245
                  
                  
                  
                  12,716
                  
                  
                  
                  2,026Adjusted
      EBITDA
                  
                  $
                  11,736
                  
                  
                  $
                  22,668
                  
                  
                  $
                  18,633
                  
                  
                  $
                  18,871




(12)
              Depreciation
      and amortization within our Consolidated Five-Year Financial Summary
      includes expense relating to both continuing operations and discontinued
      operations.  In reconciling operating loss to EBITDA,
      depreciation and amortization includes only expense relating to continuing
      operations, as discontinued operations is excluded from operating
      loss.


- 20
-





ITEM 7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIALCONDITION
      AND RESULTS OF OPERATIONS





Management’s
discussion and analysis of financial condition and results of operations is
comprised of the following sections:





1.
            Overview


·
            Introduction


·
            Business
      Strategy


·
            Critical
      Accounting Policies





2.
            Results
      of Operations


·
            Overview


·
            Financial
      Results





3.
            Liquidity
      and Capital Resources


·
            Overview


·
            Financial
      Results





4.
            Impact
      of New Accounting Pronouncements





5.
            Off-Balance
      Sheet Arrangements





6.
            Contractual
      Obligations and Commitments





7.
            Certain
      Trends and Uncertainties





Overview





Introduction





The Penn
Traffic Company and its subsidiaries (the “Company”) are engaged in the retail
food business.  As of January 31, 2009, we operated
83 stores under the “P&C”, “Quality”, and “Bi-Lo” banners in upstate
New York, Pennsylvania, Vermont, and New Hampshire.  We service these
retail stores through four distribution centers.  Prior to December
21, 2008, we also operated a Wholesale food distribution business that serviced
independent stores.  On December 21, 2008, we completed the sale of
our Wholesale food distribution business segment to
C&S.


Business
Strategy





Our
primary objective is to improve our long-term financial performance and enhance
the in-store experience of our customers.  Under the direction of our
senior management, we have focused on rebuilding our core
business.  This means re-establishing basic disciplines and
reemphasizing and instilling a much stronger profitable growth culture around
sales and margin.  Thirty-four specific tactical initiatives were
identified and combined to form our Initiative
Portfolio.  Designed to increase sales and margin, reduce
costs, rebuild our infrastructure, and enable future business growth, the Initiative Portfolio includes
the following key components:





·
            Reduce
      center store and fresh store shrink – containing shrink
      cost


·
            Signature
      product sales initiative – developing store specific
      fresh category products


·
            Mix
      category targets – enhancing sales on high margin
      categories


·
            Private
      label plan – leveraging
      existing private label items and rolling out new
    items


·
              Minor
      remodels – targeting
      stores that benefit from minor enhancements·
              Reclamation
      process management – improving the process of
      returning outdated or damaged product to vendors for
    credit


·
            Supply
      initiative – containing
      supply costs by standardizing
items


·
              Disposition
      of underperforming assets– continually evaluating our
      asset  portfolio for underperforming
    assets




- 21
-


Critical
Accounting Policies





Critical
accounting policies are those accounting policies that are important to the
portrayal of our financial condition and which require management’s most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently
uncertain.  Our significant accounting policies are summarized in Note
2 to the consolidated financial statements.





We
believe the following accounting policies to be critical and could result in
materially different amounts being reported under different conditions or using
different assumptions.





Basis
of Presentation





As
discussed within “Fresh-Start Basis” in Note 2 to our consolidated financial
statements, we emerged from Chapter 11 bankruptcy reorganization on
April 13, 2005.  For financial reporting purposes, we accounted
for the consummation of our plan of reorganization as of the close of business
on April 16, 2005.  In accordance with Statement of Position
90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy
Code” (“SOP 90-7”), we have applied fresh-start reporting as of the close of
business on April 16, 2005, which has resulted in significant changes
to the valuation of certain of our assets and liabilities, and to our
stockholders’ equity.  In connection with the adoption of fresh-start
reporting, a new entity has been deemed to be created for financial reporting
purposes.  For purposes of the discussion of the results of
operations, the 52-week periods ended January 31, 2009 and
February 2, 2008, the 53-week period ended February 3, 2007,
and 41-week period ended January 28, 2006, are audited and presented
for comparison purposes.





Store
Closing Costs





Store
closing costs are recorded in accordance with Statement of Financial Accounting
Standard No. 146, “Accounting for Costs Associated with Exit and Disposal
Activities,” (“SFAS 146”).  We record a liability for the
estimated future cash flows (including future lease commitments, net of
estimated cost recoveries) and miscellaneous closing costs.  Future
cash flows are estimated based on our knowledge of the market in which the
closed stores are located.  The estimates of future cash flows are
then discounted to present value, based on the credit-adjusted risk-free rate of
interest.  These estimates of discounted future cash flows could be
affected by changes in real estate markets, other economic conditions, and the
interest rate used in such calculations.  Any one-time termination
benefits are recognized at the time the benefits are communicated to the
employees.  Other related costs are recognized in the period when the
liability is incurred.





Impairment
of Long-Lived Assets





In
accordance with Statement of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), we review our
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be
recoverable.  The carrying value of an asset is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset.  In estimating future cash
flows, management considers historical performance and assesses the effect of
projected changes in competition, maturation of new stores and store remodels,
merchandising and marketing strategies, and general market
conditions.  No assurance can be given that the actual future cash
flows will be sufficient to recover the carrying value of long-lived
assets.





In the
event that the carrying value of an asset is both not recoverable and exceeds
fair value, the asset is written down to its fair value.  Fair values
are determined either by management, based on management’s knowledge of local
real estate markets and the value of equipment utilized in the supermarket
industry, or by an independent third-party valuation firm.  Any
reductions in the carrying value of an asset resulting from the application of
this policy are reflected in the Consolidated Statement of Operations as an
“asset impairment charge.”





Inventories





Our
inventories are stated at the lower of cost or market.  We follow the
link-chain, dollar-value LIFO method when calculating our LIFO charge or
credit.  Vendor allowances, including early payment discounts, volume
rebates, and funds for product placement and advertising, are generally recorded
as a reduction of inventory cost based on average inventory turnover rates by
product category.





We take
physical counts of inventories throughout the year and record inventory
shortages based on our physical counts.  Where physical counts are not
available, we record an allowance for inventory shortages based on historical
shrinkage percentages.


- 22
-


Intangible
Assets
 
 We have
recorded intangible assets for favorable leases, pharmacy prescription files,
computer software, and goodwill.  We amortize our favorable leases
over the remaining life of the lease including all favorable
options.  We amortize both the pharmacy prescription files and the
computer software over five years.  We consider these assets during
our SFAS 144 impairment testing.  Our intangible assets were reduced
by approximately $6.8 million and $5.7 million during fiscal year 2009 and
fiscal year 2008, respectively, as a result of the application of Statement of
Financial Accounting Standard No. 109 (“SFAS 109”).  To the extent net
operating loss carryforwards or deductible temporary differences arising prior
to the Company’s emergence from Chapter 11 proceedings for which a valuation
allowance has been provided are realized, the resulting benefits have been
allocated to reduce intangible assets.


Allowance
for Doubtful Accounts





We
evaluate the collectability of our accounts and notes receivable based on our
analysis of past due accounts and historical loss trends.  We record
an allowance for doubtful accounts against the receivable based on the amount
that we believe is reasonably collectible.  It is possible that our
estimation process could differ materially from the actual amounts
collected.





Income
Taxes





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





Self-Insurance
Liability





We are
primarily self-insured for workers’ compensation and general liability
claims.  Self-insurance liabilities are primarily calculated based on
claims filed and an estimate of claims incurred but not yet
reported.  Workers’ compensation and general 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 to self-insured liability claims incurred by maintaining stop-loss
coverage with third party insurers, as defined in the applicable insurance
policies, for claims incurred in excess of established stop-loss levels and
policy deductibles.  Projection of losses concerning these liabilities
is subject to a high degree of variability due to factors such as claim
settlement patterns, litigation trends, legal interpretations and future levels
of health care.  Should a greater amount of claims occur compared to
what was estimated or costs of health care increase beyond what was anticipated,
reserves recorded may not be adequate and additional expense could be required
in the consolidated financial statements.





Vendor
Allowances





Vendor
allowances relating to our purchasing and merchandising functions are recorded
as a reduction of cost of sales as they are earned based on each specific
agreement and its associated event date.  Our inventory is adjusted
for these vendor allowances following EITF Abstract Issue No. 02-16, “Accounting
by a Customer for Certain Consideration Received from a Vendor” (“EITF 02-16”),
based on the allowance event date and the inventory turns for the specific
department.  These vendor allowances come in many
forms:  promotional allowances tied to weekly advertised items which
are recognized when the inventory is sold, warehouse slotting allowances which
are recorded when the item has been distributed to the stores and are available
for sale to the consumer, long-term contractual agreements such as exclusivity
programs or signing bonuses which are recognized on a straight-line basis over
the life of the agreement, volume incentive agreements which are recognized when
the incentive is deemed probable and estimable based on purchase or sales
targets, and allowances for running items in our weekly ad which are recognized
at the end of the ad week.  Cash discounts for prompt payments of
invoices are also recorded as a reduction in cost of sales when the payment is
made to the vendor.





Defined
Benefit Pension Plans





In
accordance with the provisions of SOP 90-7, upon emergence from bankruptcy, the
Company recorded the underfunded status of each of the defined benefit pension
plans as a liability on the balance sheet.  The Company elected early
application and adopted Statement of Financial Accounting Standards No. 158,
“Employers’ Accounting for Defined Benefit Pension Plans and Other
Postretirement Plans” (“SFAS 158”), effective as of
January 28, 2006.  The Company adjusted the liability
account to reflect the underfunded status of the plans in its balance sheet at
that date.  Any gains or losses that arise during the period but are
not recognized as components of net periodic pension (benefit) / cost are
recognized as a component of other comprehensive income / (loss).  The
Company measures its plan assets and benefit obligations at its
year-end.




- 23
-


Results
of Operations
 
 Overview
 
 Fiscal
year 2009 was characterized as a year of refocus.  The sale of
our warehouse inventory and outsourcing of a majority of our procurement to
C&S, the divestiture of our Wholesale food distribution business, and the
closing or sale of twenty retail locations and ten pharmacies, among other
actions, enabled us to strengthen our financial position to a point where it has
not been in recent history.  These events allowed us to refocus our
energy on our core business objective: providing fresh products to our customers
in a convenient, friendly, and economical manner.


Financial
Results





The
following table sets forth certain Consolidated Statement of Operations
components expressed as percentages of revenues for the fiscal years ended
January 31, 2009, February 2, 2008, and
February 3, 2007.





Year
      Ended
                    
                    
                    Year
      Ended
                    
                    
                    Year
      EndedJanuary
      31,
                    
                    
                    February
      2,
                    
                    
                    February
      3,2009
                    
                    
                    2008
                    
                    
                    2007Revenues
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %Gross
      profit
                    
                    
                    30.6
                    %
                    
                    
                    31.1
                    %
                    
                    
                    29.6
                    %Selling
      and administrative expenses
                    
                    
                    32.8
                    %
                    
                    
                    33.0
                    %
                    
                    
                    31.5
                    %Gain
      on sale of assets
                    
                    
                    -0.2
                    %
                    
                    
                    -0.2
                    %
                    
                    
                    -0.2
                    %Loss
      on store and distribution center closings
                    
                    
                    0.0
                    %
                    
                    
                    0.2
                    %
                    
                    
                    0.3
                    %Asset
      impairment charge
                    
                    
                    0.6
                    %
                    
                    
                    0.1
                    %
                    
                    
                    0.0
                    %Operating
      loss
                    
                    
                    -2.6
                    %
                    
                    
                    -2.0
                    %
                    
                    
                    -2.0
                    %Interest
      expense
                    
                    
                    0.7
                    %
                    
                    
                    0.7
                    %
                    
                    
                    0.6
                    %Reorganization
      and other expenses
                    
                    
                    0.1
                    %
                    
                    
                    0.6
                    %
                    
                    
                    0.1
                    %Loss
      from continuing operations before income taxes
                    
                    
                    -3.4
                    %
                    
                    
                    -3.3
                    %
                    
                    
                    -2.7
                    %Income
      tax expense
                    
                    
                    0.5
                    %
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %Loss
      from continuing operations
                    
                    
                    -3.9
                    %
                    
                    
                    -3.3
                    %
                    
                    
                    -2.7
                    %Gain
      (loss) from discontinued operations, net of taxes
                    
                    
                    1.9
                    %
                    
                    
                    -1.4
                    %
                    
                    
                    -0.2
                    %Net
      loss
                    
                    
                    -2.0
                    %
                    
                    
                    -4.7
                    %
                    
                    
                    -2.9
                    %




- 24
-





Fiscal
Year 2009 (the audited 52-week period ended January 31, 2009) and
Fiscal Year 2008 (the audited 52-week period ended
February 2, 2008)





Revenues





Revenues
for fiscal year 2009 were $872.3 million, compared to $895.9 million
for fiscal year 2008. The $23.6 million decrease in revenues was mainly
attributable to a reduction in the number of our corporate-owned retail stores
in continuing operations and a decline in same store sales resulting from a
decrease in the number of customers, as well as a decrease in the number of
items purchased per customer.





The
number of Penn Traffic’s corporate-owned retail stores declined to 83 stores at
January 31, 2009, from 103 stores at February 2, 2008.  Revenues from
continuing operations, as presented in our audited consolidated statements of
operations, include 82 active stores at January 31, 2009, and 87 active stores
at February 2, 2008.  Same store sales for fiscal year 2009
decreased 1.7% compared to fiscal year 2008.





Gross
Profit





Gross
profit for fiscal year 2009 was $267.0 million or 30.6% of revenues, compared to
$278.8 million or $31.1% of revenues for fiscal year 2008.  The $11.8
million decrease is primarily the result of the decrease in sales discussed
above (accounting for $7.3 million of the decrease, based on a 31.1% gross
profit percentage).  The slight erosion of gross profit percentage
contributed another $4.5 million to the decline in gross profit
dollars.  Gross profit margin decreased in fiscal year 2009 as a
result of increased commodity costs that were not fully passed on to customers
in order to maintain value pricing in the competitive
marketplace.  This was offset by a continued increase in sales of
higher-margin private label and signature products.





Selling
and Administrative Expenses





Selling
and administrative expenses for fiscal year 2009 were $286.0 million
or 32.8% of revenues, compared to $296.0 million or 33.0% of revenues, for
fiscal year 2008.  The $10.0 million decrease is primarily the result
of the Company’s efforts to control costs, as well as a reduction in the number
of stores within continuing operations.





Gain
on Sale of Assets





Gain on
sale of assets for fiscal year 2009 was $2.0 million or 0.2% of revenues,
compared to the gain on sale of assets of $1.7 million or 0.2% of revenues
for fiscal year 2008.





Loss
on Store and Distribution Center Closings





Loss on
store closings for fiscal year 2009 was $0.4 million or less than 0.1% of
revenues, compared to loss on store closings of $2.0 million or 0.2% of
revenues for fiscal year 2008.  Although we closed twenty retail
stores during fiscal year 2009, and three retail stores and one distribution
center during fiscal year 2008, a large portion of the loss recognized was
included within discontinued operations.





Asset
Impairment Charge





Asset
impairment for fiscal year 2009 was $5.1 million or 0.6% of revenues,
compared to $0.5 million or 0.1% of revenues for fiscal year
2008.  The increase is reflective of the increased number of closed
stores during 2009, and relates specifically to the assets of certain stores
included within continuing operations that were either closed during the year,
or for which we determined that the assets’ carrying value was not
recoverable.





Operating
Loss





Operating
loss for fiscal year 2009 was $22.6 million or 2.6% of revenues, compared
to the operating loss of $18.0 million or 2.0% of revenues, for fiscal year
2008.





Interest
Expense





Interest
expense for fiscal year 2009 was $6.3 million or 0.7% of revenues, compared
to $5.7 million or 0.7% of revenues, for fiscal year 2008. The
$0.6 million increase in interest expense for fiscal year 2009 was largely
due to an increase in amortization of deferred financing costs and commitment
fees compared to fiscal year 2008.





- 25
-





Reorganization
and Other Expenses





Reorganization
and other expense for fiscal year 2009 was $0.5 million or 0.1% of
revenues, compared to reorganization and other expense of $5.4 million or
0.6% of revenues for fiscal year 2008.  The $4.9 million
decrease was primarily attributable to $4.8 million of costs incurred
related to a proposed acquisition that was not consummated in fiscal year
2008.





Income
Tax Expense





Income
tax expense for fiscal year 2009 was $4.7 million or 0.5% of revenues, compared
to $0.1 million or less than 0.1% for fiscal year 2008.  The $4.6
million increase is largely attributable to the reclassification of deferred
income tax expense  from accumulated other comprehensive income
related to prior year unrecognized actuarial gains.





Loss
from Continuing Operations





Loss from
continuing operations for fiscal year 2009 was $34.1 million, or 3.9% of
revenues, compared to a loss from continuing operations of $29.2 million or
3.3% of revenue for fiscal year 2008. The $4.9 million increase in loss
from continuing operations is primarily due to a decrease in gross profit of
$11.8 million, partially offset by decreases in selling and administrative
expense and reorganization expense.





Discontinued
Operations





Gain from
discontinued operations for fiscal year 2009 was $16.5 million or 1.9% of
revenues, compared to a loss from discontinued operations of $12.5 million
or 1.4% of revenues for fiscal year 2008. The $29.0 million increase in the
gain from discontinued operations for fiscal year 2009 is primarily due to a
$26.8 million one-time gain related to the sale of the Company’s Wholesale
food distribution business.





Net
Loss





Net loss
for fiscal year 2009 was $17.6 million or 2.0% of revenues, compared to a
net loss of $41.7 million or 4.7% of revenues during fiscal year
2008.  The decrease in net loss of $24.1 million in 2009 is
primarily attributable to the $29.0 million increase in gain from
discontinued operations.





- 26
-





Fiscal Year 2008
(the audited 52-week period ended February 2, 2008) and Fiscal
Year 2007 (the audited 53-week period ended
February 3, 2007)





Revenues





Revenues
for fiscal year 2008 were $895.9 million, compared
to $953.2 million in fiscal year 2007. The $57.3 million decrease in
revenues was mainly attributable to a reduction in the number of our
corporate-owned retail stores within continuing operations and a slight decline
in same store sales.  Also, fiscal year 2008 was one week shorter than
fiscal year 2007, impacting sales by approximately $17.2 million.





The
number of Penn Traffic’s corporate-owned retail stores declined to 103 stores at
February 2, 2008, from 106 at
February 3, 2007.  Revenues from continuing operations, as
presented in our audited consolidated statements of operations, include 87
active stores at February 2, 2008, and 90 active stores at February 3, 2007.
 Same store sales for fiscal year 2008 decreased 0.3% compared to
fiscal year 2007.





Gross
Profit





Gross
profit was $278.8 million or 31.1% of revenues for fiscal year 2008
compared to $281.9 million or 29.6% of revenues, for fiscal year 2007.  The
$3.1 million decrease is primarily the result of the decrease in sales discussed
above.  This was offset by an increase in gross profit percent, the
result of increased sales of higher-margin private label and signature products,
the implementation of a new price optimization system and improved operational
disciplines to reduce shrinkage, partially offset by an increase in distribution
costs.





Selling
and Administrative Expenses





Selling
and administrative expenses for fiscal year 2008 were $296.0 million or
33.0% of revenues, compared to $300.0 million or 31.5% of revenues for
fiscal year 2007.  The decrease in selling and administrative expenses
was principally due to a $13.5 million decrease in payroll and
payroll-related expenses, partially offset by increases of $3.0 million in
professional fees and $2.5 million in outside services, as well as other
smaller increases.





Gain
on Sale of Assets





Gain on
sale of assets for fiscal year 2008 was $1.7 million or 0.2% of
revenues, compared to the gain on sale of assets of $2.2 million or 0.2% of
revenues for fiscal year 2007.





Loss
on Store and Distribution Center Closings





Loss on
store and distribution center closings for fiscal year 2008 was
$2.0 million or 0.2% of revenues, compared to loss on store closings of
$2.7 million or 0.3% of revenues for fiscal year 2007.





Operating
Loss





Operating
loss for fiscal year 2008 was $18.0 million or 2.0% of revenues, compared
to the operating loss of $18.7 million or 2.0% of revenues, for fiscal year
2007.





Interest
Expense





Interest
expense for fiscal year 2008 was $5.7 million or 0.7% of revenues, compared
to $6.2 million or 0.6% of revenues for fiscal year 2007.





Reorganization
and Other Expenses





Reorganization
expense for fiscal year 2008 was $5.4 million or 0.6% of revenues, compared
to reorganization expense of $1.0 million or 0.1% of revenues for fiscal
year 2007.  The $4.4 million increase was primarily attributable
to $4.8 million of costs incurred related to a proposed acquisition that
was not consummated in fiscal year 2008.





Loss
from Continuing Operations





Loss from
continuing operations for fiscal year 2008 was $29.2 million or 3.3% of
revenues, compared to a loss from continuing operations of $26.1 million or
2.7% of revenues during fiscal year 2007.  The $3.1 million
increase in loss from continuing operations is primarily due to an increase of
$4.4 million in reorganization expense and a decrease of $3.1 million in
gross profit for fiscal year 2008, partially offset by a decrease of $4.0
million in selling and administrative expense.





- 27
-





Discontinued
Operations





Loss from
discontinued operations for fiscal year 2008 was $12.5 million or 1.4% of
revenues, compared to a loss from discontinued operations of $1.9 million
or 0.2% of revenues during fiscal year 2007.  The $10.6
million increase in the loss from discontinued operations in fiscal year
2008 is primarily attributable to a one-time disposal loss of $8.2 million
related to the closure of Penny Curtiss bakery and $3.1 million loss
incurred from bakery operations.





Net
Loss





Net loss
for fiscal year 2008 was $41.7 million or 4.7% of revenues, compared to a
net loss of $28.0 million or 2.9% of revenues during fiscal year
2007.  The increase in net loss of $13.7 million in fiscal year
2008 is primarily attributable to the loss associated with the closure of the
Penny Curtiss bakery.





Liquidity
and Capital Resources





Overview





As of
January 31, 2009, we had cash and cash equivalents of $56.4 million and total
debt outstanding of $45.6 million (consisting of $17.0 million in a revolving
credit facility, $6.0 million in a term loan facility, $10.0 million in a
supplemental real estate credit facility, $3.6 million in mortgages payable, and
$9.0 million in capital lease obligations).  We also have the ability
to draw down our revolving credit facilities, subject to borrowing base
restrictions.  As a result of the amendment to the credit facilities
on December 18, 2008, the revolving credit commitments were reduced from $100
million to $50 million.  Based on the calculation of our asset
borrowing base of collateral, the revolving credit available to borrow is
significantly lower than $50 million.  As of January 31, 2009, total
availability in excess of outstanding borrowings and letters of credit is $37.4
million, an increase from $31.2 million at November 1, 2008.  Also as
a result of the amendment to the credit facilities on December 18, 2008, the
minimum amount of excess revolver availability we are required to maintain
decreased from $27.5 million to $13.5 million.  As of January 31,
2009, we were above that minimum requirement by $23.9 million.  To
date, our excess revolver availability under the credit facility has exceeded
the minimum availability amount of $13.5 million.





A number
of developments during the year ended January 31, 2009, have had a significant
impact on our current liquidity and are expected to impact our liquidity in the
future.





As
discussed in Note 4 to our audited consolidated financial statements, we entered
into a definitive procurement agreement with C&S to provide us with
significant additional procurement services.  The closing of the new
agreement on October 12, 2008, resulted in an immediate infusion of cash of
approximately $35.5 million.  Approximately $15.5 million of this
amount was used to reduce accounts payable to our warehouse vendors following
the transaction.  A majority of the remaining $20.0 million in net
cash proceeds from the transaction was utilized to reduce our
indebtedness.  Additionally, we currently anticipate this transaction
will benefit our future gross profit percents, which we expect will improve our
working capital position and gross profit over the next fiscal
year.





As
discussed in Note 10 to our audited consolidated financial statements, we
completed the sale of our Wholesale food distribution business to C&S,
resulting in a net infusion of cash of approximately $40.2
million.  While the wholesale business was profitable to us, the gross
profit margins we recognized were significantly lower than the margins we
recognize from our core retail operations.  We believe we will
generate a greater return on investment by re-investing the cash received from
the sale of the wholesale business in our core retail operations.





During
the year ended January 31, 2009, we have recognized cash inflows of
approximately $13.2 million (excluding the proceeds from the sale of our
wholesale business) related to the sale of assets, primarily fixed assets and
pharmacy scripts.  As we continue to strategically assess our assets,
we may dispose of certain additional underperforming assets in the
future.  We expect that these assets would generate additional cash
inflows; however, asset dispositions can also reduce collateral in the borrowing
base calculation under our credit facilities, which may result in reduced
availability under our current credit facilities.





Based on
the foregoing, we believe that our existing cash on hand, available borrowings
under our credit facilities, and other sources of cash will be sufficient, based
on the economic conditions as they currently exist, to satisfy our anticipated
cash requirements for at least the next 12 months.  However, we cannot
be certain that future events or developments, including but not limited to,
customer trip consolidation, decreased customer counts, continued economic and
financial volatility, and the inability to extend or obtain current or new
financing, will not change that assessment.




- 28
-





Financial
Results





Operating
Activities





Cash
provided by operating activities for the fiscal year ended January 31, 2009, was
$5.3 million, as compared to cash used in operating activities of
$3.1 million for the fiscal year ended
February 2, 2008.  For the fiscal year ended
January 31, 2009, net cash provided by operating activities included a net
loss of $17.6 million, positive adjustments for non-cash items of
$13.6 million, and a net increase in operating assets and liabilities of
$9.2 million.  For the fiscal year ended
February 2, 2008, we incurred a net loss of $41.7 million, positive
adjustments for non-cash items of $39.0 million, and a net decrease in
operating assets and liabilities of $0.3 million.  For the fiscal
year ended February 3, 2007, we incurred a net loss of
$28.0 million, positive adjustments for non-cash items of
$30.3 million, and an increase in net operating assets of
$10.3 million.





Investing
Activities





Cash
provided by investing activities of $47.7 million for the fiscal year ended
January 31, 2009, consisted of cash proceeds from the sale of the wholesale
business of $40.2 million and cash proceeds from the sale of other assets of
$13.2 million (including $7.8 million recognized from the sale of retail
locations in Oswego, New York, and Lebanon, New Hampshire), offset by capital
expenditures of $5.7 million.  Cash used in investing activities of
$6.8 million for the fiscal year ended February 2, 2008, consisted of cash
proceeds from the sale of assets of $1.1 million offset by capital expenditures
of $7.9 million.  Cash used in investing activities of $14.2 million
for the fiscal year ended February 3, 2007, consisted of cash proceeds from the
sale of assets of $10.3 million offset by capital expenditures of $22.9 million
and the acquisition of two stores of $1.5 million.  Overall, these
amounts reflect the Company’s focus on disposing of underperforming assets, or
those assets for which we are able to sell for favorable amounts, combined with
a greater focus on concentrating capital expenditures on projects that will
provide the greatest shareholder value.





Financing
Activities





Cash used
in financing activities for the fiscal year ended January 31, 2009, consisted of
net payments of debt, including capital leases, totaling $15.2 million, as well
as payment of deferred financing costs of $2.2 million.   Cash
provided by financing activities for the fiscal year ended
February 2, 2008, consisted of cash proceeds from the issuance of
preferred stock of $9.8 million offset by payments of debt totaling $3.7
million.   Cash provided by financing activities for the fiscal
year ended February 3, 2007, consisted of borrowings of $15.5 million
offset by payments of debt totaling $1.7 million.





Borrowings





On
April 13, 2005, we entered into a revolving credit and term loan facility
with a group of financial institutions providing for a $130 million
revolving credit facility and a $6 million term loan.  Also on
April 13, 2005, we entered into a supplemental real estate credit facility
with another group of lenders, providing for borrowings of up to
$28 million.  Borrowings under the revolving credit and term loan
facility are secured by substantially all our assets, subject to first liens on
certain property by other lenders.  Borrowings under the real estate
facility are secured by a first lien on substantially all of our leasehold
interests, and a second lien on realty we own.  Availability under
both credit facilities is dependent on levels of accounts receivable, inventory
and certain other assets.





On
October 10, 2008, we entered into amendments to our credit facilities that
included the lenders’ consent for us to enter into a supply agreement with
C&S, resulting in a significant decrease in inventory levels and related
collateral.  In addition, the amendments provided for a reduction in
the revolving credit commitments from $130 million to $100 million, to reflect
the reduced size of our business and operations.




On
December 18, 2008, we entered into amendments to our credit facilities that
provided the lenders’ consent for the Company’s sale of the Wholesale food
distribution business and provided for repayment of indebtedness from the
proceeds of the sale.  In connection therewith, we repaid $15.3
million of the supplemental real estate credit facility during fiscal year 2009
and on February 6, 2009, we repaid the entire outstanding balance of the
revolving credit facility.  This $17.0 million amount has been
classified as a current liability as of January 31, 2009.  The
amendments also extended the maturity date of both facilities from April 13,
2009 to April 13, 2010, effective upon the repayment of the entire outstanding
balance of the revolving credit facility, and provided for a reduction in the
revolving credit commitments from $100 million to $50 million, which includes a
maximum sub-limit commitment for letters of credit of $47.5
million.  At January 31, 2009, outstanding letters of credit under the
revolving credit facility, which are primarily associated with supporting
workers’ compensation obligations, were approximately $38.4
million.





- 29
-





Provisions of both credit facilities,
as amended, require the maintenance of $13.5 million of availability under the
revolving credit facility and limit, among other things, the assumption of
additional debt and the payment of dividends.  Availability is based
on a calculation of our borrowing base less outstanding borrowings and letters
of credit, which is also increased by certain cash balances.  These
cash balances totaled $52.8 million at January 31, 2009.  Total
availability in excess of outstanding borrowings and letters of credit was
approximately $37.4 million at January 31, 2009.  Actual
borrowings are limited to the $50 million credit
commitment.  Borrowings in excess of outstanding balances are at the
discretion of the lenders.





The
carrying amount of debt reported in our balance sheet approximates fair value as
of January 31, 2009, and February 2, 2008.





We also
have borrowings of $3.6 million as of January 31, 2009, under mortgages secured
by first liens on the related properties.





Off-Balance
Sheet Arrangements





We do not
have any material off-balance sheet arrangements.





Contractual
Obligations and Commitments





The table
below presents our significant contractual obligations for the next five years
and thereafter as of January 31, 2009 (in thousands):





Other
                            
                            
                            TotalFiscalYear
                            
                            Long-term
                            
                            
                            Capital
                            
                            
                            Operating
                            
                            
                            Long-term
                            
                            
                            ContractualEnding
                            
                            Debt(1)
                            
                            
                            Leases(2)(3)
                            
                            
                            Leases(3)
                            
                            
                            Liabilities(4)
                            
                            
                            ObligationsJanuary
      30, 2010
                            
                            $
                            17,296
                            
                            
                            $
                            2,491
                            
                            
                            $
                            14,517
                            
                            
                            $
                            6,754
                            
                            
                            $
                            41,058January
      29, 2011
                            
                            
                            16,321
                            
                            
                            
                            1,926
                            
                            
                            
                            13,720
                            
                            
                            
                            4,684
                            
                            
                            
                            36,651January
      28, 2012
                            
                            
                            259
                            
                            
                            
                            1,482
                            
                            
                            
                            11,694
                            
                            
                            
                            3,788
                            
                            
                            
                            17,223February
      2, 2013
                            
                            
                            229
                            
                            
                            
                            1,142
                            
                            
                            
                            10,440
                            
                            
                            
                            3,085
                            
                            
                            
                            14,896February
      1, 2014
                            
                            
                            243
                            
                            
                            
                            1,142
                            
                            
                            
                            8,807
                            
                            
                            
                            2,094
                            
                            
                            
                            12,286Thereafter
                            
                            
                            2,286
                            
                            
                            
                            8,877
                            
                            
                            
                            37,963
                            
                            
                            
                            9,064
                            
                            
                            
                            58,190





(1)
            The
      balance for the fiscal year ending January 30, 2010, includes the
      repayment of $17.0 million under the revolving credit facility
      completed on February 6, 2009.




(2)
            Includes
      amounts classified as imputed
interest.




(3)
            See
      Note 3 to our audited consolidated financial
  statements.




(4)
            Other
      long-term liabilities include workers’ compensation, general liability,
      asset retirement obligations, and store closing
  costs.




We have
also made certain contractual commitments that extend beyond January 31, 2009,
as shown below (in thousands):





Stand-byLetters
                    
                    
                    SuretyofCredit(1)
                    
                    
                    Bonds(2)Total
      amounts committed
                    
                    $
                    38,399
                    
                    
                    $
                    135




(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.




- 30
-





Recent
Accounting Pronouncements





In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurement” (“SFAS 157”) effective for fiscal years
beginning after November 15, 2007.  SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements.  During calendar year 2008, the FASB issued FASB Staff
Positions (“FSP”) 157-1, 157-2, and 157-3.  FSP 157-1 amends SFAS 157
to exclude SFAS No. 13, “Accounting for Leases”, and its related interpretive
accounting pronouncements that address leasing transactions, FSP 157-2 delays
the effective date of the application of SFAS 157 to fiscal years beginning
after November 15, 2008, for all nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis, and FSP 157-3 clarifies how the fair value
of a financial asset is determined when the market for that financial asset is
inactive.  The Company adopted SFAS 157 effective February 3, 2008, as
it relates to financial assets and financial liabilities.  The
adoption of SFAS 157 did not, and the Company expects adoption of FSP 157-2 will
not, have a material effect on the Company’s consolidated financial
statements.





In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which
replaces SFAS 141. SFAS 141(R) changes the accounting for business combinations,
including the measurement of acquirer shares issued in consideration for a
business combination, the recognition of contingent consideration, the
accounting for contingencies, the recognition of capitalized in-process research
and development, the accounting for acquisition-related restructuring cost
accruals, the treatment of acquisition-related transaction costs and the
recognition of changes in the acquirer’s income tax valuation allowance and
income tax uncertainties. SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December
15, 2008.  The Company currently maintains a full valuation
allowance against its deferred tax assets.  Income tax benefits
resulting from the recognition of tax attributes that existed at the time of our
emergence from bankruptcy protection currently reduce intangible
assets.  Upon adoption of SFAS 141(R), subsequent reversals of
valuation allowances will instead be reflected as reductions in income tax
expense in the period of reversal.





In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB 51” (“SFAS 160”), which changes the accounting and reporting
for minority interests. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008.  Management expects that the
adoption of this statement will not have a material effect on the Company’s
consolidated financial statements.





In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets.” This FSP amends SFAS No. 132 (revised
2003), “Employers’ Disclosures about Pensions and Other Postretirement
Benefits,” to provide guidance on an employer’s disclosures about plan assets of
a defined benefit pension or other postretirement plan on investment policies
and strategies, major categories of plan assets, inputs and valuation techniques
used to measure the fair value of plan assets and significant concentrations of
risk within plan assets. The FSP is effective for fiscal years ending after
December 15, 2009, with earlier application permitted. Management is
currently assessing the impact of this pronouncement on our consolidated
financial statements.





Certain
Trends and Uncertainties





Our
future results could differ materially from our forward-looking
statements.  Factors that could cause or contribute to such
differences include, but are not limited to those discussed in this
document.  These statements are subject to risks and uncertainties
that could cause actual results to differ materially from those
predicted.  Also, please see Risk Factors in Part I, Item
1A.





ITEM
7A.       QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK





Our
financial results are subject to risk from interest rate changes on debt that
has variable interest rates. Total variable rate debt outstanding under our loan
agreements at January 31, 2009 was $33.0 million with a weighted
average interest rate of 8.49%.  A 1% change in interest rates
would impact pre-tax income by $0.3 million based on the debt outstanding
at January 31, 2009.  In addition to the variable rate debt, we had
$3.6 million of fixed rate debt outstanding at January 31, 2009, with
a weighted average interest rate of 6.56%.  We view the fixed rate
debt as a partial hedge against interest rate fluctuations which should minimize
the potential impact on earnings from interest rate changes.





- 31
-





ITEM
8.          FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA





Index to Consolidated Financial Statements
                  
                  PageConsolidated
      Financial Statements as of January 31, 2009 and February 2,
      2008,  and for the years ended January 31, 2009, February 2,
      2008 and February 3, 2007:Report
      of Independent Registered Public Accounting Firm
                  
                  
                  33Consolidated
      Financial Statements:Consolidated
      Balance Sheets
                  
                  
                  34Consolidated
      Statements of Operations
                  
                  
                  36Consolidated
      Statements of Cash Flows
                  
                  
                  37Consolidated
      Statements of Stockholders’ Equity and Comprehensive Loss
                  
                  
                  38Notes
      to the Consolidated Financial Statements
                  
                  
                  39List
      of Financial Statement SchedulesValuation
      and Qualifying Accounts (Schedule II)
                  
                  
                  60




All other
schedules have been omitted because they are not applicable, or the required
information is shown in the financial statements or notes to the financial
statements.





List of
Exhibits





The
exhibits listed in the List of Exhibits on pages 63 through 66 are filed as part
of this Form 10-K.





- 32
-




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 Board of
Directors
 The Penn
Traffic Company
 Syracuse,
New York
 
 
 We have
audited the accompanying consolidated balance sheets of The Penn Traffic Company
(the "Company") as of January 31, 2009 and February 2, 2008, and the
related consolidated statements of operations, cash flows and stockholders'
equity for each of the three years in the period ended January 31,
2009.  Our audits also included the financial statement schedule
listed in the Index at Item 15(a).  These financial statements
and schedule are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting as of January 31,
2009.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of The Penn Traffic
Company as of January 31, 2009 and February 2, 2008, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended January 31, 2009, in conformity with accounting
principles generally accepted in the United States of America.  Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
 
 
 /s/
Eisner LLP
 
 
 New York,
New York
 April 16,
2009




- 33
-


The Penn
Traffic Company


Consolidated
Balance Sheets


(In
thousands, except share data)





January
      31,
                            
                            
                            February
      2,2009
                            
                            
                            2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                            
                            $
                            56,434
                            
                            
                            $
                            20,916Accounts
      and notes receivable (less allowance for doubtful accounts of $2,676 and
      $5,690, respectively)
                            
                            
                            19,454
                            
                            
                            
                            37,513Inventories
                            
                            
                            44,306
                            
                            
                            
                            89,208Prepaid
      expenses and other current assets
                            
                            
                            5,990
                            
                            
                            
                            7,307Total
      current assets
                            
                            
                            126,184
                            
                            
                            
                            154,944Capital
      leases:Capital
      leases
                            
                            
                            10,768
                            
                            
                            
                            11,364Less:
      Accumulated amortization
                            
                            
                            (3,357
                            )
                            
                            
                            (3,096
                            )Capital
      leases, net
                            
                            
                            7,411
                            
                            
                            
                            8,268Fixed
      assets:Land
                            
                            
                            9,036
                            
                            
                            
                            9,313Buildings
                            
                            
                            12,538
                            
                            
                            
                            13,273Equipment
      and furniture
                            
                            
                            80,819
                            
                            
                            
                            96,652Vehicles
                            
                            
                            8,020
                            
                            
                            
                            7,984Leasehold
      improvements
                            
                            
                            10,906
                            
                            
                            
                            10,246Total
      fixed assets
                            
                            
                            121,319
                            
                            
                            
                            137,468Less:
      Accumulated depreciation
                            
                            
                            (68,019
                            )
                            
                            
                            (59,066
                            )Fixed
      assets, net
                            
                            
                            53,300
                            
                            
                            
                            78,402Other
      assets:Intangible
      assets, net (Note 5)
                            
                            
                            2,883
                            
                            
                            
                            15,397Deferred
      income taxes (Note 9)
                            
                            
                            -
                            
                            
                            
                            2,440Other
      assets
                            
                            
                            3,936
                            
                            
                            
                            2,998Total
      other assets
                            
                            
                            6,819
                            
                            
                            
                            20,835Total
      assets
                            
                            $
                            193,714
                            
                            
                            $
                            262,449





The
accompanying notes are an integral part of these statements.




- 34
-




The Penn
Traffic Company


Consolidated
Balance Sheets (continued)


(In
thousands, except share data)





January
      31,
                    
                    
                    February
      2,2009
                    
                    
                    2008LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Current
      portion of obligations under capital leases (Note 3)
                    
                    $
                    1,519
                    
                    
                    $
                    1,368Current
      maturities of long-term debt (Note 6)
                    
                    
                    17,296
                    
                    
                    
                    278Accounts
      payable
                    
                    
                    8,119
                    
                    
                    
                    34,178Other
      current liabilities (Note 7)
                    
                    
                    39,587
                    
                    
                    
                    47,060Accrued
      interest expense
                    
                    
                    261
                    
                    
                    
                    176Deferred
      income taxes (Note 9)
                    
                    
                    7,373
                    
                    
                    
                    11,485Liabilities
      subject to compromise (Note 8)
                    
                    
                    -
                    
                    
                    
                    2,516Total
      current liabilities
                    
                    
                    74,155
                    
                    
                    
                    97,061Non-current
      liabilities:Obligations
      under capital leases (Note 3)
                    
                    
                    7,443
                    
                    
                    
                    8,962Long-term
      debt (Note 6)
                    
                    
                    19,338
                    
                    
                    
                    50,209Defined
      benefit pension plan liability (Note 11)
                    
                    
                    25,903
                    
                    
                    
                    6,326Deferred
      income taxes (Note 9)
                    
                    
                    523
                    
                    
                    
                    -Other
      non-current liabilities (Note 7)
                    
                    
                    30,265
                    
                    
                    
                    30,716Total
      non-current liabilities
                    
                    
                    83,472
                    
                    
                    
                    96,213Total
      liabilities
                    
                    
                    157,627
                    
                    
                    
                    193,274Commitments
      and contingencies (Notes 3, 6, 11, 12, and 13)Stockholders’
      equity:Preferred
      stock - authorized 1,000,000 shares, $.01 par value; 10,000 shares issued
      in 2009 and 2008 (Note 13)
                    
                    
                    100
                    
                    
                    
                    100Common
      stock - authorized 15,000,000 shares, $.01 par value; 8,641,676 shares
      issued in 2009; 8,519,095 shares issued and to be issued in
      2008
                    
                    
                    86
                    
                    
                    
                    85Capital
      in excess of par value
                    
                    
                    128,148
                    
                    
                    
                    128,149Deficit
                    
                    
                    (91,953
                    )
                    
                    
                    (74,356
                    )Accumulated
      other comprehensive (loss) /  income
                    
                    
                    (294
                    )
                    
                    
                    15,197Total
      stockholders’ equity
                    
                    
                    36,087
                    
                    
                    
                    69,175Total
      liabilities and stockholders’ equity
                    
                    $
                    193,714
                    
                    
                    $
                    262,449





The
accompanying notes are an integral part of these statements.




- 35
-




The Penn
Traffic Company


Consolidated
Statements of Operations


(In
thousands, except share and per share data)





Year
      Ended
                      
                      
                      Year
      Ended
                      
                      
                      Year
      EndedJanuary
      31,
                        2009
                      
                      
                      February
      2,
                        2008
                      
                      
                      February
      3,
                        2007Revenues
                      
                      $
                      872,302
                      
                      
                      $
                      895,948
                      
                      
                      $
                      953,196Cost
      and operating expensesCost
      of sales (Note 4)
                      
                      
                      605,315
                      
                      
                      
                      617,149
                      
                      
                      
                      671,345Selling
      and administrative expenses
                      
                      
                      286,022
                      
                      
                      
                      295,955
                      
                      
                      
                      299,991Gain
      on sale of assets
                      
                      
                      (1,970
                      )
                      
                      
                      (1,689
                      )
                      
                      
                      (2,158
                      )Loss
      on store and distribution center closings
                      
                      
                      420
                      
                      
                      
                      2,029
                      
                      
                      
                      2,700Asset
      impairment charge
                      
                      
                      5,081
                      
                      
                      
                      547
                      
                      
                      
                      -894,868
                      
                      
                      
                      913,991
                      
                      
                      
                      971,878Operating
      loss
                      
                      
                      (22,566
                      )
                      
                      
                      (18,043
                      )
                      
                      
                      (18,682
                      )Interest
      expense
                      
                      
                      6,259
                      
                      
                      
                      5,705
                      
                      
                      
                      6,243Reorganization
      and other expenses (Note 17)
                      
                      
                      500
                      
                      
                      
                      5,365
                      
                      
                      
                      1,020Loss
      from continuing operations before income taxes
                      
                      
                      (29,325
                      )
                      
                      
                      (29,113
                      )
                      
                      
                      (25,945
                      )Income
      tax expense (Note 9)
                      
                      
                      4,745
                      
                      
                      
                      114
                      
                      
                      
                      128Loss
      from continuing operations
                      
                      
                      (34,070
                      )
                      
                      
                      (29,227
                      )
                      
                      
                      (26,073
                      )Discontinued
      operations (Note 10)Gain
      (loss) from discontinued operations, net of taxes of $10,570 in
      2009
                      
                      
                      16,473
                      
                      
                      
                      (12,481
                      )
                      
                      
                      (1,877
                      )Net
      loss
                      
                      $
                      (17,597
                      )
                      
                      $
                      (41,708
                      )
                      
                      $
                      (27,950
                      )Net
      loss per share - basic and diluted: (Note 15)Loss
      from continuing operations
                      
                      $
                      (4.04
                      )
                      
                      $
                      (3.45
                      )
                      
                      $
                      (3.07
                      )Gain
      (loss) from discontinued operations
                      
                      $
                      1.91
                      
                      
                      $
                      (1.47
                      )
                      
                      $
                      (0.22
                      )Net
      loss per share - basic and diluted
                      
                      $
                      (2.13
                      )
                      
                      $
                      (4.92
                      )
                      
                      $
                      (3.29
                      )Basic
      and diluted shares outstanding and to be issued
                      
                      
                      8,641,676
                      
                      
                      
                      8,501,323
                      
                      
                      
                      8,498,752





The
accompanying notes are an integral part of these statements.




- 36
-




The Penn
Traffic Company


Consolidated
Statements of Cash Flows


(In
thousands)





Year
      Ended
                  
                  
                  Year
      Ended
                  
                  
                  Year
      EndedJanuary
      31,
                    2009
                  
                  
                  February
      2,
                    2008
                  
                  
                  February
      3,
                    2007Operating
      activities:Net
      loss
                  
                  $
                  (17,597
                  )
                  
                  $
                  (41,708
                  )
                  
                  $
                  (27,950
                  )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                  
                  
                  22,829
                  
                  
                  
                  26,242
                  
                  
                  
                  25,925Provision
      for doubtful accounts
                  
                  
                  (98
                  )
                  
                  
                  2,444
                  
                  
                  
                  1,324Gain
      on sale of segment
                  
                  
                  (26,813
                  )
                  
                  
                  -
                  
                  
                  
                  -(Gain)
      / loss on sale of assets
                  
                  
                  (8,001
                  )
                  
                  
                  340
                  
                  
                  
                  542Loss
      on store closings
                  
                  
                  1,166
                  
                  
                  
                  8,207
                  
                  
                  
                  1,206Asset
      impairment charge
                  
                  
                  8,375
                  
                  
                  
                  547
                  
                  
                  
                  -Amortization
      of deferred finance costs
                  
                  
                  1,191
                  
                  
                  
                  1,021
                  
                  
                  
                  1,201Deferred
      income taxes
                  
                  
                  15,168
                  
                  
                  
                  -
                  
                  
                  
                  -Phantom
      stock
                  
                  
                  (179
                  )
                  
                  
                  155
                  
                  
                  
                  60Net
      change in operating assets and liabilities:Accounts
      and notes receivable, net
                  
                  
                  5,695
                  
                  
                  
                  (4,845
                  )
                  
                  
                  534Prepaid
      expenses and other current assets
                  
                  
                  1,317
                  
                  
                  
                  1,161
                  
                  
                  
                  (2,312
                  )Inventories
                  
                  
                  44,902
                  
                  
                  
                  10,567
                  
                  
                  
                  12,996Other
      assets
                  
                  
                  85
                  
                  
                  
                  23
                  
                  
                  
                  96Accounts
      payable and other current liabilities
                  
                  
                  (34,331
                  )
                  
                  
                  (2,972
                  )
                  
                  
                  841Liabilities
      subject to compromise
                  
                  
                  (2,516
                  )
                  
                  
                  (181
                  )
                  
                  
                  (175
                  )Defined
      benefit pension plan
                  
                  
                  (5,406
                  )
                  
                  
                  (5,756
                  )
                  
                  
                  (2,278
                  )Other
      non-current liabilities
                  
                  
                  (499
                  )
                  
                  
                  1,691
                  
                  
                  
                  576Net
      cash provided by (used in) operating activities
                  
                  
                  5,288
                  
                  
                  
                  (3,064
                  )
                  
                  
                  12,586Investing
      activities:Acquisition
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,531
                  )Capital
      expenditures
                  
                  
                  (5,653
                  )
                  
                  
                  (7,879
                  )
                  
                  
                  (22,926
                  )Proceeds
      from sale of assets
                  
                  
                  13,158
                  
                  
                  
                  1,113
                  
                  
                  
                  10,271Proceeds
      from sale of segment
                  
                  
                  40,160
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      cash provided by (used in) investing activities
                  
                  
                  47,665
                  
                  
                  
                  (6,766
                  )
                  
                  
                  (14,186
                  )Financing
      activities:Payment
      of mortgages
                  
                  
                  (275
                  )
                  
                  
                  (314
                  )
                  
                  
                  (287
                  )Payment
      of credit facility
                  
                  
                  (15,075
                  )
                  
                  
                  (1,925
                  )
                  
                  
                  -Borrowing
      under credit facility
                  
                  
                  1,500
                  
                  
                  
                  -
                  
                  
                  
                  15,500Reduction
      in capital lease obligations
                  
                  
                  (1,371
                  )
                  
                  
                  (1,432
                  )
                  
                  
                  (1,384
                  )Issuance
      of preferred stock
                  
                  
                  -
                  
                  
                  
                  9,756
                  
                  
                  
                  -Payment
      of deferred financing costs
                  
                  
                  (2,214
                  )
                  
                  
                  -
                  
                  
                  
                  -Net
      cash (used in) provided by financing activities
                  
                  
                  (17,435
                  )
                  
                  
                  6,085
                  
                  
                  
                  13,829Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  35,518
                  
                  
                  
                  (3,745
                  )
                  
                  
                  12,229Cash
      and cash equivalents at beginning of period
                  
                  
                  20,916
                  
                  
                  
                  24,661
                  
                  
                  
                  12,432Cash
      and cash equivalents at end of period
                  
                  $
                  56,434
                  
                  
                  $
                  20,916
                  
                  
                  $
                  24,661





The
accompanying notes are an integral part of these statements.




- 37
-




The Penn
Traffic Company


Consolidated
Statement of Stockholders’ Equity and Comprehensive Loss


For the
years ended January 31, 2009, February 2, 2008 and
February 3, 2007


(In
thousands)





Capital
      in
                                  
                                  
                                  
                                  
                                  
                                  Accumulated Other
                                  
                                  
                                  TotalPreferred
                                  
                                  
                                  Common
                                  
                                  
                                  Excess
      of
                                  
                                  
                                  
                                  
                                  
                                  Comprehensive
                                  
                                  
                                  Stockholders'Stock
                                  
                                  
                                  Stock
                                  
                                  
                                  Par
      Value
                                  
                                  
                                  Deficit
                                  
                                  
                                  (Loss)
      Income
                                  
                                  
                                  EquityBalance
      at January 28, 2006
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  85
                                  
                                  
                                  $
                                  118,493
                                  
                                  
                                  $
                                  (4,698
                                  )
                                  
                                  $
                                  4,919
                                  
                                  
                                  $
                                  118,799Net
      loss
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (27,950
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (27,950
                                  )Unrecognized
      actuarial gain of pension plans, net of deferred taxes of
      $1,296
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,876
                                  
                                  
                                  
                                  1,876Comprehensive
      loss
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (26,074
                                  )Balance
      at February 3, 2007
                                  
                                  
                                  -
                                  
                                  
                                  
                                  85
                                  
                                  
                                  
                                  118,493
                                  
                                  
                                  
                                  (32,648
                                  )
                                  
                                  
                                  6,795
                                  
                                  
                                  
                                  92,725Issuance
      of 10,000 shares of preferred stock, net of issuance costs of
      $244
                                  
                                  
                                  100
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  9,656
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  9,756Net
      loss
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (41,708
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (41,708
                                  )Amortization
      of net actuarial gain in net pension benefit cost, net of deferred taxes
      of $(41)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (77
                                  )
                                  
                                  
                                  (77
                                  )Unrecognized
      actuarial gain of pension plans, net of deferred taxes of
      $4,858
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  8,479
                                  
                                  
                                  
                                  8,479Comprehensive
      loss
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (33,306
                                  )Balance
      at February 2, 2008
                                  
                                  
                                  100
                                  
                                  
                                  
                                  85
                                  
                                  
                                  
                                  128,149
                                  
                                  
                                  
                                  (74,356
                                  )
                                  
                                  
                                  15,197
                                  
                                  
                                  
                                  69,175Net
      loss
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (17,597
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (17,597
                                  )Issuance
      of shares in settlement of Chapter 11 claims
                                  
                                  
                                  
                                  
                                  
                                  
                                  1
                                  
                                  
                                  
                                  (1
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -Amortization
      of net actuarial gain in net pension benefit cost, net of deferred taxes
      of $(374)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (571
                                  )
                                  
                                  
                                  (571
                                  )Unrecognized
      actuarial loss of pension plans
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (24,040
                                  )
                                  
                                  
                                  (24,040
                                  )Reclassification
      to income tax expense of deferred taxes related to prior years'
      unrecognized actuarial gains
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  9,120
                                  
                                  
                                  
                                  9,120Comprehensive
      loss
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (33,088
                                  )Balance
      at January 31, 2009
                                  
                                  $
                                  100
                                  
                                  
                                  $
                                  86
                                  
                                  
                                  $
                                  128,148
                                  
                                  
                                  $
                                  (91,953
                                  )
                                  
                                  $
                                  (294
                                  )
                                  
                                  $
                                  36,087





The
accompanying notes are an integral part of these statements.




- 38
-




The Penn
Traffic Company


Notes to
the Consolidated Financial Statements




Note
1 – Description of Business





The Penn
Traffic Company and its subsidiaries (the “Company”) are engaged in the retail
food business.  As of January 31, 2009, the Company operated
83 stores under the “P&C”, “Quality”, and “Bi-Lo” banners in upstate
New York, Pennsylvania, Vermont, and New Hampshire.  The Company
services these retail stores through four distribution centers.  Prior
to December 21, 2008, the Company also operated a wholesale food distribution
business that serviced independent stores.  On December 21, 2008, the
Company completed the sale of its wholesale food distribution business
segment.





Note
2 – Summary of Significant Accounting Policies





Principles
of Consolidation





The
accompanying financial statements include the accounts of The Penn Traffic
Company and its wholly-owned subsidiaries.  All significant
intercompany balances and transactions have been eliminated in
consolidation.





Fiscal
Year





The
Company’s fiscal year ends on the Saturday closest to
January 31.  Fiscal year 2009 is the 52-week period ended January
31, 2009; fiscal year 2008 is the 52-week period ended
February 2, 2008; and fiscal year 2007 is the 53-week period
ended February 3, 2007.





Fresh-Start
Basis





The
Company emerged from Chapter 11 bankruptcy proceedings and applied fresh-start
reporting effective April 16, 2005, in accordance with Statement of Position
90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code” (“SOP 90-7”).





Use
of Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual amounts could differ from those
estimates.





Operating
Segments





The
Company consists of one operating segment, the retail food segment.





Revenue
Recognition





Revenue
from the sale of products to retail customers is recognized at the time of
sale.  Discounts provided to customers through company-sponsored
loyalty programs are recognized as a reduction in sales as products are
sold.  Discounts provided through vendor coupons are not recognized as
a reduction in sales to the extent the Company is reimbursed by the vendor.
Pharmacy revenues are recorded at the time of sale.  Sales taxes are
not recorded as a component of sales.  Revenue from gift cards and
gift certificates is recognized upon redemption of the gift cards and
certificates for products.





Prior to
December 21, 2008, (see Note 1) revenue from the sale of products to wholesale
customers was recognized at the time of shipment to the customer.





Cost
of Sales





Cost of
sales includes the cost of product and related warehousing and freight
costs.  Vendor allowances are recorded as a reduction of cost of sales
when the related product is sold in accordance with the provisions of Emerging
Issues Task Force Issue No. 02-16, “Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor” (“EITF
02-16”).  Vendor allowances, including early payment discounts, volume
rebates, and funds for product placement and advertising, are generally recorded
as a reduction of inventory cost based on average inventory turnover rates by
product category.  Vendor allowances recognized in the years ended
January 31, 2009, February 2, 2008, and February 3, 2007,
were $49.0 million, $51.9 million, and $56.0 million,
respectively.  A portion of these amounts are included within
discontinued operations.




- 39
-




Advertising





Advertising
costs are expensed as incurred and included in selling and administrative
expenses.  Advertising costs for the years ended January 31, 2009,
February 2, 2008, and February 3, 2007, aggregated $12.3
million, $11.9 million, and $12.6 million, respectively.





Cash
and Cash Equivalents





The Company considers all
highly-liquid investments with original maturities of three months or less to be
cash equivalents.The Company maintains cash and cash
equivalents in accounts in excess of the Federal Deposit Insurance Corporation
(“FDIC”) limits.  At January 31, 2009, the amount held in excess of
FDIC limits was $46.9 million.  The carrying value of cash
approximates its fair value as of January 31, 2009.





Accounts
and Notes Receivable





Accounts
and notes receivable consist primarily of debit and credit card sales,
third-party insurance pharmacy sales, and vendor allowances.  The
Company establishes an allowance for doubtful accounts based on an analysis of
past due accounts and historical loss trends.  Prior to the sale of
the wholesale food distribution business, accounts and notes receivable also
included amounts due from wholesale customers.





Inventories




Inventories,
consisting primarily of grocery and pharmacy products, are stated at the lower
of cost or market.  Cost is determined using the last-in, first-out
(“LIFO”) method.  If cost had been determined using the first-in,
first-out method (“FIFO”), inventories would have been $6.3 million and
$5.7 million higher than reported at January 31, 2009 and
February 2, 2008, respectively.





During
the years ended January 31, 2009 and February 2, 2008, inventory
quantities were reduced, which resulted in a liquidation of certain LIFO
inventory layers carried at lower costs prevailing in an earlier
period.  The effect resulted in reducing cost of sales by
approximately $6.1 million (including $4.6 million recognized upon sale of the
Company’s warehouse inventory, see Note 4) and $0.2 million in the years ended
January 31, 2009 and February 2, 2008, respectively.





The
Company takes physical counts of inventories throughout the year and records
inventory shortage adjustments based on the physical
counts.  Throughout the year the Company accrues for inventory
shortages based on historical trends.  Where physical counts are not
taken at the year end, the Company establishes an allowance for inventory
shortages based on historical shrinkage percentages.





Long-Lived
and Intangible Assets





Major
fixed asset renewals and betterments are capitalized, while maintenance and
repairs are charged to expense as incurred.  Depreciation and
amortization are provided on a straight-line basis over the estimated useful
lives of the assets or, for leasehold improvements, the shorter of the estimated
useful lives of the assets or the lease term (which includes renewal periods
that are reasonably assured).





Estimated
useful lives of long-lived fixed assets are as follows:





Buildings
                39
      yearsCapitalized
      leases
                5
      to 32 yearsEquipment
      and furniture
                3
      to 10 yearsLeasehold
      improvements
                10
      to 32 yearsVehicles
                3
      to 8 years





Identifiable
intangible assets consist primarily of favorable leases and pharmacy
prescription files (both established upon adoption of fresh-start reporting), as
well as computer software.  Favorable operating leases represent the
present value of the difference by which market value rent exceeded contract
rent upon our emergence from bankruptcy and are amortized on a straight-line
basis over the remaining lease term, including renewal options, ranging from 2
to 32 years.  Pharmacy prescription files and computer software are
amortized over 5 years.





In
accordance with Statement of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), long-lived
fixed assets and intangible assets are reviewed for impairment when events or
changes in circumstances indicate that the carrying value may not be
recoverable.  In the event that the carrying value of an asset is both
not recoverable and exceeds fair value, the asset is written down to its fair
value.




- 40
-




Leases





In
accordance with the provisions of Statement of Financial Accounting Standards
No. 13, “Accounting for Leases” (“SFAS 13”), the Company assesses all leases in
which we are the lessee to determine whether they are accounted for as capital
leases or operating leases.  The Company recognizes rent holidays and
escalating rent provisions on a straight-line basis over the term of the
lease.  The deferred amount is included in Step rent liability (see Note 7)
on the Company’s Consolidated Balance Sheet.





Unfavorable
Leases





Unfavorable
operating leases (established upon adoption of fresh-start reporting) are
reported in other non-current liabilities and represent the present value of the
difference by which contract rent exceeds market value rent and are amortized on
a straight-line basis over the remaining lease term, excluding renewal options,
ranging from 1 to 9 years as of January 31, 2009.





Income
Taxes





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





Self-Insurance
Liability





The
Company self-insures certain insurable risks related to workers’ compensation
and general product liability claims. The Company accrues estimated losses for
unpaid claims, including incurred but not reported losses by evaluating pending
claims and historical loss experience. The Company also maintains self-insured
health benefits plans, which provide medical and dental benefits to employees
electing coverage under the plans. The Company accrues estimated losses for
unpaid claims, including incurred but not reported claims, based on historical
experience and other assumptions. Commercial policies are obtained to provide
for coverage of certain risk exposure above the self-insured retention limits.
The estimated liability associated with settling unpaid claims is included in
other current liabilities if expected to be settled within one year, or
otherwise is included in other non-current liabilities.





Store
Pre-Opening Costs





Store
pre-opening costs are expensed as incurred.





Store
Closing Costs





The
Company accounts for store closing costs in accordance with Statement of
Financial Accounting Standards No. 146, “Accounting for Costs Associated with
Exit or Disposal Activities” (“SFAS 146”).  For operating leases
related to closed stores, the Company records the fair value of the liability at
the cease-use date, determined based on the present value of the remaining lease
rentals, reduced by estimated sublease rentals that could be reasonably obtained
for the property.  Any one-time termination benefits are recognized at
the time the benefits are communicated to the employees.  Other
related costs are recognized in the period when the liability is
incurred.  These amounts are included within “Loss on store and
distribution center closings” in the Consolidated Statements of
Operations.





Share-Based
Payments





The
Company recognizes all share-based payments to employees, including grants of
employee stock options, in the income statement based on their fair values in
accordance with Statement of Financial Accounting Standards No. 123 (revised
2004), “Share-Based Payment” (“SFAS 123(R)”).  The effect on
results of operations for the years ended January 31, 2009, February 2, 2008,
and February 3, 2007, was not significant.





Defined
Benefit Pension Plans





In
accordance with the provisions of SOP 90-7, upon emergence from bankruptcy, the
Company recorded the underfunded status of each of the defined benefit pension
plans as a liability on the balance sheet.  The Company elected early
application and adopted Statement of Financial Accounting Standards No. 158,
“Employers’ Accounting for Defined Benefit Pension Plans and Other
Postretirement Plans” (“SFAS 158”), effective as of
January 28, 2006.  The Company adjusted the liability
account to reflect the underfunded status of the plans in its balance sheet at
that date.  Any gains or losses that arise during the period but are
not recognized as components of net periodic pension (benefit) / cost are
recognized as a component of other comprehensive income / (loss).  The
Company measures its plan assets and benefit obligations at its
year-end.




- 41
-




Reclassifications





The
results of operations of certain components that the Company disposed of during
the year ended January 31, 2009, are presented within discontinued operations in
the Consolidated Statements of Operations for all prior
periods.  Certain other amounts have been reclassified in
the 2008 and 2007 financial statements to conform to the current year
presentation.





Recent
Accounting Pronouncements





In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurement” (“SFAS 157”), effective for fiscal years
beginning after November 15, 2007.  SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements.  During calendar year 2008, the FASB issued FASB Staff
Positions (“FSP”) 157-1, 157-2, and 157-3.  FSP 157-1 amends SFAS 157
to exclude SFAS No. 13, “Accounting for Leases”, and its related interpretive
accounting pronouncements that address leasing transactions, FSP 157-2 delays
the effective date of the application of SFAS 157 to fiscal years beginning
after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities
that are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis, and FSP 157-3 clarifies how the fair value of a financial
asset is determined when the market for that financial asset is
inactive.  The Company adopted SFAS 157 effective February 3, 2008, as
it relates to financial assets and financial liabilities.  The
adoption of SFAS 157 did not, and the Company expects adoption of FSP 157-2 will
not, have a material effect on the Company’s consolidated financial
statements.





In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which
replaces SFAS 141. SFAS 141(R) changes the accounting for business combinations,
including the measurement of acquirer shares issued in consideration for a
business combination, the recognition of contingent consideration, the
accounting for contingencies, the recognition of capitalized in-process research
and development, the accounting for acquisition-related restructuring cost
accruals, the treatment of acquisition-related transaction costs and the
recognition of changes in the acquirer’s income tax valuation allowance and
income tax uncertainties. SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December
15, 2008.  The Company currently maintains a full valuation
allowance against its deferred tax assets.  Income tax benefits
resulting from the recognition of tax attributes that existed at the time of our
emergence from bankruptcy protection currently reduce intangible
assets.  Upon adoption of SFAS 141(R), subsequent reversals of
valuation allowances will instead be reflected as reductions in income tax
expense in the period of reversal.





In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB 51” (“SFAS 160”), which changes the accounting and reporting
for minority interests. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008.  Management expects that the
adoption of this statement will not have a material effect on the Company’s
consolidated financial statements.





In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets”.  This FSP amends SFAS
No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other
Postretirement Benefits”, to provide guidance on an employer’s disclosures about
plan assets of a defined benefit pension or other postretirement plan on
investment policies and strategies, major categories of plan assets, inputs and
valuation techniques used to measure the fair value of plan assets and
significant concentrations of risk within plan assets. The FSP is effective for
fiscal years ending after December 15, 2009, with earlier application
permitted. Management is currently assessing the impact of this pronouncement on
our consolidated financial statements.




Note
3 – Leases





The
Company leases store and distribution facilities for the operation of its
business.  Most of the lease agreements provide for renewal options
and require that the Company pay real estate taxes and other related
expenses.  Certain lease agreements also provide for contingent rent
payments based on a percentage of sales.




- 42
-




The
following is a summary of future minimum rent payments for operating leases and
for capital leases as of January 31, 2009 (in thousands):





Fiscal
      Year Ending:
                      
                      Operating
      Leases
                      
                      
                      Capital
      LeasesJanuary
      30, 2010
                      
                      
                      14,517
                      
                      
                      
                      2,491January
      29, 2011
                      
                      
                      13,720
                      
                      
                      
                      1,926January
      28, 2012
                      
                      
                      11,694
                      
                      
                      
                      1,482February
      2, 2013
                      
                      
                      10,440
                      
                      
                      
                      1,142February
      1, 2014
                      
                      
                      8,807
                      
                      
                      
                      1,142Thereafter
                      
                      
                      37,963
                      
                      
                      
                      8,877Total
      minimum lease payments
                      
                      $
                      97,141
                      
                      
                      $
                      17,060Less:
      amount representing interest
                      
                      
                      
                      
                      
                      
                      8,098Present
      value of net minimum lease payments
                      
                      
                      
                      
                      
                      
                      8,962Less:
      current portion
                      
                      
                      
                      
                      
                      
                      1,519Long-term
      obligations under capital leases
                      
                      
                      
                      
                      
                      $
                      7,443





Future
minimum rent payments have not been reduced by minimum sublease rental income
due to the Company under non-cancelable subleases of
$7.6 million.





Rent
expense under operating leases for the years ended January 31, 2009,
February 2, 2008, and February 3, 2007, consists of the
following (in thousands):





Year
      Ended
                        
                        
                        Year
      Ended
                        
                        
                        Year
      EndedJanuary
      31,
                          2009
                        
                        
                        February
      2,
                          2008
                        
                        
                        February
      3,
                          2007Minimum
      rent
                        
                        $
                        18,504
                        
                        
                        $
                        19,537
                        
                        
                        $
                        21,791Contingent
      rent
                        
                        
                        121
                        
                        
                        
                        242
                        
                        
                        
                        238Less:
      sublease rent
                        
                        
                        (2,321
                        )
                        
                        
                        (2,854
                        )
                        
                        
                        (3,281
                        )Net
      rent expense
                        
                        $
                        16,304
                        
                        
                        $
                        16,925
                        
                        
                        $
                        18,748





Note
4 – Sale of Warehouse Inventory





On
September 10, 2008, the Company entered into a definitive agreement with a
supplier to provide significant additional procurement services to the
Company.  Services under the agreement began on October 12, 2008,
and will continue for a period of at least eight years.  The Company
will retain responsibility for the warehousing, transportation and distribution
of product from its Syracuse, New York and DuBois, Pennsylvania warehouse
facilities to its corporate retail stores.





To
facilitate the agreement, the Company sold substantially its entire warehouse
inventory as of October 11, 2008, to the supplier for approximately $35.5
million in cash, which was the FIFO-based cost value of the inventory on that
date.  This transaction is not included within either revenue or cost
of sales for the period ended January 31, 2009.  Although it was not
obligated to, the Company repurchased this inventory from the supplier, at the
same price at which it was sold, in order to supply its corporate retail
stores.  As of January 31, 2009, the entire inventory had been
repurchased and resold.





The
Company accounts for all inventory using the LIFO method.  The Company
deferred recognition of the income statement benefit attributable to the LIFO
carrying value of its warehouse inventory until the inventory was repurchased
and sold through its corporate retail stores to customers.  For the
year ended January 31, 2009, the Company recognized a reduction in cost of sales
of approximately $4.6 million related to the liquidation of the warehouse
inventory.


Primarily
as a result of the above transaction, the Company now purchases a significant
portion of its merchandise from a single vendor.  The Company
anticipates it will continue to purchase a significant portion of its
merchandise from this vendor in the future.
  
 - 43
-




Note
5 – Intangible Assets





Intangible
assets consist of the following as of (in thousands):





January
      31, 2009Gross
                        
                        
                        
                        
                        
                        NetCarrying
                        
                        
                        Accumulated
                        
                        
                        CarryingValue
                        
                        
                        Amortization
                        
                        
                        ValueFavorable
      leases
                        
                        $
                        4,334
                        
                        
                        $
                        (1,514
                        )
                        
                        $
                        2,820Pharmacy
      prescription files
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Computer
      software
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Goodwill
                        
                        
                        63
                        
                        
                        
                        -
                        
                        
                        
                        63Total
                        
                        $
                        4,397
                        
                        
                        $
                        (1,514
                        )
                        
                        $
                        2,883




February 2,
      2008Gross
                        
                        
                        
                        
                        
                        NetCarrying
                        
                        
                        Accumulated
                        
                        
                        CarryingValue
                        
                        
                        Amortization
                        
                        
                        ValueFavorable
      leases
                        
                        $
                        18,150
                        
                        
                        $
                        (4,336
                        )
                        
                        $
                        13,814Pharmacy
      prescription files
                        
                        
                        6,141
                        
                        
                        
                        (4,906
                        )
                        
                        
                        1,235Computer
      software
                        
                        
                        1,697
                        
                        
                        
                        (1,412
                        )
                        
                        
                        285Goodwill
                        
                        
                        63
                        
                        
                        
                        -
                        
                        
                        
                        63Total
                        
                        $
                        26,051
                        
                        
                        $
                        (10,654
                        )
                        
                        $
                        15,397





The
intangible asset balances as of February 2, 2008, reflects an $11.0 million
reduction related to pre-reorganization deferred tax valuation
allowances.  The intangible asset balances as of January 31, 2009 ,
reflect a $17.8 million reduction (which includes the $11.0 million reduction as
of February 2, 2008) related to pre-reorganization deferred tax valuation
allowances (see Note 9).  During the year ended January 31, 2009, the
Company also sold ten pharmacy prescription files with a net carrying value of
$0.1 million and disposed of favorable leases with a net carrying value of $3.2
million as a result of the closing of stores (see Note 10).





Aggregate
amortization expense for the years ended January 31, 2009, February 2, 2008, and
February 3, 2007, was $2.4 million, $3.7 million, and $4.2 million,
respectively.





Future
amortization of amortizable intangible assets is as follows (in
thousands):





Fiscal
      year ending:January
      30, 2010
                              
                              $
                              1,012January
      29, 2011
                              
                              
                              588January
      28, 2012
                              
                              
                              469February
      2, 2013
                              
                              
                              398February
      1, 2014
                              
                              
                              245Thereafter
                              
                              
                              108$
                              2,820




- 44
-




Note
6 – Debt





Debt
consists of the following as of (in thousands):





January
      31,
                                    
                                    
                                    February
      2,2009
                                    
                                    
                                    2008Revolving
      credit facility, interest (4.75% at January 31, 2009and
      7.42% at February 2, 2008) at prime rate plus 1.5% orLIBOR
      plus 3%, maturing April 13, 2010, paid in fullon  February
      6, 2009.
                                    
                                    $
                                    17,000
                                    
                                    
                                    $
                                    17,000Term
      loan facility, interest (8.25% at January 31, 2009 and11%
      at February 2, 2008) at prime rate plus 5%, maturingApril
      13, 2010.
                                    
                                    
                                    6,000
                                    
                                    
                                    
                                    6,000Supplemental
      real estate credit facility, interest (15% atJanuary
      31, 2009 and 11.5% at February 2, 2008) at prime rateplus
      9% or LIBOR plus 10%, but no less than 15% during fiscalyear
      2009, maturing April 13, 2010.
                                    
                                    
                                    10,000
                                    
                                    
                                    
                                    23,575Mortgages
      payable, interest at 6.125% to 12%, maturingat
      various dates through May 2, 2021.
                                    
                                    
                                    3,634
                                    
                                    
                                    
                                    3,912Total
      debt
                                    
                                    
                                    36,634
                                    
                                    
                                    
                                    50,487Less:
      current portion of long-term debt
                                    
                                    
                                    17,296
                                    
                                    
                                    
                                    278Total
      long-term debt
                                    
                                    $
                                    19,338
                                    
                                    
                                    $
                                    50,209





Future
maturities of debt are as follows (in thousands):





Maturities
      during the fiscal year ending:January
      30, 2010
                      
                      
                      17,296January
      29, 2011
                      
                      
                      16,321January
      28, 2012
                      
                      
                      259February
      2, 2013
                      
                      
                      229February
      1, 2014
                      
                      
                      243Thereafter
                      
                      
                      2,286$
                      36,634


- 45
-




On
April 13, 2005, the Company entered into a revolving credit and term loan
facility with a group of financial institutions providing for a
$130 million revolving credit facility and a $6 million term
loan.  Also on April 13, 2005, the Company entered into a
supplemental real estate credit facility with another group of lenders,
providing for additional term loan borrowings of up to
$28 million.  Borrowings under the revolving credit and term loan
facility are secured by substantially all the assets of the Company, subject to
first liens on certain property by other lenders. Borrowings under the real
estate facility are secured by a first lien on substantially all leasehold
interests of the Company, and a second lien on realty owned by the
Company.  Availability under both credit facilities is dependent on
levels of eligible accounts receivable, inventory and certain other
assets.





On
October 10, 2008, the Company entered into amendments to its credit facilities
that included the lenders’ consent for the Company to enter into a supply
agreement with a third party (see Note 12).  In addition, the
amendments provided for a reduction in the revolving credit commitments from
$130 million to $100 million, to reflect the reduced size of the Company’s
business and operations.




On
December 18, 2008, the Company entered into amendments to its credit facilities
that provided the lenders’ consent for the Company’s sale of the wholesale food
distribution business to a third party (see Note 10) and provided for repayment
of indebtedness from the proceeds of the sale.  In connection
therewith, the Company repaid $15.3 million of the then-outstanding supplemental
real estate credit facility during fiscal year 2009 and on February 6, 2009, the
Company repaid the entire outstanding balance of the revolving credit
facility.  This $17.0 million amount has been classified as a current
liability as of January 31, 2009.  The amendments also extended the
maturity date of both facilities from April 13, 2009 to April 13, 2010,
effective upon the repayment of the entire outstanding balance of the revolving
credit facility, and provided for a reduction in the revolving credit
commitments from $100 million to $50 million, which includes a maximum sub-limit
commitment for letters of credit of $47.5 million.  At January 31,
2009, outstanding letters of credit under the revolving credit facility, which
are primarily associated with supporting workers’ compensation obligations, were
approximately $38.4 million.




Provisions of both credit facilities,
as amended, require the maintenance of $13.5 million of availability under the
revolving credit facility and limit, among other things, the assumption of
additional debt and the payment of dividends.  Availability is based
on a calculation of the Company’s asset borrowing base less outstanding
borrowings and letters of credit, which is also increased by certain cash
balances.  These cash balances totaled $52.8 million at January 31,
2009.  Total availability in excess of outstanding borrowings and
letters of credit was approximately $37.4 million at January 31,
2009.  Actual borrowings are limited to the $50 million credit
commitment.  Borrowings in excess of outstanding balances are at the
discretion of the lenders.





The
carrying amount of debt reported in our balance sheet approximates fair value as
of January 31, 2009, and February 2, 2008.





The
Company also has borrowings under mortgages secured by first liens on the
related properties.




- 46
-




Note
7 – Other Current and Other Non-Current Liabilities





Other
current and non-current liabilities consist of the following as of (in
thousands):





January
      31,
                      
                      
                      February
      2,2009
                      
                      
                      2008Other
      current liabilities:Vacation
      and other compensated absences
                      
                      $
                      8,073
                      
                      
                      $
                      9,116Workers'
      compensation
                      
                      
                      4,323
                      
                      
                      
                      7,636Payroll
      and related payroll taxes
                      
                      
                      4,169
                      
                      
                      
                      4,904Employee
      benefits
                      
                      
                      3,910
                      
                      
                      
                      4,144Deferred
      income
                      
                      
                      2,965
                      
                      
                      
                      1,038State
      lottery
                      
                      
                      2,265
                      
                      
                      
                      2,740Accrued
      incentive pay
                      
                      
                      2,135
                      
                      
                      
                      2,026Gift
      certificates and gift cards
                      
                      
                      1,666
                      
                      
                      
                      2,312Utilities
                      
                      
                      1,579
                      
                      
                      
                      1,940General
      liability and health insurance
                      
                      
                      1,383
                      
                      
                      
                      1,007Other
      taxes payable
                      
                      
                      969
                      
                      
                      
                      1,932Employee
      severance
                      
                      
                      963
                      
                      
                      
                      523Professional
      fees
                      
                      
                      759
                      
                      
                      
                      711Other
      accrued liabilities
                      
                      
                      4,428
                      
                      
                      
                      7,031Total
      other current liabilities
                      
                      $
                      39,587
                      
                      
                      $
                      47,060Other
      non-current liabilities:Workers'
      compensation
                      
                      $
                      16,392
                      
                      
                      $
                      14,216Store
      closing costs
                      
                      
                      5,996
                      
                      
                      
                      8,417Step
      rent liability
                      
                      
                      3,460
                      
                      
                      
                      3,092Unfavorable
      leases
                      
                      
                      1,708
                      
                      
                      
                      2,646General
      liability insurance
                      
                      
                      1,239
                      
                      
                      
                      1,143Asset
      retirement obligations
                      
                      
                      1,035
                      
                      
                      
                      1,202Other
      non-current liabilities
                      
                      
                      435
                      
                      
                      
                      -Total
      other non-current liabilities
                      
                      $
                      30,265
                      
                      
                      $
                      30,716




Note
8 – Liabilities Subject to Compromise





In
connection with the Company’s Chapter 11 bankruptcy proceedings, the Ohio Bureau
of Workers’ Compensation (“OBWC”) filed priority and administrative claims
aggregating $13.4 million for pre-petition unpaid workers’ compensation
premiums and for reserves to pay future claims arising from existing
injuries.  The OBWC also filed claims aggregating $1.8 million
for alleged non-payment of post-petition premiums and for reserves to pay future
claims arising from existing injuries.  On August 22, 2008, the
Company and the OBWC filed a Notice of Presentment of Stipulation and Order with
Respect to Settlement of Ohio Bureau of Workers’ Compensation Claims (the
“Stipulation”) with the United States Bankruptcy Court for the Southern District
of New York, pursuant to which the Company and the OBWC have agreed that the
OBWC will release all potential claims against the Company in exchange for the
following payments by the Company to the OBWC: a payment of $500,000 on
September 9, 2008; and payments of $217,500 on each of the following dates:
March 2, 2009; September 1, 2009; March 1, 2010; and September 1, 2010.
 The Stipulation further provides that the payments to be made in 2010
shall be backed by a letter of credit.  The Bankruptcy Court approved the
Stipulation on September 5, 2008, and the Company has made all required payments
through May 2009.  In addition, the Company issued 290,491 shares of
its common stock, par value $0.01 per share, to the OBWC during the quarter
ended November 1, 2008.  As of January 31, 2009, the Company has
accrued $870,000 related to the OBWC Chapter 11 claim, recording $435,000 in
current liabilities and $435,000 in other non-current liabilities based upon the
payment terms of the Stipulation.




- 47
-




In
another matter, the Company settled a priority claim with COR Route 5 Company
(“COR”) allegedly arising under an agreement for a sale-leaseback
transaction.  On May 30, 2008, the Bankruptcy Court approved a
stipulation, pursuant to which COR agreed to release all potential claims
against the Company in exchange for a payment by the Company to COR of $1.1
million, to be made from an existing escrow account maintained during the
pendency of the disputed claims. The Company made the required $1.1 million
payment from the escrow account on June 9, 2008, and recorded the expense within
selling and administrative expenses in the year ended January 31,
2009.  As part of the settlement with COR, the Company has granted COR
a right of first refusal with respect to the sale, lease, transfer or other
conveyance of the Company’s store located in Fayetteville, New York that was the
subject of the dispute between the Company and COR (the
“Property”).  Under the terms of this right, the Company must notify
COR of any arm’s length written offer from an unaffiliated third party received
for sale, lease, transfer or other conveyance of the Property and provide COR
with the opportunity to consummate the proposed transaction on economic terms
and conditions substantially similar to the terms contained in such third-party
offer.




Note
9 – Income Taxes





Total
income tax expense for the years ended January 31, 2009, February 2, 2008, and
February 3, 2007, consist of the following (in thousands):





Year
      Ended
                        
                        
                        Year
      Ended
                        
                        
                        Year
      EndedJanuary
      31,
                          2009
                        
                        
                        February
      2,
                          2008
                        
                        
                        February
      3,
                          2007Continuing
      operations:Current
      tax (benefit) expenseFederal
                        
                        $
                        (3,170
                        )
                        
                        $
                        -
                        
                        
                        $
                        -State
                        
                        
                        (427
                        )
                        
                        
                        114
                        
                        
                        
                        128Deferred
      tax expenseFederal
                        
                        
                        7,264
                        
                        
                        
                        -
                        
                        
                        
                        -State
                        
                        
                        1,078
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      income tax expense from continuing operations
                        
                        $
                        4,745
                        
                        
                        $
                        114
                        
                        
                        $
                        128Discontinued
      operations:Current
      tax expenseFederal
                        
                        $
                        3,170
                        
                        
                        $
                        -
                        
                        
                        $
                        -State
                        
                        
                        576
                        
                        
                        
                        -
                        
                        
                        
                        -Deferred
      tax expenseFederal
                        
                        
                        5,955
                        
                        
                        
                        -
                        
                        
                        
                        -State
                        
                        
                        869
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      income tax expense from discontinued operations
                        
                        $
                        10,570
                        
                        
                        $
                        -
                        
                        
                        $
                        -Total
      income tax expense
                        
                        $
                        15,315
                        
                        
                        $
                        114
                        
                        
                        $
                        128




- 48
-




The
following is a reconciliation between the federal income tax benefit applicable
to loss from continuing operations computed at the statutory federal income tax
rate and actual income tax expense related to the loss from continuing
operations (in thousands):





Year
      Ended
                        
                        
                        Year
      Ended
                        
                        
                        Year
      EndedJanuary
      31,
                          2009
                        
                        
                        February
      2,
                          2008
                        
                        
                        February
      3,
                          2007Federal
      income tax benefit at statutory rate (35%)
                        
                        $
                        (10,265
                        )
                        
                        $
                        (10,190
                        )
                        
                        $
                        (9,081
                        )State
      income taxes, net of federal income tax effect
                        
                        
                        (467
                        )
                        
                        
                        74
                        
                        
                        
                        83Non-deductible
      expenses
                        
                        
                        36
                        
                        
                        
                        220
                        
                        
                        
                        14Valuation
      allowance
                        
                        
                        5,948
                        
                        
                        
                        10,010
                        
                        
                        
                        9,112Deferred
      tax expense reclassified from other comprehensive
      income/(loss)
                        
                        
                        9,493
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      income tax expense
                        
                        $
                        4,745
                        
                        
                        $
                        114
                        
                        
                        $
                        128





An
increase in the unfunded pension liability during the year ended January 31,
2009, attributable to a decline in the market value of securities held in
defined benefit pension plans resulted in an unrecognized actuarial loss
recorded in accumulated other comprehensive income (loss) which substantially
offset unrecognized actuarial gains previously recorded in other accumulated
other comprehensive income (loss) in prior years (see Note 11).  A
deferred tax asset attributable to the increase in the unfunded pension
liability was recognized and offset by a corresponding increase in valuation
allowance resulting in no tax benefit being credited to other comprehensive
income (loss) in the year ended January 31, 2009.  This resulted in
approximately $9.1 million of deferred tax charges recorded in prior years
related to the unrecognized actuarial gains remaining in accumulated other
comprehensive income (loss) that have been reclassified to income tax expense in
the year ended January 31, 2009.


The
significant components of deferred income tax assets (liabilities) are as
follows (in thousands):





January
      31,
                                  2009
                                
                                
                                February
      2,
                                  2008Current
      deferred tax assets (liabilities):Reserves
      and accruals
                                
                                $
                                10,644
                                
                                
                                $
                                12,496Valuation
      allowance
                                
                                
                                (10,154
                                )
                                
                                
                                (9,550
                                )Current
      deferred tax assets
                                
                                
                                490
                                
                                
                                
                                2,946Inventories
                                
                                
                                (7,863
                                )
                                
                                
                                (14,431
                                )Net
      current deferred tax liabilities
                                
                                
                                (7,373
                                )
                                
                                
                                (11,485
                                )Non-current
      deferred tax assets (liabilities):Reserves
      and accruals
                                
                                
                                10,939
                                
                                
                                
                                10,953Pensions
                                
                                
                                9,895
                                
                                
                                
                                2,468Fixed
      assets
                                
                                
                                9,229
                                
                                
                                
                                1,117Goodwill
                                
                                
                                1,318
                                
                                
                                
                                2,585Capital
      lease obligations
                                
                                
                                3,594
                                
                                
                                
                                4,031Net
      operating loss carryforward
                                
                                
                                28,020
                                
                                
                                
                                34,891Unfavorable
      leases
                                
                                
                                685
                                
                                
                                
                                -Valuation
      allowance
                                
                                
                                (60,099
                                )
                                
                                
                                (45,654
                                )Non-current
      deferred tax asset
                                
                                
                                3,581
                                
                                
                                
                                10,391Beneficial
      leases and other intangible assets
                                
                                
                                (1,131
                                )
                                
                                
                                (4,725
                                )Capital
      leases
                                
                                
                                (2,973
                                )
                                
                                
                                (3,226
                                )Non-current
      deferred tax lability
                                
                                
                                (4,104
                                )
                                
                                
                                (7,951
                                )Net
      non-current deferred tax asset (liability)
                                
                                
                                (523
                                )
                                
                                
                                2,440Net
      deferred tax liability
                                
                                $
                                (7,896
                                )
                                
                                $
                                (9,045
                                )




- 49
-




At
January 31, 2009, the Company had net operating loss carryforwards for federal
and state income tax purposes of approximately $68.7 million available to offset
future taxable income from 2010 to 2028.  The utilization of the
Company's net operating loss carryforwards may be limited in a given year in the
event of a significant ownership change.





A
valuation allowance of $70.3 million and $55.2 million was recorded at January
31, 2009 and February 2, 2008, respectively, to offset the net operating loss
carryforward and other deferred tax assets 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 income within the carryforward period, including future reversals of
certain taxable temporary differences.  In providing the valuation
allowance, no reversal of the taxable temporary difference arising from a
portion of LIFO inventory was considered to occur during such period since the
period in which such reversal may occur is not presently
determinable.  During the years ended January 31, 2009, February 2,
2008, and February 3, 2007, the valuation allowance increased by $15.1 million,
$14.8 million, and $10.8 million, respectively.





To the
extent net operating loss carryforwards or deductible temporary differences
arising prior to the Company’s emergence from Chapter 11 proceedings for which a
valuation allowance has been provided were realized, the resulting benefits were
allocated to reduce intangible assets.  As of January 31, 2009,
approximately $8.2 million of the valuation allowance relates to
pre-reorganization net operating loss carryforwards and deductible temporary
differences after reduction of $17.8 million, which has reduced intangible
assets.  In accordance with SFAS 141(R), future utilization of such
benefits will reduce income tax expense.





The
Company adopted the provisions of FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (“FIN 48”), on February 4, 2007.  From
the date of adoption through January 31, 2009, the Company had no unrecognized
tax benefits for uncertain tax positions.





To the
extent interest and penalties would be assessed by taxing authorities on any
underpayment of income tax, such amounts will be accrued and classified as a
component of income tax expense.





The
Company is no longer subject to federal, state, and local income tax
examinations by tax authorities for years before fiscal year
2004.  However, to the extent utilized, the Company's net operating
loss carryforwards arising in such years remain subject to
examination.  During the year ended January 31, 2009, the Internal
Revenue Service completed an examination of the Company’s tax returns for fiscal
years 2004 through 2007.  The IRS examination resulted in no changes
to the Company’s tax returns as filed for those years.  The Company’s
New York State tax returns for fiscal years 2004 through 2008 are currently
under examination by the New York State Department of Taxation and
Finance.  To date, the New York State Department of Taxation and
Finance has made information document requests.




Note
10 – Dispositions and Discontinued Operations





Sale
of the wholesale food distribution business segment





On
December 21, 2008, the Company completed the sale of its wholesale food
distribution business segment for total cash consideration of $40.2 million,
which included $12.6 million related to the sale of accounts receivable of the
wholesale business.  Other assets included in the transaction
consisted primarily of unrecognized intangible assets, including customer lists,
customer relationships, and intellectual property.  Transaction costs
totaled $0.8 million.  The consideration received by the Company is
subject to a true-up calculation based on the volume of shipments to certain
wholesale customers in the twelve months immediately following the sale (see
Note 12).  The Company recognized a gain on the sale of the wholesale
business of $26.8 million during the fourth quarter of fiscal year
2009.  In accordance with SFAS 144, the results of operations of the
wholesale food distribution business have been reported within discontinued
operations for the year ended January 31, 2009, and all prior
periods.





For a
period of time, the Company will continue to generate cash flows that are
associated with the disposed wholesale food distribution
business.  The activities that give rise to these cash flows result
from agreements that facilitate the transition of business
operations.  Specifically, the Company entered into a transition
services agreement, under which certain logistical services will be provided to
the buyer for a period of three years following the transaction, and a
third-party logistics agreement, under which certain administrative, support,
and warehousing and distribution services will be provided to the buyer for a
period of at least two years following the transaction.  Management
has performed an assessment of the ongoing cash flows between the Company and
the disposed component following the transaction under the guidance in EITF
Abstracts Issue No. 03-13, “Applying the Conditions in Paragraph 42 of FASB
Statement No. 144 in Determining Whether to Report Discontinued Operations”
(“EITF 03-13”), and concluded that they are not significant.  This
conclusion was based primarily on the amount of the continuing cash flows with
the disposed component as a percentage of the cash flows of the disposed
component absent the disposal transaction.  Neither of these
agreements provides the Company with significant continuing involvement in the
operations of the disposed component following the disposal
transaction.




- 50
-


Fiscal
Year 2009 Dispositions
 
 During
the year ended January 31, 2009, the Company disposed of twenty stores, of which
fifteen were closed, three were sold to third parties who became customers of
the wholesale food distribution business prior to December 21, 2008, and two
were sold for net proceeds of approximately $7.8 million (resulting in a gain on
sale of approximately $4.7 million, recognized in the fourth quarter of fiscal
year 2009).  It is anticipated that significant revenues will migrate
from customers of five of the closed stores to Company-owned stores located in
the same vicinity.  Accordingly, the results of operations of these
five stores have been reported within continuing operations.  The
results of operations of the other fifteen stores have been included within
discontinued operations for the year ended January 31, 2009, and for prior
periods.
 
 On
February 5, 2009, the Company closed one store.  As of January 31,
2009, the assets of this store met the criteria to be classified as held for
sale; however the net book value of those assets was not
significant.  The results of operations of the store have been
included within discontinued operations for the year ended January 31, 2009, and
for prior periods.
 
 During
the year ended January 31, 2009, the Company recorded an asset impairment charge
of $5.1 million within continuing operations in accordance with SFAS
144.  This amount consisted of approximately $3.1 million related to
stores closed during the year, approximately $1.2 million related to an
impairment of the assets of three stores held and used as of January 31, 2009,
and approximately $0.8 million in other smaller
impairments.  Additionally, an asset impairment charge of
approximately $3.3 million is included within gain from discontinued operations
for the year ended January 31, 2009, related to stores closed during the
year.  The Company generally utilized third-party appraisals to
determine fair value of assets when calculating impairment.  Where
third-party appraisals were not available, the Company estimated fair value
using the expected present value technique described in SFAS 144.
 
 Fiscal
Year 2008 Dispositions
 
 During
the year ended February 2, 2008, the Company closed three
stores.  It was anticipated that revenues would continue to be
generated from customers of two of the closed stores since one store was located
in the same vicinity of another Company store and another store would continue
to be supplied by the Company’s distribution centers.  The revenue and
operating results of this last store and the remaining closed store which was
sold were not significant.
 
 During
the year ended February 2, 2008, the Company recorded an asset impairment charge
of $0.5 million in accordance with SFAS 144.  This represents the
amount by which the cash flows of two stores were not expected to recover the
carrying value of those asset groups.
 
 Fiscal
Year 2007 Dispositions
 
 During
the year ended February 3, 2007, the Company disposed of five stores,
of which four were closed and one was sold.  It was anticipated that
revenues would continue to be generated from customers of three of these closed
stores from Company stores located in the same vicinity.  In addition,
it was anticipated that the sold store would continue to be serviced from the
Company’s distribution centers, thereby continuing to generate cash flows for
the Company.  The revenue and operating results of the two remaining
stores were not significant.
 
 In
January 2007, the Company announced the closing of a leased distribution
center used for the distribution of general merchandise and health and beauty
products.  At the same time, the Company entered into a five-year
supply agreement with a third party to provide the merchandise previously
distributed from the distribution center.  In connection with the
announced closing, in January 2007, the Company recorded a liability of
$1.4 million for termination benefits which were communicated to the
distribution center’s employees at such time.  The Company ceased use
of the facility in March 2007, at which time the Company recorded a
liability of $1.9 million representing the present value of the remaining
lease rentals reduced by estimated sublease rentals that could be reasonably
obtained for the distribution center.  In addition, in
March 2007, the Company sold its remaining inventory located in the
distribution center to the third party at current cost.
 
 Discontinued
operations – bakery
 
 On
January 2, 2008, as a result of the loss of a significant customer,
the Company announced the closing of its commercial bakery
operation.  In accordance with the provisions of SFAS 144, the results
of operations of the commercial bakery operation for the current and prior
periods have been reported as discontinued operations.  The Company
recorded a loss on disposal of $8.2 million during the year ended February
2, 2008, consisting of a $1.6 million loss on write-down of the facilities’
assets to fair value, a $3.1 million withdrawal liability related to
participation in a multi-employer pension plan, $2.4 million related to employee
severance, and $1.1 million of other costs.
  - 51
-
 
 Discontinued
operations consist of the following for the years ended January 31, 2009,
February 2, 2008, and February 3, 2007 (in thousands):
 
 Year
      Ended
                                      
                                      
                                      Year
      Ended
                                      
                                      
                                      Year
      EndedJanuary 31,
                                        2009
                                      
                                      
                                      February 2,
                                        2008
                                      
                                      
                                      February 3,
                                        2007Bakery
      - loss on disposal
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      (8,200
                                      )
                                      
                                      $
                                      -Bakery
      - results of operations
                                      
                                      
                                      (155
                                      )
                                      
                                      
                                      (3,070
                                      )
                                      
                                      
                                      (587
                                      )Wholesale
      food distribution - gain on sale of assets
                                      
                                      
                                      26,813
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Wholesale
      food distribution - results of operations
                                      
                                      
                                      3,983
                                      
                                      
                                      
                                      2,051
                                      
                                      
                                      
                                      449Retail
      stores - gain on sale of assets    (1)
                                      
                                      
                                      6,031
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Retail
      stores - loss on store closings   (2)
                                      
                                      
                                      (746
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Retail
      stores - asset impairment charge (3)
                                      
                                      
                                      (3,294
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Retail
      stores - results of operations    (4)
                                      
                                      
                                      (5,589
                                      )
                                      
                                      
                                      (3,262
                                      )
                                      
                                      
                                      (1,739
                                      )Gain
      / (loss) from discontinued operations, excluding taxes
                                      
                                      $
                                      27,043
                                      
                                      
                                      $
                                      (12,481
                                      )
                                      
                                      $
                                      (1,877
                                      )
  (1)
              Includes
      gain on sale of assets associated with eight stores disposed of by the
      Company.
 (2)
              Includes
      loss on store closings associated with five stores disposed of by the
      Company.
 (3)
              Includes
      asset impairment charges associated with ten stores disposed of by the
      Company.
 (4)
              Includes
      results of operations of sixteen stores disposed of by the
      Company.
 
 Wholesale
food distribution results of operations includes revenues of $203.1 million,
$208.3 million, and $215.4 million for the years ended January 31, 2009,
February 2, 2008, and February 3, 2007, respectively.  Retail stores
results of operations includes revenues of $64.9 million, $115.3 million, and
$125.3 million for the years ended January 31, 2009, February 2, 2008, and
February 3, 2007, respectively.  Revenues of the commercial bakery
operation amounted to $12.0 million and $17.0 million for the years
ended February 2, 2008 and February 3, 2007,
respectively.  Interest expense of $3.1 million, $3.9 million, and
$3.1 million is included within “Wholesale food distribution - results of
operations” for the years ended January 31, 2009, February 2, 2008, and February
3, 2007, respectively.  The amounts were based on the principal amount
of debt that was required to be paid with the proceeds from the sale of the
segment.
 
 Note
11 – Retirement Plans
 
 Following
the merger of two plans during the fiscal year ended January 31, 2009, the
Company now has three noncontributory defined benefit pension plans covering
certain union personnel.  The Company’s policy is to fund pension
benefits to the extent contributions are deductible for tax purposes and in
compliance with federal laws and regulations.  For the Company’s
plans, normal retirement age is either 62 or 65, but provisions are made for
earlier retirement.  Benefits are determined either on average annual
compensation and years of service, or as a pre-determined amount for each year
of service.  Full vesting occurs upon completion of five years of
service.  Assets of the Company’s pension plans primarily consist of
investments in publicly traded equity and debt securities.
 
 Actuarial
gains and losses are amortized subject to the corridor method, which consists of
amortizing over the remaining service lives of active employees only the portion
of net cumulative actuarial gains and losses that exceeds the greater of 10% of
either the projected benefit obligation or the fair value of the plan
assets.
 
 During
the fiscal year ended January 31, 2009, the Company recorded $24.0 million of
net unrecognized actuarial losses and during the years ended February 2, 2008
and February 3, 2007, recorded net unrecognized actuarial gains of $13.3 million
and $3.2 million, respectively, resulting in a corresponding increase and
reduction in the defined benefit pension plan liability at such
dates.  The loss recorded during the year ended January 31, 2009, was
a result of actual return on plan assets as compared to assumptions estimated by
management in the actuarial valuation for the Plans as well as certain other
actuarial assumptions.  The gain recorded during the year ended
February 2, 2008,  primarily related to a reduction in the defined
benefit obligation of the Company’s most significant defined benefit plan
resulting from adjustments of actuarial assumptions relating to participants’
status.  Unrecognized losses and gains were recognized as an element
of other comprehensive loss and recorded in other accumulated other
comprehensive (loss) income.
 - 52
-
 
 A
curtailment occurred in two plans due to a significant decrease in future
working years as a result of store closings during the year ended January 31,
2009.  The total curtailment gain of $2.1 million reduced the
projected benefit obligation to calculate the unfunded status of the plans at
January 31, 2009.  Approximately $2.0 million of the curtailment was
recognized as net periodic pension benefit during the year ended January 31,
2009, while $0.1 million of the gain was included in unrecognized net actuarial
loss in other comprehensive loss as of January 31, 2009.
 
 The
following table sets forth the plans’ benefit obligations, fair value of plan
assets, and funded status as of January 31, 2009 and February 2,
2008:
 
 January 31,
                        
                        
                        February 2,2009
                        
                        
                        2008Change
      in benefit obligation:Benefit
      obligation at beginning of year
                        
                        $
                        (92,310
                        )
                        
                        $
                        (106,798
                        )Service
      cost
                        
                        
                        (1,253
                        )
                        
                        
                        (1,980
                        )Interest
      cost
                        
                        
                        (5,897
                        )
                        
                        
                        (6,238
                        )Actuarial
      gain
                        
                        
                        984
                        
                        
                        
                        17,478Curtailments
      / amendment
                        
                        
                        2,119
                        
                        
                        
                        (25
                        )Benefits
      paid
                        
                        
                        5,035
                        
                        
                        
                        5,253Benefit
      obligation at end of year
                        
                        $
                        (91,322
                        )
                        
                        $
                        (92,310
                        )Change
      in plan assets:Fair
      value of plan assets at beginning of year
                        
                        $
                        85,984
                        
                        
                        $
                        84,647Actual
      return on plan assets
                        
                        
                        (18,812
                        )
                        
                        
                        2,128Employer
      contributions
                        
                        
                        3,282
                        
                        
                        
                        4,462Benefits
      paid
                        
                        
                        (5,035
                        )
                        
                        
                        (5,253
                        )Fair
      value of plan assets at end of year
                        
                        $
                        65,419
                        
                        
                        $
                        85,984Underfunded
      status (included in non-current liabilities)
                        
                        $
                        (25,903
                        )
                        
                        $
                        (6,326
                        )
 
 Amounts
recorded in accumulated other comprehensive (loss) income on a pre-tax basis
consist of net actuarial loss (gain) of $0.5 million and $(24.6) million as of
January 31, 2009 and February 2, 2008, respectively.  Amounts recorded
in accumulated other comprehensive loss will be subsequently recognized as a
component of net periodic pension cost pursuant to the Company’s accounting
policy for amortizing such amounts.  Approximately $0.1 million
is expected to be recognized as a component of net periodic pension cost for the
year ending January 30, 2010.
 
 Amounts
recognized as components of net periodic pension (benefit) cost are as
follows:
 
 Year
      Ended
                              
                              
                              Year
      Ended
                              
                              
                              Year
      EndedJanuary 31,
                              
                              
                              February 2,
                              
                              
                              February 3,2009
                              
                              
                              2008
                              
                              
                              2007Components
      of net periodic pension cost:Service
      cost
                              
                              $
                              1,253
                              
                              
                              $
                              1,980
                              
                              
                              $
                              1,982Interest
      cost
                              
                              
                              5,897
                              
                              
                              
                              6,238
                              
                              
                              
                              5,975Expected
      return on plan assets
                              
                              
                              (6,372
                              )
                              
                              
                              (6,386
                              )
                              
                              
                              (5,975
                              )Curtailment
      gain
                              
                              
                              (2,032
                              )
                              
                              
                              -
                              
                              
                              
                              -Amortization
      of net actuarial gains
                              
                              
                              (945
                              )
                              
                              
                              (118
                              )
                              
                              
                              -Net
      periodic pension (benefit) cost
                              
                              $
                              (2,199
                              )
                              
                              $
                              1,714
                              
                              
                              $
                              1,982
  - 53
-
 
 Changes
in plan assets and benefit obligations recognized in comprehensive loss are as
follows (amounts are before tax):
 
 Year
      Ended
                      
                      
                      Year
      Ended
                      
                      
                      Year
      EndedJanuary 31,
                      
                      
                      February 2,
                      
                      
                      February 3,2009
                      
                      
                      2008
                      
                      
                      2007Net
      periodic pension (benefit) cost
                      
                      $
                      (2,199
                      )
                      
                      $
                      1,714
                      
                      
                      $
                      1,982Incurred
      net actuarial loss (gain)
                      
                      
                      24,040
                      
                      
                      
                      (13,337
                      )
                      
                      
                      (3,172
                      )Amortization
      of net actuarial gain
                      
                      
                      945
                      
                      
                      
                      118
                      
                      
                      
                      -Total
      recognized in other comprehensive loss (income)
                      
                      
                      24,985
                      
                      
                      
                      (13,219
                      )
                      
                      
                      (3,172
                      )Total
      recognized in comprehensive loss
                      
                      $
                      22,786
                      
                      
                      $
                      (11,505
                      )
                      
                      $
                      (1,190
                      )
 
 The
weighted-average assumptions used to determine the net benefit obligation as of
year-end are as follows:
 
 January 31,
                        
                        
                        February 2,2009
                        
                        
                        2008Discount
      rate
                        
                        
                        6.51
                        %
                        
                        
                        6.43
                        %Rate
      of compensation increase
                        
                        
                        3.00
                        %
                        
                        
                        3.00
                        %
 
 The
weighted-average assumptions used to determine the net periodic pension
(benefit) cost are as follows:
 
 Year
      Ended
                      
                      
                      Year
      Ended
                      
                      
                      Year
      EndedJanuary 31,
                      
                      
                      February 2,
                      
                      
                      February 3,2009
                      
                      
                      2008
                      
                      
                      2007Discount
      rate
                      
                      
                      6.43
                      %
                      
                      
                      5.97
                      %
                      
                      
                      5.68
                      %Rate
      of compensation increase
                      
                      
                      3.00
                      %
                      
                      
                      3.00
                      %
                      
                      
                      3.00
                      %Expected
      return on plan assets
                      
                      
                      7.50
                      %
                      
                      
                      7.50
                      %
                      
                      
                      7.50
                      %
 
 The
target and actual investment allocations of the Company’s pension plan assets
are as follows:
 
 January 31, 2009
                    
                    February 2, 2008Target Range
                    
                    Actual Allocation
                    
                    Target Range
                    
                    Actual AllocationEquity
      securities
                    50% to 60%
                    
                    
                    44
                    %
                    50% to 60%
                    
                    
                    51
                    %Debt securities
                    40% to 50%
                    
                    
                    42
                    %
                    40% to 50%
                    
                    
                    38
                    %Cash and other
                    0% to 10%
                    
                    
                    14
                    %
                    0% to 10%
                    
                    
                    11
                    %
 
 The
Company’s investment policies and strategies for the pension benefit plans use
target allocations for individual asset categories.  The Company’s
investment goals are to maximize returns subject to specific risk management
policies.  The Company, in conjunction with its investment advisers
and plan trustees, meets quarterly and annually to review investment performance
and actual allocation versus target allocation.  The Company considers
the actual asset categories of the invested assets and the historical rates of
return of those categories as the basis for establishing the expected long-term
rate of return on plan assets.
 
 Within
the cash and other asset category there is approximately $7.7 million and $8.3
million of real estate holdings that comprise approximately 11.8% and 10.5% of
the category at January 31, 2009 and February 2, 2008,
respectively.  The real estate investment is a common collective trust
that primarily invests in core institutional-quality office, retail, industrial
and multi-family properties located throughout the United States and is
diversified by product type, geographic region and economic exposure in order to
mitigate investment risk.  The asset is a level 3 investment as
defined under SFAS 157 and is valued on a quarterly basis following a calendar
year.  While the investment is an open-end fund, requests for
redemption of units in the fund are subject to a redemption notice that may be
redeemed in installments as funds become available for such
purpose.
  - 54
-
 
 For the
years ended January 31, 2009, February 2, 2008, and
February 3, 2007, the Company contributed $3.3 million,
$4.5 million, $4.3 million, respectively, to the defined benefit
pension plans.  For the year ending January 31, 2010, the
Company expects to contribute $4.0 million to these plans.
 
 The
amount of benefits expected to be paid in the future is as follows (in
thousands):
 
 Year
                      
                      Amount2010
                      
                      $
                      5,0082011
                      
                      
                      5,1622012
                      
                      
                      5,2202013
                      
                      
                      5,4552014
                      
                      
                      5,6382015-2019
                      
                      
                      31,525
  The
Company maintains a 401(k) savings plan for eligible employees.  The
plan provides for matching contributions by the Company for all employees not
covered by other union pension plans.  The Company’s contributions
aggregated $1.7 million, $1.9 million, and $1.4 million  for the years
ended January 31, 2009, February 2, 2008, and
February 3, 2007, respectively.
 
 The
Company also participates through its collective bargaining agreements that
provide for employer contributions to fund union-sponsored pension and other
benefits.  The Company’s contributions aggregated $4.9 million,
$4.9 million, and $5.2 million for the years ended January 31, 2009,
February 2, 2008, and February 3, 2007,
respectively.  The Company incurred a withdrawal liability from one
plan of $3.1 million during the year ended February 2, 2008, in connection
with the closing of the commercial bakery operation.  While the
Company has not indicated an intention to withdraw from any other multiemployer
plan, such withdrawal could result in an obligation to the plans for a portion
of unfunded benefit obligations of the particular plans.  The
Company’s remaining aggregate withdrawal liability at January 31, 2009, is
approximately $77 million.  Approximately 87% of the Company’s
employees are unionized, 93% of whom are members of one union.
 
 Note
12 – Commitments and Contingencies
 
 The
United States Attorney Office for the Northern District of New York (the “USAO”)
and the Securities and Exchange Commission (“SEC”) have been conducting
investigations relating to certain of the Company’s accounting practices and
policies prior to the Company’s emergence from bankruptcy in April
2005.  The Company has been cooperating with these investigations and
has produced documents and made Company employees available for interviews as
requested.
 
 On
September 17, 2007, the SEC filed civil fraud charges against the Company’s
former Chief Marketing Officer and former Vice President, Non-Perishables
Marketing alleging that such individuals orchestrated a scheme to inflate the
Company’s income and other financial results by prematurely recognizing
promotional allowances received from vendors from approximately the second
quarter of fiscal year 2001 through at least the fourth quarter of fiscal year
2003. These officers had been terminated by the Company in February
2006.  The SEC's complaint further alleges that the individuals
deceived the Company’s accounting personnel to carry out their fraudulent scheme
and aided and abetted the Company’s violations of the Securities Exchange Act of
1934 and rules thereunder.  In addition, on the same date, the USAO
announced that a federal grand jury has returned an indictment against the
above-mentioned individuals on related criminal charges.
 
 On
September 30, 2008, the Company reached a settlement with the SEC with respect
to its ongoing investigation.  Without admitting or denying the
allegations in the SEC’s complaint, the Company agreed to settle the charges by
consenting to a permanent injunction against any future violations of the
federal securities laws. The SEC imposed no fines or monetary penalties on the
Company. As part of the settlement, the Company has hired an independent
examiner who will provide annual reports to the SEC, the USAO and the Company’s
board on, among other things, the Company’s promotional-allowance internal
controls and financial reporting. The examiner will serve for three
years.  Other settlement terms included the Company’s consent to
reform its internal controls and policies and procedures related to promotional
allowances, as well as implementation of a telephone hotline for associates and
vendors to anonymously notify the company of misconduct related to promotional
allowances.
  - 55
-
 
 On
October 28, 2008, the Company entered into a non-prosecution agreement with the
USAO.  Under the agreement, the USAO has agreed not to prosecute the
Company for any crimes committed by its employees between 2001 and 2004 relating
to the matters that were the subject of the USAO’s previously announced
investigation of, among other things, the Company’s accounting policies,
practices and related conduct.  The USAO’s obligations under the
agreement are subject to a number of conditions, including the
Company’s:
 
 ·
              acceptance
      of responsibility for the conduct of its employees between 2001 and
      2004;
 ·
              adoption
      of the remedial measures required under, and compliance with the terms of,
      the previously announced settlement of the SEC’s investigation of the
      Company, including its compliance with specified federal securities laws;
      and
 ·
              provision
      of full cooperation to the USAO and Federal Bureau of Investigation with
      respect to their ongoing investigations through the conclusion of any and
      all related criminal trials.
 
 If the
USAO determines that the Company has deliberately given false, incomplete or
misleading information under the agreement, or if the Company commits a crime or
otherwise knowingly, intentionally and materially violates any provision of the
agreement, then the Company may be subject to prosecution for any federal
criminal violation of which the USAO has knowledge, including any federal
criminal violation relating to the matters subject to the USAO’s investigation.
The Company agreed that any such prosecutions that are not time-barred by the
applicable statute of limitations on the date of the agreement may be commenced
against the Company notwithstanding the expiration of the statute of limitations
after the date of the agreement.
 
 The
Company has incurred significant legal costs associated with these matters to
date and may continue to do so.  These costs are recorded in selling
and administrative expenses as incurred.
 
 On March
12, 2008, the Company commenced an action in the Supreme Court for the State of
New York for the County of Onondaga seeking declaratory judgment to resolve a
dispute over the lease term for commercial property pertaining to a store that
was closed in 2007.  The Company is seeking an order declaring the
proper and effective lease termination date to be November 30, 2009, rather than
June 30, 2017, the date asserted by the landlord.  The Company
estimates that the increased rent expense for the additional lease term asserted
by the landlord to be approximately $2.8 million.  At present, the
Company is unable to estimate the likelihood of an unfavorable outcome and
accordingly, no liability has been recorded for this contingency.
 
 The
Company enters into various purchase commitments in the ordinary course of
business.  In the opinion of management, no losses are expected to
result from these purchase commitments.  In connection with the supply
agreement for grocery and other non-perishable merchandise (see Note 4), the
Company is obligated to generate annual fees of at least $3.0 million to the
supplier.  In connection with the five-year supply agreement for
general merchandise and health and beauty products (see Note 10), the Company is
obligated to pay a fee of 1.5% of the amount by which purchases by the Company
are less than $20 million in each six-month period during the term of the
agreement.
 
 As
discussed in Note 10, the consideration received by the Company for the sale of
the wholesale food distribution business is subject to a true-up calculation
based on the volume of shipments to certain wholesale customers in the twelve
months immediately following the sale compared to the Company’s fiscal year
ended February 2, 2008 (the “Base Year”).
 In
connection with the sale of the wholesale food distribution business (see Note
10), we currently guarantee the future lease payments to be made by the owners
of certain independent grocery stores for a period of one to seven
years.  The aggregate future lease payments guaranteed by the Company
was $0.7 million as of January 31, 2009.
 
 See Note
6 with respect to commitments under outstanding stand-by letters of
credit.
  - 56
-
  Note
13 – Preferred Stock
 
 On
December 13, 2007, the Company issued 10,000 shares of $.01 par value
Series A Convertible Preferred Stock to entities affiliated with certain
principal common shareholders for an aggregate purchase price of
$10 million.  The preferred stock accrues dividends at a rate of
8% per annum and is convertible into shares of the Company’s common stock after
December 13, 2008, at a conversion price of $16.12 per
share.  As of January 31, 2009, no shares had been
converted.  The preferred stock is redeemable at the option of the
Company after December 13, 2009, provided the market price of the common
stock of the Company exceeds $20.96 per share for 20 consecutive
days.  Upon a sale of the Company, as defined, the holders of the
preferred stock will have the option to receive 108% of the original purchase
price of the shares and all accrued but unpaid dividends.  As of
January 31, 2009, accumulated preferred stock dividends aggregated
$0.9 million.
 
 Note
14 – Stock Award Plan
 
 On
December 15, 2006, the Company established the 2006 Omnibus Award Plan
(the “Award Plan”).  Pursuant to the provisions of the Award Plan, the
Company can grant stock options, restricted stock, phantom stock and stock
appreciation rights.  The number of shares of common stock that can be
granted is limited to 902,268 in the aggregate.
 
 On
December 15, 2006, the Company granted an aggregate of 150,000 shares of
phantom stock to two officers of the Company.  The awards provide for
a payment in cash on the 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 grant date and the settlement date.  In accordance
with SFAS 123(R) the awards are being accounted for as compensation expense
and a corresponding liability over the period to settlement date based on
changes in the value of the Company’s common stock.  On October 1,
2007, 100,000 of these shares were forfeited.
 
 On
May 14, 2007, the Company granted an aggregate of 22,685 shares of
phantom stock to five non-officer directors.  The awards provide for a
payment in cash on the settlement date, which is the earlier of when the
individual ceases to be a member of the Company’s board 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
grant date.
 
 On
February 4, 2008, the Company granted an aggregate of 15,575
additional shares of phantom stock to the same five non-officer
directors.
 
 Compensation
expense amounting to $0.2 million and $0.1 million was recognized during
the years ended February 2, 2008 and February 3, 2007, respectively,
in connection with the Award Plan.  Compensation benefit amounting to
$0.2 million was recognized during the year ended January 31, 2009, in
connection with the Award Plan.
 
 Note
15 – Net Loss Per Share
 
 Basic and
diluted net loss per share is based on the net loss available to common
stockholders (computed by increasing the net loss by preferred stock dividends
for the period) and the number of shares of common stock issued and estimated to
be issued pursuant to the Company’s bankruptcy reorganization
plan.  Shares of common stock issued and estimated to be issued in
settlement of claims filed in the Company’s Chapter 11 proceeding are treated as
outstanding as of the effective date of the Company’s bankruptcy reorganization
plan.  Shares of common stock estimated to be issued in connection
with the settlement of remaining claims were 188,164 at
February 2, 2008 and 201,055 at
February 3, 2007.  There are no shares of common stock
estimated to be issued as of January 31, 2009 as a result of settling all claims
relating to the bankruptcy reorganization.  Diluted loss per share for
the years ended January 31, 2009 and February 2, 2008, does not include 626,550
shares of common stock issuable on the conversion of the preferred stock as the
effect is anti-dilutive.
  - 57
-
 
 Net loss
per basic and diluted share is calculated as follows (in thousands, except per
share data):
 
 Year
      Ended
                                    
                                    
                                    Year
      Ended
                                    
                                    
                                    Year
      EndedJanuary
      31,
                                    
                                    
                                    February
      2,
                                    
                                    
                                    February
      3,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2007Loss
      from continuing operations
                                    
                                    $
                                    (34,070
                                    )
                                    
                                    $
                                    (29,227
                                    )
                                    
                                    $
                                    (26,073
                                    )Less:
      cumulative preferred stock dividends
                                    
                                    
                                    (800
                                    )
                                    
                                    
                                    (112
                                    )
                                    
                                    
                                    -Loss
      available to common stock holders
                                    
                                    
                                    (34,870
                                    )
                                    
                                    
                                    (29,339
                                    )
                                    
                                    
                                    (26,073
                                    )Gain
      (loss) from discontinued operations
                                    
                                    
                                    16,473
                                    
                                    
                                    
                                    (12,481
                                    )
                                    
                                    
                                    (1,877
                                    )Net
      loss available to common stockholders
                                    
                                    $
                                    (18,397
                                    )
                                    
                                    $
                                    (41,820
                                    )
                                    
                                    $
                                    (27,950
                                    )Weighted
      average shares
                                    
                                    
                                    8,641,676
                                    
                                    
                                    
                                    8,501,323
                                    
                                    
                                    
                                    8,498,752Loss
      per share from continuing operations
                                    
                                    $
                                    (4.04
                                    )
                                    
                                    $
                                    (3.45
                                    )
                                    
                                    $
                                    (3.07
                                    )Gain
      (loss) per share from discontinued operations
                                    
                                    
                                    1.91
                                    
                                    
                                    
                                    (1.47
                                    )
                                    
                                    
                                    (0.22
                                    )Net
      loss per share - basic and diluted
                                    
                                    $
                                    (2.13
                                    )
                                    
                                    $
                                    (4.92
                                    )
                                    
                                    $
                                    (3.29
                                    )
 
 Note
16 – Supplemental Cash Flow Information
 
 Year
      Ended
                      
                      
                      Year
      Ended
                      
                      
                      Year
      EndedJanuary
      31,
                      
                      
                      February 2,
                      
                      
                      February 3,2009
                      
                      
                      2008
                      
                      
                      2007Cash
      paid for interest
                      
                      $
                      7,245
                      
                      
                      $
                      8,053
                      
                      
                      $
                      7,183Cash
      paid for income taxes
                      
                      $
                      217
                      
                      
                      $
                      114
                      
                      
                      $
                      128Non-cash
      reduction in intangible assets (1)
                      
                      $
                      6,824
                      
                      
                      $
                      5,693
                      
                      
                      $
                      2,068
 
 (1)     
To the extent the Company realizes net operating loss carryforwards or
deductible temporary differences that arose prior to the Company’s emergence
from bankruptcy for which a valuation allowance has been provided, the resulting
benefits are allocated to reduce intangible assets that were recognized upon
emergence from bankruptcy.
 
 Note
17 – Reorganization and Other Expenses
 
 Reorganization
expense includes professional fees and other expenses incurred in connection
with the Company’s Chapter 11 bankruptcy proceedings.  Other expenses
for the year ended February 2, 2008, consist of $4.8 million in
professional fees and other expenses incurred in connection with a proposed
acquisition that was not consummated.
  - 58
-
 
 Note
18 – Quarterly Financial Data (unaudited)
 
 Summarized
below is quarterly financial data for the years ended January 31, 2009 and
February 2, 2008:
 
 January 31, 20091st
                                  
                                  
                                  2nd
                                  
                                  
                                  3rd
                                  
                                  
                                  4th13
      Weeks
                                  
                                  
                                  13
      Weeks
                                  
                                  
                                  13
      Weeks
                                  
                                  
                                  13
      WeeksEnded
                                  
                                  
                                  Ended
                                  
                                  
                                  Ended
                                  
                                  
                                  EndedMay
      3,
                                  
                                  
                                  August
      2,
                                  
                                  
                                  November
      1,
                                  
                                  
                                  January
      31,2008
                                  
                                  
                                  2008
                                  
                                  
                                  2008
                                  
                                  
                                  2009Fiscal
      2009Sales
      from continuing operations
                                  
                                  $
                                  211,685
                                  
                                  
                                  $
                                  228,051
                                  
                                  
                                  $
                                  214,542
                                  
                                  
                                  $
                                  218,024Gross
      profit on sales from continuing operations
                                  
                                  
                                  66,351
                                  
                                  
                                  
                                  69,610
                                  
                                  
                                  
                                  65,587
                                  
                                  
                                  
                                  65,439Loss
      from continuing operations
                                  
                                  
                                  (12,274
                                  )
                                  
                                  
                                  (2,827
                                  )
                                  
                                  
                                  (4,541
                                  )
                                  
                                  
                                  (14,428
                                  )(Loss)
      / income from discontinued operations
                                  
                                  
                                  (158
                                  )
                                  
                                  
                                  (570
                                  )
                                  
                                  
                                  (1,044
                                  )
                                  
                                  
                                  18,245
                                  (1)Net
      (loss) / income
                                  
                                  
                                  (12,431
                                  )
                                  
                                  
                                  (3,397
                                  )
                                  
                                  
                                  (5,585
                                  )
                                  
                                  
                                  3,816Basic
      and diluted loss per share from continuing operations
                                  
                                  
                                  (1.44
                                  )
                                  
                                  
                                  (0.36
                                  )
                                  
                                  
                                  (0.54
                                  )
                                  
                                  
                                  (1.70
                                  )Basic
      and diluted net loss per share
                                  
                                  
                                  (1.47
                                  )
                                  
                                  
                                  (0.42
                                  )
                                  
                                  
                                  (0.67
                                  )
                                  
                                  
                                  0.43
  February 2, 20081st
                            
                            
                            2nd
                            
                            
                            3rd
                            
                            
                            4th13
      Weeks
                            
                            
                            13
      Weeks
                            
                            
                            13
      Weeks
                            
                            
                            13
      WeeksEnded
                            
                            
                            Ended
                            
                            
                            Ended
                            
                            
                            EndedMay
      5,
                            
                            
                            August
      4,
                            
                            
                            November
      3,
                            
                            
                            February
      2,2007
                            
                            
                            2007
                            
                            
                            2007
                            
                            
                            2008Fiscal
      2008Sales
      from continuing operations
                            
                            $
                            218,232
                            
                            
                            $
                            234,995
                            
                            
                            $
                            219,417
                            
                            
                            $
                            223,304Gross
      profit on sales from continuing operations
                            
                            
                            68,152
                            
                            
                            
                            74,393
                            
                            
                            
                            69,293
                            
                            
                            
                            66,961Loss
      from continuing operations
                            
                            
                            (7,178
                            )
                            
                            
                            (4,972
                            )
                            
                            
                            (7,918
                            )
                            
                            
                            (9,159
                            )(Loss)
      / income from discontinued operations
                            
                            
                            (232
                            )
                            
                            
                            60
                            
                            
                            
                            (1,658
                            )
                            
                            
                            (10,651
                            )
      (2)Net
      (loss) / income
                            
                            
                            (7,410
                            )
                            
                            
                            (4,912
                            )
                            
                            
                            (9,576
                            )
                            
                            
                            (19,810
                            )Basic
      and diluted loss per share from continuing operations
                            
                            
                            (0.84
                            )
                            
                            
                            (0.59
                            )
                            
                            
                            (0.93
                            )
                            
                            
                            (1.09
                            )Basic
      and diluted net loss per share
                            
                            
                            (0.87
                            )
                            
                            
                            (0.58
                            )
                            
                            
                            (1.13
                            )
                            
                            
                            (2.34
                            )
 (1)
              Includes
      a $26.8 million gain on sale of the wholesale food distribution
      business.
 
 (2)
              Includes
      an $8.2 million loss on disposal of the commercial bakery
      operations.
  - 59
-
 
 SCHEDULE
II—Valuation and Qualifying Accounts
 (in
thousands)
 Column CAdditionsColumn A
                                              
                                              Column B
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              Column D
                                              
                                              
                                              Column EBalance
      at
                                              
                                              
                                              Charged
      to
                                              
                                              
                                              Charged
      to
                                              
                                              
                                              
                                              
                                              
                                              Balance
      atBeginning
      of
                                              
                                              
                                              Costs
      and
                                              
                                              
                                              Other
                                              
                                              
                                              
                                              
                                              
                                              End
      ofDescription
                                              
                                              Period
                                              
                                              
                                              Expense
                                              
                                              
                                              Accounts
                                              
                                              
                                              Deductions
                                              
                                              
                                              Period2009Allowance
      for bad debts
                                              
                                              $
                                              5,690
                                              
                                              
                                              $
                                              (98
                                              )
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              (2,916
                                              )
      (2)
                                              
                                              $
                                              2,676Reserve
      forclosed
      stores
                                              
                                              
                                              8,417
                                              
                                              
                                              
                                              1,166
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (3,587
                                              )
                                              
                                              
                                              5,996Deferred
      tax assetvaluation
      allowance
                                              
                                              
                                              55,204
                                              
                                              
                                              
                                              21,873
                                              (1)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (6,824
                                              )
      (3)
                                              
                                              
                                              70,2532008Allowance
      for bad debts
                                              
                                              $
                                              3,736
                                              
                                              
                                              $
                                              2,444
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              (490
                                              )
                                              
                                              $
                                              5,690Reserve
      forclosed
      stores
                                              
                                              
                                              1,851
                                              
                                              
                                              
                                              7,832
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (1,266
                                              )
                                              
                                              
                                              8,417Deferred
      tax assetvaluation
      allowance
                                              
                                              
                                              40,480
                                              
                                              
                                              
                                              20,417
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (5,693
                                              )(3)
                                              
                                              
                                              55,2042007Allowance
      for bad debts
                                              
                                              $
                                              3,174
                                              
                                              
                                              $
                                              1,324
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              (762
                                              )
                                              
                                              $
                                              3,736Reserve
      forclosed
      stores
                                              
                                              
                                              655
                                              
                                              
                                              
                                              1,475
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (279
                                              )
                                              
                                              
                                              1,851Deferred
      tax assetvaluation
      allowance
                                              
                                              
                                              29,722
                                              
                                              
                                              
                                              12,826
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (2,068
                                              )
      (3)
                                              
                                              
                                              40,480
 
 (1)
              Amount
      includes approximately $9.1 million of valuation allowance recorded in
      other comprehensive income related to the deferred tax asset attributable
      to the tax effects of the unrecognized actuarial loss (see Note
      9).
 
 (2)
              Deductions
      from the allowance for bad debt amount for the year ended January 31,
      2009, include allowances that were sold as part of the wholesale food
      distribution business.  Amount is included within the gain on
      sale of the wholesale business, as a component of discontinued
      operations.
 
 (3)
              Deductions
      relate to reversal of the valuation allowance related to utilization of
      pre-reorganization net operating loss
  carryforwards.
  - 60
-
 
 ITEM 9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING
      AND FINANCIAL DISCLOSURE
 
 There
were no changes in or disagreements with accountants on accounting and financial
disclosure.
 
 ITEM 9A.
              CONTROLS
      AND PROCEDURES
 
 (a)
Evaluation of Disclosure Controls and Procedures
 
 Under the
supervision and with the participation of our management, including the Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of the Company’s disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as
amended.  In designing and implementing our disclosure controls and
procedures, management recognized all internal control systems have inherent
limitations, including the possibility of circumvention and overriding the
control.  Accordingly, even effective internal control can provide
only reasonable assurance as to the reliability of financial statement
preparation and presentation.  Further, because of changes in
conditions, the effectiveness of internal control may vary over
time.  Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that the Company’s disclosure controls
and procedures were effective as of January 31, 2009.
 
 (b)
Management’s Report on Internal Control Over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended.  The Company’s internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles in the United States of America (“US GAAP).  The
Company’s management assessed the effectiveness of our internal controls over
financial reporting as of January 31, 2009.  In making the assessment,
our management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated
Framework.  Based on this assessment, our management, under the
supervision and with the participation of our Chief Executive Officer and our
Chief Financial Officer, has concluded that our internal controsl over financial
reporting are effective as of January 31, 2009.
 
 This
Annual Report on Form 10-K does not include an attestation report of our
independent registered public accounting firm regarding management’s report of
our internal control over financial reporting.  Management’s report
was not subject to attestation by our independent registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this Annual
Report.
 (c)
Remediation of Prior Year Material Weakness
 
 A
material weaknessis a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibilitythat a material
misstatement of the company's annual or interim financial statements will not be
prevented or detected on a timely basis.
 
 As
disclosed in our Annual Report on Form 10-K for the fiscal year ended February
2, 2008, we had a material weakness in our entity-level control environment in
that we did not file interim financial results through Form 10-Q for the fiscal
year ending February 2, 2008, in accordance with US GAAP within the time periods
specified in the Securities and Exchange Commission’s rules and
forms.  The principal factor that contributed to our inability to file
any Form 10-Q for the fiscal year ending February 2, 2008, was the
lack of a sufficient complement of personnel to prepare and file these interim
financial statements on a timely basis.
 
 As of
January 31, 2009, our management implemented a number of remediation measures to
address the previously-reported material weakness in internal control over
financial reporting, including:
 
 ·         We
have completed our annual and interim reporting requirements for the period
ended February 2, 2008.  Additionally, we completed all interim
reporting for the period ended January 31, 2009.
 
 ·         Management
has hired additional personnel with the technical knowledge, experience, and
training in the application of generally accepted accounting principles and
public reporting requirements commensurate with our external reporting and US
GAAP requirements.
 
 ·         We
have improved our procedures and internal controls to help ensure interim
financial statements are prepared and filed on a timely basis.
  - 61
-
 
 (d) 
Changes in Internal Control Over Financial Reporting
 
 Except as
otherwise indicated above, there have been no changes in the Company’s internal
control over financial reporting during the most recently completed fiscal
quarter and fiscal year ended January 31, 2009, that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
 
 ITEM 9B.
              OTHER
      INFORMATION
 
 None.
 
 PART
III
 
 ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
 
 The
information required by this Item is incorporated herein by reference to the
captions “Election of Directors” and “Executive Officers” in the Company’s Proxy
Statement to be filed in connection with the Company’s Annual Meeting of
Stockholders to be held on or about June 15, 2009.
 
 ITEM
      11.
              EXECUTIVE
      COMPENSATION
 
 The
information required by this Item is incorporated herein by reference to the
caption “Executive Compensation” in the Company’s Proxy Statement to be filed in
connection with the Company’s Annual Meeting of Stockholders to be held on or
about June 15, 2009.
 
 ITEM
      12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT
      AND RELATED SHAREHOLDER MATTERS
 
 The
information required by this Item is incorporated herein by reference to the
caption “Security Ownership of Certain Beneficial Owners and Management” in the
Company’s Proxy Statement to be filed in connection with the Company’s Annual
Meeting of Stockholders to be held on or about June 15, 2009.
 
 ITEM
      13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTORINDEPENDENCE
 
 The
information required by this Item is incorporated herein by reference to the
caption “Compensation of Directors” in the Company’s Proxy Statement to be filed
in connection with the Company’s Annual Meeting of Stockholders to be held on or
about June 15, 2009.
 
 ITEM
      14.
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
 
 The
information called for by Item 14 appears in the Company’s Proxy Statement to be
filed in connection with the Company’s Annual Meeting of Stockholders to be held
on or about June 15, 2009, under the caption “Principal Accountant Fees and
Services” is incorporate herein by reference.
  - 62
-
  PART
VI
 
 ITEM
      15.
              EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULE
 
 (b)
              (1)  List
      of  Financial Statements
 .
 Consolidated
Balance Sheets
 
 Consolidated Statements of
Operations
 
 Consolidated Statements of Cash
Flows
 
 Consolidated Statements of
Stockholders’ Equity and Comprehensive Loss
 
 (2)
List of Financial Statement Schedules
 
 Valuation
and Qualifying Accounts (Schedule II)
 
 (3)    List
of Exhibits
 
 The
following are filed as Exhibits to this Report:
 
 Exhibit No.
                  
                  Description2.1
                  
                  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).2.3
                  
                  Asset
      Purchase Agreement, dated as of December 17, 2008, between the Company and
      C&S Wholesale Grocers, Inc. (incorporated by reference to Exhibit 2.1
      to the Form 8-K filed on December 23, 2008).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).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).
  - 63
-
  
 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 (incorporated by reference to Exhibit 10.5 to
      the Form 10-K filed on August 17, 2007).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 (incorporated by reference to Exhibit
      10.6 to the Form 10-K filed on August 17, 2007).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 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).10.9
                
                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).10.10
                
                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).10.11
                
                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 14,
      2007).10.12
                
                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
      14, 2007).10.13
                
                Promotion
      letter, dated October 1, 2007, addressed to Gregory J. Young (incorporated
      by reference to Exhibit 99.1 to the Form 8-K filed on October 1,
      2007).10.14
                
                Registration
      Rights Agreement, dated as of December 13, 2007, by and among The Penn
      Traffic Company and each of the purchasers set forth therein (incorporated
      by reference to Exhibit 10.2 to the Form 8-K filed on December 14,
      2007).10.15
                
                Securities
      Purchase Agreement, dated December 13, 2007, by and among The Penn Traffic
      Company and each of the purchasers set forth therein (incorporated by
      reference to Exhibit 10.1 to the Form 8-K filed on December 14,
      2007).10.16
                
                Fourth
      Amendment to Credit Agreement, dated as of March 27, 2008 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 March
      31, 2008).
  - 64
-
 
 10.17
                
                Fourth
      Amendment, dated as of March 27, 2008, 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 March
      31, 2008).10.18
                
                Form
      of Change of Control Agreement (incorporated by reference to Exhibit 10.3
      to the Form 10-Q filed on June 10, 2008).10.19
                
                Form
      of Bonus Agreement (incorporated by reference to Exhibit 10.4 to the Form
      10-Q filed on June 10, 2008).10.20†
                
                Amended
      and Restated Penn Traffic Company Supply Agreement, dated September 10,
      2008, between The Penn Traffic Company and C&S Wholesale Grocers, Inc.
      (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed on
      December 11, 2008).10.21
                
                Fifth
      Amendment, Acknowledgement and Consent to Credit Agreement, dated as of
      October 10, 2008 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 10.2 to
      the Form 10-Q filed on December 11, 2008).10.22
                
                Acknowledgment
      and Consent, dated as of October 10, 2008, 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 10.3 to the Form 10-Q filed on
      December 11, 2008).10.23
                
                Non-Prosecution
      Agreement, dated October 28, 2008, between The Penn Traffic Company and
      the U.S. Attorney’s Office for the Northern District of New York
      (incorporated by reference to Exhibit 10.4 to the Form 10-Q filed on
      December 11, 2008).10.24*
                
                Sixth
      Amendment, Acknowledgement and Consent and Waiver to Credit Agreement,
      dated as of December 18, 2008 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.10.25*
                
                Fifth
      Amendment, Acknowledgement and Consent and Waiver to Credit Agreement,
      dated as of December 18, 2008, 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.10.26†
                
                Third
      Party Logistics Agreement, dated December 17, 2008, between the Company
      and C&S Wholesale Grocers, Inc. (incorporated by reference to Exhibit
      2.2 to the Form 8-K filed on December 29, 2008).10.27†
                
                Transition
      Services Agreement, dated December 17, 2008, between the Company and
      C&S Wholesale Grocers, Inc. (incorporated by reference to Exhibit 2.3
      to the Form 8-K filed on December 29, 2008).10.28†
                
                First
      Amendment to Amended and Restated Penn Traffic Company Supply Agreement,
      dated December 21, 2008, between The Penn Traffic Company and C&S
      Wholesale Grocers, Inc. (incorporated by reference to Exhibit 2.4 to the
      Form 8-K filed on December 29, 2008).10.29
                
                Form
      of Bonus Agreement (incorporated by reference to Exhibit 10.1 to the Form
      8-K filed on December 31,
2008).
  - 65
-
 
 21.1
                    
                    Subsidiaries
      of The Penn Traffic Company (incorporated by reference to Exhibit 21.1 to
      the Form 10-K filed on August 17, 2007).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.
 
 *
              Filed
      herewith.
 †
              Portions
      of this exhibit have been omitted pursuant to confidential treatment with
      regard to such portions granted by the
SEC.
  - 66
-
  Signatures
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized as of the 21st day of
April 2009.
 
 THE
PENN TRAFFIC COMPANY
 
 By:
                /s/
      Gregory J. YoungName:
                Gregory
      J. YoungTitle:
                President
      and Chief Executive Officer
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on its behalf by the registrant and in the
capacities and on the dates indicated:
 
 Signature
                
                Title
                
                Date/s/
      Robert J. Kelly
                
                Chairman
      of the Board
                
                April
      21, 2009Robert
      J. Kelly/s/
      John E. Burke
                
                Director
                
                April
      21, 2009John
      E. Burke/s/
      Kevin P. Collins
                
                Director
                
                April
      21, 2009Kevin
      P. Collins/s/
      Ben Evans
                
                Director
                
                April
      21, 2009Ben
      Evans/s/
      Alan C. Levitan
                
                Director
                
                April
      21, 2009Alan
      C. Levitan/s/
      Kurt M. Cellar
                
                Director
                
                April
      21, 2009Kurt
      M. Cellar/s/
      Scott Sozio
                
                Director
                
                April
      21, 2009Scott
      Sozio/s/
      Gregory J. Young
                
                President
      and Chief Executive Officer
                
                April
      21, 2009Gregory
      J. Young
                
                and
      Director (Principal Executive Officer)/s/
      Tod A. Nestor
                
                Senior
      Vice President and
                
                April
      21, 2009Tod
      A. Nestor
                
                Chief
      Financial Officer (Principal Financialand
      Accounting Officer)
  - 67
-