**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K/A**

 

**x ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thefiscal year ended February 3, 2007**

 

**OR**

 

**o TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the Transition Periodfrom                  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)                 |       | (Telephone Number)                 |

 

Securities registeredpursuant to Section 12(b) of the Act:  **None**

 

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

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.  YES o  NO x

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The aggregate market value of the registrant’s voting stock held bynonaffiliates of the registrant was approximately $89,806,019 as of July 29,2006, the last business day of the registrant’s most recently completed secondfiscal quarter.

 

CommonStock, par value $.01 per share: 8,297,697 shares outstanding as of October 22,2007

 

 

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**FORM 10-K/AINDEX**

 
| **PART II.** |   |
|-------------------|--------|
|              |   |
| Item              | 6.     | Selected Financial Data | 4 |
|              |   |   |   |
| Item              | 7.     | Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 8 |
|              |   |   |   |
| Item              | 8.     | Financial  Statements and Supplementary Data | 20 |
|              |   |   |   |
| **PART IV.** |   |
|              |   |   |   |
| Item              | 15.    | Exhibits,  and Financial Statement Schedules | 51 |
|              |   |   |   |
| Signatures        |   |   | 54 |
|                   |        |  |  |  |

 

2

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**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

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

 

**Explanation**

 

ThePenn Traffic Company (the “Company”) is filing this amendment to Form 10-Kfor the fiscal year ended February 3, 2007, filed with the Securities andExchange Commission on October 31, 2007 to reflect the results of arestatement and to report in Note 18 selected quarterly financial data assupplementary information to the basic financial statements.  As a result of cancellation of debt in the Chapter 11proceedings, the Company previously entirely eliminated all net operating losscarryforwards and reduced the tax basis of its long-lived assets effective January 29, 2006.  During the year ended February 2, 2008,the Company corrected the amount of debt forgiveness in the Chapter 11proceedings that reduced tax attributes which results in an increaseaggregating $66 million in the tax basis of its long-lived assets and netoperating loss carryforwards. The correction resulted in an increase indeferred tax assets attributable to the net operating loss carryforwards, therecording of a related valuation allowance and a reduction in the deferred taxliability attributable to the increase in the tax basis of long-livedassets.  The net effect of the above wasa $3.5 million reduction in the net deferred tax liability and a correspondingreduction in the carrying value of certain long-lived assets upon adoption offresh-start reporting on April 16, 2005 and corresponding adjustments toincome tax provision and depreciation expense for the period ended February 3, 2007(see Note 4 to the consolidate financial statements).

 

We are amendingthe following to reflect the above.

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

 
| PART  IV |
|----------|

 
| Item  15.  Exhibits and Financial Statement  Schedules |
|-------------------------------------------------------------|

 

Except asdescribed above, no other changes have been made to our Annual Report on Form 10-Kfor the fiscal year ended February 3, 2007, as initially filed with theSecurities and Exchange Commission on October 31, 2007 to reflect theresult of a restatement.

 

3

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**PART II**

 

**ITEM 6.          SELECTEDFINANCIAL DATA**

 

**ConsolidatedFive-Year Financial Summary**

 

Set forth below is ourselected historical consolidated financial data for the five fiscal years endedFebruary 3, 2007.  As a resultof the consummation of our plan of reorganization we adopted fresh-startreporting as of April 16, 2005. The accounting periods ended on or prior to April 16, 2005have been designated “Predecessor Company” and the periods subsequent to April 16, 2005have been designated “Successor Company.”

 

In accordance with theimplementation of fresh-start reporting, our assets, liabilities andstockholders’ equity have been revalued as of April 16, 2005.  In addition, as a result of the consummationof our plan of reorganization, the amount of our indebtedness was substantiallyreduced.  Accordingly, our financial statementsfor periods after April 16, 2005 are not comparable to our financialstatements for periods ended on or prior to such date.

 

The selected historicalconsolidated financial data for the 53-week period ended February 3, 2007and the 41-week period ended January 28, 2006, are derived from ourrestated consolidated financial statements, which have been audited by EisnerLLP, independent accountants.  ThePredecessor Company’s selected historical consolidated financial data for the11-week period ended April 16, 2005, and the 52-week periods ended January 29,2005, January 31, 2004 and February 1, 2003 are derived from ourunaudited consolidated financial statements. In addition, the selected historical consolidated financial data for theSuccessor Company should be read in conjunction with our consolidated financialstatements and related notes included elsewhere herein.

 

4

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| ** **                                                                                    | ** ** | **(Audited and Restated)** | ** ** | ** **                                    | ** ** | ** **         | ** ** | ** **           | ** ** | ** **           | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------------|------------|--------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                    | ** ** | **Successor Company**           | ** ** | **(Unaudited) Predecessor Company** | ** ** |
| ** **                                                                                    | ** ** | **53 Weeks**                    | ** ** | **41 Weeks**                             | ** ** | **11 Weeks**  | ** ** | **52 Weeks**    | ** ** | **52 Weeks**    | ** ** | **52 Weeks** | ** ** |
| ** **                                                                                    | ** ** | **Ended**                            | ** ** | **Ended**                                     | ** ** | **Ended**          | ** ** | **Ended**            | ** ** | **Ended**            | ** ** | **Ended** | ** ** |
| **(In thousands of dollars,**                                                                 | ** ** | **February 3,**                 | ** ** | **January 28,**                          | ** ** | **April 16,** | ** ** | **January 29,** | ** ** | **January 31,** | ** ** | **February 1,** | ** ** |
| **except per share data)**                                                                    | ** ** | **2007 (1)**                         | ** ** | **2006 (1)**                                  | ** ** | **2005**           | ** ** | **2005**             | ** ** | **2004**             | ** ** | **2003** | ** ** |
|                                                                                          |       |                                 |       |                                          |       |               |       |                 |       |                 |       |   |   |
| **Revenues**                                                                                  |       | $                                    | 1,310,905  |                                          | $          | 1,015,893          |       | $                    | 265,260    |                 | $          | 1,285,148 |   | $ | 1,307,977 |   | $ | 1,348,437 |   |
|                                                                                          |       |                                 |       |                                          |       |               |       |                 |       |                 |       |   |   |
| **Costs and Operating Expenses:**                                                             |       |                                 |       |                                          |       |               |       |                 |       |                 |       |   |   |
|                                                                                          |       |                                 |       |                                          |       |               |       |                 |       |                 |       |   |   |
| Cost of sales (2)                                                                             |       | 981,419                              |       | 754,995                                       |       | 195,533            |       | 955,609              |       | 973,393              |       | 999,880 |   |
| Selling and administrative expenses (3)                                                       |       | 345,523                              |       | 255,503                                       |       | 71,414             |       | 312,826              |       | 325,388              |       | 319,118 |   |
| Loss on store closings                                                                        |       | 1,308                                |       | 520                                           |       | —             |       | —               |       | —               |       | — |   |
| Amortization of goodwill (5)                                                                  |       | —                               |       | —                                        |       | —             |       | —               |       | —               |       | — |   |
| Asset impairment charge (4)                                                                   |       | —                               |       | —                                        |       | —             |       | —               |       | 1,002                |       | 17,858 |   |
| Goodwill impairment charge (5)                                                                |       | —                               |       | —                                        |       | —             |       | —               |       | 22,832               |       | 28,397 |   |
|                                                                                          |       |                                 |       |                                          |       |               |       |                 |       |                 |       |   |   |
| **Operating (Loss) Income**                                                                   |       | (17,345                              | )          | 4,875                                         |       | (1,687             | )          | 16,713               |       | (14,638              | )          | (16,816 | ) |
| Interest expense (6)                                                                          |       | 9,357                                |       | 8,289                                         |       | 1,755              |       | 12,365               |       | 32,018               |       | 35,479 |   |
| Gain on extinguishment of debt (7)                                                            |       | —                               |       | —                                        |       | (182,831           | )          | —               |       | —               |       | — |   |
| Reorganization expenses (8)                                                                   |       | 1,020                                |       | 1,023                                         |       | 71,117             |       | 19,060               |       | 30,818               |       | — |   |
|                                                                                          |       |                                 |       |                                          |       |               |       |                 |       |                 |       |   |   |
| **(Loss) income from Continuing Operations Before  Income Taxes and Discontinued Operations** |       | (27,722                              | )          | (4,437                                        | )          | 108,272            |       | (14,712              | )          | (77,474              | )          | (52,295 | ) |
|                                                                                          |       |                                 |       |                                          |       |               |       |                 |       |                 |       |   |   |
| Provision (benefit) for income taxes (9)                                                      |       | 228                                  |       | 261                                           |       | (23,945            | )          | 251                  |       | 755                  |       | (8,565 | ) |
|                                                                                          |       |                                 |       |                                          |       |               |       |                 |       |                 |       |   |   |
| **(Loss) Income from Continuing Operations before  Discontinued Operations**                  |       | (27,950                              | )          | (4,698                                        | )          | 132,217            |       | (14,963              | )          | (78,229              | )          | (43,730 | ) |
| Loss from discontinued operations, net of tax (10)                                            |       | —                               |       | —                                        |       | (3,133             | )          | (8,994               | )          | (84,163              | )          | (4,337 | ) |
|                                                                                          |       |                                 |       |                                          |       |               |       |                 |       |                 |       |   |   |
| **Net (Loss) Income**                                                                         |       | $                                    | (27,950    | )                                             | $          | (4,698             | )          | $                    | 129,084    |                 | $          | (23,957 | ) | $ | (162,392 | ) | $ | (48,067 | ) |
|                                                                                          |       |                                 |       |                                          |       |               |       |                 |       |                 |       |   |   |
| **Net Loss Per Share (Basic and Diluted)**                                                    |       | $                                    | (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 our revised capital structure. |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

 
| **Balance Sheet Data:**               |   |    |   |    |   |    |   |     |   |    |   |    |   |
|---------------------------------------|--------|---------|--------|---------|--------|---------|--------|----------|--------|---------|--------|---------|--------|
| Total assets                          |   | 307,467 |   | 325,391 |   | 414,579 |   | 394,225  |   | 454,417 |   | 739,974 |   |
| Total debt (including capital leases) |   | 65,154  |   | 51,252  |   | 67,473  |   | 156,201  |   | 164,555 |   | 356,925 |   |
| Stockholders’ equity (deficit)   |   | 92,725  |   | 118,799 |   | —  |   | (133,606 | )      | (99,021 | )      | 61,739  |   |
|                                  |   |    |   |    |   |    |   |     |   |    |   |    |   |
| **Other Data:**                       |   |    |   |    |   |    |   |     |   |    |   |    |   |
| EBITDA (11)                           |   | 11,317  |   | 25,130  |   | 3,100   |   | 39,511   |   | 31,596  |   | 53,506  |   |
| Depreciation and amortization         |   | 27,134  |   | 18,798  |   | 4,712   |   | 21,985   |   | 21,697  |   | 26,173  |   |
| LIFO (benefit) provision              |   | 1,528   |   | 1,457   |   | 75      |   | 813      |   | 703     |   | (2,106  | )      |
| Capital expenditures                  |   | 22,926  |   | 20,533  |   | 4,148   |   | 21,244   |   | 6,377   |   | 56,439  |   |
| Cash interest expense                 |   | 8,398   |   | 7,222   |   | 1,753   |   | 10,520   |   | 27,542  |   | 32,858  |   |

 

5

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**Notes**

 

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

 

The correctionresulted in an increase in deferred tax assets attributable to the netoperating loss carryforwards and the recording of a related valuation allowanceand a reduction in the deferred tax liability attributable to the increase inthe tax basis of long-lived assets.  Thenet effect of the above was a $3.5 million reduction in the net deferred taxliability and a corresponding reduction in the carrying value of certainlong-lived assets upon adoption of fresh-start reporting on April 16,2005.  See Note 4 on the consolidatedfinancial statements related to restatement.

 

(2)   During the fourth quarter of fiscal year 2003 weadopted Emerging Issues Task Force Issue No. 02-16 “Accounting by aReseller for Cash Consideration Received from a Vendor”, or EITF 02-16.  EITF 02-16 requires that vendor allowances,including slotting allowances, be categorized as a reduction of cost of salesunless they are a reimbursement of costs incurred to sell the vendor’sproducts, in which case, the cash consideration should be characterized as areduction of that cost.  EITF 02-16 alsorequires that rebates or refunds payable be recognized as a reduction of costof sales based on a systematic and rational allocation over the purchase periodif the customer completes a specified cumulative level of purchases from thevendor.  Adoption of this standard didnot materially affect our net loss for fiscal year 2003.

 

(3)   During the fourth quarter of fiscal year 2003, werecorded a $3.6 million reduction of selling and administrative expensesassociated with an adjustment to reserves for group health and generalliability insurance.  The reserve balancefor our sponsored group health insurance was reduced due to improved claimsprocessing that decreased the claims incurred but not reported.  The increase in costs associated with thefiscal year ended February 3, 2007 and the fiscal periods ended January 28,2006 and April 16, 2005 are primarily due to increases in professionalfees.  In addition, fiscal year 2007includes severance payments to prior management and employees of the closedJamestown facility.

 

(4)   We adopted Statement of Financial Accounting Standard No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets”, orSFAS 144, during fiscal year 2003. SFAS 144 requires us to perform areview of the recorded value of our long-lived assets whenever changes incircumstances indicate the carrying value of the asset may not berecoverable.  During the fourth quarterof fiscal year 2003, we recorded a non-cash charge of $17.9 millionrelated to the write-down of 16 of our operating retail stores and threeclosed stores to estimated fair market value. In fiscal year 2004, we recorded a non-cash charge of $1.0 millionfor four retail stores.  The impairmentcharges under SFAS 144 resulted from lower estimated future cash flowsthat were due to a combination of factors, including the changes in theeconomic environment and a more challenging competitive environment duringfiscal year 2003 and fiscal year 2004. These factors reduced the profitability of our stores and caused us toconclude that the profitability of certain of our stores would not increase toa level that would enable the carrying value to be recovered.

 

(5)   We adopted Statement of Financial Accounting Standard No. 142“Goodwill and Other Intangible Assets,” or SFAS 142, in fiscal year 2003and performed a transitional goodwill assessment, which resulted in noimpairment.  SFAS 142 provides thatintangible assets with finite useful lives be amortized and that goodwill andintangible assets with indefinite useful lives not be amortized but tested atleast annually for impairment.  Since theadoption of SFAS 142, we no longer record amortization of goodwill in ourConsolidated Statement of Operations. During the fourth quarter of fiscal years 2003 and 2004, wecompleted an annual impairment review, which was further necessitated by thechange in the economic and competitive environment, and we recorded non-cashcharges for the impairment of goodwill of $28.4 million and $22.8 million,respectively.

 

(6)   As a result of our Chapter 11 filing on May 30,2003, no principal or interest payments were made on or after such date on ourformerly outstanding senior and senior subordinated notes.  Accordingly, no interest expense for theseobligations has been accrued on or after such date.  Had such interest been accrued, interestexpense would have increased by $7.4 million, $11.0 million and $2.3 millionfor fiscal years 2004, 2005 and the 11-week period ended April 16, 2005,respectively.

 

(7)   The gain on extinguishment of debt forthe 11-week period ended April 16, 2005 consists of our extinguishment ofthe (i) allowed claims of our unsecured creditors, including trade claims,and (ii) Cash Balance Pension Plan assumed by Pension Benefit GuarantyCorporation and the former senior notes, which were exchanged primarily forshares of our common stock.

 

6

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(8)          During the 53-week period ended February 3, 2007and the 41-week period ended January 28, 2006, reorganization expenseconsisted of $1.0 million for professional fees.  During the 11-week period ended April 16, 2005,reorganization expense primarily consisted of $10.4 million ofprofessional fees and $60.0 million of losses included in accumulatedother comprehensive loss related to the Cash Balance Pension Plan, which wasrecognized in income on termination of the plan upon assumption thereof by thePBGC.  For fiscal year ended January 29, 2005,the reorganization expenses consisted of $17.9 million for professional feesrelated to the bankruptcy filing, $0.2 million loss on asset disposals and $0.9million related to severances paid in connection with the reorganization.  For fiscal year 2004, the reorganizationexpenses were primarily for professional fees related to our plan ofreorganization.

 

(9)          At February 3, 2007, we had anet operating loss carryforward for federal and state income tax purposes ofapproximately $58.9 million available to offset future taxable incomethrough 2027.  See Note 4 of the auditedcondensed consolidated financial statements.

 

The tax benefitfrom continuing operations for the 11-week period ended April 16, 2005 isnot recorded at statutory rates principally due to the gain on theextinguishment of debt not being included in taxable income and a $24.0 milliontax benefit related to losses from the Cash Balance Pension Plan, which benefithad previously been credited to accumulated other comprehensive loss.  The tax provision for fiscal years 2004 and2005 was not recorded at statutory rates due to the recording of a valuationallowance for all of the income tax benefits generated.  A valuation allowance is required when it ismore likely than not that the recorded value of a deferred tax asset will notbe realized.  The tax (benefit) forfiscal year 2003 is not recorded at statutory rates due to differences betweenincome calculations for financial reporting and tax reporting purposes thatresult primarily from nondeductible amortization of goodwill.

 

(10)    The loss from discontinued operationsreflects operating results and (gains) losses on disposals of Big Bear Storesand other stores, which were closed or sold in connection with ourreorganization during the fiscal years of 2004 and 2005 and the 11-week periodended April 16, 2005.  The losses(gains) for these periods are $33.6 million, ($1.9) million and ($0.3) million,respectively.

 

(11)    EBITDA is earnings from continuingoperations before interest, taxes, depreciation, amortization, amortization ofgoodwill, asset impairment charge, goodwill impairment charge, and LIFOprovision.  EBITDA should not beinterpreted as a measure of operating results, cash flow provided by operatingactivities or liquidity, or as an alternative to any generally acceptedaccounting principle measure of performance. We report EBITDA as it is an important measure utilized by management tomonitor the operating performance of our business.  We also believe that EBITDA assists investorsand other interested parties in evaluating our capacity to service ourdebt.  Our reported EBITDA may not becomparable to similarly titled measures used by other companies.  Below is a table that sets forth thereconciliation of operating (loss) income to EBITDA.

 
| ** **                    | ** ** | **(Audited)**              | ** ** | ** **                                    | ** ** | ** **         | ** ** | ** **           | ** ** | ** **           | ** ** |
|-------------------------------|------------|----------------------------|------------|-----------------------------------------------|------------|--------------------|------------|----------------------|------------|----------------------|------------|
| ** **                    | ** ** | **Successor Company** | ** ** | ** **                                    | ** ** | ** **         | ** ** | ** **           | ** ** | ** **           | ** ** |
| ** **                    | ** ** | **Restated**               | ** ** | **(Unaudited) Predecessor Company** | ** ** |
| ** **                    | ** ** | **53 Weeks**          | ** ** | **41 Weeks**                             | ** ** | **11 Weeks**  | ** ** | **52 Weeks**    | ** ** | **52 Weeks**    | ** ** | **52 Weeks** | ** ** |
| ** **                    | ** ** | **Ended**                  | ** ** | **Ended**                                     | ** ** | **Ended**          | ** ** | **Ended**            | ** ** | **Ended**            | ** ** | **Ended** | ** ** |
| ** **                    | ** ** | **February 3,**       | ** ** | **January 28,**                          | ** ** | **April 16,** | ** ** | **January 29,** | ** ** | **January 31,** | ** ** | **February 1,** | ** ** |
| **(In thousands of dollars)** | ** ** | **2007**                   | ** ** | **2006**                                      | ** ** | **2005**           | ** ** | **2005**             | ** ** | **2004**             | ** ** | **2003** | ** ** |
|                          |       |                       |       |                                          |       |               |       |                 |       |                 |       |   |   |
| Operating (Loss) Income       |       | $                          | (17,345    | )                                             | $          | 4,875              |       | $                    | (1,687     | )                    | $          | 16,713 |   | $ | (14,638 | ) | $ | (16,816 | ) |
|                          |       |                       |       |                                          |       |               |       |                 |       |                 |       |   |   |
| Depreciation and amortization |       | 27,134                     |       | 18,798                                        |       | 4,712              |       | 21,985               |       | 21,697               |       | 26,173 |   |
| Amortization of goodwill      |       | —                     |       | —                                        |       | —             |       | —               |       | —               |       | — |   |
| Asset impairment charge       |       | —                     |       | —                                        |       | —             |       | —               |       | 1,002                |       | 17,858 |   |
| Goodwill impairment charge    |       | —                     |       | —                                        |       | —             |       | —               |       | 22,832               |       | 28,397 |   |
| LIFO provision (benefit)      |       | 1,528                      |       | 1,457                                         |       | 75                 |       | 813                  |       | 703                  |       | (2,106 | ) |
|                          |       |                       |       |                                          |       |               |       |                 |       |                 |       |   |   |
| **EBITDA**                    |       | $                          | 11,317     |                                          | $          | 25,130             |       | $                    | 3,100      |                 | $          | 39,511 |   | $ | 31,596 |   | $ | 53,506 |   |

 

7

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| **ITEM  7.** | ** ** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|--------------|------------|-------------------------------------------------------------------------------------------------|

 

**Overview**

 

As discussed in Note 2 to the accompanyingConsolidated Financial Statements, we emerged from our Chapter 11 proceedingson April 13, 2005.  For financialreporting purposes, we accounted for the consummation of our plan ofreorganization as of the close of business on April 16, 2005.  In accordance with the American Institute ofCertified Public Accountant’s Statement of Position 90-7, “Financial Reportingby Entities in Reorganization under the Bankruptcy Code” we have appliedfresh-start reporting as of the close of business on April 16, 2005,which has resulted in significant changes to the valuation of certain of ourassets and liabilities, and to our stockholders’ equity.  In connection with the adoption offresh-start reporting, a new entity has been deemed to be created for financialreporting purposes.  The periods ended onor prior to April 16, 2005 have been designated “Predecessor Company”and the periods subsequent to April 16, 2005 have been designated “SuccessorCompany.”  For purposes of the discussionof the unaudited Results of Operations, the 11-week period ended April 16, 2005and the audited and restated 41-week period ended January 28, 2006have been deemed noncomparible to prior fiscal years.

 

**Results of Operations**

 

The following table setsforth certain Consolidated Statement of Operations components expressed aspercentages of revenues for the 53-week period ended February 3, 2007and the 41-week period ended January 28, 2006.

 
| ** **                          | ** ** | **(Audited and**      | ** ** | **(Audited and**      | ** ** |
|-------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **Restated**               | ** ** | **Restated**               | ** ** |
| ** **                          | ** ** | **53-Weeks**               | ** ** | **41-Weeks**               | ** ** |
| ** **                          | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** |
| ** **                          | ** ** | **February 3,  2007** | ** ** | **January 28,  2006** | ** ** |
| ** **                          | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Revenues                            |       | 100.0                      | %          | 100.0                      | %          |
| ** **                          | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Gross profit (1)                    |       | 25.1                       |       | 25.7                       |       |
|                                |       |                       |       |                       |       |
| Selling and administrative expenses |       | 26.4                       |       | 25.1                       |       |
|                                |       |                       |       |                       |       |
| Loss on store closings              |       | 0.1                        |       | 0.1                        |       |
|                                |       |                       |       |                       |       |
| Operating (loss) income             |       | (1.3                       | )          | 0.5                        |       |
|                                |       |                       |       |                       |       |
| Interest expense                    |       | 0.7                        |       | 0.8                        |       |
|                                |       |                       |       |                       |       |
| Reorganization expenses             |       | 0.1                        |       | 0.1                        |       |
|                                |       |                       |       |                       |       |
| Income tax provision                |       | 0.0                        |       | 0.0                        |       |
|                                |       |                       |       |                       |       |
| Net loss                            |       | (2.1                       | )          | (0.5                       | )          |

 

----

(1)                                  Revenues less cost of sales.

 

8

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**Fiscal Year2007 (the audited 53-week period ended February 3, 2007) and theFiscal Period 2006 (the audited 41-week period ended January 28, 2006)**

 

**Revenues**

 

Revenues for the 53-weekperiod ended February 3, 2007 increased 29.0% to $1.3 billion from$1.0 billion in the 41-week period ended January 28, 2006  The increase in revenues was mainlyattributed to the difference in the number of weeks in each period.  For the unaudited 52-week period ended January 28,2006, revenues were approximately $1.3 billion.

 

Same store sales for the52-week period ended January 27, 2007 decreased 1.7% compared to theunaudited 52-week period ended January 28, 2006.

 

Wholesale fooddistribution revenues for the 53-week period ended February 3, 2007increased 26.4% to $217.3 million or 16.6% of total revenues from $171.9million or 16.9% of total revenues for the 41-week period ended January 28,2006.  The fiscal year 2007 increase inthe wholesale food distribution revenues was attributable to the difference inthe number of weeks in each period.  During the unaudited 52-week period ended January 28,2006, our wholesale food distribution revenues would have been approximately$216.8 million, or 16.9% of revenues.

 

**Gross Profit**

 

Gross profit was 25.1% ofrevenues for the 53-week period ended February 3, 2007, compared to25.7% of revenues, for the 41-week period ended January 28, 2006.  Thedecrease in gross profit as a percent of revenues in the 53-week period wasprimarily due to higher product costing.

 

**Selling and AdministrativeExpenses**

 

Selling andadministrative expenses for the 53-week period ended February 3, 2007,were $345.5 million or 26.4% of revenues, compared to $255.5 million or 25.1%of revenues, for the 41-week period ended January 28, 2006.  The increase in selling and administrativeexpenses as a percentage of revenues was principally due to non-recurringexpenses, totaling $11.4 million, which consisted principally of$4.1 million of SEC investigation related legal fees, $2.8 million inseverance payments to prior management and employees of the closed Jamestownfacility, $1.5 million in professional fees, and $0.8 million of costsassociated with obtaining new management**.**

 

**Depreciation and Amortization**

 

Depreciation andamortization expense was $27.1 million or 2.1% of revenues, for the 53-weekperiod ended February 3, 2007 compared to $18.8 million or 1.9% ofrevenues, for the 41-week period ended January 28, 2006.  The increase in depreciation and amortizationas a percent of revenues in the 53-week period was primarily due todepreciation of additions in fiscal year 2007 of approximately $22.9 million.

 

**Operating(Loss) Income**

 

Operating loss for the53-week period ended February 3, 2007 was 1.3% of revenues, comparedto the operating income of 0.5% of revenues, for the 41-week period ended January 28,2006.  The change in operating (loss)income for the 53-week period included $11.4 million of non-recurring expense,explained in Selling and Administrative Expenses above.

 

**Interest Expense**

 

Interest expense for the53-week period ended February 3, 2007 was 0.7% of revenues, comparedto 0.8% of revenues, for the 41-week period ended January 28, 2006.  Thedecrease in interest expense as a percentage of revenues for the 53-week periodwas due to a decrease in our average borrowings.

 

9

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**ReorganizationExpense**

 

During the 53-week periodended February 3, 2007 and the 41-week period ended January 28, 2006,we recorded reorganization expense totaling 0.1% of revenues, in eachperiod.  These expenses were primarilyprofessional fees.

 

**Income Tax Provision**

 

The income tax provisionfor the 53-week period ended February 3, 2007 was $0.2 million andless than 0.1% of revenues.  Income taxprovision for the 41-week period ended January 28, 2006 was $0.3 millionand less than 0.1% of revenues.

 

During Fiscal 2007 and2006 we provided for only minimal state taxes and capital/franchise tax.

 

**Net Loss**

 

Net loss for the 53-weekperiod ended February 3, 2007 was $28.0 million or 2.1% of revenues,compared to a net loss of $4.7 million or 0.5% of revenue during the 41-weekperiod ended January 28, 2006.  Theincrease in net loss as a percentage of revenues in the 53-week period isprimarily due to an $8.3 million increase in depreciation and amortization andthe recording of $11.4 million in non-recurring expenses during fiscal year2007.

 

10

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**Results of Operations (continued)**

 

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

 
| ** **                          | ** ** | **(Audited and**      | ** ** | **(Unaudited)**          | ** ** |
|-------------------------------------|------------|----------------------------|------------|--------------------------|------------|
| ** **                          | ** ** | **Restated)**              | ** ** | **Predecessor**          | ** ** |
| ** **                          | ** ** | **Successor Company** | ** ** | **Company**              | ** ** |
| ** **                          | ** ** | **41-Weeks**               | ** ** | **11-Weeks**             | ** ** |
| ** **                          | ** ** | **Ended**                  | ** ** | **Ended**                | ** ** |
| ** **                          | ** ** | **January 28,  2006** | ** ** | **April 16,  2005** | ** ** |
| ** **                          | ** ** | ** **                 | ** ** | ** **               | ** ** |
| Revenues                            |       | 100.0                      | %          | 100.0                    | %          |
| ** **                          | ** ** | ** **                 | ** ** | ** **               | ** ** |
| Gross profit (1)                    |       | 25.7                       |       | 26.3                     |       |
|                                |       |                       |       |                     |       |
| Selling and administrative expenses |       | 25.1                       |       | 26.9                     |       |
|                                |       |                       |       |                     |       |
| Loss on store closings              |       | 0.1                        |       | 0.0                      |       |
|                                |       |                       |       |                     |       |
| Operating income                    |       | 0.5                        |       | (0.6                     | )          |
|                                |       |                       |       |                     |       |
| Interest expense                    |       | 0.8                        |       | 0.7                      |       |
|                                |       |                       |       |                     |       |
| Extinguishment of debt              |       | 0.0                        |       | (68.9                    | )          |
|                                |       |                       |       |                     |       |
| Reorganization item                 |       | 0.1                        |       | 26.8                     |       |
|                                |       |                       |       |                     |       |
| Income tax provision                |       | 0.0                        |       | (9.0                     | )          |
|                                |       |                       |       |                     |       |
| Discontinued operations             |       | 0.0                        |       | 1.2                      |       |
|                                |       |                       |       |                     |       |
| Net (loss) income                   |       | (0.5                       | )          | 48.7                     |       |

 

----

(1)                                 Revenues less cost of sales.

 

**Fiscal Year 2006 (theaudited 41-week period ended January 28, 2006 and the unaudited 11-weekperiod ended April 16, 2005)**

 

**Revenues**

 

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

 

Same store sales for the41-week period ended January 28, 2006 decreased 1.6% compared to the41-week period ended January 29, 2005 and the same store sales for the11-week period ended April 16, 2005 decreased by 0.5% compared to the11-week period ended April 17, 2004.

 

Wholesale fooddistribution revenues were $171.9 million, or 16.9% of revenues, for the41-week period ended January 28, 2006 and $28.7 million, or 10.8% ofrevenues, for the 11-week period ended April 16, 2005.

 

11

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**Gross Profit**

 

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

 

**Selling and AdministrativeExpenses**

 

Selling andadministrative expenses for the 41-week period ended January 28, 2006 were$255.5 million, or 25.1% of revenues, and for the 11-week period ended April 16,2005 were $71.4 million, or 26.9% of revenues.

 

**Depreciation and Amortization**

 

Depreciation andamortization expense was $18.8 million, or 1.9% of revenues, for the41-week period ended January 28, 2006 and $4.7 million, or 1.8% ofrevenues, for the 11-week period ended April 16, 2005.  Depreciation and amortization expenseincreased in fiscal year 2006 primarily due to the shortening of the asset lifefor our property, equipment and machinery, an increase in carrying value offavorable leases and the addition of two new intangible assets (PharmacyScripts and Software) with the implementation of fresh-start reporting in connectionwith our reorganization.  The increase indepreciation and amortization expense was partially offset by the recording ofunfavorable leases associated with the implementation of fresh-start reportingin connection with our reorganization.

 

**Operating Income (Loss)**

 

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

 

**Interest Expense**

 

Interest expense for the41-week period ended January 28, 2006 was $8.3 million, or 0.8% ofrevenues, and was $1.8 million, or 0.7% of revenues, for the 11-weekperiod ended April 16, 2005. We eliminated our existing interest rate swap in connection with ourreorganization.  We obtained a morefavorable interest rate under our credit facility and cancellation of ourdebtor-in-possession facility.

 

**Reorganization Item**

 

During the 41-week periodended January 28, 2006 we recorded reorganization item expense of$1.0 million, or 0.1% of revenues, and for the 11-week period ended April 16,2005 we recorded reorganization item expense of $71.1 million, or 26.8% ofrevenues. These expenses were primarily due to PBGC assumption of our CashBalance Plan and consulting fees paid to various bankruptcy professionals.

 

12

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**Income Taxes**

 

Income tax provision forthe 41-week period ended January 28, 2006 was $0.3 million, or lessthan 0.1% of revenues.  For the 11-weekperiod ended April 16, 2005, the income tax provision was$23.9 million, or 9.0% of revenues.

 

During fiscal year 2006we provided for only minimal state taxes and capital/franchise tax and resetour deferred tax liability due to our emergence from bankruptcy.

 

At January 29, 2005,we had approximately $58.9 million of federal net operating losscarryforwards, as well as certain state net operating loss carryforwards.

 

**Discontinued Operations**

 

Loss from discontinuedoperations for the 11-week period ended April 16, 2005 was $3.1 million.  This loss was primarily attributable to ourclosure of unprofitable stores during this period.

 

**Net (Loss) Income**

 

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

 

13

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**Liquidity and Capital Resources**

 

On April 16, 2005,upon emergence from Chapter 11 proceedings, we entered into a revolving creditand term loan facility with a group of financial institutions providing for a$130.0 million revolving credit facility and a $6.0 million termloan.  Also on April 16, 2005, weentered into a supplemental real estate credit facility with another group oflenders, providing for term loan borrowings of up to $28.0 million.  Availability under both credit facilities isdependent on levels of accounts receivable, inventory and certain otherassets.  Interest rates on borrowingsunder the revolving credit facility vary depending upon the amount of availability.  At February 3, 2007, outstandingborrowings under both facilities aggregated $48.5 million.  At such date, availability in excess ofoutstanding borrowings and letters of credit was approximately$42.0 million.  Borrowings under therevolving credit and term loan facility are secured by substantially all of ourassets, subject to first liens on certain properties by other lenders.  Borrowings under the real estate facility aresecured by a first lien on substantially all of our leasehold interests and asecond lien on substantially all of our remaining assets.  During fiscal year 2007, we had stand-byletters of credit of approximately $48.4 million.  Many of these stand-by letters of credit wererequired upon emergence from bankruptcy and as a result of our inability tofile financial statements.

 

Provisions of both creditfacilities, among other things, require the maintenance of certain financialcovenants (when availability under the credit facilities is less than$35.0 million for four consecutive days or less than $30.0 millionfor any one day), and limit the amount of capital expenditures, our assumptionof additional debt and our payment of dividends.  At no time through February 3, 2007had we been subject to compliance with these financial covenants because theannual available for borrowing had not dropped to these levels.  However, had such an event occurred, we wouldnot have been in compliance with the financial covenants and would have been indefault under the terms of the loan agreement at February 3, 2007.  Pursuant to our plan of reorganization, weentered into a collateral trust agreement with the collateral trustee inconnection with the secured trade lien program. The secured trade lien program is with certain of our vendors and allowsus to maintain trade terms.  This programhas been extended until April 13, 2008.

 

On December 26, 2006and on August 1, 2007, both the revolving credit and term loan facilityand the supplemental real estate credit facility were amended to provide uswith additional liquidity by lowering the excess availability thresholds forpurposes of determining compliance with certain financial covenants in thecredit facilities and to permit the disposal of assets in connection with theclosing of certain stores.

 

We also have borrowingsunder mortgages secured by the related properties.

 

**Off-Balance Sheet Arrangements**

 

We do not have any material off-balance sheetarrangements.

 

14

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**Contractual Obligations and Commitments**

 

The table below presentsour significant contractual obligations at February 3, 2007 (inthousands of dollars):

 
| ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **          | ** ** | ** **               | ** ** | **Total**       | ** ** |
|----------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------|------------|--------------------------|------------|-----------------|------------|
| **Commitment expires**      | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **          | ** ** | **Other**                | ** ** | **Contractual** | ** ** |
| **during the**              | ** ** | **Long-term**     | ** ** | **Capital Lease**      | ** ** | **Operating**       | ** ** | **Long-term**            | ** ** | **Cash**        | ** ** |
| **Fiscal Year Ending** | ** ** | **Debt (1)** | ** ** | **Obligations (2)(3)** | ** ** | **Leases (3)** | ** ** | **Liabilities (4)** | ** ** | **Obligations** | ** ** |
| ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **          | ** ** | ** **               | ** ** | ** **      | ** ** |
| February 2, 2008            |       | $                 | 314        |                        | $          | 2,855               |       | $                        | 20,092     |            | $          | 8,633 |   | $ | 31,894 |   |
| January 31, 2009            |       | 48,778            |       | 2,855                       |       | 20,020              |       | 5,062                    |       | 76,715          |       |
| January 30, 2010            |       | 296               |       | 2,781                       |       | 16,158              |       | 3,068                    |       | 22,303          |       |
| January 29, 2011            |       | 321               |       | 1,944                       |       | 14,459              |       | 2,043                    |       | 18,767          |       |
| January 28, 2012            |       | 259               |       | 1,496                       |       | 12,299              |       | 1,680                    |       | 15,734          |       |
| Thereafter                       |       | 2,758             |       | 11,269                      |       | 59,116              |       | 672                      |       | 73,815          |       |
|                                  |            |                   |            |                             |            |                     |            |                          |            |                 |            |  |  |  |  |  |

 

----

(1)     The balance for the fiscal year ending January 31,2009 includes repayment of $48.5 million under the revolving creditfacility, term loan and supplemental real estate loan.

 

(2)     Includes amounts classified as imputedinterest.

 

(3)     See Note 5 to the Consolidated FinancialStatements.

 

(4)     Other long-term liabilities include workerscompensation, general liability, asset retirement obligations, store closingcosts and the PBGC settlement.

 

We have also made certaincontractual commitments that extend beyond February 3, 2007 as shownbelow (in thousands of dollars):

 
| ** **              | ** ** | **Stand-by**        | ** ** | ** **         | ** ** |
|-------------------------|------------|---------------------|------------|--------------------|------------|
| ** **              | ** ** | **Letters of** | ** ** | **Surety**         | ** ** |
| ** **              | ** ** | **Credit (1)** | ** ** | **Bonds (2)** | ** ** |
| ** **              | ** ** | ** **          | ** ** | ** **         | ** ** |
| Total amounts committed |       | $                   | 48,349     |               | $          | 7,495 |   |
|                    |       |                |       |               |       |
|                         |            |                     |            |                    |            |  |  |

 

----

(1)                       Letters of credit are primarilyassociated with supporting workers’ compensation obligations and are renewableannually.

 

(2)                       We are required to maintain surety bondsfor varying periods of up to three years from the date of issuance.

 

15

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**Impact of N****ew AccountingPronouncements**

 

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

 

In June 2006,the FASB ratified Emerging Issues Task Force Issue No. 06-3, “How SalesTaxes Collected From Customers and Remitted to Governmental Authorities ShouldBe Presented in the Income Statement (that is, Gross Versus Net Presentation)”,or EITF 06-3, effective for periods beginning after December 15,2006.  EITF 06-3 allows taxes assessed byvarious governmental authorities that are directly imposed on revenue-producingtransactions between a seller and a customer, such as sales and some excisetaxes, to be presented on either a gross or net basis.  We record sales net of applicable sales taxesand intend to continue such policy. Therefore, the adoption of EITF 06-3 will have no effect on the presentationof our revenues and expenses.

 

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157, “FairValue Measurement,” or SFAS 157, effective for fiscal years beginning after November 15, 2007.  SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements.  SFAS 157 does not require any new fair valuemeasurements.  We are currentlyevaluating the effect of adopting SFAS 157.

 

In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities” – Includingan amendment of FASB Statement No. 115, or SFAS 159, effective for fiscalyears ending after November 15, 2007. SFAS 159 permits an entity to elect fair value as the initial andsubsequent measurement attribute for many financial assets andliabilities.  Entities electing the fairvalue option would be required to recognize changes in fair value in earnings andto distinguish on the face of the statement of financial position the fairvalue of assets and liabilities for which the fair value option has beenelected and similar assets and liabilities measured using another measurementattribute.  The adjustment to reflect thedifference between the fair value and the carrying amount would be accountedfor as a cumulative-effect adjustment to retained earnings as of the date ofinitial adoption.  We are currentlyevaluating the effect of adopting SFAS 159.

 

16

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**CriticalAccounting Policies**

 

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

 

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

 

**Reservefor Store Closures**

 

Reserves for closedstores are recorded in accordance with Statement of Financial AccountingStandard No. 146, “Accounting for Costs Associated with Exit and DisposalActivities,” or SFAS 146.  We recorda liability for the estimated future cash flows (including future leasecommitments, net of estimated cost recoveries) and miscellaneous closing costs. Future cash flows are estimated based onour knowledge of the market in which the closed stores are located.  The estimates of future cash flows are thendiscounted to the present, based on the interest rate of our real estatefacility term loan.  These estimates ofdiscounted future cash flows could be affected by changes in real estatemarkets, other economic conditions and the interest rate used in suchcalculations.

 

**Impairmentof Long-lived Assets**

 

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

 

In the event such cashflows are not expected to be sufficient to recover the recorded value of theassets, such assets are written down to their fair value.  In estimating future cash flows, managementconsiders historical performance and assesses the effect of projected changesin competition, maturation of new stores and store remodels, merchandising andmarketing strategies and general market conditions.  Fair values were determined either bymanagement, based on management’s knowledge of local real estate markets andthe value of equipment utilized in the supermarket industry, or by anindependent third party valuation firm.  Noassurance can be given that the actual future cash flows will be sufficient torecover the carrying value of long-lived assets.  Any reductions in the carrying valueresulting from the application of this policy are reflected in the ConsolidatedStatement of Operations as “Asset impairment charge.”

 

**Inventories**

 

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

 

We take physical countsof inventories throughout the year and record inventory shortages based on ourphysical counts.  Where physical countsare not available we record an allowance for inventory shortages based onhistorical shrinkage percentages.

 

17

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**IntangibleAssets**

 

We have recordedintangible assets for favorable leases, pharmacy prescription files andcomputer software.  We amortize ourfavorable leases over the remaining life of the lease including all favorableoptions.  We amortize the pharmacyprescription files over five years and we amortize the computer software overfive years.  We consider these assetsannually during our impairment testing.

 

**Allowancefor Doubtful Accounts**

 

We evaluate thecollectability of our accounts and notes receivable based on our analysis ofpast due accounts and historical loss trends. We record an allowance for doubtful accounts against the receivablebased on the amount that we believe is reasonably collectable.  It is possible that our estimation processcould differ materially from the actual amounts collected.

 

**IncomeTaxes**

 

Income taxes are providedbased on the liability method of accounting. Deferred income taxes are recorded to reflect the tax consequences infuture years of net operating loss carryovers and temporary differences betweenthe tax basis of assets and liabilities and their corresponding financialreporting amounts at each year-end.

 

**Self-InsuranceLiability**

 

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

 

18

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**Pension Accounting**

 

We currently are solesponsors of four tax-qualified defined benefit pension plans.  In accordance with the provisions of SOP90-1, upon emergence from bankruptcy, we recorded the underfunded status ofeach of the defined benefit plans as a liability on our balance sheet.  As of January 28, 2006, we adopted theprovisions of Financial Accounting Standard No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans,” or SFAS158, and in accordance therewith reflected the underfunded status of the plansin our balance sheet at such date. Prospectively, we have adjusted the liability to reflect the currentfunded status of the plan.  Any gains orlosses that arise during the period but are not recognized as components of netperiodic benefit cost will be recognized as a component of other comprehensiveincome.  The adoption of SFAS 158resulted in the recognition of $8.3 million of unrecognized actuarialgains which arose during the period ended January 28, 2006 and acorresponding reduction in the defined benefit pension plan liability at January 28, 2006.  Such unrecognized gains, net of deferredtaxes of $3.4 million were credited to accumulated other comprehensiveincome in the amount of $4.9 million. The adoption of SFAS 158 had no effect on our consolidated statement ofoperations for the period ended January 28, 2006.

 

During the year ended February 3, 2007,we recorded $3.2 million of net unrecognized actuarial gains which arose duringthe period and a corresponding reduction in the defined benefit pension planliability at such date.  Unrecognizedgains, net of deferred taxes of $1.3 million, were recognized as an element ofcomprehensive loss and credited to accumulated other comprehensive income inthe amount of $1.9 million.  See Note 12to the Consolidated Financial Statements for further discussion on pensions.

 

Pension expense iscalculated based upon a number of actuarial assumptions, including an expectedlong-term rate of return on our pension plans’ assets, a discount rate, and anassumed rate of compensation increase. After consultation with our actuaries, we determined these actuarialassumptions at our fiscal year end to calculate liability information as ofthat date and pension expense for the following year.  The discount rate assumption is determinedbased on the internal rate of return for Citigroup Pension Liability Index withmaturities that are consistent with projected future plan cash flows.  The assumed discount rate used to determinepension expense for the period ended January 28, 2006 was 5.48%.  The assumed discount rate at January 28,2006 of 5.68% was used to determine pension expense for Fiscal 2007.

 

The assets of the plansconsist of approximately 57% and 54% equity securities, 33% and 44% fixedincome securities and 10% and 2% cash at February 3, 2007 and January 28,2006, respectively.  The expectedlong-term rates of return on plan assets is based on historical and projectedaverage rates of return for current and planned asset classes in the planinvestment portfolio.  At February 3, 2007and January 28, 2006 the expected long-term rate of return on plan assetsto be used in the determination of pension expense was 7.5%.

 

Significant differencesbetween our actual experience or significant changes in our assumptions, maymaterially affect the pension obligations and future expense.  Additionally, changes in the fair value ofplan assets at year end may materially affect our future pension expense.  The fair value of plan assets can varysignificantly from year to year.

 

19

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**ITEM 8.        FINANCIALSTATEMENTS AND SUPPLEMENTAL DATA**

 
| **Index  to Consolidated Financial Statements**                                                                                                                                                                  | ** ** | **Page** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                                                                                                                             |       |     |
| Consolidated Financial  Statements as of February 3, 2007 and January 28, 2006and for the year ended  February 3, 2007 and the period from April 17, 2005to January 28, 2006: |       |
|                                                                                                                                                                                                             |       |     |
| Report of  Independent Registered Public Accounting Firm                                                                                                                                                         | 21         |
|                                                                                                                                                                                                             |       |     |
| Consolidated Financial  Statements:                                                                                                                                                                              |       |
|                                                                                                                                                                                                             |       |     |
| Balance Sheets                                                                                                                                                                                                   | 22         |
|                                                                                                                                                                                                             |       |     |
| Statements  of Operations                                                                                                                                                                                        | 24         |
|                                                                                                                                                                                                             |       |     |
| Statements  of Cash Flows                                                                                                                                                                                        | 25         |
|                                                                                                                                                                                                             |       |     |
| Statements  of Stockholders’ Equity                                                                                                                                                                         | 26         |
|                                                                                                                                                                                                             |       |     |
| Notes to  Financial Statements                                                                                                                                                                                   | 27         |

 

20

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Board of Directors

The Penn Traffic Company

Syracuse, New York

 

We have audited theaccompanying consolidated balance sheets of The Penn Traffic Company (the “Company”)as of February 3, 2007 and January 28, 2006, and the relatedconsolidated statements of operations, cash flows and stockholders’ equity forthe year ended February 3, 2007 and the period from April 17, 2005(effective date of plan of reorganization for accounting purposes) to January 28,2006.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our auditsin accordance with auditing standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of The Penn Traffic Company as ofFebruary 3, 2007 and January 28, 2006, and the consolidated resultsof its operations and its cash flows for the year ended February 3, 2007and the period from April 17, 2005 to January 28, 2006, in conformitywith accounting principles generally accepted in the United States of America.

 

As discussed in Note 2 tothe consolidated financial statements, on May 30, 2003, the Company filedfor voluntary bankruptcy protection and reorganization under Chapter 11 ofthe United States Bankruptcy Code.  On April 13,2005, the Company’s amended plan of reorganization became effective and theCompany emerged from bankruptcy and effective April 16, 2005 adoptedfresh-start reporting which results in a new reporting entity and a new basisof accounting.

 

As discussed inNote 4 to the consolidated financial statements, the 2007 and 2006financial statements have been restated to correct a misstatement.

 

The selectedquarterly financial data required by item 302(a) of Regulation S-K, whichhad previously been omitted, is included in Note 18 to the consolidatedfinancial statements.

 

We also wereengaged to audit, in accordance with the standards of Public Company AccountingOversight Board (United States), the effectiveness of the Company’s internalcontrol over financial reporting as of February 3, 2007, based on criteriaestablished in Internal Control - Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission and our report dated September 6,2007, disclaimed an opinion thereon.

 

 

/s/ Eisner LLP

 

 

New York, New York

September 6,2007, except for the third paragraph of Note 13 and the effects of therestatement discussed in Note 4, as to which the dates are September 17,2007 and April 11, 2008, respectively.

 

21

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The Penn Traffic Company

Consolidated BalanceSheets

(In thousands, exceptshare and per share data)

 
| ** **                                                                                              | ** ** | **February 3,** | ** ** | **January 28,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                              | ** ** | **2007**             | ** ** | **2006**             | ** ** |
| ** **                                                                                              | ** ** | **Restated**         | ** ** | **Restated**         | ** ** |
| ** **                                                                                              | ** ** | **(Note 4)**    | ** ** | **(Note 4)**    | ** ** |
| **ASSETS**                                                                                              |       |                 |       |                 |       |
|                                                                                                    |       |                 |       |                 |       |
| **Current Assets:**                                                                                     |       |                 |       |                 |       |
| Cash and cash equivalents                                                                               |       | $                    | 24,661     |                 | $          | 12,432 |   |
| Accounts and notes receivable (less allowance fordoubtful accounts of  $3,736 and $3,174, respectively) |       | 35,112               |       | 36,970               |       |
| Inventories (Note 3)                                                                                    |       | 100,035              |       | 113,467              |       |
| Prepaid expenses and other current assets                                                               |       | 8,469                |       | 6,157                |       |
|                                                                                                    |       | 168,277              |       | 169,026              |       |
|                                                                                                    |       |                 |       |                 |       |
| **Capital Leases:**                                                                                     |       |                 |       |                 |       |
| Capital leases                                                                                          |       | 12,023               |       | 12,023               |       |
| Less: Accumulated amortization                                                                          |       | (2,168               | )          | (1,026               | )          |
|                                                                                                    |       | 9,855                |       | 10,997               |       |
|                                                                                                    |       |                 |       |                 |       |
| **Fixed Assets:**                                                                                       |       |                 |       |                 |       |
| Land                                                                                                    |       | 9,313                |       | 11,588               |       |
| Buildings                                                                                               |       | 13,214               |       | 13,621               |       |
| Equipment and furniture                                                                                 |       | 94,742               |       | 83,378               |       |
| Vehicles                                                                                                |       | 7,766                |       | 6,749                |       |
| Leasehold improvements                                                                                  |       | 9,050                |       | 5,062                |       |
|                                                                                                    |       | 134,085              |       | 120,398              |       |
| Less: Accumulated depreciation                                                                          |       | (37,597              | )          | (15,999              | )          |
|                                                                                                    |       | 96,488               |       | 104,399              |       |
|                                                                                                    |       |                 |       |                 |       |
| **Other Assets:**                                                                                       |       |                 |       |                 |       |
| Intangible assets (Note 6)                                                                              |       | 25,188               |       | 33,025               |       |
| Deferred tax asset                                                                                      |       | 3,621                |       | 2,609                |       |
| Other assets                                                                                            |       | 4,038                |       | 5,335                |       |
|                                                                                                    |       | 32,847               |       | 40,969               |       |
|                                                                                                    |       |                 |       |                 |       |
| **Total Assets**                                                                                        |       | $                    | 307,467    |                 | $          | 325,391 |   |

 

 

The accompanying notes are an integral part of these statements.

 

22

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| ** **                                                                                                           | ** ** | **February 3,** | ** ** | **January 28,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                                           | ** ** | **2007**             | ** ** | **2006**             | ** ** |
| ** **                                                                                                           | ** ** | **Restated**         | ** ** | **Restated**         | ** ** |
| ** **                                                                                                           | ** ** | **(Note 4)**    | ** ** | **(Note 4)**    | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                        |       |                 |       |                 |       |
|                                                                                                                 |       |                 |       |                 |       |
| **Current Liabilities:**                                                                                             |       |                 |       |                 |       |
| Current portion of obligations under capital leases (Note 5)                                                         |       | $                    | 1,472      |                 | $          | 1,310 |   |
| Current maturities of long-term debt (Note 7)                                                                        |       | 314                  |       | 278                  |       |
| Accounts payable                                                                                                     |       | 34,704               |       | 36,695               |       |
| Other current liabilities (Note 8)                                                                                   |       | 49,653               |       | 46,294               |       |
| Accrued interest expense                                                                                             |       | 30                   |       | 557                  |       |
| Deferred income taxes (Note 10)                                                                                      |       | 13,542               |       | 13,302               |       |
| Liabilities subject to compromise (Note 9)                                                                           |       | 2,696                |       | 2,871                |       |
|                                                                                                                 |       | 102,411              |       | 101,307              |       |
|                                                                                                                 |       |                 |       |                 |       |
| **Non-current Liabilities:**                                                                                         |       |                 |       |                 |       |
| Obligations under capital leases (Note 5)                                                                            |       | 10,956               |       | 12,429               |       |
| Long-term debt (Note 7)                                                                                              |       | 52,412               |       | 37,235               |       |
| Defined benefit pension plan liability (Note 12)                                                                     |       | 22,150               |       | 27,600               |       |
| Other non-current liabilities (Note 8)                                                                               |       | 26,813               |       | 28,021               |       |
|                                                                                                                 |       | 112,331              |       | 105,285              |       |
|                                                                                                                 |       |                 |       |                 |       |
| **Total Liabilities**                                                                                                |       | 214,742              |       | 206,592              |       |
|                                                                                                                 |       |                 |       |                 |       |
| **Commitments and Contingencies (Notes 5, 7, 13  and 13)**                                                           |       |                 |       |                 |       |
|                                                                                                                 |       |                 |       |                 |       |
| **Stockholders’ Equity:**                                                                                       |       |                 |       |                 |       |
| Preferred stock - authorized 1,000,000 shares, $.01 par value; none  issued at both dates                            |       | —               |       | —               |       |
| Common stock - authorized 15,000,000 shares, $.01 par value; issued  and to be issued 8,498,752 shares at both dates |       | 85                   |       | 85                   |       |
| Capital in excess of par value                                                                                       |       | 118,493              |       | 118,493              |       |
| Deficit                                                                                                              |       | (32,648              | )          | (4,698               | )          |
| Accumulated other comprehensive income                                                                               |       | 6,795                |       | 4,919                |       |
| **Total stockholders’ equity**                                                                                  |       | 92,725               |       | 118,799              |       |
|                                                                                                                 |       |                 |       |                 |       |
| **Total Liabilities and Stockholders’ Equity**                                                                  |       | $                    | 307,467    |                 | $          | 325,391 |   |

 

The accompanying notes are an integral part of these statements.

 

23

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ThePenn Traffic Company

ConsolidatedStatements of Operations

(Inthousands, except share and per share data)

 
| ** **                                          | ** ** | **Year Ended**  | ** ** | **Period from**                 | ** ** |
|-----------------------------------------------------|------------|----------------------|------------|--------------------------------------|------------|
| ** **                                          | ** ** | **February 3,** | ** ** | **April 17, 2005 to** | ** ** |
| ** **                                          | ** ** | **2007**             | ** ** | **January 28, 2006**       | ** ** |
| ** **                                          | ** ** | **Restated**         | ** ** | **Restated**                         | ** ** |
| ** **                                          | ** ** | **(Note 4)**    | ** ** | **(Note 4)**                    | ** ** |
|                                                |       |                 |       |                                 |       |
| **Revenues**                                        |       | $                    | 1,310,905  |                                 | $          | 1,015,893 |   |
|                                                |       |                 |       |                                 |       |
| **Cost and operating expenses**                     |       |                 |       |                                 |       |
| Cost of sales                                       |       | 981,419              |       | 754,995                              |       |
| Selling and administrative expenses                 |       | 345,523              |       | 255,503                              |       |
| Loss on store closings                              |       | 1,308                |       | 520                                  |       |
|                                                |       | 1,328,250            |       | 1,011,018                            |       |
|                                                |       |                 |       |                                 |       |
| **Operating (loss) income**                         |       | (17,345              | )          | 4,875                                |       |
| Interest expense                                    |       | 9,357                |       | 8,289                                |       |
| Reorganization expenses                             |       | 1,020                |       | 1,023                                |       |
|                                                |       |                 |       |                                 |       |
| **Loss before income taxes**                        |       | (27,722              | )          | (4,437                               | )          |
| Income tax expense                                  |       | 228                  |       | 261                                  |       |
|                                                |       |                 |       |                                 |       |
| **Net loss**                                        |       | $                    | (27,950    | )                                    | $          | (4,698 | ) |
|                                                |       |                 |       |                                 |       |
| Shares outstanding and to be issued                 |       | 8,498,752            |       | 8,498,752                            |       |
|                                                |       |                 |       |                                 |       |
| **Net Loss Per Share (Basic and Diluted) (Note 3)** |       | $                    | (3.29      | )                                    | $          | (0.55 | ) |

 

24

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The Penn Traffic Company

Consolidated Statementsof Cash Flows

(In thousands)

 
| ** **                                                                       | ** ** | ** **                     | ** ** | **Period from**                 | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------------|------------|
| ** **                                                                       | ** ** | **Year Ended**            | ** ** | **April 17, 2005 to** | ** ** |
| ** **                                                                       | ** ** | **February 3, 2007** | ** ** | **January 28, 2006**       | ** ** |
| ** **                                                                       | ** ** | **Restated**                   | ** ** | **Restated**                         | ** ** |
| ** **                                                                       | ** ** | **(Note 4)**              | ** ** | **(Note 4)**                    | ** ** |
| **Operating Activities:**                                                        |       |                           |       |                                 |       |
| Net loss                                                                         |       | $                              | (27,950    | )                                    | $          | (4,698 | ) |
| Adjustments to reconcile net loss to net cash provided by operating  activities: |       |                           |       |                                 |       |
| Depreciation and amortization                                                    |       | 27,134                         |       | 18,798                               |       |
| Amortization of deferred financing cost                                          |       | 1,201                          |       | 1,066                                |       |
| Loss (gain) on sale of fixed assets                                              |       | 539                            |       | (605                                 | )          |
|                                                                             |       |                           |       |                                 |       |
| **Net change in operating assets and liabilities:**                              |       |                           |       |                                 |       |
| Accounts and notes receivable, net                                               |       | 1,858                          |       | 3,446                                |       |
| Prepaid expenses and other current assets                                        |       | (2,312                         | )          | 5,276                                |       |
| Inventories                                                                      |       | 12,996                         |       | 3,051                                |       |
| Liabilities subject to compromise                                                |       | (175                           | )          | (5,626                               | )          |
| Accounts payable and other current liabilities                                   |       | 841                            |       | (10,659                              | )          |
| Other assets                                                                     |       | 96                             |       | 444                                  |       |
| Defined benefit pension plan                                                     |       | (2,278                         | )          | (4,044                               | )          |
| Other non-current liabilities                                                    |       | 636                            |       | (1,799                               | )          |
|                                                                             |       |                           |       |                                 |       |
| **Net Cash Provided by Operating Activities**                                    |       | 12,586                         |       | 4,650                                |       |
|                                                                             |       |                           |       |                                 |       |
| **Investing Activities:**                                                        |       |                           |       |                                 |       |
| Acquisitions                                                                     |       | (1,531                         | )          | —                               |       |
| Capital expenditures                                                             |       | (22,926                        | )          | (20,533                              | )          |
| Proceeds from sale of fixed assets                                               |       | 10,271                         |       | 605                                  |       |
|                                                                             |       |                           |       |                                 |       |
| **Net Cash Used in Investing Activities**                                        |       | (14,186                        | )          | (19,928                              | )          |
|                                                                             |       |                           |       |                                 |       |
| **Financing Activities:**                                                        |       |                           |       |                                 |       |
| Payments of mortgages                                                            |       | (287                           | )          | (208                                 | )          |
| Net borrowings  (repayments) under credit facility                               |       | 15,500                         |       | (500                                 | )          |
| Reduction in capital lease  obligations                                          |       | (1,384                         | )          | (886                                 | )          |
|                                                                             |       |                           |       |                                 |       |
| **Net Cash  Provided by (Used In) Financing Activities**                         |       | 13,829                         |       | (1,594                               | )          |
|                                                                             |       |                           |       |                                 |       |
| **Net increase  (decrease) in cash and cash equivalents**                        |       | 12,229                         |       | (16,872                              | )          |
|                                                                             |       |                           |       |                                 |       |
| **Cash and  cash equivalents at the beginning of period**                        |       | 12,432                         |       | 29,304                               |       |
|                                                                             |       |                           |       |                                 |       |
| **Cash and  cash equivalents at end of period**                                  |       | $                              | 24,661     |                                 | $          | 12,432 |   |

 

25

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The Penn Traffic Company

Consolidated Statement ofStockholders’ Equity

For the year ended February 3, 2007and the period from April 17, 2005 to January 28, 2006

(In thousands)

 
| ** **                                                                      | ** ** | **Common  Stock** | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------------------------------------|------------|-------------|------------|-----------------------------------------------|------------|---------------------------------------|------------|
|                                                                            |       |              |       |                                                |       |        |       |                                          |       |                                  |       |
| Common stock issued and to be issued in connection with plan of  reorganization |       | $                 | 85         |                                                | $          | 118,493     |       | $                                             | —     |                                  | $          | — |   | $ | 118,578 |   |
|                                                                            |       |              |       |                                                |       |        |       |                                          |       |                                  |       |
| Net loss for the 41-week period ended January 28, 2006                     |       | —            |       | —                                              |       | (4,698      | )          | —                                        |       | (4,698                                | )          |
| Unrecognized actuarial gain of pension plans, net of deferred taxes  of $3,396  |       | —            |       | —                                              |       | —      |       | 4,919                                         |       | 4,919                                 |       |
|                                                                            |       |              |       |                                                |       |        |       |                                          |       |                                  |       |
| Balance at January 28, 2006                                                |       | 85                |       | 118,493                                             |       | (4,698      | )          | 4,919                                         |       | 118,799                               |       |
| Restated (Note 4)                                                               |       |              |       |                                                |       |        |       |                                          |       |                                  |       |
|                                                                            |       |              |       |                                                |       |        |       |                                          |       |                                  |       |
| Net loss for the year ended February 3, 2007                               |       | —            |       | —                                              |       | (27,950     | )          | —                                        |       | (27,950                               | )          |
| Unrecognized actuarial gain of pension plans, net of deferred taxes  of $1,296  |       | —            |       | —                                              |       | —      |       | 1,876                                         |       | 1,876                                 |       |
| Comprehensive loss                                                              |       | —            |       | —                                              |       | —      |       | —                                        |       | (26,074                               | )          |
|                                                                            |       |              |       |                                                |       |        |       |                                          |       |                                  |       |
| Balance at February 3, 2007                                                |       | $                 | 85         |                                                | $          | 118,493     |       | $                                             | (32,648    | )                                     | $          | 6,795 |   | $ | 92,725 |   |
| Restated (Note 4)                                                               |       |              |       |                                                |       |        |       |                                          |       |                                  |       |

 

26

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ThePenn Traffic Company

Notesto Consolidated Financial Statements

 

**Note 1 – Description of Business**

 

ThePenn Traffic Company and its subsidiaries (the “Company”) are engaged in theretail food business and the wholesale food distribution business.  As of February 3, 2007, the Companyoperated 106 supermarkets under the “P&C”, “Quality” and “Bi-Lo”banners in upstate New York, Pennsylvania, Vermont and New Hampshire, andsupplied 119 independent supermarkets and other independent wholesaleaccounts.  The Company services theseowned and independent supermarkets and independent wholesale accounts throughfive distribution centers and a bakery.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

27

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

 

**Principlesof Consolidation**

 

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

 

**FiscalYear**

 

TheCompany’s fiscal year ends on the Saturday closest to January 31.  Fiscal year 2007 is the 53-week period ended February 3, 2007.  Fiscal year 2006 is the 41-week period from April 17, 2005,the commencement of fresh-start reporting (see below), to January 28,2006.

 

**Basisof Presentation**

 

Theaccompanying consolidated financial statements have been prepared in accordancewith the provisions of Statement of Position 90-7 “Financial Reporting byEntities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”) issued bythe American Institute of Certified Public Accountants.  Pursuant to the provisions of SOP 90-7, uponemergence from Chapter 11 proceedings, the Company adopted fresh-startreporting which resulted in a new reporting entity and a new basis ofaccounting.

 

AlthoughApril 13, 2005 was the effective date of the Plan, the Company chose theclose of business on April 16, 2005 as the effective date foraccounting purposes to adopt fresh-start reporting because of the proximity ofthat date to the end of an accounting period. Applying fresh-start reporting as of April 16, 2005 ratherthan the actual effective date of April 13, 2005 did not have a materialeffect on the financial condition or results of operations of the Company.

 

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

 

**Use ofEstimates**

 

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

 

28

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**RevenueRecognition**

 

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

 

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

 

**Cost ofSales**

 

Costof sales includes the cost of product and related warehousing and freightcosts.  Vendor allowances are recorded asa reduction of cost of sales when the related product is sold in accordancewith the provisions of Emerging Issues Task Force Issue 02-16 “Accounting by aCustomer (Including a Reseller) for Certain Consideration Received from aVendor.”  Vendor allowances, includingearly payment discounts, volume rebates, and funds for product placement andadvertising, are generally recorded as a reduction of inventory cost based onaverage inventory turnover rates by product category.

 

Vendorallowances recognized as a reduction of cost of sales for the year ended February 3, 2007aggregated $56.0 million and for the period ended January 28, 2006aggregated $43.8 million.

 

**Advertising**

 

Advertisingcosts are expensed as incurred and included in selling and administrativeexpenses. Advertising expense for the year ended February 3, 2007aggregated $12.6 million and for the period ended January 28, 2006aggregated $11.1 million.

 

**Cashand Cash Equivalents**

 

TheCompany considers all highly liquid debt instruments with maturities of threemonths or less at the date of purchase to be cash equivalents.

 

**Accountsand Notes Receivable**

 

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

 

**FairValue of Financial Instruments**

 

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

 

29

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**Inventories**

 

Inventories,consisting primarily of grocery and pharmacy products, are stated at the lowerof cost or market.  Cost is determinedusing the last-in, first-out method (“LIFO”) using the estimated fair value ofinventory on April 16, 2005 upon adoption of fresh-start reporting todetermine LIFO cost for financial reporting purposes.  If cost had been determined using thefirst-in, first-out method (“FIFO”), inventories would have been $3.0 millionand $1.5 million higher than reported at February 3, 2007 and January 28,2006, respectively.

 

Duringthe year ended February 3, 2007, inventory quantities were reduced,which resulted in a liquidation of certain LIFO inventory layers carried atlower costs prevailing in an earlier period. The effect was to reduce cost of sales by approximately $0.5 million.

 

TheCompany takes physical counts of inventories throughout the year and recordsinventory shortage adjustments based on the physical counts.  Throughout the year the Company is accruingfor inventory shortages based on historical trends.  Where physical counts are not taken at theyear end, the Company establishes an allowance for inventory shortages based onhistorical shrinkage percentages.

 

**FixedAssets and Capital Leases**

 

Majorrenewals and betterments are capitalized, while maintenance and repairs are chargedto expense as incurred.  Depreciation andamortization are provided on a straight-line basis over the estimated usefullives of the assets or, for leasehold improvements, the shorter of theestimated useful lives of the assets or the lease term (which includes renewalperiods that are reasonably assured).

 

Estimateduseful lives are as follows:

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

 

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

 

**IntangibleAssets**

 

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

 

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

 

30

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**UnfavorableLeases**

 

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

 

**IncomeTaxes**

 

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

 

**Self-InsuranceLiability**

 

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

 

**StorePre-Opening Costs**

 

Storepre-opening costs are expensed as incurred.

 

**Store Closing Costs**

 

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

 

**Share-Based Payments**

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards No. 123 (revised 2004),“Share-Based Payment” (“SFAS 123(R)”) which is a revision of FASBStatement No. 123 “Accounting for Stock-Based Compensation.”  SFAS 123(R) supersedes APB Opinion No. 25“Accounting for Stock Issued to Employees” and requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the income statement based on their fair values.  Pro forma disclosure is no longer analternative.  SFAS 123(R) isrequired to be adopted in the first annual reporting period beginning after June 15,2005.  Accordingly, the Company adoptedSFAS 123(R) effective January 29, 2006.  The adoption of SFAS 123(R) did not havea material effect on the financial statements for year ended February 3, 2007(see Note 14).

 

31

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**Per Share Data**

 

Basic and diluted net loss per share is based on the number of commonshares issued and estimated to be issued pursuant to the Plan.  Common shares issued and estimated to beissued in settlement of claims filed in the Company’s Chapter 11 proceeding aretreated as outstanding as of the effective date of the Plan.  At both February 3, 2007 and January 28,2006, 201,055 common shares are estimated to be issued in connection with thesettlement of remaining claims (see Note 9).

 

**Defined Benefit Pension Plans**

 

In September 2006, the FASB issued Statement of Financial AccountingStandards No. 158, “Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans – an amendment of FASB Statements No. 87, 88,106 and 132R” (“SFAS 158”) effective for fiscal years ending after December 15,2006 with early application encouraged. SFAS 158 requires financial statement recognition of the overfunded orunderfunded status of a defined benefit postretirement plan or otherpostretirement plan as an asset or liability and recognition of changes in thefunded status in comprehensive earnings in the year in which the changes occur.The Company elected early application and adopted SFAS 158 effective as of January 28, 2006.  The adoption of the recognition provisions ofSFAS 158 increased stockholders equity by $4.9 million, reduced thedefined benefit pension plan liability by $8.3 million and increased thedeferred tax liability by $3.4 million at January 28, 2006 (see Note12).

 

**Recently Issued Accounting Standards Not Yet Adopted**

 

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

 

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

 

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

 

In February 2007, the FASB issued Statement of FinancialAccounting Standards No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities – Including an amendment of FASB Statement No. 115”(“SFAS 159”) effective for fiscal years ending after November 15, 2007.  SFAS 159 permits an entity to elect fairvalue as the initial and subsequent measurement attribute for many financialassets and liabilities.  Entitieselecting the fair value option would be required to recognize changes in fairvalue in earnings.  Entities electing thefair value option are required to distinguish on the face of the statement offinancial position, the fair value of assets and liabilities for which the fairvalue option has been elected and similar assets and liabilities measured usinganother measurement attribute.  Theadjustment to reflect the difference between the fair value and the carryingamount would be accounted for as a cumulative-effect adjustment to retainedearnings as of the date of initial adoption. The Company is currently evaluating the effect of adopting SFAS 159.

 

32

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**Note 4 –Restatement**

 

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

 

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

 
| ** **                                      | ** ** | **Period Ended** | ** ** | **Period Ended** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **February 3,**  | ** ** | **January 28,**  | ** ** |
| ** **                                      | ** ** | **2007**              | ** ** | **2006**              | ** ** |
| ** **                                      | ** ** | ** **            | ** ** | ** **            | ** ** |
| Net loss as previously reported                 |       | $                     | (21,225    | )                     | $          | (3,811 | ) |
|                                            |       |                  |       |                  |       |
| Reduction in depreciation of long-lived  assets |       | 351                   |       | 277                   |       |
| Reduction in income tax benefit                 |       | (7,076                | )          | (1,164                | )          |
|                                            |       |                  |       |                  |       |
| Net loss as restated                            |       | $                     | (27,950    | )                     | $          | (4,698 | ) |
|                                            |       |                  |       |                  |       |
| Net loss per share (basic and diluted):         |       |                  |       |                  |       |
| As previously reported                          |       | $                     | (2.50      | )                     | $          | (0.45 | ) |
| Restated                                        |       | (0.79                 | )          | (0.10                 | )          |
| As restated                                     |       | $                     | (3.29      | )                     | $          | (0.55 | ) |

 

Thebalance sheets at February 3, 2007 and January 28, 2006, have beenrestated as follows:

 
| ** **                | ** ** | **February 3, 2007** | ** ** |
|---------------------------|------------|--------------------------------|------------|
| ** **                | ** ** | ** **                     | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **                | ** ** | **As previously**         | ** ** | ** ** | ** ** | **Increase /** | ** ** |
| ** **                | ** ** | **reported**                   | ** ** | **As restated** | ** ** | **(decrease)** | ** ** |
|                      |       |                           |       |   |   |   |   |
| Intangible assets, net    |       | $                              | 30,451     |   | $ | 25,188 |   | $ | (5,263 | ) |
| Fixed assets, net         |       | 99,364                         |       | 96,488 |   | (2,876 | ) |
|                      |       |                           |       |   |   |   |   |
| Deferred income taxes:    |       |                           |       |   |   |   |   |
| Other assets              |       | —                         |       | 3,621 |   | 3,621 |   |
| Current liabilities       |       | 7,816                          |       | 13,542 |   | 5,726 |   |
| Non-current liabilities   |       | 2,632                          |       | — |   | (2,632 | ) |
|                      |       | 10,448                         |       | 9,921 |   | 527 |   |
|                      |       |                           |       |   |   |   |   |
| Stockholders’ equity |       | $                              | 100,337    |   | $ | 92,725 |   | $ | (7,612 | ) |

 

33

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| ** **                | ** ** | **January 28, 2006** | ** ** |
|---------------------------|------------|--------------------------------|------------|
| ** **                | ** ** | **As previously**         | ** ** | **As restated** | ** ** | **Change** | ** ** |
|                      |       |                           |       |   |   |   |   |
| Intangible assets, net    |       | $                              | 36,220     |   | $ | 33,025 |   | $ | (3,195 | ) |
| Fixed assets, net         |       | 107,629                        |       | 104,399 |   | (3,230 | ) |
|                      |       |                           |       |   |   |   |   |
| Deferred income taxes:    |       |                           |       |   |   |   |   |
| Other assets              |       | —                         |       | 2,609 |   | 2,609 |   |
| Current liabilities       |       | 7,900                          |       | 13,302 |   | 5,402 |   |
| Non-current liabilities   |       | 8,331                          |       | — |   | (8,331 | ) |
|                      |       | 16,231                         |       | 10,693 |   | 5,538 |   |
|                      |       |                           |       |   |   |   |   |
| Stockholders’ equity |       | $                              | 119,686    |   | $ | 118,799 |   | $ | (887 | ) |

 

**Note 5 –Leases**

 

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

 

Thefollowing is a summary of future minimum rent payments for operating leases andfor capital leases as of February 3, 2007 (in thousands):

 
| **Fiscal Year Ending**            | ** ** | **Operating Leases** | ** ** | **Capital Leases** | ** ** |
|---------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
|                                        |       |                      |       |                    |       |
| February 2, 2008                       |       | $                         | 21,092     |                    | $          | 2,855 |   |
| January 31, 2009                       |       | 20,020                    |       | 2,855                   |       |
| January 30, 2010                       |       | 16,158                    |       | 2,781                   |       |
| January 29, 2011                       |       | 14,459                    |       | 1,944                   |       |
| January 28, 2012                       |       | 12,299                    |       | 1,496                   |       |
| Thereafter                                  |       | 59,116                    |       | 11,269                  |       |
|                                        |       |                      |       |                    |       |
| Total minimum lease payments                |       | $                         | 143,144    |                    | 23,200     |   |
|                                        |       |                      |       |                    |       |
| Less: Amount representing interest          |       |                      |       | 10,772                  |       |
|                                        |       |                      |       |                    |       |
| Present value of net minimum lease payments |       |                      |       | 12,428                  |       |
|                                        |       |                      |       |                    |       |
| Less: Current portion                       |       |                      |       | 1,472                   |       |
|                                        |       |                      |       |                    |       |
| Long-term obligations under capital leases  |       |                      |       | $                       | 10,956     |   |

 

Futureminimum rent payments have not been reduced by minimum sublease rent income of$8.6 million due in the future under non-cancelable subleases.

 

Rentexpense under operating leases for the year ended February 3, 2007was $18.7 million and for the period ended January 28, 2006 was$10.7 million as follows (in thousands):

 
| ** **          | ** ** | **Year Ended**            | ** ** | **Period Ended**          | ** ** |
|---------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **          | ** ** | **February 3, 2007** | ** ** | **January 28, 2006** | ** ** |
| Minimum rent        |       | $                              | 21,791     |                           | $          | 13,115 |   |
| Contingent rent     |       | 238                            |       | 201                            |       |
| Less: sublease rent |       | (3,281                         | )          | (2,625                         | )          |
| Net rent expense    |       | $                              | 18,748     |                           | $          | 10,691 |   |

 

34

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**Note 6 –Intangible Assets**

 

Intangibleassets as of February 3, 2007 and January 28, 2006 consist ofthe following (in thousands):

 
| ** **                       | ** ** | **February  3, 2007** | ** ** | **January  28, 2006** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **                       | ** ** | **Gross**                            | ** ** | ** **                           | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Carrying**                         | ** ** | **Accumulated**                      | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Amount**                           | ** ** | **Amortization**                     | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
|                             |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |
| Amortized intangible assets (1): |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |
| Favorable leases                 |       | $                                    | 22,525     |                                 | $          | (2,918 | ) | $ | 19,607 |   | $ | 24,584 |   | $ | (1,365 | ) | $ | 23,219 |   |
| Pharmacy prescription files      |       | 7,514                                |       | (3,172                               | )          | 4,342 |   | 9,527 |   | (1,657 | ) | 7,870 |   |
| Computer software                |       | 2,152                                |       | (913                                 | )          | 1,239 |   | 2,337 |   | (401 | ) | 1,936 |   |
|                             |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |
| Total                            |       | $                                    | 32,191     |                                 | $          | (7,003 | ) | $ | 25,188 |   | $ | 36,448 |   | $ | (3,423 | ) | $ | 33,025 |   |

 

----

| (1) |   | Reduced by  approximately $5.0 million and $3.0 million at February 3, 2007 and  January 28, 2006, respectively by reduction in pre-reorganization  deferred tax valuation allowance (see Note 10). |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| Aggregate  amortization expense:            |   |   |   |
|---------------------------------------------|--------|--------|--------|
|                                        |   |   |   |   |   |
| For the year  ended February 3, 2007   |   | $      | 4,236  |   |
|                                        |   |   |   |   |   |
| For the  period ended January 28, 2006 |   | $      | 3,423  |   |
|                                        |   |   |   |   |   |
| Future Amortization:                        |   |   |   |   |   |
|                                        |   |   |   |   |   |
| Fiscal Year Ending:                         |   |   |   |   |   |
| February 2, 2008                       |   |   |   | $ | 2,794 |   |
| January 31, 2009                       |   |   |   | 2,794 |   |
| January 30, 2010                       |   |   |   | 3,352 |   |
| January 29, 2011                       |   |   |   | 1,693 |   |
| January 28, 2012                       |   |   |   | 1,229 |   |
| Thereafter                                  |   |   |   | 13,326 |   |
|                                        |   |   |   |   |   |
|                                        |   |   |   | $ | 25,188 |   |

 

35

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**Note 7 –Debt**

 

Debtconsists of the following as of February 3, 2007 and January 28,2006 (in thousands):

 
| ** **                                                                                                                                                                                        | ** ** | **February 3,** | ** ** | **January 28,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2007**             | ** ** | **2006**             | ** ** |
|                                                                                                                                                                                              |       |                 |       |                 |       |
| Revolving credit  facility, interest (7.82% at February 3, 2007 and 6.60% at  January 28, 2006) at prime plus .50% to 1.25% or LIBOR plus 2.00% to  2.75%, maturing April 13, 2008 |       | $                    | 17,000     |                 | $          | 17,000 |   |
|                                                                                                                                                                                              |       |                 |       |                 |       |
| Term loan  facility, interest (13.25% at February 3, 2007 and 12.25% at  January 28, 2006) at prime plus 5.00%, maturing April 13, 2008                                            |       | 6,000                |       | 6,000                |       |
|                                                                                                                                                                                              |       |                 |       |                 |       |
| Supplemental real  estate credit facility, interest (13.75% at February 3, 2007 and 12.75%  at January 28, 2006) at prime plus 5.50%, maturing April 13, 2008                      |       | 25,500               |       | 10,000               |       |
|                                                                                                                                                                                              |       |                 |       |                 |       |
| Mortgages payable, interest at 6.125% to 12%,  maturing at various dates through May 1, 2021                                                                                                 |       | 4,226                |       | 4,513                |       |
|                                                                                                                                                                                              |       |                 |       |                 |       |
| Total debt                                                                                                                                                                                        |       | 52,726               |       | 37,513               |       |
|                                                                                                                                                                                              |       |                 |       |                 |       |
| Less: Current portion of long-term debt                                                                                                                                                           |       | 314                  |       | 278                  |       |
|                                                                                                                                                                                              |       |                 |       |                 |       |
| Total long-term  debt                                                                                                                                                                             |       | $                    | 52,412     |                 | $          | 37,235 |   |

 

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

 
| Fiscal Year Ending:   |   |   |   |
|-----------------------|--------|--------|--------|
| February 2, 2008 |   | 314    |   |
| January 31, 2009 |   | 48,778 |   |
| January 30, 2010 |   | 296    |   |
| January 29, 2011 |   | 321    |   |
| January 28, 2012 |   | 259    |   |
| Thereafter            |   | 2,758  |   |
|                  |   |   |   |
|                  |   | $      | 52,726 |   |
|                       |        |        |        |  |

 

36

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OnApril 16, 2005, upon emergence from Chapter 11 proceedings, the Companyentered into a revolving credit and term loan facility with a group offinancial institutions providing for a $130 million revolving creditfacility and a $6 million term loan. Also on April 16, 2005, the Company entered into a supplementalreal estate credit facility with another group of lenders, providing forborrowings of up to $28 million. Availability under both credit facilitiesis dependent on levels of accounts receivable, inventory and certain otherassets.  Interest rates on borrowingsunder the revolving credit facility vary depending upon the amount ofavailability.  At February 3, 2007,outstanding borrowings under both facilities aggregated $48.5 million andoutstanding letters of credit under the revolving credit facility, which areprimarily associated with supporting workers’ compensation obligations,amounted to approximately $48 million. At such date, availability inexcess of outstanding borrowings and letters of credit was approximately$42 million. Borrowings under the revolving credit and term loan facilityare secured by substantially all the assets of the Company, subject to firstliens on certain property by other lenders. Borrowings under the real estate facilityare secured by a first lien on substantially all leasehold interests of theCompany, and a second lien on realty owned by the Company.

 

Provisionsof both credit facilities, among other things, require the maintenance ofcertain financial covenants (when availability under the credit facilities isless than $35 million for four consecutive days or less than$30 million for any one day), and limit the amount of capitalexpenditures, the assumption of additional debt and the payment of dividends.  At no time through February 3, 2007had the Company been subject to compliance with these financial covenantsbecause the amount available for borrowing had not dropped to thoselevels.  However, had such an eventoccurred, the Company would not have been in compliance with the financialcovenants and would have been in default under the terms of the loan agreementat February 3, 2007.

 

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

 

OnAugust 1, 2007, both facilities were amended to permit the disposal ofassets in connection with the closing of two additional stores.  Further, the availability amount, which theCompany is required to maintain under certain financial covenants, was reducedto less than $27.5 million for four consecutive days or less than $25 millionfor any one day.

 

TheCompany also has borrowings under mortgages secured by first liens on therelated properties.

 

37

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

 

Other current and non-current liabilities as of February 3, 2007and January 28, 2006 consist of the following (in thousands):

 
| ** **                              | ** ** | **February 3,** | ** ** | **January 28,** | ** ** |
|-----------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                              | ** ** | **2007**             | ** ** | **2006**             | ** ** |
| ** **                              | ** ** | ** **           | ** ** | ** **           | ** ** |
| **Other Current Liabilities:**          | ** ** | ** **           | ** ** | ** **           | ** ** |
| ** **                              | ** ** | ** **           | ** ** | ** **           | ** ** |
| Payroll and related payroll taxes       |       | $                    | 5,622      |                 | $          | 2,938 |   |
| Other taxes payable                     |       | 2,837                |       | 2,627                |       |
| Workers compensation                    |       | 7,270                |       | 9,980                |       |
| Vacation and other compensated absences |       | 12,322               |       | 12,329               |       |
| Reorganization costs                    |       | 134                  |       | 250                  |       |
| Employee benefits                       |       | 4,364                |       | 5,310                |       |
| Employee severance                      |       | 2,546                |       | —               |       |
| State lottery                           |       | 2,404                |       | 2,345                |       |
| Utilities                               |       | 2,196                |       | 2,195                |       |
| Professional fees                       |       | 373                  |       | 1,680                |       |
| Other accrued liabilities               |       | 9,585                |       | 6,640                |       |
|                                    |       |                 |       |                 |       |
| Total                                   |       | $                    | 49,653     |                 | $          | 46,294 |   |

 
| **Other Non-Current Liabilities:** |   |   |   |   |   |
|------------------------------------|--------|--------|--------|--------|--------|
|                               |   |   |   |   |   |
| Workers compensation               |   | $      | 16,106 |   | $      | 16,172 |   |
| Unfavorable leases                 |   | 3,475  |   | 5,767  |   |
| General liability insurance        |   | 1,374  |   | 1,294  |   |
| Asset retirement obligations       |   | 959    |   | 928    |   |
| Step rent liability                |   | 2,180  |   | 705    |   |
| PBGC settlement                    |   | 869    |   | 2,500  |   |
| Store closing costs                |   | 1,850  |   | 655    |   |
|                               |   |   |   |   |   |
| Total                              |   | $      | 26,813 |   | $      | 28,021 |   |

 

38

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**Note 9 –Liabilities Subject to Compromise**

 

Inconnection with the Chapter 11 proceeding, there are two pending mattersinvolving claims for the payment of money or the transfer of property.  In one matter, the Ohio Bureau of Workers’Compensation (“OBWC”) has filed priority and administrative claims aggregating$13.4 million for pre-petition unpaid workers’ compensation premiums andfor reserves to pay future claims arising from existing injuries.  The OBWC has also filed claims aggregating$1.8 million for alleged non-payment of post-petition premiums and forreserves to pay future claims arising from existing injuries.  The Company disputes the amounts of theclaims, and is attempting to negotiate a settlement.

 

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

 

Duringthe year ended February 3, 2007 and the period ended January 28,2006, the Company paid $0.2 million and $5.6 million, respectively, insettlement of disputed claims.  TheCompany has established liabilities for the estimated cash payments required tosettle the remaining claims outstanding in the Chapter 11 proceedings.  Estimated shares of common stock to be issuedin settlement of claims have been accounted for as stockholders’ equity.

 

**Note 10– Income Taxes**

 

TheCompany files a consolidated federal income tax return.  The components of income tax expense for theyear ended February 3, 2007 and for the period ended January 28, 2006are as follows (in thousands):

 
| ** **               | ** ** | **Restated**                   | ** ** | **Restated**                   | ** ** |
|--------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **Year Ended**            | ** ** | **Period Ended**          | ** ** |
| ** **               | ** ** | **February 3, 2007** | ** ** | **January 28, 2006** | ** ** |
| ** **               | ** ** | **(see Note 4)**     | ** ** |
|                     |       |                           |       |                           |       |
| Current tax provision    |       |                           |       |                           |       |
| Federal                  |       | $                              | —     |                           | $          | — |   |
| State                    |       | 228                            |       | 261                            |       |
|                     |       |                           |       |                           |       |
| Total income tax expense |       | $                              | 228        |                           | $          | 261 |   |

 

39

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Thefollowing is a reconciliation between the federal income tax benefit computedat the statutory federal income tax rate and actual income tax expense (inthousands):

 
| ** **                                            | ** ** | **Year Ended**            | ** ** | **Period Ended**          | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **February 3, 2007** | ** ** | **January 28, 2006** | ** ** |
|                                                  |       |                           |       |                           |       |
| Federal income tax benefit at statutory  rate (35%)   |       | $                              | (9,703     | )                              | $          | (1,553 | ) |
| State income taxes, net of federal income  tax effect |       | 148                            |       | 170                            |       |
| Non-deductible expenses                               |       | 14                             |       | 602                            |       |
| Valuation allowance                                   |       | 9,769                          |       | 1,042                          |       |
| Total income tax expense                              |       | $                              | 228        |                           | $          | 261 |   |

 

Thesignificant components of deferred income tax assets and liabilities as of February 3, 2007and January 28, 2006 are as follows (in thousands):

 
| ** **                                              | ** ** | **February 3,** | ** ** | **January 28,** | ** ** |
|---------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **2007**             | ** ** | **2006**             | ** ** |
|                                                    |       |                 |       |                 |       |
| Current deferred income tax assets /  (liabilities)     |       |                 |       |                 |       |
|                                                    |       |                 |       |                 |       |
| Reserves and accruals                                   |       | $                    | 11,409     |                 | $          | 11,295 |   |
| Valuation allowance                                     |       | (7,069               | )          | (5,402               | )          |
| Current deferred tax assets                             |       | 4,340                |       | 5,893                |       |
|                                                    |       |                 |       |                 |       |
| Inventories                                             |       | (17,882              | )          | (19,195              | )          |
| Net current deferred tax liabilities                    |       | (13,542              | )          | (13,302              | )          |
|                                                    |       |                 |       |                 |       |
| Non-current deferred income tax assets /  (liabilities) |       |                 |       |                 |       |
|                                                    |       |                 |       |                 |       |
| Reserves and accruals                                   |       | 8,289                |       | 7,781                |       |
| Pensions                                                |       | 9,048                |       | 11,274               |       |
| Goodwill (1)                                            |       | 4,218                |       | 5,695                |       |
| Capital lease obligations                               |       | 5,077                |       | 5,612                |       |
| Net operating loss carryforward                         |       | 24,069               |       | 17,760               |       |
| Valuation allowance                                     |       | (33,411              | )          | (24,320              | )          |
| Non-current deferred tax assets                         |       | 17,290               |       | 23,802               |       |
|                                                    |       |                 |       |                 |       |
| Beneficial leases and other intangible  assets          |       | (8,994               | )          | (11,122              | )          |
| Fixed assets                                            |       | (649                 | )          | (5,579               | )          |
| Capital leases                                          |       | (4,026               | )          | (4,492               | )          |
| Non-current deferred tax liabilities                    |       | (13,669              | )          | (21,193              | )          |
|                                                    |       |                 |       |                 |       |
| Net non-current deferred tax assets                     |       | 3,621                |       | 2,609                |       |
|                                                    |       |                 |       |                 |       |
| Net deferred income tax (liabilities)                   |       | $                    | (9,921     | )                    | $          | (10,693 | ) |

 

----

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

 

AtFebruary 3, 2007, the Company had a net operating loss carryforwardfor federal and state income tax purposes of approximately $58.9 millionavailable to offset future taxable income from 2009 through 2027.

 

A valuation allowance of $40.5 million and $29.7 million wasestablished at February 3, 2007 and January 28, 2006 to offsetthe net operating loss carryforward and other deferred tax assets to the extentit is more likely than not, based upon available evidence, that the recordedvalue will not be realized.  Realizationis dependent on the existence of sufficient taxable income within thecarryforward period, including future reversals of certain taxable temporarydifferences.  In providing the valuationallowance, no reversal of the taxable temporary difference arising from aportion of LIFO inventory was considered to occur during such period as theperiod in which such reversal may occur is not presently determinable. During fiscal2007 and the period ended January 28, 2006, the valuation allowanceincreased by $10.8 million and $4.2 million, respectively.

 

40

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To the extent net operating loss carryforwards or deductible temporarydifference arising prior to the Company’s emergence from Chapter 11 proceedingsfor which a valuation allowance has been provided are realized, the resultingbenefits will be allocated first to reduce intangible assets until they aretotally eliminated and thereafter reported as an increase to additional paid-incapital.  As of February 3, 2007,approximately $21.0 million of the valuation allowance relates topre-reorganization net operating loss carryforwards and deductible temporarydifferences after reduction of $5.0 million which has reduced intangibleassets.

 

**Note 11– Acquisitions and Dispositions**

 

InMarch and April 2006, the Company acquired two retail stores for anaggregate purchase price of $1.5 million. The cost of the acquisitions was allocated $0.5 million to inventoriesand $1.0 million to equipment.

 

Duringthe year ended February 3, 2007, the Company disposed of five storesof which four were closed and one was sold. It is anticipated that revenues will continue to be generated fromcustomers of three closed stores in Company stores located in the samevicinity.  In addition, it is anticipatedthat the sold store will continue to be serviced from the Company’sdistribution centers thereby continuing to generate revenue for theCompany.  The revenues and operatingresults of the remaining closed store were not significant.  During the period ended January 28, 2006,the Company closed one store for which the revenues and operating results werenot significant.  Accordingly, theoperations of the stores have not been reported as discontinued operations inthe accompanying financial statements. The Company incurred approximately $1.3 million and $0.5 million ofstore closing costs related to leases and terminated employees during 2007 and2006, respectively.

 

InJanuary 2007, the Company announced the closing of a leased distributioncenter used for the distribution of general merchandise and health and beautyproducts.  At the same time, the Companyentered into a five-year supply agreement with a third party to provide themerchandise 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(included in selling and administrative expenses) which were communicated tothe 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 thepresent value of the remaining lease rentals reduced by estimated subleaserentals that could be reasonably obtained for the distribution center.  In addition, in March 2007, the Companysold its remaining inventory located in the distribution center to the thirdparty at current cost.  The carryingvalue of such inventory at February 3, 2007 was approximately$4.8 million.

 

**Note 12– Retirement Plans**

 

TheCompany has four noncontributory defined benefit pension plans covering certainunion personnel.  The Company’s policy isto fund pension benefits to the extent contributions are deductible for taxpurposes and in compliance with federal laws and regulations.  For the Company’s plans, normal retirementage is either 62 or 65, but provisions are made for earlier retirement.  Benefits are determined either on averageannual compensation and years of service, or as a pre-determined amount foreach year of service.  Full vestingoccurs upon completion of five years of service.  Assets of the Company’s pension plansprimarily consist of investments in publicly traded equity and debt securities.

 

Inaccordance with the provisions of SOP 90-1, upon emergence from bankruptcy, theCompany recorded the underfunded status of each of the defined benefit plans asa liability on the balance sheet.  As of January 28,2006, the Company adopted the provisions of Financial Accounting Standard No. 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans” (“SFAS 158”) and in accordance therewith reflected the underfundedstatus of the plans in its balance sheet at such date.  Prospectively, the Company will adjust theliability to reflect the current funded status of the plan.  Any gains or losses that arise during theperiod but are not recognized as components of net periodic benefit cost willbe recognized as a component of other comprehensive income (loss).  The adoption of SFAS 158 resulted in therecognition of $8.3 million of unrecognized actuarial gains which aroseduring the period ended January 28, 2006 and a correspondingreduction in the defined benefit pension plan liability at January 28, 2006.  Such unrecognized gains, net of deferredtaxes of $3.4 million were credited to accumulated other comprehensiveincome in the amount of $4.9 million. The adoption of SFAS 158 had no effect on the Company’s consolidatedstatement of operations for the period ended January 28, 2006 and it willnot effect the Company’s operating results in future periods.

 

41

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Duringthe year ended February 3, 2007, the Company recorded $3.2 million ofnet unrecognized actuarial gains which arose during the period and acorresponding reduction in the defined benefit pension plan liability at suchdate.  Unrecognized gains, net ofdeferred taxes of $1.3 million, were recognized as an element ofcomprehensive loss and credited to accumulated other comprehensive income inthe amount of $1.9 million.

 

Informationas to the Company’s four defined benefit pension plans as of February 3, 2007and January 28, 2006, which are the measurement dates of the plans, andfor the year/period then ended is as follows (in thousands):

 
| ** **                                        | ** ** | **February 3,** | ** ** | **January 28,** | ** ** |
|---------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                        | ** ** | **2007**             | ** ** | **2006**             | ** ** |
|                                              |       |                 |       |                 |       |
| Change in benefit obligation                      |       |                 |       |                 |       |
| Benefit obligation at beginning of period         |       | $                    | (107,600   | )                    | $          | (108,766 | ) |
| Service cost                                      |       | (1,982               | )          | (1,468               | )          |
| Interest cost                                     |       | (5,975               | )          | (4,356               | )          |
| Actuarial gain                                    |       | 3,757                |       | 2,836                |       |
| Benefits paid                                     |       | 5,002                |       | 4,154                |       |
|                                              |       |                 |       |                 |       |
| Benefit obligation at end of period               |       | (106,798             | )          | (107,600             | )          |
|                                              |       |                 |       |                 |       |
| Change in plan assets                             |       |                 |       |                 |       |
| Fair value of plan assets at beginning of  period |       | 80,000               |       | 68,824               |       |
| Actual return on plan assets                      |       | 5,391                |       | 9,459                |       |
| Employer contributions                            |       | 4,259                |       | 5,872                |       |
| Benefits paid                                     |       | (5,002               | )          | (4,155               | )          |
|                                              |       |                 |       |                 |       |
| Fair value of plan assets at end of period        |       | 84,648               |       | 80,000               |       |
|                                              |       |                 |       |                 |       |
| Underfunded status                                |       | $                    | (22,150    | )                    | $          | (27,600 | ) |

 

42

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| ** **                                                                                                                                             | ** ** | **Year Ended**  | ** ** | **Period Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                             | ** ** | **February 3,** | ** ** | **January 28,**  | ** ** |
| ** **                                                                                                                                             | ** ** | **2007**             | ** ** | **2006**              | ** ** |
|                                                                                                                                                   |       |                 |       |                  |       |
| Components of net periodic pension cost for  the year ended February 3, 2007 and for the period ended  January 28, 2006 are as follows: |       |                 |       |                  |       |
|                                                                                                                                                   |       |                 |       |                  |       |
| Service cost                                                                                                                                           |       | $                    | 1,982      |                  | $          | 1,468 |   |
| Interest cost                                                                                                                                          |       | 5,975                |       | 4,356                 |       |
| Expected return on plan assets                                                                                                                         |       | (5,975               | )          | (3,979                | )          |
| Amount of recognized gains and losses                                                                                                                  |       | —               |       | —                |       |
|                                                                                                                                                   |       |                 |       |                  |       |
| Net periodic pension cost                                                                                                                              |       | $                    | 1,982      |                  | $          | 1,845 |   |

 

The weighted-averageassumptions used to determine the net benefit obligations as ofFebruary 3, 2007 and January 28, 2006 are as follows:

 
| ** **                    | ** ** | **Year Ended**  | ** ** | **Period Ended** | ** ** |
|-------------------------------|------------|----------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **February 3,** | ** ** | **January 28,**  | ** ** |
| ** **                    | ** ** | **2007**             | ** ** | **2006**              | ** ** |
|                          |       |                 |       |                  |       |
| Discount rate                 |       | 5.97                 | %          | 5.68                  | %          |
| Rate of compensation increase |       | 3.00                 | %          | 3.00                  | %          |

 

The weighted-averageassumptions used to determine the net benefit cost for the year endedFebruary 3, 2007 and for the period ended January 28, 2006 areas follows:

 
| ** **                     | ** ** | **Year Ended**  | ** ** | **Period Ended** | ** ** |
|--------------------------------|------------|----------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **February 3,** | ** ** | **January 28,**  | ** ** |
| ** **                     | ** ** | **2007**             | ** ** | **2006**              | ** ** |
|                           |       |                 |       |                  |       |
| Discount rate                  |       | 5.68                 | %          | 5.48                  | %          |
| Expected return on plan assets |       | 7.50                 | %          | 7.50                  | %          |
| Rate of compensation increase  |       | 3.00                 | %          | 3.00                  | %          |

 

Amountsin accumulated other comprehensive income will be subsequently recognized as acomponent of net periodic pension cost pursuant to the Company’s accountingpolicy for amortizing such amounts. Included in accumulated other comprehensive income at February 3, 2007are unrecognized actuarial gains of $11.5 million ($6.8 million net of taxes),of which $0.1 million is expected to be recognized as a component of netperiodic pension cost for the year ending February 2, 2008.

 

43

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Planassets by major category as of February 3, 2007 and January 28,2006 are as follows:

 
| ** **        | ** ** | **February 3, 2007** | ** ** | **January 28, 2006** | ** ** |
|-------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **        | ** ** | **Target Range**          | ** ** | **Actual Allocation**     | ** ** | **Target Range** | ** ** | **Actual Allocation** | ** ** |
|              |       |                           |       |                           |       |   |   |   |   |
| Equity securities |       | 50% to 60%                     |       | 57                             | %          | 50% to 60% |   | 54 | % |
| Debt securities   |       | 40% to 50%                     |       | 33                             | %          | 40% to 50% |   | 44 | % |
| Cash              |       | 0% to 10%                      |       | 10                             | %          | 0% to 10% |   | 2 | % |

 

TheCompany considers the actual asset categories of the invested assets and thehistorical rates of return of those categories as the basis for establishingthe expected long-term rate of return (7.5% at both February 3, 2007and January 28, 2006) on plan assets.

 

Forthe period ended January 28, 2006, the Company contributed$5.9 million to the four defined benefit pension plans and for the yearended February 3, 2007, contributed $4.3 million to theseplans.  For the year ending February 2, 2008,the Company expects to contribute $3.7 million to these plans.

 

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

 
| **Year**  | ** ** | **Amount** | ** ** |
|-----------|------------|------------|------------|
|      |       |       |       |
| 2008      |       | $          | 5,092      |   |
| 2009      |       | 5,080      |       |
| 2010      |       | 5,205      |       |
| 2011      |       | 5,434      |       |
| 2012      |       | 5,735      |       |
| 2013-2017 |       | 31,124     |       |
|           |            |            |            |  |

 

OnMay 20, 2004, a distress termination application was filed with the PBGCto terminate a cash balance pension plan sponsored by the Company.  The PBGC filed various claims in bankruptcycourt for payment of unfunded benefit liabilities.  On February 4, 2005, the parties enteredinto a global settlement whereby the Company settled the PBGC claims byagreeing to pay the PBGC $0.2 million upon emergence from bankruptcy and$3.5 million over a two year period commencing six months after theemergence from bankruptcy.  Further, thePBGC was permitted to retain a $60 million unsecured claim in thebankruptcy proceeding which was settled through the issuance of common sharespursuant to the Plan.

 

44

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TheCompany maintains a 401(k) savings plan for eligible employees.  The plan provides for matching contributionsby the Company for all employees not covered by other union pension plans.  The Company’s contributions aggregated $1.4million for the year ended February 3, 2007 and $1.4 million forthe period ended January 28, 2006.

 

TheCompany also participates in seventeen multiemployer collective bargainingagreements that provide for employer contributions to fund union-sponsoredpension and other benefits.  The Company’scontributions aggregated $5.2 million for the year ended February 3, 2007and $3.9 million for the period ended January 28, 2006.  While the Company has not indicated anintention to withdraw from any multiemployer plan, such withdrawal could resultin an obligation to the plans for a portion of unfunded benefit obligations ofthe particular plans.  The Company’saggregate withdrawal liability at February 3, 2007 is approximately $70 million.

 

**Note 13– Commitments and Contingencies**

 

TheUnited States Attorney for the Northern District of New York and the Securitiesand Exchange Commission (“SEC”) have been conducting investigations relating tothe Company’s promotional allowance practices and policies.  Such investigations began prior to theCompany’s emergence from bankruptcy in April 2005.  The Company has been cooperating with theseinvestigations and has produced documents and made Company employees availablefor interviews as requested.

 

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

 

OnSeptember 17, 2007, the SEC filed civil fraud charges against the Company’sformer Chief Marketing Officer and former Vice-President, Non-PerishablesMarketing alleging that such individuals orchestrated a scheme to inflate theCompany’s income and other financial results by prematurely recognizingpromotional allowances received from vendors from approximately the secondquarter of fiscal year 2001 through at least the fourth quarter of fiscal year2003. The complaint further alleges that the individuals deceived the Company’saccounting personnel to carry out their fraudulent scheme and aided and abettedviolations of the Exchange Act of 1934 and rules thereunder. In addition,on the same date, the United States Attorney for the Northern District of NewYork announced that a federal grand jury has returned an indictment against theabovementioned individuals on related criminal charges. Both the SEC and theUnited States Attorney indicated that their investigations are continuing.

 

Inconnection with these matters, the Company could be subject to damage claims,fines or penalties.  At present, theCompany is unable to estimate the likelihood of an unfavorable outcome or theamount of any damage claims, fines or penalties in the event of an unfavorableoutcome and, accordingly, no liability has been recorded for this contingency.

 

TheCompany enters into various purchase commitments in the ordinary course ofbusiness.  In the opinion of management,no losses are expected to result from these purchase commitments.  In connection with the five-year supplyagreement 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 purchasesby the Company are less than $20 million in each six month period during theterm of the agreement.

 

SeeNote 7 with respect to commitments under outstanding stand-by letters ofcredit.  At February 3, 2007, theCompany is also committed under an aggregate of $7.4 million of surety bondswhich are required to be maintained for up to three years from the date ofissuance.

 

45

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**Note 14– Stock Award Plan**

 

OnDecember 15, 2006, the Company established the 2006 Omnibus Award Plan(the “Award Plan”).  Pursuant to theprovisions of the Award Plan, the Company can grant stock options, restrictedstock, phantom stock and stock appreciation rights.  The amount of shares of common stock that canbe granted are limited to 902,268 in the aggregate.

 

OnDecember 15, 2006, the Company granted an aggregate of 150,000 shares ofphantom 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 valueof the Company’s common stock on the grant date and the settlement date.  In accordance with SFAS 123(R) theawards are being accounted for as compensation expense and a correspondingliability over the period to settlement date based on changes in the value ofthe Company’s common stock.  Compensationexpense and a corresponding liability amounting to $0.06 million was recognizedduring the year ended February 3, 2007 in connection with such grant.

 

OnMay 14, 2007, the Company granted an aggregate of 22,685 shares of phantomstock to five non-officer directors.  Theawards provide for a payment in cash on the settlement date, which is theearlier of when the individual ceases to be a member of the Company’s Board ofDirectors or upon the occurrence of a change in control, as defined, of thevalue of an equivalent number of shares of common stock.  The award was fully vested upon the grantdate, and the Company will record a compensation charge with a corresponding liabilityfor the fair value of the awards at date of grant.  The liability will be adjusted based onchanges in value of the Company’s common stock, with a corresponding adjustmentto compensation expense, at each period to settlement date.

 

46

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**Note 15– Segment Information**

 

The Company operates intwo segments – the retail food business and the wholesale food distributionbusiness.  The retail food businessconsists of 106 supermarkets which the Company operates.  The wholesale food distribution businesssupplies 119 independent operators with food and related products.  In fiscal period 2006, the Company hadallocated warehouse and transportation costs based on each segment’s percentageof total shipments.  In fiscal year 2007,the allocation method was changed to include order size and distance from thewarehouse.  The effect of this change wasto increase the operating income of the retail food segment and decrease theoperating income of the wholesale food distribution segment by $4.9 million forthe year ended February 3, 2007.

 

The Company’s seniormanagement utilizes more than one measurement to evaluate segment performanceand allocate resources.  However, thedominant measures utilized are revenues and operating income beforedepreciation and amortization and unallocated overhead expenses.

 

The accounting policiesof the reportable segments are the same as those described in Note 3 exceptthat the Company accounts for inventory on a FIFO basis at the segment levelcompared to LIFO basis at the consolidated level.  The tables below present information for theyear ended February 3, 2007 and the period ended January 28,2006 with respect to operating segments as well as reconciliations toconsolidated information (in thousands).

 

Year Ended February 3, 2007

 
| ** **                                                    | ** ** | ** **           | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|---------------------|------------|-----------------|------------|------------|------------|
| ** **                                                    | ** ** | **Retail Food** | ** ** | **Distribution**    | ** ** | **Items**       | ** ** | **Total**  | ** ** |
|                                                          |       |                 |       |                |       |            |       |       |       |
| Revenues                                                      |       | $                    | 1,068,188  |                | $          | 217,320         |       | $          | 25,397     | (1) | $ | 1,310,905 |   |
|                                                          |       |                 |       |                |       |            |       |       |       |
| Cost of sales                                                 |       | (755,524             | )          | (206,017            | )          | (15,596         | )(2)       | (977,137   | )(4)       |
| Selling and administrative expense                            |       | (257,910             | )          | (5,429              | )          | (59,332         | )(3)       | (322,671   | )(4)       |
| Loss on store closings                                        |       | —               |       | —              |       | (1,308          | )          | (1,308     | )          |
|                                                          |       |                 |       |                |       |            |       |       |       |
| Operating income (loss) before depreciation and amortization  |       | 54,754               |       | 5,874               |       | (50,839         | )          | 9,789      |       |
|                                                          |       |                 |       |                |       |            |       |       |       |
| Depreciation and amortization                                 |       | (24,802              | )          | (1,060              | )          | (1,272          | )(5)       | (27,134    | )          |
|                                                          |       |                 |       |                |       |            |       |       |       |
| Operating income (loss)                                       |       | 29,952               |       | 4,814               |       | (52,111         | )          | (17,345    | )          |
| Interest expense                                              |       | —               |       | —              |       | —          |       | (9,357     | )          |
| Reorganization costs                                          |       | —               |       | —              |       | —          |       | (1,020     | )          |
|                                                          |       |                 |       |                |       |            |       |       |       |
| Consolidated loss before income taxes                         |       |                 |       |                |       |            |       | $          | (27,722    | ) |
|                                                          |       |                 |       |                |       |            |       |       |       |
| Total assets as of February 3, 2007                      |       | $                    | 236,357    | (6)                 | $          | 25,703          | (6)        | $          | 45,407     | (7) | $ | 307,467 |   |
|                                                          |       |                 |       |                |       |            |       |       |       |
| Capital expenditures for the year ended February 3, 2007 |       | $                    | 20,408     |                | $          | —          |       | $          | 2,518      |   | $ | 22,926 |   |

 

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(1)       Consists principally of approximately$17.0 million for bakery sales primarily to customers other than those ofthe retail and wholesale segments and approximately $6.3 million fortrucking revenues.

 

(2)       Consists principally of approximately$10.6 million for bakery sales and approximately $1.5 millionincrease in cost of sales to reconcile segment inventories on FIFO toconsolidated inventories on LIFO.

 

(3)       Consists principally of approximately$32.0 million of payroll, benefits, and payroll taxes associated with theadministrative staff, approximately $6.1 million associated with sellingand administrative costs of the bakery, approximately $5.6 million of contracthauling costs associated with trucking revenue, approximately $11.4 million ofprofessional fees (including approximately $4.1 million of legal costsassociated with the internal and SEC investigation relating to the Company’spractices regarding promotional discounts and allowances),  approximately $2.1 million for dataprocessing maintenance and $1.1 million for corporate insurance costs.

 

(4)       Excludes depreciation and amortization of$4.3 million for cost of sales and $22.8 million for selling andadministrative expenses.

 

47

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(5)       Consists of depreciation on bakery and corporate fixedassets.

 

(6)       The warehouse and transportation assets have beenallocated using the same methodology as that which was used for the warehouseand transportation costs described above. The effect of the change in allocation method in fiscal year 2007 was toincrease the assets of the wholesale food distribution segment and decreaseassets of the retail food segment by $4.3 million.

 

(7)       Consists principally of fixed assets and inventory of thebakery operation and general corporate assets (including cash and cashequivalents).

 

Period Ended January 28,2006

 
| ** **                                                      | ** ** | ** **           | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------|------------|----------------------|------------|---------------------|------------|-----------------|------------|------------|------------|
| ** **                                                      | ** ** | **Retail Food** | ** ** | **Distribution**    | ** ** | **Items**       | ** ** | **Total**  | ** ** |
|                                                            |       |                 |       |                |       |            |       |       |       |
| Revenues                                                        |       | $                    | 824,340    |                | $          | 171,907         |       | $          | 19,646     |  (1) | $ | 1,015,893 |   |
|                                                            |       |                 |       |                |       |            |       |       |       |
| Cost of sales                                                   |       | (579,288             | )          | (158,656            | )          | (13,715         | )(2)       | (751,659   | )(4)       |
| Selling and administrative expense                              |       | (207,260             | )          | (6,438              | )          | (26,343         | )(3)       | (240,041   | )(4)       |
| Loss on store closings                                          |       | —               |       | —              |       | (520            | )          | (520       | )          |
|                                                            |       |                 |       |                |       |            |       |       |       |
| Operating income (loss) before depreciation and amortization    |       | 37,792               |       | 6,813               |       | (20,932         | )          | 23,673     |       |
|                                                            |       |                 |       |                |       |            |       |       |       |
| Depreciation and amortization                                   |       | (16,291              | )          | (1,337              | )          | (1,170          | )(5)       | (18,798    | )          |
|                                                            |       |                 |       |                |       |            |       |       |       |
| Operating income (loss)                                         |       | 21,501               |       | 5,476               |       | (22,102         | )          | 4,875      |       |
| Interest expense                                                |       |                 |       |                |       |            |       | (8,289     | )          |
| Reorganization costs                                            |       |                 |       |                |       |            |       | (1,023     | )          |
|                                                            |       |                 |       |                |       |            |       |       |       |
| Consolidated loss before income taxes                           |       |                 |       |                |       |            |       | $          | (4,437     | ) |
|                                                            |       |                 |       |                |       |            |       |       |       |
| Total assets as of January 28, 2006                        |       | $                    | 286,414    | (6)                 | $          | 23,744          | (6)        | $          | 15,233     | (7) | $ | 325,391 |   |
|                                                            |       |                 |       |                |       |            |       |       |       |
| Capital expenditures for the period ended January 28, 2006 |       | $                    | 16,649     |                | $          | —          |       | $          | 3,884      |   | $ | 20,533 |   |

 

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(1)       Consists principally of approximately$12.2 million for bakery sales primarily to customers other than those ofthe retail and wholesale segments and approximately $5.1 million fortrucking revenues.

 

(2)       Consists principally of approximately$10.8 million for bakery sales and approximately $1.5 millionincrease in cost of sales to reconcile segment inventories on FIFO toconsolidated inventories on LIFO.

 

(3)       Consists principally of approximately$22.3 million of payroll, benefits, and payroll taxes associated with theadministrative staff, approximately $2.5 million of contract hauling costsassociated with trucking revenue, and approximately $2.2 million of legalcosts associated with the internal and SEC investigation relating to theCompany’s practices regarding promotional discounts and allowances.

 

(4)       Excludes depreciation and amortization of$3.3 million for cost of sales and $15.5 million for selling andadministrative expenses.

 

(5)       Consists of depreciation on bakery and corporate fixedassets.

 

(6)       The warehouse and transportation assets have beenallocated using the same methodology as that which was used for the warehouseand transportation costs.

 

(7)       Consists principally of fixed assets and inventory ofthe bakery operation and general corporate assets (including cash and cashequivalents).

 

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**Note 16 –Allowance for Doubtful Accounts**

 

An analysis of thechanges to the allowance for doubtful accounts for the year ended February 3, 2007and the period ended January 28, 2006 is as follows (in thousands):

 
| Balance at April 16, 2005          |   | $      | 3,243  |   |
|-----------------------------------------|--------|--------|--------|--------|
| Additions charged to costs and expenses |   | 2,540  |   |
| Accounts written off, net of recoveries |   | (2,609 | )      |
| Balance at January 28, 2006        |   | 3,174  |   |
|                                    |   |   |   |
| Additions charged to costs and expenses |   | 1,324  |   |
| Accounts written off, net of recoveries |   | (762   | )      |
| Balance at February 3, 2007   |   | $      | 3,736  |   |

 

**Note 17 – Supplemental Cash FlowInformation**

 
| ** **                              | ** ** | **Year Ended**  | ** ** | **Period Ended** | ** ** |
|-----------------------------------------|------------|----------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **February 3,** | ** ** | **January 28,**  | ** ** |
| ** **                              | ** ** | **2007**             | ** ** | **2006**              | ** ** |
| ** **                              | ** ** | ** **           | ** ** | ** **            | ** ** |
| Cash paid for interest                  |       | $                    | 7,183      |                  | $          | 4,309 |   |
|                                    |       |                 |       |                  |       |
| Cash paid for income taxes              |       | $                    | 228        |                  | $          | 261 |   |
|                                    |       |                 |       |                  |       |
| Non-cash reduction in intangible assets |       | $                    | 2,068      |                  | $          | 3,194 |   |

 

49

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**Note 18– Quarterly Financial Data(Unaudited)**

 

The following tablepresents our quarterly results of operations:

 
| ** **                                             | ** ** | **Year Ended February 3, 2007**   | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                             | ** ** | **1st**                                               | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** |
| ** **                                             | ** ** | **13-Week**                                           | ** ** | **13-Weeks** | ** ** | **13-Weeks** | ** ** | **13-Weeks** | ** ** |
| ** **                                             | ** ** | **Period**                                            | ** ** | **Ended** | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                                             | ** ** | **April 29,**                                    | ** ** | **July 29,** | ** ** | **October 28,** | ** ** | **February 3,** | ** ** |
| **Description**                                        | ** ** | **2006**                                              | ** ** | **2006** | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | **(In  thousands of dollars, except per share data)** | ** ** |
|                                                   |       |                                                  |       |   |   |   |   |   |   |
| Revenues                                               |       | $                                                     | 310,414    |   | $ | 338,152 |   | $ | 319,802 |   | $ | 342,537 |   |
|                                                   |       |                                                  |       |   |   |   |   |   |   |
| Gross profit                                           |       | 78,068                                                |       | 85,852 |   | 79,898 |   | 85,668 |   |
|                                                   |       |                                                  |       |   |   |   |   |   |   |
| Net income (loss)                                      |       | (7,457                                                | )          | (12 | ) | (5,504 | ) | (14,977 | )(1) |
|                                                   |       |                                                  |       |   |   |   |   |   |   |
| Net loss per common share                              |       | $                                                     | (0.88      | ) | $ | (0.00 | ) | $ | (0.65 | ) | $ | (1.76 | ) |
|                                                   |       |                                                  |       |   |   |   |   |   |   |
| Weighted average common shares issued or to be issued: |       | 8,498,752                                             |       | 8,498,572 |   | 8,498,752 |   | 8,498,752 |   |

 

----

(1)          Includes $2.7 million related to storeand distribution facility closings and $3.5 million related to increase inliability for workers compensation.

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

 

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**PART IV**

 

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

## ** **

Our consolidatedfinancial statements filed as part of this report appear beginning on page 21.

 

**Exhibits:**

 

The following are filedas Exhibits to this Report:

 
| **Exhibit No.** | ** ** | **Description** |
|----------------------|------------|-----------------|
|                 |       |            |
|                 | 2.1        |            | First Amended Joint Plan  of Reorganization of The Penn Traffic Company and its Affiliated Debtors and  Debtors-in-Possession, dated February 4, 2005 (incorporated by reference  to Exhibit 2.1 to Form 8-K filed on March 24, 2005). |
|                 |       |            |   |
|                 | 2.2        |            | Notice of Technical  Modifications to the First Amended Joint Plan of Reorganization of The Penn  Traffic Company and its Affiliated Debtors and Debtors in Possession under  Chapter 11 of the Bankruptcy Code dated February 4, 2005 (incorporated  by reference to Exhibit 2.3 to the Form 8-K filed on March 24,  2005). |
|                 |       |            |   |
|                 | 3.1        |            | Second Amended and  Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1  to Form 8-A12G/A filed on April 13, 2005). |
|                 |       |            |   |
|                 | 3.2        |            | Amended and Restated  By-Laws of Penn Traffic (incorporated by reference to Exhibit 2 to  Form 8-A12G/A filed on June 29, 1999). |
|                 |       |            |   |
|                 | 10.1       |            | Global Settlement  Agreement and Mutual Release, dated as of February 4, 2005, by and  between The Pension Benefit Guaranty Corporation, the Official Committee of  Unsecured Creditors and The Penn Traffic Company and its affiliated debtors  (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on  February 11, 2005). |
|                 |       |            |   |
|                 | 10.2       |            | Form of Change in  Control Protection Agreement (incorporated by reference to Exhibit 99.1  to the Form 8-K filed on April 18, 2006). |
|                 |       |            |   |
|                 | 10.3       |            | Credit Agreement, among  The Penn Traffic Company, Penny Curtiss Baking Company, Inc. and Big M  Supermarkets, Inc., as borrowers; the other credit parties signatory  thereto; General Electric Capital Corporation; JP Morgan Chase Bank, N.A.;  The CIT Group/Business Credit; GECC Capital Markets Group, Inc.; and the  other lenders signatory thereto from time to time (incorporated by reference  to Exhibit 99.1 to the Form 8-K filed on September 12, 2006). |
|                 |       |            |   |
|                 | 10.4       |            | Supplemental Loan Credit  Agreement, dated as of April 13, 2005, among The Penn Traffic Company,  Penny Curtiss Baking Company, Inc. and Big M Supermarkets, Inc., as  borrowers; the other credit parties signatory thereto; Kimco Capital Corp.;  and the other lenders signatory thereto from time to time (incorporated by  reference to Exhibit 99.2 to the Form 8-K filed on September 12,  2006). |
|                 |       |            |   |
|                 | 10.5       |            | Amendment, dated  December 28, 2006, to the Credit Agreement, among The Penn Traffic  Company, Penny Curtiss Baking Company, Inc. and Big M  Supermarkets, Inc., as borrowers; the other credit parties signatory  thereto; General Electric Capital Corporation; JP Morgan Chase Bank, N.A.;  The CIT Group/Business Credit; GECC Capital Markets Group, Inc.; and the  other lenders signatory thereto from time to time (incorporated by reference  to Exhibit 10.5 to the Form 10-K filed on August 17, 2007). |

 

51

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| **Exhibits No.** | ** ** | ** ** |
|------------------|------------|------------|
|             |       |       |
|             | 10.6       |       | Amendment, dated  December 28, 2006, to the Supplemental Loan Credit Agreement, dated as  of April 13, 2005, among The Penn Traffic Company, Penny Curtiss Baking  Company, Inc. and Big M Supermarkets, Inc., as borrowers; the other  credit parties signatory thereto; Kimco Capital Corp.; and the other lenders  signatory thereto from time to time (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 as of  October 2, 2006, between The Penn Traffic Company and Robert Panasuk  (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on  October 6, 2006). |
|             |       |       |   |
|             | 10.9       |       | Offer Letter, dated as of  December 12, 2006, between The Penn Traffic Company and Robert Panasuk  (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on  December 18, 2006). |
|             |       |       |   |
|             | 10.10      |       | Description of Material  Terms of Compensation of Randy P. Martin (incorporated by reference to the  Form 8-K filed on March 15, 2005). |
|             |       |       |   |
|             | 10.11      |       | Severance Agreement between  The Penn Traffic Company and Randy P. Martin (incorporated by  reference to Exhibit 99.1 to the Form 8-K filed on February 1,  2007). |
|             |       |       |   |
|             | 10.12      |       | Offer Letter, dated  May 2, 2007, between The Penn Traffic Company and Tod A. Nestor  (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on  May 9, 2007). |
|             |       |       |   |
|             | 10.13      |       | The Penn Traffic Company  2006 Omnibus Award Plan (incorporated by reference to Exhibit 99.4 to  the Form 8-K filed on December 18, 2006). |
|             |       |       |   |
|             | 10.14      |       | Form of The Penn  Traffic Company Phantom Stock Award Agreement (incorporated by reference to  Exhibit 99.1 to the Form 8-K filed on May 18, 2007). |
|             |       |       |   |
|             | 10.15      |       | Second Amendment, dated as  of August 1, 2007, to the Credit Agreement, among The Penn Traffic  Company, Penny Curtiss Baking Company, Inc. and Big M  Supermarkets, Inc., as borrowers; the other credit parties signatory  thereto; General Electric Capital Corporation; JP Morgan Chase Bank, N.A.;  The CIT Group/Business Credit; GECC Capital Markets Group, Inc.; and the  other lenders signatory thereto from time to time (incorporated by reference  to Exhibit 99.1 to the Form 8-K filed on August 14, 2007). |
|             |       |       |   |
|             | 10.16      |       | Second Amendment, dated as  of August 1, 2007, to the Supplemental Loan Credit Agreement, dated as  of April 13, 2005, among The Penn Traffic Company, Penny Curtiss Baking  Company, Inc. and Big M Supermarkets, Inc., as borrowers; the other  credit parties signatory thereto; Kimco Capital Corp.; and the other lenders  signatory thereto from time to time (incorporated by reference to  Exhibit 99.2 to the Form 8-K filed on August 14, 2007). |
|             |       |       |   |
|             | 10.17      |       | 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). |
|             |       |       |   |
|             | 16.1       |       | Letter from Deloitte &  Touche LLP to the Securities and Exchange Commission dated September 12,  2006 (incorporated by reference to Exhibit 99.1 to the Form 8-K  filed on September 12, 2006). |

 

52

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| **Exhibits No.** |   |   |
|------------------|--------|--------|
|             |   |   |   |
|             | 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. |

 

53

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** **

**Signatures**

** **

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized as of the 8th day of May 2008.

 

**THE PENNTRAFFIC COMPANY**

 

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

 

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