UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





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


OF THE
SECURITIES EXCHANGE ACT OF 1934





For the
quarterly period ended October 31, 2009


OR


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


OF THE
SECURITIES EXCHANGE ACT OF 1934





For the
transition period from____________ to _____________





Commission
file number: 0-8858





THE
PENN TRAFFIC COMPANY


(Exact
name of registrant as specified in its charter)





Delaware
              
              25-0716800(State or other jurisdiction of incorporation or organization)
              
              (I.R.S. Employer Identification No.)1200 State Fair Blvd., Syracuse, New York
              
              13221-4737(Address of principal executive offices)
              
              (Zip Code)





(315)
453-7284


(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.    YES x           NO
o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).  YES o   NO
o





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





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





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





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.    YES x           NO
o





Common Stock, par value $.01
per share:  8,779,832 shares outstanding as of December 21,
2009





FORM 10-Q
INDEX





PAGEPART
      I.  FINANCIAL INFORMATIONItem
                          1.
                          Financial
      Statements
                          4Item
                          2.
                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          16Item
                          3.
                          Quantitative
      and Qualitative Disclosures about Market Risk
                          24Item
                          4T.
                          Controls
      and Procedures
                          24PART
      II.  OTHER INFORMATIONItem
                          1.
                          Legal
      Proceedings
                          25Item
                          1A.
                          Risk Factors
                          25Item
                          6.
                          Exhibits
                          26


- 2 -


SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS





Certain
statements included in this Form 10-Q, including without limitation, statements
included in Item 2 - “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” which are not statements of historical
fact, are intended to be, and are hereby identified as, “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995, as amended, reflecting management’s current analysis and expectations,
based on what management believes to be reasonable assumptions. These
forward-looking statements include statements relating to our anticipated
financial performance and business prospects. Statements preceded by, followed
by or that include words such as “believe”, “anticipate”, “estimate”, “expect”,
“could”, “may”, and other similar expressions are to be considered such
forward-looking statements. Forward-looking statements may involve known and
unknown risks, uncertainties and other factors, which may cause the actual
results to differ materially from those projected, stated or implied, depending
on such factors as the risks set forth in Item 1.A. – “Risk Factors” in Part II
of this Form 10-Q, Item 1A – “Risk Factors” in our Annual Report on Form 10-K
for the fiscal year ended January 31, 2009; general economic and business
conditions; economic and competitive uncertainties; our ability to maintain
operating performance and effectuate an orderly liquidation of our assets; our
ability to operate pursuant to the terms of the Interim Order and to comply with
the terms of our borrowing agreements or to amend or modify the terms of such
agreements as may be needed from time to time; our ability to generate cash;
increases in prevailing interest rates; our ability to obtain trade credit, and
shipments and terms with vendors and service providers for current orders; our
ability to maintain contracts that are critical to our operations; potential
further adverse developments with respect to our liquidity or results of
operations; labor relations; labor and employee benefit costs including
increases in health care and pension costs and the level of contributions to our
sponsored pension plans; our ability to sell our assets at favorable prices, if
at all; changes in strategies; changes in generally accepted accounting
principles; adverse changes in economic and political climates around the world,
including terrorist activities and international hostilities; and the outcome of
pending, or the commencement of any new, legal proceedings against, or
governmental investigations of us. We caution that the foregoing list of
important factors is not exhaustive. Accordingly, there can be no assurance that
we will meet future results, performance or achievements expressed or implied by
such forward-looking statements, which are generally required to be revised as
circumstances change, and which we undertake no obligation to
update.





NOTE REGARDING CHAPTER 11 BANKRUPTCY
FILING





The Company filed for voluntary petitions for relief
under Chapter 11 of the Bankruptcy Code on November 18, 2009. These events
create uncertainty relating to our ability to continue as a going concern. The
accompanying financial statements do not reflect any adjustments relating to the
recoverability of assets and classification of liabilities that might result
from the outcome of these uncertainties. In addition, our plan of reorganization
could materially change the amounts reported in our consolidated financial
statements. Our consolidated financial statements as of October 31, 2009, do not
give effect to any adjustments to the carrying value of assets and liabilities
that may become necessary as a consequence of our bankruptcy
proceedings.





Our condensed consolidated financial statements have
been prepared on a going-concern basis, which contemplates continuity of
operations, realization of assets and liquidation of liabilities in the ordinary
course of business. However, as a result of our bankruptcy filing, such
realization of assets and liquidation of liabilities are subject to uncertainty.
While operating as debtors in possession under the protection of Chapter 11 of
the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as
permitted in the ordinary course of business, the Debtors, or some of them, may
sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the condensed consolidated financial
statements.


- 3 -


PART
I





ITEM
1.     Financial Statements




The
financial statements presented below have not been reviewed or audited by an
independent registered public accounting firm.  See Note 1 to the
financial statements ("Basis of Presentation").The Company filed voluntary petitions for
relief under Chapter 11 of the Bankruptcy Codeon November 18, 2009.




The Penn
Traffic Company


Condensed
Consolidated Balance Sheets


(In
thousands)





October 31,
                          
                          
                          January 31,2009
                          
                          
                          2009(unaudited and
                            unreviewed)ASSETSCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          29,740
                          
                          
                          $
                          56,434Accounts
      and notes receivable (less allowance for doubtful accounts of $1,933 and
      $2,676, respectively)
                          
                          
                          17,498
                          
                          
                          
                          19,454Inventories
                          
                          
                          37,432
                          
                          
                          
                          44,306Prepaid
      expenses and other current assets
                          
                          
                          7,308
                          
                          
                          
                          5,990Total
      current assets
                          
                          
                          91,978
                          
                          
                          
                          126,184Capital
      leases:Capital
      leases
                          
                          
                          10,768
                          
                          
                          
                          10,768Less:
      Accumulated amortization
                          
                          
                          (4,097
                          )
                          
                          
                          (3,357
                          )Capital
      leases, net
                          
                          
                          6,671
                          
                          
                          
                          7,411Fixed
      assets:Land
                          
                          
                          9,036
                          
                          
                          
                          9,036Buildings
                          
                          
                          12,695
                          
                          
                          
                          12,538Equipment
      and furniture
                          
                          
                          80,203
                          
                          
                          
                          80,819Vehicles
                          
                          
                          8,077
                          
                          
                          
                          8,020Leasehold
      improvements
                          
                          
                          14,124
                          
                          
                          
                          10,906Total
      fixed assets
                          
                          
                          124,135
                          
                          
                          
                          121,319Less:
      Accumulated depreciation
                          
                          
                          (77,840
                          )
                          
                          
                          (68,019
                          )Fixed
      assets, net
                          
                          
                          46,295
                          
                          
                          
                          53,300Other
      assets:Intangible
      assets, net
                          
                          
                          2,493
                          
                          
                          
                          2,883Other
      assets
                          
                          
                          2,973
                          
                          
                          
                          3,936Total
      other assets
                          
                          
                          5,466
                          
                          
                          
                          6,819Total
      assets
                          
                          $
                          150,410
                          
                          
                          $
                          193,714





The
accompanying notes are an integral part of these statements.


- 4 -





The Penn
Traffic Company


Condensed
Consolidated Balance Sheets, continued


(In
thousands, except share and per share data)





October 31,
                    
                    
                    January 31,2009
                    
                    
                    2009(unaudited and
                      unreviewed)LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Current
      portion of obligations under capital leases
                    
                    $
                    1,272
                    
                    
                    $
                    1,519Current
      maturities of long-term debt (Note 4)
                    
                    
                    16,315
                    
                    
                    
                    17,296Accounts
      payable
                    
                    
                    13,778
                    
                    
                    
                    8,119Other
      current liabilities
                    
                    
                    34,335
                    
                    
                    
                    39,848Deferred
      income taxes (Note 5)
                    
                    
                    7,096
                    
                    
                    
                    7,373Total
      current liabilities
                    
                    
                    72,796
                    
                    
                    
                    74,155Non-current
      liabilities:Obligations
      under capital leases
                    
                    
                    6,554
                    
                    
                    
                    7,443Long-term
      debt (Note 4)
                    
                    
                    3,099
                    
                    
                    
                    19,338Defined
      benefit pension plan liability (Note 7)
                    
                    
                    24,423
                    
                    
                    
                    25,903Deferred
      income taxes (Note 5)
                    
                    
                    583
                    
                    
                    
                    523Other
      non-current liabilities
                    
                    
                    31,367
                    
                    
                    
                    30,265Total
      non-current liabilities
                    
                    
                    66,026
                    
                    
                    
                    83,472Total
      liabilities
                    
                    
                    138,822
                    
                    
                    
                    157,627Commitments
      and contingencies (Notes 4, 7, and 8)Stockholders’
      equity (Note 9):Preferred
      stock - authorized 1,000,000 shares, $.01 par value; 8,000 and 10,000
      shares issued and outstanding at October 31, 2009 and January 31, 2009,
      respectively
                    
                    
                    -
                    
                    
                    
                    -Common
      stock - authorized 15,000,000 shares, $.01 par value; 8,779,832 and
      8,641,676 shares issued and outstanding at October 31, 2009 and January
      31, 2009, respectively
                    
                    
                    88
                    
                    
                    
                    86Capital
      in excess of par value
                    
                    
                    128,246
                    
                    
                    
                    128,248Deficit
                    
                    
                    (116,488
                    )
                    
                    
                    (91,953
                    )Accumulated
      other comprehensive loss
                    
                    
                    (258
                    )
                    
                    
                    (294
                    )Total
      stockholders’ equity
                    
                    
                    11,588
                    
                    
                    
                    36,087Total
      liabilities and stockholders’ equity
                    
                    $
                    150,410
                    
                    
                    $
                    193,714





The
accompanying notes are an integral part of these statements.


- 5 -





The Penn
Traffic Company


Condensed
Consolidated Statements of Operations


(In
thousands, except share and per share data)


(unaudited
and unreviewed)





Quarter Ended
                    
                    
                    Year to DateOctober 31, 2009
                    
                    
                    November 1, 2008
                    
                    
                    October 31, 2009
                    
                    
                    November 1, 2008Revenues
                    
                    $
                    198,081
                    
                    
                    $
                    214,814
                    
                    
                    $
                    606,950
                    
                    
                    $
                    655,224Cost
      and operating expensesCost
      of sales
                    
                    
                    137,591
                    
                    
                    
                    149,498
                    
                    
                    
                    419,985
                    
                    
                    
                    454,548Selling
      and administrative expenses
                    
                    
                    66,963
                    
                    
                    
                    70,591
                    
                    
                    
                    205,491
                    
                    
                    
                    215,291Gain
      on sale of assets
                    
                    
                    (78
                    )
                    
                    
                    0
                    
                    
                    
                    (136
                    )
                    
                    
                    (660
                    )Gain
      / (loss) on store closings
                    
                    
                    -
                    
                    
                    
                    (99
                    )
                    
                    
                    12
                    
                    
                    
                    420Asset
      impairment charge
                    
                    
                    -
                    
                    
                    
                    347
                    
                    
                    
                    123
                    
                    
                    
                    1,432204,475
                    
                    
                    
                    220,337
                    
                    
                    
                    625,475
                    
                    
                    
                    671,030Operating
      loss
                    
                    
                    (6,394
                    )
                    
                    
                    (5,523
                    )
                    
                    
                    (18,525
                    )
                    
                    
                    (15,806
                    )Interest
      expense
                    
                    
                    1,590
                    
                    
                    
                    1,289
                    
                    
                    
                    5,257
                    
                    
                    
                    4,148Reorganization
      and other expenses
                    
                    
                    (33
                    )
                    
                    
                    185
                    
                    
                    
                    119
                    
                    
                    
                    366Loss
      from continuing operations before income taxes
                    
                    
                    (7,951
                    )
                    
                    
                    (6,997
                    )
                    
                    
                    (23,901
                    )
                    
                    
                    (20,320
                    )Income
      tax expense (Note 5)
                    
                    
                    395
                    
                    
                    
                    108
                    
                    
                    
                    303
                    
                    
                    
                    386Loss
      from continuing operations
                    
                    
                    (8,346
                    )
                    
                    
                    (7,105
                    )
                    
                    
                    (24,204
                    )
                    
                    
                    (20,706
                    )Discontinued
      operations (Note 6)Gain
      / (loss) from discontinued operations
                    
                    
                    370
                    
                    
                    
                    1,520
                    
                    
                    
                    (331
                    )
                    
                    
                    (707
                    )Net
      loss
                    
                    $
                    (7,977
                    )
                    
                    $
                    (5,585
                    )
                    
                    $
                    (24,535
                    )
                    
                    $
                    (21,413
                    )Net
      loss per share - basic and diluted: (Note 3)Loss
      per share from continuing operations
                    
                    $
                    (0.97
                    )
                    
                    $
                    (0.85
                    )
                    
                    $
                    (2.83
                    )
                    
                    $
                    (2.47
                    )Gain
      / (loss) per share from discontinued operations
                    
                    $
                    0.04
                    
                    
                    $
                    0.18
                    
                    
                    $
                    (0.04
                    )
                    
                    $
                    (0.08
                    )Net
      loss per share - basic and diluted
                    
                    $
                    (0.93
                    )
                    
                    $
                    (0.67
                    )
                    
                    $
                    (2.87
                    )
                    
                    $
                    (2.55
                    )Weighted
      average shares outstanding
                    
                    
                    8,779,832
                    
                    
                    
                    8,650,110
                    
                    
                    
                    8,727,707
                    
                    
                    
                    8,650,110





The
accompanying notes are an integral part of these statements.


- 6 -


The Penn
Traffic Company


Condensed
Consolidated Statements of Cash Flows


(In
thousands)


(unaudited
and unreviewed)





For the Period
            
            
            For the PeriodFebruary 1, 2009
            
            
            February 3, 2008to October 31, 2009
            
            
            to November 1, 2008Operating
      activities:Net
      loss
            
            $
            (24,535
            )
            
            $
            (21,413
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            13,368
            
            
            
            17,090Provision
      for doubtful accounts
            
            
            379
            
            
            
            327Loss
      / (gain) on sale of assets
            
            
            (406
            )
            
            
            (2,757
            )Asset
      impairment charge
            
            
            123
            
            
            
            3,178Amortization
      of deferred finance costs
            
            
            962
            
            
            
            608Deferred
      income taxes
            
            
            (217
            )
            
            
            378Phantom
      stock compensation expense / (benefit)
            
            
            41
            
            
            
            (52
            )Net
      change in operating assets and liabilities:Accounts
      and notes receivable
            
            
            1,577
            
            
            
            6,912Prepaid
      expenses and other current assets
            
            
            (1,318
            )
            
            
            645Inventories
            
            
            6,874
            
            
            
            37,227Other
      assets
            
            
            -
            
            
            
            (85
            )Accounts
      payable and other current liabilities
            
            
            (179
            )
            
            
            (22,435
            )Liabilities
      subject to compromise
            
            
            -
            
            
            
            (2,503
            )Defined
      benefit pension plan liability
            
            
            (1,456
            )
            
            
            (2,644
            )Other
      non-current liabilities
            
            
            1,397
            
            
            
            (1,311
            )Net
      cash used in operating activities
            
            
            (3,390
            )
            
            
            13,165Investing
      activities:Capital
      expenditures
            
            
            (5,749
            )
            
            
            (5,269
            )Proceeds
      from sale of assets
            
            
            801
            
            
            
            5,058Net
      cash used in investing activities
            
            
            (4,948
            )
            
            
            (211
            )Financing
      activities:Payment
      of mortgages
            
            
            (220
            )
            
            
            (208
            )Net
      borrowing (repayments) under revolving credit facility
            
            
            (17,000
            )
            
            
            1,500Reduction
      in capital lease obligations
            
            
            (1,136
            )
            
            
            (1,011
            )Payment
      of deferred financing costs
            
            
            -
            
            
            
            (1,255
            )Net
      cash used in financing activities
            
            
            (18,356
            )
            
            
            (974
            )Net
      decrease in cash and cash equivalents
            
            
            (26,694
            )
            
            
            11,980Cash
      and cash equivalents at beginning of period
            
            
            56,434
            
            
            
            20,916Cash
      and cash equivalents at end of period
            
            $
            29,740
            
            
            $
            32,896





The
accompanying notes are an integral part of these statements.


- 7 -


The Penn
Traffic Company


Condensed
Consolidated Statements of Stockholders’ Equity


For the
unaudited and unreviewed period January 31, 2009 to October 31,
2009


(In
thousands, except share data)





Capital in
                              
                              
                              
                              
                              
                              Accumulated Other
                              
                              
                              TotalPreferred
                              
                              
                              Common
                              
                              
                              Excess of
                              
                              
                              
                              
                              
                              Comprehensive
                              
                              
                              Stockholders'Stock
                              
                              
                              Stock
                              
                              
                              Par Value
                              
                              
                              Deficit
                              
                              
                              (Loss) / Income
                              
                              
                              EquityBalance
      at January 31, 2009
                              
                              $
                              -
                              
                              
                              $
                              86
                              
                              
                              $
                              128,248
                              
                              
                              $
                              (91,953
                              )
                              
                              $
                              (294
                              )
                              
                              $
                              36,087Net
      loss
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (24,535
                              )
                              
                              
                              
                              
                              
                              
                              (24,535
                              )Issuance
      of 138,156 shares of common stock in conversion of preferred
      stock
                              
                              
                              
                              
                              
                              
                              2
                              
                              
                              
                              (2
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              -Amortization
      of net actuarial loss in net pension benefit cost
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              36
                              
                              
                              
                              36Comprehensive
      loss
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (24,499
                              )Balance
      at October 31, 2009
                              
                              $
                              -
                              
                              
                              $
                              88
                              
                              
                              $
                              128,246
                              
                              
                              $
                              (116,488
                              )
                              
                              $
                              (258
                              )
                              
                              $
                              11,588





The
accompanying notes are an integral part of these statements.


- 8 -


The Penn
Traffic Company


Notes to
Condensed Consolidated Financial Statements





Note
1 – Basis of Presentation




The
financial statements included herein have not been audited and have not been
reviewed by the Company's independent registered public accounting
firm.  Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted;  therefore,
these financial statements should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations, as
well as the audited annual financial statements and related notes thereto
included in the Annual Report on Form 10-K for the year ended January 31,
2009.  The accompanying unaudited and unreviewed financial statements
reflect all adjustments which are, in the opinion of management, necessary in
order to present a fair statement of the results for the interim periods
presented.  Preparing financial statements requires management to make
estimates and assumptions that affect the amounts that are reported in the
financial statements and accompanying disclosures.  Although these
estimates are based on management's best knowledge of current events and actions
that the Company may undertake in the future, actual results may be different
from the estimates.


Regulation
S-X requires that interim financial statements contained in Form 10-Q be
reviewed by an independent registered public accountant using professional
standards and procedures for conducting such reviews.  The Company's
independent registered public accounting firm has not reviewed the Company's
financial statements for the period ending October 31,
2009.   Pursuant to the Company's reporting obligations under the
Securities and Exchange Act of 1934 (the "Exchange Act"), the Company has
reviewed and has herein filed the unaudited and unreviewed results of its
operations.  Because the required review has not been completed,
however, this Form 10-Q is considered deficient.  As a result, the
Company is no longer considered to be timely or current in its filings under the
Exchange Act.  While this filing may not comply with the current
filing requirements of the SEC, and should not be interpreted to be a substitute
for the review that would normally occur by the Company's independent registered
public accounting firm, the Company believes the filing to be otherwise
materially accurate and complete.
  The
balance sheet as of January 31, 2009, has been derived from the audited
consolidated financial statements as of such date, but does not include all of
the information and footnotes required by generally-accepted accounting
principles (“GAAP”) for complete financial statements.  All
significant intercompany transactions and accounts have been eliminated in
consolidation.




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





Chapter
11 Bankruptcy





As
previously disclosed in the Current Report on Form 8-K filed on November 4,
2009, on October 30, 2009, the agent for the lenders under the Company’s
revolving credit and term loan agreement (the “Revolving Loan Agreement”)
notified the Company that events of default had occurred and continue to exist
under the terms of that agreement and had entered into a forbearance agreement
with such agent and lenders. As previously disclosed in its Current Report on
Form 8-K filed on November 12, 2009, on November 5, 2009 the agent for the
lenders under the Company’s supplemental real estate credit agreement (the
“Supplemental Loan Agreement”, and together with the Revolving Loan Agreement,
the “Senior Secured Loan Agreements”) notified the Company that events of
default had occurred and continue to exist under the terms of the Supplemental
Loan Agreement, and entered into a forbearance agreement with such agent and
lenders.





Due to
these default notices, and in order to ensure sufficient liquidity to maintain
ongoing operations while conducting an orderly sale of its retail stores and
other assets with the consent of its lenders under the Senior Secured Loan
Agreements (the “Senior Secured Lenders”), on November 18, 2009 the Company
filed voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court
for the District of Delaware (the “Bankruptcy Court”). The Company has and
intends to continue to manage its properties and operate its businesses as a
“debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code. No trustee or
examiner has been appointed in the Company’s case in the Bankruptcy
Court.





On
November 19, 2009, the Bankruptcy Court issued an interim order (the “Interim
Order”) authorizing an arrangement under which, among other things, the
Company’s Senior Secured Lenders consented to the Company using its cash
collateral to a limited extent in order to fund and obtain letters of credit for
ongoing operations. Under the arrangement the Company is allowed to use its cash
collateral solely for purposes identified in a budget approved by the Senior
Secured Lenders (the “Budget”), and agreed to commence a process to sell all or
substantially all of its assets. As previously disclosed, on December 4, 2009,
the Company entered into a comprehensive agency agreement with a joint venture
under which the joint venture would act as Agent for the sale of all the
Company’s assets other than 4 specified retail stores (the “Initial PC Stores”)
in exchange for a minimum of $36.5 million of sale proceeds, subject to certain
adjustments. On the same day the Company also entered into an asset purchase
agreement with Price Chopper Operating Co., Inc. (“Price Chopper”) pursuant to
which the Company agreed to sell Price Chopper substantially all the assets used
in the operation of the Initial PC Stores in exchange for $12.3 million. On
December 15, 2009, the Company entered a new asset purchase agreement with Price
Chopper pursuant to which the Company agreed to sell Price Chopper substantially
all the assets used in the operation of 22 of the Company’s retail stores
(including the Initial PC Stores) in exchange for $54 million (the “PC
Agreement”). The comprehensive agency agreement and the PC Agreement are each
subject to approval by the Bankruptcy Court.




- 9 -




These
matters create uncertainty relating to our ability to continue as a going
concern. The accompanying financial statements do not reflect any adjustments
relating to the recoverability of assets and classification of liabilities that
might result from the outcome of these uncertainties. In addition, our plan of
reorganization could materially change the amounts reported in our consolidated
financial statements. Our consolidated financial statements as of October 31,
2009, do not give effect to any adjustments to the carrying value of assets and
liabilities that may become necessary as a consequence of our bankruptcy
proceedings.





Our
condensed consolidated financial statements have been prepared on a
going-concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of our bankruptcy filing, such realization of assets and
liquidation of liabilities are subject to uncertainty. While operating as
debtors in possession under the protection of Chapter 11 of the Bankruptcy Code,
and subject to Bankruptcy Court approval or otherwise as permitted in the
ordinary course of business, the Debtors, or some of them, may sell or otherwise
dispose of assets and liquidate or settle liabilities for amounts other than
those reflected in the condensed consolidated financial statements.





Reporting
Periods





The
Company’s fiscal year ends on the Saturday closest to January 31. Fiscal year
2010 is the 52-week period ending January 30, 2010. Fiscal year 2009 was the
52-week period ended January 31, 2009. The information presented in this
Quarterly Report on Form 10-Q is for the 13-week periods ended (“quarter ended”)
and the 39-week periods ended (“year to date ended”) October 31, 2009, and
November 1, 2008.





Operating
Segments





On
December 21, 2008, the Company completed the sale of its wholesale food
distribution business segment. Subsequent to that date, the Company consists of
one operating segment, the retail food segment.





Note
2 – Recent Accounting Standards





In
December 2007, the FASB issued guidance on reporting noncontrolling interests in
consolidated financial statements. FASB ASC 810-10-65, “Consolidation”, changes
the accounting and reporting for minority interests. ASC 810-10-65 is effective
for fiscal years beginning on or after December 15, 2008. The recent accounting
guidance in this ASC was adopted on February 1, 2009.





In
December 2008, the FASB issued guidance on an employer’s disclosures about plan
assets of a defined benefit pension plan. FASB ASC 715-20-65, “Defined Benefit
Plans”, provides guidance on an employer’s disclosures about plan assets of a
defined benefit pension or other postretirement plan on investment policies and
strategies, major categories of plan assets, inputs and valuation techniques
used to measure the fair value of plan assets and significant concentrations of
risk within plan assets. The recent account guidance in this ASC will be
effective for the Company’s consolidated financial statements for the fiscal
year ending January 30, 2010.





In April
2009, the FASB issued guidance on interim disclosures about the fair value of
financial instruments. FASB ASC
820-10-50, “Fair Value Measurements and Disclosures”, requires companies to
include the disclosures about the fair value of financial instruments whenever
it issues interim financial information.  The Company has adopted recent
accounting guidance in this ASC.





In May
2009, the FASB issued guidance on disclosure of subsequent events. FASB ASC
855-10, “Subsequent Events”, requires disclosure of the date through which an
entity has evaluated subsequent events and whether that represents the date the
financial statements were issued or were available to be issued. The Company has
adopted recent accounting guidance in this ASC.





In June
2009, the FASB issued the FASB Accounting Standards Codification
(“Codification”). The Codification became the single source for all
authoritative GAAP recognized by the FASB and has been applied to financial
statements issued for periods ending after September 15, 2009. The Codification
does not change GAAP and will not have an effect on our financial position,
results of operations or liquidity.




- 10 -




In August
2009, the FASB issued Accounting Standards Updated (“ASU”) No. 2009-05,
“Measuring Liabilities at Fair Value.” This ASU clarifies the application of
certain valuation techniques in circumstances in which a quoted price in an
active market for the identical liability is not available and clarifies that
when estimating the fair value of a liability, the fair value is not adjusted to
reflect the impact of contractual restrictions that prevent its transfer. The
guidance provided in this ASU becomes effective for the Company on November 1,
2009. We have evaluated this ASU and have determined there are no significant
impacts to our financial position or results of operations.





Note
3 - Per Share Data





Basic and
diluted net loss per share is based on the net loss available to common
stockholders and the number of shares of common stock issued and estimated to be
issued pursuant to the Company’s 2005bankruptcy reorganization plan. Diluted loss per share for the fiscal
quarters ended October 31, 2009 and November 1, 2008, does not include 571,114
and 665,012 shares of common stock, respectively, issuable on the conversion of
preferred stock, which was issued in December 2007, as the effect is
anti-dilutive. The following table details the calculation of our basic and
diluted per share data (amounts in thousands, except share and per share
data):





Quarter Ended
                    
                    
                    Year to DateOctober 31,
                      2009
                    
                    
                    November 1,
                      2008
                    
                    
                    October 31,
                      2009
                    
                    
                    November 1,
                      2008(unaudited and unreviewed)Loss
      from continuing operations
                    
                    $
                    (8,346
                    )
                    
                    $
                    (7,105
                    )
                    
                    $
                    (24,204
                    )
                    
                    $
                    (20,706
                    )Less:
      cumulative preferred stock dividends
                    
                    
                    (160
                    )
                    
                    
                    (200
                    )
                    
                    
                    (531
                    )
                    
                    
                    (604
                    )Loss
      available to common stock holders
                    
                    
                    (8,506
                    )
                    
                    
                    (7,305
                    )
                    
                    
                    (24,735
                    )
                    
                    
                    (21,310
                    )Gain
      / (loss) from discontinued operations
                    
                    
                    370
                    
                    
                    
                    1,520
                    
                    
                    
                    (331
                    )
                    
                    
                    (707
                    )Net
      loss available to common stockholders
                    
                    $
                    (8,136
                    )
                    
                    $
                    (5,785
                    )
                    
                    $
                    (25,066
                    )
                    
                    $
                    (22,017
                    )Weighted
      average shares
                    
                    
                    8,779,832
                    
                    
                    
                    8,650,110
                    
                    
                    
                    8,727,707
                    
                    
                    
                    8,650,110Loss
      per share from continuing operations
                    
                    $
                    (0.97
                    )
                    
                    $
                    (0.85
                    )
                    
                    $
                    (2.83
                    )
                    
                    $
                    (2.47
                    )Gain
      / (loss) per share from discontinued operations
                    
                    
                    0.04
                    
                    
                    
                    0.18
                    
                    
                    
                    (0.04
                    )
                    
                    
                    (0.08
                    )Net
      loss per share - basic and diluted
                    
                    $
                    (0.93
                    )
                    
                    $
                    (0.67
                    )
                    
                    $
                    (2.87
                    )
                    
                    $
                    (2.55
                    )





Note
4– Long-term Debt





The
Revolving Loan Agreement provides for a $50 million revolving credit facility
commitment that includes a maximum sub-limit commitment for letters of credit of
$47.5 million, and a $6 million term loan. Outstanding letters of credit under
the revolving credit facility, which are primarily associated with supporting
workers’ compensation obligations, were approximately $35.8 million at October
31, 2009. The Company has borrowed an additional $10 million under the
Supplemental Loan Agreement. The maturity date of both facilities is April 13,
2010. Borrowings under the revolving credit and term loan facility are secured
by substantially all the assets of the Company, subject to first liens on
certain property by other lenders. Borrowings under the real estate facility are
secured by a first lien on substantially all leasehold interests of the Company,
and a second lien on real estate owned by the Company. The carrying amount of debt reported in our balance
sheet approximates fair value as of October 31, 2009, and January 31, 2009. The
Company also has $3.4 million in borrowings under mortgages that mature at
various dates through 2021 and are secured by first liens on the related
properties.





The
filing of the Chapter 11 petitions (see Note 1) on November 18, 2009,
constituted events of default under the Senior Secured Loan Agreements, causing
all of the Company’s obligations to become immediately due and payable under
these agreements. The Company believes that any efforts to enforce such
obligations are stayed as a result of the filing of the Chapter 11 petitions
with the Bankruptcy Court, subject to the terms of the Interim Order. These
events of default may have also constituted an event of default or otherwise
triggered repayment obligations under the express terms of other agreements or
instruments relating to direct financial obligations of the Company. Although
the Interim Order authorizes the Company to use a portion of its cash
collateral, which was $21.6 million at
October 31, 2009, to fund and obtain letters of credit for ongoing operations in
accordance with the restrictive Budget, as previously disclosed, the agents for
the Senior Secured Lenders have notified the Company that they reserve all their
rights as a result of the occurrence of certain events, including the right to
terminate such use of cash collateral (“Termination Events”). The occurrence of
such Termination Events may also result in the termination of the automatic stay
under the Bankruptcy Code of any rights of the Senior Secured Lenders to enforce
the Company’s payment obligations under the Senior Secured Loan Agreements,
subject only to the agent for the lenders under either Senior Secured Loan
Agreement providing certain written notices.


- 11 -


Note
5 – Income Taxes





The
Company maintains a full valuation allowance against substantially all of its
deferred tax assets including amounts resulting from net operating loss
carry-forwards. The valuation allowance will be maintained until there is
sufficient positive evidence to conclude that it is more likely than not that
the deferred tax assets will be realized.





The
Company does not have any material tax positions that meet a
“more-likely-than-not” recognition threshold. As such, the Company has not
recorded any liabilities for uncertain tax positions. During the quarter and
year-to-date ended October 31, 2009, there have been no material changes to the
amount of uncertain tax positions.





For
federal tax purposes, the Company is subject to a review of its fiscal year
ended 2008 tax return. The New York State Department of Taxation and Finance has
concluded a desk examination of the Company's New York State tax returns for the
fiscal years ended 2004-2008. The New York State examination resulted in no
significant changes to the tax returns. For other states tax purposes, the
Company is subject to a review of its fiscal years ended 2005 through 2008 state
tax returns.




Note
6 – Dispositions and Discontinued Operations





On
November 18, 2009, the Company filed voluntary petitions for relief under
Chapter 11 of the United States Bankruptcy Code (see Note 1) in the United
States Bankruptcy Court for the District of Delaware. The Company will continue
to manage their properties and operate their businesses as
“debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code. As part of the
arrangement, the Company has agreed to commence a process to sell all or
substantially all of their assets, and expect to present offers for the sale of
the Company’s assets to the Bankruptcy Court for approval by January
2010.





Dispositions





During
the year-to-date ended October 31, 2009, the Company has closed a total of four
stores. The results of operations of three of these stores are included within
continuing operations. In connection with these store closures, the Company
recognized a cumulative impairment loss of $0.1 million, and a cumulative
liability of less than $0.1 million in costs associated with the disposal
activities.





During
the year to date ended November 1, 2008, the Company closed six stores and sold
four others. It is anticipated that revenues will continue to be generated from
customers of one of the six closed stores from Company stores located in the
same vicinity. The Company will no longer have a presence in the vicinity of the
other five closed stores and have reported the results of operations of those
stores within discontinued operations. The results of operations of the four
stores that were sold are also included within discontinued operations. The
stores that were sold resulted in cash proceeds of $3.3 million and associated
gain on sale of leasehold and fixed assets of $1.3 million for the year to date
ended November 1, 2008. The Company obtained waivers related to the sale of
store assets in accordance with the terms of the credit facilities.





During
the year to date ended November 1, 2008, an impairment loss of $3.2 million
(including $0.2 million recognized during the quarter ended November 1, 2008)
was recognized with respect to assets related to closed stores. In addition, the
Company recorded a liability of $0.9 million representing the present value of
the remaining lease rentals reduced by estimated sublease rentals that could be
reasonably obtained for five of the six closed stores (one closed store location
was owned by the Company.





Gain
/ (Loss) from Discontinued Operations





Discontinued
operations include revenues from the wholesale business of $58.3 million and
$170.8 million for the period and year to date ended November 1, 2008,
respectively. Discontinued operations include revenues from the retail stores of
$13.7 million and $55.3 million for the period and year to date ended November
1, 2008, respectively. Interest expense of $0.9 million and $2.6 million is also
included within discontinued operations for the period and year to date ended
November 1, 2008, respectively. The amounts were based on the principal amount
of debt that was required to be paid with the proceeds from the sale of the
segment.




Note
7 – Retirement Plans





The
Company has three noncontributory defined benefit pension plans covering certain
union personnel. The Company’s policy has
been to fund pension benefits to the extent contributions are deductible
for tax purposes and in compliance with federal laws and
regulations.




- 12 -




The
following table provides the components of net periodic pension cost / (benefit)
(in thousands):





Quarter Ended
                    
                    
                    Year to DateOctober 31,
                    
                    
                    August 2,
                    
                    
                    October 31,
                    
                    
                    August 2,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(unaudited and unreviewed)Service
      cost
                    
                    $
                    269
                    
                    
                    $
                    313
                    
                    
                    $
                    807
                    
                    
                    $
                    939Interest
      cost
                    
                    
                    1,444
                    
                    
                    
                    1,474
                    
                    
                    
                    4,332
                    
                    
                    
                    4,422Expected
      return on plan assets
                    
                    
                    (1,217
                    )
                    
                    
                    (1,593
                    )
                    
                    
                    (3,651
                    )
                    
                    
                    (4,779
                    )Amortization
      of unrecognized actuarial loss / (gain)
                    
                    
                    20
                    
                    
                    
                    (236
                    )
                    
                    
                    60
                    
                    
                    
                    (708
                    )Net
      periodic pension cost / (benefit)
                    
                    $
                    516
                    
                    
                    $
                    (42
                    )
                    
                    $
                    1,548
                    
                    
                    $
                    (126
                    )





For the
quarters ended October 31, 2009 and November 1, 2008, the Company contributed
$1.3 million and $1.1 million, respectively, to the defined benefit pension
plans. For the year to date ended October 31, 2009 and November 1, 2008, the
Company contributed $3.0 million and $2.5 million, respectively, to the defined
benefit pension plans.





The
Company maintains a 401(k) savings plan for eligible employees. The plan
provides for contributions by the Company for all employees not covered by other
union pension plans. The Company’s contributions aggregated $0.2 million and
$0.4 million for the quarters October 31, 2009 and November 1, 2008,
respectively. For the year to date ended October 31, 2009 and November 1, 2008,
the Company contributed $0.9 million and $1.3 million, respectively, to the
401(k) plans.





The
Company also participates in three union-sponsored, multi-employer defined
benefit pension plans. The Company recognizes as net pension expense any
required contributions made during the period as well as any required amounts,
such as a withdrawal liability, that are due and unpaid, or for which it is
probable that such an obligation exists for the Company’s portion of the
unfunded benefit obligations. For the quarters ended October 31, 2009 and
November 1, 2008, the Company made required contributions of $1.2 million and
$1.2 million, respectively, to the multi-employer defined benefit pension plans.
For the year to date ended October 31, 2009 and November 1, 2008, the Company
made required contributions of $5.1 million and $3.6 million, respectively, to
the multi-employer defined benefit pension plans. During the quarter ended
August 1, 2009, it became probable that a withdrawal liability obligation exists
for the Company’s portion of the unfunded benefit obligations of one of the
three multi-employer plans. Accordingly, the Company recorded a liability of
$1.5 million related to this plan.





Approximately
88% of the Company’s employees are unionized, 93% of whom are members of one
union. We are party to fourteen collective bargaining agreements. As of October
31, 2009, five bargaining agreements are scheduled to expire during the next 12
months.





The Company's filing for bankruptcy protection on
November 18, 2009 raises significant doubt about the ability of the Company to
continue to fund and/or maintain the aforementioned plans.




Note
8 – Commitments and Contingencies





The
United States Attorney Office for the Northern District of New York (the “USAO”)
and the Securities and Exchange Commission (“SEC”) have been conducting
investigations relating to certain of the Company’s accounting practices and
policies prior to the Company’s emergence from bankruptcy in April
2005.





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




- 13 -




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





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


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


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





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





On
September 17, 2007, the SEC filed civil fraud charges against the Company’s
former Chief Marketing Officer and former Vice President, Non-Perishables
Marketing alleging that such individuals orchestrated a scheme to inflate the
Company’s income and other financial results by prematurely recognizing
promotional allowances received from vendors from approximately the second
quarter of fiscal year 2001 through at least the fourth quarter of fiscal year
2003. These officers had been terminated by the Company in February 2006. The
SEC's complaint further alleges that the individuals deceived the Company’s
accounting personnel to carry out their fraudulent scheme and aided and abetted
the Company’s violations of the Securities Exchange Act of 1934 and rules
thereunder. In addition, on the same date, the USAO announced that a federal
grand jury has returned an indictment against the above-mentioned individuals on
related criminal charges. On August 28, 2009, the two former employees pled
guilty to causing false and misleading information and reports to be filed with
the SEC; sentencing is scheduled for January 8, 2010.





The
Company has incurred significant legal costs associated with the USAO and SEC
investigations since their inception. These costs have been recorded in selling
and administrative expenses as incurred. As a result of the aforementioned
guilty pleas by the two former employees, the Company anticipates that its legal
costs, including individuals' legal reimbursement costs pursuant to an
advancement and indemnification obligation, will decrease beginning in the
current fiscal quarter and end altogether by the end of the fiscal year. Further, as a result of the Company's November 18, 2009
filing for bankruptcy protection, it is unlikely to have the ability to continue
to pay any such costs.





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





The
Company enters into various purchase commitments in the ordinary course of
business. In the opinion of management, no losses are expected to result from
these purchase commitments. In connection with the supply agreement for grocery
and other non-perishable merchandise, the Company is obligated to generate
annual fees of at least $3.0 million to the supplier. In connection with the
five-year supply agreement for general merchandise and health and beauty
products, the Company is obligated to pay a fee of 1.5% of the amount by which
purchases by the Company are less than $20 million in each six-month period
during the term of the agreement.





We
purchase substantially all of our retail merchandise from a single vendor. Any
material change in this vendor’s results of operation or a termination or
material modification of our contractual relationships could have an adverse
impact on our supply chain, sales, and earnings.





The
consideration received by the Company for the sale of the wholesale food
distribution business is subject to a true-up calculation based on the volume of
shipments to certain wholesale customers in the twelve months immediately
following the sale compared to the Company’s fiscal year ended February 2,
2008.The Company hasrecorded a liability of less than $0.2 million to date, which is reported within discontinued
operations.





The
Company experienced a $2.1 million increase in workers' compensation expense
during its second fiscal quarter after one of its insurers asserted a right to
several years' worth of retrospective premium adjustments and effected a draw
down of such amount from collateral in the form of a standby letter of credit.
The Company has disputed the insurer's actions and is seeking
restitution.




- 14 -




Note
9 – Stockholders’ Equity





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





At
October 31, 2009, there were 188,260 shares of phantom stock granted, 150,000
shares of phantom stock forfeited (50,000 of which were forfeited during the
year-to-date ended October 31, 2009), and 38,260 shares of phantom stock
outstanding to officers and non-officer directors. There are no shares of
phantom stock unvested as of October 31, 2009. The awards are accounted for as
compensation expense with a corresponding liability over the period to
settlement date based on changes in the value of the Company’s common
stock.





On May
14, 2009, the holder of 2,000 shares of Penn Traffic preferred stock elected to
convert their shares into shares of Penn Traffic common stock. In accordance
with the provisions of the preferred stock, the Company issued 138,156 shares of
common stock to the holder on the date of conversion.





Note
10 – Subsequent Events





The
Company has evaluated potential subsequent events through December 21, 2009,
which represents the date the financial statements were issued. All events that
occurred subsequent to the date of the financial statements through the date of
issuance that have had a significant impact on the financial statements,
including the Company filing voluntary petitions for relief under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware on November 18, 2009, have been disclosed in the
accompanying notes.




- 15 -


ITEM
2.      Management’s Discussion and Analysis of
Financial Condition and Results of Operations





Introduction





The Penn
Traffic Company and its subsidiaries (the “Company”) are engaged in the retail
food business. As of October 31, 2009, we operated 79 stores under the
“P&C”, “Quality”, and “Bi-Lo” banners in upstate New York, Pennsylvania,
Vermont, and New Hampshire. We service these retail stores through four
distribution centers. Prior to December 21, 2008, we also operated a Wholesale
food distribution business that serviced independent stores. On December 21,
2008, we completed the sale of our Wholesale food distribution business segment,
which allowed us to significantly pay down our long-term debt and focus our
resources and efforts on our Retail Food business. Nonetheless, the Company’s
results of operations subsequent to the sale of this segment, including during
the fiscal quarter ended October 31, 2009, were adversely effected by declines
in same store sales, customer counts, and average items sold per shopping order,
and increased workers compensation and pension costs.





As
previously disclosed in the Current Report on Form 8-K filed on November 4,
2009, on October 30, 2009, the agent for the lenders under the Company’s
revolving credit and term loan agreement (the “Revolving Loan Agreement”)
notified the Company that events of default had occurred and continue to exist
under the terms of that agreement and had entered into a forbearance agreement
with such agent and lenders. As previously disclosed in its Current Report on
Form 8-K filed on November 12, 2009, on November 5, 2009 the agent for the
lenders under the Company’s supplemental real estate credit agreement (the
“Supplemental Loan Agreement”, and together with the Revolving Loan Agreement,
the “Senior Secured Loan Agreements”) notified the Company that events of
default had occurred and continue to exist under the terms of the Supplemental
Loan Agreement, and entered into a forbearance agreement with such agent and
lenders.





Due to
these default notices, and in order to ensure sufficient liquidity to maintain
ongoing operations while conducting an orderly sale of its retail stores and
other assets with the consent of its lenders under the Senior Secured Loan
Agreements (the “Senior Secured Lenders”), on November 18, 2009 the Company
filed voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court
for the District of Delaware (the “Bankruptcy Court”). The Company has and
intends to continue to manage its properties and operate its businesses as a
“debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code. No trustee or
examiner has been appointed in the Company’s case in the Bankruptcy
Court.





On
November 19, 2009, the Bankruptcy Court issued an interim order (the “Interim
Order”) authorizing an arrangement under which, among other things, the
Company’s Senior Secured Lenders consented to the Company using its cash
collateral to a limited extent in order to fund and obtain letters of credit for
ongoing operations. Under the arrangement
the Company is allowed to use its cash collateral solely for purposes identified
in a budget approved by the Senior Secured Lenders (the “Budget”), and agreed to
commence a process to sell all or substantially all of its assets. As previously
disclosed, on December 4, 2009, the Company entered into a comprehensive agency
agreement with a joint venture under which the joint venture would act as Agent
for the sale of all the Company’s assets other than 4 specified retail stores
(the “Initial PC Stores”) in exchange for a minimum of $36.5 million of sale
proceeds, subject to certain adjustments. On the same day the Company also
entered into an asset purchase agreement with Price Chopper Operating Co., Inc.
(“Price Chopper”) pursuant to which the Company agreed to sell Price Chopper
substantially all the assets used in the operation of the PC Stores in exchange
for $12.3 million. On December 15, 2009, the Company entered a new asset
purchase agreement with Price Chopper pursuant to which the Company agreed to
sell Price Chopper substantially all the assets used in the operation of 22 of
the Company’s retail stores (including the Initial PC Stores) in exchange for
$54 million (the “PC Agreement”). The comprehensive agency agreement and the PC
Agreement are each subject to approval by the Bankruptcy Court.





While
we continue our bankruptcy proceedings under Chapter 11, investments in our
securities will be highly speculative. Although shares of our common stock
continue to trade over the counter under the symbol “PTFC”, the trading
prices of the shares may have little or no relationship to the actual recovery,
if any, by the holders under any eventual court-approved plan. The opportunity
for any recovery by holders of our common stock under such plan is uncertain and
shares of our common stock may be cancelled without any compensation pursuant to
such plan.




- 16 -





Results
of Operations





The
following table sets forth certain Consolidated Statement of Operations
components expressed as percentages of revenues for the quarters and years to
date ended October 31, 2009 and November 1, 2008.





Quarter
      Ended
                  
                  
                  Year
      to DateOctober
      31, 2009
                  
                  
                  November
      1, 2008
                  
                  
                  October
      31, 2009
                  
                  
                  November
      1, 2008(unaudited
      and unreviewed)Revenues
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %Gross
      profit (1)
                  
                  
                  30.5
                  %
                  
                  
                  30.4
                  %
                  
                  
                  30.8
                  %
                  
                  
                  30.6
                  %Selling
      and administrative expenses
                  
                  
                  33.8
                  %
                  
                  
                  32.9
                  %
                  
                  
                  33.9
                  %
                  
                  
                  32.9
                  %Loss
      / (gain) on sale of assets
                  
                  
                  0.1
                  %
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %
                  
                  
                  -0.1
                  %Loss
      on store closings
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %Asset
      impairment charge
                  
                  
                  0.0
                  %
                  
                  
                  0.1
                  %
                  
                  
                  0.0
                  %
                  
                  
                  0.2
                  %Operating
      loss
                  
                  
                  -3.2
                  %
                  
                  
                  -2.6
                  %
                  
                  
                  -3.1
                  %
                  
                  
                  -2.4
                  %Interest
      expense
                  
                  
                  0.8
                  %
                  
                  
                  0.7
                  %
                  
                  
                  0.8
                  %
                  
                  
                  0.6
                  %Reorganization
      and other expenses
                  
                  
                  0.0
                  %
                  
                  
                  0.1
                  %
                  
                  
                  0.0
                  %
                  
                  
                  0.1
                  %Loss
      from continuing operations before income taxes
                  
                  
                  -4.0
                  %
                  
                  
                  -3.4
                  %
                  
                  
                  -3.9
                  %
                  
                  
                  -3.1
                  %Income
      tax expense
                  
                  
                  0.2
                  %
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %
                  
                  
                  0.1
                  %Loss
      from continuing operations
                  
                  
                  -4.2
                  %
                  
                  
                  -3.4
                  %
                  
                  
                  -3.9
                  %
                  
                  
                  -3.2
                  %Gain
      / (loss) from discontinued operations
                  
                  
                  0.2
                  %
                  
                  
                  0.8
                  %
                  
                  
                  -0.1
                  %
                  
                  
                  -0.1
                  %







(1)
            Revenues
      less cost of sales.


- 17 -


Quarter
Ended October 31, 2009 and Quarter Ended November 1, 2008





Revenues





Revenues
for the quarter ended October 31, 2009 decreased to $198.1 million from $214.8
million for the quarter ended November 1, 2008.  The $16.7 million
decrease in revenues was mainly attributable to a reduction in the number of
stores reported within continuing operations, from 93 at November 1, 2008, to 79
at October 31, 2009, as well as a 5.7% decline in same store
sales.  The Company monitors customer traffic counts and average items
per order in order to assess the causes for fluctuations in
sales.  While our customer counts were down slightly, by less than
2.0%, our average items sold per shopping order decreased more than 4.0% in the
quarter ended October 31, 2009, compared to the quarter ended November 1,
2008.  We believe this is a reflection of the economic downturn in the
United States and particularly in the markets we serve, many of which are
experiencing unemployment rates in excess of the national average.





Gross
Profit





Gross
profit was $60.5 million, or 30.5% of revenues, for the quarter ended October
31, 2009, compared to $65.3 million, or 30.4% of revenues, for the quarter ended
November 1, 2008.  The $4.8 million decrease is primarily the result
of decreased sales discussed above.  Gross profit percentage for the
quarter is flat compared to November 1, 2008.





Selling
and Administrative Expenses





Selling
and administrative expenses for the quarter ended October 31, 2009 were $67.0 million, or 33.8% of revenues, compared to $70.6 million, or
32.9% of revenues, for the quarter ended November 1, 2008.  The $3.6
million decrease in selling and administrative expenses is comprised primarily
of decreases in salary and wages of $2.4 million, utilities of $1.2 million,
advertising of $1.1 million, and other cost reductions of $0.5 million driven by
the reduction in stores and cost-reduction initiatives.





Depreciation
and Amortization





Depreciation
and amortization expense was $4.1 million, or 2.1% of revenues, for the quarter
ended October 31, 2009, compared to $5.7 million, or 2.0% of revenues, for the
quarter ended November 1, 2008.  The $1.6 million decrease in
depreciation and amortization during the quarter ended October 31, 2009, was
primarily due to a $6.8 million write-down of intangible assets made in fiscal
year 2009 in conjunction with the recognition of deferred income tax benefits
attributable to the reversal of valuation allowance of pre-reorganization net
operating loss carry-forwards for prior years, as well as a decrease in gross
depreciable assets relating to the closure of 14 stores since the quarter ended
November 1, 2008.





Gain
on Sale of Assets and Loss on Store Closings





Gain on
sale of assets and loss on store closings was less than $0.1 million, or less
than 0.1% of revenues, for the quarter ended October 31, 2009, compared to $0.1
million, or less than 0.1% of revenues, for the quarter ended November 1,
2008.





Asset
Impairment Charge





There
was no asset impairment charge within continuing operations during the
quarter ended October 31, 2009, compared to $0.3 million, or 0.1% of revenues,
for the quarter ended November 1, 2008, which is reflective of the decrease in
store closings year over year.





Operating
Loss





Operating
loss for the quarter ended October 31, 2009, was $6.4 million, or 3.2% of revenues, compared to the operating loss
of $5.5 million, or 2.6% of
revenues, for the quarter ended November 1, 2008.  The $0.9 million increase in operating loss is
primarily due to the decrease in revenues.


- 18 -


Interest
Expense





Interest
expense for the quarter ended October 31, 2009, was $1.6 million, or 0.8% of
revenues, compared to the interest expense of $1.3 million, or 0.7% of revenues,
for the quarter ended November 1, 2008.  Interest expense for the
quarter ended November 1, 2008, excludes $0.9 million of interest expense
attributable to the wholesale business, which is included within discontinued
operations.





Loss
from Continuing Operations before Income Taxes





Loss from
continuing operations before income taxes for the quarter ended October 31, 2009
was $8.0 million, or 4.0% of revenues, compared to $7.0 million, or 3.4% of
revenues, for the quarter ended November 1, 2008.  The $1.9 million
increase in loss from continuing operations before income taxes is primarily due
to the decrease in revenues.





Discontinued
Operations





Gain from
discontinued operations for the quarter ended October 31, 2009, was $0.4
million, or 0.2% of revenues, compared to a gain from discontinued operations of
$1.5
million, or 0.8% of revenues, for the
quarter ended November 1, 2008.  The fluctuation reflects the decline
in store closings in the quarter ended October 31, 2009, compared to the quarter
ended November 1, 2008.





Net
Loss





Net loss
for the quarter ended October 31, 2009, was $8.0 million, or 4.0% of revenues, compared to a net loss of $5.6
million, or 2.6% of revenues, during the quarter ended November 1, 2008,
primarily as the result of the decrease in revenues and gross
profit.


- 19 -





Year
to Date Ended October 31, 2009 and Year to Date Ended November 1,
2008





Revenues





Revenues
for the year to date ended October 31, 2009 decreased to $607.0 million from
$655.2 million for the year to date ended November 1, 2008.  The $48.2
million decrease in revenues was mainly attributable to a reduction in the
number of stores reported within continuing operations, from 93 at November 1,
2008, to 79 at October 31, 2009, as well as a 5.8% decline in same store
sales.





Gross
Profit





Gross
profit was $187.0 million, or 30.8% of revenues, for the year to date ended
October 31, 2009, compared to $200.7 million, or 30.6% of revenues, for the year
to date ended November 1, 2008.  The $13.7 million decrease is
primarily the result of decreased sales discussed.  Gross profit
percentage increased 0.2%, reflecting slight decreases in commodity
costs.





Selling
and Administrative Expenses





Selling
and administrative expenses for the year to date ended October 31, 2009 were
$205.5 million, or 33.9% of revenues, compared to $215.3 million, or
32.9% of revenues, for the year to date ended November 1, 2008.  The
overall decrease in selling and administrative expenses was largely driven by
the closure of stores combined with the positive impact of cost-reduction
initiatives implemented during fiscal years 2009 and 2010.





Depreciation
and Amortization





Depreciation
and amortization expense was $13.4 million, or 2.2% of revenues, for the year to
date ended October 31, 2009, compared to $17.1 million, or 2.6% of revenues, for
the year to date ended November 1, 2008.  The decrease during the year
to date ended October 31, 2009, was primarily due to a $6.8 million write-down
of intangible assets made in fiscal year 2009 in conjunction with the
recognition of deferred income tax benefits attributable to the reversal of
valuation allowance of pre-reorganization net operating loss carry-forwards for
prior years, as well as a decrease in gross depreciable assets relating to the
closure of 14 stores since the year to date ended November 1, 2008.





Gain
on Sale of Assets and Loss on Store Closings





Gain on
sale of assets and loss on store closings was $0.1 million, or less than 0.1% of
revenues, for the year to date ended October 31, 2009, compared to a net of gain
of $0.2 million, or less than 0.1% of revenues, for the year to date
ended November 1, 2008, due to the timing and proceeds of asset
disposals.





Asset
Impairment Charge





Asset
impairment charge from continuing operations was $0.1 million, or less than 0.1%
of revenues, for the year to date ended October 31, 2009, compared to $1.4
million, or 0.2% of revenues, for the year to date ended November 1, 2008, which
reflects the decrease in store closings year over year.





Operating
Loss





Operating
loss for the year to date ended October 31, 2009, was $18.5 million, or 3.1% of revenues, compared to the operating loss
of $15.8 million, or 2.5% of
revenues, for the year to date ended November 1, 2008.   The
increase in operating loss is primarily the result of the increase in workers’
compensation and pension cost discussed above.





Interest
Expense





Interest
expense for the year to date ended October 31, 2009, was $5.3 million, or 0.9%
of revenues, compared to the interest expense of $4.1 million, or 0.7% of
revenues, for the year to date ended November 1, 2008.  The increase
is primarily the result of miscellaneous financing and legal fees associated
with the payment of our revolving line of credit during the year to date ended
October 31, 2009, as well as increased amortization of deferred financing fees
compared to the prior year.  Additionally, interest expense for the
year to date ended November 1, 2008, excludes $2.6 million of interest expense
attributable to the wholesale business, which is included within discontinued
operations.


- 20 -


Loss
from Continuing Operations before Income Taxes





Loss from
continuing operations before income taxes for the year to date ended October 31,
2009 was $23.9 million, or 3.9% of revenues, compared to $20.3 million, or 3.1% of revenues, for the year to date ended
November 1, 2008.  The $3.6 million increase in loss from continuing
operations before income taxes is primarily due the increase in workers’
compensation and pension cost discussed above.





Discontinued
Operations





Loss from
discontinued operations for the year to date ended October 31, 2009, was $0.3
million, or 0.1% of revenues, compared to $0.7 million, or 0.1% of revenues, for the year to date ended
November 1, 2008.





Net
Loss





Net loss
for the year to date ended October 31, 2009, was $24.5 million, or 4.0% of revenues, compared to a net loss of $21.4
million, or 3.3% of revenues, during the year to date ended November 1, 2008,
primarily as the result of the decrease in revenues and gross
profit.





Liquidity
and Capital Resources





Overview





As of
October 31, 2009, we had cash and cash equivalents of $29.7 million and total
debt outstanding of $27.2 million (consisting of $6.0 million in a term loan
facility, $10.0 million in a supplemental real estate credit facility, $3.4
million in mortgages payable, and $7.8 million in capital lease
obligations).  The Company is currently focused on maintaining its
ongoing operations while conducting an orderly sale of all or substantially all
its assetsthrough processes governed by the
Bankruptcy Court.





Financial
Results





Operating
Activities





Cash used
in operating activities for the year to date ended October 31, 2009, was $3.4 million compared to cash provided by operating activities of $13.2 million for the year to date ended November
1, 2008.  For the year to date ended October 31, 2009, we incurred a
net loss of $24.5 million, adjustments for
non cash items of $14.3 million, and a net
increase in operating assets of $6.9
million, driven primarily by reductions in inventory.  For the year to
date ended November 1, 2008, we incurred a net loss of $21.4 million, adjustments for non-cash items of
$18.8 million, and a net decrease in
operating assets of $15.8
million.





Investing
Activities





Cash used
in investing activities for the year to date ended October 31, 2009, was $4.9 million compared to cash used in investing
activities of $0.2 million for the year to
date ended November 1, 2008.  The $4.7 million increase was primarily due to a
decrease in proceeds from the sale of fixed assets ($0.8 million compared to $5.1 million), the result of closing fewer stores
in the year to date ended October 31, 2009.





Financing
Activities





Cash used
in financing activities for the years to date ended October 31, 2009, and
November 1, 2008, was $18.4 million and $1.0 million, respectively.  The
increase primarily reflects the $17.0 million payment of our revolving line of
credit during the year to date ended October 31, 2009.





Borrowings





The
Revolving Loan Agreement provides for a $50 million revolving credit facility
commitment which includes a maximum sub-limit commitment for letters of credit
of $47.5 million, and a $6 million term loan.  Outstanding letters of
credit under the Revolving Loan Agreement, which are primarily associated with
supporting workers’ compensation obligations, were approximately $35.8 million
at October 31, 2009.  The Company has borrowed an additional $10
million under the Supplemental Loan Agreement   The maturity date
of both facilities is April 13, 2010.  Borrowings under the Revolving
Loan Agreement are secured by substantially all the assets of the Company,
subject to first liens on certain property by other
lenders.  Borrowings under the Supplemental Loan Agreement are secured
by a first lien on substantially all leasehold interests of the Company, and a
second lien on real estate owned by the Company.  Prior to the Company
filing Chapter 11 petitions on November 18, 2009, availability under both credit
facilities was dependent on levels of eligible accounts receivable, inventory
and certain other assets.


- 21 -


The
Company’s filing of Chapter 11 petitions on November 18, 2009 constituted events
of default under the Senior Secured Loan Agreements, causing all of the
Company’s obligations to become immediately due and payable under these
agreements.  The Company believes that any efforts to enforce such
obligations are stayed as a result of the filing of the Chapter 11 petitions
with the Bankruptcy Court, subject to the terms of the Interim
Order.  These events of default may have also constituted an event of
default or otherwise triggered repayment obligations under the express terms of
other agreements or instruments relating to direct financial obligations of the
Company.  Although the Interim Order authorizes the Company to use its
cash collateral, which was $21.6 million at
October 31, 2009, to fund and obtain letters of credit for ongoing operations in
accordance with a restrictive Budget, as previously disclosed, the agents for
the Senior Secured Lenders have notified the Company that they reserve all their
rights as a result of the occurrence of certain events, including the right to
terminate such use of cash collateral (“Termination Events”).  The
occurrence of such Termination Events may also result in the termination of the
automatic stay under the Bankruptcy Code of any rights of the Senior Secured
Lenders to enforce the Company’s payment obligations under the Senior Secured
Loan Agreements, subject only to the agent for the lenders under either Senior
Secured Loan Agreement providing certain written notices.





The
Company also has $3.4 million in borrowings under mortgages that mature at
various dates through 2021 and are secured by first liens on the related
properties.





Off-Balance
Sheet Arrangements





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





Critical
Accounting Policies





Preparation
of our financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
and expenses.  The critical accounting
policies described below were applied for the periods presented, but may change
in subsequent periods as a result of the Company’s voluntary petitions for
relief under Chapter 11 of the United States Bankruptcy Code (see Note 1 to the
financial statements filed with this Form 10-Q).Critical
accounting policies are those accounting policies that are important to the
portrayal of our financial condition and which require management’s most
difficult, subjective, or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently
uncertain.  We summarized our
critical accounting policies in Note 1 to the consolidated financial
statements in our Annual Report on Form 10-K for the year ended January 31,
2009.  There have been no significant changes in our critical
accounting estimates during the year to date ended October 31,
2009.





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





Store
Closing Costs





We record
a liability for the estimated future cash flows (including future lease
commitments, net of estimated cost recoveries) and miscellaneous closing
costs.  Future cash flows are estimated based on our knowledge of the
market in which the closed stores are located.  The estimates of
future cash flows are then discounted to present value, based on the
credit-adjusted risk-free rate of interest.  These estimates of
discounted future cash flows could be affected by changes in real estate
markets, other economic conditions, and the interest rate used in such
calculations.  Any one-time termination benefits are recognized at the
time the benefits are communicated to the employees.  Other related
costs are recognized in the period when the liability is incurred.





Impairment
of Long-Lived Assets





We review
our long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be
recoverable.  The carrying value of an asset is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset.  In estimating future cash
flows, management considers historical performance and assesses the effect of
projected changes in competition, maturation of new stores and store remodels,
merchandising and marketing strategies, and general market
conditions.  No assurance can be given that the actual future cash
flows will be sufficient to recover the carrying value of long-lived
assets.





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





- 22 -




Inventories


Our
inventories are stated at the lower of cost or market.  We follow the
link-chain, dollar-value LIFO method when calculating our LIFO charge or
credit.  Vendor allowances, including early payment discounts, volume
rebates, and funds for product placement and advertising, are generally recorded
as a reduction of inventory cost based on average inventory turnover rates by
product category.  We take physical counts of inventories throughout
the year and record inventory shortages based on our physical
counts.  Where physical counts are not available, we record an
allowance for inventory shortages based on historical shrinkage
percentages.





Intangible
Assets





We have
recorded intangible assets for favorable leases, pharmacy prescription files,
computer software, and goodwill.  We amortize our favorable leases
over the remaining life of the lease including all favorable
options.  We amortize both the pharmacy prescription files and the
computer software over five years.  We consider these assets during
our SFAS 144 impairment testing.  To the extent net operating loss
carryforwards or deductible temporary differences arising prior to the Company’s
emergence from Chapter 11 proceedings for which a valuation allowance has been
provided are realized, the resulting benefits have been allocated to reduce
intangible assets.





Allowance
for Doubtful Accounts





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





Income
Taxes





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





Self-Insurance
Liability





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





Vendor
Allowances





Vendor
allowances relating to our purchasing and merchandising functions are recorded
as a reduction of cost of sales as they are earned based on each specific
agreement and its associated event date.  Our inventory is adjusted
for these vendor allowances, based on the allowance event date and the inventory
turns for the specific department.  These vendor allowances come in
many forms:  promotional allowances tied to weekly advertised items
which are recognized when the inventory is sold, warehouse slotting allowances
which are recorded when the item has been distributed to the stores and are
available for sale to the consumer, long-term contractual agreements such as
exclusivity programs or signing bonuses which are recognized on a straight-line
basis over the life of the agreement, volume incentive agreements which are
recognized when the incentive is deemed probable and estimable based on purchase
or sales targets, and allowances for running items in our weekly ad which are
recognized at the end of the ad week.  Cash discounts for prompt
payments of invoices are also recorded as a reduction in cost of sales when the
payment is made to the vendor.





Defined
Benefit Pension Plans





The
Company adjusts its defined benefit pension plan liability account to reflect
the underfunded status of the plans in its balance sheet.  Any gains
or losses that arise during the period but are not recognized as components of
net periodic pension (benefit) / cost are recognized as a component of other
comprehensive income / (loss).  The Company measures its plan assets
and benefit obligations at its year-end.





Recent
Accounting Pronouncements





See Note
2 to the Consolidated Condensed Financial Statements for a discussion of new
accounting pronouncements.


- 23 -





ITEM
3.      QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK





Our
financial results are subject to risk from interest rate changes on debt that
has variable interest rates. Total variable rate debt outstanding under our loan
agreements at October 31, 2009, was $16.0 million with a weighted average
interest rate of 12.5%.  A 1.0% change in interest rates under our
credit facilities would impact pre-tax income by $0.2 million on an annual
basis, based on the debt outstanding October 31, 2009.  In addition to
the variable rate debt, we had $3.4 million of fixed rate debt outstanding at
October 31, 2009 with a weighted average interest rate of 6.5%.  We
view the fixed rate debt as a partial hedge against interest rate
fluctuations.





ITEM
4T.    CONTROLS AND PROCEDURES





Disclosure
controls and procedures under Rule 13a-15(e) of the Securities Exchange Act of
1934 (the “Exchange Act”) are those controls and other procedures of a company
that are designed to ensure that information required to be disclosed by the
company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rule and forms.  Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports it files or
submits under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.





Pursuant
to Rule 13a-15(e) under the Exchange Act, our management evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures with the participation of our principal executive and principal
financial officers.  Based on their current observations, these
members of management, with input, where appropriate, from members of the audit
committee, have concluded that our disclosure controls and procedures were
effective as of October 31, 2009, in
providing reasonable assurance that material information requiring disclosure
was brought to management’s attention on a timely basis and that our financial
reporting was reliable.





Change
in our Internal Control over Financial Reporting





There
have been no changes during the quarter ended October 31, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.


- 24 -


PART
II – OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





Reference
is made to Item 3 of the Company’s Annual Report on Form 10-K for the year ended
January 31, 2009, and to Note 8 to the Consolidated Condensed Financial
Statements included in Part I of this Report on Form 10-Q.





On
November 18, 2009 the Company filed voluntary petitions for relief under Chapter
11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United
States Bankruptcy Court for the District of Delaware (the “Bankruptcy
Court”).  The Company has and intends to continue to manage its
properties and operate its businesses as a “debtor-in-possession” under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code.  No trustee or examiner has been
appointed in the Company’s case in the Bankruptcy Court.  The Company
has commenced a process to sell all or substantially all of its
assets.





ITEM 1A.  RISK FACTORS





Information concerning risks and uncertainties appears
in Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the
fiscal year ended January 31, 2009. In addition, we have identified the
following additional risk factors to supplement those set forth in our Annual
Report on Form 10-K for the fiscal year ended January 31, 2009. You should
carefully consider these risk factors, which could materially affect the
proceeds from the disposition of assets.





Our interim unaudited financial statements were not
reviewed by an independent registered public accounting firm in accordance with
the rules of the SEC.





Because the unaudited interim financial statements and
notes thereto for the quarterly period ended October 31, 2009 included in this
Form 10-Q have not been reviewed in accordance with SAS 100, as required by
Regulation S-X as promulgated by the SEC under the Securities Act of 1934, the
Form 10-Q is deemed deficient and not timely. The review and resulting comments
from an independent registered public accounting firm on our unaudited interim
financial statements have in the past resulted in our making changes in those
financial statements before they were filed with our quarterly or annual
reports. The financial statements included in this Form 10-Q do not reflect any
changes that may have resulted from such a review. The SEC may request that we
amend this Form 10-Q to include financial statements reviewed by an independent
registered public accounting firm, and in order to comply we would need to
incur additional expenses and expend substantial additional management time
that would otherwise be devoted to ensuring the orderly disposition of our
assets. Our failure to obtain the review required by SEC rules and the resulting
status of this Form 10-Q as not having been filed on a timely basis will also
render us ineligible to file registration statements on Form
S-3.





The prices of our securities are volatile, and, in
connection with our Chapter 11 reorganization, holders of our securities may
receive no payment or payment that is less than the purchase price of such
securities.





Prior to filing the Chapter 11 petition, the market price
for our common stock was volatile, in part due to the very low volume of trading
in our common stock.  Trading in our securities may be further limited
on account of the Chapter 11 petition, and holders of such securities may not be
able to resell their securities for their purchase price or at
all.  The price of our securities may fluctuate substantially in the
future. In addition, it is possible that, in connection with our reorganization,
all of the outstanding shares of our capital stock could be cancelled, and
holders of such securities may not be entitled to any payment in respect of
their shares.





Accordingly, trading in our securities during the
pendency of our reorganization is highly speculative and poses substantial risks
to purchasers of such securities, as holders may not be able to resell such
securities or, in connection with our reorganization, may receive no payment, or
a payment or other consideration that is less than the purchase price of such
securities.





The Company filed a Chapter 11 petition on November 18,
2009 and is subject to the associated risks and
uncertainties.





For the duration of the Chapter 11 petition, our
operations and our ability to maintain our value as a going concern will be
subject to the risks and uncertainties associated with bankruptcy. These risks
include:





·
            our ability to operate within the restrictions and
      the liquidity limitations of the Interim Order and any subsequent
      collateral order entered by the Bankruptcy Court in connection with the
      Chapter 11 petition;


·
            our ability to obtain Bankruptcy Court approval
      with respect to motions filed in the Bankruptcy Petitions from time to
      time;


·
            our ability to obtain and maintain normal payment
      and other terms with customers, vendors and service
      providers;


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·
            our ability to maintain our leased and owned real
      properties and material contracts that are critical to our
      operations;


·
            our ability to attract, motivate and retain key
      employees; and


·
            our ability to attract and retain customers,
      vendors and service
providers





We will also be subject to risks and uncertainties with
respect to the actions and decisions of our and our subsidiaries’ creditors and
other third parties who have interests in the Chapter 11 petition,
which  may impair the Company’s value as a going
concern.





As a result of the Chapter 11 petition, realization of
assets and liquidation of liabilities are subject to uncertainty. These risks
and uncertainties could affect the proceeds we realize from the disposition of
our assets in various ways. For example, negative events or publicity associated
with the Chapter 11 petition could adversely affect our relationships with our
vendors and employees, as well as with customers, which in turn could adversely
affect these proceeds.  Also, pursuant to the Bankruptcy Code, we need
the approval of the Bankruptcy Court, and sometimes our creditors and other
third parties, for transactions outside the ordinary course of business, which
may limit our ability to respond timely to certain events or take advantage of
certain opportunities. Because of the risk and uncertainties associated with the
Chapter 11 petition, we cannot predict or quantify the ultimate impact that
events occurring during the reorganization process will have on the proceeds we
realize upon the disposition of our assets.





Our financial results may be volatile and may not
reflect historical trends.




Whilein the
bankruptcy process, we expect our financial
results to continue to be volatile as asset dispositions, restructuring
activities, contract terminations and rejections, and claims assessments may
significantly impact our consolidated financial statements. As a result, our
historical financial performance is likely not indicative of our financial
performance after the date of the Chapter 11 petition. In addition, therealizablevalue of our
assets and liabilities may differ materially from the recorded values of assets
and liabilities on our consolidated balance sheets.




Conducting a successful Chapter 11 reorganization will
depend significantly on our ability to retain and motivate management and key
employees.





Our success depends significantly on the skills,
experience and efforts of our personnel.  We do not maintain "key
person" life insurance for any of our officers.  The loss of any of
our officers could harm our results of operations and our financial position and
could delay or prevent the achievement of our business
objectives.  Our ability to conduct the orderly liquidation of our
assets will be highly dependent upon the skills, experience and effort of our
senior management and other personnel.  Our ability to attract,
motivate and retain key employees is restricted, however, by provisions of the
Bankruptcy Code, which limit or prevent our ability to implement a retention
program or take other measures intended to motivate key employees to remain with
the Company during the pendency of the Chapter 11 proceedings.  In
addition, we must obtain Bankruptcy Court approval of employment contracts and
other employee compensation programs.  The loss of the services of one
or more members of our senior management or certain employees with critical
skills, or a diminution in our ability to attract talented, committed
individuals to fill vacant positions when needs arise, could harm our ability to
conduct an orderly liquidation of our assets.





ITEM
6.      EXHIBITS





The
following are filed as Exhibits to this Report:





Exhibit No.
              
              Description31.1
              
              Certification
      of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities
      Exchange Act of 1934, as amended.31.2
              
              Certification
      of CFO pursuant to Rule 13a-14(a) or Rule 15d-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.


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Signatures





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





THE
PENN TRAFFIC COMPANY





By:
                  /s/
                  Gregory J. YoungName:
                  Gregory
      J. YoungTitle:
                  Chief
      Executive Officer and PresidentBy:
                  /s/
                  Eric SattlerName:
                  Eric
      SattlerTitle:
                  Chief
      Financial
Officer


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