**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**x**** QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended August 2, 2008**

 

**OR**

 

**o**** TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the Transition Periodfrom              to              **

** **

**Commission file number: 0-8858**

 

**THE PENN TRAFFIC COMPANY**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**              | ** ** | **25-0716800**                     |
|---------------------------|------------|------------------------------------|
| (State of  incorporation) |       | (IRS Employer  Identification No.) |

 

| **1200 State Fair Blvd.,  Syracuse, New York** | ** ** | **13221-4737** |
|------------------------------------------------|------------|----------------|
| (Address of principal executive offices)       |       | (Zip Code)     |

 

**(315)453-7284**

(Registrant’s telephonenumber, including area code)

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

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

 

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

 

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

 

CommonStock, par value $.01 per share: 8,336,192 shares outstanding as of September 3, 2008

 

 

 

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**FORM 10-Q INDEX**

 
| ** **                              | ** ** | ** **                                                                                  | **PAGE** |
|-----------------------------------------|------------|---------------------------------------------------------------------------------------------|----------|
| **PART I. FINANCIAL  INFORMATION** |       |
|                                    |       |                                                                                        |     |
| Item                                    | 1.         | Financial Statements                                                                        | 4        |
|                                    |       |                                                                                        |     |
| Item                                    | 2.         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 18       |
|                                    |       |                                                                                        |     |
| Item                                    | 3.         | Quantitative  and Qualitative Disclosures About Market Risk                                 | 25       |
|                                    |       |                                                                                        |     |
| Item                                    | 4.         | Controls and  Procedures                                                                    | 25       |
|                                    |       |                                                                                        |     |
| **PART II. OTHER  INFORMATION**    |       |
|                                    |       |                                                                                        |     |
| Item                                    | 1A.        | Risk Factors                                                                                | 26       |
|                                    |       |                                                                                        |     |
| Item                                    | 4.         | Submission  of Matters to a Vote of Security Holders                                        | 26       |
|                                    |       |                                                                                        |     |
| Item                                    | 6.         | Exhibits                                                                                    | 26       |

 

2

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**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Certainstatements included in this Form 10-Q, including without limitation,statements included in Item 2 - “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” which are not statements ofhistorical fact, are intended to be, and are hereby identified as, “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, as amended, reflecting management’s current analysis and expectations,based on what management believes to be reasonable assumptions.  These forward-looking statements include statementsrelating to our anticipated financial performance and business prospects.  Statements preceded by, followed by or thatinclude words such as “believe,” “anticipate,” “estimate,” “expect,” “could,”and other similar expressions are to be considered such forward-lookingstatements.  Forward-looking statementsmay involve known and unknown risks, uncertainties and other factors, which maycause the actual results to differ materially from those projected, stated orimplied, depending on such factors as the risks set forth in Item 1A — “RiskFactors” in our Annual Report on Form 10-K for the fiscal year ended February 2,2008; our ability to improve operating performance and effectuate businessplans; our ability to operate pursuant to the terms of our credit facilitiesand to comply with the terms of our lending agreements or to amend or modifythe terms of such agreements as may be needed from time to time; our ability togenerate cash; our ability to attract and maintain adequate capital; our abilityto refinance our indebtedness; increases in prevailing interest rates; ourability to obtain trade credit, and shipments and terms with vendors andservice providers for current orders; our ability to maintain contracts thatare critical to our operations; potential adverse developments with respect toour liquidity or results of operations; general economic and businessconditions; competition, including increased capital investment and promotionalactivity by our competitors; availability, location and terms of sites forstore development; the successful implementation of our capital expenditureprogram; labor relations; labor and employee benefit costs including increasesin health care and pension costs and the level of contributions to oursponsored pension plans; the result of our pursuit of strategic alternatives;our ability to pursue strategic alternatives; economic and competitiveuncertainties; changes in strategies; changes in generally accepted accountingprinciples; adverse changes in economic and political climates around theworld, including terrorist activities and international hostilities; and theoutcome of pending, or the commencement of any new, legal proceedings against,or governmental investigations of us, including the previously announced SECand U.S. Attorney’s Office investigations. We caution that the foregoing list of important factors is notexhaustive.  Accordingly, there can be noassurance that we will meet future results, performance or achievementsexpressed or implied by such forward-looking statements, which are generallyrequired to be publicly revised as circumstances change, and which we do notintend to update.

 

3

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**PART I**

 

**ITEM 1.          Financial Statements**

 

The Penn Traffic Company

CondensedConsolidated Balance Sheets

(Inthousands)

 
| ** **                                                                                                | ** ** | **August 2,** | ** ** | **February 2,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                                                                                | ** ** | **2008**           | ** ** | **2008**             | ** ** |
| ** **                                                                                                | ** ** | **(unaudited)**    | ** ** | ** **           | ** ** |
| **ASSETS**                                                                                                |       |               |       |                 |       |
|                                                                                                      |       |               |       |                 |       |
| **Current Assets:**                                                                                       |       |               |       |                 |       |
| Cash and cash equivalents                                                                                 |       | $                  | 4,792      |                 | $          | 20,916 |   |
| Accounts and  notes receivable (less allowance for doubtful accounts of $5,704 and $5,690,  respectively) |       | 33,098             |       | 37,513               |       |
| Inventories                                                                                               |       | 84,210             |       | 89,208               |       |
| Prepaid expenses and other current assets                                                                 |       | 6,991              |       | 7,307                |       |
| **Total current assets**                                                                                  |       | 129,091            |       | 154,944              |       |
|                                                                                                      |       |               |       |                 |       |
| **Capital Leases, net**                                                                                   |       | 7,743              |       | 8,268                |       |
| ** **                                                                                                |       |               |       |                 |       |
| **Fixed Assets, net**                                                                                     |       | 67,762             |       | 78,402               |       |
|                                                                                                      |       |               |       |                 |       |
| **Other Assets:**                                                                                         |       |               |       |                 |       |
| Intangible assets                                                                                         |       | 13,691             |       | 15,397               |       |
| Deferred tax asset                                                                                        |       | 3,291              |       | 2,440                |       |
| Other assets                                                                                              |       | 3,593              |       | 2,998                |       |
| **Total other assets**                                                                                    |       | 20,575             |       | 20,835               |       |
|                                                                                                      |       |               |       |                 |       |
| **Total Assets**                                                                                          |       | $                  | 225,171    |                 | $          | 262,449 |   |

 

The accompanying notes are an integral partof these statements.

 

4

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ThePenn Traffic Company

CondensedConsolidated Balance Sheets

(Inthousands)

 
| ** **                                                                                                                                             | ** ** | **August 2,** | ** ** | **February 2,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                                                                                                                             | ** ** | **2008**           | ** ** | **2008**             | ** ** |
| ** **                                                                                                                                             | ** ** | **(unaudited)**    | ** ** | ** **           | ** ** |
|                                                                                                                                                   |       |               |       |                 |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                          |       |               |       |                 |       |
|                                                                                                                                                   |       |               |       |                 |       |
| **Current liabilities:**                                                                                                                               |       |               |       |                 |       |
| Current portion of obligations under  capital leases                                                                                                   |       | $                  | 1,450      |                 | $          | 1,368 |   |
| Current maturities of long-term debt (Note  6)                                                                                                         |       | 46,859             |       | 278                  |       |
| Accounts payable                                                                                                                                       |       | 23,379             |       | 34,178               |       |
| Other current liabilities                                                                                                                              |       | 40,605             |       | 47,060               |       |
| Accrued interest expense                                                                                                                               |       | 67                 |       | 176                  |       |
| Deferred income taxes (Note 7)                                                                                                                         |       | 12,437             |       | 11,485               |       |
| Liabilities subject to compromise (Note 5)                                                                                                             |       | 718                |       | 2,516                |       |
| **Total current liabilities**                                                                                                                          |       | 125,515            |       | 97,061               |       |
|                                                                                                                                                   |       |               |       |                 |       |
| **Non-current liabilities:**                                                                                                                           |       |               |       |                 |       |
| Obligations under capital leases                                                                                                                       |       | 8,215              |       | 8,962                |       |
| Long-term debt (Note 6)                                                                                                                                |       | 3,489              |       | 50,209               |       |
| Defined benefit  pension plan liability (Note 9)                                                                                                       |       | 5,299              |       | 6,326                |       |
| Other non-current  liabilities                                                                                                                         |       | 29,593             |       | 30,716               |       |
| **Total non-current liabilities**                                                                                                                      |       | 46,596             |       | 96,213               |       |
|                                                                                                                                                   |       |               |       |                 |       |
| **Total liabilities**                                                                                                                                  |       | 172,111            |       | 193,274              |       |
|                                                                                                                                                   |       |               |       |                 |       |
| **Commitments and contingencies (Notes 5, 6,  9 and 10)**                                                                                              |       |               |       |                 |       |
|                                                                                                                                                   |       |               |       |                 |       |
| **Stockholders’ equity:**                                                                                                                         |       |               |       |                 |       |
| Preferred stock - authorized 1,000,000  shares, $.01 par value; 10,000 shares issued in fiscal year 2008                                               |       | 100                |       | 100                  |       |
| Common stock - authorized 15,000,000  shares, $.01 par value; shares issued and to be issued 8,650,110 in second  quarter and 8,519,095 in fiscal 2008 |       | 86                 |       | 85                   |       |
| Capital in excess of par value                                                                                                                         |       | 128,148            |       | 128,149              |       |
| Deficit                                                                                                                                                |       | (90,184            | )          | (74,356              | )          |
| Accumulated other comprehensive income                                                                                                                 |       | 14,910             |       | 15,197               |       |
| **Total stockholders’ equity**                                                                                                                    |       | 53,060             |       | 69,175               |       |
|                                                                                                                                                   |       |               |       |                 |       |
| **Total liabilities and stockholders’ equity**                                                                                                    |       | $                  | 225,171    |                 | $          | 262,449 |   |

 

The accompanying notes are an integral part of these statements.

 

5

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ThePenn Traffic Company

CondensedConsolidated Statements of Operations

(Inthousands, except share and per share data)

(unaudited)

 
| ** **                                                                                                                                                  | ** ** | **Quarter Ended**       | ** ** | **Year to Date**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                  | ** ** | **August 2, 2008** | ** ** | **August 4, 2007** | ** ** | **August 2, 2008** | ** ** | **August 4, 2007** | ** ** |
|                                                                                                                                                        |       |                         |       |                         |       |   |   |   |   |
| **Revenues**                                                                                                                                                |       | $                            | 306,890    |                         | $          | 318,012 |   | $ | 593,948 |   | $ | 615,985 |   |
|                                                                                                                                                        |       |                         |       |                         |       |   |   |   |   |
| **Cost and operating expenses:**                                                                                                                            |       |                         |       |                         |       |   |   |   |   |
| Cost of sales                                                                                                                                               |       | 228,816                      |       | 232,500                      |       | 440,836 |   | 451,138 |   |
| Selling and administrative expenses                                                                                                                         |       | 78,526                       |       | 85,777                       |       | 161,714 |   | 168,013 |   |
| Loss (gain) on sale of leasehold and fixed  assets                                                                                                          |       | 73                           |       | (121                         | )          | (1,801 | ) | (612 | ) |
| Loss on store and  distribution center closings (including asset impairment of $399 and $3,003  for the quarter and year to date ended August 2, 2008) |       | 399                          |       | —                       |       | 3,924 |   | 1,883 |   |
|                                                                                                                                                        |       |                         |       |                         |       |   |   |   |   |
| **Operating loss**                                                                                                                                          |       | (924                         | )          | (144                         | )          | (10,725 | ) | (4,437 | ) |
|                                                                                                                                                        |       |                         |       |                         |       |   |   |   |   |
| Interest expense                                                                                                                                            |       | 2,211                        |       | 2,454                        |       | 4,564 |   | 4,795 |   |
| Reorganization and other expenses                                                                                                                           |       | 71                           |       | 1,988                        |       | 181 |   | 2,152 |   |
|                                                                                                                                                        |       |                         |       |                         |       |   |   |   |   |
| **Loss from continuing operations before  income taxes**                                                                                                    |       | (3,206                       | )          | (4,586                       | )          | (15,470 | ) | (11,384 | ) |
|                                                                                                                                                        |       |                         |       |                         |       |   |   |   |   |
| Income tax expense                                                                                                                                          |       | 120                          |       | 58                           |       | 277 |   | 117 |   |
|                                                                                                                                                        |       |                         |       |                         |       |   |   |   |   |
| **Loss from continuing operations**                                                                                                                         |       | (3,326                       | )          | (4,644                       | )          | (15,747 | ) | (11,501 | ) |
|                                                                                                                                                        |       |                         |       |                         |       |   |   |   |   |
| **Discontinued operations (Note 8)**                                                                                                                        |       |                         |       |                         |       |   |   |   |   |
| Loss from discontinued  operations                                                                                                                          |       | (71                          | )          | (268                         | )          | (81 | ) | (821 | ) |
| **Net loss**                                                                                                                                                |       | $                            | (3,397     | )                            | $          | (4,912 | ) | $ | (15,828 | ) | $ | (12,322 | ) |
|                                                                                                                                                        |       |                         |       |                         |       |   |   |   |   |
| **Loss per share - basic and diluted (Note 4)**                                                                                                             |       |                         |       |                         |       |   |   |   |   |
|                                                                                                                                                        |       |                         |       |                         |       |   |   |   |   |
| Loss from  continuing operations                                                                                                                            |       | $                            | (0.41      | )                            | $          | (0.55 | ) | $ | (1.87 | ) | $ | (1.35 | ) |
| Loss from  discontinued operations                                                                                                                          |       | $                            | (0.01      | )                            | $          | (0.03 | ) | $ | (0.01 | ) | $ | (0.10 | ) |
| **Loss per share – basic and diluted**                                                                                                                 |       | $                            | (0.42      | )                            | $          | (0.58 | ) | $ | (1.88 | ) | $ | (1.45 | ) |
|                                                                                                                                                        |       |                         |       |                         |       |   |   |   |   |
| Shares  outstanding and to be issued                                                                                                                        |       | 8,650,110                    |       | 8,498,752                    |       | 8,650,110 |   | 8,498,752 |   |

 

The accompanying notes are an integral part of thesestatements.

 

6

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ThePenn Traffic Company

CondensedConsolidated Statements of Cash Flows

(Inthousands)

(unaudited)

 
| ** **                                                                   | ** ** | **For the Period**   | ** ** | **For the Period**         | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------------|------------|
| ** **                                                                   | ** ** | **February 3, 2008** | ** ** | **February 4, 2007**       | ** ** |
| ** **                                                                   | ** ** | **August 2, 2008**   | ** ** | **to August 4, 2007** | ** ** |
|                                                                         |       |                           |       |                                 |       |
| **Operating activities:**                                                    |       |                           |       |                                 |       |
| Net loss                                                                     |       | $                              | (15,828    | )                                    | $          | (12,322 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                           |       |                                 |       |
| Depreciation and amortization                                                |       | 11,412                         |       | 13,758                               |       |
| Allowance for doubtful accounts                                              |       | 582                            |       | 370                                  |       |
| Gain on sale of fixed assets                                                 |       | (1,801                         | )          | (612                                 | )          |
| Asset impairment charge                                                      |       | 3,003                          |       | —                               |       |
| Amortization of deferred financing cost                                      |       | 466                            |       | 501                                  |       |
| Deferred income taxes                                                        |       | 285                            |       | —                               |       |
| Phantom stock compensation                                                   |       | (100                           | )          | 1,223                                |       |
|                                                                         |       |                           |       |                                 |       |
| **Net change in operating assets and  liabilities:**                         |       |                           |       |                                 |       |
| Accounts and notes receivable, net                                           |       | 3,833                          |       | (2,738                               | )          |
| Prepaid expenses and other current assets                                    |       | 316                            |       | 967                                  |       |
| Inventories                                                                  |       | 4,998                          |       | 4,263                                |       |
| Liabilities subject to compromise                                            |       | (1,103                         | )          | (180                                 | )          |
| Accounts payable and other current  liabilities                              |       | (17,363                        | )          | (4,985                               | )          |
| Other assets                                                                 |       | 24                             |       | 2                                    |       |
| Defined benefit pension plan                                                 |       | (1,499                         | )          | (2,623                               | )          |
| Other non-current liabilities                                                |       | (1,340                         | )          | 758                                  |       |
|                                                                         |       |                           |       |                                 |       |
| **Net cash used in operating activities**                                    |       | (14,115                        | )          | (1,618                               | )          |
|                                                                         |       |                           |       |                                 |       |
| **Investing activities:**                                                    |       |                           |       |                                 |       |
| Capital expenditures                                                         |       | (4,250                         | )          | (1,875                               | )          |
| Proceeds from sale of fixed assets                                           |       | 4,128                          |       | 919                                  |       |
|                                                                         |       |                           |       |                                 |       |
| **Net cash used in investing activities**                                    |       | (122                           | )          | (956                                 | )          |
|                                                                         |       |                           |       |                                 |       |
| **Financing activities:**                                                    |       |                           |       |                                 |       |
| Payments of mortgages                                                        |       | (139                           | )          | (154                                 | )          |
| Reduction in  capital lease obligations                                      |       | (664                           | )          | (806                                 | )          |
| Deferred  financing costs                                                    |       | (1,084                         | )          | —                               |       |
|                                                                         |       |                           |       |                                 |       |
| **Net cash used in financing activities**                                    |       | (1,887                         | )          | (960                                 | )          |
|                                                                         |       |                           |       |                                 |       |
| **Decrease in cash and cash equivalents**                                    |       | (16,124                        | )          | (3,534                               | )          |
|                                                                         |       |                           |       |                                 |       |
| **Cash and cash equivalents at the beginning of period**                     |       | 20,916                         |       | 24,661                               |       |
|                                                                         |       |                           |       |                                 |       |
| **Cash and cash equivalents at end of period**                               |       | $                              | 4,792      |                                 | $          | 21,127 |   |

 

The accompanying notes arean integral part of these statements.

 

7

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ThePenn Traffic Company

CondensedConsolidated Statements of Stockholders’ Equity

Forthe unaudited period February 2, 2008 to August 2, 2008

(Inthousands, except share data)

 
| ** **                                                                                                                                              | ** ** | **Common  Stock** | ** ** | **Preferred  Stock** | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|-----------------------------------------------------|------------|-------------|------------|-----------------------------------------------|------------|---------------------------------------|------------|
|                                                                                                                                                    |       |              |       |                 |       |                                                |       |        |       |                                          |       |                                  |       |
| Balance at February 2, 2008                                                                                                                        |       | $                 | 85         |                 | $          | 100                                                 |       | $           | 128,149    |                                          | $          | (74,356                               | )          | $ | 15,197 |   | $ | 69,175 |   |
|                                                                                                                                                    |       |              |       |                 |       |                                                |       |        |       |                                          |       |                                  |       |
| Net loss for the period ended  August 2, 2008                                                                                                      |       | —            |       | —               |       | —                                              |       | (15,828     | )          | —                                        |       | (15,828                               | )          |
|                                                                                                                                                    |       |              |       |                 |       |                                                |       |        |       |                                          |       |                                  |       |
| Increase of 125,754 shares estimated to be  issued in connection with settlement of Chapter 11 claims                                                   |       | 1                 |       | —               |       | (1                                                  | )          | —      |       | —                                        |       | —                                |       |
|                                                                                                                                                    |       |              |       |                 |       |                                                |       |        |       |                                          |       |                                  |       |
| Amortization of net actuarial gain included  in net periodic pension benefit, net of deferred taxes of ($185) for the  period ended August 2, 2008 |       | —            |       | —               |       | —                                              |       | —      |       | (287                                          | )          | (287                                  | )          |
|                                                                                                                                                    |       |              |       |                 |       |                                                |       |        |       |                                          |       |                                  |       |
| Comprehensive loss                                                                                                                                      |       | —            |       | —               |       | —                                              |       | —      |       | —                                        |       | (16,115                               | )          |
| Balance at August 2, 2008                                                                                                                          |       | $                 | 86         |                 | $          | 100                                                 |       | $           | 128,148    |                                          | $          | (90,184                               | )          | $ | 14,910 |   | $ | 53,060 |   |

 

The accompanying notes are an integral part of these statements.

 

8

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ThePenn Traffic Company

Notesto Condensed Consolidated Financial Statements

 

**Note 1 – Basis of Presentation**

 

The accompanying unaudited condensed consolidatedfinancial statements of The Penn Traffic Company and subsidiaries (the “Company”)have been prepared in accordance with accounting principles generally acceptedin the United States for interim financial information and with theinstructions for Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby accounting principles generally accepted in the Unites States of America forcomplete financial statements. In the opinion of management, all adjustments(consisting of normal recurring deferrals and accruals) considered necessaryfor a fair presentation have been included. The operating results for the periods presented are not necessarilyindicative of the results to be expected for the full year.  For further information, refer to the auditedconsolidated financial statements and footnotes thereto included in the Company’slatest Annual Report on Form 10-K.

 

The balance sheet as of February 2, 2008 has beenderived from the audited consolidated financial statements as of such date, butdoes not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.

 

***Reporting Periods***

 

The Company’s fiscal year ends each year on theSaturday closest to January 31. Fiscal year 2009 is the 52-week period ended January 31, 2009.  Fiscal year 2008 is the 52-week period ended February 2,2008.  The information presented in thisQuarterly Report on Form 10-Q is for the 13-week quarter ending and26-week period ending August 2, 2008.

 

All significant intercompany transactions and accountshave been eliminated in consolidation.

 

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

 

OnMay 30, 2003, the Company and all of its subsidiaries filed voluntarypetitions under Chapter 11 of the United States Bankruptcy Code in theUnited States Bankruptcy Court for the Southern District of New York.  The filing was made in response to pendingdefaults under the Company’s then-existing loan agreements and a lack ofliquidity to continue operations.  UnderChapter 11, the Company continued to operate its businesses asdebtor-in-possession under court protection from its creditors and claimants,while using the Chapter 11 process to substantially reduce its debt obligationsand implement a plan of reorganization.

 

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

 

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

 
| 1.     |   | The  Company entered into new credit agreements providing for borrowings of up to  $164 million. Proceeds from these new credit agreements provided funds  sufficient to repay a debtor-in-possession credit facility and all administrative  and priority claims to the extent provided for in the Plan.                                                                                                                                               |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.     |   | The  Company sold and leased back its five owned distribution facilities for a  sales price of approximately $37 million.                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.     |   | All  shares of common stock and all stock options and warrants outstanding prior  to the confirmation of the Plan were cancelled and the holders of such equity  securities received no distributions under the Plan.                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.     |   | The  reorganized Company was authorized to issue new shares of common stock to  unsecured creditors, which included holders of $100 million of senior  notes, a claim by the Pension Benefit Guaranty Corporation (the “PBGC”) of  $60 million and trade claims, all of whom were eligible to receive pro  rata distributions of new shares of common stock and the right to share in  potential proceeds from certain causes of action. |

 

Pursuantto the provisions of Statement of Position 90-7, “Financial Reporting byEntities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”) issued bythe American Institute of Certified Public Accountants upon emergence fromChapter 11 proceedings, the Company adopted fresh-start reporting whichresulted in a new reporting entity and a new basis of accounting.

 

AlthoughApril 13, 2005 was the effective date of the Plan, the Company chose April 16,2005 as the effective date for accounting purposes to adopt fresh-startreporting because of the proximity of that date to the end of an accountingperiod.  Applying fresh-start reportingas of April 16, 2005 rather than the actual effective date of April 13,2005 did not have a material effect on the financial condition or results ofoperations of the Company.

 

9

----

 

**Note 3 –New Accounting Standards**

 

InSeptember 2006, the FASB issued Statement of Financial AccountingStandards No. 157, “Fair Value Measurement,” (“SFAS 157”), effective forfiscal years beginning after November 15, 2007.  SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements.  SFAS 157 does not require any new fair valuemeasurements.  Effective February 3,2008, the Company adopted the provision of SFAS 157.  The adoption did not have a material effecton our consolidated financial statements.

 

InFebruary 2007, the FASB issued Statement of Financial Accounting StandardsNo. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities – Including an amendment of FASB Statement No. 115”, (“SFAS159”), effective for fiscal years beginning after November 15, 2007.  SFAS 159 permits an entity to elect fairvalue as the initial and subsequent measurement attribute for many financialassets and liabilities.  Entitieselecting the fair value option would be required to recognize changes in fairvalue in earnings.  The Company has notelected to apply the provision of SFAS 159 which became effective for theCompany on February 3, 2008.

 

**Note 4- Per Share Data**

 

Basicand diluted net loss per share is based on the number of common shares issuedand estimated to be issued pursuant to the Plan.  At August 2, 2008 and February 2,2008, 313,918 and 188,164 common shares, respectively, are estimated to beissued in connection with the settlement of remaining claims.  Diluted loss per share for the period ended August 2,2008 does not include the 652,468 common shares issuable on the conversion ofthe preferred stock, which was issued in December 2007, as the effect isantidilutive.

 
| ** **                                            | ** ** | **Quarter Ended**       | ** ** | **Year to Date**   | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                            | ** ** | **August 2, 2008** | ** ** | **August 4, 2007** | ** ** | **August 2, 2008** | ** ** | **August 4, 2007** | ** ** |
| Loss per share - basic and diluted:                   |       |                         |       |                         |       |   |   |   |   |
|                                                  |       |                         |       |                         |       |   |   |   |   |
| Loss from continuing operations                       |       | $                            | (3,326     | )                            | $          | (4,644 | ) | $ | (15,747 | ) | $ | (11,501 | ) |
| Less: cumulative preferred stock dividends            |       | (202                         | )          | —                       |       | (405 | ) | — |   |
| Loss available to common stockholders                 |       | (3,528                       | )          | (4,644                       | )          | (16,152 | ) | (11,501 | ) |
| Loss from discontinued operations                     |       | (71                          | )          | (268                         | )          | (81 | ) | (821 | ) |
| Net loss available to common stockholders             |       | $                            | (3,599     | )                            | $          | (4,912 | ) | $ | (16,233 | ) | $ | (12,322 | ) |
|                                                  |       |                         |       |                         |       |   |   |   |   |
| Weighted average shares outstanding and to  be issued |       | 8,650,110                    |       | 8,498,752                    |       | 8,650,110 |   | 8,498,752 |   |
|                                                  |       |                         |       |                         |       |   |   |   |   |
| Net loss per share:                                   |       |                         |       |                         |       |   |   |   |   |
| Loss from continuing operations                       |       | $                            | (0.41      | )                            | $          | (0.55 | ) | $ | (1.87 | ) | $ | (1.35 | ) |
| Loss from discontinued operations                     |       | (0.01                        | )          | (0.03                        | )          | (0.01 | ) | (0.10 | ) |
| Net loss per share: basic and diluted                 |       | $                            | (0.42      | )                            | $          | (0.58 | ) | $ | (1.88 | ) | $ | (1.45 | ) |

 

**Note 5 –Liabilities Subject to Compromise**

 

In connection with the Chapter 11 proceeding, the Ohio Bureau of Workers’Compensation (“OBWC”) filed priority and administrative claims aggregating$13.4 million for pre-petition unpaid workers’ compensation premiums andfor reserves to pay future claims arising from existing injuries.  The OBWC also filed claims aggregating$1.8 million for alleged non-payment of post-petition premiums and forreserves to pay future claims arising from existing injuries.  On August 22, 2008, the Company and theOBWC filed a Notice of Presentment of Stipulation and Order with Respect to Settlementof Ohio Bureau of Workers’ Compensation Claims (the “Stipulation”) with theUnited States Bankruptcy Court for the Southern District of New York, pursuantto which the Company and the OBWC have agreed that the OBWC will release allpotential claims against the Company in exchange for the following payments bythe Company to the OBWC: a payment of $500,000 on September 9, 2008; andpayments of $217,500 on each of the following dates: March 2, 2009; September 1,2009; March 1, 2010; and September 1, 2010. The Stipulation furtherprovides that the payments to be made in 2010 shall be backed by a letter ofcredit. In addition, the Company will issue 290,491 shares of its 

 

10

----

 

common stock, par value $0.01 per share, to the OBWC.  As of August 2, 2008, the Company hasaccrued $1.4 million related to the OBWC Chapter 11 claim, recording $0.7million in current liabilities and $0.7 million in long-term liabilities basedupon the payment terms of the Stipulation.

 

Duringthe quarter ended August 4, 2007, the Company paid out $0.2 million insettlement of disputed claims.  No claimswere paid during the quarter ended August 2, 2008.

 

TheCompany has established liabilities for the estimated cash payments required tosettle the remaining claims outstanding in the Chapter 11 proceedings.  Estimated shares of common stock to be issuedin settlement of claims have been accounted for as common shares to be issuedin stockholders’ equity.

 

**Note 6 –Long-term Debt**

 

OnAugust 1, 2007, both of the Company’s credit facilities were amended topermit the disposal of assets in connection with the closing of twostores.  Further, the availabilityamount, which the Company is required to maintain under certain financialcovenants contained in such facilities was reduced to less than $27.5 millionfor four consecutive days or less than $25 million for any one day.

 

InMarch 2008, the maturity dates of both facilities were extended from April 13,2008 to April 13, 2009.  Based onthe maturity dates of April 13, 2009, amounts due under the revolvingcredit and term loan facility and the supplemental real estate credit facilityhave been classified as current maturities in the accompanying balance sheet asof August 2, 2008.  In theevent certain conditions are met, the credit facilities could be automaticallyextended to expiration dates of April 13, 2010.

 

**Note 7 –Income Taxes**

 

TheCompany maintains a full valuation allowance against substantially all of itsdeferred tax assets including amounts resulting from net operating losscarryforwards.  The valuation allowancewill be maintained until there is sufficient positive evidence to conclude thatit is more likely than not that the deferred tax assets will be realized.

 

TheCompany has recently filed its federal and state income tax returns for itsfiscal years ended in 2004, 2005, 2006, and 2007 and is currently underexamination by the Internal Revenue Service for these years.

 

**Note 8 –Dispositions and Discontinued Operations**

 

OnJanuary 2, 2008, as a result of the loss of a significant customer, theCompany announced the closing of its commercial bakery operation.  In accordance with the provisions ofStatement of Financial Accounting Standards No. 144, “Accounting for theImpairment or Disposal of Long-lived Assets” (“SFAS 144”), the results ofoperations of the commercial bakery operation for the periods ended August 2,2008 and August 4, 2007 have been reported as discontinued operations.

 

Duringthe year to date ended August 2, 2008, the Company closed six stores(including one in the second quarter) and sold four others (including three inthe second quarter).  Three of the fourstores that were sold are now Independent customers that the Company provideswith food, related products and other services. As revenues will continue to be generated from the three sold stores theresults of operations of these stores are included in continuingoperations.  It is anticipated thatrevenues will continue to be generated from customers of four of the six closedstores from the Company stores located in the same vicinity.  The Company will no longer have a presence inthe vicinity of the other two closed store but the amount of lost revenues wasdetermined to be immaterial and is not reported as discontinuedoperations.  The stores that were soldresulted in cash proceeds of $3.3 million and associated gain on sale ofleasehold and fixed assets of $1.3 million for the year to date ended August 2, 2008.  The Company obtained waivers related to thesale of store assets in accordance with the terms of the credit facilities.

 

Duringthe year to date ended August 2, 2008, an impairment loss of $3.0 million(including $0.4 million recognized in the second quarter) was recognized withrespect to assets related to closed stores. In addition, the Company recorded a liability of $0.9 millionrepresenting the present value of the remaining lease rentals reduced byestimated sublease rentals that could be reasonably obtained for five of thesix closed stores (one closed store location was owned by the Company).  Also, certain ongoing maintenance expensesrelated to the bakery operations have been classified as discontinuedoperations in the quarter ended August 2, 2008.

 

Subsequentto August 2, 2008, the Company sold 4 groups of pharmacy scripts resultingin cash proceeds of $0.3 million and gain on sale of intangible assets of $0.3million.

 

Nostores were closed or sold during the quarter ended and year to date ended August 4,2007.

 

11

----

 

**Note 9 –Pension Plans**

 

OnMay 30, 2008, the Board of Directors of the Company resolved to merge theBig Bear Stores Hourly Paid General Merchandise Warehouse Employees’ PensionPlan with and into the Big Bear Stores Hourly Paid Food Warehouse Employees’Pension Plan (the “Plans”) and renamed that Plan as The Penn Traffic CompanyBig Bear Retirement Plan (the “Plan”) effective May 31, 2008.  Further, the Plans’ assets were consolidatedand are now held by one Trustee resulting in an amendment to the Master TrustAgreement to reflect the fact that the Plan is no longer a Master TrustPlan.  A new Plan document was createdfor the Plan amended and effective retroactively as of June 1, 2002.  The Company now has three noncontributorydefined benefit pension plans covering certain union personnel.  The Company’s policy is to fund pensionbenefits to the extent contributions are deductible for tax purposes and incompliance with federal laws and regulations.

 

Thefollowing table provides the components of net periodic pension (benefit) cost(in thousands):

 
| ** **                                  | ** ** | **Quarter**        | ** ** | **Quarter**        | ** ** | ** **                 | ** ** | ** **                 | ** ** |
|---------------------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                  | ** ** | **Ended**          | ** ** | **Ended**          | ** ** | **Year to Date** | ** ** | **Year to Date** | ** ** |
| ** **                                  | ** ** | **August 2,** | ** ** | **August 4,** | ** ** | **August 2,**         | ** ** | **August 4,**         | ** ** |
| ** **                                  | ** ** | **2008**           | ** ** | **2007**           | ** ** | **2008**                   | ** ** | **2007**                   | ** ** |
| ** **                                  | ** ** | ** **         | ** ** | ** **         | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| ** **                                  | ** ** | **(unaudited)**    | ** ** |
|                                        |       |               |       |               |       |                       |       |                       |       |
| Service cost                                |       | $                  | 313        |               | $          | 495                        |       | $                          | 626        |   | $ | 990 |   |
| Interest cost                               |       | 1,474              |       | 1,558              |       | 2,948                      |       | 3,118                      |       |
| Expected return on plan assets              |       | (1,593             | )          | (1,596             | )          | (3,186                     | )          | (3,193                     | )          |
| Amortization of unrecognized actuarial gain |       | (236               | )          | (29                | )          | (472                       | )          | (59                        | )          |
|                                        |       |               |       |               |       |                       |       |                       |       |
| Net periodic pension (benefit) cost         |       | $                  | (42        | )                  | $          | 428                        |       | $                          | (84        | ) | $ | 856 |   |

 

Forthe quarters ended August 2, 2008 and August 4, 2007, the Companycontributed $0.6 million and $1.4 million, respectively, to the four defined benefitpension plans.  For the year to dateended August 2, 2008 and August 4, 2007, the Company contributed $1.4million and $3.5 million, respectively, to the four defined benefit pensionplans.

 

**Note 10– Commitments and Contingencies**

 

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

 

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

 

On September 17, 2007, the SEC filed civil fraud charges againstthe Company’s former Chief Marketing Officer and former Vice President,Non-Perishables Marketing alleging that such individuals orchestrated a schemeto inflate the Company’s income and other financial results by prematurelyrecognizing promotional allowances received from vendors from approximately thesecond quarter of fiscal year 2001 through at least the fourth quarter offiscal year 2003. These officers had been terminated by the Company in February 2006following an interim report to the Audit Committee on the findings of aninternal investigation.  The SEC’scomplaint further alleges that the individuals deceived the Company’saccounting personnel to carry out their fraudulent scheme and aided and abettedthe Company’s violations of the Securities Exchange Act of 1934 and rules thereunder.In addition, on the same date, the United States Attorney for the NorthernDistrict of New York announced that a federal grand jury has returned anindictment against the above-mentioned individuals on related criminal charges.Both the SEC and the United States Attorney have indicated that theirinvestigations are continuing.

 

In connection with these matters, the Company could be subject todamage claims, fines or penalties.  At present,the Company is unable to estimate the likelihood of an unfavorable outcome orthe amount of any damage claims, fines or penalties in the event of

 

12

----

 

an unfavorable outcome and, accordingly, no liability has been recordedfor this contingency.  In addition, theCompany has incurred significant legal costs associated with these matters todate and expects to continue to do so. These costs are recorded in selling and administrative expenses asincurred and are expected to increase in the next several periods unless anduntil the matters are resolved.

 

On March 12, 2008, the Company commencedan action in the Supreme Court for the State of New York for the County ofOnondaga seeking declaratory judgment to resolve a dispute over the lease termfor commercial property pertaining to a store that was closed in 2007.  The Company is seeking an order declaring theproper 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 rentexpense for the additional lease term asserted by the landlord to beapproximately $2.8 million.  At present,the Company is unable to estimate the likelihood of an unfavorable outcome andaccordingly, no liability has been recorded for this contingency.

 

**Note 11– Stock Award Plan**

 

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

 

At August 2, 2008, there were 188,260 shares of phantom stock granted,100,000 shares forfeited, and 88,260 shares outstanding to officers andnon-officer directors.  Approximately15,668 shares of phantom stock are unvested as of the quarter ended August 2,2008.  In accordance with Statement ofFinancial Accounting Standards No. 123(R), “Share-Based Payment,” theawards are being accounted for as compensation expense and a correspondingliability over the period to settlement date based on changes in the value ofthe Company’s common stock.  Compensation(benefit) expense totaled ($0.2) million and $0.8 million for the quartersended August 2, 2008 and August 4, 2007, respectively.  Compensation (benefit) expense totaled ($0.1)million and $1.2 million for the year to date ended August 2, 2008 and August 4,2007, respectively.  Refer to Note 15 tothe financial statements included in the Annual Report on Form 10-K foradditional information.

 

13

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**Note 12– Segment Information**

 

TheCompany operates in two segments – the retail food business and the wholesalefood distribution business.  The retailfood business consists of supermarkets which the Company operates.  The wholesale food distribution businesssupplies independent supermarkets and other independent wholesale accounts withfood, related products and other services.

 

Thetables below present information with respect to operating segments as well asreconciliations to consolidated information (in thousands).

 
| ** **                                                    | ** ** | **Quarter Ended August 2, 2008** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                           | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Retail Food**                                 | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
| ** **                                                    | ** ** | **(unaudited)**                                      | ** ** |
| Revenues                                                      |       | $                                                    | 245,179    |   | $ | 59,714 |   | $ | 1,997 | (1) | $ | 306,890 |   |
|                                                          |       |                                                 |       |   |   |   |   |   |   |
| Cost of sales                                                 |       | (171,938                                             | )          | (56,025 | ) | (331 | )(2) | (228,294 | )(4) |
| Selling and administrative expense                            |       | (59,935                                              | )          | (1,237 | ) | (12,201 | )(3) | (73,373 | )(4) |
| Loss on store closing (including asset  impairment)           |       | (399                                                 | )          | — |   | — |   | (399 | ) |
|                                                          |       |                                                 |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation  and amortization |       | 12,907                                               |       | 2,452 |   | (10,535 | ) | 4,824 |   |
|                                                          |       |                                                 |       |   |   |   |   |   |   |
| Depreciation and amortization                                 |       | (5,270                                               | )          | (187 | ) | (291 | ) | (5,748 | ) |
|                                                          |       |                                                 |       |   |   |   |   |   |   |
| Operating income (loss)                                       |       | $                                                    | 7,637      |   | $ | 2,265 |   | $ | (10,826 | ) | (924 | ) |
| Interest expense                                              |       |                                                 |       |   |   |   |   | (2,211 | ) |
| Reorganization costs                                          |       |                                                 |       |   |   |   |   | (71 | ) |
|                                                          |       |                                                 |       |   |   |   |   |   |   |
| Loss from continuing operations before income  taxes          |       |                                                 |       |   |   |   |   | $ | (3,206 | ) |

 

----

| (1)    |   | Consists  principally of approximately $1.5 million for trucking revenues, $0.2 million  of rental income, and $0.1 million from sales of electronic data.                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (2)    |   | Consists  principally of approximately $0.3 million increase in cost of sales to  reconcile segment inventories on FIFO to consolidated inventories on LIFO.                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (3)    |   | Consists  principally of approximately $6.8 million of payroll, benefits, and  payroll taxes associated with the administrative staff, approximately $3.4  million of Professional fees (of which approximately $1.3 million pertained  to legal costs associated with the internal and SEC investigation relating to  the Company’s practices regarding promotional discounts and allowances),  approximately $1.4 million of contract hauling costs associated with trucking  revenue, $0.3 million in data processing maintenance costs, and $0.1 million  for general insurance. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (4)    |   | Excludes  depreciation and amortization of $0.5 million for cost of sales and  $5.2 million related to selling and administrative expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

14

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| ** **                                                    | ** ** | **Quarter Ended August 4, 2007** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                           | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Retail Food**                                 | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
| ** **                                                    | ** ** | **(unaudited)**                                      | ** ** |
| Revenues                                                      |       | $                                                    | 261,765    |   | $ | 54,081 |   | $ | 2,166 | (1) | $ | 318,012 |   |
|                                                          |       |                                                 |       |   |   |   |   |   |   |
| Cost of sales                                                 |       | (180,756                                             | )          | (50,539 | ) | (370 | )(2) | (231,665 | )(4) |
| Selling and administrative expense                            |       | (63,373                                              | )          | (1,217 | ) | (15,241 | )(3) | (79,831 | )(4) |
|                                                          |       |                                                 |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation  and amortization |       | 17,636                                               |       | 2,325 |   | (13,445 | ) | 6,516 |   |
|                                                          |       |                                                 |       |   |   |   |   |   |   |
| Depreciation and amortization                                 |       | (6,179                                               | )          | (241 | ) | (240 | ) | (6,660 | ) |
|                                                          |       |                                                 |       |   |   |   |   |   |   |
| Operating income (loss)                                       |       | $                                                    | 11,457     |   | $ | 2,084 |   | $ | (13,685 | ) | (144 | ) |
| Interest expense                                              |       |                                                 |       |   |   |   |   | (2,454 | ) |
| Reorganization costs                                          |       |                                                 |       |   |   |   |   | (1,988 | ) |
|                                                          |       |                                                 |       |   |   |   |   |   |   |
| Loss from continuing operations before  income taxes          |       |                                                 |       |   |   |   |   | $ | (4,586 | ) |

 

----

| (1)    |   | Consists  principally of approximately $1.6 million for trucking revenues, $0.3 million  of rental income and $0.1 million from sales of electronic data.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (2)    |   | Consists  principally of approximately $0.3 million in cost of sales to reconcile  segment inventories on FIFO to consolidated inventories on LIFO.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (3)    |   | Consists  principally of approximately $7.7 million of payroll, benefits, and  payroll taxes associated with the administrative staff, approximately  $3.8 million of professional fees (of which approximately $0.3 million  pertaining to legal costs associated with the internal and SEC investigation  relating to the Company’s practices regarding promotional discounts and  allowances), approximately $1.4 million of   contract hauling costs associated with trucking revenue, approximately  $0.4 million for an increase in reserves for doubtful accounts,  $0.3 million in data processing maintenance costs, and $0.4 million of  general insurance. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (4)    |   | Excludes  depreciation and amortization of $0.8 million for cost of sales and  $5.8 million related to selling and administrative expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

15

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| ** **                                                    | ** ** | **Period from February 3, 2008 to August 2, 2008** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                                                                 | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Retail Food**                                                                       | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
| ** **                                                    | ** ** | **(unaudited)**                                                                            | ** ** |
| Revenues                                                      |       | $                                                                                          | 476,602    |   | $ | 113,240 |   | $ | 4,106 | (1) | $ | 593,948 |   |
|                                                          |       |                                                                                       |       |   |   |   |   |   |   |
| Cost of sales                                                 |       | (332,601                                                                                   | )          | (106,509 | ) | (662 | )(2) | (439,772 | )(4) |
| Selling and administrative expense                            |       | (120,794                                                                                   | )          | (2,469 | ) | (26,302 | )(3) | (149,565 | )(4) |
| Loss on store closings (including asset  impairment)          |       | (3,003                                                                                     | )          | — |   | (921 | ) | (3,924 | ) |
|                                                          |       |                                                                                       |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation  and amortization |       | 20,204                                                                                     |       | 4,262 |   | (23,779 | ) | 687 |   |
|                                                          |       |                                                                                       |       |   |   |   |   |   |   |
| Depreciation and amortization                                 |       | (10,502                                                                                    | )          | (370 | ) | (540 | ) | (11,412 | ) |
|                                                          |       |                                                                                       |       |   |   |   |   |   |   |
| Operating income (loss)                                       |       | $                                                                                          | 9,702      |   | $ | 3,892 |   | $ | (24,319 | ) | (10,725 | ) |
| Interest expense                                              |       |                                                                                       |       |   |   |   |   | (4,564 | ) |
| Reorganization costs                                          |       |                                                                                       |       |   |   |   |   | (181 | ) |
|                                                          |       |                                                                                       |       |   |   |   |   |   |   |
| Loss from continuing operations before  income taxes          |       |                                                                                       |       |   |   |   |   | $ | (15,470 | ) |
|                                                          |       |                                                                                       |       |   |   |   |   |   |   |
| Total assets as of August 2, 2008                        |       | $                                                                                          | 173,708    | (5) | $ | 21,573 | (5) | $ | 29,890 | (6) | $ | 225,171 |   |
|                                                          |       |                                                                                       |       |   |   |   |   |   |   |
| Capital expenditures for the year ended  August 2, 2008  |       | $                                                                                          | 3,775      |   | $ | 12 |   | $ | 463 |   | $ | 4,250 |   |

 

----

| (1)    |   | Consists principally of approximately $3.1 million for trucking  revenues, $0.5 million of rental income and $0.2 million from sales of  electronic data.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (2)    |   | Consists principally of approximately $0.6 million in cost of sales  to reconcile segment inventories on FIFO to consolidated inventories on LIFO.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (3)    |   | Consists principally of approximately $14.4 million of payroll,  benefits, and payroll taxes associated with the administrative staff,  approximately $8.7 million of professional fees (of which approximately  $1.7 million pertaining to legal costs associated with the internal and SEC  investigation relating to the Company’s practices regarding promotional discounts  and allowances), approximately $2.8 million of contract hauling costs  associated with trucking revenue, approximately $0.6 million for an increase  in reserves for doubtful accounts, $0.5 million in data processing  maintenance costs, and $0.2 million of general insurance. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (4)    |   | Excludes depreciation and amortization of $1.0 million for cost  of sales and $10.3 million related to selling and administrative  expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (5)    |   | The warehouse and transportation assets have been allocated using the  same methodology as that which was used for the warehouse and transportation  costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (6)    |   | Consists principally of general corporate assets (including cash and  cash equivalents) that cannot be separated by business segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

16

----

 
| ** **                                                     | ** ** | **Period from February 4, 2007 to August 4, 2007** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | ** **                                                                                 | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **Retail Food**                                                                       | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
| ** **                                                     | ** ** | **(unaudited)**                                                                            | ** ** |
| Revenues                                                       |       | $                                                                                          | 506,924    |   | $ | 104,615 |   | $ | 4,446 | (1) | $ | 615,985 |   |
|                                                           |       |                                                                                       |       |   |   |   |   |   |   |
| Cost of sales                                                  |       | (350,963                                                                                   | )          | (97,757 | ) | (711 | )(2) | (449,431 | )(4) |
| Selling and administrative expense                             |       | (124,212                                                                                   | )          | (2,642 | ) | (28,915 | )(3) | (155,769 | )(4) |
| Loss on store and distribution center  closings                |       | —                                                                                     |       | — |   | (1,883 | ) | (1,883 | ) |
|                                                           |       |                                                                                       |       |   |   |   |   |   |   |
| Operating income before depreciation and  amortization         |       | 31,749                                                                                     |       | 4,216 |   | (27,063 | ) | 8,902 |   |
|                                                           |       |                                                                                       |       |   |   |   |   |   |   |
| Depreciation and amortization                                  |       | (12,397                                                                                    | )          | (486 | ) | (456 | ) | (13,339 | ) |
|                                                           |       |                                                                                       |       |   |   |   |   |   |   |
| Operating income (loss)                                        |       | $                                                                                          | 19,352     |   | $ | 3,730 |   | $ | (27,519 | ) | (4,437 | ) |
|                                                           |       |                                                                                       |       |   |   |   |   |   |   |
| Interest expense                                               |       |                                                                                       |       |   |   |   |   | (4,795 | ) |
| Reorganization and other expenses                              |       |                                                                                       |       |   |   |   |   | (2,152 | ) |
|                                                           |       |                                                                                       |       |   |   |   |   |   |   |
| Consolidated loss before income taxes                          |       |                                                                                       |       |   |   |   |   | $ | (11,384 | ) |
|                                                           |       |                                                                                       |       |   |   |   |   |   |   |
| Total assets as of August 4, 2007                         |       | $                                                                                          | 213,646    | (5) | $ | 24,714 | (5) | $ | 49,604 | (6) | $ | 287,964 |   |
|                                                           |       |                                                                                       |       |   |   |   |   |   |   |
| Capital expenditures for the period ended  August 4, 2007 |       | $                                                                                          | 1,511      |   | $ | 139 |   | $ | 225 |   | $ | 1,875 |   |

 

----

| (1)    |   | Consists principally of approximately $3.3 million for trucking  revenues, $0.6 million of rental income and $0.2 million from sales of  electronic data.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (2)    |   | Consists principally of approximately $0.6 million in cost of sales  to reconcile segment inventories on FIFO to consolidated inventories on LIFO.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (3)    |   | Consists principally of approximately $15.3 million of payroll,  benefits, and payroll taxes associated with the administrative staff,  approximately $8.1 million of professional fees (of which approximately  $0.6 million pertaining to legal costs associated with the internal and SEC  investigation relating to the Company’s practices regarding promotional  discounts and allowances), approximately $2.8 million of contract hauling  costs associated with trucking revenue, approximately $0.9 million for an  increase in reserves for doubtful accounts, $0.6 million in data  processing maintenance costs, and $0.4 million of general insurance. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (4)    |   | Excludes depreciation and amortization of $1.7 million for cost  of sales and $11.7 million related to selling and administrative  expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (5)    |   | The warehouse and transportation assets have been allocated using the  same methodology as that which was used for the warehouse and transportation  costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (6)    |   | Consists principally of general corporate assets (including cash and  cash equivalents) that cannot be separated by business segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

17

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

 

**Introduction**

 

We operate or supply approximately 210 supermarkets inupstate New York, Pennsylvania, Vermont and New Hampshire.  We operate in two segments.  Our retail food business includescorporate-owned stores with the “BiLo”, “P&C” and “Quality” trade names,and our wholesale food distribution business supplies independently operatedsupermarkets and other wholesale accounts.

 

Our primary objective is to enhance the in-storeexperience of our customers and improve our long-term financialperformance.  Under the direction of ournew senior team (formed in fiscal year 2007), we are focusing onrebuilding our core business.  This meansre-establishing basic disciplines and reemphasizing and instilling a muchstronger profitable growth culture around sales and margin, as well asdelivering a sufficient economic return on assets.

 

**Results of Operations**

 

The following table setsforth certain Consolidated Statement of Operations components expressed aspercentages of revenues for the quarters and year to date ended August 2,2008 and August 4, 2007.

 
| ** **                                                                  | ** ** | **Quarter**                  | ** ** | **Quarter**                  | ** ** | ** **                   | ** ** | ** **                   | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                  | ** ** | **Ended**                    | ** ** | **Ended**                    | ** ** | **Year to Date**   | ** ** | **Year to Date**   | ** ** |
| ** **                                                                  | ** ** | **August 2, 2008** | ** ** | **August 4, 2007** | ** ** | **August 2, 2008** | ** ** | **August 4, 2007** | ** ** |
| ** **                                                                  | ** ** | **(unaudited)**              | ** ** |
| Revenues                                                                    |       | 100.0                        | %          | 100.0                        | %          | 100.0                        | %          | 100.0                        | %          |
|                                                                        |       |                         |       |                         |       |                         |       |                         |       |
| Gross profit (1)                                                            |       | 25.4                         |       | 26.9                         |       | 25.8                         |       | 26.8                         |       |
|                                                                        |       |                         |       |                         |       |                         |       |                         |       |
| Selling and administrative expenses                                         |       | 25.6                         |       | 26.9                         |       | 27.2                         |       | 27.3                         |       |
|                                                                        |       |                         |       |                         |       |                         |       |                         |       |
| Loss (gain) on sale of leasehold and fixed  assets                          |       | 0.0                          |       | (0.0                         | )          | (0.3                         | )          | (0.1                         | )          |
|                                                                        |       |                         |       |                         |       |                         |       |                         |       |
| Loss on store and distribution center  closing (including asset impairment) |       | 0.1                          |       | 0.0                          |       | 0.7                          |       | 0.3                          |       |
|                                                                        |       |                         |       |                         |       |                         |       |                         |       |
| Operating loss                                                              |       | (0.3                         | )          | (0.0                         | )          | (1.8                         | )          | (0.7                         | )          |
|                                                                        |       |                         |       |                         |       |                         |       |                         |       |
| Interest expense                                                            |       | 0.7                          |       | 0.8                          |       | 0.8                          |       | 0.8                          |       |
|                                                                        |       |                         |       |                         |       |                         |       |                         |       |
| Reorganization and other expenses                                           |       | 0.0                          |       | 0.6                          |       | 0.0                          |       | 0.3                          |       |
|                                                                        |       |                         |       |                         |       |                         |       |                         |       |
| Loss from continuing operations before  income taxes                        |       | (1.0                         | )          | (1.4                         | )          | (2.6                         | )          | (1.8                         | )          |
|                                                                        |       |                         |       |                         |       |                         |       |                         |       |
| Income tax expense                                                          |       | (0.0                         | )          | (0.0                         | )          | (0.1                         | )          | (0.0                         | )          |
|                                                                        |       |                         |       |                         |       |                         |       |                         |       |
| Loss from continuing operations                                             |       | (1.0                         | )          | (1.4                         | )          | (2.7                         | )          | (1.8                         | )          |
|                                                                        |       |                         |       |                         |       |                         |       |                         |       |
| Loss from discontinued operations                                           |       | (0.0                         | )          | (0.1                         | )          | (0.0                         | )          | (0.1                         | )          |
|                                                                        |       |                         |       |                         |       |                         |       |                         |       |
| Net loss                                                                    |       | (1.0                         | )          | (1.5                         | )          | (2.7                         | )          | (1.9                         | )          |

 

----

(1)  Revenues less cost of sales.

 

18

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**QuarterEnded August 2, 2008 and Quarter Ended August 4, 2007**

 

Revenues for the quarterended August 2, 2008 decreased to $306.9 million from $318.0 million forthe quarter ended August 4, 2007. The $11.1 million decrease in revenues was mainly attributable to areduction in 13 corporate stores from August 4, 2007 to August 2,2008 (from 106 to 93 stores), a 1.2% decline in same store sales, partially offsetby an increase in wholesale food distribution revenues.

 

Wholesale fooddistribution revenues for the quarter ended August 2, 2008 increased to$59.7 million, or 19.5% of total revenues, from $54.1 million, or 17.0% oftotal revenues, for the quarter ended August 4, 2007.  The increase in the wholesale fooddistribution revenues was primarily attributable to the addition of three newwholesale accounts during fiscal year 2009, as well as conversion of certaincorporate stores to Independent customers.

 

**GrossProfit**

 

Gross profit was $78.1million, or 25.4% of revenues, for the quarter ended August 2, 2008compared to $85.5 million, or 26.9% of revenues, for the quarter ended August 4,2007.  The decrease is the result ofdecreased sales due to store closings, declining customer counts due toapparent trip consolidation, and erosion of margins due to certain departments’cost inflation outpacing price inflation such as produce where cost increasescan not be included in retail prices due to customer sensitivity.  In response to the increasing competition inthe marketplace, we increased advertised sale items in an attempt to increasesales volume during the quarter ended August 2, 2008 that resulted indecreased margins on certain products and ultimately a decrease in grossprofit.

 

**Sellingand Administrative Expenses**

 

Sellingand administrative expenses for the quarter ended August 2, 2008 were$78.5 million, or 25.6% of revenues, compared to $85.8 million, or 26.9%of revenues, for the quarter ended August 4, 2007.  The decrease in selling and administrativeexpenses is comprised of decreases in payroll and employee related benefits of$2.9 million, property taxes and rent expense of $1.2 million, professionalfees and outside services of $0.9 million, equipment rental of $0.4 million,insurance of $0.3 million, and supplies of $0.2 million.  The aforementioned decrease in selling andadministrative expenses were mainly driven by the closure of stores as detailedabove and completion of unfiled Securities and Exchange Commission reports asof April 2008 resulting in a decrease in professional fees and outsideservices.

 

**Depreciationand Amortization**

 

Depreciation andamortization expense was $5.7 million, or 1.9% of revenues, for the quarterended August 2, 2008 compared to $6.9 million, or 1.9% of revenues, forthe quarter ended August 4, 2007. The decrease in depreciation and amortization during the quarter ended August 2,2008 was primarily due to an $11.0 million write-down of intangible assets inconjunction with the recognition of net operating loss carryforwards for prioryears and a reduction in depreciation related to the closure of the bakery in January 2008.

 

**Loss onStore Closings (including asset impairment)**

 

Asset impairment chargeswere $0.4 million, or 0.1% of revenues, for the quarter ended August 2,2008.  The asset impairment charges weremainly attributed to the write-down of closed store assets held for sale.

 

**OperatingLoss**

 

Operating loss for thequarter ended August 2, 2008 was $0.9 million, or 0.3% of revenues,compared to the operating loss of $0.1 million, or less than 0.1% of revenues,for the quarter ended August 4, 2007.

 

**Reorganization and Other Expenses**

 

Reorganizationexpense for the quarter ended August 2, 2008 was $0.1 million, or lessthan 0.1% of revenues, compared to $2.0 million, or 0.6% of revenues, forthe quarter ended August 4, 2007. They consist primarily of professional fees.

 

**Loss from Continuing Operations**

 

Lossfrom continuing operations for the quarter ended August 2, 2008 was $3.3million, or 1.0% of revenues, compared to a loss from continuing operations of$4.6 million, or 1.4% of revenues, during the quarter ended August 4,2007.  The $1.3 million decrease in lossfrom continuing operations is primarily due to a decrease in reorganization andother expenses as a result of decreased professional fees, offset by an assetimpairment charge and gross profit rate erosion.

 

19

----

 

**Net Loss**

 

Net loss for the quarterended August 2, 2008 was $3.4 million, or 1.0% of revenues, comparedto a net loss of $4.9 million, or 1.5% of revenues, during the quarterended August 4, 2007.

 

20

----

 

**Year toDate Ended August 2, 2008 and Year to Date Ended August 4, 2007**

 

**Revenues**

 

Revenues for the year todate ended August 2, 2008 decreased to $593.9 million from $616.0 millionfor the year to date ended August 4, 2007. The $22.1 million decrease in revenues was mainly attributable to areduction in 13 corporate stores from August 4, 2007 to August 2,2008, a 1.3% decline in same store sales, partially offset by an increase inwholesale food distribution revenues.

 

Wholesale fooddistribution revenues for the year to date ended August 2, 2008 increased$8.6 million, or 8.2% to $113.2 million, or 19.1% of total revenues, from$104.6 million, or 17.0% of total revenues, for the year to date ended August 4,2007.  The increase in the wholesale fooddistribution revenues was primarily attributable to the addition of three newwholesale accounts during fiscal year 2009, as well as the conversion ofcertain corporate stores to Independent customers.

 

**Gross Profit**

 

Gross profit was $153.1million, or 25.8% of revenues, for the year to date ended August 2, 2008compared to $164.8 million, or 26.8% of revenues, for the year to dateended August 4, 2007.  The decreaseis the result of decreased sales due to store closings, declining customercounts due to apparent trip consolidation and erosion of margins due to certaindepartments’ cost inflation outpacing price inflation such as produce wherecost increases can not be included in retail prices due to customersensitivity.  In response to theincreasing competition in the marketplace, we increased advertised sale itemsin an attempt to increase sales volume during the year to date ended August 2,2008 that resulted in decreased margins on certain products and ultimately adecrease in gross profit.

 

**Selling and AdministrativeExpenses**

 

Selling andadministrative expenses for the year to date ended August 2, 2008 were$161.7 million, or 27.2% of revenues, compared to $168.0 million, or 27.3%of revenues, for the year to date ended August 4, 2007.  The decrease in selling and administrativeexpenses is comprised of decreases in payroll and employee related benefits of$3.8 million, property taxes and rent expense of $0.9 million, equipment rentalof $0.5 million, depreciation of $0.5 million, insurance of $0.3 million, andsupplies of $0.2 million.  The decreasesin selling and administrative expenses were mainly driven by the closure ofstores as detailed above.

 

**Depreciation and Amortization**

 

Depreciation andamortization expense was $11.4 million, or 1.9% of revenues, for the year todate ended August 2, 2008 compared to $13.8 million, or 2.2% of revenues,for the year to date ended August 4, 2007. The decrease in depreciation and amortization during the year to dateended August 2, 2008 was primarily due to an $11.0 million write-down ofintangible assets in conjunction with the recognition of net operating losscarryforwards for prior years and a reduction in depreciation related to theclosure of the bakery in January 2008.

 

**Loss onStore and Distribution Center Closings (including asset impairment)**

 

For the year to dateended August 2, 2008 the Company recorded a loss on store closings(including asset impairment) of $3.9 million, or 0.7% of revenues, representingthe net present value of the remaining lease rentals associated with its closedstores of $0.9 million and asset impairment charges of $3.0 million.  The asset impairment charges were mainlyattributed to the write-down of closed store assets.  A loss of $1.9 million, or 0.3% of revenues,representing the net present value of the remaining lease payments associatedwith our closed distribution centers, was incurred for the year to date ended August 4,2007.

 

**OperatingLoss**

 

Operating loss for theyear to date ended August 2, 2008 was $10.7 million, or 1.8% of revenues,compared to the operating loss of $4.4 million, or 0.7% of revenues, for theyear to date ended August 4, 2007.

 

21

----

 

**Reorganizationand Other Expenses**

 

Reorganization expensefor the year to date ended August 2, 2008 was $0.2 million, or less than0.1% of revenues, compared to $2.2 million, or 0.3% of revenues, for theyear to date ended August 4, 2007. This expense consists primarily of professional fees.

 

**Loss fromContinuing Operations**

 

Loss from continuingoperations for the year to date ended August 2, 2008 was $15.7 million, or2.6% of revenues, compared to a loss from continuing operations of $11.5million, or 1.8% of revenues, during the year to date ended August 4,2007.  The $4.2 million increase in lossfrom continuing operations is primarily due to decreases in gross profit of$11.7 million, asset impairment charges of $3.0 million offset by a decrease inselling and administrative expenses of $7.5 million, loss on store and distributioncenter closings of $1.0 million and reorganization and other expenses of $2.0million.

 

**Loss fromDiscontinued Operations**

 

Loss from discontinuedoperations for the year to date ended August 2, 2008 was $0.1 million, orless than 0.1% of revenues, compared to a loss from discontinued operations of$0.8 million, or 0.1% of revenues, during the year to date ended August 4,2007.  The decrease in the loss fromdiscontinued operations for the year to date ended August 2, 2008 to August 4,2007 is a result of the bakery generating operating losses during the first sixmonths of fiscal year 2008 versus the closure of the bakery in January 2008resulting in no operations during the first six months of fiscal year 2009.

 

**Net Loss**

 

Net loss for the year todate ended August 2, 2008 was $15.8 million, or 2.7% of revenues, comparedto a net loss of $12.3 million, or 1.9% of revenues, during the year todate ended August 4, 2007.

 

22

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**Liquidityand Capital Resources**

 

Overview

 

Asof August 2, 2008, we had cash and cash equivalents of $4.8 million andtotal debt outstanding of $60.0 million. We also have the ability to draw down on our revolving creditfacilities.  We believe that our existingcash on hand and available borrowings under our credit facility will besufficient to satisfy our currently anticipated cash requirements for at leastthe next 12 months.

 

FinancialResults

 

*OperatingActivities*

 

Cashused in operating activities for the year to date ended August 2, 2008 was$14.1 million as compared to cash used in operating activities of $1.6 millionfor the year to date ended August 4, 2007. For the year to date  ended August 2,2008, we incurred a net loss of $15.8 million, adjustments for non cash itemsof $13.8 million, and a net decrease in operating net assets of $12.1million.  For the year to date ended August 4,2007, we incurred a net loss of $12.3 million, adjustments for non-cash itemsof $15.2 million and a net decrease in operating net assets of $4.5 million.

 

*InvestingActivities*

 

Cashused in investing activities for the year to date ended August 2, 2008 andAugust 4, 2007 was $0.1 million and $1.0 million, respectively.  The $0.9 million increase was due toincreased proceeds from the sale of fixed assets ($4.1 million as compared to$0.9 million) partially offset by increased capital expenditures($4.3 million as compared to $1.9 million).

 

*FinancingActivities*

 

Cashused in financing activities for the year to date ended August 2, 2008 andAugust 4, 2007 was $1.9 million and $1.0 million,respectively.  The $0.9 million increasewas due to fees incurred with the amendment to the revolving credit and termloan facility.

 

Borrowings

 

On April 13, 2005,upon emergence from Chapter 11 proceedings, we entered into a revolving creditand term loan facility with a group of financial institutions providing for a$130.0 million revolving credit facility and a $6.0 million termloan.  Also on April 13, 2005, weentered into a supplemental real estate credit facility with another group oflenders, providing for term loan borrowings of up to $28.0 million.  Availability under both credit facilities isdependent on levels of accounts receivable, inventory and certain otherassets.  Interest rates on borrowings underthe revolving credit facility vary depending upon the amount ofavailability.  At August 2, 2008,outstanding borrowings under both facilities aggregated$46.6 million.  At such date,availability in excess of outstanding borrowings and letters of credit wasapproximately $27.5 million. Borrowings under the revolving credit and term loan facility are securedby substantially all of our assets, subject to first liens on certainproperties by other lenders.  Borrowingsunder the real estate facility are secured by a first lien on substantially allof our leasehold interests and a second lien on substantially all of ourremaining assets.  At August 2,2008, we had stand-by letters of credit of approximately$38.9 million.  Many of thesestand-by letters of credit were required upon emergence from bankruptcy and asa result of our inability to file financial statements.

 

Provisions of both creditfacilities, among other things, require the maintenance of certain financialcovenants (when availability under the credit facilities is less than$27.5 million for four consecutive days or less than $25 million forany one day), and limit the amount of capital expenditures, our assumption ofadditional debt and our payment of dividends. At no time through August 2, 2008 had we been subject to compliancewith these financial covenants because the amount available for borrowing hadnot dropped to these levels.  However,had such an event occurred, we would not have been in compliance with thefinancial covenants and would have been in default under the terms of the loanagreement at August 2, 2008.

 

Pursuant to our plan ofreorganization, we entered into a collateral trust agreement with thecollateral trustee in connection with the secured trade lien program.  The secured trade lien program is withcertain of our vendors and allows us to maintain trade terms.

 

On December 26, 2006,August 1, 2007 and January 30, 2008, both the revolvingcredit and term loan facility and the supplemental real estate credit facilitywere amended to permit the disposal of assets in connection with the closing ofcertain stores.  In March 2008, thematurity date of both facilities was extended to at least April 13,2009.  See Note 7 to the financialstatements included in the Annual Report on Form 10-K for the fiscal yearended February 2, 2008 for additional information.

 

23

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Wealso have $3.8 million of borrowings under mortgages secured by three relatedproperties as of August 2, 2008.

 

**Certain Contingencies**

 

TheUnited States Attorney for the Northern District of New York and the SEC havebeen conducting investigations relating to the Company’s promotional allowancepractices and policies.  Suchinvestigations began prior to the Company’s emergence from bankruptcy in April 2005.  The Company has been cooperating with theseinvestigations and has produced documents and made Company employees availablefor interviews as requested.

 

OnSeptember 17, 2007, the SEC filed civil fraud charges against the Company’sformer Chief Marketing Officer and former Vice President, Non-PerishablesMarketing alleging that such individuals orchestrated a scheme to inflate theCompany’s income and other financial results by prematurely recognizingpromotional allowances received from vendors from approximately the secondquarter of fiscal year 2001 through at least the fourth quarter of fiscal year2003. These officers had been terminated by the Company in February 2006following an interim report to the Audit Committee on the findings of aninternal investigation.  The SEC’scomplaint further alleges that the individuals deceived the Company’saccounting personnel to carry out their fraudulent scheme and aided and abettedthe Company’s violations of the Securities Exchange Act of 1934 and rules thereunder.  In addition, on the same date, the UnitedStates Attorney for the Northern District of New York announced that a federalgrand jury has returned an indictment against the above-mentioned individualson related criminal charges. Both the SEC and the United States Attorney haveindicated that their investigations are continuing.

 

Inconnection with these matters, the Company could be subject to damage claims,fines or penalties.  At present, theCompany is unable to estimate the likelihood of an unfavorable outcome or theamount of any damage claims, fines or penalties in the event of an unfavorableoutcome and, accordingly, no liability has been recorded for thiscontingency.  In addition, the Companyhas incurred significant legal costs associated with these matters to date andexpects to continue to do so.  Thesecosts are recorded in selling and administrative expenses as incurred and areexpected to increase in the next several periods unless and until the mattersare resolved.

 

Foradditional information regarding contingencies that may effect our financialcondition, see Note 10 to our unaudited financial statements.

 

24

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**ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSUREABOUT MARKET RISK**

 

Our financial results aresubject to risk from interest rate changes on debt that has variable interestrates. Total variable rate debt outstanding under our loan agreements at August 2,2008 was $46.6 million with a weighted average interest rate of 10.5%.  A 1.0% change in interest rates wouldimpact pre-tax income by $0.5 million based on the debt outstanding at August 2,2008.  In addition to the variable ratedebt we had $3.8 million of fixed rate debt outstanding at August 2, 2008with a weighted average interest rate of 6.6%. We view the fixed rate debt as a partial hedge against interest ratefluctuations.

 

**ITEM 4.          CONTROLSAND PROCEDURES**

 

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

 

Pursuant to Rule 13a-15(e) under theExchange Act, our management evaluated the effectiveness of the design andoperation of our disclosure controls and procedures with the participation ofour principal executive and principal financial officers.  Based on their current observations combinedwith observations by the disclosure committee, which is comprised of members ofmanagement, members of the audit committee and external counsel, managementconcluded that our disclosure controls and procedures were effective as of August 2,2008 in providing reasonable assurance that material information requiringdisclosure was brought to management’s attention on a timely basis and that ourfinancial reporting was reliable.

 

**Change inour Internal Control Over Financial Reporting**

 

There have been nochanges during the quarter ended August 2, 2008 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II – OTHER INFORMATION**

 

**ITEM 1A.       RISK FACTORS**

 

***Our performance is affected byinflation.***

 

In recent periods, we haveexperienced increases in transportation costs and the cost of products we sellin our stores.  The increases in ourcosts are attributed to increases in fuel, plastic, grains and other commoditycosts.  As inflation has increasedexpenses, we have recovered, to the extent permitted by competition, theincrease in expenses by increasing prices over time.  Our ability to recover the effect ofinflation in the future may be effected by steps taken by our competitors andby the sensitivity of our customers to price increases.  The economic and competitive environment inthe North Eastern Unites States continues to challenge us to become more costefficient as our ability to recover increases in expenses through priceincreases is diminished.  Our futureresults operations will depend upon our ability to adapt to the currenteconomic environment as well as the current competitive conditions.

 

**ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

The Company held itsAnnual Meeting of Stockholders on July 9, 2008.  Eight individuals were nominated to serve asdirectors for the one-year term expiring at the 2009 Annual Meeting ofStockholders, as detailed below with respective votes cast for and votes castagainst:

 
| **Director  Nominees** | ** ** | **Votes Cast For** | ** ** | **Votes Cast Against** |
|------------------------|------------|--------------------|------------|------------------------|
| Robert J. Kelly        |       | 5,677,741          |       | 21,397                 |
| John E. Burke          |       | 5,677,741          |       | 21,397                 |
| Kevin P. Collins       |       | 5,677,741          |       | 21,397                 |
| Ben Evans              |       | 5,677,741          |       | 21,397                 |
| Alan C. Levitan        |       | 5,677,741          |       | 21,397                 |
| Gregory J. Young       |       | 5,677,741          |       | 21,397                 |
| Kurt M. Cellar         |       | 5,677,741          |       | 21,397                 |
| Scott Sozio            |       | 5,677,741          |       | 21,397                 |

 

Eisner LLP, independentcertified public accountants, were nominated and selected through a vote as theCompany’s auditors for the fiscal year ending January 31, 2009.  Votes were cast as follows: For 5,691,770,Against 6,056 and Abstained 1,312.

 

**ITEM 6.          EXHIBITS**

 

The following are filedas Exhibits to this Report:

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

 

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**Signatures**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

**THE PENNTRAFFIC COMPANY**

 
| By:    | /s/ Gregory J. Young                               |   |
|--------|----------------------------------------------------|--------|
| Name:  | Gregory J. Young                                   |
| Title: | Chief Executive Officer  and President             |
|   |                                               |
| By:    | /s/ Tod A. Nestor                                  |   |
| Name:  | Tod A. Nestor                                      |
| Title: | Senior Vice President  and Chief Financial Officer |

 

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