**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**x**** QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended July 29, 2006**

 

**OR**

 

**o**** TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the Transition Period from                   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** | ** ** | **(315) 453-7284**                 |
| (Address of principal executive offices)                  |       | (Telephone Number)                 |

 

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

 

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

 

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

 

Indicated by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  YES o     NO x

 

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

 

Common Stock, par value$.01 per share:  8,336,192 sharesoutstanding as of May 14, 2008

 

 

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**FORM 10-Q INDEX**

 
| ** **        | ** ** | ** **                                                                                  | **PAGE** |
|-------------------|------------|---------------------------------------------------------------------------------------------|----------|
| **PART I.**  |       |                                                                                        |     |
|              |       |                                                                                        |     |
| Item              | 1.         | Financial Statements                                                                        | 4        |
|              |       |                                                                                        |     |
| Item              | 2.         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 17       |
|              |       |                                                                                        |     |
| Item              | 3.         | Quantitative  and Qualitative Disclosures About Market Risk                                 | 20       |
|              |       |                                                                                        |     |
| Item              | 4.         | Controls and  Procedures                                                                    | 21       |
|              |       |                                                                                        |     |
| **PART II.** |       |                                                                                        |     |
|              |       |                                                                                        |     |
| Item              | 1.         | Legal Proceedings                                                                           | 22       |
|              |       |                                                                                        |     |
| Item              | 1A.        | Risk Factors                                                                                | 22       |
|              |       |                                                                                        |     |
| Item              | 4.         | Submission  of Matters to a Vote of Security Holders                                        | 22       |
|              |       |                                                                                        |     |
| Item              | 6.         | Exhibits                                                                                    | 22       |

 

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 includestatements relating to our anticipated financial performance and businessprospects.  Statements preceded by,followed by or that include words such as “believe,” “anticipate,” “estimate,” “expect,”“could,” and other similar expressions are to be considered suchforward-looking statements. Forward-looking statements may involve known and unknown risks,uncertainties and other factors, which may cause the actual results to differmaterially from those projected, stated or implied, depending on such factorsas: our ability to improve operating performance and effectuate business plans;our ability to operate pursuant to the terms of our credit facilities and tocomply with the terms of our lending agreements or to amend or modify the termsof such agreements as may be needed from time to time; our ability to generatecash; our ability to attract and maintain adequate capital; our ability torefinance our indebtedness; increases in prevailing interest rates; our abilityto obtain trade credit, and shipments and terms with vendors and serviceproviders for current orders; our ability to maintain contracts that arecritical to our operations; potential adverse developments with respect to ourliquidity or results of operations; general economic and business conditions;competition, including increased capital investment and promotional activity byour competitors; availability, location and terms of sites for storedevelopment; the successful implementation of our capital expenditure program;labor relations; labor and employee benefit costs including increases in healthcare and pension costs and the level of contributions to our sponsored pensionplans; the result of our pursuit of strategic alternatives; economic andcompetitive uncertainties; our ability to pursue strategic alternatives;economic and competitive uncertainties; changes in strategies; changes ingenerally accepted accounting principles; adverse changes in economic andpolitical climates around the world, including terrorist activities andinternational hostilities; and the outcome of pending, or the commencement ofany new, legal proceedings against, or governmental investigations of us,including the previously announced SEC and U.S. Attorney’s Officeinvestigations.  We caution that theforegoing list of important factors is not exhaustive.  Accordingly, there can be no assurance thatwe will meet future results, performance or achievements expressed or impliedby such forward-looking statements, which are generally required to be publiclyrevised as circumstances change, and which we do not intend to update.

 

**EXPLANATORY NOTE**

 

This Quarterly Report on Form 10-Qis for the period beginning April 30, 2006 and ending July 29, 2006and, except as expressly indicated otherwise, information in this report speaksas of such date.  As discussed further inthis report, we emerged from Chapter 11 bankruptcy reorganization effective April 13,2005.

 

3

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**PART I**

 
| **ITEM 1.** | **Financial  Statements** |
|-------------|---------------------------|

 

The Penn Traffic Company

CondensedConsolidated Balance Sheets

(Inthousands, except share and per share data)

 
| ** **                                                                                               | ** ** | **July 29,** | ** ** | **January 28,**          | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------------------|------------|
| ** **                                                                                               | ** ** | **2006**          | ** ** | **2006**                      | ** ** |
| ** **                                                                                               | ** ** | **unaudited**     | ** ** | **audited**                   | ** ** |
| ** **                                                                                               | ** ** | ** **        | ** ** | **(Restated – Note  3)** | ** ** |
| **ASSETS**                                                                                               | ** ** | ** **        | ** ** | ** **                    | ** ** |
|                                                                                                     |       |              |       |                          |       |
| **Current Assets:**                                                                                      |       |              |       |                          |       |
| Cash                                                                                                     |       | $                 | 9,258      |                          | $          | 12,432 |   |
| Accounts and notes receivable (less  allowance for doubtful accounts of $3,267 and $3,174, respectively) |       | 37,124            |       | 36,970                        |       |
| Inventories                                                                                              |       | 109,908           |       | 113,467                       |       |
| Prepaid expenses and other current assets                                                                |       | 9,804             |       | 6,157                         |       |
|                                                                                                     |       | 166,094           |       | 169,026                       |       |
|                                                                                                     |       |              |       |                          |       |
| **Capital Leases, net**                                                                                  |       | 10,355            |       | 10,997                        |       |
| ** **                                                                                               |       |              |       |                          |       |
| **Fixed Assets, net**                                                                                    |       | 110,824           |       | 104,399                       |       |
| ** **                                                                                               |       |              |       |                          |       |
| **Other Assets:**                                                                                        |       |              |       |                          |       |
| Intangible assets                                                                                        |       | 30,929            |       | 33,025                        |       |
| Deferred tax asset                                                                                       |       | 2,609             |       | 2,609                         |       |
| Other assets                                                                                             |       | 4,606             |       | 5,335                         |       |
|                                                                                                     |       | 38,144            |       | 40,969                        |       |
|                                                                                                     |       |              |       |                          |       |
| Total Assets                                                                                             |       | $                 | 325,417    |                          | $          | 325,391 |   |

 

The accompanying notes are an integral part of these statements.

 

4

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| ** **                                                                                                            | ** ** | **July 29,** | ** ** | **January 28,**          | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------------------|------------|
| ** **                                                                                                            | ** ** | **2006**          | ** ** | **2006**                      | ** ** |
| ** **                                                                                                            | ** ** | **unaudited**     | ** ** | **audited**                   | ** ** |
| ** **                                                                                                            | ** ** | ** **        | ** ** | **(Restated – Note  3)** | ** ** |
|                                                                                                                  |       |              |       |                          |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                        |       |              |       |                          |       |
|                                                                                                                  |       |              |       |                          |       |
| **Current Liabilities:**                                                                                              |       |              |       |                          |       |
| Current portion of obligations under  capital leases                                                                  |       | $                 | 1,389      |                          | $          | 1,310 |   |
| Current maturities of long-term debt                                                                                  |       | 290               |       | 278                           |       |
| Accounts payable                                                                                                      |       | 42,693            |       | 36,695                        |       |
| Other current liabilities                                                                                             |       | 45,253            |       | 46,294                        |       |
| Accrued interest expense                                                                                              |       | 329               |       | 557                           |       |
| Deferred income taxes                                                                                                 |       | 13,302            |       | 13,302                        |       |
| Liabilities subject to compromise (Note 5)                                                                            |       | 2,776             |       | 2,871                         |       |
|                                                                                                                  |       | 106,032           |       | 101,307                       |       |
|                                                                                                                  |       |              |       |                          |       |
| **Non-current Liabilities:**                                                                                          |       |              |       |                          |       |
| Obligations under capital leases                                                                                      |       | 11,714            |       | 12,429                        |       |
| Long-term debt                                                                                                        |       | 41,006            |       | 37,235                        |       |
| Defined benefit  pension plan liability (Note 7)                                                                      |       | 26,540            |       | 27,600                        |       |
| Other non-current  liabilities                                                                                        |       | 28,795            |       | 28,021                        |       |
|                                                                                                                  |       | 108,055           |       | 105,285                       |       |
|                                                                                                                  |       |              |       |                          |       |
| **Total Liabilities**                                                                                                 |       | 214,087           |       | 206,592                       |       |
|                                                                                                                  |       |              |       |                          |       |
| **Commitments and Contingencies (Notes 5 and  8)**                                                                    |       |              |       |                          |       |
| ** **                                                                                                            |       |              |       |                          |       |
| **Stockholders’ Equity:**                                                                                        |       |              |       |                          |       |
| Preferred stock - authorized 1,000,000  shares, $.01 par value; none issued                                           |       | —            |       | —                        |       |
| Common stock - authorized 15,000,000  shares, $.01 par value; issued and to be issued 8,498,752 shares at both  dates |       | 85                |       | 85                            |       |
| Capital in excess of par value                                                                                        |       | 118,493           |       | 118,493                       |       |
| Deficit                                                                                                               |       | (12,167           | )          | (4,698                        | )          |
| Accumulated other comprehensive income                                                                                |       | 4,919             |       | 4,919                         |       |
| **Total stockholders’ equity**                                                                                   |       | 111,330           |       | 118,799                       |       |
| ** **                                                                                                            |       |              |       |                          |       |
| **Total Liabilities and Stockholders’ Equity**                                                                   |       | $                 | 325,417    |                          | $          | 325,391 |   |

 

The accompanyingnotes 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  Ended** | ** ** | **Period from  April 17, 2005  to** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|----------------------------------------------------|------------|
| ** **                                      | ** ** | **July 29, 2006** | ** ** | **July 30, 2005**       | ** ** | **July 29, 2006**                        | ** ** | **July 30, 2005** | ** ** |
| ** **                                      | ** ** | ** **                  | ** ** | **(Restated –  Note 3)**     | ** ** | ** **                                         | ** ** | **(Restated – Note  3)** | ** ** |
|                                            |       |                        |       |                              |       |                                               |       |   |   |
| **Revenues**                                    |       | $                           | 338,152    |                              | $          | 331,329                                            |       | $ | 648,566 |   | $ | 377,394 |   |
|                                            |       |                        |       |                              |       |                                               |       |   |   |
| **Cost and Operating Expenses:**                |       |                        |       |                              |       |                                               |       |   |   |
| Cost of sales                                   |       | 252,300                     |       | 247,363                           |       | 484,646                                            |       | 283,317 |   |
| Selling and administrative expenses             |       | 83,401                      |       | 86,543                            |       | 166,628                                            |       | 97,453 |   |
|                                            |       |                        |       |                              |       |                                               |       |   |   |
| **Operating Income (Loss)**                     |       | 2,451                       |       | (2,577                            | )          | (2,708                                             | )          | (3,376 | ) |
|                                            |       |                        |       |                              |       |                                               |       |   |   |
| Interest expense                                |       | 2,350                       |       | 2,550                             |       | 4,385                                              |       | 2,805 |   |
| Reorganization expense                          |       | 56                          |       | —                            |       | 262                                                |       | — |   |
|                                            |       |                        |       |                              |       |                                               |       |   |   |
| **Income (Loss) Before Income Taxes**           |       | 45                          |       | (5,127                            | )          | (7,355                                             | )          | (6,181 | ) |
|                                            |       |                        |       |                              |       |                                               |       |   |   |
| Income tax provision                            |       | 57                          |       | 66                                |       | 114                                                |       | 131 |   |
|                                            |       |                        |       |                              |       |                                               |       |   |   |
| **Net Loss**                                    |       | $                           | (12        | )                                 | $          | (5,193                                             | )          | $ | (7,469 | ) | $ | (6,312 | ) |
|                                            |       |                        |       |                              |       |                                               |       |   |   |
| Shares  outstanding and to be issued            |       | 8,498,752                   |       | 8,498,752                         |       | 8,498,752                                          |       | 8,498,752 |   |
|                                            |       |                        |       |                              |       |                                               |       |   |   |
| **Loss Per Share (Basic and Diluted) (Note 4)** |       | $                           | 0.00       |                              | $          | (0.61                                              | )          | $ | (0.88 | ) | $ | (0.74 | ) |

 

Theaccompanying notes are an integral part of these statements.

 

6

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ThePenn Traffic Company

CondensedConsolidated Statements of Cash Flows

(Inthousands)

(unaudited)

 
| ** **                                                                                                       | ** ** | **Period from**           | ** ** | **Period from**          | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                       | ** ** | **January 29, 2006** | ** ** | **April 17, 2005**  | ** ** |
| ** **                                                                                                       | ** ** | **to  July 29, 2006**     | ** ** | **to  July 30, 2005**    | ** ** |
| ** **                                                                                                       | ** ** | ** **                     | ** ** | **(Restated –  Note 3)** | ** ** |
| **Operating Activities:**                                                                                        |       |                           |       |                          |       |
| Net loss                                                                                                         |       | $                              | (7,469     | )                             | $          | (6,312 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities:   Depreciation and amortization |       | 12,986                         |       | 6,982                         |       |
| Amortization of deferred financing cost                                                                          |       | 647                            |       | 703                           |       |
| (Gain) on sale of fixed assets                                                                                   |       | (29                            | )          | —                        |       |
|                                                                                                             |       |                           |       |                          |       |
| **Net change in operating assets and  liabilities:**                                                             |       |                           |       |                          |       |
| Accounts and notes receivable, net                                                                               |       | (154                           | )          | 6,941                         |       |
| Prepaid expenses and other current assets                                                                        |       | (3,647                         | )          | 4,333                         |       |
| Inventories                                                                                                      |       | 3,559                          |       | 4,866                         |       |
| Liabilities subject to compromise                                                                                |       | (95                            | )          | (5,244                        | )          |
| Accounts payable and other current  liabilities                                                                  |       | 4,729                          |       | (5,478                        | )          |
| Other assets                                                                                                     |       | (420                           | )          | 55                            |       |
| Defined benefit pension plan                                                                                     |       | (1,060                         | )          | (275                          | )          |
| Other non-current liabilities                                                                                    |       | 1,793                          |       | 303                           |       |
|                                                                                                             |       |                           |       |                          |       |
| **Net Cash Provided by Operating Activities**                                                                    |       | 10,840                         |       | 6,874                         |       |
|                                                                                                             |       |                           |       |                          |       |
| **Investing Activities:**                                                                                        |       |                           |       |                          |       |
| Capital expenditures                                                                                             |       | (17,190                        | )          | (1,220                        | )          |
| Proceeds from sale of fixed assets                                                                               |       | 29                             |       | —                        |       |
|                                                                                                             |       |                           |       |                          |       |
| **Net Cash Used in Investing Activities**                                                                        |       | (17,161                        | )          | (1,220                        | )          |
|                                                                                                             |       |                           |       |                          |       |
| **Financing Activities:**                                                                                        |       |                           |       |                          |       |
| Payments of mortgages                                                                                            |       | (138                           | )          | (78                           | )          |
| Net borrowings  (repayments) under revolving credit facility                                                     |       | 3,921                          |       | (500                          | )          |
| Reduction in  capital lease obligations                                                                          |       | (636                           | )          | (287                          | )          |
|                                                                                                             |       |                           |       |                          |       |
| **Net Cash Provided by (Used in) Financing Activities**                                                          |       | 3,147                          |       | (865                          | )          |
|                                                                                                             |       |                           |       |                          |       |
| **Net (decrease) increase in Cash**                                                                              |       | (3,174                         | )          | 4,789                         |       |
|                                                                                                             |       |                           |       |                          |       |
| **Cash and Cash Equivalents at the beginning of period**                                                         |       | 12,432                         |       | 29,304                        |       |
|                                                                                                             |       |                           |       |                          |       |
| **Cash and Cash Equivalents at end of period**                                                                   |       | $                              | 9,258      |                          | $          | 34,093 |   |

 

Theaccompanying notes are an integral part of these statements.

 

7

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ThePenn Traffic Company

CondensedConsolidated Statement of Stockholders’ Equity

Forthe period January 29, 2006 to July 29, 2006

(Inthousands)

(unaudited)

 
| ** **                                          | ** ** | **Common  Stock** | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|-----------------------------------------------------|------------|-------------|------------|-----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                          | ** ** | ** **        | ** ** | ** **                                          | ** ** | ** **  | ** ** | ** **                                                | ** ** | ** **                            | ** ** |
| Balance at January 28, 2006                    |       | $                 | 85         |                                                | $          | 118,493     |       | $                                                         | (4,698     | )                                     | 4,919      |   | $ | 118,799 |   |
|                                                |       |              |       |                                                |       |        |       |                                                      |       |                                  |       |
| Net loss for year to date ended July 29,  2006 |       |              |       |                                                |       | (7,469      | )          |                                                      |       | (7,469                                | )          |
|                                                |       |              |       |                                                |       |        |       |                                                      |       |                                  |       |
| Balance at July 29, 2006                       |       | $                 | 85         |                                                | $          | 118,493     |       | $                                                         | (12,167    | )                                     | $          | 4,919 |   | $ | 111,330 |   |
|                                                     |            |                   |            |                                                     |            |             |            |                                                           |            |                                       |            |  |  |  |  |  |

 

The accompanying notes are an integral part of thesestatements.

 

8

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** **

The Penn Traffic Company

Notesto 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 of America for interim financial information and theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,they do not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.

 

In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included. Operating results for the interim periodsended July 29, 2006 are not necessarily an indication of results to beexpected for the fiscal year ended February 3, 2007. These unauditedinterim financial statements should be read in conjunction with the auditedconsolidated financial statements and related notes contained in the Company’sannual report on Form 10-K/A for the fiscal year ended February 3,2007.

 

The balance sheet as of January 28, 2006 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.

 

TheCompany’s fiscal year ends on the Saturday closest to January 31. Fiscalyear 2007 is the 53-week period ended February 3, 2007. Fiscal year2006 is the 41-week period from April 17, 2005, the commencement offresh-start reporting (see Note 3 to the Company’s Annual Report on Form 10-K/Afor the fiscal year ended February 3, 2007), to January 28, 2006. Theinformation presented in this quarterly report on Form 10-Q is for thequarter beginning April 30, 2006 and ending July 29, 2006.

 

All significant intercompanytransactions and accounts have been eliminated in consolidation.

 

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

 

OnMay 30, 2003, The Penn Traffic Company and all of its subsidiaries filedvoluntary petitions under Chapter 11 of the United States Bankruptcy Codein the United States Bankruptcy Court for the Southern District of New York. Thefiling was made in response to pending defaults under the Company’sthen-existing loan agreements and a lack of liquidity 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 confirmedon March 17, 2005 and became effective on April 13, 2005 (the “EffectiveDate”).

 

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

 

1.        The Company entered into new credit agreements providing for borrowingsof up to $164 million. Proceeds from these new credit agreements providedfunds sufficient to repay a debtor-in-possession credit facility and alladministrative and priority claims to the extent provided for in the Plan.

 

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

 

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

 

4.        The reorganized Company was authorized to issue new shares of commonstock to unsecured creditors, which included holders of $100 million ofsenior notes, a claim by the Pension Benefit Guaranty Corporation or the (“PBGC”)of $60 million (see Note 7) and trade claims, all of whom were eligible toreceive pro rata distributions of new shares of common stock and the right toshare in potential proceeds from certain causes of action.

 

9

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Pursuantto the provisions of Statement of Position 90-7 “Financial Reporting by Entitiesin Reorganization Under the Bankruptcy Code” (“SOP 90-7”) issued by theAmerican Institute of Certified Public Accountants upon emergence from Chapter11 proceedings, the Company adopted fresh-start reporting which resulted in anew 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 reporting as of April 16, 2005 rather thanthe actual effective date of April 13, 2005 did not have a material effecton the financial condition or results of operations of the Company.

 

**Note 3 –Restatement**

 

Asa result of cancellation of debt in the Chapter 11 proceedings (see Note 2),the Company previously entirely eliminated all net operating loss carryforwardsand reduced the tax basis of its long-lived assets effective January 28, 2006.During the year ended February 2, 2008, the Company corrected the amountof debt forgiveness in the Chapter 11 proceedings that reduced tax attributeswhich results in an increase aggregating $66 million in the tax basis of itslong-lived assets and net operating loss carryforwards.

 

Thecorrection resulted in an increase in deferred tax assets attributable to thenet operating loss carryforwards and the recording of a related valuationallowance and a reduction in the deferred tax liability attributable to theincrease in the tax basis of long-lived assets. The net effect of the above wasa $3.5 million reduction in the net deferred tax liability and a correspondingreduction in the carrying value of certain long-lived assets upon adoption offresh-start reporting on April 16, 2005. As a result, net loss for theperiod from May 1, 2005 to July 30, 2005 and from April 17, 2005to July 30, 2005 were restated as follows:

 
| ** **                                      | ** ** | **Quarter Ended** | ** ** | **Period Ended**  | ** ** |
|-------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                      | ** ** | **July 30,** | ** ** | **July 30,** | ** ** |
| ** **                                      | ** ** | **2005**          | ** ** | **2005**          | ** ** |
| ** **                                      | ** ** | ** **        | ** ** | ** **        | ** ** |
| Net loss as  previously reported                |       | $                 | (4,202     | )                 | $          | (5,080 | ) |
|                                            |       |              |       |              |       |
| Reduction in  depreciation of long-lived assets |       | 87                |       | 101               |       |
| Reduction in  income tax benefit                |       | (1,078            | )          | (1,333            | )          |
|                                            |       |              |       |              |       |
| Net loss as  restated                           |       | $                 | (5,193     | )                 | $          | (6,312 | ) |
|                                            |       |              |       |              |       |
| Net loss per  share (basic and diluted):        |       |              |       |              |       |
| As previously reported                          |       | $                 | (0.49      | )                 | $          | (0.60 | ) |
| Restated                                        |       | (0.12             | )          | (0.14             | )          |
|                                            |       |              |       |              |       |
| As restated                                     |       | $                 | (0.61      | )                 | $          | (0.74 | ) |

 

10

----

 

**Note 4 –Per Share Data**

 

Basic and diluted net loss per share is based on the number of commonshares issued and estimated to be issued pursuant to the Plan. Common sharesissued and estimated to be issued in settlement of claims filed in the Company’sChapter 11 proceeding are treated as outstanding as of the effective date ofthe Plan. At both July 29, 2006 and January 28, 2006, 201,055 commonshares are estimated to be issued in connection with the settlement ofremaining claims.

 

**Note 5 –Liabilities Subject to Compromise**

 

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

 

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

 

Duringthe quarter and period ended July 29, 2006, the Company paid $0.1 millionin settlement of disputed claims. The Company has established liabilities forthe estimated cash payments required to settle the remaining claims outstandingin the Chapter 11 proceedings. Estimated shares of common stock to be issued insettlement of claims have been accounted for as stockholders’ equity.

 

**Note 6 –Acquisitions and Dispositions**

 

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

 

Duringthe period ended July 29, 2006, no stores were closed. During the periodending July 29, 2006, the Company incurred approximately$0.1 million of store closing costs relating to leases and terminatedemployees relating to closures of stores during the latter half of the yearended January 28, 2006.

 

**Note 7 –Pension Plans**

 

TheCompany has four noncontributory defined benefit pension plans covering certainunion personnel. The Company’s policy is to fund pension benefits to the extentcontributions are deductible for tax purposes and in compliance with federallaws and regulations. For the Company’s plans, normal retirement age is either62 or 65, but provisions are made for earlier retirement. Benefits aredetermined either on average annual compensation and years of service, or as apre-determined amount for each year of service. Full vesting occurs uponcompletion of five years of service. Assets of the Company’s pension plansprimarily consist of investments in publicly traded equity and debt securities.

 

Thecomponents of net periodic benefit cost for the year to date ended July 29,2006 and the period ended July 30, 2005 is as follows (in thousands):

 
|                           | ** ** | **Year to Date**       | ** ** | **Period Ended**       | ** ** |
|--------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **July 29, 2006** | ** ** | **July 30, 2005** | ** ** |
|                           |       |                   |       |                   |       |
| Service cost                   |       | $                      | 991        |                   | $          | 537 |   |
| Interest cost                  |       | 2,988                  |       | 1,594                  |       |
| Expected return on plan assets |       | (2,988                 | )          | (1,456                 | )          |
|                           |       |                   |       |                   |       |
|                           |       | $                      | 991        |                   | $          | 675 |   |

 

Forthe period ended July 29, 2006, the Company contributed $1.6 million tothe four defined benefit pension plans. For the period from April 17, 2005to July 30, 2005, the Company contributed $0.6 million to the fourdefined benefit pension plans.

 

11

----

 

**Note 8 –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 investigationsbegan prior to the Company’s emergence from bankruptcy in April 2005. TheCompany has been cooperating with these investigations and has produceddocuments and made Company employees available for 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. The Audit Committee hired independent counselto perform the investigation. The Audit Committee found that the Company hadengaged 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 Company announced that the employment of the Company’s ChiefMarketing Officer and the Company’s Vice President, Non-Perishables Marketinghad been terminated following an interim report to the Audit Committee on thefindings of the investigation.

 

OnSeptember 17, 2007, the SEC filed civil fraud charges against the Company’sformer Chief Marketing Officer and former Vice President, Non-PerishablesMarketing alleging that such individuals orchestrated a scheme to inflate theCompany’s income and other financial results by prematurely recognizingpromotional allowances received from vendors from approximately the secondquarter of fiscal year 2001 through at least the fourth quarter of fiscal year2003. The complaint further alleges that the individuals deceived the Company’saccounting personnel to carry out their fraudulent scheme and aided and 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 abovementioned individuals on related criminal charges.Both the SEC and the United States Attorney indicated that their investigationsare continuing.

 

Inconnection with these matters, the Company could be subject to damage claims,fines or penalties. At present, the Company is unable to estimate thelikelihood of an unfavorable outcome or the amount of any damage claims, finesor penalties in the event of an unfavorable outcome and, accordingly, noliability has been recorded for this contingency.

 

12

----

 

**Note 9 –Segment Information**

 

TheCompany operates in two segments – the retail food business and the wholesalefood distribution business. The retail food business consists of supermarketswhich the Company operates. The wholesale food distribution business suppliesindependent supermarkets and other independent wholesale accounts with food,related products and other services. In fiscal period 2006, the Company hadallocated warehouse and transportation costs based on each segment’s percentageof total shipments. In fiscal year 2007, the allocation method was changed toinclude order size and distance from the warehouse. The effect of this changewas to increase the operating income of the retail food segment and decreasethe operating income of the wholesale food distribution segment by $2.4 millionfor the year to date ended July 29, 2006.

 

Thetables below presents (in thousands) information with respect to operatingsegments as well as reconciliations to consolidated information.

 
| **‘**                                                    | ** ** | **Quarter Ended July 29, 2006** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | ** **                           | ** ** | **Wholesale Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Retail Food**                      | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                          |       |                                 |       |   |   |   |   |   |   |
| Revenues                                                      |       | $                                    | 274,472    |   | $ | 57,067 |   | $ | 6,613 | (1) | $ | 338,152 |   |
|                                                          |       |                                 |       |   |   |   |   |   |   |
| Cost of  sales                                                |       | (193,376                             | )          | (53,657 | ) | (3,891 | )(2) | (250,924 | )(4) |
| Selling and  administrative expense                           |       | (63,143                              | )          | (1,998 | ) | (12,988 | )(3) | (78,129 | )(4) |
|                                                          |       |                                 |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation  and amortization |       | 17,953                               |       | 1,412 |   | (10,266 | ) | 9,099 |   |
|                                                          |       |                                 |       |   |   |   |   |   |   |
| Depreciation  and amortization                                |       | (6,048                               | )          | (156 | ) | (444 | ) | (6,648 | ) |
|                                                          |       |                                 |       |   |   |   |   |   |   |
| Operating  income (loss)                                      |       | $                                    | 11,905     |   | $ | 1,256 |   | $ | (10,710 | ) | 2,451 |   |
| Interest  expense                                             |       |                                 |       |   |   |   |   | (2,350 | ) |
| Reorganization  costs                                         |       |                                 |       |   |   |   |   | (56 | ) |
|                                                          |       |                                 |       |   |   |   |   |   |   |
| Consolidated  income before income taxes                      |       |                                 |       |   |   |   |   | $ | 45 |   |
|                                                               |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

| (1)    |   | Consists  principally of approximately $4.5 million for bakery sales principally  to customers other than those of the retail and wholesale segments and  approximately $1.6 million for trucking revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (2)    |   | Consists  principally of approximately $2.7 million for bakery sales and  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 $6.2 million of payroll, benefits, and payroll  taxes associated with the administrative staff, approximately  $1.5 million associated with selling and administrative costs of the  bakery, approximately $1.4 million of contract hauling costs associated with  trucking revenue, approximately $2.3 million of professional fees (including  approximately $1.2 million of legal costs associated with the internal and  SEC investigation relating to the Company’s practices regarding promotional  discounts and allowances), approximately $1.0 million for data processing  maintenance and $0.5 million for corporate insurance costs. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (4)    |   | Excludes  depreciation and amortization of $1.3 million for cost of sales and  $5.3 million for selling and administrative expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

13

----

 
| ** **                                             | ** ** | **Quarter Ended July 30, 2005** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                             | ** ** | ** **                           | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | **Retail Food**                      | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                   |       |                                 |       |   |   |   |   |   |   |
| Revenues                                               |       | $                                    | 269,093    |   | $ | 56,045 |   | $ | 6,191 | (1) | $ | 331,329 |   |
|                                                   |       |                                 |       |   |   |   |   |   |   |
| Cost of  sales                                         |       | (189,700                             | )          | (52,320 | ) | (4,321 | )(2) | (246,341 | )(4) |
| Selling and  administrative expense                    |       | (70,026                              | )          | (2,509 | ) | (9,224 | )(3) | (81,759 | )(4) |
|                                                   |       |                                 |       |   |   |   |   |   |   |
| Operating  income before depreciation and amortization |       | 9,367                                |       | 1,216 |   | (7,354 | ) | 3,229 |   |
|                                                   |       |                                 |       |   |   |   |   |   |   |
| Depreciation  and amortization                         |       | (5,165                               | )          | (326 | ) | (315 | ) | (5,806 | ) |
|                                                   |       |                                 |       |   |   |   |   |   |   |
| Operating  income (loss)                               |       | $                                    | 4,202      |   | $ | 890 |   | $ | (7,669) |   | (2,577 | ) |
| Interest  expense                                      |       |                                 |       |   |   |   |   | (2,550 | ) |
|                                                   |       |                                 |       |   |   |   |   |   |   |
| Consolidated  loss before income taxes                 |       |                                 |       |   |   |   |   | $ | (5,127 | ) |

 

----

(1)       Consists principally of approximately$4.0 million for bakery sales principally to customers other than those ofthe retail and wholesale segments and approximately $1.7 million fortrucking revenues.

 

(2)       Consists principally of approximately$3.6 million for bakery sales and approximately $0.5 million increasein cost of sales to reconcile segment inventories on FIFO to consolidatedinventories on LIFO.

 

(3)       Consists principally of approximately$7.0 million of payroll, benefits, and payroll taxes associated with theadministrative staff and approximately $0.9 million of contract haulingcosts associated with trucking revenue.

 

(4)       Excludes depreciation and amortization of$1.0 million for cost of sales and $4.8 million for selling andadministrative expenses.

 

14

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| ** **                                                      | ** ** | **Period from January 29, 2006 to July 29, 2006** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                      | ** ** | ** **                                                  | ** ** | **Wholesale Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **Retail Food**                                             | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                            |       |                                                        |       |   |   |   |   |   |   |
| Revenues                                                        |       | $                                                           | 527,588    |   | $ | 109,002 |   | $ | 11,976 | (1) | $ | 648,566 |   |
|                                                            |       |                                                        |       |   |   |   |   |   |   |
| Cost of  sales                                                  |       | (371,770                                                    | )          | (102,722 | ) | (7,403 | )(2) | (481,895 | )(4) |
| Selling and  administrative expense                             |       | (125,532                                                    | )          | (3,483 | ) | (27,378 | )(3) | (156,393 | )(4) |
|                                                            |       |                                                        |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation  and amortization   |       | 30,286                                                      |       | 2,797 |   | (22,805 | ) | 10,278 |   |
|                                                            |       |                                                        |       |   |   |   |   |   |   |
| Depreciation  and amortization                                  |       | (11,785                                                     | )          | (312 | ) | (889 | ) | (12,986 | ) |
|                                                            |       |                                                        |       |   |   |   |   |   |   |
| Operating  income (loss)                                        |       | $                                                           | 18,501     |   | $ | 2,485 |   | $ | (23,694 | ) | (2,708 | ) |
| Interest  expense                                               |       |                                                        |       |   |   |   |   | (4,385 | ) |
| Reorganization  costs                                           |       |                                                        |       |   |   |   |   | (262 | ) |
|                                                            |       |                                                        |       |   |   |   |   |   |   |
| Consolidated  loss before income taxes                          |       |                                                        |       |   |   |   |   | $ | (7,355 | ) |
|                                                            |       |                                                        |       |   |   |   |   |   |   |
| Total assets  as of July 29, 2006                          |       | $                                                           | 261,263    | (5) | $ | 31,070 | (5) | $ | 33,084 | (6) | $ | 325,417 |   |
|                                                            |       |                                                        |       |   |   |   |   |   |   |
| Capital  expenditures for year to date ended July 29, 2006 |       | $                                                           | 15,509     |   | $ | — |   | $ | 1,681 |   | $ | 17,190 |   |
|                                                                 |            |                                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)   Consists principally of approximately$8.2 million for bakery sales principally to customers other than those ofthe retail and wholesale segments and approximately $3.1 million fortrucking revenues.

 

(2)   Consists principally of approximately$5.1 million for bakery sales and approximately $0.7 million increasein cost of sales to reconcile segment inventories on FIFO to consolidatedinventories on LIFO.

 

(3)   Consists principally of approximately $13.0million of payroll, benefits, and payroll taxes associated with theadministrative staff, approximately $3.0 million associated with sellingand administrative costs of the bakery, approximately $2.7 million of contracthauling costs associated with trucking revenue, approximately $5.3 million ofprofessional fees (including approximately $3.1 million of legal costsassociated with the internal and SEC investigation relating to the Company’spractices regarding promotional discounts and allowances), approximately$1.0 million for data processing maintenance and $0.6 million forcorporate insurance costs.

 

(4)   Excludes depreciation and amortization of$2.7 million for cost of sales and $10.3 million for selling andadministrative expenses.

 

(5)   The warehouse and transportation assets havebeen allocated using the same methodology as that which was used for thewarehouse and transportation costs described above. The effect of the change inallocation method in fiscal year 2007 was to increase the assets of thewholesale food distribution segment and decrease assets of the retail foodsegment by $4.3 million.

 

(6)   Consists principally of fixed assets andinventory of the bakery operation and general corporate assets (including cashand cash equivalents).

 

15

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| ** **                                                    | ** ** | **Period from April 17, 2005 to July 30, 2005** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                                | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Retail Food**                                           | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                          |       |                                                      |       |   |   |   |   |   |   |
| Revenues                                                      |       | $                                                         | 306,550    |   | $ | 63,798 |   | $ | 7,046 | (1) | $ | 377,394 |   |
|                                                          |       |                                                      |       |   |   |   |   |   |   |
| Cost of  sales                                                |       | (217,338                                                  | )          | (59,904 | ) | (4,912 | )(2) | (282,154 | )(4) |
| Selling and  administrative expense                           |       | (78,374                                                   | )          | (2,757 | ) | (10,501 | )(3) | (91,632 | )(4) |
|                                                          |       |                                                      |       |   |   |   |   |   |   |
| Operating  income before depreciation and amortization        |       | 10,838                                                    |       | 1,137 |   | (8,367 | ) | 3,608 |   |
|                                                          |       |                                                      |       |   |   |   |   |   |   |
| Depreciation  and amortization                                |       | (6,280                                                    | )          | (387 | ) | (317 | ) | (6,984 | ) |
|                                                          |       |                                                      |       |   |   |   |   |   |   |
| Operating  income (loss)                                      |       | $                                                         | 4,558      |   | $ | 750 |   | $ | (8,684) |   | (3,376 | ) |
| Interest  expense                                             |       |                                                      |       |   |   |   |   | (2,805 | ) |
|                                                          |       |                                                      |       |   |   |   |   |   |   |
| Consolidated  loss before income taxes                        |       |                                                      |       |   |   |   |   | $ | (6,181 | ) |
|                                                          |       |                                                      |       |   |   |   |   |   |   |
| Total assets  as of July 30, 2005                        |       | $                                                         | 297,098    | (5) | $ | 24,633 | (5) | $ | 15,829 | (6) | $ | 337,560 |   |
|                                                          |       |                                                      |       |   |   |   |   |   |   |
| Capital  expenditures for the period ended July 30, 2005 |       | $                                                         | 988        |   | $ | — |   | $ | 232 |   | $ | 1,220 |   |

 

----

(1)      Consists principally of approximately$4.4 million for bakery sales to customers other than those of the retailand wholesale segments and approximately $1.7 million for truckingrevenues.

 

(2)      Consists principally of approximately$4.0 million for bakery sales and approximately $0.5 million increasein cost of sales to reconcile segment inventories on FIFO to consolidatedinventories on LIFO.

 

(3)      Consists principally of approximately$8.0 million of payroll, benefits, and payroll taxes associated with theadministrative staff and approximately $0.9 million of contract haulingcosts associated with trucking revenue.

 

(4)      Excludes depreciation and amortization of$1.2 million for cost of sales and $5.8 million for selling andadministrative expenses.

 

(5)      The warehouse and transportation assets havebeen allocated using the same methodology as that which was used for thewarehouse and transportation costs.

 

(6)      Consists principally of fixed assets andinventory of the bakery operation and general corporate asset (including cashand cash equivalents).

 

16

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** **

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

 

**Overview**

 

As discussed inNote 2 to the accompanying condensed consolidated financial statements, weemerged from Chapter 11 proceedings on April 13, 2005.  For financial reporting purposes, weaccounted for the consummation of our plan of reorganization as of the close ofbusiness on April 16, 2005.  Inaccordance with the American Institute of Certified Public Accountant’sStatement of Position 90-7, “Financial Reporting by Entities in Reorganizationunder the Bankruptcy Code” we have applied fresh-start reporting as of theclose of business on April 16, 2005, which has resulted insignificant changes to the valuation of certain of our assets and liabilities,and to our stockholders’ equity.  Inconnection with the adoption of fresh-start reporting, a new entity has beendeemed to be created for financial reporting purposes.  The periods ended on or prior to April 16, 2005have been designated “Predecessor Company” and the periods subsequent to April 16, 2005have been designated “Successor Company”. For purposes of the discussion of the unaudited Results of Operations,the activities of the Successor Company have been deemed noncomparable to thoseof the Predecessor Company and, accordingly, no comparison was done with thePredecessor Company.

 

**Results of Operations**

 

The following table setsforth certain Consolidated Statement of Operations components expressed aspercentages of revenues for the quarter and the (26-week) year to date periodended July 29, 2006 and the quarter and the (15-week) period ended July 30, 2005.

 
| ** **                           | ** ** | **Unaudited**          | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **Quarter**            | ** ** | **Quarter** | ** ** | **Year to Date** | ** ** | **Period from** | ** ** |
| ** **                           | ** ** | **Ended**              | ** ** | **Ended** | ** ** | **Ended** | ** ** | **April 17,  2005 to** | ** ** |
| ** **                           | ** ** | **July 29, 2006** | ** ** | **July 30, 2005** | ** ** | **July 29, 2005** | ** ** | **July 30, 2005** | ** ** |
|                                 |       |                   |       |   |   |   |   |   |   |
| Revenues                             |       | 100.0                  | %          | 100.0 | % | 100.0 | % | 100.0 | % |
|                                 |       |                   |       |   |   |   |   |   |   |
| Gross profit (1)                     |       | 25.4                   |       | 25.3 |   | 25.3 |   | 24.9 |   |
|                                 |       |                   |       |   |   |   |   |   |   |
| Selling and administrative  expenses |       | 24.7                   |       | 26.1 |   | 25.7 |   | 25.8 |   |
|                                 |       |                   |       |   |   |   |   |   |   |
| Operating income (loss)              |       | 0.7                    |       | (0.8 | ) | (0.4 | ) | (0.9 | ) |
|                                 |       |                   |       |   |   |   |   |   |   |
| Interest expense                     |       | 0.7                    |       | 0.8 |   | 0.7 |   | 0.7 |   |
|                                 |       |                   |       |   |   |   |   |   |   |
| Reorganization expenses              |       | 0.0                    |       | 0.0 |   | 0.0 |   | 0.0 |   |
|                                 |       |                   |       |   |   |   |   |   |   |
| Income tax provision                 |       | 0.0                    |       | 0.0 |   | 0.0 |   | 0.0 |   |
|                                 |       |                   |       |   |   |   |   |   |   |
| Net loss                             |       | (0.0                   | )          | (1.6 | ) | (1.1 | ) | (1.6 | ) |

 

----

(1)                                 Revenues less cost of sales.

 

17

----

 

**Fiscal Year 2007 (theQuarter Ended July 29, 2006) and Fiscal Year 2006 (the Quarter Ended July 30,2005)**

 

**Revenues**

 

Revenues for the quarterended July 29, 2006 and the quarter ended July 30, 2005 were$338.2 million and $331.3 million, respectively.  The increase is attributed to $5.4 millionincrease in retail food revenues and a $1.1 million increase in wholesale fooddistribution revenues.

 

Retail food revenues were$274.5 million for the quarter ended July 29, 2006 and $269.1 million forthe quarter ended July 30, 2005.

 

Wholesale fooddistribution revenues were $57.1 million for the quarter ended July 29, 2006and $56.0 million for the quarter ended July 30, 2005.

 

**Gross Profit**

 

Gross profit was $85.9million, or 25.4% of revenues for the quarter ended July 29, 2006 and$84.0 million, or 25.3% of revenues for the quarter ended July 30, 2005.

 

**Selling and AdministrativeExpenses**

 

Selling andadministrative expenses for the quarter ended July 29, 2006 were$83.4 million, or 24.7% of revenues and the selling and administrativeexpenses for the quarter ended July 30, 2005 were $86.5 million, or26.1% of revenues.  The 1.4% decrease asa percentage of revenues is due to higher retail revenues.

 

**Depreciation and Amortization**

 

Depreciation andamortization expense was $6.6 million, or 2.0% of revenues, for the quarterended July 29, 2006 and $5.8 million or 1.8% of revenues, for the quarterended July 30, 2005.  The increasein depreciation and amortization during the quarter ended July 29, 2006was primarily due to the depreciation of additions in fiscal 2006 ofapproximately $20.5 million.

 

**OperatingIncome (Loss)**

 

Operating income for thequarter ended July 29, 2006 was $2.5 million, or 0.7% of revenues,and for the quarter ended July 30, 2005, operating loss was $2.6 million,or 0.8% of revenues.  The $5.0 millionincrease is due to higher retail revenues while achieving lower selling andadministrative expenses during the period.

 

**Interest Expense**

 

Interest expense for thequarter ended July 29, 2006 was $2.4 million, or 0.7% of revenues,and for the quarter ended July 30, 2005, interest expense was $2.6million, or 0.8% of revenues.

 

**Income Tax Provision**

 

Income tax provision forthe quarter ended July 29, 2006 and the quarter ended July 30, 2005were less than $0.1 million.  Thetaxes consist of minimal state taxes and capital / franchise tax.

 

**Net Loss**

 

Net loss for the quarterended July 29, 2006 was minimal or less than $0.1 million as compared to anet loss of $5.2 million for the quarter ended July 30, 2005.. Thedecrease is due to higher retail revenues while achieving lower selling andadministrative expenses during the period.

 

18

----

 

**Fiscal Year 2007 (the Yearto Date Ended July 29, 2006) and Fiscal Year 2006 (the Period Ended July 30,2005)**

 

**Revenues**

 

Revenues for the year todate ended July 29, 2006 and the period ended July 30, 2005 were$648.6 million and $377.4 million, respectively.

 

Retail food revenues were$527.6 million for the year to date ended July 29, 2006 and $306.6 millionfor the period ended July 30, 2005.

 

Wholesale fooddistribution revenues were $109.0 million for the year to date ended July 29, 2006and $63.8 million for the period ended July 30, 2005.

 

**Gross Profit**

 

Gross profit was $163.9million, or 25.3% of revenues for the year to date ended July 29, 2006 and$94.1 million, or 24.9% of revenues for the period ended July 30, 2005.

 

**Selling and AdministrativeExpenses**

 

Selling andadministrative expenses for the year to date ended July 29, 2006 were$166.6 million, or 25.7% of revenues and the selling and administrativeexpenses for the period ended July 30, 2005 were $97.5 million, or25.8% of revenues.

 

**Depreciation and Amortization**

 

Depreciation andamortization expense was $13.0 million, or 1.9% of revenues, for the year todate ended July 29, 2006 and $7.0 million or 1.9% of revenues, forthe period ended July 30, 2005.

 

**OperatingLoss**

 

Operating loss for theyear to date ended July 29, 2006 was $2.7 million, or 0.4% ofrevenues.  Operating loss for the periodended July 30, 2005 was $3.4 million, or 0.9% of revenues.

 

**Interest Expense**

 

Interest expense for theyear to date ended July 29, 2006 was $4.4 million, or 0.7% of revenues,and for the period ended July 30, 2005, interest expense was $2.8 million,or 0.7% of revenues.

 

**Income Tax Provision**

 

Income tax provision forthe year to date ended July 29, 2006 and the period ended July 30,2005 were $0.1 million or less than 0.1% of revenues.  Taxes consist of minimal state taxes andcapital / franchise tax.

 

**Net Loss**

 

Net loss for the year todate ended July 29, 2006 was $7.5 million, or 1.1% of revenues, and netloss for the period ended July 30, 2005 was $6.3 million, or 1.6% ofrevenues.  The increase in net loss ismainly attributed to the difference in the number of weeks in each period,(26-weeks as compared to 15-weeks).

 

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**Liquidityand Capital Resources**

 

On April 16, 2005,upon emergence from Chapter 11 proceedings, we entered into a revolving creditand term loan facility with a group of financial institutions providing for a$130.0 million revolving credit facility and a $6.0 million termloan.  Also on April 16, 2005, weentered into a supplemental real estate credit facility with another group oflenders, providing for term loan borrowings of up to $28.0 million.  Availability under both credit facilities isdependent on levels of accounts receivable, inventory and certain otherassets.  Interest rates on borrowingsunder the revolving credit facility vary depending upon the amount ofavailability.  At July 29, 2006,outstanding borrowings under both facilities aggregated $36.9 million andoutstanding letters of credit under the revolving credit facility amounted toapproximately $50.0 million.  Atsuch date, availability in excess of outstanding borrowings and letters ofcredit was approximately $44.0 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.  During fiscal quarterended July 29, 2006, we had stand-by letters of credit of approximately$49.6 million.  Many of these stand-byletters of credit were required upon emergence from bankruptcy and as a result ofour 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$35.0 million for four consecutive days or less than $30.0 millionfor any one day), and limit the amount of capital expenditures, our assumptionof additional debt and our payment of dividends.  At no time through the quarter ended July 29,2006 had we been subject to compliance with these financial covenants becausethe annual available for borrowing had not dropped to these levels.  However, had such an event occurred, we wouldnot have been in compliance with the financial covenants and would have been indefault under the terms of the loan agreement at July 29, 2006.  Pursuant to our plan of reorganization, weentered into a collateral trust agreement with the collateral trustee inconnection with the secured trade lien program. The secured trade lien program is with certain of our vendors and allowsus to maintain trade terms.  This programhas been extended until April 13, 2009.

 

On December 26,2006, August 1, 2007 and January 30, 2008, both the revolving creditand term loan facility and the supplemental real estate credit facility wereamended to permit the disposal of assets in connection with the closing ofcertain stores.  In March 2008, thematurity date of both facilities were extended to April 13, 2009. (See Note 7to the financial statements included in the annual report on Form 10-K for yearended February 2, 2008 for additional information).

 

We also have $4.4 millionof borrowings under mortgages secured by the related properties as of July 29,2006.

 

**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 July 29,2006 was $36.9 million with a weighted average interest rate of 10.92%.  A 1% change in interest rates wouldimpact annual pre-tax income by $0.4 million based on the debt outstandingat July 29, 2006.  In addition tothe variable rate debt we had $4.4 million of fixed rate debt outstanding at July 29,2006 with a weighted average interest rate of 6.80%.  We view the fixed rate debt as a partialhedge against interest rate fluctuations which should minimize the potentialimpact on earnings from interest rate changes.

 

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**ITEM 4.        CONTROLSAND PROCEDURES**

 

Disclosure controls and procedures under Rule 13a-15(e) ofthe Securities Exchange Act of 1934 (the “Exchange Act”) are those controls andother 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 and operationof our disclosure controls and procedures with the participation of ourprincipal executive and principal financial officers.  Our President and Chief Executive Officer andour Senior Vice President and Chief Financial Officer were not with us duringfiscal year 2007.  Based on their currentobservations combined with observations by the disclosure committee, which iscomprised of members of management, members of the audit committee and externalcounsel, management concluded that our disclosure controls and procedures wereineffective as of July 29, 2006, in providing reasonable assurancethat material information requiring disclosure was brought to management’sattention on a timely basis and that our financial reporting was reliable.

 

**Change inour Internal Control Over Financial Reporting**

 

Management did notconduct an annual evaluation of the effectiveness of our internal control overfinancial reporting as of January 28, 2006.  In May 2007, we hired an outsideconsulting firm to assist management in its evaluation of the effectiveness ofour internal controls over financial reporting, including disclosure controlsand procedures.  They have sincedetermined they will use the framework established in “InternalControl-Integrated Framework”, issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

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**PART II – OTHER INFORMATION**

 

**ITEM 1.        LEGAL PROCEEDINGS**

 

There have been nomaterial changes to the legal proceedings disclosed in the Company’s AnnualReport on Form 10-K for the fiscal year ended February 2, 2008.

 

**ITEM 1A.     RISKFACTORS**

 

There have been nomaterial changes to the risk factors disclosed in the Company’s Annual Reporton Form 10-K for the fiscal year ended February 2, 2008.

 

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

 

No matter was submitted to avote of security holders during the quarter ended July 29, 2006.

 

**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 the requirements of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

**THE PENN TRAFFIC COMPANY**

 
| Date:  May 14, 2008 | By:                                                       | /s/  Gregory J. Young |
|---------------------|-----------------------------------------------------------|-----------------------|
|                | Name:  Gregory J. Young                                   |
|                | Title:  Chief Executive Officer and President             |
|                |                                                      |
|                |                                                      |
| Date:  May 14, 2008 | By:                                                       | /s/  Tod A. Nestor    |
|                | Name:  Tod A. Nestor                                      |
|                | Title:  Senior Vice President and Chief Financial Officer |

 

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