** **

**UNITEDSTATES**

**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 30, 2005**

 

**OR**

 

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

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the Transition Periodfrom                        to                     **

 

**Commission file number: 0-8858**

 

**THE PENN TRAFFIC COMPANY**

(Exact name of registrant 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) |

 
| Securities  registered pursuant to Section 12(b) of the Act:  **None** |                              |   |
|---------------------------------------------------------------------------------------|-----------------------------------|--------|
|                                                                                  |                              |   |
| Securities  registered pursuant to Section 12(g) of the Act:                | **Common  Stock, $.01 par value** |
|                                                                                       |                                   |        |  |

 

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 registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company.  See thedefinitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

 

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

 

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

** **

 

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**FORM 10-Q INDEX**

 
| ** **        | ** **                 | ** **                                                                                  | **PAGE** |
|-------------------|----------------------------|---------------------------------------------------------------------------------------------|----------|
| **PART I.**  | **FINANCIAL  INFORMATION** |                                                                                        |
|              |                       |                                                                                        |     |
| Item              | 1.                         | Financial Statements                                                                        | 4        |
|              |                       |                                                                                        |     |
| Item              | 2.                         | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 16       |
|              |                       |                                                                                        |     |
| Item              | 3.                         | Quantitative and Qualitative Disclosures  About Market Risk                                 | 21       |
|              |                       |                                                                                        |     |
| Item              | 4.                         | Controls and Procedures                                                                     | 21       |
|              |                       |                                                                                        |     |
| **PART II.** | **OTHER INFORMATION**      |                                                                                        |
|              |                       |                                                                                        |     |
| Item              | 1.                         | Legal Proceedings                                                                           | 22       |
|              |                       |                                                                                        |     |
| Item              | 1A.                        | Risk Factors                                                                                | 22       |
|              |                       |                                                                                        |     |
| Item              | 6.                         | Exhibits                                                                                    | 23       |
|                   |                            |                                                                                             |          |  |  |  |

 

2

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**SPECIAL NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

Certain statements included in this Form 10-Q, including withoutlimitation, statements included in Item 2 - “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” which are notstatements of historical fact, are intended to be, and are hereby identifiedas, “forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995, as amended, reflecting management’s currentanalysis and expectations, based on what management believes to be reasonableassumptions.  These forward-lookingstatements include statements relating to our anticipated financial performanceand business prospects.  Statementspreceded by, followed by or that include words such as “believe,” “anticipate,”“estimate,” “expect,” “could,” and other similar expressions are to beconsidered such forward-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.

 

**EXPLANATORYNOTE**

 

ThisQuarterly Report on Form 10-Q is for the period beginning May 1, 2005and ending July 30, 2005 and, except as expressly indicated otherwise,information in this report speaks as of such date.  As discussed further in this report, weemerged from Chapter 11 bankruptcy reorganization effective April 13,2005.  Although April 13, 2005 wasthe effective date of the Plan, the Company chose April 16, 2005 asthe effective date for accounting purposes to adopt fresh-start reportingbecause of the proximity of that date to the end of an accounting period.  Applying fresh-start reporting as of April 16, 2005rather than the actual effective date of April 13, 2005 did not have amaterial effect on the financial condition or results of operations of theCompany.

 

3

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**PART I**

**ITEM 1.          FinancialStatements**

 

The PennTraffic Company

Condensed Consolidated Balance Sheets

As of July 30, 2005 and April 16,2005

(In thousands, except share and per sharedata)

(unaudited)

 
| ** **                                                                                               | ** ** | **July 30,** | ** ** | **April 16,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                               | ** ** | **2005**          | ** ** | **2005**           | ** ** |
|                                                                                                     |       |              |       | **(Note 1)**       |       |
| ** **                                                                                               |       |              |       |               |       |
| **ASSETS**                                                                                               |       |              |       |               |       |
|                                                                                                     |       |              |       |               |       |
| **Current Assets:**                                                                                      |       |              |       |               |       |
| Cash                                                                                                     |       | $                 | 34,093     |               | $          | 29,304 |   |
| Accounts and notes receivable (less  allowance for doubtful accounts of $3,186 and $3,243, respectively) |       | 33,475            |       | 40,416             |       |
| Inventories                                                                                              |       | 111,652           |       | 116,518            |       |
| Prepaid expenses and other current assets                                                                |       | 7,100             |       | 11,433             |       |
|                                                                                                     |       | 186,320           |       | 197,671            |       |
|                                                                                                     |       |              |       |               |       |
| **Capital Leases, net**                                                                                  |       | 11,639            |       | 12,023             |       |
|                                                                                                     |       |              |       |               |       |
| **Fixed Assets, net**                                                                                    |       | 98,590            |       | 103,406            |       |
|                                                                                                     |       |              |       |               |       |
| **Other Assets:**                                                                                        |       |              |       |               |       |
| Intangible assets                                                                                        |       | 38,330            |       | 39,612             |       |
| Other assets                                                                                             |       | 6,087             |       | 6,845              |       |
|                                                                                                     |       | 44,417            |       | 46,457             |       |
|                                                                                                     |       |              |       |               |       |
| **Total Assets**                                                                                         |       | $                 | 340,966    |               | $          | 359,557 |   |

 

Theaccompanying notes are an integral part of these statements.

 

4

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| ** **                                                                                                            | ** ** | **July 30,** | ** ** | **April 16,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                                            | ** ** | **2005**          | ** ** | **2005**           | ** ** |
|                                                                                                                  |       |              |       | **(Note 1)**       |       |
|                                                                                                                  |       |              |       |               |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                        |       |              |       |               |       |
|                                                                                                                  |       |              |       |               |       |
| **Current Liabilities:**                                                                                              |       |              |       |               |       |
| Current portion of obligations under  capital leases                                                                  |       | $                 | 1,235      |               | $          | 1,200 |   |
| Current maturities of long-term debt                                                                                  |       | 250               |       | 254                |       |
| Accounts payable                                                                                                      |       | 40,311            |       | 35,075             |       |
| Other current liabilities                                                                                             |       | 48,082            |       | 58,576             |       |
| Accrued interest expense                                                                                              |       | 552               |       | 554                |       |
| Deferred income taxes                                                                                                 |       | 7,965             |       | 8,857              |       |
| Liabilities subject to compromise (Note 4)                                                                            |       | 3,253             |       | 8,497              |       |
|                                                                                                                  |       | 101,648           |       | 113,013            |       |
|                                                                                                                  |       |              |       |               |       |
| **Non-current Liabilities:**                                                                                          |       |              |       |               |       |
| Obligations under capital leases                                                                                      |       | 13,103            |       | 13,425             |       |
| Long-term debt                                                                                                        |       | 37,393            |       | 37,967             |       |
| Deferred income taxes                                                                                                 |       | 4,483             |       | 5,142              |       |
| Defined benefit  pension plan liability (Note 5)                                                                      |       | 39,684            |       | 39,959             |       |
| Other non-current  liabilities                                                                                        |       | 31,157            |       | 31,473             |       |
|                                                                                                                  |       | 125,820           |       | 127,966            |       |
|                                                                                                                  |       |              |       |               |       |
| **Total Liabilities**                                                                                                 |       | 227,468           |       | 240,979            |       |
|                                                                                                                  |       |              |       |               |       |
| **Commitments and Contingencies (Notes 4 and  6)**                                                                    |       |              |       |               |       |
|                                                                                                                  |       |              |       |               |       |
| **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                                                                                                               |       | (5,080            | )          | —             |       |
| **Total stockholders’ equity**                                                                                   |       | 113,498           |       | 118,578            |       |
|                                                                                                                  |       |              |       |               |       |
| **Total Liabilities and Stockholders’ Equity**                                                                   |       | $                 | 340,966    |               | $          | 359,557 |   |

 

Theaccompanying notes are an integral part of these statements.

 

5

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The Penn Traffic Company

Condensed Consolidated Statement ofOperations

For the three months ended July 30, 2005

And the Period from April 17, 2005 to July 30,2005

(In thousands, except share and per sharedata)

(unaudited)

 
| ** **                                      | ** ** | **Three**                   | ** ** | **Period from**                | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **Months Ended**       | ** ** | **April 17, 2005**        | ** ** |
| ** **                                      | ** ** | **July 30, 2005** | ** ** | **to July 30, 2005** | ** ** |
|                                            |       |                        |       |                                |       |
| **Revenues**                                    |       | $                           | 331,329    |                                | $          | 377,394 |   |
|                                            |       |                        |       |                                |       |
| **Cost and Operating Expenses:**                |       |                        |       |                                |       |
| Cost of sales                                   |       | 247,363                     |       | 283,317                             |       |
| Selling and administrative expenses             |       | 86,630                      |       | 97,554                              |       |
|                                            |       |                        |       |                                |       |
| **Operating Loss**                              |       | (2,664                      | )          | (3,477                              | )          |
|                                            |       |                        |       |                                |       |
| Interest expense                                |       | 2,550                       |       | 2,805                               |       |
|                                            |       |                        |       |                                |       |
| **Loss Before Income Taxes**                    |       | (5,214                      | )          | (6,282                              | )          |
|                                            |       |                        |       |                                |       |
| Income tax benefit                              |       | (1,012                      | )          | (1,202                              | )          |
|                                            |       |                        |       |                                |       |
| **Net Loss**                                    |       | $                           | (4,202     | )                                   | $          | (5,080 | ) |
|                                            |       |                        |       |                                |       |
| Shares  outstanding and to be issued            |       | 8,498,752                   |       | 8,498,752                           |       |
|                                            |       |                        |       |                                |       |
| **Loss Per Share (Basic and Diluted) (Note 3)** |       | $                           | (0.49      | )                                   | $          | (0.60 | ) |

 

The accompanying notes are an integral part of these statements.

 

6

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The Penn Traffic Company

Condensed Consolidated Statement of CashFlows

For the Period from April 17, 2005 to July 30,2005

(In thousands)

(unaudited)

 
| **Operating Activities:**                                                        |   |   |   |
|----------------------------------------------------------------------------------|--------|--------|--------|
| Net loss                                                                         |   | $      | (5,080 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |   |   |   |
| Depreciation and amortization                                                    |   | 7,084  |   |
| Deferred income taxes                                                            |   | (1,551 | )      |
| Amortization of deferred financing cost                                          |   | 702    |   |
|                                                                             |   |   |   |
| **Net change in operating assets and  liabilities:**                             |   |   |   |
| Accounts and notes receivable, net                                               |   | 6,941  |   |
| Prepaid expenses and other current assets                                        |   | 4,333  |   |
| Inventories                                                                      |   | 4,866  |   |
| Liabilities subject to compromise                                                |   | (5,244 | )      |
| Accounts payable and other current  liabilities                                  |   | (5,260 | )      |
| Other assets                                                                     |   | 55     |   |
| Defined benefit pension plan                                                     |   | (275   | )      |
| Other non-current liabilities                                                    |   | 303    |   |
|                                                                             |   |   |   |
| **Net Cash Provided by Operating Activities**                                    |   | 6,874  |   |
|                                                                             |   |   |   |
| **Investing Activities:**                                                        |   |   |   |
| Capital expenditures                                                             |   | (1,220 | )      |
|                                                                             |   |   |   |
| **Net Cash Used in Investing Activities**                                        |   | (1,220 | )      |
|                                                                             |   |   |   |
| **Financing Activities:**                                                        |   |   |   |
| Payments of mortgages                                                            |   | (78    | )      |
| Net repayments  under revolving credit facility                                  |   | (500   | )      |
| Reduction in  capital lease obligations                                          |   | (287   | )      |
|                                                                             |   |   |   |
| **Net Cash Used In Financing Activities**                                        |   | (865   | )      |
|                                                                             |   |   |   |
| **Net increase in cash**                                                         |   | 4,789  |   |
|                                                                             |   |   |   |
| **Cash at the beginning of period**                                              |   | 29,304 |   |
|                                                                             |   |   |   |
| **Cash at end of period**                                                        |   | $      | 34,093 |   |

 

The accompanying notes are an integral part of these statements.

 

7

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The Penn Traffic Company

Condensed Consolidated Statement ofStockholders’ Equity

For the Period from April 17, 2005 to July 30,2005

(In thousands)

(unaudited)

 
| ** **                                                           | ** ** | **Common  Stock** | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Deficit** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|----------------------------------------------------------------------|------------|-------------------|------------|-----------------------------------------------------|------------|-------------|------------|---------------------------------------|------------|
|                                                                 |       |              |       |                                                |       |        |       |                                  |       |
| Common stock to be issued in connection  with plan of reorganization |       | $                 | 85         |                                                | $          | 118,493     |       | $                                     | 0          |   | $ | 118,578 |   |
|                                                                 |       |              |       |                                                |       |        |       |                                  |       |
| Net loss for the period ended July 30,  2005                    |       |              |       |                                                |       | (5,080      | )          | (5,080                                | )          |
|                                                                 |       |              |       |                                                |       |        |       |                                  |       |
| Balance at July 30, 2005                                        |       | $                 | 85         |                                                | $          | 118,493     |       | $                                     | (5,080     | ) | $ | 113,498 |   |

 

8

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The Penn Traffic Company

Notes to Condensed Consolidated Financial Statements

 

**Note 1 – Basis of Presentation**

 

The accompanying unauditedcondensed consolidated financial statements of The Penn Traffic Company andsubsidiaries (the “Company”) have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they donot include all the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements.

 

In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.  Operating results for the interim periodending July 30, 2005 are not necessarily an indication of results that maybe expected for the fiscal year ended January 28, 2006.  For further information, refer to the auditedconsolidated financial statement and footnotes thereto included in the Company’sannual report on Form 10-K for the fiscal year ended January 28,2006.

 

The balance sheet as of April 16,2005 has been derived from the audited consolidated financial statements as ofsuch date, but does not include all of the information and footnotes requiredby accounting principles generally accepted in the United States of America forcomplete financial statements.

 

The Company’s fiscal yearends on the Saturday closest to January 31.  Fiscal year 2006 is the 41-week period from April 17,2005, the commencement of fresh-start reporting (see Note 2), to January 28,2006.  The information presented in thisquarterly report on Form 10-Q is for the quarter beginning May 1,2005 and ending July 30, 2005.

 

All significant intercompanytransactions and accounts have been eliminated in consolidation.

 

**Note 2 – Voluntary Bankruptcy Filing andReorganization**

 

On May 30, 2003, The Penn Traffic Company and all of itssubsidiaries filed voluntary petitions under Chapter 11 of the UnitedStates Bankruptcy Code in the United States Bankruptcy Court for the SouthernDistrict of New York.  The filing wasmade in response to pending defaults under the Company’s then-existing loanagreements and a lack of liquidity to continue operations.  Under Chapter 11, the Company continuedto operate its businesses as debtor-in-possession under court protection fromits creditors and claimants, while using the Chapter 11 process tosubstantially reduce its debt obligations and implement a plan ofreorganization.

 

On February 2, 2005, the Company filed the First Amended JointPlan of Reorganization (the “Plan”) with the bankruptcy court.  The Plan was confirmed on March 17, 2005and became 

 

9

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effective on April 13, 2005 (the “Effective Date”).

 

Pursuant to the terms of the Plan, the following transactions occurredon or around the Effective Date:

 

1.       TheCompany entered into new credit agreements providing for borrowings of up to$164 million.  Proceeds from thesenew credit agreements provided funds sufficient to repay a debtor-in-possessioncredit facility and all administrative and priority claims to the extent providedfor in the Plan.

 

2.       TheCompany sold and leased back its five owned distribution facilities for a salesprice of approximately $37 million.

 

3.       Allshares of common stock and all stock options and warrants outstanding prior tothe confirmation of the Plan were cancelled and the holders of such equitysecurities received no distributions under the Plan.

 

4.       Thereorganized Company was authorized to issue new shares of common stock tounsecured creditors, which included holders of $100 million of seniornotes, a claim by the Pension Benefit Guaranty Corporation (“PBGC”) of$60 million and trade claims, all of whom were eligible to receive prorata distributions of new shares of common stock and the right to share inpotential proceeds from certain causes of action.

 

The accompanying condensed consolidated financial statements as of April 16,2005 and July 30, 2005, and for the fiscal period from April 17, 2005to July 30, 2005, have been prepared in accordance with the provisions ofStatement of Position 90-7 “Financial Reporting by Entities in ReorganizationUnder the Bankruptcy Code” (“SOP 90-7”) issued by the American Institute ofCertified Public Accountants.  Pursuantto the provisions of SOP 90-7, upon emergence from Chapter 11 proceedings, theCompany adopted fresh-start reporting which resulted in a new reporting entityand a new basis of accounting.

 

Although April 13, 2005 was the effective date of the Plan, theCompany chose April 16, 2005 as the effective date for accountingpurposes to adopt fresh-start reporting because of the proximity of that dateto the end of an accounting period. Applying fresh-start reporting as of April 16, 2005 ratherthan the actual effective date of April 13, 2005 did not have a materialeffect on the financial condition or results of operations of the Company.

 

The reorganization value of the Company upon emergence from the Chapter11 proceedings was approximately $195 million.  The reorganization value represents the debtand equity value of the Company as of the effective date.  Such value, which was determined with theassistance of the Company’s financial advisors, was based upon variousvaluation methods, including discounted cash flow methodologies and analysis ofcomparable companies.  The equity valueof the Company upon reorganization amounting to approximately$118 million, was determined after taking into account approximately$77 million of debt, consisting of long-term debt, obligations undercapital leases and defined benefit pension plan liabilities, net of relateddeferred taxes.  In accordance withfresh-start reporting, all assets and liabilities were recorded at theirrespective fair values.  The fair valuesof the Company’s long-lived assets were determined, in part, using informationprovided by third-party appraisers.  Theexcess of the aggregate fair 

 

10

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value of the Company’s tangible and identifiable intangible assets lessnon-interest bearing liabilities over the total reorganization value ofapproximately $31.7 million has been recorded as a pro rata reduction ofnon-current assets.

 

**Note 3 – Per Share Data**

 

Basic and diluted net loss per share is basedon the number of common shares issued and estimated to be issued pursuant tothe Plan.  Common shares issued andestimated to be issued in settlement of claims filed in the Company’s Chapter11 proceeding are treated as outstanding as of the effective date of thePlan.  At July 30, 2005, 201,055common shares are estimated to be issued in connection with the settlement ofremaining claims.

 

**Note 4 – Liabilities Subject to Compromise**

 

In connection with the Chapter 11 proceeding,there are two pending matters involving claims for the payment of money or thetransfer of property.  In one matter, theOhio Bureau of Workers’ Compensation (“OBWC”) has filed priority andadministrative claims aggregating $13.4 million for pre-petition unpaidworkers’ compensation premiums and for reserves to pay future claims arisingfrom existing injuries.  The OBWC hasalso filed claims aggregating $1.8 million for alleged non-payment ofpost-petition premiums and for reserves to pay future claims arising fromexisting injuries.  The Company disputesthe amounts of the claims, and is attempting to negotiate a settlement.

 

In another matter, a claimant has filed a priorityclaim allegedly arising under an agreement for a sale-leaseback transactionseeking either damages of $2.2 million or specific performance of theagreement.  The Company disputes themerits of the claim and is defending against it.

 

During the period ended July 30, 2005, the Company paid$5.2 million in settlement of disputed claims.  The Company has established liabilities forthe estimated cash payments required to settle the remaining claims outstandingin the Chapter 11 proceedings.  Estimatedshares of common stock to be issued in settlement of claims have been accountedfor as stockholders’ equity.

 

11

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**Note 5 – Pension Plans**

 

The Company has four noncontributory defined benefit pension plans coveringcertain union personnel.  The Company’spolicy is to fund pension benefits to the extent contributions are deductiblefor tax purposes and in compliance with federal laws and regulations.

 

The components of net periodic benefit cost for the quarter ended July 30,2005 and the period from April 17, 2005 to July 30, 2005 is asfollows (in thousands):

 
| ** **                     | ** ** | **Three**                   | ** ** | **Period from**                | ** ** |
|--------------------------------|------------|-----------------------------|------------|-------------------------------------|------------|
| ** **                     | ** ** | **Months Ended**       | ** ** | **April 17, 2005**        | ** ** |
| ** **                     | ** ** | **July 30, 2005** | ** ** | **to July 30, 2005** | ** ** |
|                           |       |                        |       |                                |       |
| Service cost                   |       | $                           | 465        |                                | $          | 537 |   |
| Interest cost                  |       | 1,381                       |       | 1,594                               |       |
| Expected return on plan assets |       | (1,261                      | )          | (1,456                              | )          |
|                           |       |                        |       |                                |       |
|                           |       | $                           | 585        |                                | $          | 675 |   |

 

For the period from April 17, 2005 to July 30, 2005, theCompany contributed $0.6 million to the four defined benefit pensionplans.

 

**Note 6 – Commitments and Contingencies**

 

The United States Attorney for the Northern District of New York andthe Securities and Exchange Commission have been conducting investigationsrelating to the Company’s promotional allowance practices and policies.  Such investigations began prior to theCompany’s emergence from bankruptcy in April 2005.  The Company has been cooperating with theseinvestigations and has produced documents and made Company employees availablefor interviews as requested.  The Companyunderstands that these investigations are ongoing.

 

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

 

On September 17, 2007, the SEC filed civil fraud charges againstthe Company’s former Chief Marketing Officer and former Vice-President,Non-Perishables Marketing alleging that such individuals orchestrated a schemeto inflate the Company’s income and other financial results by prematurelyrecognizing promotional allowances received from vendors from approximately the

 

12

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second quarter of fiscal year 2001 through at least the fourth quarterof fiscal year 2003. The complaint further alleges that the individualsdeceived the Company’s accounting personnel to carry out their fraudulentscheme and aided and abetted violations of the Securities Exchange Act of 1934and rules thereunder. In addition, on the same date, the United StatesAttorney for the Northern District of New York announced that a federal grandjury has returned an indictment against the abovementioned individuals onrelated criminal charges. Both the SEC and the United States Attorney indicatedthat their investigations are continuing.

 

In connection with these matters, the Companycould be subject to damage claims, fines or penalties.  At present, the Company is unable to estimatethe likelihood of an unfavorable outcome or the amount of any damage claims,fines or penalties in the event of an unfavorable outcome and, accordingly, noliability has been recorded for this contingency.

 

**Note 7 – Segment Information**

 

The Company operates in two segments – the retail food business and thewholesale food distribution business. The retail food business consists of supermarkets which the Companyoperates.  The wholesale food distributionbusiness supplies independent supermarkets and other independent wholesaleaccounts with food, related products, and other services.  The Company has allocated warehouse andtransportation costs based on each segment’s percentage of total shipments.

 

The table below presents information with respect to operating segmentsas well as reconciliations to consolidated information (in thousands) for the13-week period ended July 30, 2005.

 
| ** **                                             | ** ** | **Period from May 1, 2005 to 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                          |       | (5,252                                                                               | )          | (326 | ) | (315 | ) | (5,893 | ) |
| Operating income (loss)                                |       | $                                                                                    | 4,115      |   | $ | 890 |   | $ | (7,669 | ) | (2,664 | ) |
| Interest expense                                       |       |                                                                                 |       |   |   |   |   | (2,550 | ) |
|                                                   |       |                                                                                 |       |   |   |   |   |   |   |
| Consolidated loss before income taxes                  |       |                                                                                 |       |   |   |   |   | $ | (5,214 | ) |

 

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(1)       Consists principally ofapproximately $4.0 million for bakery sales principally to customers otherthan those of the retail and wholesale segments and approximately$1.7 million for trucking revenues.

 

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(2)       Consists principally ofapproximately $3.6 million for bakery sales and approximately$0.5 million increase in cost of sales to reconcile segment inventories onFIFO to consolidated inventories on LIFO.

 

(3)       Consists principally ofapproximately $7.0 million of payroll, benefits, and payroll taxesassociated with the administrative staff and approximately $0.9 million ofcontract hauling costs associated with trucking revenue.

 

(4)       Excludes depreciation andamortization of $1.0 million for cost of sales and $4.9 million forselling and administrative expenses.

 

The table below presents information with respect to operating segmentsas well as reconciliations to consolidated information (in thousands) for the15-week period ended July 30, 2005.

 
| ** **                                                    | ** ** | **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                                                 |       | (217,337                                                                                | )          | (59,904 | ) | (4,912 | )(2) | (282,153 | )(4) |
| Selling and administrative expense                            |       | (78,375                                                                                 | )          | (2,757 | ) | (10,501 | )(3) | (91,633 | )(4) |
|                                                          |       |                                                                                    |       |   |   |   |   |   |   |
| Operating income before depreciation and  amortization        |       | 10,838                                                                                  |       | 1,137 |   | (8,367 | ) | 3,608 |   |
|                                                          |       |                                                                                    |       |   |   |   |   |   |   |
| Depreciation and amortization                                 |       | (6,380                                                                                  | )          | (387 | ) | (318 | ) | (7,085 | ) |
| Operating income (loss)                                       |       | $                                                                                       | 4,458      |   | $ | 750 |   | $ | (8,685 | ) | (3,477 | ) |
| Interest expense                                              |       |                                                                                    |       |   |   |   |   | (2,805 | ) |
|                                                          |       |                                                                                    |       |   |   |   |   |   |   |
| Consolidated loss before income taxes                         |       |                                                                                    |       |   |   |   |   | $ | (6,282 | ) |
|                                                          |       |                                                                                    |       |   |   |   |   |   |   |
| Total assets as of July 30, 2005                         |       | $                                                                                       | 300,504    | (5) | $ | 24,633 |   | $ | 15,829 |   | $ | 340,966 |   |
|                                                          |       |                                                                                    |       |   |   |   |   |   |   |
| Capital expenditures for the period ended  July 30, 2005 |       | $                                                                                       | 988        |   | $ | — |   | $ | 232 |   | $ | 1,220 |   |

 

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| (1)    |   | Consists principally of approximately $4.4 million for bakery  sales to customers other than those of the retail and wholesale segments and  approximately $1.7 million for trucking revenues.                                    |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                        |
| (2)    |   | Consists principally of approximately $4.0 million for bakery  sales and approximately $0.5 million increase in cost of sales to  reconcile segment inventories on FIFO to consolidated inventories on LIFO.                      |
|   |   |                                                                                                                                                                                                                                        |
| (3)    |   | Consists principally of approximately $8.0 million of payroll,  benefits, and payroll taxes associated with the administrative staff and  approximately $0.9 million of contract hauling costs associated with  trucking revenue. |

 

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(4)       Excludes depreciation andamortization of $1.2 million for cost of sales and $5.9 million forselling and administrative expenses.

 

(5)       The warehouse andtransportation assets have been allocated using the same methodology as thatwhich was used for the warehouse and transportation costs.

 

(6)       Consists principally offixed assets and inventory of the bakery operation and general corporateassets.

 

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**ITEM 2.****         ****Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Overview**

 

Asdiscussed in Note 2 to the accompanying unaudited condensed consolidatedfinancial statements, we emerged from Chapter 11 proceedings on April 13,2005.  For financial reporting purposes,we accounted for the consummation of our plan of reorganization as of the closeof business on April 16, 2005. In accordance with SOP 90-7, we have applied fresh-start reporting as ofthe close of business on April 16, 2005, which has resulted insignificant changes to the valuation of certain of our assets and liabilities,and to 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.

 

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**Results of Operations**

 

Thefollowing table sets forth certain Consolidated Statement of Operationscomponents expressed as percentages of revenues for the 13-week period ended July 30,2005 and the 15-week period ended July 30, 2005.

 
| ** **                          | ** ** | **13-Weeks**                | ** ** | **15-Weeks**                | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** |
| ** **                          | ** ** | **July 30, 2005** | ** ** | **July 30, 2005** | ** ** |
| ** **                          | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Revenues                            |       | 100.0                       | %          | 100.0                       | %          |
| ** **                          | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Gross profit (1)                    |       | 25.3                        |       | 24.9                        |       |
|                                |       |                        |       |                        |       |
| Selling and administrative expenses |       | 26.1                        |       | 25.8                        |       |
|                                |       |                        |       |                        |       |
| Operating loss                      |       | (0.8                        | )          | (0.9                        | )          |
|                                |       |                        |       |                        |       |
| Interest expense                    |       | 0.8                         |       | 0.7                         |       |
|                                |       |                        |       |                        |       |
| Income tax benefit                  |       | (0.3                        | )          | (0.3                        | )          |
|                                |       |                        |       |                        |       |
| Net loss                            |       | (1.3                        | )          | (1.3                        | )          |

 

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(1)           Revenues less cost ofsales.

 

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**Analysis of the 13 and 15 week periods ended July 30,2005**

 

**Revenues**

 

Revenuesfor the 13-week period ended July 30, 2005 and the 15-week period ended July 30, 2005were $331.3 million and $377.4 million, respectively.

 

Retailfood revenues were $269.1 million for the 13-week period ended July 30,2005 and $306.6 million for the 15-week period ended July 30, 2005.

 

Wholesalefood distribution revenues were $56.0 million for the 13-week period endedJuly 30, 2005 and $63.8 million for the 15-week period ended July 30,2005.

 

**Gross Profit**

 

Gross profit was $84.0 million, 25.3% of revenues for the 13-weekperiod ended July 30, 2005 and $94.1 million or 24.9% of revenues for the15-week period ended July 30, 2005.

 

**Selling and Administrative Expenses**

 

Selling and administrative expenses for the 13-week period ended July 30,2005 were $86.6 million, or 26.1% of revenues and the selling andadministrative expenses for the 15-week period ended July 30, 2005 were$97.6 million, or 25.8% of revenues.

 

**Depreciation and Amortization**

 

Depreciationand amortization expense was $5.9 million, or 1.8% of revenues for the13-week period ended July 30, 2005 and $7.1 million, or 1.9% ofrevenues for the 15-week period ended July 30, 2005.  Depreciation and amortization expense is higherin this period and is expected to be higher in future periods primarily due tothe shortening of asset life for our property, equipment and machinery, anincrease in carrying value of favorable leases, and the addition of two newintangible assets (Pharmacy Scripts and Software) with the implementation offresh-start reporting.  The increase indepreciation and amortization expense was partially offset by the amortizationof unfavorable leases associated with the implementation of fresh-startreporting.

 

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**OperatingIncome (Loss)**

 

Operatingloss for the 13-week period ended July 30, 2005 was $2.7 million, or0.8% of revenues, and for the 15-week period ended July 30, 2005 operatingloss was $3.5 million, or 0.9% of revenues.

 

**InterestExpense**

 

Interestexpense for the 13-week period ended July 30, 2005 was $2.6 million,or 0.8% of revenues, and for the 15-week period ended July 30, 2005interest expense was $2.8 million, or 0.7% of revenues.

 

**IncomeTax Benefit**

 

Incometax benefit for the 13-week period ended July 30, 2005 was $1.0 million or0.3% of revenues.  Income tax benefit forthe 15-week period ended July 30, 2005 was $1.2 million or 0.3%.  Current taxes consist of minimal state taxesand capital/franchise tax.

 

The Company had an effective income tax (benefit) rate of (19.4%) forthe 13-week period ended July 30, 2005 and (19.1%) for the 15-week periodending July 30, 2005. Differences in the effective income tax rate from the statutory federalincome tax rate arise primarily from state taxes net of federal benefits andnondeductible expenses.

 

We believe prior net operating loss carryforwards are entirelyeliminated effective January 29, 2006 principally as a result ofcancellation of debt in the Chapter 11 proceedings. We also estimate thatthe Company lost a portion of the tax basis of its long-lived assets, reducingthe amount of tax depreciation and amortization that the Company will be ableto utilize on its future tax returns.

 

**Net Loss**

 

Netloss for the 13-week period ended July 30, 2005 was $4.2 million.  Net loss for the 15-week period ended July 30,2005 was $5.1 million.

 

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**Liquidity and Capital Resources**

 

OnApril 16, 2005, upon emergence from Chapter 11 proceedings, we enteredinto a revolving credit and term loan facility with a group of financialinstitutions providing for a $130.0 million revolving credit facility anda $6.0 million term loan.  Also on April 16,2005, we entered into a supplemental real estate credit facility with anothergroup of lenders, providing for term loan borrowings of up to$28.0 million.  Availability underboth credit facilities is dependent on levels of accounts receivable, inventoryand certain other assets.  Interest rateson borrowings under the revolving credit facility vary depending upon theamount of availability.  At July 30,2005, outstanding borrowings under both facilities aggregated $33 millionand outstanding letters of credit under the revolving credit facility amountedto approximately $53 million.  Atsuch date, availability in excess of outstanding borrowings and letters ofcredit was approximately $66 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 the period, wehad stand-by letters of credit of approximately $53 million.  Many of these stand-by letters of credit wererequired upon emergence from bankruptcy and as a result of our inability tofile financial statements.

 

Provisionsof both credit facilities, among other things, require the maintenance ofcertain financial covenants (when availability under the credit facilities isless than $35.0 million for four consecutive days or less than$30.0 million for any one day), and limit the amount of capital expenditures,our assumption of additional debt and our payment of dividends.  At no time through July 30, 2005 have webeen subject to compliance with these financial covenants.  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 30, 2005.  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.

 

OnDecember 26, 2006, August 1, 2007 and January 30, 2008, both therevolving credit and term loan facility and the supplemental real estate creditfacility were amended to permit the disposal of assets in connection with theclosing of certain stores.

 

Wealso have $4.6 million of borrowings under mortgages secured by the relatedproperties as of July 30, 2005.

 

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**ITEM 3.****         ****QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

 

Ourfinancial results are subject to risk from interest rate changes on debt thathas variable interest rates. Total variable rate debt outstanding under ourloan agreements at July 30, 2005 was $33.0 million with a weightedaverage interest rate of 8.62%.  A1% change in interest rates would impact pre-tax income by$0.3 million based on the debt outstanding at July 30, 2005.  In addition to the variable rate debt we had$4.6 million of fixed rate debt outstanding at July 30, 2005with a weighted average interest rate of 7.82%. We view the fixed rate debt as a partial hedge against interest ratefluctuations which should minimize the potential impact on earnings frominterest rate changes.

 

**ITEM 4.****         ****CONTROLS AND PROCEDURES**

 

Disclosurecontrols and procedures under Rule 13a-15(e) of the SecuritiesExchange Act of 1934 (the “Securities Act”) are those controls and otherprocedures of a company that are designed to ensure that information requiredto be disclosed by the company in the reports that it files or submits underthe Exchange Act is recorded, processed, summarized and reported, within thetime 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 the Exchange Act, ourmanagement evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures as of July 30, 2005 with theparticipation of our principal executive and principal financial officers.  Our current President and Chief ExecutiveOfficer has been employed by us since July 2006 but did not become ourPresident and Chief Executive Officer until October 2007.  Our Senior Vice President and Chief FinancialOfficer were not with us during fiscal year 2007. Based on their observations,combined with observations by members of management, members of the auditcommittee and external counsel, management concluded that our disclosurecontrols and procedures were ineffective as of July 30, 2005 in providingreasonable assurance that material information requiring disclosure was broughtto management’s attention on a timely basis and that our financial reportingwas reliable.

 

**Changein our Internal Control Over Financial Reporting**

 

Managementdid not conduct an evaluation of the effectiveness of our internal control overfinancial reporting as of April 16, 2005.

 

InMay 2007, we hired an outside consulting firm to assist management in itsevaluation of the effectiveness of our internal controls over financialreporting, including disclosure controls and procedures.  We have since determined that we will use theframework established in “Internal Control-Integrated Framework”, issued by theCommittee of Sponsoring Organizations of the Treadway Commission.

 

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**PART II — OTHER INFORMATION**

 

**ITEM 1.****         ****LEGAL PROCEEDINGS**

 

There have been no changes to the legal proceedings disclosed in the Company’s Annual Report on Form 10-K for the year ended February 3, 2007.

 

**ITEM 1A.****      ****RISKFACTORS**

 

There have been no changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended February 3, 2007.

 

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## **ITEM 6.**          EXHIBITS

## ** **

**Exhibits:**

 

Thefollowing are filed as 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**

** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

**THE PENN TRAFFIC COMPANY**

 
| Date:  April 8, 2008 | By:                                           | /s/  Gregory J. Young |
|---------------------------|-----------------------------------------------|-----------------------|
|                      | Name:  Gregory J. Young                       |
|                      | Title:  Chief Executive Officer and President |

 

 
| Date:  April 8, 2008 | By:                                                       | /s/  Tod A. Nestor |
|---------------------------|-----------------------------------------------------------|--------------------|
|                      | Name:  Tod A. Nestor                                      |
|                      | Title:  Senior Vice President and Chief Financial Officer |

 

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