**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 November 3, 2007**

 

**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**                     |
| (Address of principal executive offices)      |       | (Zip Code)                         |

** **

**(315)453-7284**

(Registrant’s telephone number,including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.YES 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  (Do not check if a smaller reporting company) |   | Smaller reporting  company o |

 

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 22, 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                                 | 21       |
|              |   |   |                                                                                        |     |
| Item              | 4.     |   | Controls and  Procedures                                                                    | 21       |
|              |   |   |                                                                                        |     |
| **PART II.** |   |   |                                                                                        |     |
|              |   |   |                                                                                        |     |
| Item              | 1.     |   | Legal Proceedings                                                                           | 22       |
|              |   |   |                                                                                        |     |
| Item              | 1A.    |   | Risk Factors                                                                                | 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-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 the risks set forth in Item 1A – “Risk Factors” in our Annual Report on Form 10-Kfor the fiscal year ended February 2, 2008; our ability to improveoperating performance and effectuate business plans; our ability to operatepursuant to the terms of our credit facilities and to comply with the terms ofour lending agreements or to amend or modify the terms of such agreements asmay be needed from time to time; our ability to generate cash; our ability toattract and maintain adequate capital; our ability to refinance ourindebtedness; increases in prevailing interest rates; our ability to obtaintrade credit, and shipments and terms with vendors and service providers forcurrent orders; our ability to maintain contracts that are critical to ouroperations; potential adverse developments with respect to our liquidity orresults of operations; general economic and business conditions; competition,including increased capital investment and promotional activity by ourcompetitors; availability, location and terms of sites for store development;the successful implementation of our capital expenditure program; laborrelations; labor and employee benefit costs including increases in health careand pension costs and the level of contributions to our sponsored pensionplans; the result of our pursuit of strategic alternatives; economic andcompetitive uncertainties; our ability to pursue strategic alternatives;economic and competitive uncertainties; changes in strategies; changes ingenerally accepted accounting principles; adverse changes in economic andpolitical climates around the world, including terrorist activities andinternational hostilities; and the outcome of pending, or the commencement ofany new, legal proceedings against, or governmental investigations of us,including the previously announced SEC and U.S. Attorney’s Officeinvestigations.  We caution that theforegoing list of important factors is not exhaustive.  Accordingly, there can be no assurance thatwe will meet future results, performance or achievements expressed or impliedby such forward-looking statements, which are generally required to be publiclyrevised as circumstances change, and which we do not intend to update.

 

**EXPLANATORY NOTE**

 

This Quarterly Report on Form 10-Qis for the period beginning August 5, 2007 and ending November 3,2007 and, except as expressly indicated otherwise, information in this reportspeaks as of such date.  As discussedfurther in this report, we emerged from Chapter 11 bankruptcy reorganizationeffective April 13, 2005.

 

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** **

**PART I**

 

**ITEM 1.          Financial Statements**

 

The Penn Traffic Company

CondensedConsolidated Balance Sheets

(Inthousands)

 
| ** **                                                                                                     | ** ** | **November 3,** | ** ** | **February 3,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                                     | ** ** | **2007**             | ** ** | **2007**             | ** ** |
|                                                                                                           |       | **(unaudited)**      |       |                 |       |
| **ASSETS**                                                                                                     |       |                 |       |                 |       |
|                                                                                                           |       |                 |       |                 |       |
| **Current Assets:**                                                                                            |       |                 |       |                 |       |
| Cash and cash equivalents                                                                                      |       | $                    | 6,688      |                 | $          | 24,661 |   |
| Accounts and notes receivable (less  allowance for doubtful accounts of  $4,916 and $3,736, respectively) |       | 33,756               |       | 35,112               |       |
| Inventories                                                                                                    |       | 99,094               |       | 100,035              |       |
| Prepaid expenses and other current assets                                                                      |       | 7,375                |       | 8,469                |       |
|                                                                                                           |       | 146,913              |       | 168,277              |       |
|                                                                                                           |       |                 |       |                 |       |
| **Capital Leases, net**                                                                                        |       | 8,565                |       | 9,855                |       |
|                                                                                                           |       |                 |       |                 |       |
| **Fixed Assets, net**                                                                                          |       | 82,876               |       | 96,488               |       |
|                                                                                                           |       |                 |       |                 |       |
| **Other Assets:**                                                                                              |       |                 |       |                 |       |
| Intangible assets                                                                                              |       | 22,366               |       | 25,188               |       |
| Deferred tax assets                                                                                            |       | 3,621                |       | 3,621                |       |
| Other assets                                                                                                   |       | 3,284                |       | 4,038                |       |
|                                                                                                           |       | 29,271               |       | 32,847               |       |
|                                                                                                           |       |                 |       |                 |       |
| Total Assets                                                                                                   |       | $                    | 267,625    |                 | $          | 307,467 |   |

 

The accompanying notes are an integral partof these statements.

 

4

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| ** **                                                                                                                 | ** ** | **November 3,** | ** ** | **February 3,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                                                 | ** ** | **2007**             | ** ** | **2007**             | ** ** |
| ** **                                                                                                                 | ** ** | **(unaudited)**      | ** ** | ** **           | ** ** |
|                                                                                                                       |       |                 |       |                 |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                             |       |                 |       |                 |       |
|                                                                                                                       |       |                 |       |                 |       |
| **Current Liabilities:**                                                                                                   |       |                 |       |                 |       |
| Current portion of obligations under  capital leases                                                                       |       | $                    | 1,317      |                 | $          | 1,472 |   |
| Current maturities of long-term debt (Note  5)                                                                             |       | 48,437               |       | 314                  |       |
| Accounts payable                                                                                                           |       | 27,442               |       | 34,704               |       |
| Other current liabilities                                                                                                  |       | 43,474               |       | 49,653               |       |
| Accrued interest expense                                                                                                   |       | —               |       | 30                   |       |
| Deferred income taxes                                                                                                      |       | 13,542               |       | 13,542               |       |
| Liabilities subject to compromise (Note 4)                                                                                 |       | 2,516                |       | 2,696                |       |
|                                                                                                                       |       | 136,728              |       | 102,411              |       |
|                                                                                                                       |       |                 |       |                 |       |
| **Non-current Liabilities:**                                                                                               |       |                 |       |                 |       |
| Obligations under capital leases                                                                                           |       | 9,319                |       | 10,956               |       |
| Long-term debt (Note 5)                                                                                                    |       | 3,706                |       | 52,412               |       |
| Defined benefit  pension plan liability (Note 7)                                                                           |       | 19,712               |       | 22,150               |       |
| Other non-current  liabilities                                                                                             |       | 27,333               |       | 26,813               |       |
|                                                                                                                       |       | 60,070               |       | 112,331              |       |
|                                                                                                                       |       |                 |       |                 |       |
| **Total Liabilities**                                                                                                      |       | 196,798              |       | 214,742              |       |
|                                                                                                                       |       |                 |       |                 |       |
| **Commitments and Contingencies (Notes 4 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                                                                                                                    |       | (54,546              | )          | (32,648              | )          |
| Accumulated other comprehensive income                                                                                     |       | 6,795                |       | 6,795                |       |
| **Total stockholders’ equity**                                                                                        |       | 70,827               |       | 92,725               |       |
|                                                                                                                       |       |                 |       |                 |       |
| **Total Liabilities and Stockholders’ Equity**                                                                        |       | $                    | 267,625    |                 | $          | 307,467 |   |
|                                                                                                                       |       |                 |       |                 |       |

 
| The accompanying notes are an integral part of these statements. |
|------------------------------------------------------------------|

 

5

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The Penn Traffic Company

CondensedConsolidated Statements of Operations

(Inthousands, except share and per share data)

(unaudited)

 
| ** **                                                        | ** ** | **Quarter Ended**     | ** ** | **Year to Date Ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------|------------|---------------------------------------|------------|
| ** **                                                        | ** ** | **November 3,  2007** | ** ** | **October 28,  2006**            | ** ** | **November3,  2007** | ** ** | **October 28,  2006** | ** ** |
| ** **                                                        | ** ** | ** **                 | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                                      |       | $                          | 300,603    |                                  | $          | 319,802 |   | $ | 925,474 |   | $ | 968,368 |   |
|                                                              |       |                       |       |                                  |       |   |   |   |   |
| **Cost and Operating Expenses:**                                  |       |                       |       |                                  |       |   |   |   |   |
| Cost of sales                                                     |       | 220,308                    |       | 239,904                               |       | 677,110 |   | 724,550 |   |
| Selling and administrative expenses                               |       | 84,850                     |       | 83,126                                |       | 256,293 |   | 249,754 |   |
| Loss on store and  distribution center closings                   |       | 146                        |       | —                                |       | 2,029 |   | — |   |
|                                                              |       |                       |       |                                  |       |   |   |   |   |
| **Operating Loss**                                                |       | (4,701                     | )          | (3,228                                | )          | (9,958 | ) | (5,936 | ) |
|                                                              |       |                       |       |                                  |       |   |   |   |   |
| Interest expense                                                  |       | 2,023                      |       | 2,029                                 |       | 6,818 |   | 6,414 |   |
| Reorganization and other expenses                                 |       | 2,792                      |       | 190                                   |       | 4,945 |   | 452 |   |
|                                                              |       |                       |       |                                  |       |   |   |   |   |
| **Loss Before Income Taxes**                                      |       | (9,516                     | )          | (5,447                                | )          | (21,721 | ) | (12,802 | ) |
|                                                              |       |                       |       |                                  |       |   |   |   |   |
| Income tax provision                                              |       | 60                         |       | 57                                    |       | 177 |   | 171 |   |
|                                                              |       |                       |       |                                  |       |   |   |   |   |
| **Net Loss**                                                      |       | $                          | (9,576     | )                                     | $          | (5,504 | ) | $ | (21,898 | ) | $ | (12,973 | ) |
|                                                              |       |                       |       |                                  |       |   |   |   |   |
| 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 3)**                   |       | $                          | (1.13      | )                                     | $          | (0.65 | ) | $ | (2.58 | ) | $ | (1.53 | ) |
|                                                              |       |                       |       |                                  |       |   |   |   |   |
| The accompanying notes are  an integral part of these statements. |       |
|                                                                   |            |                            |            |                                       |            |  |  |  |  |  |  |  |  |  |

 

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ThePenn Traffic Company

CondensedConsolidated Statements of Cash Flows

(Inthousands)

(unaudited)

 
| ** **                                                                                 | ** ** | **For the Period**           | ** ** | **For the Period**           | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                 | ** ** | **February 4, 2007**         | ** ** | **January 29, 2006**         | ** ** |
| ** **                                                                                 | ** ** | **to November 3, 2007** | ** ** | **to October 28, 2006** | ** ** |
| **Operating Activities:**                                                                  |       |                                   |       |                                   |       |
| Net loss                                                                                   |       | $                                      | (21,898    | )                                      | $          | (12,973 | ) |
| Adjustments to reconcile net loss to net  cash (used in) provided by operating activities: |       |                                   |       |                                   |       |
| Depreciation and amortization                                                              |       | 20,492                                 |       | 19,770                                 |       |
| Amortization of deferred financing cost                                                    |       | 744                                    |       | 970                                    |       |
| Gain on sale of fixed assets                                                               |       | (328                                   | )          | (2,422                                 | )          |
|                                                                                       |       |                                   |       |                                   |       |
| **Net change in operating assets and  liabilities:**                                       |       |                                   |       |                                   |       |
| Accounts and notes receivable, net                                                         |       | 1,356                                  |       | 3,165                                  |       |
| Prepaid expenses and other current assets                                                  |       | 1,094                                  |       | (3,328                                 | )          |
| Inventories                                                                                |       | 941                                    |       | 1,725                                  |       |
| Liabilities subject to compromise                                                          |       | (180                                   | )          | (175                                   | )          |
| Accounts payable and other current  liabilities                                            |       | (13,471                                | )          | (1,608                                 | )          |
| Other assets                                                                               |       | 13                                     |       | 90                                     |       |
| Defined benefit pension plan                                                               |       | (2,438                                 | )          | (2,366                                 | )          |
| Other non-current liabilities                                                              |       | 1,140                                  |       | 1,142                                  |       |
|                                                                                       |       |                                   |       |                                   |       |
| **Net Cash (Used in) Provided by Operating  Activities**                                   |       | (12,535                                | )          | 3,990                                  |       |
|                                                                                       |       |                                   |       |                                   |       |
| **Investing Activities:**                                                                  |       |                                   |       |                                   |       |
| Capital expenditures                                                                       |       | (4,942                                 | )          | (18,268                                | )          |
| Proceeds from sale of fixed assets                                                         |       | 1,879                                  |       | 7,202                                  |       |
|                                                                                       |       |                                   |       |                                   |       |
| **Net Cash Used in Investing Activities**                                                  |       | (3,063                                 | )          | (11,066                                | )          |
|                                                                                       |       |                                   |       |                                   |       |
| **Financing Activities:**                                                                  |       |                                   |       |                                   |       |
| Payments of mortgages                                                                      |       | (233                                   | )          | (212                                   | )          |
| Net (repayments) borrowings  under revolving credit facility                               |       | (350                                   | )          | 4,000                                  |       |
| Reduction in  capital lease obligations                                                    |       | (1,792                                 | )          | (968                                   | )          |
|                                                                                       |       |                                   |       |                                   |       |
| **Net Cash (Used in) Provided by Financing Activities**                                    |       | (2,375                                 | )          | 2,820                                  |       |
|                                                                                       |       |                                   |       |                                   |       |
| **Decrease in Cash and Cash Equivalents**                                                  |       | (17,973                                | )          | (4,256                                 | )          |
|                                                                                       |       |                                   |       |                                   |       |
| **Cash and Cash Equivalents at the beginning of period**                                   |       | 24,661                                 |       | 12,432                                 |       |
|                                                                                       |       |                                   |       |                                   |       |
| **Cash and Cash Equivalents at end of period**                                             |       | $                                      | 6,688      |                                   | $          | 8,176 |   |
|                                                                                       |       |                                   |       |                                   |       |
| The accompanying notes are an integral part of these statements.                           |       |

 

7

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ThePenn Traffic Company

CondensedConsolidated Statements of Stockholders’ Equity

Forthe unaudited period February 4, 2007 to November 3, 2007

(Inthousands)

 
| ** **                                           | ** ** | **Common  Stock** | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Deficit** | ** ** | **Accumulated  Other   Comprehensive  Income** | ** ** | **Total  Stockholders’   Equity** | ** ** |
|------------------------------------------------------|------------|-------------------|------------|-----------------------------------------------------|------------|-------------|------------|-----------------------------------------------------|------------|---------------------------------------------|------------|
|                                                 |       |              |       |                                                |       |        |       |                                                |       |                                        |       |
| Balance at February 3, 2007                     |       | $                 | 85         |                                                | $          | 118,493     |       | $                                                   | (32,648    | )                                           | $          | 6,795 |   | $ | 92,725 |   |
|                                                 |       |              |       |                                                |       |        |       |                                                |       |                                        |       |
| Net loss for the period ended  November 3, 2007 |       | —            |       | —                                              |       | (21,898     | )          | —                                              |       | (21,898                                     | )          |
|                                                 |       |              |       |                                                |       |        |       |                                                |       |                                        |       |
| Balance at November 3, 2007                     |       | $                 | 85         |                                                | $          | 118,493     |       | $                                                   | (54,546    | )                                           | $          | 6,795 |   | $ | 70,827 |   |

 

Theaccompanying notes are an integral part of these statements.

 

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ThePenn 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 principlesgenerally accepted in the United States of America for interim financialinformation and the instructions to Form 10-Q and Article 10 ofRegulation S-X.  Accordingly, they do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements.

 

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 periods ended November 3, 2007are not necessarily an indication of results to be expected for the fiscal yearended February 2, 2008.  Theseunaudited interim financial statements should be read in conjunction with theaudited consolidated financial statements and related notes contained in theCompany’s Annual Report on Form 10-K for the fiscal year ended February 2,2008.

 

The balance sheet as of February 3, 2007 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.  Fiscal year 2008 is the 52-week period ended February2, 2008.  Fiscal year 2007 is the 53-weekperiod ended February 3, 2007.  Theinformation presented in this Quarterly Report on Form 10-Q is for thequarter beginning August 5, 2007 and ending November 3, 2007.

 

All significant intercompany transactions andaccounts 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 NewYork.  The filing was made in response topending defaults under the Company’s then-existing loan agreements and a lackof liquidity to continue operations. Under Chapter 11, the Company continued to operate its businesses asdebtor-in-possession under court protection from its creditors and claimants,while using the Chapter 11 process to substantially reduce its debt obligationsand implement a plan of reorganization.

 

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

 

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

 

1.     The Company entered into new creditagreements providing for borrowings of up to $164 million.  Proceeds from these new credit agreementsprovided funds sufficient to repay a debtor-in-possession credit facility andall administrative and priority claims to the extent provided for in the Plan.

 

2.     The Company sold and leased back its five owneddistribution facilities for a sales price of approximately $37 million.

 

3.     All shares of common stock and all stockoptions and warrants outstanding prior to the confirmation of the Plan werecancelled and the holders of such equity securities received no distributionsunder the Plan.

 

4.     The reorganized Company was authorized toissue new shares of common stock to unsecured creditors, which included holdersof $100 million of senior notes, a claim by the Pension Benefit GuarantyCorporation or the (“PBGC”) of $60 million and trade claims, all of whomwere eligible to receive pro rata distributions of new shares of common stockand the right to share in potential proceeds from certain causes of action.

 

9

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

 

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

 

**Note 3– Per Share Data**

 

Basicand diluted net loss per share is based on the number of common shares issuedand estimated to be issued pursuant to the Plan.  Common shares issued and estimated to beissued in settlement of claims filed in the Company’s Chapter 11 proceeding aretreated as outstanding as of the effective date of the Plan.  At both November 3, 2007 and February 3,2007, 201,055 common shares are estimated to be issued in connection with thesettlement of remaining claims.

 

**Note 4 –Liabilities Subject to Compromise**

 

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

 

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

 

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

 

**Note 5 –Long Term Debt**

 

OnAugust 1, 2007, the Company’s revolving credit and term loan facility andthe supplemental real estate credit facility were amended to permit thedisposal of assets in connection with the closing of two additionalstores.  Further, the availabilityamount, which the Company is required to maintain under certain financialcovenants, was reduced to less than $27.5 million for four consecutive days orless than $25 million for any one day

 

Basedon the original maturity date of April 13, 2008, amounts due under therevolving credit and term loan facility and the supplemental real estate creditfacility have been classified as current maturities in the accompanying balancesheet as of May 5, 2007.  In March 2008,the maturity date of both facilities was extended to April 13, 2009.  See Note 7 to the financial statements includedin the Company’s Annual Report on Form 10-K for year ended February 2,2008 for additional information.

 

10

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**Note 6– Acquisitions and Dispositions**

 

Acquisitions

 

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

 

Dispositions

 

Duringthe quarter ended November 3, 2007, the Company disposed of twostores.  It is anticipated that revenueswill continue to be generated from one of the closed stores as the store wasconverted to an independent store and will continue to be supplied by theCompany’s distribution center.  Revenueand operating results of the remaining closed store which was sold were notsignificant.

 

Duringthe quarter ended October 28, 2006, the Company sold one store which itanticipates will continue to be serviced from the Company’s distributioncenters thereby continuing to generate revenue for the Company.

 

Basedon the above, the operations of the disposed stores have not been reported asdiscontinued operations in the accompanying financial statements.

 

Storeclosing costs related to leases and terminated employees for the quarter andyear to date ended November 3, 2007 were approximately$0.1 million.

 

InJanuary 2007, the Company announced the closing of a leased distributioncenter used for the distribution of general merchandise and health and beautyproducts.  At the same time, the Companyentered into a five-year supply agreement with a third party to provide themerchandise previously distributed from the distribution center.  In connection with the announced closing, in January 2007,the Company recorded a liability of $1.4 million for termination benefitswhich were communicated to the distribution center’s employees at suchtime.  The Company ceased use of thefacility in March 2007, at which time the Company recorded a liability of$1.9 million, representing the present value of the remaining leaserentals reduced by estimated sublease rentals that could be reasonably obtainedfor the distribution center.  Inaddition, in March 2007, the Company sold its remaining inventory locatedin the distribution center to the third party at current cost.  The carrying value of such inventory at February 3, 2007was approximately $4.8 million.

 

**Note 7– Pension Plans**

 

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

 

Thecomponents of net periodic benefit costs for the year to date ended November 3,2007 and October 28, 2006 are as follows (in thousands):

 
| ** **                     | ** ** | **Year to Date** | ** ** | **Year to Date** | ** ** |
|--------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** |
| ** **                     | ** ** | **November 3,**       | ** ** | **October 28,**       | ** ** |
| ** **                     | ** ** | **2007**                   | ** ** | **2006**                   | ** ** |
|                           |       | **(unaudited)**            |       |
|                           |       |                       |       | ** **                 |       |
| Service cost                   |       | $                          | 1,485      |                       | $          | 1,487 |   |
| Interest cost                  |       | 4,679                      |       | 4,481                      |       |
| Expected return on plan assets |       | (4,790                     | )          | (4,481                     | )          |
| Amount of recognized gain      |       | (89                        | )          | —                     |       |
|                           |       |                       |       |                       |       |
|                           |       | $                          | 1,285      |                       | $          | 1,487 |   |
|                                |            |                            |            |                            |            |  |  |  |  |

 

Forthe 9 months ended November 3, 2007 and October 28, 2006 the Companycontributed $3.7 million and $3.1 million, respectively, to the fourdefined benefit pension plans.

 

11

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**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 investigations began prior to theCompany’s emergence from bankruptcy in April 2005.  The Company has been cooperating with theseinvestigations and has produced documents and made Company employees availablefor interviews as requested.

 

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

 

OnSeptember 17, 2007, the SEC filed civil fraud charges against theCompany’s former Chief Marketing Officer and former Vice President,Non-Perishables Marketing alleging that such individuals orchestrated a schemeto inflate the Company’s income and other financial results by prematurelyrecognizing promotional allowances received from vendors from approximately thesecond quarter of fiscal year 2001 through at least the fourth quarter offiscal year 2003. The complaint further alleges that the individuals deceivedthe Company’s accounting personnel to carry out their fraudulent scheme andaided and abetted the Company’s violations of the 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, theCompany is unable to estimate the likelihood of an unfavorable outcome or theamount of any damage claims, fines or penalties in the event of an unfavorableoutcome and, accordingly, no liability has been recorded for this contingency.

 

**Note 9– Issuance of Stock**

 

On May 14, 2007, the Company granted an aggregate of 22,685 sharesof phantom stock to five non-officer directors. On the settlement date, whichis the earlier of when the individual ceases to be a member of the Company’sBoard of Directors or upon the occurrence of a change in control, the awardsprovide for payment in cash of the value of an equivalent number of shares ofcommon stock. The awards were fully vested upon the grant date, and the Companyrecorded a compensation charge with a corresponding liability for the fairvalue of the awards at date of grant totaling $0.5 million. The liability willbe adjusted based on changes in value of the Company’s common stock, with acorresponding adjustment to compensation expense, at each period to settlementdate.

 

12

----

 

**Note 10– Segment Information**

 

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

 

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

 
| ** **                                                    | ** ** | **Quarter Ended November 3, 2007** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                             | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Retail Food**                                   | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Revenues                                                      |       | $                                                      | 244,364    |   | $ | 52,211 |   | $ | 4,028 | (1) | $ | 300,603 |   |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Cost of sales                                                 |       | (167,904                                               | )          | (48,920 | ) | (2,685 | )(2) | (219,509 | )(4) |
| Selling and administrative expense                            |       | (61,506                                                | )          | (1,348 | ) | (16,061 | )(3) | (78,915 | )(4) |
| Loss on store and distribution center  closings               |       | —                                                 |       | — |   | (146 | ) | (146 | ) |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation  and amortization |       | 14,954                                                 |       | 1,943 |   | (14,864 | ) | 2,033 |   |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Depreciation and amortization                                 |       | (6,025                                                 | )          | (237 | ) | (472 | ) | (6,734 | ) |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Operating income (loss)                                       |       | $                                                      | 8,929      |   | $ | 1,706 |   | $ | (15,336 | ) | (4,701 | ) |
| Interest expense                                              |       |                                                   |       |   |   |   |   | (2,023 | ) |
| Reorganization and other expenses                             |       |                                                   |       |   |   |   |   | (2,792 | ) |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Consolidated loss before income taxes                         |       |                                                   |       |   |   |   |   | $ | (9,516 | ) |

 

----

(1)   Consists principally of approximately$1.9 million for bakery sales principally to customers other than those ofthe retail and wholesale segments, $1.6 million for trucking revenues and$0.3 million of rental income.

 

(2)   Consists principally of approximately$1.6 million for bakery sales and approximately $0.3 million increasein cost of sales to reconcile segment inventories on FIFO to consolidatedinventories on LIFO.

 

(3)   Consists principally of approximately $7.0million of payroll, benefits, and payroll taxes associated with the administrativestaff, approximately $1.9 million associated with selling and administrativecosts of the bakery, approximately $2.8 million associated with ofprofessional fees (of which approximately $0.6 million pertained to legalcosts associated with the internal and SEC investigation relating to theCompany’s practices regarding promotional discounts and allowances),approximately $1.3 million of contract hauling costs associated withtrucking revenue, approximately $0.1 million for an increase in reserves fordoubtful accounts, $0.3 million in data processing maintenance, and $0.4million for corporate insurance costs.

 

(4)   Excludes depreciation and amortization of$0.8 million for cost of sales and $5.9 million for selling andadministrative expenses.

 

13

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| ** **                                                    | ** ** | **Quarter Ended October 28, 2006** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                             | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Retail Food**                                   | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Revenues                                                      |       | $                                                      | 259,402    |   | $ | 54,052 |   | $ | 6,348 | (1) | $ | 319,802 |   |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Cost of sales                                                 |       | (183,482                                               | )          | (51,032 | ) | (3,963 | )(2) | (238,477 | )(4) |
| Selling and administrative expense                            |       | (63,279                                                | )          | (1,203 | ) | (13,287 | )(3) | (77,769 | )(4) |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation  and amortization |       | 12,641                                                 |       | 1,817 |   | (10,902 | ) | 3,556 |   |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Depreciation and amortization                                 |       | (6,183                                                 | )          | (155 | ) | (446 | ) | (6,784 | ) |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Operating income (loss)                                       |       | $                                                      | 6,458      |   | $ | 1,662 |   | $ | (11,348 | ) | (3,228 | ) |
| Interest expense                                              |       |                                                   |       |   |   |   |   | (2,029 | ) |
| Reorganization costs                                          |       |                                                   |       |   |   |   |   | (190 | ) |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Consolidated loss before income taxes                         |       |                                                   |       |   |   |   |   | $ | (5,447 | ) |

 

----

(1)       Consists principally of approximately$4.2 million for bakery sales principally to customers other than those ofthe retail and wholesale segments and approximately $1.6 million fortrucking revenues.

 

(2)       Consists principally of approximately$2.7 million for bakery sales and approximately $0.3 million increasein cost of sales to reconcile segment inventories on FIFO to consolidatedinventories on LIFO.

 

(3)       Consists principally of approximately$5.9 million of payroll, benefits, and payroll taxes associated with theadministrative staff, approximately $1.5 million associated with sellingand administrative costs of the bakery, approximately $1.4 million of contracthauling costs associated with trucking revenue, approximately $2.7 million ofprofessional fees (including approximately $1.2 million of legal costsassociated with the internal and SEC investigation relating to the Company’spractices regarding promotional discounts and allowances), approximately$0.5 million for data processing maintenance and $0.3 million forcorporate insurance costs.

 

(4)       Excludes depreciation and amortization of$1.4 million for cost of sales and $5.3 million for selling andadministrative expenses.

 

14

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| ** **                                                       | ** ** | **Period From February 4, 2007 to November 3, 2007** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | ** **                                                                                   | ** ** | **Wholesale** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | ** **                                                                                   | ** ** | **Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **Retail Food**                                                                         | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                             |       |                                                                                         |       |   |   |   |   |   |   |
| Revenues                                                         |       | $                                                                                            | 751,462    |   | $ | 156,696 |   | $ | 17,316 | (1)  | $ | 925,474 |   |
|                                                             |       |                                                                                         |       |   |   |   |   |   |   |
| Cost of sales                                                    |       | (517,604                                                                                     | )          | (146,056 | ) | (10,974 | )(2) | (674,634 | )(4) |
| Selling and administrative expense                               |       | (185,581                                                                                     | )          | (3,990 | ) | (48,706 | )(3) | (238,277 | )(4) |
| Loss on store and distribution center  closings                  |       | —                                                                                       |       | — |   | (2,029 | )(3) | (2,029 | )(4) |
|                                                             |       |                                                                                         |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation  and amortization    |       | 48,277                                                                                       |       | 6,650 |   | (44,393 | ) | 10,534 |   |
|                                                             |       |                                                                                         |       |   |   |   |   |   |   |
| Depreciation and amortization                                    |       | (18,422                                                                                      | )          | (723 | ) | (1,347 | )(5) | (20,492 | ) |
|                                                             |       |                                                                                         |       |   |   |   |   |   |   |
| Operating income (loss)                                          |       | 29,855                                                                                       |       | 5,927 |   | (45,740 | ) | (9,958 | ) |
| Interest expense                                                 |       |                                                                                         |       |   |   |   |   | (6,818 | ) |
| Reorganization and other expenses                                |       |                                                                                         |       |   |   |   |   | (4,945 | ) |
|                                                             |       |                                                                                         |       |   |   |   |   |   |   |
| Consolidated loss before income taxes                            |       |                                                                                         |       |   |   |   |   | $ | (21,721 | ) |
|                                                             |       |                                                                                         |       |   |   |   |   |   |   |
| Total assets as of November 3, 2007                         |       | $                                                                                            | 213,552    | (5)  | $ | 24,621 | (5)  | $ | 29,452 | (6) | $ | 267,625 |   |
|                                                             |       |                                                                                         |       |   |   |   |   |   |   |
| Capital expenditures for the period Ended  November 3, 2007 |       | $                                                                                            | 4,253      |   | $ | 203 |   | $ | 486 |   | $ | 4,942 |   |

 

----

(1)   Consists principally of approximately $10.8 million for bakerysales principally to customers other than those of the retail and wholesalesegments, $4.9 million for trucking revenues and $0.9 million of rentalincome.

 

(2)   Consists principally of approximately $7.6 million for bakerysales and approximately $0.9 million increase in cost of sales toreconcile segment inventories on FIFO to consolidated inventories on LIFO.

 

(3)   Consists principally of approximately $20.3 million of payroll,benefits, and payroll taxes associated with the administrative staff,approximately $5.7 million associated with selling and administrative costs ofthe bakery, approximately $10.3 million associated with of professionalfees (of which approximately $1.2 million pertained to legal costsassociated with the internal and SEC investigation relating to the Company’spractices regarding promotional discounts and allowances), approximately$4.1 million of contract hauling costs associated with trucking revenue,approximately $1.0 million for an increase in reserves for doubtful accounts,$0.8 million in data processing maintenance, and $0.8 million for corporateinsurance costs.

 

(4)   Excludes depreciation and amortization of $2.5 million for cost ofsales and $18.0 million for selling and administrative expenses.

 

(5)   Thewarehouse and transportation assets have been allocated using the samemethodology that was used for the warehouse and transportation costs.

 

(6)   Consistsprincipally of fixed assets and inventory of the bakery operation and generalcorporate assets that can not separated by business segment (including cash andcash equivalents).

 

15

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| ** **                                                       | ** ** | **Period from January 29, 2006 to October 28, 2006** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | ** **                                                                                   | ** ** | **Wholesale** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | ** **                                                                                   | ** ** | **Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **Retail Food**                                                                         | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                             |       |                                                                                         |       |   |   |   |   |   |   |
| Revenues                                                         |       | $                                                                                            | 786,990    |   | $ | 163,054 |   | $ | 18,324 | (1)  | $ | 968,368 |   |
|                                                             |       |                                                                                         |       |   |   |   |   |   |   |
| Cost of sales                                                    |       | (555,252                                                                                     | )          | (153,754 | ) | (11,366 | )(2) | (720,372 | )(4) |
| Selling and administrative expense                               |       | (188,811                                                                                     | )          | (4,686 | ) | (40,665 | )(3) | (234,162 | )(4) |
|                                                             |       |                                                                                         |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation  and amortization    |       | 42,927                                                                                       |       | 4,614 |   | (33,707 | ) | 13,834 |   |
|                                                             |       |                                                                                         |       |   |   |   |   |   |   |
| Depreciation and amortization                                    |       | (17,968                                                                                      | )          | (467 | ) | (1,335 | ) | (19,770 | ) |
| Operating income (loss)                                          |       | $                                                                                            | 24,959     |   | $ | 4,147 |   | $ | (35,042 | ) | (5,936 | ) |
| Interest expense                                                 |       |                                                                                         |       |   |   |   |   | (6,414 | ) |
| Reorganization costs                                             |       |                                                                                         |       |   |   |   |   | (452 | ) |
|                                                             |       |                                                                                         |       |   |   |   |   |   |   |
| Consolidated loss before income taxes                            |       |                                                                                         |       |   |   |   |   | $ | (12,802 | ) |
|                                                             |       |                                                                                         |       |   |   |   |   |   |   |
| Total assets as of October 28, 2007                         |       | $                                                                                            | 251,932    | (5) | $ | 28,345 | (5)  | $ | 30,560 | (6)  | $ | 310,837 |   |
|                                                             |       |                                                                                         |       |   |   |   |   |   |   |
| Capital expenditures for the period ended  October 28, 2007 |       | $                                                                                            | 16,216     |   | $ | — |   | $ | 2,052 |   | $ | 18,268 |   |

 

----

(1)       Consists principally of approximately $12.4million for bakery sales principally to customers other than those of theretail and wholesale segments and approximately $4.7 million for truckingrevenues.

 

(2)       Consists principally of approximately$7.8 million for bakery sales and approximately $1.0 million increasein cost of sales to reconcile segment inventories on FIFO to consolidatedinventories on LIFO.

 

(3)       Consists principally of approximately$19.0 million of payroll, benefits, and payroll taxes associated with theadministrative staff, approximately $4.4 million associated with sellingand administrative costs of the bakery, approximately $4.1 million of contracthauling costs associated with trucking revenue, and approximately$8.0 million of professional fees (including approximately $4.3 million oflegal costs associated with the internal and SEC investigation relating to theCompany’s practices regarding promotional discounts and allowances),approximately $1.5 million for data processing maintenance and $0.9 million forcorporate insurance costs.

 

(4)       Excludes depreciation and amortization of$4.2 million for cost of sales and $15.6 million for selling andadministrative expenses.

 

(5)       The warehouse and transportation assets havebeen allocated using the same methodology that was used for the warehouse andtransportation costs.  The effect of thechange in allocation method in fiscal year 2007 increased the assets of thewholesale food distribution segment and decreased 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).

 

16

----

 

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

 

We operate or supply more than 200 supermarkets inUpstate New York, Pennsylvania, Vermont and New Hampshire.  We operate in two segments.  Our retail food business includescorporate-owned stores with the “BiLo”, “P&C” and “Quality” trade names,and our wholesale food distribution business supplies independently operatedsupermarkets and other wholesale accounts.

 

Our primary objective is to improve our long-termfinancial performance and enhance the in-store experience of ourcustomers.  Under the direction of ournew senior team (formed in fiscal year 2007), we are focusing onrebuilding our core business.  This meansre-establishing basic disciplines and reemphasizing and instilling a muchstronger profitable growth culture around sales and margin.

 

**Results of Operations**

 

The following table setsforth certain Consolidated Statement of Operations components expressed aspercentages of revenues for the quarter and year to date ended November 3,2007 and the quarter and year to date ended October 28, 2006.

 
| ** **                                      | ** ** | **Unaudited**        | ** ** |
|-------------------------------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **Quarter**          | ** ** | **Quarter** | ** ** | **Year to Date** | ** ** | **Year to Date** | ** ** |
| ** **                                      | ** ** | **Ended**            | ** ** | **Ended** | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                                      | ** ** | **November 3,** | ** ** | **October 28,** | ** ** | **November 3,** | ** ** | **October 28,** | ** ** |
| ** **                                      | ** ** | **2007**             | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                            |       |                 |       |   |   |   |   |   |   |
| Revenues                                        |       | 100.0                | %          | 100.0 | % | 100.0 | % | 100.0 | % |
|                                            |       |                 |       |   |   |   |   |   |   |
| Gross profit (1)                                |       | 26.8                 |       | 25.0 |   | 26.8 |   | 25.2 |   |
|                                            |       |                 |       |   |   |   |   |   |   |
| Selling and administrative expenses             |       | 28.2                 |       | 26.0 |   | 27.7 |   | 25.8 |   |
|                                            |       |                 |       |   |   |   |   |   |   |
| Loss on store and distribution center  closings |       | 0.1                  |       | 0.0 |   | 0.2 |   | 0.0 |   |
|                                            |       |                 |       |   |   |   |   |   |   |
| Operating (loss) income                         |       | (1.6                 | )          | (1.0 | ) | (1.1 | ) | (0.6 | ) |
|                                            |       |                 |       |   |   |   |   |   |   |
| Interest expense                                |       | 0.7                  |       | 0.6 |   | 0.7 |   | 0.7 |   |
|                                            |       |                 |       |   |   |   |   |   |   |
| Reorganization and other expenses               |       | 0.9                  |       | 0.1 |   | 0.5 |   | 0.0 |   |
|                                            |       |                 |       |   |   |   |   |   |   |
| Income tax expense                              |       | 0.0                  |       | 0.0 |   | 0.0 |   | 0.0 |   |
|                                            |       |                 |       |   |   |   |   |   |   |
| Net loss                                        |       | (3.2                 | )          | (1.7 | ) | (2.4 | ) | (1.3 | ) |

 

----

(1)                                  Revenues less cost of sales.

 

17

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**Fiscal Year2008 (the Quarter Ended November 3, 2007) Fiscal Year 2007 (the QuarterEnded October 28, 2006)**

 

**Revenues**

 

Revenues for the quarterended November 3, 2007 decreased to $300.6 million from $319.8 million forthe quarter ended October 28, 2006. The $19.2 million decrease in revenues was mainly attributable to areduction in the number of our corporate-owned stores, a decline in same storesales and a decrease in wholesale food distribution revenues.

 

Same store sales for thequarter ended November 3, 2007 decreased 0.4% as compared to the quarterended October 28, 2006.

 

Wholesale fooddistribution revenues for the quarter ended November 3, 2007 decreased$1.9 million, or 3.4% to $52.2 million, or 17.4% of total revenues, from $54.1million, or 16.9% of total revenues for the quarter ended October 28,2006.  The decrease in the wholesale fooddistribution revenues of $1.9 million was attributable to the loss of certainwholesale customers.

 

**GrossProfit**

 

Gross profit was $80.3million or 26.8% of revenues for the quarter ended November 3, 2007 and$79.9 million, or 25.0% of revenues, for the quarter ended October 28,2006.  The increase was a result ofincreased sales of higher margin private label and signature products, theimplementation of a new price optimization system and improved operationaldisciplines to reduce shrinkage, partially offset by an increase indistribution costs.

 

**Sellingand Administrative Expenses**

 

Sellingand administrative expenses for the quarter ended November 3, 2007 were$84.9 million, or 28.2% of revenues, compared to $83.1 million, or 26.0%of revenues, for the quarter ended October 28, 2006.  The increase in selling and administrativeexpenses as a percentage of revenue was primarily due to an increase in auditand professional fees and outside services.

 

**Depreciationand Amortization**

 

Depreciation andamortization expense was $6.7 million, or 2.2% of revenues, for the quarterended November 3, 2007, compared to $6.8 million, or 2.1% ofrevenues.  The decrease in depreciationand amortization during the quarter ended November 3, 2007 was primarilydue to disposals of depreciable assets in fiscal year 2007 of approximately$10.8 million partially offset by the depreciation on capital expendituresplace in service in fiscal year 2007.

 

**Operating Loss**

 

Operating loss for thequarter ended November 3, 2007 was $4.7 million, or 1.6% of revenues,compared to the operating loss of $3.2 million, or 1.0% of revenues, for thequarter ended October 28, 2006.

 

**InterestExpense**

 

Interest expense for thequarters ended November 3, 2007 and October 28, 2006 was$2.0 million.

 

**Reorganization and Other Expenses**

 

Reorganizationand other expenses for the quarter ended November 3, 2007 was $2.8million, or 0.9% of revenues, compared to reorganization expense of $0.2million, or 0.1% for the quarter ended October 28, 2006.  The $2.6 million increase was primarilyattributable to a proposed acquisition that was not consummated.

 

**Net Loss**

 

Net loss for the quarterended November 3, 2007 was $9.6 million, or 3.2% of revenues, compared toa net loss of $5.5 million, or 1.7% of revenues, during the quarter ended October 28,2006.  The increase in net loss of$4.1 million during the quarter ended November 3, 2007 is primarilyattributable to increase in audit and professional fees and to a proposedacquisition that was not consummated.

 

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**Fiscal Year2008 (the Year to Date Ended November 3, 2007) and Fiscal Year 2007 (theYear to Date Ended October 28, 2006)**

 

**Revenues**

 

Revenues for the year todate ended November 3, 2007 decreased to $925.5 million from $968.4million for the year to date ended October 28, 2006.  The $42.9 million decrease in revenues wasmainly attributable to a reduction in the number of our corporate-owned stores,a decline in same store sales and a decrease in wholesale food distributionrevenues.

 

Same store sales for theyear to date ended November 3, 2007 decreased 0.2% as compared to the yearto date ended October 28, 2006.

 

Wholesale fooddistribution revenues for year to date ended November 3, 2007 decreased3.9% to $156.7 million, or 16.9% of total revenues, from $163.1 million, or16.8% of total revenues for year to date ended October 28, 2006.  The decrease in the wholesale fooddistribution revenues of $6.6 million was attributable to the loss of certainwholesale customers.

 

**GrossProfit**

 

Gross profit was $248.4million, or 26.8% of revenues for year to date ended November 3, 2007,compared to $243.8 million, or 25.2% of revenues, for year to date ended October 28,2006.  The increase is a result ofincreased sales of higher margin private label and signature products, theimplementation of a new price optimization system and improved operationaldisciplines to reduce shrinkage, partially offset by an increase indistribution costs.

 

**Sellingand Administrative Expenses**

 

Sellingand administrative expenses for year to date ended November 3, 2007 were$256.3 million, or 27.7% of revenues compared to $249.8 million, or 25.8% ofrevenues for year to date ended October 28, 2006.  The increase in selling and administrativeexpenses as a percentage of revenue was primarily due to an increase in auditand professional fees and outside services.

 

**Depreciationand Amortization**

 

Depreciation andamortization expense was $20.5 million, or 2.2% of revenues, for year to dateended November 3, 2007, compared to $19.8 million, or 2.0% ofrevenues.  The slight increase indepreciation and amortization during the year to date ended November 3,2007 was primarily due to additional depreciation from assets placed in servicein fiscal year 2007.

 

**Loss on Store and Distribution Center Closings**

 

Losson store and distribution center closings for the year to date ended November 3,2007 was $2.0 million, or 0.2% of revenues, as we closed our distributioncenter in March 2007, incurring $1.9 million in costs.  No loss on store closings was incurred forthe year to date ended October 28, 2006.

 

**Operating Loss**

 

Operating loss for yearto date ended November 3, 2007 was $10.0 million, or 1.1% ofrevenues, compared to the operating loss of $5.9 million, or 0.6% of revenues,for year to date ended October 28, 2006. The $4.1 million decrease is primarily due to increases in selling andadministrative expense as explained above and losses on store closings.

 

**InterestExpense**

 

Interest expense for yearto date ended November 3, 2007 was $6.8 million, or 0.7% of revenues,compared to $6.4 million, or 0.7% of revenues, for year to date ended October 28,2006.  The $0.4 million increase ininterest expense for year to date ended November 3, 2007 was due to anincrease in our average borrowings under our credit facility.

 

**Reorganization and Other Expenses**

 

Reorganizationand other expenses for the year to date ended November 3, 2007 was $4.9million, or 0.5% of revenues, compared to reorganization expense of $0.5million, or 0.1% of revenues, for the year to date ended October 28,2006.  Approximately $4.2 million ofthe $4.5 million increase is attributable to a proposed acquisition that wasnot consummated.

 

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**Net Loss**

 

Net loss for the year todate ended November 3, 2007 was $21.9 million, or 2.4% of revenues,compared to a net loss of $13.0 million, or 1.3% of revenues, for the year todate ended October 28, 2006.  The$8.9 million increase in net loss was primarily attributable to increasedselling and administrative expenses, as explained above, $1.9 million ofdistribution center closing costs, and the $4.2 million of expenses for aproposed acquisition that was not consummated.

 

**Liquidity and Capital Resources**

 

Overview

 

As of November 3, 2007, we had cash and cashequivalents of $6.7 million and total debt outstanding of$62.8 million.  In addition, we havethe ability to draw down on our revolving credit facilities.  We believe our borrowing capability under ourcredit facilities provides the necessary liquidity to operate our business,invest in our core retail store portfolio, improve our customers’ shoppingexperience, and improve our overall offering in the market served.

 

Financial Results

 

*Operating Activities*

 

Cash used in operating activities for year to dateended November 3, 2007 was $12.5 million, as compared to cash provided byoperating activities of $4.0 million for year to date ended October 28,2006.  For year to date ended November 3,2007, we incurred a net loss of $21.9 million, adjustments for non cash itemsof $20.9 million, and a net increase in operating net assets of $11.5million.  For year to date ended October 28,2006, we incurred a net loss of $13.0 million, adjustments for non-cashitems of $18.4 million, a net increase in operating net assets of$1.4 million.

 

*Investing Activities*

 

Cash used in investing activities for year to dateended November 3, 2007 and the year to date ended October 28, 2006were $3.1 million and $11.1 million, respectively.  The $8.0 million reduction was due to lowercapital expenditures ($4.9 million for year to date ended November 3, 2007as compared to $18.3 million for year to date ended October 28, 2006)partially offset by a decline in proceeds from sales of fixed assets ($1.9million for year to date ended November 3, 2007 as compared to $7.2million for the year to date ended October 28, 2006).

 

*Financing Activities*

 

Cash used in financing activities for year to dateended November 3, 2007 were $2.4 million. For year to date ended October 28, 2006, cash provided by financingactivities were $2.8 million.  The $5.2million differences was primarily due to activity under our revolving creditfacility as $0.4 million was repaid during the period ended November 3,2007 while an additional $4.0 million was borrowed during the year to dateended October 28, 2006.

 

Borrowings

 

OnApril 13, 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 13,2005, 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 November 3, 2007,outstanding borrowings under both facilities aggregated$48.2 million.  At such date,availability in excess of outstanding borrowings and letters of credit wasapproximately $26.8 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 priority lien on substantiallyall of our leasehold interests and a second lien on substantially all of ourremaining assets.  As of November 3,2007, we had stand-by letters of credit of approximately$47.0 million.  Many of thesestand-by letters of credit were required upon emergence from bankruptcy and asa result of our inability to file financial statements.

 

Provisionsof both credit facilities, as amended, among other things, require themaintenance of certain financial covenants (when availability under the creditfacilities is less than $27.5 million for four consecutive days or lessthan $25.0 million for any one day), and limit the amount of capitalexpenditures, our assumption of additional debt and our payment of dividends.  We were not subject to compliance with thefinancial covenants during fiscal year 2008 because the amount ofavailability 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 November 3, 2007.

 

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Pursuantto our plan of reorganization, we entered into a collateral trust agreementwith the collateral trustee in connection with the secured trade lienprogram.  The secured trade lien programis with certain of our vendors and allows us to maintain trade terms.  This program has been extended until April 13, 2009.

 

OnDecember 26, 2006, August 1, 2007 and January 30, 2008,both the revolving credit and term loan facility and the supplemental realestate credit facility were amended to provide us with additional liquidity bylowering the excess availability thresholds for purposes of determiningcompliance with certain financial covenants in the credit facilities and topermit the disposal of assets in connection with the closing of certain stores.In March 2008, the maturity date of both facilities were extended to April 13,2009.  See Note 7 to the financialstatements included in the annual report on Form 10-K for year ended February 2,2008 for additional information.

 

We also have $4.1 million of borrowings under mortgages secured by therelated properties as of November 3, 2007.

 

**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 November 3, 2007 was $48.2 million, with a weightedaverage interest rate of 11.6%.  A1% change in interest rates would impact annual pre-tax income by$0.5 million based on the debt outstanding at November 3, 2007.  In addition to the variable rate debt we had$4.0 million of fixed rate debt outstanding at November 3, 2007, with aweighted average interest rate of 6.65%. We view the fixed rate debt as a partial hedge against interest ratefluctuations.

 

**ITEM 4.          CONTROLS AND PROCEDURES**

 

Disclosure controls andprocedures under Rule 13a-15(e) of the Securities Exchange Act of1934 (the “Exchange Act”) are those controls and other procedures of a companythat are designed to ensure that information required to be disclosed by thecompany in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the SEC’s rule and forms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed byan issuer in the reports it files or submits under the Exchange Act isaccumulated and communicated to the issuer’s management, including itsprincipal executive and principal financial officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure.

 

Pursuant to Rule 13a-15(e) underthe Exchange Act, our management evaluated the effectiveness of the design andoperation of our disclosure controls and procedures with the participation ofour principal executive and principal financial officers.  Based on their current observations combinedwith observations by the disclosure committee, which is comprised of members ofmanagement, members of the audit committee and external counsel, managementconcluded that our disclosure controls and procedures were ineffective as of November 3,2007, in providing reasonable assurance that material information requiringdisclosure was brought to management’s attention on a timely basis and that ourfinancial reporting was reliable.

 

**Changein our Internal Control Over Financial Reporting**

 

In May 2007, wehired an outside consulting firm to assist management in its evaluation of theeffectiveness of our internal control over financial reporting, includingdisclosure controls and procedures.  Asof November 3, 2007 they had not completed their evaluation.  They are using the framework established in“Internal Control-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 no material changes to the legal proceedings disclosed in the Company’s Annual Report on Form 10-K for the year ended February 2, 2008.

 

**ITEM 1A.       RISK FACTORS**

 

Therehave been no changes to the risk factors disclosed in the Company’s AnnualReport on Form 10-K for the year ended February 2, 2008.

 

**ITEM 6.          EXHIBITS**

 

Thefollowing are filed as Exhibits to this Report:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                           |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                      |
| 10.1                 |       | Promotion Letter, dated October 1, 2007, addressed to Gregory J.  Young (incorporated by reference to Exhibit 99.1 to the Form 8-K  filed on October 1, 2007).        |
|                 |       |                                                                                                                                                                                      |
| 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** |   |
|------------------------------|--------|
| ** **                   |   |   |
|                         |   |   |   |
|                         | By:    | /s/  Gregory J. Young |   |
|                         | Name:  | Gregory  J. Young |   |
|                         | Title: | Chief  Executive Officer and President |   |
|                         |   |   |   |
|                         | By:    | /s/  Tod A. Nestor |   |
|                         | Name:  | Tod  A. Nestor |   |
|                         | Title: | Senior  Vice President and Chief Financial Officer |   |

 

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