**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended October 28, 2006**

 

**OR**

 

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

 

**For the Transition Periodfrom                        to                        **

 

**Commission file number: 0-8858**

 

**THE PENN TRAFFIC COMPANY**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                                              | **25-0716800**                     |
|-----------------------------------------------------------|------------------------------------|
| (State of  incorporation)                                 | (IRS Employer  Identification No.) |
|                                                      |                               |
| **1200  State Fair Blvd., Syracuse, New York 13221-4737** | **(315)  453-7284**                |
| (Address of principal  executive offices)                 | (Telephone Number)                 |

 

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.

YESo  NO x

 

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

 

| Large accelerated filer  o                                            |   | Accelerated filer 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 a court.YES o NO x

 

Common Stock, par value$.01 per share:  8,336,192 sharesoutstanding as of May 7, 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              | 4.         |       | Submission  of Matters to a Vote of Security Holders                                        | 22       |
|              |       |       |                                                                                        |     |
| Item              | 6.         |       | Exhibits                                                                                    | 22       |

 

2

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**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Certainstatements included in this Form 10-Q, including without limitation,statements included in Item 2 - “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” which are not statements ofhistorical fact, are intended to be, and are hereby identified as, “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, as amended, reflecting management’s current analysis and expectations,based on what management believes to be reasonable assumptions.  These forward-looking statements includestatements relating to our anticipated financial performance and businessprospects.  Statements preceded by,followed by or that include words such as “believe,” “anticipate,” “estimate,” “expect,”“could,” and other similar expressions are to be considered suchforward-looking statements. Forward-looking statements may involve known and unknown risks,uncertainties and other factors, which may cause the actual results to differmaterially from those projected, stated or implied, depending on such factorsas: our ability to improve operating performance and effectuate business plans;our ability to operate pursuant to the terms of our credit facilities and tocomply with the terms of our lending agreements or to amend or modify the termsof such agreements as may be needed from time to time; our ability to generatecash; our ability to attract and maintain adequate capital; our ability to refinanceour indebtedness; 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 pension plans;the result of our pursuit of strategic alternatives; economic and competitiveuncertainties; our ability to pursue strategic alternatives; economic andcompetitive uncertainties; changes in strategies; changes in generally acceptedaccounting principles; adverse changes in economic and political climatesaround the world, including terrorist activities and international hostilities;and the outcome of pending, or the commencement of any new, legal proceedingsagainst, or governmental investigations of us, including the previouslyannounced SEC and U.S. Attorney’s Office investigations.  We caution that the foregoing list ofimportant factors is not exhaustive. Accordingly, there can be no assurance that we will meet future results,performance or achievements expressed or implied by such forward-lookingstatements, which are generally required to be publicly revised ascircumstances change, and which we do not intend to update.

 

**EXPLANATORY NOTE**

 

This Quarterly Report on Form 10-Qis for the period beginning July 30, 2006 and ending October 28, 2006and except as expressly indicated otherwise, information in this report speaksas of such date.  As discussed further inthis report, we emerged from Chapter 11 bankruptcy reorganization effective April 13,2005.

 

3

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**PART I**

 

**ITEM 1.          Financial Statements**

 

The Penn Traffic CompanyCondensed Consolidated Balance Sheets(In thousands, except share and per share data)

 
| ** **                                                                                               | ** ** | **October 28,**                        | ** ** | **January 28,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|----------------------|------------|
| ** **                                                                                               | ** ** | **2006**                                    | ** ** | **2006**             | ** ** |
| ** **                                                                                               | ** ** | **Unaudited**                               | ** ** | **audited**          | ** ** |
| ** **                                                                                               | ** ** | **(Restated – Note 3)** | ** ** |
| **ASSETS**                                                                                               |       |                                        |       |                 |       |
|                                                                                                     |       |                                        |       |                 |       |
| **Current Assets:**                                                                                      |       |                                        |       |                 |       |
| Cash                                                                                                     |       | $                                           | 8,176      |                 | $          | 12,432 |   |
| Accounts and notes receivable (less  allowance for doubtful accounts of $3,284 and $3,174, respectively) |       | 33,805                                      |       | 36,970               |       |
| Inventories                                                                                              |       | 111,742                                     |       | 113,467              |       |
| Prepaid expenses and other current assets                                                                |       | 9,485                                       |       | 6,157                |       |
|                                                                                                     |       | 163,208                                     |       | 169,026              |       |
|                                                                                                     |       |                                        |       |                 |       |
| **Capital Leases, net**                                                                                  |       | 10,034                                      |       | 10,997               |       |
|                                                                                                     |       |                                        |       |                 |       |
| **Fixed Assets, net**                                                                                    |       | 101,319                                     |       | 104,399              |       |
|                                                                                                     |       |                                        |       |                 |       |
| **Other Assets:**                                                                                        |       |                                        |       |                 |       |
| Intangible assets                                                                                        |       | 29,656                                      |       | 33,025               |       |
| Deferred tax asset                                                                                       |       | 2,609                                       |       | 2,609                |       |
| Other assets                                                                                             |       | 4,011                                       |       | 5,335                |       |
|                                                                                                     |       | 36,276                                      |       | 40,969               |       |
|                                                                                                     |       |                                        |       |                 |       |
| Total Assets                                                                                             |       | $                                           | 310,837    |                 | $          | 325,391 |   |

 

The accompanying notes are an integral part of these statements.

 

4

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| ** **                                                                                                            | ** ** | **October 28,**                        | ** ** | **January 28,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                            | ** ** | **2006**                                    | ** ** | **2006**             | ** ** |
| ** **                                                                                                            | ** ** | **Unaudited**                               | ** ** | **audited**          | ** ** |
| ** **                                                                                                            | ** ** | **(Restated – Note 3)** | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                        |       |                                        |       |                 |       |
|                                                                                                                  |       |                                        |       |                 |       |
| **Current Liabilities:**                                                                                              |       |                                        |       |                 |       |
| Current portion of obligations under  capital leases                                                                  |       | $                                           | 1,430      |                 | $          | 1,310 |   |
| Current maturities of long-term debt                                                                                  |       | 308                                         |       | 278                  |       |
| Accounts payable                                                                                                      |       | 39,602                                      |       | 36,695               |       |
| Other current liabilities                                                                                             |       | 42,026                                      |       | 46,294               |       |
| Accrued interest expense                                                                                              |       | 310                                         |       | 557                  |       |
| Deferred income taxes                                                                                                 |       | 13,302                                      |       | 13,302               |       |
| Liabilities subject to compromise (Note 5)                                                                            |       | 2,696                                       |       | 2,871                |       |
|                                                                                                                  |       | 99,674                                      |       | 101,307              |       |
|                                                                                                                  |       |                                        |       |                 |       |
| **Non-current Liabilities:**                                                                                          |       |                                        |       |                 |       |
| Obligations under capital leases                                                                                      |       | 11,341                                      |       | 12,429               |       |
| Long-term debt                                                                                                        |       | 40,993                                      |       | 37,235               |       |
| Defined benefit  pension plan liability (Note 7)                                                                      |       | 25,234                                      |       | 27,600               |       |
| Other non-current  liabilities                                                                                        |       | 27,769                                      |       | 28,021               |       |
|                                                                                                                  |       | 105,337                                     |       | 105,285              |       |
|                                                                                                                  |       |                                        |       |                 |       |
| **Total Liabilities**                                                                                                 |       | 205,011                                     |       | 206,592              |       |
|                                                                                                                  |       |                                        |       |                 |       |
| **Commitments and Contingencies (Notes 5 and  8)**                                                                    |       |                                        |       |                 |       |
|                                                                                                                  |       |                                        |       |                 |       |
| **Stockholders’ Equity:**                                                                                        |       |                                        |       |                 |       |
| Preferred stock - authorized 1,000,000 shares,  $.01 par value; none issued                                           |       | —                                      |       | —               |       |
| Common stock - authorized 15,000,000  shares, $.01 par value; issued and to be issued 8,498,752 shares at both  dates |       | 85                                          |       | 85                   |       |
| Capital in excess of par value                                                                                        |       | 118,493                                     |       | 118,493              |       |
| Deficit                                                                                                               |       | (17,671                                     | )          | (4,698               | )          |
| Accumulated other comprehensive income                                                                                |       | 4,919                                       |       | 4,919                |       |
| **Total stockholders’ equity**                                                                                   |       | 105,826                                     |       | 118,799              |       |
|                                                                                                                  |       |                                        |       |                 |       |
| **Total Liabilities and Stockholders’ Equity**                                                                   |       | $                                           | 310,837    |                 | $          | 325,391 |   |

 

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**           | ** ** | **Period from  April 17, 2005 to** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                      | ** ** | **October 28,**                        | ** ** | **October 29,**                        | ** ** | **October 28,**                                   | ** ** | **October 29,** | ** ** |
| ** **                                      | ** ** | **2006**                                    | ** ** | **2005**                                    | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(Restated – Note 3)** | ** ** | **(Restated – Note 3)** | ** ** |
| ** **                                      |       |                                        |       |                                        |       |                                                   |       |   |   |
| **Revenues**                                    |       | $                                           | 319,802    |                                        | $          | 315,373                                                |       | $ | 968,368 |   | $ | 692,767 |   |
|                                            |       |                                        |       |                                        |       |                                                   |       |   |   |
| **Cost and Operating Expenses:**                |       |                                        |       |                                        |       |                                                   |       |   |   |
| Cost of sales                                   |       | 239,904                                     |       | 232,822                                     |       | 724,550                                                |       | 516,139 |   |
| Selling and administrative expenses             |       | 83,126                                      |       | 82,315                                      |       | 249,754                                                |       | 179,768 |   |
|                                            |       |                                        |       |                                        |       |                                                   |       |   |   |
| **Operating (Loss) Income**                     |       | (3,228                                      | )          | 236                                         |       | (5,936                                                 | )          | (3,140 | ) |
|                                            |       |                                        |       |                                        |       |                                                   |       |   |   |
| Interest expense                                |       | 2,029                                       |       | 2,103                                       |       | 6,414                                                  |       | 4,908 |   |
| Reorganization expense                          |       | 190                                         |       | 703                                         |       | 452                                                    |       | 703 |   |
|                                            |       |                                        |       |                                        |       |                                                   |       |   |   |
| **Loss Before Income Taxes**                    |       | (5,447                                      | )          | (2,570                                      | )          | (12,802                                                | )          | (8,751 | ) |
|                                            |       |                                        |       |                                        |       |                                                   |       |   |   |
| Income tax provision                            |       | 57                                          |       | 65                                          |       | 171                                                    |       | 196 |   |
| ** **                                      |       |                                        |       |                                        |       |                                                   |       |   |   |
| **Net Loss**                                    |       | $                                           | (5,504     | )                                           | $          | (2,635                                                 | )          | $ | (12,973 | ) | $ | (8,947 | ) |
|                                            |       |                                        |       |                                        |       |                                                   |       |   |   |
| Shares  outstanding and to be issued            |       | 8,498,752                                   |       | 8,498,752                                   |       | 8,498,752                                              |       | 8,498,752 |   |
|                                            |       |                                        |       |                                        |       |                                                   |       |   |   |
| **Loss Per Share (Basic and Diluted) (Note 4)** |       | $                                           | (0.65      | )                                           | $          | (0.31                                                  | )          | $ | (1.53 | ) | $ | (1.05 | ) |

 

The accompanying notes are an integral part of these statements.

 

6

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ThePenn Traffic Company

CondensedConsolidated Statements of Cash Flows

(Inthousands)

(unaudited)

 
| ** **                                                                                 | ** ** | **For the Period  January 29, 2006  to October 28,  2006** | ** ** | **For the Period  April 17, 2005 to  October 29, 2005** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | ** **                                                                               | ** ** | **(Restated – Note 3)**                                                | ** ** |
| **Operating Activities:**                                                                  |       |                                                                                     |       |                                                                                       |       |
| Net loss                                                                                   |       | $                                                                                        | (12,973    | )                                                                                          | $          | (8,947 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                                                                                     |       |                                                                                       |       |
| Depreciation and amortization                                                              |       | 19,770                                                                                   |       | 12,562                                                                                     |       |
| Amortization of deferred financing cost                                                    |       | 970                                                                                      |       | 1,030                                                                                      |       |
| Gain on sale of fixed assets                                                               |       | (2,422                                                                                   | )          | —                                                                                     |       |
| ** **                                                                                 |       |                                                                                     |       |                                                                                       |       |
| **Net change in operating assets and  liabilities:**                                       |       |                                                                                     |       |                                                                                       |       |
| Accounts and notes receivable, net                                                         |       | 3,165                                                                                    |       | 6,768                                                                                      |       |
| Prepaid expenses and other current assets                                                  |       | (3,328                                                                                   | )          | 5,937                                                                                      |       |
| Inventories                                                                                |       | 1,725                                                                                    |       | (3,933                                                                                     | )          |
| Liabilities subject to compromise                                                          |       | (175                                                                                     | )          | (5,358                                                                                     | )          |
| Accounts payable and other current  liabilities                                            |       | (1,608                                                                                   | )          | (7,621                                                                                     | )          |
| Other assets                                                                               |       | 90                                                                                       |       | 105                                                                                        |       |
| Defined benefit pension plan                                                               |       | (2,366                                                                                   | )          | (3,997                                                                                     | )          |
| Other non-current liabilities                                                              |       | 1,142                                                                                    |       | (343                                                                                       | )          |
|                                                                                       |       |                                                                                     |       |                                                                                       |       |
| **Net Cash Provided by (Used In) Operating  Activities**                                   |       | 3,990                                                                                    |       | (3,797                                                                                     | )          |
|                                                                                       |       |                                                                                     |       |                                                                                       |       |
| **Investing Activities:**                                                                  |       |                                                                                     |       |                                                                                       |       |
| Capital expenditures                                                                       |       | (18,268                                                                                  | )          | (7,100                                                                                     | )          |
| Proceeds from sale of fixed assets                                                         |       | 7,202                                                                                    |       | —                                                                                     |       |
|                                                                                       |       |                                                                                     |       |                                                                                       |       |
| **Net Cash Used in Investing Activities**                                                  |       | (11,066                                                                                  | )          | (7,100                                                                                     | )          |
|                                                                                       |       |                                                                                     |       |                                                                                       |       |
| **Financing Activities:**                                                                  |       |                                                                                     |       |                                                                                       |       |
| Payments of mortgages                                                                      |       | (212                                                                                     | )          | (142                                                                                       | )          |
| Net borrowings  (repayments) under revolving credit facility                               |       | 4,000                                                                                    |       | (500                                                                                       | )          |
| Reduction in  capital lease obligations                                                    |       | (968                                                                                     | )          | (582                                                                                       | )          |
|                                                                                       |       |                                                                                     |       |                                                                                       |       |
| **Net Cash Provided by (Used In) Financing Activities**                                    |       | 2,820                                                                                    |       | (1,224                                                                                     | )          |
|                                                                                       |       |                                                                                     |       |                                                                                       |       |
| **Decrease in cash**                                                                       |       | (4,256                                                                                   | )          | (12,121                                                                                    | )          |
| ** **                                                                                 |       |                                                                                     |       |                                                                                       |       |
| **Cash and cash equivalents at the beginning of period**                                   |       | 12,432                                                                                   |       | 29,304                                                                                     |       |
|                                                                                       |       |                                                                                     |       |                                                                                       |       |
| **Cash and cash equivalents at end of period**                                             |       | $                                                                                        | 8,176      |                                                                                       | $          | 17,183 |   |

 

The accompanying notes are an integral part of these statements.

 

7

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ThePenn Traffic Company

CondensedConsolidated Statements of Stockholders’ Equity

Forthe January 29, 2006 to October 28, 2006

(Inthousands)

(unaudited)

 
| ** **                                                 | ** ** | **Common  Stock** | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|------------------------------------------------------------|------------|-------------------|------------|-----------------------------------------------------|------------|-------------|------------|-----------------------------------------------|------------|---------------------------------------|------------|
|                                                       |       |              |       |                                                |       |        |       |                                          |       |                                  |       |
| Balance at January 28, 2006                           |       | $                 | 85         |                                                | $          | 118,493     |       | $                                             | (4,698     | )                                     | $          | 4,919 |   | 118,799 |   |
|                                                       |       |              |       |                                                |       |        |       |                                          |       |                                  |       |
| Net loss for the year to date ended  October 28, 2006 |       |              |       |                                                |       | (12,973     | )          |                                          |       | (12,973                               | )          |
|                                                       |       |              |       |                                                |       |        |       |                                          |       |                                  |       |
| Balance at October 28, 2006                           |       | $                 | 85         |                                                | $          | 118,493     |       | $                                             | (17,671    | )                                     | $          | 4,919 |   | $ | 105,826 |   |
|                                                            |            |                   |            |                                                     |            |             |            |                                               |            |                                       |            |  |  |  |  |  |

 

The accompanying notes are an integral part of these statements.

 

8

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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 principles generally acceptedin the United States of America for interim financial information and theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements.

 

In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included. Operating results for the interim periods ended October 28, 2006are not necessarily an indication of results to be expected for the fiscal yearended February 3, 2007.  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/A for the fiscal year ended February 3, 2007.

 

The balance sheet as of January 28, 2006 has beenderived from the audited consolidated financial statements as of such date, butdoes not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.

 

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

 

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 fiveowned distribution 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 (see Note 7) and trade claims,all of whom were eligible to receive pro rata distributions of new shares ofcommon stock and the right to share in potential proceeds from certain causesof 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 –Restatement**

 

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

 

Thecorrection resulted in an increase in deferred tax assets attributable to thenet operating loss carryforwards and the recording of a related valuationallowance and a reduction in the deferred tax liability attributable to theincrease in the tax basis of long-lived assets. The net effect of the above was a $3.5 million reduction in the netdeferred tax liability and a corresponding reduction in the carrying value ofcertain long-lived assets upon adoption of fresh-start reporting on April 16,2005.  As a result, net loss for theperiod from July 31, 2005 to October 29, 2005 and from April 17,2005 to October 29, 2005 were restated as follows:

 
| ** **                                      | ** ** | **Quarter Ended** | ** ** | **Period Ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **October 29,**   | ** ** | **October 29,**  | ** ** |
| ** **                                      | ** ** | **2005**               | ** ** | **2005**              | ** ** |
|                                            |       |                   |       |                  |       |
| Net loss as previously reported                 |       | $                      | (2,090     | )                     | $          | (7,170 | ) |
|                                            |       |                   |       |                  |       |
| Reduction in depreciation of long-lived  assets |       | 88                     |       | 189                   |       |
| Reduction in income tax benefit                 |       | (633                   | )          | (1,966                | )          |
|                                            |       |                   |       |                  |       |
| Net loss as restated                            |       | $                      | (2,635     | )                     | $          | (8,947 | ) |
|                                            |       |                   |       |                  |       |
| Net loss per share (basic and diluted):         |       |                   |       |                  |       |
|                                            |       |                   |       |                  |       |
| As previously reported                          |       | $                      | (0.25      | )                     | $          | (0.84 | ) |
|                                            |       |                   |       |                  |       |
| Restated                                        |       | (0.06                  | )          | (0.21                 | )          |
|                                            |       |                   |       |                  |       |
| As restated                                     |       | $                      | (0.31      | )                     | $          | (1.05 | ) |

 

**Note 4–Per Share Data**

 

Basicand diluted net loss per share is based on the number of common shares issuedand estimated to be issued pursuant to the Plan.  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 October 28, 2006 and January 28,2006, 201,055 common shares are estimated to be issued in connection with thesettlement of remaining claims.

 

10

----

 

**Note 5–Liabilities Subject to Compromise**

 

Inconnection with the Chapter 11 proceeding, there are two pending mattersinvolving claims for the payment of money or the transfer of property.  In 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 for reservesto pay future claims arising from existing injuries.  The Company disputes the amounts of theclaims, and is attempting to negotiate a settlement.

 

Inanother matter, a claimant has filed a priority claim allegedly arising underan agreement for a sale-leaseback transaction seeking either damages of$2.2 million or specific performance of the agreement.  The Company disputes the merits of the claimand is defending against it.

 

Duringthe quarter and period ended October 28, 2006 the Company paid $0.1million and $0.2 million, respectively, in settlement of disputedclaims.  The Company has establishedliabilities for the estimated cash payments required to settle the remainingclaims 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 6 –Acquisitions and Dispositions**

 

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

 

TheCompany sold two stores during the quarter ended October 28, 2006 and theperiod ended October 28, 2006 and recognized store closures of $0.2million and $0.5 million, respectively. During the quarter ended October 29, 2005 and the period ended October 29,2005, the Company closed one store and incurred store closing costs of$0.7 million.  Revenues andoperating results for these stores were not significant.  Accordingly, the operations of the storeshave not been reported as discontinued operations in the accompanying financialstatements.

 

**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 vesting occursupon completion of five years of service. Assets of the Company’s pension plans primarily consist of investmentsin publicly traded equity and debt securities.

 

Thecomponents of net periodic benefit costs for the year to date ended October 28,2006 and period ended October 29, 2005 are as follows (in thousands):

 
| ** **                     | ** ** | **Year to Date** | ** ** | **Period Ended** | ** ** |
|--------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **October 28,**       | ** ** | **October 29,**  | ** ** |
| ** **                     | ** ** | **2006**                   | ** ** | **2005**              | ** ** |
|                           |       |                       |       |                  |       |
| Service cost                   |       | 1,487                      |       | 1,002                 |       |
| Interest cost                  |       | 4,481                      |       | 2,975                 |       |
| Expected return on plan assets |       | (4,481                     | )          | (2,717                | )          |
|                           |       |                       |       |                  |       |
|                           |       | $                          | 1,487      |                  | $          | 1,260 |   |
|                                |            |                            |            |                       |            |  |  |

 

Forthe period ended October 28, 2006, the Company contributed $3.1 million tothe four defined benefit pension plans. For the period ended October 29, 2005, the Company contributed$5.4 million to the four defined benefit pension plans.

 

11

----

 

**Note 8 –Commitments and Contingencies**

 

TheUnited States Attorney for the Northern District of New York and the Securitiesand Exchange Commission (“SEC”) have been conducting investigations relating tothe Company’s promotional allowance practices and policies.  Such 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 the Company’sformer Chief Marketing Officer and former Vice President, Non-PerishablesMarketing alleging that such individuals orchestrated a scheme to inflate the Company’sincome and other financial results by prematurely recognizing promotionalallowances received from vendors from approximately the second quarter offiscal year 2001 through at least the fourth quarter of fiscal year 2003. Thecomplaint further alleges that the individuals deceived the Company’saccounting personnel to carry out their fraudulent scheme and aided and abettedthe Company’s violations of the Securities Exchange Act of 1934 and rules thereunder.In addition, on the same date, the United States Attorney for the NorthernDistrict of New York announced that a federal grand jury has returned anindictment against the abovementioned individuals on related criminal charges.Both the SEC and the United States Attorney indicated that their investigationsare continuing.

 

Inconnection with these matters, the Company could be subject to damage claims,fines or penalties.  At present, 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.

 

 

12

----

 

**Note 9 –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 and related products and other services. In fiscal period 2006, the Company had allocated warehouse andtransportation costs based on each segment’s percentage of totalshipments.  In fiscal year 2007, theallocation method was changed to include order size and distance from thewarehouse.  The effect of this change wasto increase the operating income of the retail food segment and decrease theoperating income of the wholesale food distribution segment by$3.6 million for the year to date ended October 28, 2006.

 

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

 
| ** **                                                    | ** ** | **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 bakerysales principally to customers other than those of the retail and wholesalesegments and approximately $1.6 million for trucking revenues.

 

(2)   Consists principally of approximately $2.7 million for bakerysales and approximately $0.3 million increase in cost of sales toreconcile segment inventories on FIFO to consolidated inventories on LIFO.

 

(3)   Consists principally of approximately $5.9 million of payroll,benefits, and payroll taxes associated with the administrative staff,approximately $1.5 million associated with selling and administrativecosts of the bakery, approximately $1.4 million of contract hauling costsassociated with trucking revenue, approximately $2.7 million of professionalfees (including approximately $1.2 million of legal costs associated with theinternal and SEC investigation relating to the Company’s practices regardingpromotional discounts and allowances), approximately $0.5 million for dataprocessing maintenance and $0.3 million for corporate insurance costs.

 

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

 

 

13

----

 
| ** **                                                    | ** ** | **Quarter Ended October 29, 2005** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                             | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Retail Food**                                   | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Revenues                                                      |       | $                                                      | 255,399    |   | $ | 53,808 |   | $ | 6,166 | (1) | $ | 315,373 |   |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Cost of sales                                                 |       | (177,943                                               | )          | (49,179 | ) | (4,555 | )(2) | (231,677 | )(4) |
| Selling and administrative expense                            |       | (66,698                                                | )          | (2,605 | ) | (8,579 | )(3) | (77,882 | )(4) |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation  and amortization |       | 10,758                                                 |       | 2,024 |   | (6,968 | ) | 5,814 |   |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Depreciation and amortization                                 |       | (4,621                                                 | )          | (566 | ) | (391 | ) | (5,578 | ) |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Operating income (loss)                                       |       | $                                                      | 6,137      |   | $ | 1,458 |   | $ | (7,359 | ) | 236 |   |
| Interest expense                                              |       |                                                   |       |   |   |   |   | (2,103 | ) |
| Reorganization costs                                          |       |                                                   |       |   |   |   |   | (703 | ) |
|                                                          |       |                                                   |       |   |   |   |   |   |   |
| Consolidated loss before income taxes                         |       |                                                   |       |   |   |   |   | $ | (2,570 | ) |

 

----

(1)   Consists principally of approximately $3.9 million for bakerysales to customers other than those of the retail and wholesale segments andapproximately $1.7 million for trucking revenues.

 

(2)   Consists principally of approximately $3.8 million for bakerysales and approximately $0.5 million increase in cost of sales toreconcile segment inventories on FIFO to consolidated inventories on LIFO.

 

(3)   Consists principally of approximately $7.0 million of payroll,benefits, and payroll taxes associated with the administrative staff,approximately $0.8 million of contract hauling costs associated withtrucking revenue, and approximately $0.5 million of legal costs associatedwith the internal and SEC investigation relating to the Company’s practicesregarding promotional discounts and allowances.

 

(4)   Excludes depreciation and amortization of $1.1 million for cost ofsales and $4.4 million for selling and administrative expenses.

 

14

----

 
| ** **                                                       | ** ** | **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, 2006                         |       | $                                                                                            | 251,932    | (5) | $ | 28,345 | (5) | $ | 30,560 | (6) | $ | 310,837 |   |
|                                                             |       |                                                                                         |       |   |   |   |   |   |   |
| Capital expenditures for the period ended October 28,  2006 |       | $                                                                                            | 16,216     |   | $ | — |   | $ | 2,052 |   | $ | 18,268 |   |

 

----

(1)   Consists principally of approximately $12.4 million for bakery salesprincipally to customers other than those of the retail and wholesale segmentsand approximately $4.7 million for trucking revenues.

 

(2)   Consists principally of approximately $7.8 million for bakerysales and approximately $1.0 million increase in cost of sales toreconcile segment inventories on FIFO to consolidated inventories on LIFO.

 

(3)   Consists principally of approximately $19.0 million of payroll,benefits, and payroll taxes associated with the administrative staff,approximately $4.4 million associated with selling and administrativecosts of the bakery, approximately $4.1 million of contract hauling costsassociated with trucking revenue, and approximately $8.0 million ofprofessional fees (including approximately $4.3 million of legal costsassociated with the internal and SEC investigation relating to the Company’spractices regarding promotional discounts and allowances), approximately $1.5million for data processing maintenance and $0.9 million for corporateinsurance costs.

 

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

 

(5)   The warehouse and transportation assets have been allocated using thesame methodology as that which was used for the warehouse and transportationcosts described above.  The effect of thechange in allocation method in fiscal year 2007 was to increase the assets ofthe wholesale food distribution segment and decrease assets of the retail foodsegment by $4.3 million.

 

(6)   Consists principally of fixed assets and inventory of the bakeryoperation and general corporate assets (including cash and cash equivalents).

 

15

----

 
| ** **                                                       | ** ** | **Period from April 17, 2005 to October 29, 2005** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | ** **                                                                                 | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **Retail Food**                                                                       | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                             |       |                                                                                       |       |   |   |   |   |   |   |
| Revenues                                                         |       | $                                                                                          | 561,949    |   | $ | 117,606 |   | $ | 13,212 | (1) | $ | 692,767 |   |
|                                                             |       |                                                                                       |       |   |   |   |   |   |   |
| Cost of sales                                                    |       | (395,281                                                                                   | )          | (109,083 | ) | (9,467 | )(2) | (513,831 | )(4) |
| Selling and administrative expense                               |       | (145,072                                                                                   | )          | (5,362 | ) | (19,080 | )(3) | (169,514 | )(4) |
|                                                             |       |                                                                                       |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation  and amortization    |       | 21,596                                                                                     |       | 3,161 |   | (15,335 | ) | 9,422 |   |
|                                                             |       |                                                                                       |       |   |   |   |   |   |   |
| Depreciation and amortization                                    |       | (10,901                                                                                    | )          | (953 | ) | (708 | ) | (12,562 | ) |
|                                                             |       |                                                                                       |       |   |   |   |   |   |   |
| Operating income (loss)                                          |       | $                                                                                          | 10,695     |   | $ | 2,208 |   | $ | (16,043 | ) | (3,140 | ) |
| Interest expense                                                 |       |                                                                                       |       |   |   |   |   | (4,908 | ) |
| Reorganization costs                                             |       |                                                                                       |       |   |   |   |   | (703 | ) |
|                                                             |       |                                                                                       |       |   |   |   |   |   |   |
| Consolidated loss before income taxes                            |       |                                                                                       |       |   |   |   |   | $ | (8,751 | ) |
|                                                             |       |                                                                                       |       |   |   |   |   |   |   |
| Total assets as of October 29, 2005                         |       | $                                                                                          | 288,265    | (5) | $ | 23,855 | (5) | $ | 15,304 | (6) | $ | 327,424 |   |
|                                                             |       |                                                                                       |       |   |   |   |   |   |   |
| Capital expenditures for the period ended  October 29, 2005 |       | $                                                                                          | 5,751      |   | $ | — |   | $ | 1,349 |   | $ | 7,100 |   |

 

----

(1)   Consists principally of approximately $8.3 million for bakerysales principally to customers other than those of the retail and wholesalesegments and approximately $3.7 million for trucking revenues.

 

(2)   Consists principally of approximately $7.7 million for bakerysales and approximately $1.0 million increase in cost of sales toreconcile segment inventories on FIFO to consolidated inventories on LIFO.

 

(3)   Consists principally of approximately $14.8 million of payroll,benefits, and payroll taxes associated with the administrative staff,approximately $1.8 million of contract hauling costs associated withtrucking revenue, and approximately $0.5 million of legal costs associatedwith the internal and SEC investigation relating to the Company’s practicesregarding promotional discounts and allowances.

 

(4)   Excludes depreciation and amortization of $2.3 million for cost ofsales and $10.3 million for selling and administrative expenses.

 

(5)   The warehouse and transportation assets have been allocated using thesame methodology as that which was used for the warehouse and transportationcosts.

 

(6)   Consists principally of fixed assets and inventory of the bakeryoperation and general corporate assets (including cash and cash equivalents).

 

16

----

 

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

 

**Overview**

 

As discussed in Note 2 to the accompanyingcondensed consolidated financial statements, we emerged from Chapter 11proceedings on April 13, 2005.  Forfinancial reporting purposes, we accounted for the consummation of our plan ofreorganization as of the close of business on April 16, 2005.  In accordance with the American Institute ofCertified Public Accountant’s Statement of Position 90-7, “Financial Reportingby Entities in Reorganization under the Bankruptcy Code” we have appliedfresh-start reporting as of the close of business on April 16, 2005,which has resulted in significant changes to the valuation of certain of ourassets and liabilities, and to our stockholders’ equity.  In connection with the adoption offresh-start reporting, a new entity has been deemed to be created for financialreporting purposes.  The periods ended onor prior to April 16, 2005 have been designated “Predecessor Company”and the periods subsequent to April 16, 2005 have been designated “SuccessorCompany”.  For purposes of the discussionof the unaudited Results of Operations, the activities of the Successor Companyhave been deemed noncomparable to those of the Predecessor Company and,accordingly, no comparison was done with the Predecessor Company.

 

**Results ofOperations**

 

The following table sets forth certainConsolidated Statement of Operations components expressed as percentages ofrevenues for the quarter and the (39-week) year to date period ended October 28, 2006and the quarter and the (28-week) period ended October 29, 2005.

 
| ** **                          | ** ** | **Unaudited**              | ** ** |
|-------------------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **Quarter**                | ** ** | **Quarter** | ** ** | **Year to Date** | ** ** | **Period from** | ** ** |
| ** **                          | ** ** | **Ended**                  | ** ** | **Ended** | ** ** | **Ended** | ** ** | **April 17, 2005 to** | ** ** |
| ** **                          | ** ** | **October 28,  2006** | ** ** | **October 29,  2005** | ** ** | **October 28,  2006** | ** ** | **October 29,  2005** | ** ** |
|                                |       |                       |       |   |   |   |   |   |   |
| Revenues                            |       | 100.0                      | %          | 100.0 | % | 100.0 | % | 100.0 | % |
|                                |       |                       |       |   |   |   |   |   |   |
| Gross profit (1)                    |       | 25.0                       |       | 26.2 |   | 25.2 |   | 25.5 |   |
|                                |       |                       |       |   |   |   |   |   |   |
| Selling and administrative expenses |       | 26.0                       |       | 26.1 |   | 25.8 |   | 26.0 |   |
|                                |       |                       |       |   |   |   |   |   |   |
| Operating (loss) income             |       | (1.0                       | )          | 0.1 |   | (0.6 | ) | (0.5 | ) |
|                                |       |                       |       |   |   |   |   |   |   |
| Interest expense                    |       | 0.6                        |       | 0.7 |   | 0.7 |   | 0.7 |   |
|                                |       |                       |       |   |   |   |   |   |   |
| Reorganization expense              |       | 0.1                        |       | 0.2 |   | 0.0 |   | 0.1 |   |
|                                |       |                       |       |   |   |   |   |   |   |
| Income tax provision                |       | 0.0                        |       | 0.0 |   | 0.0 |   | 0.0 |   |
|                                |       |                       |       |   |   |   |   |   |   |
| Net loss                            |       | (1.7                       | )          | (0.8 | ) | (1.3 | ) | (1.3 | ) |

 

----

(1)                                  Revenues less cost of sales.

 

17

----

 

**Fiscal Year 2007 (theQuarter Ended October 28, 2006) and Fiscal Year 2006 (the Quarter Ended October 29, 2005)**

 

**Revenues**

 

Revenues for the quarters ended October 28,2006 and the October 29, 2005 were $319.8 million and $315.4 million,respectively.  Revenues increased ascompared to prior year quarter due to an increase in retail revenues of$4.0 million and an increase in wholesale distribution revenues of $0.3million.

 

Wholesale food distribution revenues for thequarter ended October 28, 2006 and the quarter ended October 29, 2005were $54.1 million and $53.8 million, respectively.  Increases in revenues were a result of increasedprices.

 

**Gross Profit**

 

Gross profit was $79.9 million, or 25.0% ofrevenues for the quarter ended October 28, 2006 and$82.6 million, or 26.2% of revenues for the quarter ended October 29,2005.  Gross profit decreased due tohigher inventory costs.

 

**Selling and AdministrativeExpenses**

 

Selling and administrative expenses for thequarter ended October 28, 2006 were $83.2 million, or 26.0% ofrevenues and the selling and administrative expenses for the quarter ended October 29,2005 were $82.3 million, or 26.1% of revenues.  Selling and administrative expenses increaseddue to one time charges which include the hiring of new executive management,SEC investigation related legal fees, and severance payments.

 

**Depreciation and Amortization**

 

Depreciation and amortization expense was$6.8 million, or 2.1% of revenues, for the quarter ended October 28, 2006and $5.6 million or 1.8% of revenues, for the quarter ended October 29,2005.  The increase in depreciation andamortization during the quarter ended October 28, 2006 was primarily dueto the depreciation of additions in fiscal 2006 of approximately $20.5 million.

 

**Operating (Loss) Income**

 

Operating loss for the quarter ended October 28,2006 was $3.2 million, or 1.0% of revenues, and for the quarter ended October 29,2005, operating income was $0.2 million, or 0.1% of revenues.  The difference is due to a rise in sellingand administrative expenses and increases in inventory costs.

 

**Interest Expense**

 

Interest expense for the quarter ended October 28,2006 was $2.0 million, or 0.6% of revenues, and for the quarter ended October 29,2005, interest expense was $2.1 million, or 0.7% of revenues.

 

**Reorganization Expense**

 

During the quarter ended October 28,2006, we recorded reorganization expenses of $0.2 million, or 0.1% of revenues,and for the quarter ended October 29, 2005, we recorded reorganizationexpenses of $0.7 million, or 0.2% of revenues.

 

**Income Tax Provision**

 

Income tax provision for the quarter ended October 28,2006 and October 29, 2005 were less than $0.1 million.  Taxes consist of minimal state taxes andcapital franchise taxes.

 

**Net Loss**

 

Net loss for the quarter ended October 28,2006 was $5.5 million, or 1.7% of revenues, and net loss for the quarter ended October 29,2005 was $2.6 million, or 0.8% of revenues. The increase in net loss is due to an increase in selling andadministrative expenses and a increase in inventory costs.

 

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**Fiscal Year 2007 (Year toDate Ended October 28, 2006) and Fiscal Year 2006 (the Period Ended October 29,2005)**

 

**Revenues**

 

Revenues for year to date ended October 28,2006 and the period ended October 29, 2005 were $968.4 million and$692.8 million, respectively.

 

Retail food revenues were $787.0 million foryear to date ended October 28, 2006 and $561.9 million for the periodended October 29, 2005.

 

Wholesale food distribution revenues for theyear to date ended October 28, 2006 and the period ended October 29, 2005were $163.1 million and $117.6 million, respectively.

 

**Gross Profit**

 

Gross profit was $243.8 million, or 25.2% ofrevenues for year to date ended October 28, 2006 and$176.6 million, or 25.5% of revenues for the period ended October 29,2005.  Gross profit decreased as apercentage of revenue due to increased inventory costs.

 

**Selling and AdministrativeExpenses**

 

Selling and administrative expenses for yearto date ended October 28, 2006 were $249.8 million, or 25.8% ofrevenues.  The selling and administrativeexpenses for the period ended October 29, 2005 were $179.8 million,or 26.0% of revenues.

 

**Depreciation and Amortization**

 

Depreciation and amortization expense was$19.8 million, or 2.0% of revenues, for year to date ended October 28, 2006and $12.6 million or 2.0% of revenues, for the period ended October 29,2005.

 

**Operating Loss**

 

Operating loss for year to date ended October 28,2006 was $5.9 million, or 0.6% of revenues, and for the period ended October 29,2005, operating loss was $3.1 million, or 0.5% of revenues.

 

**Interest Expense**

 

Interest expense for the year to date ended October 28,2006 was $6.4 million, or 0.7% of revenues, and for the period ended October 29,2005, interest expense was $4.9 million, or 0.7% of revenues.

 

**Reorganization Expense**

 

During the year to date ended October 28,2006, we recorded reorganization expenses of $0.5 million, or less than 0.1% ofrevenues, and for the period ended October 29, 2005, we recordedreorganization expenses of $0.7 million, or 0.1% of revenues.

 

**Income Tax Provision**

 

Income tax provision for year to date ended October 28,2006 and the period ended October 29, 2005 were $0.2 million, orless than 0.1% of revenues.  Taxesconsist of minimal state taxes and capital franchise taxes.

 

**Net Loss**

 

Net loss for year to date ended October 28,2006 was $13.0 million, or 1.3% of revenues, and net loss for the period ended October 29,2005 was $8.9 million, or 1.3% of revenues. The increase in net loss is mainly attributable to the difference in thenumber of weeks in each period, (39-weeks as compared to 28-weeks).

 

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**Liquidityand Capital Resources**

 

On April 16, 2005, upon emergence fromChapter 11 proceedings, the Company entered into a revolving credit and termloan facility with a group of financial institutions providing for a$130.0 million revolving credit facility and a $6.0 million termloan.  Also on April 16, 2005, theCompany entered into a supplemental real estate credit facility with anothergroup of lenders, providing for borrowings of up to $28.0 million.Availability under both credit facilities is dependent on levels of accountsreceivable, inventory and certain other assets. Interest rates on borrowings under the revolving credit facility vary dependingupon the amount of availability.  At October 28, 2006 outstandingborrowings under both facilities aggregated $37.0 million and outstandingletters of credit under the revolving credit facility, which are primarilyassociated with supporting worker’s compensation obligations, amounted to approximately$49.5 million. At such date, availability in excess of outstanding borrowingsand letters of credit was approximately $49.6 million. Borrowings underthe revolving credit and term loan facility are secured by substantially allthe assets of the Company, subject to first liens on certain property by otherlenders. Borrowings under the real estate facility are secured by a first lienon substantially all leasehold interests of the Company, and a second lien onrealty owned by the Company.

 

Provisions of both credit facilities, amongother things, require the maintenance of certain financial covenants (whenavailability under the credit facilities is less than $35.0 million forfour consecutive days or less than $30.0 million for any one day), and limitthe amount of capital expenditures, our assumption of additional debt and ourpayment of dividends.  At no time throughthe quarter ended October 28, 2006 had we been subject to compliance withthese financial covenants because the annual available for borrowing had notdropped to these levels.  However, hadsuch an event occurred, we would not have been in compliance with the financialcovenants and would have been in default under the terms of the loan agreement atOctober 28, 2006.  Pursuant to ourplan of reorganization, we entered into a collateral trust agreement with thecollateral trustee in connection with the secured trade lien program.  The secured trade lien program is withcertain of our vendors and allows us to maintain trade terms.

 

On December 26, 2006, August 1,2007 and January 30, 2008, both the revolving credit and term loanfacility and the supplemental real estate credit facility were amended topermit the disposal of assets in connection with the closing of certain stores.In March 2008, the maturity date of both facilities were extended toApril 13, 2009. (See Note 7 to the financial statements included in theannual report on Form 10-K for year ended February 2, 2008 for additionalinformation).

 

We also have $4.3 million of borrowings undermortgages secured by the related properties as of October 28, 2006.

 

 

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

 

Our financial results are subject to riskfrom interest rate changes on debt that has variable interest rates. Totalvariable rate debt outstanding under our loan agreements at October 28, 2006was $37.0 million with a weighted average interest rate of 10.85%.  A 1% change in interest rates wouldimpact pre-tax income by $0.4 million based on the debt outstanding at October 28, 2006.  In addition to the variable rate debt we had$4.3 million of fixed rate debt outstanding at October 28, 2006 witha weighted average interest rate of 6.78%. We view the fixed rate debt as a partial hedge against interest ratefluctuations which should minimize the potential impact on earnings frominterest rate changes.

 

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

 

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

 

Pursuant to Rule 13a-15(e) 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.  Our President and Chief Executive Officer andour Senior Vice President and Chief Financial Officer were not with us duringfiscal year 2007.  Based on their currentobservations combined with observations by the disclosure committee, which iscomprised of members of management, members of the audit committee and externalcounsel, management concluded that our disclosure controls and procedures wereineffective as of October 29, 2006 in providing reasonable assurancethat material information requiring disclosure was brought to management’sattention on a timely basis and that our financial reporting was reliable.

 

**Change in our Internal ControlOver Financial Reporting**

 

Management did not conduct an evaluation ofthe effectiveness of our internal control over financial reporting as of October 29, 2006.  In May 2007, we hired an outsideconsulting firm to assist management in its evaluation of the effectiveness ofour internal controls over financial reporting, including disclosure controlsand procedures.  They have sincedetermined they will use the framework established in “InternalControl-Integrated Framework”, issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

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**PART II– OTHER INFORMATION**

 

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

 

There have been no materialchanges to the legal proceedings disclosed in the Company’s Annual Report on Form 10-Kfor the year ended February 2, 2008.

 

**ITEM 1A.****                        ****RISK FACTORS**

 

There have been no materialchanges to the risk factors disclosed in the Company’s Annual Report on Form 10-Kfor the year ended February 2, 2008.

 

**ITEM 4.****                                 ****SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

No matter wassubmitted to a vote of security holders during the quarter ended October 28,2006.

 

**ITEM 6.****                                 ****EXHIBITS**

 

The following are filed as Exhibits to thisReport:

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

 

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**Signatures**

 

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

 

**THE PENNTRAFFIC COMPANY**

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

 

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