**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**x QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended May 3, 2008**

 

**OR**

 

**o TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Transition Periodfrom                        to**

 

**Commission file number: 0-8858**

 

**THE PENNTRAFFIC COMPANY**

(Exact name of registrant as specified in its charter)

 

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

 

**(315) 453-7284**

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

CommonStock, par value $.01 per share: 8,336,192 shares outstanding as of June 2, 2008

 

 

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**FORM 10-QINDEX**

 
| ** **                              | **PAGE**   |
|-----------------------------------------|------------|
| **PART I. FINANCIAL  INFORMATION** | ** ** |
|                                    |       |   |   |
| Item                                    | 1.         | Financial Statements | 4 |
|                                    |       |   |   |
| Item                                    | 2.         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 16 |
|                                    |       |   |   |
| Item                                    | 3.         | Quantitative  and Qualitative Disclosures About Market Risk | 20 |
|                                    |       |   |   |
| Item                                    | 4.         | Controls and  Procedures | 20 |
|                                    |       |   |   |
| **PART II.  OTHER INFORMATION**    |       |
|                                    |       |   |   |
| Item                                    | 6.         | Exhibits | 21 |

 

2

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**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Certain statementsincluded in this Form 10-Q, including without limitation, statementsincluded in Item 2 - “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” which are not statements of historicalfact, 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 the risks set forth in Item 1A – “Risk Factors” in our Annual Report on Form 10-Kfor the fiscal year ended February 2, 2008; our ability to improveoperating performance and effectuate business plans; our ability to operate pursuantto the terms of our credit facilities and to comply with the terms of ourlending agreements or to amend or modify the terms of such agreements as may beneeded from time to time; our ability to generate cash; our ability to attractand maintain adequate capital; our ability to refinance our indebtedness;increases in prevailing interest rates; our ability to obtain trade credit, andshipments and terms with vendors and service providers for current orders; ourability to maintain contracts that are critical to our operations; potentialadverse developments with respect to our liquidity or results of operations;general economic and business conditions; competition, including increasedcapital investment and promotional activity by our competitors; availability,location and terms of sites for store development; the successfulimplementation of our capital expenditure program; labor relations; labor andemployee benefit costs including increases in health care and pension costs andthe level of contributions to our sponsored pension plans; the result of ourpursuit of strategic alternatives; economic and competitive uncertainties; ourability to pursue strategic alternatives; economic and competitiveuncertainties; changes in strategies; changes in generally accepted accountingprinciples; adverse changes in economic and political climates around theworld, including terrorist activities and international hostilities; and theoutcome of pending, or the commencement of any new, legal proceedings against,or governmental investigations of us, including the previously announced SECand U.S. Attorney’s Office investigations. We caution that the foregoing list of important factors is notexhaustive.  Accordingly, there can be noassurance that we will meet future results, performance or achievementsexpressed or implied by such forward-looking statements, which are generallyrequired to be publicly revised as circumstances change, and which we do notintend to update.

 

3

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**PART I**

 

**ITEM 1.          Financial Statements**

 

The Penn TrafficCompany

Condensed ConsolidatedBalance Sheets

(In thousands)

 
| ** **                                                                                              | ** ** | **May 3,** | ** ** | **February 2,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------------|------------|
| ** **                                                                                              | ** ** | **2008**        | ** ** | **2008**             | ** ** |
| ** **                                                                                              | ** ** | **(unaudited)** | ** ** | ** **           | ** ** |
| **ASSETS**                                                                                              |       |            |       |                 |       |
|                                                                                                    |       |            |       |                 |       |
| **Current Assets:**                                                                                     |       |            |       |                 |       |
| Cash and cash equivalents                                                                               |       | $               | 11,793     |                 | $          | 20,916 |   |
| Accounts and notes receivable (less allowance fordoubtful accounts of $6,139 and $5,690,  respectively) |       | 32,811          |       | 37,513               |       |
| Inventories                                                                                             |       | 87,517          |       | 89,208               |       |
| Prepaid expenses and other current assets                                                               |       | 6,281           |       | 7,307                |       |
| **Total current assets**                                                                                |       | 138,402         |       | 154,944              |       |
|                                                                                                    |       |            |       |                 |       |
| **Capital Leases, net**                                                                                 |       | 8,000           |       | 8,268                |       |
| ** **                                                                                              |       |            |       |                 |       |
| **Fixed Assets, net**                                                                                   |       | 71,526          |       | 78,402               |       |
|                                                                                                    |       |            |       |                 |       |
| **Other Assets:**                                                                                       |       |            |       |                 |       |
| Intangible assets                                                                                       |       | 14,412          |       | 15,397               |       |
| Deferred tax asset                                                                                      |       | 3,604           |       | 2,440                |       |
| Other assets                                                                                            |       | 3,753           |       | 2,998                |       |
| **Total other assets**                                                                                  |       | 21,769          |       | 20,835               |       |
|                                                                                                    |       |            |       |                 |       |
| **Total Assets**                                                                                        |       | $               | 239,697    |                 | $          | 262,449 |   |

 

The accompanying notesare an integral part of these statements.

 

4

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| ** **                                                                                                                                    | ** ** | **May 3,** | ** ** | **February 2,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------------|------------|
| ** **                                                                                                                                    | ** ** | **2008**        | ** ** | **2008**             | ** ** |
| ** **                                                                                                                                    | ** ** | **(unaudited)** | ** ** | ** **           | ** ** |
|                                                                                                                                          |       |            |       |                 |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                 |       |            |       |                 |       |
|                                                                                                                                          |       |            |       |                 |       |
| **Current Liabilities:**                                                                                                                      |       |            |       |                 |       |
| Current portion of obligations under capital leases                                                                                           |       | $               | 1,420      |                 | $          | 1,368 |   |
| Current maturities of long-term debt (Note 6)                                                                                                 |       | 46,853          |       | 278                  |       |
| Accounts payable                                                                                                                              |       | 27,803          |       | 34,178               |       |
| Other current liabilities                                                                                                                     |       | 45,436          |       | 47,060               |       |
| Accrued interest expense                                                                                                                      |       | 108             |       | 176                  |       |
| Deferred income taxes (Note 7)                                                                                                                |       | 12,649          |       | 11,485               |       |
| Liabilities subject to compromise (Note 5)                                                                                                    |       | 1,413           |       | 2,516                |       |
| **Total current liabilities**                                                                                                                 |       | 135,682         |       | 97,061               |       |
|                                                                                                                                          |       |            |       |                 |       |
| **Non-current Liabilities:**                                                                                                                  |       |            |       |                 |       |
| Obligations under capital leases                                                                                                              |       | 8,594           |       | 8,962                |       |
| Long-term debt (Note 6)                                                                                                                       |       | 3,562           |       | 50,209               |       |
| Defined benefit pension  plan liability (Note 9)                                                                                              |       | 5,715           |       | 6,326                |       |
| Other non-current  liabilities                                                                                                                |       | 29,544          |       | 30,716               |       |
| **Total non-current liabilities**                                                                                                             |       | 47,415          |       | 96,213               |       |
|                                                                                                                                          |       |            |       |                 |       |
| **Total Liabilities**                                                                                                                         |       | 183,097         |       | 193,274              |       |
|                                                                                                                                          |       |            |       |                 |       |
| **Commitments and Contingencies (Notes 5, 6, 9 and  10)**                                                                                     |       |            |       |                 |       |
|                                                                                                                                          |       |            |       |                 |       |
| **Stockholders’ Equity:**                                                                                                                |       |            |       |                 |       |
| Preferred stock - authorized 1,000,000 shares, $.01 par value                                                                                 |       | 100             |       | 100                  |       |
| Common stock - authorized 15,000,000 shares, $.01 par value; issued  and to be issued 8,650,110 in first quarter and 8,519,095 in fiscal 2008 |       | 86              |       | 85                   |       |
| Capital in excess of par value                                                                                                                |       | 128,148         |       | 128,149              |       |
| Deficit                                                                                                                                       |       | (86,787         | )          | (74,356              | )          |
| Accumulated other comprehensive income                                                                                                        |       | 15,053          |       | 15,197               |       |
| **Total  stockholders’ equity**                                                                                                          |       | 56,600          |       | 69,175               |       |
|                                                                                                                                          |       |            |       |                 |       |
| **Total  Liabilities and Stockholders’ Equity**                                                                                          |       | $               | 239,697    |                 | $          | 262,449 |   |

 

Theaccompanying notes are an integral part of these statements.

 

5

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The Penn Traffic Company

Condensed ConsolidatedStatements of Operations

(In thousands, exceptshare and per share data)

(unaudited)

 
| ** **                                               | ** ** | **Quarter**               | ** ** | **Quarter**               | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                               | ** ** | **Ended**                 | ** ** | **Ended**                 | ** ** |
| ** **                                               | ** ** | **May 3, 2008** | ** ** | **May 5, 2007** | ** ** |
|                                                     |       |                      |       |                      |       |
| **Revenues**                                             |       | $                         | 287,058    |                      | $          | 297,973 |   |
|                                                     |       |                      |       |                      |       |
| **Cost and Operating Expenses:**                         |       |                      |       |                      |       |
| Cost of sales                                            |       | 212,020                   |       | 218,637                   |       |
| Selling and administrative expenses                      |       | 81,314                    |       | 81,746                    |       |
| Loss on store and  distribution center closings          |       | 921                       |       | 1,883                     |       |
| Asset impairment                                         |       | 2,604                     |       | —                    |       |
|                                                     |       |                      |       |                      |       |
| **Operating Loss**                                       |       | (9,801                    | )          | (4,293                    | )          |
|                                                     |       |                      |       |                      |       |
| Interest expense                                         |       | 2,353                     |       | 2,341                     |       |
| Reorganization and other expenses                        |       | 110                       |       | 164                       |       |
|                                                     |       |                      |       |                      |       |
| **Loss from continuing operations before income  taxes** |       | (12,264                   | )          | (6,798                    | )          |
|                                                     |       |                      |       |                      |       |
| Income tax expense (Note 7)                              |       | 157                       |       | 59                        |       |
|                                                     |       |                      |       |                      |       |
| **Loss from continuing operations**                      |       | $                         | (12,421    | )                         | (6,857     | ) |
|                                                     |       |                      |       |                      |       |
| **Discontinued  operations (Note 8)**                    |       |                      |       |                      |       |
| Loss from discontinued  operations                       |       | (10                       | )          | (553                      | )          |
| **Net loss**                                             |       | $                         | (12,431    | )                         | $          | (7,410 | ) |
|                                                     |       |                      |       |                      |       |
| **Loss per  share – basic and diluted (Note 4):**   |       |                      |       |                      |       |
|                                                     |       |                      |       |                      |       |
| Loss from continuing  operations                         |       | $                         | (1.47      | )                         | $          | (0.81 | ) |
| Loss from discontinued  operations                       |       | 0.00                      |       | (0.06                     | )          |
| **Loss per  share – basic and diluted**             |       | $                         | (1.47      | )                         | $          | (0.87 | ) |
|                                                     |       |                      |       |                      |       |
| Basic and diluted shares  outstanding and to be issued   |       | 8,650,110                 |       | 8,498,752                 |       |

 

The accompanying notesare an integral part of these statements.

 

6

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The Penn Traffic Company

Condensed ConsolidatedStatements of Cash Flows

(In thousands)

(unaudited)

 
| ** **                                                                   | ** ** | **Quarter Ended**    | ** ** | **Quarter Ended**    | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                                                   | ** ** | **May 3, 2008** | ** ** | **May 5, 2007** | ** ** |
|                                                                         |       |                      |       |                      |       |
| **Operating activities:**                                                    |       |                      |       |                      |       |
| Net loss                                                                     |       | $                         | (12,431    | )                         | $          | (7,410 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |       |                      |       |                      |       |
| Depreciation and amortization                                                |       | 5,664                     |       | 6,868                     |       |
| Allowance for doubtful accounts                                              |       | 619                       |       | 918                       |       |
| Gain on sale of fixed assets                                                 |       | (1,874                    | )          | (491                      | )          |
| Asset impairment charge                                                      |       | 2,604                     |       | —                    |       |
| Amortization of deferred financing cost                                      |       | 333                       |       | 5                         |       |
| Deferred income taxes                                                        |       | 92                        |       | —                    |       |
| Phantom stock compensation                                                   |       | 131                       |       | 406                       |       |
|                                                                         |       |                      |       |                      |       |
| **Net change in operating assets and liabilities:**                          |       |                      |       |                      |       |
| Accounts and notes receivable, net                                           |       | 4,083                     |       | (691                      | )          |
| Prepaid expenses and other current assets                                    |       | 1,026                     |       | 277                       |       |
| Inventories                                                                  |       | 1,691                     |       | 2,940                     |       |
| Liabilities subject to compromise                                            |       | (1,103                    | )          | (181                      | )          |
| Accounts payable and other current liabilities                               |       | (8,067                    | )          | (3,331                    | )          |
| Other assets                                                                 |       | (4                        | )          | 10                        |       |
| Defined benefit pension plan                                                 |       | (847                      | )          | (1,668                    | )          |
| Other non-current liabilities                                                |       | (1,302                    | )          | 912                       |       |
|                                                                         |       |                      |       |                      |       |
| **Net cash used in operating activities**                                    |       | (9,385                    | )          | (1,436                    | )          |
|                                                                         |       |                      |       |                      |       |
| **Investing activities:**                                                    |       |                      |       |                      |       |
| Capital expenditures                                                         |       | (1,764                    | )          | (657                      | )          |
| Proceeds from sale of fixed assets                                           |       | 3,498                     |       | 490                       |       |
|                                                                         |       |                      |       |                      |       |
| **Net cash provided by (used in) investing  activities**                     |       | 1,734                     |       | (167                      | )          |
|                                                                         |       |                      |       |                      |       |
| **Financing activities:**                                                    |       |                      |       |                      |       |
| Payments of mortgages                                                        |       | (72                       | )          | (76                       | )          |
| Reduction in capital lease  obligations                                      |       | (316                      | )          | (445                      | )          |
| Deferred financing costs                                                     |       | (1,084                    | )          | —                    |       |
|                                                                         |       |                      |       |                      |       |
| **Net cash  used in financing activities**                                   |       | (1,472                    | )          | (521                      | )          |
|                                                                         |       |                      |       |                      |       |
| **Decrease in  cash and cash equivalents**                                   |       | (9,123                    | )          | (2,124                    | )          |
|                                                                         |       |                      |       |                      |       |
| **Cash and  cash equivalents at the beginning of period**                    |       | 20,916                    |       | 24,661                    |       |
|                                                                         |       |                      |       |                      |       |
| **Cash and  cash equivalents at end of period**                              |       | $                         | 11,793     |                      | $          | 22,537 |   |

 

The accompanying notesare an integral part of these statements.

 

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The Penn Traffic Company

Condensed ConsolidatedStatements of Stockholders’ Equity

For the unaudited period February 2,2008 to May 3, 2008

(In thousands, exceptshare data)

 
| ** **                                                                                                                                           | ** ** | **Common  Stock** | ** ** | **Preferred  Stock** | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|-----------------------------------------------------|------------|-------------|------------|-----------------------------------------------|------------|---------------------------------------|------------|
|                                                                                                                                                 |       |              |       |                 |       |                                                |       |        |       |                                          |       |                                  |       |
| Balance at February 2, 2008                                                                                                                     |       | $                 | 85         |                 | $          | 100                                                 |       | $           | 128,149    |                                          | $          | (74,356                               | )          | $ | 15,197 |   | $ | 69,175 |   |
|                                                                                                                                                 |       |              |       |                 |       |                                                |       |        |       |                                          |       |                                  |       |
| Net loss for the quarter ended May 3, 2008                                                                                                      |       | —            |       | —               |       | —                                              |       | (12,431     | )          | —                                        |       | (12,431                               | )          |
|                                                                                                                                                 |       |              |       |                 |       |                                                |       |        |       |                                          |       |                                  |       |
| Increase of 125,754 shares estimated to be issued in connection with  settlement                                                                     |       | 1                 |       | —               |       | (1                                                  | )          | —      |       | —                                        |       | —                                |       |
|                                                                                                                                                 |       |              |       |                 |       |                                                |       |        |       |                                          |       |                                  |       |
| Amortization of net actuarial gain included in net periodic pension  benefit, net of deferred taxes of ($92) for the quarter ended May 3,  2008 |       | —            |       | —               |       | —                                              |       | —      |       | (144                                          | )          | (144                                  | )          |
|                                                                                                                                                 |       |              |       |                 |       |                                                |       |        |       |                                          |       |                                  |       |
| Comprehensive loss                                                                                                                                   |       | —            |       | —               |       | —                                              |       | —      |       | —                                        |       | (12,575                               | )          |
|                                                                                                                                                 |       |              |       |                 |       |                                                |       |        |       |                                          |       |                                  |       |
| Balance at May 3, 2008                                                                                                                          |       | $                 | 86         |                 | $          | 100                                                 |       | $           | 128,148    |                                          | $          | (86,787                               | )          | $ | 15,053 |   | $ | 56,600 |   |

 

The accompanyingnotes are an integral part of these statements.

 

8

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The Penn Traffic Company

Notes to CondensedConsolidated Financial Statements

 

**Note 1 –Basis of Presentation**

 

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

 

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

 

The Company’s fiscal year ends each year on theSaturday closest to January 31. Fiscal year 2009 is the 52-week period ended January 31, 2009.  Fiscal year 2008 is the 52-week period ended February 2,2008.  The information presented in thisQuarterly Report on Form 10-Q is for the quarter beginning February 3,2008 and ending May 3, 2008.

 

All significant intercompany transactions and accountshave been eliminated in consolidation.

 

**Note 2 – Voluntary BankruptcyFiling and Reorganization**

 

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

 

On February 2, 2005,the Company filed the First Amended Joint Plan of Reorganization (the “Plan”)with the bankruptcy court.  The Plan wasconfirmed on March 17, 2005 and became effective on April 13, 2005(the “Effective Date”).

 

Pursuant to the terms ofthe Plan, the following transactions occurred on or around the Effective Date:

 

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

 

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

 

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

 

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

 

Pursuant to theprovisions of Statement of Position 90-7 “Financial Reporting by Entities inReorganization Under the Bankruptcy Code” (“SOP 90-7”) issued by the AmericanInstitute of Certified Public Accountants upon emergence from Chapter 11proceedings, the Company adopted fresh-start reporting which resulted in a newreporting entity and a new basis of accounting.

 

Although April 13,2005 was the effective date of the Plan, the Company chose April 16, 2005as the effective date for accounting purposes to adopt fresh-start reportingbecause of the proximity of that date to the end of an accounting period.  Applying fresh-start reporting as of April 16,2005 rather than the actual effective date of April 13, 2005 did not havea material effect on the financial condition or results of operations of theCompany.

 

9

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**Note 3 – New Accounting Standards**

 

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157, “FairValue Measurement,” or SFAS 157, effective for fiscal years beginning November 15, 2007.  SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements.  SFAS 157 does not require any new fair valuemeasurements.  Effective February 3,2008, the Company adopted the provision of SFAS 157.  The adoption did not have any effect on ourconsolidated financial statements.

 

In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities” – Includingan amendment of FASB Statement No. 115, or SFAS 159, effective for fiscalyears ending after November 15, 2007. SFAS 159 permits an entity to elect fair value as the initial andsubsequent measurement attribute for many financial assets andliabilities.  Entities electing the fairvalue option would be required to recognize changes in fair value inearnings.  The Company has not elected toapply the provision of SFAS 159 which became effective for the Company in February 2,2008.

 

**Note 4 - Per Share Data**

 

Basic and diluted netloss per share is based on the number of common shares issued and estimated tobe issued pursuant to the Plan.  At May 3,2008 and February 2, 2008, 313,918 and 188,164 common shares,respectively, are estimated to be issued in connection with the settlement ofremaining claims.  Diluted loss per sharefor the quarter ended May 3, 2008 does not include the 639,923 commonshares issuable on the conversion of the preferred stock as the effect isantidilutive.

 

**Note 5 – Liabilities Subject toCompromise**

 

In connection with theChapter 11 proceeding, there are two pending matters involving claims for thepayment of money or the transfer of property. In one matter, the Ohio Bureau of Workers’ Compensation (“OBWC”) hasfiled priority and administrative claims aggregating $13.4 million forpre-petition unpaid workers’ compensation premiums and for reserves to payfuture claims arising from existing injuries. The OBWC has also filed claims aggregating $1.8 million for allegednon-payment of post-petition premiums and for reserves to pay future claimsarising from existing injuries.  TheCompany disputes the amounts of the claims, and is attempting to negotiate asettlement.

 

In the other matter, CORRoute 5 Company LLC (“COR”) had filed a priority claim allegedly arising out ofa sale-leaseback transaction seeking either damages of $2.2 million or specificperformance of the agreement.  On May 30, 2008,the Bankruptcy Court approved the entry of the Stipulation and Order withRespect to Settlement of COR Route five Company Claims (the “Stipulation”),pursuant to which COR agreed to release all potential claims against theCompany in exchange for a payment by the Company to COR of $1.1 million, to bemade from an existing escrow account maintained during the pendency of the disputedclaims.  As of May 30, 2008, theescrow account held approximately $1.4 million (included in accountsreceivable).  Escrowed funds remainingafter the payment to COR will be retained by the Company, and the Company’sobligations to make monthly payments into the escrow account haveterminated.  As a result, the Companyrecorded a liability (included in other current liability) and correspondingchange (included in selling and administrative expense) for $1.1 million duringthe quarter ended May 3, 2008.  TheCompany made the required $1.1 million payment to COR from the escrow account June 9,2008.

 

As part of the settlementwith COR, the Company has granted COR a right of first refusal with respect tothe sale, lease, transfer or other conveyance of the Company’s supermarketlocated in Fayetteville, New York that was the subject of the dispute betweenthe Company and COR (the “Property”). Under the terms of this right, the Company must notify COR of any arm’slength written offer from an unaffiliated third party received for sale, lease,transfer or other conveyance of the Property and provide COR with theopportunity to consummate the proposed transaction on economic terms andconditions substantially similar to the terms contained in such third partyoffer.

 

During the quarter ended May 3,2008, the Company paid out $0.01 million in settlement of disputed claims ascompared to $0.2 million during the quarter ended May 5, 2007.

 

The Company hasestablished liabilities for the estimated cash payments required to settle theremaining claims outstanding in the Chapter 11 proceedings.  Estimated shares of common stock to be issuedin settlement of claims have been accounted for as stockholders’ equity.

 

10

----

 

**Note 6 – Long Term Debt**

 

On August 1, 2007,both of the Company’s credit facilities were amended to permit the disposal ofassets in connection with the closing of two stores.  Further, the availability amount, which theCompany is required to maintain under certain financial covenants contained insuch facilities was reduced to less than $27.5 million for four consecutivedays or less than $25 million for any one day.

 

In March 2008, thematurity date of both facilities were extended from April 13, 2008 to April 13,2009.  Based on the maturity date of April 13,2009, amounts due under the revolving credit and term loan facility and thesupplemental real estate credit facility have been classified as currentmaturities in the accompanying balance sheet as of May 3, 2008.  See Note 7 to the financial statementsincluded in the Annual Report on Form 10-K for year ended February 2,2008 for additional information.

 

**Note 7 – Income Taxes**

 

The Company maintains afull valuation allowance against substantially all of its deferred tax assetsincluding amounts resulting from net operating loss carryforwards.  The valuation allowance will be maintaineduntil there is sufficient positive evidence to conclude that it is more likely thannot that the deferred tax assets will be realized.

 

The Company has recentlyfiled its federal and state income tax returns for its fiscal years ended in2004, 2005, 2006, and 2007 and is currently under examination by the InternalRevenue Service for these years.

 

**Note 8 – Dispositions andDiscontinued Operations**

 

In January 2007, theCompany announced the closing of a leased distribution center used for thedistribution of general merchandise and health and beauty products.  At the same time, the Company entered into afive-year supply agreement with a third party to provide the merchandisepreviously distributed from the distribution center.  In connection with the announced closing, in January 2007,the Company recorded a liability of $1.4 million for termination benefits whichwere provided to the distribution center’s employees at such time.  The Company ceased use of the facility in March 2007,at which time the Company recorded a liability of $1.9 million representing thepresent value of the remaining lease rentals reduced by estimated subleaserentals that could be reasonably obtained for the distribution center.  In addition, in March 2007, the Companysold its remaining inventory located in the distribution center to the thirdparty at current cost.  The carryingvalue of such inventory at February 3, 2007 was approximately $4.8million.

 

On January 2, 2008,as a result of the loss of a significant customer, the Company announced theclosing of its commercial bakery operation. In accordance with the provisions of FASB No. 144, “Accounting forthe Impairment or Disposal of Long-lived Assets” (“SFAS 144”), the results ofoperations of the commercial bakery operation for the period ended May 5,2007 have been reported as discontinued operations.

 

Fixed assets at February 2,2008 include $1.0 million of commercial bakery equipment held for sale.  The bakery equipment held for sale was soldduring the quarter ended May 3, 2008 for $1.0 million.

 

During the quarter ended May 3,2008, the Company closed five stores and sold one.  It is anticipated that revenues will continueto be generated from customers of four of the five closed stores and the soldstore from the Company stores located in the same vicinity.  Accordingly, the result of operations of thesestores are included in continuing operations. The Company will no longer have a presence in the vicinity of the otherclosed store but the amount of lost revenues was determined to be immaterialand not treated as discontinued operations. The store that was sold resulted in cash proceeds of $1.8 million and anassociated leasehold gain of $1.3 million for the quarter ended May 3, 2008.

 

During the quarter ended May 3,2008, an impairment loss of $2.6 million was recognized with respect to theassets related to the 5 closed stores. In addition, the Company recorded a liability of $0.9 millionrepresenting the present value of the remaining lease rentals reduced byestimated sublease rentals that could reasonably be obtained for the fiveclosed stores.  In addition, certainongoing maintenance expense related to the bakery operations have beenclassified as discontinued operations in the quarter ended May 3, 2008.

 

No stores were closedduring the quarter ended May 5, 2007.

 

11

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**Note 9 – Pension Plans**

 

The Company has fournoncontributory defined benefit pension plans covering certain unionpersonnel.  The Company’s policy is tofund pension benefits to the extent contributions are deductible for taxpurposes and in compliance with federal laws and regulations.

 

The components of netperiodic pension (benefit) cost for the periods ended May 3, 2008 and May 5,2007 is as follows (in thousands):

 
| ** **                          | ** ** | **Quarter Ended** | ** ** | **Quarter Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **May 3,**        | ** ** | **May 5,**        | ** ** |
| ** **                          | ** ** | **2008**               | ** ** | **2007**               | ** ** |
| ** **                          | ** ** | **(unaudited)**        | ** ** |
| Service cost                        |       | $                      | 313        |                   | $          | 495 |   |
| Interest cost                       |       | 1,474                  |       | 1,560                  |       |
| Expected return on plan assets      |       | (1,593                 | )          | (1,597                 | )          |
| Amount of recognized gain           |       | (236                   | )          | (30                    | )          |
|                                |       |                   |       |                   |       |
| Net periodic pension (benefit) cost |       | $                      | (42        | )                      | $          | 428 |   |

 

For the quarters ended May 3,2008 and May 5, 2007, the Company contributed $0.8 million and $2.1million, respectively, to the four defined benefit pension plans.

 

**Note 10 – Commitments andContingencies**

 

The United StatesAttorney for the Northern District of New York and the Securities and ExchangeCommission (“SEC”) have been conducting investigations relating to the Company’spromotional allowance practices and policies. Such investigations began prior to the Company’s emergence frombankruptcy in April 2005.  TheCompany has been cooperating with these investigations and has produceddocuments and made Company employees available for interviews as requested.

 

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

 

On September 17,2007, the SEC filed civil fraud charges against the Company’s former ChiefMarketing Officer and former Vice President, Non-Perishables Marketing allegingthat such individuals orchestrated a scheme to inflate the Company’s income andother financial results by prematurely recognizing promotional allowancesreceived from vendors from approximately the second quarter of fiscal year 2001through at least the fourth quarter of fiscal year 2003. These officers hadbeen terminated by the Company in February 2006 following an interimreport to the Audit Committee on the findings of an internalinvestigation.  The SEC’s complaintfurther alleges that the individuals deceived the Company’s accountingpersonnel to carry out their fraudulent scheme and aided and abetted theCompany’s violations of the Securities Exchange Act of 1934 and rules thereunder.In addition, on the same date, the United States Attorney for the NorthernDistrict of New York announced that a federal grand jury has returned anindictment against the above-mentioned individuals on related criminal charges.Both the SEC and the United States Attorney have indicated that theirinvestigations are continuing.

 

In connection withthese matters, the Company could be subject to damage claims, fines orpenalties.  At present, the Company isunable to estimate the likelihood of an unfavorable outcome or the amount ofany damage claims, fines or penalties in the event of an unfavorable outcomeand, accordingly, no liability has been recorded for this contingency.  In addition, the Company has incurredsignificant legal costs associated with these matters to date and expects tocontinue to do so.  These costs arerecorded in selling and administrative expenses as incurred and are expected toincrease in the next several periods unless and until the matters are resolved.

 

12

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On March 12, 2008, the Company commenced an action in the SupremeCourt for the State of New York for the County of Onondaga seeking declaratoryjudgment to resolve a dispute over the lease term for commercial propertypertaining to a store that was closed in 2007. The Company is seeking an order declaring the proper and effective leasetermination date to be November 30, 2009, rather than June 30, 2017the date asserted by the landlord.  TheCompany estimates that the increased rent expense for the additional lease termasserted by the landlord to be approximately $2.8 million.  At present, the Company is unable to estimatethe likelihood of an unfavorable outcome and accordingly, no liability has beenrecorded for this contingency.

 

**Note 11 – Stock Award Plan**

 

On December 15,2006, the Company established the 2006 Omnibus Award Plan (the “Award Plan”).  Pursuant to the provisions of the Award Plan,the Company can grant stock options, restricted stock, phantom stock and stockappreciation rights.  The amount ofshares of common stock that can be granted are limited to 902,268 in theaggregate.

 

At May 3,2008, there were 188,260 shares of phantom stock granted, 100,000 sharesforfeited, and 88,260 shares outstanding to officers and non-officer directors.  Approximately 20,910 shares of phantom stockare unvested as of the quarter ended May 3, 2008.  In accordance with SFAS 123(R) theawards are being accounted for as compensation expense and a correspondingliability over the period to settlement date based on changes in the value ofthe Company’s common stock.  Compensationexpense totaled $0.1 million and $0.4 million for the quarters ended May 3, 2008and May 5, 2007, respectively. Refer to Note 15 to the financial statements included in the AnnualReport on Form 10-K for additional information.

 

13

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**Note 12 –Segment Information**

 

The Company operates intwo segments – the retail food business and the wholesale food distributionbusiness.  The retail food businessconsists of supermarkets which the Company operates.  The wholesale food distribution businesssupplies independent supermarkets and other independent wholesale accounts withfood, related products and other services.

 

The tables below presentsinformation with respect to operating segments as well as reconciliations toconsolidated information (in thousands).

 
| ** **                                                   | ** ** | **Quarter Ended May 3, 2008** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                   | ** ** | ** **                                        | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | **Retail Food**                              | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                         |       |                                              |       |   |   |   |   |   |   |
| Revenues                                                     |       | $                                                 | 231,423    |   | $ | 53,527 |   | $ | 2,108 | (1) | $ | 287,058 |   |
|                                                         |       |                                              |       |   |   |   |   |   |   |
| Cost of sales                                                |       | (160,663                                          | )          | (50,484 | ) | (331 | )(2) | (211,478 | )(4) |
| Selling and administrative expense                           |       | (60,859                                           | )          | (1,232 | ) | (14,101 | )(3) | (76,192 | )(4) |
| Loss on store closings                                       |       | —                                            |       | — |   | (921 | ) | (921 | ) |
| Asset impairment                                             |       | —                                            |       | — |   | (2,604 | )(5) | (2,604 | ) |
|                                                         |       |                                              |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation and amortization |       | 9,901                                             |       | 1,811 |   | (15,849 | ) | (4,137 | ) |
|                                                         |       |                                              |       |   |   |   |   |   |   |
| Depreciation and amortization                                |       | (5,232                                            | )          | (183 | ) | (249 | )(6) | (5,664 | ) |
|                                                         |       |                                              |       |   |   |   |   |   |   |
| Operating income (loss)                                      |       | $                                                 | 4,669      |   | $ | 1,628 |   | $ | (16,098 | ) | (9,801 | ) |
| Interest expense                                             |       |                                              |       |   |   |   |   | (2,353 | ) |
| Reorganization costs                                         |       |                                              |       |   |   |   |   | (110 | ) |
|                                                         |       |                                              |       |   |   |   |   |   |   |
| Loss from continuing operations before income taxes          |       |                                              |       |   |   |   |   | $ | (12,264 | ) |
|                                                         |       |                                              |       |   |   |   |   |   |   |
| Total assets as of May 3, 2008                          |       | $                                                 | 182,091    | (6) | $ | 19,883 | (6) | $ | 37,723 | (7) | $ | 239,697 |   |
|                                                         |       |                                              |       |   |   |   |   |   |   |
| Capital expenditures for the year ended May 3, 2008     |       | $                                                 | 1,454      |   | $ | 8 |   | $ | 302 |   | $ | 1,764 |   |

 

----

| (1)    |   | Consists  principally of approximately $1.6 million for trucking revenues, $0.3 million  of rental income, and $0.1 million from sales of electronic data.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (2)    |   | Consists  principally of approximately $0.3 million increase in cost of sales to  reconcile segment inventories on FIFO to consolidated inventories on LIFO.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (3)    |   | Consists  principally of approximately $7.6 million of payroll, benefits, and  payroll taxes associated with the administrative staff, approximately $5.3  million of Professional fees (of which approximately $0.4 million pertained  to legal costs associated with the internal and SEC investigation relating to  the Company’s practices regarding promotional discounts and allowances),  approximately $1.4 million of contract hauling costs associated with trucking  revenue, approximately $0.8 million for an increase in reserves for doubtful  accounts, $0.2 million in data processing maintenance costs, and $0.1 million  for general insurance. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (4)    |   | Excludes  depreciation and amortization of $0.5 million for cost of sales and  $5.1 million related to selling and administrative expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (5)    |   | Asset impairment  charges are recorded at the corporate level and are not carried on a store by  store basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (6)    |   | The warehouse  and transportation assets have been allocated using the same methodology as  that which was used for the warehouse and transportation costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (7)    |   | Consists  principally of general corporate assets (including cash and cash equivalents)  that cannot be separated by business segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

14

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| ** **                                                   | ** ** | **Quarter Ended May 5, 2007** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                   | ** ** | ** **                                        | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | **Retail Food**                              | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                         |       |                                              |       |   |   |   |   |   |   |
| Revenues                                                     |       | $                                                 | 245,159    |   | $ | 50,534 |   | $ | 2,280 | (1) | $ | 297,973 |   |
|                                                         |       |                                              |       |   |   |   |   |   |   |
| Cost of sales                                                |       | (170,207                                          | )          | (47,218 | ) | (340 | )(2) | (217,765 | )(4) |
| Selling and administrative expense                           |       | (60,839                                           | )          | (1,425 | ) | (13,674 | )(3) | (75,938 | )(4) |
| Loss on distribution center closing                          |       | —                                            |       | — |   | (1,883 | ) | (1,883 | ) |
|                                                         |       |                                              |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation and amortization |       | 14,113                                            |       | 1,891 |   | (13,617 | ) | 2,387 |   |
|                                                         |       |                                              |       |   |   |   |   |   |   |
| Depreciation and amortization                                |       | (6,218                                            | )          | (245 | ) | (217 | ) | (6,680 | ) |
|                                                         |       |                                              |       |   |   |   |   |   |   |
| Operating income (loss)                                      |       | $                                                 | 7,895      |   | $ | 1,646 |   | $ | (13,834 | ) | (4,293 | ) |
| Interest expense                                             |       |                                              |       |   |   |   |   | (2,341 | ) |
| Reorganization costs                                         |       |                                              |       |   |   |   |   | (164 | ) |
|                                                         |       |                                              |       |   |   |   |   |   |   |
| Loss from continuing operations before income taxes          |       |                                              |       |   |   |   |   | $ | (6,798 | ) |
|                                                         |       |                                              |       |   |   |   |   |   |   |
| Total assets as of May 5, 2007                          |       | $                                                 | 214,690    | (5) | $ | 23,126 | (5) | $ | 57,647 | (6) | $ | 295,463 |   |
|                                                         |       |                                              |       |   |   |   |   |   |   |
| Capital expenditures for the year ended May 5, 2007     |       | $                                                 | 494        |   | $ | 101 |   | $ | 62 |   | $ | 657 |   |

 

----

| (1)    |   | Consists  principally of approximately $1.7 million for trucking revenues, $0.3 million  of rental income and $0.1 million from sales of electronic data.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (2)    |   | Consists  principally of approximately $0.3 million in cost of sales to reconcile  segment inventories on FIFO to consolidated inventories on LIFO.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (3)    |   | Consists  principally of approximately $7.6 million of payroll, benefits, and  payroll taxes associated with the administrative staff, approximately  $4.3 million of professional fees (of which approximately $0.3 million  pertaining to legal costs associated with the internal and SEC investigation  relating to the Company’s practices regarding promotional discounts and  allowances), approximately $1.4 million of contract hauling costs associated  with trucking revenue, approximately $0.5 million for an increase in reserves  for doubtful accounts, $0.3 million in data processing maintenance  offset by $0.5 million gain on disposal of assets. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (4)    |   | Excludes  depreciation and amortization of $0.9 million for cost of sales and  $5.8 million related to selling and administrative expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (5)    |   | The warehouse  and transportation assets have been allocated using the same methodology as  that which was used for the warehouse and transportation costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (6)    |   | Consists  principally of general corporate assets (including cash and cash equivalents)  that cannot be separated by business segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

15

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

 

**Introduction**

 

We operate or supply more than 220 supermarkets in upstate New York,Pennsylvania, Vermont and New Hampshire. We operate in two segments.  Ourretail food business includes corporate-owned stores with the “BiLo”, “P&C”and “Quality” trade names, and our wholesale food distribution businesssupplies independently operated supermarkets and other wholesale accounts.

 

Our primary objective is to enhance the in-store experience of ourcustomers and improve our long-term financial performance.  Under the direction of our new senior team(formed in fiscal year 2007), we are focusing on rebuilding our corebusiness.  This means re-establishingbasic disciplines and reemphasizing and instilling a much stronger profitablegrowth culture around sales and margin.

 

**Resultsof Operations**

 

The following table sets forth certain ConsolidatedStatement of Operations components expressed as percentages of revenues for thequarters ended May 3, 2008 and May 5, 2007.

 
| ** **                                           | ** ** | **Unaudited**             | ** ** |
|------------------------------------------------------|------------|---------------------------|------------|
| ** **                                           | ** ** | **Quarter**               | ** ** | **Quarter** | ** ** |
| ** **                                           | ** ** | **Ended**                 | ** ** | **Ended** | ** ** |
| ** **                                           | ** ** | **May 3, 2008** | ** ** | **May 5, 2007** | ** ** |
|                                                 |       |                      |       |   |   |
| Revenues                                             |       | 100.0                     | %          | 100.0 | % |
|                                                 |       |                      |       |   |   |
| Gross profit (1)                                     |       | 26.1                      |       | 26.6 |   |
|                                                 |       |                      |       |   |   |
| Selling and administrative expenses                  |       | 28.3                      |       | 27.4 |   |
|                                                 |       |                      |       |   |   |
| Loss on store and distribution center closing        |       | 0.3                       |       | 0.6 |   |
|                                                 |       |                      |       |   |   |
| Asset impairment                                     |       | 0.9                       |       | 0.0 |   |
|                                                 |       |                      |       |   |   |
| Operating loss                                       |       | (3.4                      | )          | (1.4 | ) |
|                                                 |       |                      |       |   |   |
| Interest expense                                     |       | 0.8                       |       | 0.8 |   |
|                                                 |       |                      |       |   |   |
| Reorganization and other expenses                    |       | 0.0                       |       | 0.1 |   |
|                                                 |       |                      |       |   |   |
| Loss from continuing operations, before income taxes |       | (4.2                      | )          | (2.3 | ) |
|                                                 |       |                      |       |   |   |
| Income tax expense                                   |       | 0.1                       |       | 0.0 |   |
|                                                 |       |                      |       |   |   |
| Loss from continuing operations                      |       | (4.3                      | )          | (2.3 | ) |
|                                                 |       |                      |       |   |   |
| Loss from discontinued operations                    |       | 0.0                       |       | (0.2 | ) |
|                                                 |       |                      |       |   |   |
| Net loss                                             |       | (4.3                      | )          | (2.5 | ) |

 

----

(1)          Revenues less cost of sales.

 

16

----

 

**Fiscal Year 2009 (the Quarter Ended May 3,2008) and Fiscal Year 2008 (the Quarter Ended May 5, 2007)**

 

**Revenues**

 

Revenues for the quarter ended May 3, 2008decreased to $287.1 million from $298.0 million for the quarter ended May 5,2007.  The $10.9 million decrease inrevenues was mainly attributable to a decline in same store sales, partiallyoffset by an increase in wholesale food distribution revenues.

 

Same store sales for the quarter ended May 3,2008 decreased 1.4% compared to the quarter ended May 5, 2007.

 

Wholesale food distribution revenues for the quarterended May 3, 2008 increased $3.0 million, or 5.9% to $53.5 million or18.6% of total revenues, from $50.5 million or 17.0% of total revenues for thequarter ended May 5, 2007.  Theincrease in the wholesale food distribution revenues was primarily attributableto the addition of three new wholesale accounts.

 

**Gross Profit**

 

Gross profit was $75.0 million, or 26.1% of revenues,for the quarter ended May 3, 2008 compared to $79.3 million, or 26.6%of revenues, for the quarter ended May 5, 2007.  The decrease is the result of decreased salesdue to store closings and declining customer counts.

 

**Selling and Administrative Expenses**

 

Selling andadministrative expenses for the quarter ended May 3, 2008 were$81.3 million, or 28.3% of revenues, compared to $81.7 million, or 27.4%of revenues, for the quarter ended May 5, 2007.  The increase in selling and administrativeexpenses as a percentage of revenues was due to the decrease in sales.

 

**Depreciation and Amortization**

 

Depreciation and amortization expense was $5.7million, or 2.0% of revenues, for the quarter ended May 3, 2008compared to $6.9 million, or 2.3% of revenues, for the quarter ended May 5,2007.  The decrease in depreciation andamortization during the quarter ended May 3, 2008 was primarily due to an$11.0 million write-down of intangible assets in conjunction with therecognition of net operating loss carryforwards for prior years.

 

**Loss on Store and DistributionCenter Closings**

 

For the quarter ended May 3, 2008 the Companyrecorded a loss on store closings of $0.9 million, or 0.3% of revenues,representing the net present value of the remaining lease rentals associatedwith its closed stores.  A loss of $1.9million, or 0.6% of revenues, representing the net present value of theremaining lease payments associated with our closed distribution centers, wasincurred for the quarter ended May 5, 2007

 

**Asset Impairment Charges**

 

Asset impairment charges were $2.6 million, or 0.9% ofrevenues, for the quarter ended May 3, 2008.  The asset impairment charges were mainlyattributed to the write-down of closed store assets.

 

**Operating Loss**

 

Operating loss for the quarter ended May 3, 2008was $9.8 million, or 3.4% of revenues, compared to the operating loss of $4.3million, or 1.4% of revenues, for the quarter ended May 5, 2007.

 

**Interest Expense**

 

Interest expense for the quarter ended May 3, 2008was $2.4 million, or 0.8% of revenues, compared to $2.3 million, or 0.8%of revenues, for the quarter ended May 5, 2007.  The $0.1 million increase ininterest expense for the quarter, under our credit facilities ended May 3,2008 was due to the increase in our average borrowings, and a higherweighted-average borrowing rate under our credit facility.

 

**Reorganization and Other Expenses**

 

Reorganization expensefor the quarter ended May 3, 2008 was $0.1 million, or less than 0.1% ofrevenues, compared to $0.2 million, or 0.1% of revenues, for the quarterended May 5, 2007.  They consistprimarily of professional fees.

 

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**Loss from Continuing Operations**

 

Loss from continuingoperations for the quarter ended May 3, 2008 was $12.4 million, or 4.3% ofrevenues, compared to a loss from continuing operations of $6.9 million, or2.3% of revenues, during the quarter ended May 5, 2007.  The $5.5 million increase in loss fromcontinuing operations is primarily due to a decrease in gross profit of $4.3million related to decreased sales due to store closings, declining customercounts and an asset impairment charge of $2.6 million related to the write-downof closed store assets for the quarter ended May 3, 2008.

 

**Loss from Discontinued Operations**

 

Loss from discontinuedoperations for the quarter ended May 3, 2008 was $0.01 million, or lessthan 0.1% of revenues, compared to a loss from discontinued operations of $0.6million, or 0.2% of revenues, during the quarter ended May 5, 2007.  The decrease in the loss from discontinuedoperations in the quarter ended May 3, 2008 is primarily due to $0.6million incurred from bakery operations.

 

**Net Loss**

 

Net loss for the quarter ended May 3, 2008 was$12.4 million, or 4.3% of revenues, compared to a net loss of$7.4 million, or 2.5% of revenues, during the quarter ended May 5,2007.

 

**Liquidity and Capital Resources**

 

Overview

 

As of the quarter ended May 3, 2008, wehad cash and cash equivalents of $11.8 million and total debt outstanding of$60.4 million.  We also have the abilityto draw down on our revolving credit facilities.  We believe that our existing cash on hand,cash generated from operating activities and available borrowings under ourcredit facility will be sufficient to satisfy our currently anticipated cashrequirements for at least the next 12 months.

 

Financial Results

 

*Operating Activities*

 

Cash used in operating activities for thequarter ended May 3, 2008 was $9.4 million as compared to cash used inoperating activities of $1.4 million for the quarter ended May 5,2007.  For the quarter ended May 3,2008, we incurred a net loss of $12.4 million, adjustments for non cash itemsof $7.5 million, and a net decrease in operating net assets of $4.5million.  For the quarter ended May 5,2007, we incurred a net loss of $7.4 million, adjustments for non-cash items of$7.7 million and a net decrease in operating net assets of $1.7 million.

 

*Investing Activities*

 

Cash provided by investing activities for thequarter ended May 3, 2008 was $1.7 million and cash used in investingactivities for the quarter ended May 5, 2007 was $0.2 million.  The $1.9 million increase was due toincreased proceeds from the sale of fixed assets ($3.5 million as compared to$0.5 million) partially offset by increased capital expenditures($1.8 million as compared to $0.7 million).

 

*Financing Activities*

 

Cash used in financing activities for thequarter ended May 3, 2008 and the quarter ended May 5, 2007 were$1.5 million and $0.5 million, respectively.  The $1.0 million increase was due to feesincurred with the amendment to the revolving credit and term loan facility.

 

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Borrowings

 

On April 13, 2005, upon emergence from Chapter 11 proceedings, we enteredinto a revolving credit and term loan facility with a group of financialinstitutions providing for a $130.0 million revolving credit facility anda $6.0 million term loan.  Also on April 13,2005, we entered into a supplemental real estate credit facility with anothergroup of lenders, providing for term loan borrowings of up to$28.0 million.  Availability underboth credit facilities is dependent on levels of accounts receivable, inventoryand certain other assets.  Interest rateson borrowings under the revolving credit facility vary depending upon theamount of availability.  At May 3,2008, outstanding borrowings under both facilities aggregated$46.6 million.  At such date,availability in excess of outstanding borrowings and letters of credit wasapproximately $31.5 million. Borrowings under the revolving credit and term loan facility are securedby substantially all of our assets, subject to first liens on certainproperties by other lenders.  Borrowingsunder the real estate facility are secured by a first lien on substantially allof our leasehold interests and a second lien on substantially all of ourremaining assets.  At May 3, 2008,we had stand-by letters of credit of approximately $40.6 million.  Many of these stand-by letters of credit wererequired upon emergence from bankruptcy and as a result of our inability tofile financial statements.

 

Provisions of both credit facilities, among other things, require themaintenance of certain financial covenants (when availability under the creditfacilities is less than $27.5 million for four consecutive days or lessthan $25 million for any one day), and limit the amount of capitalexpenditures, our assumption of additional debt and our payment of dividends.  At no time through May 3, 2008 had webeen subject to compliance with these financial covenants because the annualavailable for borrowing had not dropped to these levels.  However, had such an event occurred, we wouldnot have been in compliance with the financial covenants and would have been indefault under the terms of the loan agreement at May 3, 2008.

 

Pursuant to our plan of reorganization, we entered into a collateraltrust agreement with the collateral trustee in connection with the securedtrade lien program.  The secured trade lienprogram is with certain 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 loan facility and the supplemental realestate credit facility were amended to permit the disposal of assets inconnection with the closing of certain stores. In March 2008, the maturity date of both facilities was extended to atleast April 13, 2009.  See Note 7 tothe financial statements included in the Annual Report on Form 10-K foryear ended February 2, 2008 for additional information.

 

We also have $3.8 million of borrowings undermortgages secured by three related properties as of May 3, 2008.

 

***Certain Contingencies***

 

The United States Attorney for the NorthernDistrict of New York and the Securities and Exchange Commission (“SEC”) havebeen conducting investigations relating to the Company’s promotional allowancepractices and policies.  Suchinvestigations began prior to the Company’s emergence from bankruptcy in April 2005.  The Company has been cooperating with theseinvestigations and has produced documents and made Company employees availablefor interviews as requested.

 

On September 17, 2007, the SEC filedcivil fraud charges against the Company’s former Chief Marketing Officer andformer Vice President, Non-Perishables Marketing alleging that such individualsorchestrated a scheme to inflate the Company’s income and other financialresults by prematurely recognizing promotional allowances received from vendorsfrom approximately the second quarter of fiscal year 2001 through at least thefourth quarter of fiscal year 2003. These officers had been terminated by theCompany in February 2006 following an interim report to the AuditCommittee on the findings of an internal investigation.  The SEC’s complaint further alleges that theindividuals deceived the Company’s accounting personnel to carry out theirfraudulent scheme and aided and abetted the Company’s violations of theSecurities Exchange Act of 1934 and rules thereunder.  In addition, on the same date, the UnitedStates Attorney for the Northern District of New York announced that a federalgrand jury has returned an indictment against the above-mentioned individualson related criminal charges. Both the SEC and the United States Attorney haveindicated that their investigations are continuing.

 

In connection with these matters, the Companycould be subject to damage claims, fines or penalties.  At present, the Company is unable to estimatethe likelihood of an unfavorable outcome or the amount of any damage claims,fines or penalties in the event of an unfavorable outcome and, accordingly, noliability has been recorded for this contingency.  In addition, the Company has incurredsignificant legal costs associated with these matters to date and expects tocontinue to do so.  These costs arerecorded in selling and administrative expenses as incurred and are expected toincrease in the next several periods unless and until the matters are resolved.

 

For additional information regardingcontingencies that may effect our financial condition, see Note 10 to ourunaudited financial statements.

 

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**ITEM 3.****                            ****QUANTITATIVE ANDQUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

Our financial results are subject to risk frominterest rate changes on debt that has variable interest rates. Total variablerate debt outstanding under our loan agreements at May 3, 2008 was $46.6million with a weighted average interest rate of 10.1%.  A 1.0% change in interest rates would impactpre-tax income by $0.5 million based on the debt outstanding at May 3,2008.  In addition to the variable ratedebt we had $3.8 million of fixed rate debt outstanding at May 3, 2008with a weighted average interest rate of 6.6%. We view the fixed rate debt as a partial hedge against interest ratefluctuations.

 

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

 

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

 

Pursuant to Rule 13a-15(e) under the Exchange Act, ourmanagement evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures with the participation of our principalexecutive and principal financial officers. Based on their current observations combined with observations by thedisclosure committee, which is comprised of members of management, members ofthe audit committee and external counsel, management concluded that ourdisclosure controls and procedures were effective as of May 3, 2008 inproviding reasonable assurance that material information requiring disclosurewas brought to management’s attention on a timely basis and that our financialreporting was reliable.

 

**Change in our Internal Control Over FinancialReporting**

 

In May 2007, we hired an outside consulting firmto assist management in its evaluation of the effectiveness of our internalcontrols over financial reporting, including disclosure controls andprocedures.  They have since determinedthey will use the framework established in “Internal Control-IntegratedFramework”, issued by the Committee of Sponsoring Organizations of the TreadwayCommission.

 

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**PART II– OTHER INFORMATION**

 

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

 

The following are filed as Exhibits to this Report:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                           |
| 10.1                 |       | Fourth Amendment to the Credit Agreement, dated as  of April 13, 2005, by and among The Penn Traffic Company, various of its  subsidiaries, General Electric Capital Corporation as agent and lender, and  the other lenders party thereto (incorporated by reference to exhibit 99.1 to  the Form 8-K filed by the Company on March 31, 2008). |
|                 |       |                                                                                                                                                                                                                                                                                                                                                           |
| 10.2                 |       | Fourth Amendment to the Credit Agreement, dated as  of April 13, 2005, by and among The Penn Traffic Company, various of its  subsidiaries and Kimco Capital Corp. (incorporated by reference to  Exhibit 99.2 to the Form 8-K filed by the Company on March 31,  2008).                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                           |
| 10.3                 |       | Form of Change of Control  Agreement.                                                                                                                                                                                                                                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                           |
| 10.4                 |       | Form of Bonus Agreement.                                                                                                                                                                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                           |
| 31.1                 |       | Certification of CEO pursuant to  Rule 13a-14(a) under the Securities Exchange Act of 1934, as  amended.                                                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                           |
| 31.2                 |       | Certification of CFO pursuant to  Rule 13a-14(a) under the Securities Exchange Act of 1934, as  amended.                                                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                           |
| 32.1                 |       | Certification of CEO pursuant to  Rule 13a-14(b) under the Securities Exchange Act of 1934, as  amended, and Section 1350 of Chapter 63 of Title 18 of the United States  Code.                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                           |
| 32.2                 |       | Certification of CFO pursuant to  Rule 13a-14(b) under the Securities Exchange Act of 1934, as  amended, and Section 1350 of Chapter 63 of Title 18 of the United States  Code.                                                                                                                                                                      |

 

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**Signatures**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

**THE PENN TRAFFIC COMPANY**

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

 

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