**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**x**** QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended May 5, 2007**

 

**OR**

 

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

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the Transition Periodfrom                        to                   **

 

**Commission file number: 0-8858**

 

**THE PENNTRAFFIC COMPANY**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                               | ** ** | **25-0716800**                    |
|------------------------------------------------------------|------------|-----------------------------------|
| (State of incorporation)                                   | ** ** | (IRS Employer Identification No.) |
| ** **                                                 | ** ** | ** **                        |
| **1200 State Fair Blvd., Syracuse, New York**              | ** ** | **13221-4737**                    |
| (Address of principal executive offices)                   | ** ** | (Zip Code)                        |
|                                                       | ** ** |                              |
| **(315) 453-7284**                                         |
| (Registrant’s telephone number, including area  code) |

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.

YES   o   NO   x

 

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

 

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

 

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

 

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

 

Common Stock, par value $.01per share:  8,336,192 sharesoutstanding as of May 22, 2008

 

 

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**FORM 10-Q INDEX**

 
| ** **        | ** ** | ** ** | ** **                                                                                  | **PAGE** |
|-------------------|------------|------------|---------------------------------------------------------------------------------------------|----------|
| **PART I.**  |       |
|              |       |       |                                                                                        |     |
| Item              | 1.         |       | Financial Statements                                                                        | 4        |
|              |       |       |                                                                                        |     |
| Item              | 2.         |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 14       |
|              |       |       |                                                                                        |     |
| Item              | 3.         |       | Quantitative  and Qualitative Disclosures About Market Risk                                 | 17       |
|              |       |       |                                                                                        |     |
| Item              | 4.         |       | Controls and  Procedures                                                                    | 17       |
|              |       |       |                                                                                        |     |
| **PART II.** |       |
|              |       |       |                                                                                        |     |
| Item              | 1.         |       | Legal Proceedings                                                                           | 18       |
|              |       |       |                                                                                        |     |
| Item              | 1A.        |       | Risk Factors                                                                                | 18       |
|              |       |       |                                                                                        |     |
| Item              | 6.         |       | Exhibits                                                                                    | 18       |

 

2

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**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Certainstatements included in this Form 10-Q, including without limitation,statements included in Item 2 - “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” which are not statements ofhistorical fact, are intended to be, and are hereby identified as, “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, as amended, reflecting management’s current analysis and expectations,based on what management believes to be reasonable assumptions.  These forward-looking statements includestatements relating to our anticipated financial performance and businessprospects.  Statements preceded by, followedby 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 operatepursuant to the terms of our credit facilities and to comply with the terms ofour lending agreements or to amend or modify the terms of such agreements asmay be needed from time to time; our ability to generate cash; our ability toattract and maintain adequate capital; our ability to refinance ourindebtedness; increases in prevailing interest rates; our ability to obtaintrade credit, and shipments and terms with vendors and service providers forcurrent orders; our ability to maintain contracts that are critical to ouroperations; potential adverse developments with respect to our liquidity orresults of operations; general economic and business conditions; competition,including increased capital investment and promotional activity by ourcompetitors; availability, location and terms of sites for store development;the successful implementation of our capital expenditure program; labor relations;labor and employee benefit costs including increases in health care and pensioncosts and the level of contributions to our sponsored pension plans; the resultof our pursuit of strategic alternatives; economic and competitiveuncertainties; our ability to pursue strategic alternatives; economic andcompetitive uncertainties; changes in strategies; changes in generally acceptedaccounting principles; adverse changes in economic and political climatesaround the world, including terrorist activities and international hostilities;and the outcome of pending, or the commencement of any new, legal proceedingsagainst, or governmental investigations of us, including the previouslyannounced SEC and U.S. Attorney’s Office investigations.  We caution that the foregoing list ofimportant factors is not exhaustive. Accordingly, there can be no assurance that we will meet future results,performance or achievements expressed or implied by such forward-lookingstatements, which are generally required to be publicly revised ascircumstances change, and which we do not intend to update.

 

**EXPLANATORYNOTE**

 

This Quarterly Report on Form 10-Qis for the period beginning February 4, 2007 and ending May 5, 2007and, except as expressly indicated otherwise, information in this report speaksas of such date.  As discussed further inthis report, we emerged from Chapter 11 bankruptcy reorganization effective April 13,2005.

 

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**PART I**

 

**ITEM 1.      Financial Statements**

 

The Penn Traffic Company

CondensedConsolidated Balance Sheets

(Inthousands)

 
| ** **                                                                                               | ** ** | **May 5,** | ** ** | **February 3,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------------|------------|
| ** **                                                                                               | ** ** | **2007**        | ** ** | **2007**             | ** ** |
| ** **                                                                                               | ** ** | **(unaudited)** | ** ** | ** **           | ** ** |
| **ASSETS**                                                                                               |       |            |       |                 |       |
|                                                                                                     |       |            |       |                 |       |
| **Current Assets:**                                                                                      |       |            |       |                 |       |
| Cash and cash equivalents                                                                                |       | $               | 22,537     |                 | $          | 24,661 |   |
| Accounts and notes receivable (less  allowance for doubtful accounts of $4,314 and $3,736, respectively) |       | 34,885          |       | 35,112               |       |
| Inventories                                                                                              |       | 97,095          |       | 100,035              |       |
| Prepaid expenses and other current assets                                                                |       | 8,192           |       | 8,469                |       |
|                                                                                                     |       | 162,709         |       | 168,277              |       |
|                                                                                                     |       |            |       |                 |       |
| **Capital Leases, net**                                                                                  |       | 9,525           |       | 9,855                |       |
|                                                                                                     |       |            |       |                 |       |
| **Fixed Assets, net**                                                                                    |       | 91,332          |       | 96,488               |       |
|                                                                                                     |       |            |       |                 |       |
| **Other Assets:**                                                                                        |       |            |       |                 |       |
| Intangible assets                                                                                        |       | 24,251          |       | 25,188               |       |
| Deferred tax asset                                                                                       |       | 3,621           |       | 3,621                |       |
| Other assets                                                                                             |       | 4,025           |       | 4,038                |       |
|                                                                                                     |       | 31,897          |       | 32,847               |       |
|                                                                                                     |       |            |       |                 |       |
| Total Assets                                                                                             |       | $               | 295,463    |                 | $          | 307,467 |   |

 

The accompanying notes are an integral partof these statements.

 

4

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| ** **                                                                                                            | ** ** | **May 5,** | ** ** | **February 3,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------------|------------|
| ** **                                                                                                            | ** ** | **2007**        | ** ** | **2007**             | ** ** |
| ** **                                                                                                            | ** ** | **(unaudited)** | ** ** | ** **           | ** ** |
|                                                                                                                  |       |            |       |                 |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                         |       |            |       |                 |       |
|                                                                                                                  |       |            |       |                 |       |
| **Current Liabilities:**                                                                                              |       |            |       |                 |       |
| Current portion of obligations under  capital leases                                                                  |       | $               | 1,509      |                 | $          | 1,472 |   |
| Current maturities of long-term debt (Note  5)                                                                        |       | 48,810          |       | 314                  |       |
| Accounts payable                                                                                                      |       | 33,653          |       | 34,704               |       |
| Other current liabilities                                                                                             |       | 47,248          |       | 49,653               |       |
| Accrued interest expense                                                                                              |       | 155             |       | 30                   |       |
| Deferred income taxes                                                                                                 |       | 13,542          |       | 13,542               |       |
| Liabilities subject to compromise (Note 4)                                                                            |       | 2,516           |       | 2,696                |       |
|                                                                                                                  |       | 147,433         |       | 102,411              |       |
|                                                                                                                  |       |            |       |                 |       |
| **Non-current Liabilities:**                                                                                          |       |            |       |                 |       |
| Obligations under capital leases                                                                                      |       | 10,474          |       | 10,956               |       |
| Long-term debt (Note 5)                                                                                               |       | 3,840           |       | 52,412               |       |
| Defined benefit  pension plan liability (Note 7)                                                                      |       | 20,482          |       | 22,150               |       |
| Other non-current  liabilities                                                                                        |       | 27,919          |       | 26,813               |       |
|                                                                                                                  |       | 62,715          |       | 112,331              |       |
|                                                                                                                  |       |            |       |                 |       |
| **Total Liabilities**                                                                                                 |       | 210,148         |       | 214,742              |       |
|                                                                                                                  |       |            |       |                 |       |
| **Commitments and Contingencies (Notes 4 and  8)**                                                                    |       |            |       |                 |       |
|                                                                                                                  |       |            |       |                 |       |
| **Stockholders’ Equity:**                                                                                        |       |            |       |                 |       |
| Preferred stock - authorized 1,000,000  shares, $.01 par value; none issued                                           |       | —          |       | —               |       |
| Common stock - authorized 15,000,000  shares, $.01 par value; issued and to be issued 8,498,752 shares at both  dates |       | 85              |       | 85                   |       |
| Capital in excess of par value                                                                                        |       | 118,493         |       | 118,493              |       |
| Deficit                                                                                                               |       | (40,058         | )          | (32,648              | )          |
| Accumulated other comprehensive income                                                                                |       | 6,795           |       | 6,795                |       |
| **Total stockholders’ equity**                                                                                   |       | 85,315          |       | 92,725               |       |
|                                                                                                                  |       |            |       |                 |       |
| **Total Liabilities and Stockholders’ Equity**                                                                   |       | $               | 295,463    |                 | $          | 307,467 |   |

 

The accompanying notes are an integral partof these statements.

 

5

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ThePenn Traffic Company

CondensedConsolidated Statements of Operations

(Inthousands, except share and per share data)

(unaudited)

 
| ** **                                      | ** ** | **Quarter**               | ** ** | **Quarter**                  | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **Ended**                 | ** ** | **Ended**                    | ** ** |
| ** **                                      | ** ** | **May 5, 2007** | ** ** | **April 29, 2006** | ** ** |
|                                            |       |                      |       |                         |       |
| **Revenues**                                    |       | $                         | 301,955    |                         | $          | 310,414 |   |
|                                            |       |                      |       |                         |       |
| **Cost and Operating Expenses:**                |       |                      |       |                         |       |
| Cost of sales                                   |       | 221,175                   |       | 232,346                      |       |
| Selling and administrative expenses             |       | 83,743                    |       | 83,227                       |       |
| Loss on store and  distribution center closings |       | 1,883                     |       | —                       |       |
|                                            |       |                      |       |                         |       |
| **Operating Loss**                              |       | (4,846                    | )          | (5,159                       | )          |
|                                            |       |                      |       |                         |       |
| Interest expense                                |       | 2,341                     |       | 2,035                        |       |
| Reorganization and other expenses               |       | 164                       |       | 206                          |       |
|                                            |       |                      |       |                         |       |
| **Loss Before Income Taxes**                    |       | (7,351                    | )          | (7,400                       | )          |
|                                            |       |                      |       |                         |       |
| Income tax expense                              |       | 59                        |       | 57                           |       |
|                                            |       |                      |       |                         |       |
| **Net Loss**                                    |       | $                         | (7,410     | )                            | $          | (7,457 | ) |
|                                            |       |                      |       |                         |       |
| Shares  outstanding and to be issued            |       | 8,498,752                 |       | 8,498,752                    |       |
|                                            |       |                      |       |                         |       |
| **Loss Per Share (Basic and Diluted) (Note 3)** |       | $                         | (0.87      | )                            | $          | (0.88 | ) |

 

The accompanying notes are an integral partof these statements.

 

6

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ThePenn Traffic Company

CondensedConsolidated Statements of Cash Flows

(Inthousands)

(unaudited)

 
| ** **                                                                                 | ** ** | **Quarter Ended**    | ** ** | **Quarter Ended**       | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                                                                 | ** ** | **May 5, 2007** | ** ** | **April 29, 2006** | ** ** |
|                                                                                       |       |                      |       |                         |       |
| **Operating Activities:**                                                                  |       |                      |       |                         |       |
| Net income                                                                                 |       | $                         | (7,410     | )                            | $          | (7,457 | ) |
| Adjustments to reconcile net loss to net  cash (used in) provided by operating activities: |       |                      |       |                         |       |
| Depreciation and amortization                                                              |       | 6,868                     |       | 6,338                        |       |
| Amortization of deferred financing cost                                                    |       | 5                         |       | 323                          |       |
| (Gain) on sale of fixed assets                                                             |       | (491                      | )          | (13                          | )          |
|                                                                                       |       |                      |       |                         |       |
| **Net change in operating assets and  liabilities:**                                       |       |                      |       |                         |       |
| Accounts and notes receivable, net                                                         |       | 227                       |       | (173                         | )          |
| Prepaid expenses and other current assets                                                  |       | 277                       |       | (995                         | )          |
| Inventories                                                                                |       | 2,940                     |       | (1,237                       | )          |
| Liabilities subject to compromise                                                          |       | (180                      | )          | —                       |       |
| Accounts payable and other current  liabilities                                            |       | (3,331                    | )          | 7,004                        |       |
| Other assets                                                                               |       | 9                         |       | (451                         | )          |
| Defined benefit pension plan                                                               |       | (1,668                    | )          | (974                         | )          |
| Other non-current liabilities                                                              |       | 1,317                     |       | (672                         | )          |
|                                                                                       |       |                      |       |                         |       |
| **Net Cash (Used in) Provided by Operating  Activities**                                   |       | (1,437                    | )          | 1,693                        |       |
|                                                                                       |       |                      |       |                         |       |
| **Investing Activities:**                                                                  |       |                      |       |                         |       |
| Capital expenditures                                                                       |       | (657                      | )          | (10,057                      | )          |
| Proceeds from sale of fixed assets                                                         |       | 491                       |       | 13                           |       |
|                                                                                       |       |                      |       |                         |       |
| **Net Cash Used in Investing Activities**                                                  |       | (166                      | )          | (10,044                      | )          |
|                                                                                       |       |                      |       |                         |       |
| **Financing Activities:**                                                                  |       |                      |       |                         |       |
| Payments of mortgages                                                                      |       | (76                       | )          | (67                          | )          |
| Net borrowings  under revolving credit facility                                            |       | —                    |       | 4,103                        |       |
| Reduction in  capital lease obligations                                                    |       | (445                      | )          | (313                         | )          |
|                                                                                       |       |                      |       |                         |       |
| **Net Cash (Used in) Provided by Financing Activities**                                    |       | (521                      | )          | 3,723                        |       |
|                                                                                       |       |                      |       |                         |       |
| **Decrease in Cash and Cash Equivalents**                                                  |       | (2,124                    | )          | (4,628                       | )          |
|                                                                                       |       |                      |       |                         |       |
| **Cash and cash equivalents at the beginning of period**                                   |       | 24,661                    |       | 12,432                       |       |
|                                                                                       |       |                      |       |                         |       |
| **Cash and cash equivalents at end of period**                                             |       | $                         | 22,537     |                         | $          | 7,804 |   |

 

The accompanying notes are an integral partof these statements.

 

7

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ThePenn Traffic Company

CondensedConsolidated Statements of Stockholders’ Equity

Forthe unaudited period February 4, 2007 to May 5, 2007

(Inthousands)

 
| ** **                                       | ** ** | **Common  Stock** | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Deficit** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|-----------------------------------------------------|------------|-------------|------------|---------------------------------------------|------------|---------------------------------------|------------|
|                                             |       |              |       |                                                |       |        |       |                                        |       |                                  |       |
| Balance at February 3, 2007                 |       | $                 | 85         |                                                | $          | 118,493     |       | $                                           | (32,648    | )                                     | $          | 6,795 |   | $ | 92,725 |   |
|                                             |       |              |       |                                                |       |        |       |                                        |       |                                  |       |
| Net loss for the quarter ended May 5,  2007 |       | —            |       | —                                              |       | (7,410      | )          | —                                      |       | (7,410                                | )          |
| Balance at May 5, 2007                      |       | $                 | 85         |                                                | $          | 118,493     |       | $                                           | (40,058    | )                                     | $          | 6,795 |   | $ | 85,315 |   |

 

The accompanying notes are an integral part of these statements.

 

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ThePenn Traffic Company

Notesto Consolidated Financial Statements

 

**Note 1 – Basis of Presentation**

 

The accompanying unauditedcondensed consolidated financial statements of The Penn Traffic Company andsubsidiaries (the “Company”) have been prepared in accordance with generallyaccepted accounting principles for interim financial information and theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements.

 

In the opinion of management,all adjustments (consisting of normal recurring accruals) considered necessaryfor a fair presentation have been included.  Operating results for the interim period endedMay 5, 2007 are not necessarily an indication of results to be expectedfor the fiscal year ended February 2, 2008.  For further information, refer to the auditedconsolidated financial statement and footnotes thereto included in the Company’sAnnual Report on Form 10-K for the fiscal year ended February 2,2008.

 

The balance sheet as of February 3,2007 has been derived from the audited consolidated financial statements as ofsuch date, but does not include all of the information and footnotes requiredby accounting principles generally accepted in the United States of America forcomplete financial statements.

 

The Company’s fiscal year endson the Saturday closest to January 31. Fiscal year 2008 is the 52-week period ended February 2, 2008.  Fiscal year 2007 is the 53-week period ended February 3,2007.  The information presented in thisQuarterly Report on Form 10-Q is for the quarter beginning February 4,2007 and ending May 5, 2007.

 

All significant intercompanytransactions and accounts have been eliminated in consolidation.

 

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

 

On May 30, 2003, The PennTraffic Company 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.

 

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

 

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

 

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

 

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

 

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

 

4.     The reorganized Company was authorized toissue new shares of common stock to unsecured creditors, which included holdersof $100 million of senior notes, a claim by the Pension Benefit GuarantyCorporation or the (“PBGC”) of $60 million 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.

 

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

 

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

 

9

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**Note 3 - Per Share Data**

 

Basic and diluted net loss per share is based on the number of commonshares issued and estimated to be issued pursuant to the Plan.  Common shares issued and estimated to beissued in settlement of claims filed in the Company’s Chapter 11 proceeding aretreated as outstanding as of the effective date of the Plan.  At both May 5, 2007 and February 3,2007, 201,055 common shares are estimated to be issued in connection with thesettlement of remaining claims.

 

**Note 4 –Liabilities Subject to Compromise**

 

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

 

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

 

Duringthe quarter ended May 5, 2007, the Company paid out $0.2 million insettlement of disputed claims.  TheCompany has established liabilities for the estimated cash payments required tosettle the remaining claims outstanding in the Chapter 11 proceedings.  Estimated shares of common stock to be issuedin settlement of claims have been accounted for as stockholders’ equity.

 

**Note 5 –Long Term Debt**

 

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

 

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

 

**Note 6 –Acquisitions and Dispositions**

 

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

 

InJanuary 2007, the Company announced the closing of a leased distributioncenter used for the distribution of general merchandise and health and beautyproducts.  At the same time, the Companyentered into a five-year supply agreement with a third party to provide themerchandise previously distributed from the distribution center.  In connection with the announced closing, in January 2007,the Company recorded a liability of $1.4 million for termination benefits whichwere communicated 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, representingthe present 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 carrying valueof such inventory at February 3, 2007 was approximately $4.8 million.

 

Nostores were closed during the quarters ended May 5, 2007 and April 29,2006.

 

10

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**Note 7 –Pension Plans**

 

TheCompany has four noncontributory defined benefit pension plans covering certainunion personnel.  The Company’s policy isto fund pension benefits to the extent contributions are deductible for taxpurposes and in compliance with federal laws and regulations.

 

Thecomponents of net periodic benefit cost for the quarters ended May 5, 2007and April 29, 2006 is as follows (in thousands):

 
| ** **                     | ** ** | **Quarter Ended** | ** ** | **Quarter Ended** | ** ** |
|--------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **May 5,**        | ** ** | **April 29,**     | ** ** |
| ** **                     | ** ** | **2007**               | ** ** | **2006**               | ** ** |
| ** **                     | ** ** | **(Unaudited)**        | ** ** |
| Service cost                   |       | $                      | 495        |                   | $          | 496 |   |
| Interest cost                  |       | 1,560                  |       | 1,494                  |       |
| Expected return on plan assets |       | (1,597                 | )          | (1,494                 | )          |
| Amount of recognized gain      |       | (30                    | )          | —                 |       |
|                           |       |                   |       |                   |       |
|                           |       | $                      | 428        |                   | $          | 496 |   |

 

Forthe quarter ended May 5, 2007, the Company contributed $2.1 million to thefour defined benefit pension plans.  Forthe quarter ended April 29, 2006, the Company contributed $1.1 million tothe four defined benefit pension plan.

 

**Note 8 –Commitments and Contingencies**

 

TheUnited States Attorney for the Northern District of New York and the Securitiesand Exchange Commission (“SEC”) have been conducting investigations relating tothe Company’s promotional allowance practices and policies.  Such investigations began prior to theCompany’s emergence from bankruptcy in April 2005.  The Company has been cooperating with theseinvestigations and has produced documents and made Company employees availablefor interviews as requested.

 

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

 

OnSeptember 17, 2007, the SEC filed civil fraud charges against the Company’sformer Chief Marketing Officer and former Vice President, Non-PerishablesMarketing alleging that such individuals orchestrated a scheme to inflate theCompany’s income and other financial results by prematurely recognizingpromotional allowances received from vendors from approximately the secondquarter of fiscal year 2001 through at least the fourth quarter of fiscal year2003. The complaint further alleges that the individuals deceived the Company’saccounting personnel to carry out their fraudulent scheme and aided and abettedthe Company’s violations of the Exchange Act of 1934 and rules thereunder.In addition, on the same date, the United States Attorney for the NorthernDistrict of New York announced that a federal grand jury has returned anindictment against the abovementioned individuals on related criminal charges.Both the SEC and the United States Attorney indicated that their investigationsare continuing.

 

Inconnection with these matters, the Company could be subject to damage claims,fines or penalties.  At present, theCompany is unable to estimate the likelihood of an unfavorable outcome or theamount of any damage claims, fines or penalties in the event of an unfavorableoutcome and, accordingly, no liability has been recorded for this contingency.

 

11

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**Note 9 –Subsequent Events**

 

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

 

**Note 10 – Segment Information**

 

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

 

Thetables below presents information with respect to operating segments as well asreconciliations to consolidated information (in thousands).

 
| ** **                                                    | ** ** | **Quarter Ended May 5, 2007** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                        | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Retail Food**                              | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                          |       |                                              |       |   |   |   |   |   |   |
| Revenues                                                      |       | $                                                 | 245,232    |   | $ | 50,471 |   | $ | 6,252 | (1) | $ | 301,955 |   |
|                                                          |       |                                              |       |   |   |   |   |   |   |
| Cost of sales                                                 |       | (169,570                                          | )          | (46,913 | ) | (3,814 | )(2) | (220,297 | )(4) |
| Selling and administrative expense                            |       | (60,702                                           | )          | (1,425 | ) | (15,626 | )(3) | (77,753 | )(4) |
| Loss on store and distribution center  closings               |       | —                                            |       | — |   | (1,883 | ) | (1,883 | ) |
|                                                          |       |                                              |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation  and amortization |       | 14,960                                            |       | 2,133 |   | (15,071 | ) | 2,022 |   |
|                                                          |       |                                              |       |   |   |   |   |   |   |
| Depreciation and amortization                                 |       | (6,218                                            | )          | (245 | ) | (405 | ) | (6,868 | ) |
|                                                          |       |                                              |       |   |   |   |   |   |   |
| Operating income (loss)                                       |       | $                                                 | 8,742      |   | $ | 1,888 |   | $ | (15,476 | ) | (4,846 | ) |
| Interest expense                                              |       |                                              |       |   |   |   |   | (2,341 | ) |
| Reorganization costs                                          |       |                                              |       |   |   |   |   | (164 | ) |
|                                                          |       |                                              |       |   |   |   |   |   |   |
| Consolidated loss before income taxes                         |       |                                              |       |   |   |   |   | $ | (7,351 | ) |
|                                                          |       |                                              |       |   |   |   |   |   |   |
| 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 |   |

 

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(1)        Consists principally of approximately $4.0million for bakery operations, $1.7 million for trucking revenues and $0.3million of rental income.

 

(2)        Consists principally of approximately$2.7 million for bakery sales and approximately $0.3 million in cost ofsales to reconcile segment inventories on FIFO to consolidated inventories onLIFO.

 

(3)        Consists principally of approximately$7.6 million of payroll, benefits, and payroll taxes associated with theadministrative staff, approximately $1.9 million associated with selling andadministrative costs of the bakery, approximately $4.0 million ofprofessional fees (of which approximately $0.3 million pertaining to legalcosts associated with the internal and SEC investigation relating to theCompany’s practices regarding promotional discounts and allowances),approximately $1.4 million of contract hauling costs associated with truckingrevenue, approximately $0.5 million for an increase in reserves for doubtfulaccounts, and $0.3 million in data processing maintenance.

 

12

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(4)        Excludes depreciation and amortization of$0.9 million for cost of sales and $6.0 million for selling andadministrative expenses.

 

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

 

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

 
| ** **                                                      | ** ** | **Quarter Ended April 29, 2006** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                      | ** ** | ** **                                           | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **Retail Food**                                 | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                            |       |                                                 |       |   |   |   |   |   |   |
| Revenues                                                        |       | $                                                    | 253,116    |   | $ | 51,935 |   | $ | 5,363 | (1) | $ | 310,414 |   |
|                                                            |       |                                                 |       |   |   |   |   |   |   |
| Cost of sales                                                   |       | (178,394                                             | )          | (49,065 | ) | (3,512 | )(2) | (230,971 | )(4) |
| Selling and administrative expense                              |       | (62,389                                              | )          | (1,485 | ) | (14,390 | )(3) | (78,264 | )(4) |
|                                                            |       |                                                 |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation  and amortization   |       | 12,333                                               |       | 1,385 |   | (12,539 | ) | 1,179 |   |
|                                                            |       |                                                 |       |   |   |   |   |   |   |
| Depreciation and amortization                                   |       | (5,737                                               | )          | (156 | ) | (445 | ) | (6,338 | ) |
|                                                            |       |                                                 |       |   |   |   |   |   |   |
| Operating income (loss)                                         |       | $                                                    | 6,596      |   | $ | 1,229 |   | $ | (12,984 | ) | (5,159 | ) |
| Interest expense                                                |       |                                                 |       |   |   |   |   | (2,035 | ) |
| Reorganization costs                                            |       |                                                 |       |   |   |   |   | (206 | ) |
|                                                            |       |                                                 |       |   |   |   |   |   |   |
| Consolidated loss before income taxes                           |       |                                                 |       |   |   |   |   | $ | (7,400 | ) |
|                                                            |       |                                                 |       |   |   |   |   |   |   |
| Total assets as of April 29, 2006                          |       | $                                                    | 264,393    | (5) | $ | 30,233 | (5) | $ | 31,881 | (6) | $ | 326,507 |   |
|                                                            |       |                                                 |       |   |   |   |   |   |   |
| Capital expenditures for the quarter ended  April 29, 2006 |       | $                                                    | 9,106      |   | $ | — |   | $ | 951 |   | $ | 10,057 |   |

 

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(1)        Consists principally of approximately$3.8 million for bakery sales principally to customers other than those ofthe retail and wholesale segments and approximately $1.5 million fortrucking revenues.

 

(2)        Consists principally of approximately$2.4 million for bakery sales and approximately $0.3 million increasein cost of sales to reconcile segment inventories on FIFO to consolidatedinventories on LIFO.

 

(3)        Consists principally of approximately $6.8 millionof payroll, benefits, and payroll taxes associated with the administrativestaff, approximately $1.5 million associated with selling andadministrative costs of the bakery, approximately $1.4 million of contracthauling costs associated with trucking revenue, approximately $3.1 million ofprofessional fees (including approximately $1.9 million of legal costsassociated with the internal and SEC investigation relating to the Company’spractices regarding promotional discounts and allowances),  approximately $0.5 million for dataprocessing maintenance and $0.3 million for corporate insurance costs.

 

(4)        Excludes depreciation and amortization of$1.3 million for cost of sales and $5.0 million for selling andadministrative expenses.

 

(5)        The warehouse and transportation assets havebeen allocated using the same methodology that was used for the warehouse andtransportation costs.  The effect of thechange in allocation method in fiscal year 2007 was to increase the assets ofthe wholesale food distribution segment and decrease assets of the retail foodsegment by $4.3 million.

 

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

 

13

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

 

**Introduction**

 

We operate or supply more than200 supermarkets in Upstate New York, Pennsylvania, Vermont and NewHampshire.  We operate in twosegments.  Our retail food businessincludes corporate-owned stores with the “BiLo”, “P&C” and “Quality” tradenames, and our wholesale food distribution business supplies independentlyoperated supermarkets and other wholesale accounts.

 

Our primary objective is toimprove our long-term financial performance and enhance the in-store experienceof our customers.  Under the direction ofour new senior team (formed in fiscal year 2007), we are focusing on rebuildingour core business.  This means re-establishingbasic disciplines and reemphasizing and instilling a much stronger profitablegrowth culture around sales and margin.

 

**Results of Operations**

 

The following table sets forthcertain Consolidated Statement of Operations components expressed as percentagesof revenues for the quarters ended May 5, 2007 and April 29, 2006.

 
| ** **                                      | ** ** | **Unaudited**             | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|
| ** **                                      | ** ** | **Quarter**               | ** ** | **Quarter** | ** ** |
| ** **                                      | ** ** | **Ended**                 | ** ** | **Ended** | ** ** |
| ** **                                      | ** ** | **May 5, 2007** | ** ** | **April 29, 2006** | ** ** |
|                                            |       |                      |       |   |   |
| Revenues                                        |       | 100.0                     | %          | 100.0 | % |
|                                            |       |                      |       |   |   |
| Gross profit (1)                                |       | 26.7                      |       | 25.1 |   |
|                                            |       |                      |       |   |   |
| Selling and administrative expenses             |       | 27.7                      |       | 26.8 |   |
|                                            |       |                      |       |   |   |
| Loss on store and distribution center  closings |       | 0.6                       |       | — |   |
|                                            |       |                      |       |   |   |
| Operating loss                                  |       | (1.6                      | )          | (1.7 | ) |
|                                            |       |                      |       |   |   |
| Interest expense                                |       | 0.8                       |       | 0.7 |   |
|                                            |       |                      |       |   |   |
| Reorganization and other expenses               |       | 0.1                       |       | 0.1 |   |
|                                            |       |                      |       |   |   |
| Income tax expense                              |       | 0.0                       |       | 0.0 |   |
|                                            |       |                      |       |   |   |
| Net loss                                        |       | (2.5                      | )          | (2.5 | ) |

 

----

(1)          Revenues less cost of sales.

 

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**Fiscal Year2008 (the Quarter Ended May 5, 2007) and Fiscal Year 2007 (the QuarterEnded April 29, 2006)**

 

**Revenues**

 

Revenues for the quarter ended May 5,2007 decreased to $302.0 million from $310.4 million for the quarter ended April 29,2006.  The $8.4 million decrease inrevenues was mainly attributable to a reduction in the number of ourcorporate-owned stores, a decline in same store sales and a decrease inwholesale food distribution revenues.

 

Same store sales for thequarter ended May 5, 2007 decreased 0.4% compared to the quarter ended April 29,2006.

 

Wholesale food distributionrevenues for the quarter ended May 5, 2007 decreased to$50.5 million, or 16.7% of total revenues, from $51.9 million, or 16.7% oftotal revenues, for the quarter ended April 29, 2006.  The decrease in the wholesale fooddistribution revenues of $1.4 million was attributable to the loss of certainwholesale customers.

 

**GrossProfit**

 

Gross profit was $80.8 million,or 26.7% of revenues, for the quarter ended May 5, 2007 compared to $78.1million, or 25.1% of revenues, for the quarter ended April 29, 2006.  The increase is the result of increased salesof higher margin private label and signature products.

 

**Sellingand Administrative Expenses**

 

Selling and administrativeexpenses for the quarter ended May 5, 2007, were $83.7 million, or27.7% of revenues, compared to $83.2 million, or 26.8% of revenues, for thequarter ended April 29, 2006.  Theincrease in selling and administrative expenses as a percentage of revenue wasprimarily due to an increase in auditing fees, professional fees, and outsideservices.

 

**Depreciationand Amortization**

 

Depreciation and amortizationexpense was $6.9 million, or 2.3% of revenues, for the quarter ended May 5,2007 compared to $6.3 million, or 2.0% of revenues, for the quarter ended April 29,2006.  The increase in depreciation andamortization during the quarter ended May 5, 2007 was primarily due toadditional depreciation from assets placed in service in fiscal year 2007.

 

**Loss on Store and Distribution Center Closings**

 

For the quarter ended May 5,2007 we recorded a loss on store closings of $1.9 million, or 0.6% of revenues,representing the net present value of the remaining lease rentals associatedwith our closed distribution center.  Weceased use of the distribution center in March 2007.

 

**OperatingLoss**

 

Operating loss for the quarterended May 5, 2007 was $4.8 million, or 1.6% of revenues, compared to theoperating loss of $5.2 million, or 1.7% of revenues for the quarter ended April 29,2006.

 

**InterestExpense**

 

Interest expense for thequarter ended May 5, 2007 was $2.3 million, or 0.8% of revenues,compared to $2.0 million, or 0.7% of revenues, for the quarter ended April 29,2006. The $0.3 million increase in interest expense for the quarter ended May 5,2007 was due to the increase in our average borrowings under our creditfacilities.

 

**Net Loss**

 

Net loss for the quarterended May 5, 2007 was $7.4 million, or 2.5% of revenues, compared toa net loss of $7.5 million, or 2.5% of revenue during the quarter ended April 29,2006.

 

15

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**Liquidity and Capital Resources**

 

Overview

 

As of the quarter ended May 5,2007, we had cash and cash equivalents of $22.5 million and total debtoutstanding of $64.6 million.  Inaddition, we have the ability to draw down on our revolving credit facilities.  We believe our borrowing capability under ourcredit facilities provides the necessary liquidity to operate our business,invest in our core retail store portfolio, improve our customers’ shoppingexperience, and improve our overall offering in the market served.

 

Financial Results

 

*Operating Activities*

 

Cash used in operatingactivities for the quarter ended May 5, 2007 was $1.4 million, as comparedto cash provided by operating activities of $1.7 million for the quarter ended April 29,2006.  For the quarter ended May 5,2007, we incurred a net loss of $7.4 million, adjustments for non cash items of$6.4 million, and a net increase in operating net assets of $0.4 million.  For the quarter ended April 29, 2006, weincurred a net loss of $7.5 million, adjustments for non-cash items of $6.6million and a net decrease in operating net assets of $2.6 million.

 

*Investing Activities*

 

Cash used in investingactivities for the quarter ended May 5, 2007 and the quarter ended April 29,2006 were $0.2 million and $10.0 million, respectively.  The $9.8 million reduction was due to lowercapital expenditures ($0.7 million for the quarter ended May 5, 2007as compared to $10.1 million for the quarter ended April 29, 2006)partially offset by the $0.5 million in proceeds received from sales of fixedassets during the quarter ended May 5, 2007.

 

*Financing Activities*

 

Cash used in financingactivities for the quarter ended May 5, 2007 were $0.5 million. For thequarter ended April 29, 2006, $3.7 million was provided by financing activities.  The $4.2 million difference was primarily dueto no borrowing under the revolving credit facility during the quarter ended May 5,2007 as compared to $4.1 million of net borrowings under our revolving creditfacility during the quarter ended April 29, 2006.

 

Borrowings

 

On April 13, 2005, uponemergence from Chapter 11 proceedings, we entered into a revolving credit andterm loan facility with a group of financial institutions providing for a$130.0 million revolving credit facility and a $6.0 million termloan.  Also on April 13, 2005, weentered into a supplemental real estate credit facility with another group oflenders, providing for term loan borrowings of up to $28.0 million.  Availability under both credit facilities isdependent on levels of accounts receivable, inventory and certain otherassets.  Interest rates on borrowingsunder the revolving credit facility vary depending upon the amount ofavailability.  At May 5, 2007,outstanding borrowings under both facilities aggregated $48.5 million.  At such date, availability in excess ofoutstanding borrowings and letters of credit was approximately$36.6 million.  Borrowings under therevolving credit and term loan facility are secured by substantially all of ourassets, subject to priority liens on certain properties by other lenders.  Borrowings under the real estate facility aresecured by a first lien on substantially all of our leasehold interests and asecond lien on substantially all of our remaining assets.  At May 5, 2007, we had stand-by lettersof credit of approximately $48.3 million. Many of these stand-by letters of credit were required upon emergencefrom bankruptcy and as a result of our inability to file financial statements.

 

Provisions of both creditfacilities, among other things, require the maintenance of certain financialcovenants (when availability under the credit facilities is less than$35 million for four consecutive days or less than $30 million forany one day), and limit the amount of capital expenditures, our assumption ofadditional debt and our payment of dividends. At no time through May 5, 2007 had we been subject tocompliance with these financial covenants because the annual available forborrowing had not dropped to these levels. However, had such an event occurred, we would not have been incompliance with the financial covenants and would have been in default underthe terms of the loan agreement at May 5, 2007.

 

Pursuant to our plan ofreorganization, we entered into a collateral trust agreement with thecollateral trustee in connection with the secured trade lien program.  The secured trade lien program is withcertain of our vendors and allows us to maintain trade terms.

 

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

 

We also have $4.2 million ofborrowings under mortgages secured by the related properties as of May 5, 2007.

 

16

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

 

Our financial results aresubject to risk from interest rate changes on debt that has variable interestrates. Total variable rate debt outstanding under our loan agreements at May 5,2007 was $48.5 million, with a weighted average interest rate of 11.6%.  A 1% change in interest rates would impactpre-tax income by $0.5 million million based on the debt outstanding at May 5,2007.  In addition to the variable ratedebt we had $4.2 million of fixed rate debt outstanding at May 5, 2007,with a weighted average interest rate of 6.65%. We view the fixed rate debt as a partial hedge against interest ratefluctuations.

 

**ITEM 4.          CONTROLS AND PROCEDURES**

 

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

 

Pursuant to Rule 13a-15(e) underthe Exchange Act, our management evaluated the effectiveness of the design andoperation of our disclosure controls and procedures with the participation ofour principal executive and principal financial officers.  Based on their current observations combinedwith observations by the disclosure committee, which is comprised of members ofmanagement, members of the audit committee and external counsel, managementconcluded that our disclosure controls and procedures were ineffective as of May 5, 2007in providing reasonable assurance that material information requiringdisclosure was brought to management’s attention on a timely basis and that ourfinancial reporting was reliable.

 

**Change in our Internal Control Over Financial Reporting**

 

In May 2007, we hired anoutside consulting firm to assist management in its evaluation of theeffectiveness of our internal control over financial reporting, includingdisclosure controls and procedures.  Theyare using the framework established in “Internal Control-Integrated Framework”issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

17

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**PART II – OTHER INFORMATION**

 

**ITEM 1.          LEGAL PROCEEDINGS**

 

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

 

**ITEM 1A.       RISK FACTORS**

 

TherehavebeennochangestotheriskfactorsdisclosedintheCompany’sAnnualReportonForm 10-KfortheyearendedFebruary 2, 2008.

 

**ITEM 6.          EXHIBITS**

 

The following are filed asExhibits to this Report:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                           |
| 10.1                 |       | Form of Severance Agreement between Randy P. Martin and The Penn  Traffic Company (incorporated by reference to Exhibit 99.1 to the  Form 8-K filed on February 1, 2007).  |
|                 |       |                                                                                                                                                                                           |
| 10.2                 |       | Offer  Letter, dated May 2, 2007 between The Penn Traffic Company and Tod A.  Nestor (incorporated by reference to Exhibit 99.1 to the Form 8-K  filed on May 9, 2007).    |
|                 |       |                                                                                                                                                                                           |
| 31.1                 |       | Certification of CEO  pursuant to Rule 13a-14(a) under the Securities Exchange Act of  1934, as amended.                                                                             |
|                 |       |                                                                                                                                                                                           |
| 31.2                 |       | Certification of CFO  pursuant to Rule 13a-14(a) under the Securities Exchange Act of  1934, as amended.                                                                             |
|                 |       |                                                                                                                                                                                           |
| 32.1                 |       | Certification of CEO  pursuant to Rule 13a-14(b) under the Securities Exchange Act of  1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the  United States Code. |
|                 |       |                                                                                                                                                                                           |
| 32.2                 |       | Certification of CFO  pursuant to Rule 13a-14(b) under the Securities Exchange Act of  1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the  United States Code. |

 

18

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**Signatures**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned 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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