**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended August 4, 2007**

 

**OR**

 

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

 

**For the Transition Periodfrom                        to                        **

 

**Commission file number: 0-8858**

 

**THE PENN TRAFFIC COMPANY**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**              | ** ** | **25-0716800**                     |
|---------------------------|------------|------------------------------------|
| (State of  incorporation) |       | (IRS Employer  Identification No.) |

 
| **1200 State Fair Blvd., Syracuse, New York** |   | **13221-4737** |
|-----------------------------------------------|--------|----------------|
| (Address of principal executive offices)      |   | (Zip Code)     |

 

**(315) 453-7284**

(Registrant’s telephonenumber, including area code)

 

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

YES  o        NO  x

 

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

 

| 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 markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

YES  o        NO  x

 

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

 

Common Stock, par value$.01 per share:  8,336,192 sharesoutstanding as of May 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 | 16         |
|              |       |       |                                                                                        |       |
| Item              | 3.         |       | Quantitative  and Qualitative Disclosures About Market Risk                                 | 20         |
|              |       |       |                                                                                        |       |
| Item              | 4.         |       | Controls and  Procedures                                                                    | 20         |
|              |       |       |                                                                                        |       |
| **PART II.** | ** ** | ** ** | ** **                                                                                  | ** ** |
| ** **        | ** ** | ** ** | ** **                                                                                  | ** ** |
| Item              | 1.         |       | Legal Proceedings                                                                           | 21         |
|              |       |       |                                                                                        |       |
| Item              | 1A.        |       | Risk Factors                                                                                | 21         |
|              |       |       |                                                                                        |       |
| Item              | 6.         |       | Exhibits                                                                                    | 21         |
|              |       |       |                                                                                        |       |

 

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**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Certainstatements included in this Form 10-Q, including without limitation,statements included in Item 2 - “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” which are not statements ofhistorical fact, are intended to be, and are hereby identified as, “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, as amended, reflecting management’s current analysis and expectations,based on what management believes to be reasonable assumptions.  These forward-looking statements includestatements relating to our anticipated financial performance and businessprospects.  Statements preceded by,followed by or that include words such as “believe,” “anticipate,” “estimate,” “expect,”“could,” and other similar expressions are to be considered suchforward-looking statements.  Forward-lookingstatements may involve known and unknown risks, uncertainties and otherfactors, which may cause the actual results to differ materially from thoseprojected, stated or implied, depending on such factors as the risks set forthin Item 1A – “Risk Factors” in our Annual Report on Form 10-K for thefiscal year ended February 2, 2008; our ability to improve operatingperformance and effectuate business plans; our ability to operate pursuant tothe terms of our credit facilities and to comply with the terms of our lendingagreements or to amend or modify the terms of such agreements as may be neededfrom time to time; our ability to generate cash; our ability to attract andmaintain adequate capital; our ability to refinance our indebtedness; increasesin prevailing interest rates; our ability to obtain trade credit, and shipmentsand terms with vendors and service providers for current orders; our ability tomaintain contracts that are critical to our operations; potential adversedevelopments with respect to our liquidity or results of operations; generaleconomic and business conditions; competition, including increased capitalinvestment and promotional activity by our competitors; availability, locationand terms of sites for store development; the successful implementation of ourcapital expenditure program; labor relations; labor and employee benefit costsincluding increases in health care and pension costs and the level ofcontributions to our sponsored pension plans; the result of our pursuit ofstrategic alternatives; economic and competitive uncertainties; our ability topursue strategic alternatives; economic and competitive uncertainties; changesin strategies; changes in generally accepted accounting principles; adversechanges in economic and political climates around the world, includingterrorist activities and international hostilities; and the outcome of pending,or the commencement of any new, legal proceedings against, or governmentalinvestigations of us, including the previously announced SEC and U.S. Attorney’sOffice investigations.  We caution thatthe foregoing list of important factors is not exhaustive.  Accordingly, there can be no assurance thatwe will meet future results, performance or achievements expressed or implied bysuch forward-looking statements, which are generally required to be publiclyrevised as circumstances change, and which we do not intend to update.

 

**EXPLANATORY NOTE**

** **

This Quarterly Report on Form 10-Qis for the period beginning May 6, 2007 and ending August 4, 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)

 
| ** **                                                                                               | ** ** | **August 4,** | ** ** | **February 3,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                                                                               | ** ** | **2007**           | ** ** | **2007**             | ** ** |
| ** **                                                                                               | ** ** | **(unaudited)**    | ** ** | ** **           | ** ** |
| **ASSETS**                                                                                               |       |               |       |                 |       |
|                                                                                                     |       |               |       |                 |       |
| **Current Assets:**                                                                                      |       |               |       |                 |       |
| Cash                                                                                                     |       | $                  | 21,127     |                 | $          | 24,661 |   |
| Accounts and notes receivable (less  allowance for doubtful accounts of $4,747 and $3,736, respectively) |       | 37,480             |       | 35,112               |       |
| Inventories                                                                                              |       | 95,772             |       | 100,035              |       |
| Prepaid expenses and other current assets                                                                |       | 7,502              |       | 8,469                |       |
|                                                                                                     |       | 161,881            |       | 168,277              |       |
|                                                                                                     |       |               |       |                 |       |
| **Capital Leases, net**                                                                                  |       | 9,194              |       | 9,855                |       |
|                                                                                                     |       |               |       |                 |       |
| **Fixed Assets, net**                                                                                    |       | 86,421             |       | 96,488               |       |
|                                                                                                     |       |               |       |                 |       |
| **Other Assets:**                                                                                        |       |               |       |                 |       |
| Intangible assets                                                                                        |       | 23,309             |       | 25,188               |       |
| Deferred tax assets                                                                                      |       | 3,621              |       | 3,621                |       |
| Other assets                                                                                             |       | 3,538              |       | 4,038                |       |
|                                                                                                     |       | 30,468             |       | 32,847               |       |
|                                                                                                     |       |               |       |                 |       |
| Total Assets                                                                                             |       | $                  | 287,964    |                 | $          | 307,467 |   |

 

The accompanying notes are an integral partof these statements.

 

4

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ThePenn Traffic Company

CondensedConsolidated Balance Sheets

(Inthousands)

 
| ** **                                                                                                            | ** ** | **August 4,** | ** ** | **February 3,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                                                                                            | ** ** | **2007**           | ** ** | **2007**             | ** ** |
| ** **                                                                                                            | ** ** | **(unaudited)**    | ** ** | ** **           | ** ** |
|                                                                                                                  |       |               |       |                 |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                        |       |               |       |                 |       |
|                                                                                                                  |       |               |       |                 |       |
| **Current Liabilities:**                                                                                              |       |               |       |                 |       |
| Current portion of obligations under  capital leases                                                                  |       | $                  | 1,554      |                 | $          | 1,472 |   |
| Current maturities of long-term debt (Note  5)                                                                        |       | 48,799             |       | 314                  |       |
| Accounts payable                                                                                                      |       | 31,834             |       | 34,704               |       |
| Other current liabilities                                                                                             |       | 47,181             |       | 49,653               |       |
| Accrued interest expense                                                                                              |       | 387                |       | 30                   |       |
| Deferred income taxes                                                                                                 |       | 13,542             |       | 13,542               |       |
| Liabilities subject to compromise (Note 4)                                                                            |       | 2,516              |       | 2,696                |       |
|                                                                                                                  |       | 145,813            |       | 102,411              |       |
|                                                                                                                  |       |               |       |                 |       |
| **Non-current Liabilities:**                                                                                          |       |               |       |                 |       |
| Obligations under capital leases                                                                                      |       | 10,068             |       | 10,956               |       |
| Long-term debt (Note 5)                                                                                               |       | 3,773              |       | 52,412               |       |
| Defined benefit  pension plan liability (Note 7)                                                                      |       | 19,527             |       | 22,150               |       |
| Other non-current  liabilities                                                                                        |       | 28,380             |       | 26,813               |       |
|                                                                                                                  |       | 61,748             |       | 112,331              |       |
|                                                                                                                  |       |               |       |                 |       |
| **Total Liabilities**                                                                                                 |       | 207,561            |       | 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                                                                                                               |       | (44,970            | )          | (32,648              | )          |
| Accumulated other comprehensive income                                                                                |       | 6,795              |       | 6,795                |       |
| **Total stockholders’ equity**                                                                                   |       | 80,403             |       | 92,725               |       |
|                                                                                                                  |       |               |       |                 |       |
| **Total Liabilities and Stockholders’ Equity**                                                                   |       | $                  | 287,964    |                 | $          | 307,467 |   |

 

The accompanying notes are an integral part of these statements.

 

5

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ThePenn Traffic Company

CondensedConsolidated Statements of Operations

(Inthousands, except share and per share data)

(unaudited)

 
| ** **                                      | ** ** | **Quarter Ended**   | ** ** | **Year to Date** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **August 4,  2007** | ** ** | **July 29,  2006**    | ** ** | **August 4,  2007** | ** ** | **July 29,  2006** | ** ** |
|                                            |       |                     |       |                       |       |   |   |   |   |
| **Revenues**                                    |       | $                        | 322,916    |                       | $          | 338,152 |   | $ | 624,871 |   | $ | 648,566 |   |
|                                            |       |                     |       |                       |       |   |   |   |   |
| **Cost and Operating Expenses:**                |       |                     |       |                       |       |   |   |   |   |
| Cost of sales                                   |       | 235,627                  |       | 252,300                    |       | 456,802 |   | 484,646 |   |
| Selling and administrative expenses             |       | 87,700                   |       | 83,401                     |       | 171,443 |   | 166,628 |   |
| Loss on store and  distribution center closings |       | —                   |       | —                     |       | 1,883 |   | — |   |
|                                            |       |                     |       |                       |       |   |   |   |   |
| **Operating (Loss) Income**                     |       | (411                     | )          | 2,451                      |       | (5,257 | ) | (2,708 | ) |
|                                            |       |                     |       |                       |       |   |   |   |   |
| Interest expense                                |       | 2,454                    |       | 2,350                      |       | 4,795 |   | 4,385 |   |
| Reorganization and other expenses               |       | 1,989                    |       | 56                         |       | 2,153 |   | 262 |   |
|                                            |       |                     |       |                       |       |   |   |   |   |
| **(Loss) Income Before Income Taxes**           |       | (4,854                   | )          | 45                         |       | (12,205 | ) | (7,355 | ) |
|                                            |       |                     |       |                       |       |   |   |   |   |
| Income tax provision                            |       | 58                       |       | 57                         |       | 117 |   | 114 |   |
|                                            |       |                     |       |                       |       |   |   |   |   |
| **Net Loss**                                    |       | $                        | (4,912     | )                          | $          | (12 | ) | $ | (12,322 | ) | $ | (7,469 | ) |
|                                            |       |                     |       |                       |       |   |   |   |   |
| Shares  outstanding and to be issued            |       | 8,498,752                |       | 8,498,752                  |       | 8,498,752 |   | 8,498,752 |   |
|                                            |       |                     |       |                       |       |   |   |   |   |
| **Loss Per Share (Basic and Diluted) (Note 3)** |       | $                        | (0.58      | )                          | $          | (0.00 | )  | $ | (1.45 | ) | $ | (0.88 | ) |

 

The accompanying notes are an integral part of thesestatements.

 

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ThePenn Traffic Company

CondensedConsolidated Statements of Cash Flows

(Inthousands)

(unaudited)

 
| ** **                                                                                 | ** ** | **For the Period**         | ** ** | **For the Period**        | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                 | ** ** | **February 4, 2007**       | ** ** | **January 29, 2006**      | ** ** |
| ** **                                                                                 | ** ** | **to August 4, 2007** | ** ** | **to July 29, 2006** | ** ** |
| **Operating Activities:**                                                                  |       |                                 |       |                                |       |
| Net loss                                                                                   |       | $                                    | (12,322    | )                                   | $          | (7,469 | ) |
| Adjustments to reconcile net loss to net  cash (used in) provided by operating activities: |       |                                 |       |                                |       |
| Depreciation and amortization                                                              |       | 13,758                               |       | 12,986                              |       |
| Amortization of deferred financing cost                                                    |       | 501                                  |       | 647                                 |       |
| Gain on sale of fixed assets                                                               |       | (612                                 | )          | (29                                 | )          |
|                                                                                       |       |                                 |       |                                |       |
| **Net change in operating assets and  liabilities:**                                       |       |                                 |       |                                |       |
| Accounts and notes receivable, net                                                         |       | (2,368                               | )          | (154                                | )          |
| Prepaid expenses and other current assets                                                  |       | 967                                  |       | (3,647                              | )          |
| Inventories                                                                                |       | 4,263                                |       | 3,559                               |       |
| Liabilities subject to compromise                                                          |       | (180                                 | )          | (95                                 | )          |
| Accounts payable and other current  liabilities                                            |       | (4,985                               | )          | 4,729                               |       |
| Other assets                                                                               |       | 2                                    |       | (420                                | )          |
| Defined benefit pension plan                                                               |       | (2,623                               | )          | (1,060                              | )          |
| Other non-current liabilities                                                              |       | 1,981                                |       | 1,793                               |       |
|                                                                                       |       |                                 |       |                                |       |
| **Net Cash (Used in) Provided by Operating  Activities**                                   |       | (1,618                               | )          | 10,840                              |       |
|                                                                                       |       |                                 |       |                                |       |
| **Investing Activities:**                                                                  |       |                                 |       |                                |       |
| Capital expenditures                                                                       |       | (1,875                               | )          | (17,190                             | )          |
| Proceeds from sale of fixed assets                                                         |       | 919                                  |       | 29                                  |       |
|                                                                                       |       |                                 |       |                                |       |
| **Net Cash Used in Investing Activities**                                                  |       | (956                                 | )          | (17,161                             | )          |
|                                                                                       |       |                                 |       |                                |       |
| **Financing Activities:**                                                                  |       |                                 |       |                                |       |
| Payments of mortgages                                                                      |       | (154                                 | )          | (138                                | )          |
| Net borrowings  under revolving credit facility                                            |       | —                               |       | 3,921                               |       |
| Reduction in  capital lease obligations                                                    |       | (806                                 | )          | (636                                | )          |
|                                                                                       |       |                                 |       |                                |       |
| **Net Cash (Used in) Provided By Financing Activities**                                    |       | (960                                 | )          | 3,147                               |       |
|                                                                                       |       |                                 |       |                                |       |
| **Decrease in Cash and Cash Equivalents**                                                  |       | (3,534                               | )          | (3,174                              | )          |
|                                                                                       |       |                                 |       |                                |       |
| **Cash and Cash Equivalents at the beginning of period**                                   |       | 24,661                               |       | 12,432                              |       |
|                                                                                       |       |                                 |       |                                |       |
| **Cash and Cash Equivalents at end of period**                                             |       | $                                    | 21,127     |                                | $          | 9,258 |   |

 

The accompanying notes are an integral partof these statements.

 

7

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ThePenn Traffic Company

Condensed ConsolidatedStatement of Stockholders’ Equity

For the unaudited period February 4,2007 to August 4, 2007

(In thousands)

 
| ** **                                        | ** ** | **Common  Stock** | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|-----------------------------------------------------|------------|-------------|------------|-----------------------------------------------|------------|---------------------------------------|------------|
|                                              |       |              |       |                                                |       |        |       |                                          |       |                                  |       |
| Balance at February 3, 2007                  |       | $                 | 85         |                                                | $          | 118,493     |       | $                                             | (32,648    | )                                     | $          | 6,795 |   | $ | 92,725 |   |
|                                              |       |              |       |                                                |       |        |       |                                          |       |                                  |       |
| Net loss for the period ended August 4, 2007 |       | —            |       | —                                              |       | (12,322     | )          | —                                        |       | (12,322                               | )          |
|                                              |       |              |       |                                                |       |        |       |                                          |       |                                  |       |
| Balance at August 4, 2007                    |       | $                 | 85         |                                                | $          | 118,493     |       | $                                             | (44,970    | )                                     | $          | 6,795 |   | $ | 80,403 |   |

 

The accompanyingnotes are an integral part of these statements.

 

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The Penn Traffic Company

Notes to ConsolidatedFinancial Statements

 

**Note 1 –Basis of Presentation**

 

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

 

In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included. Operating results for the interim periods ended August 4, 2007 arenot necessarily an indication of results to be expected for the fiscal yearended February 2, 2008.  Theseunaudited interim financial statements should be read in conjunction with theaudited consolidated financial statements and related notes contained in theCompany’s Annual Report on Form 10-K for the fiscal year ended February 2,2008.

 

The balance sheet as of February 3, 2007 has beenderived from the audited consolidated financial statements as of such date, butdoes not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.

 

The Company’s fiscal yearends on the Saturday closest to January 31.  Fiscal year 2008 is the 52-week period ended February2, 2008.  Fiscal year 2007 is the 53-weekperiod ended February 3, 2007.  Theinformation presented in this quarterly report on Form 10-Q is for thequarter beginning May 6, 2007 and ending August 4, 2007.

 

All significant intercompany transactions andaccounts have been eliminated in consolidation.

 

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

 

On May 30, 2003, ThePenn Traffic Company and all of its subsidiaries filed voluntary petitionsunder Chapter 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 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.

 

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.

 

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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.

 

**Note 3 – Per Share Data**

 

Basic and dilutednet loss per share is based on the number of common shares issued and estimatedto be issued pursuant to the Plan. Common shares issued and estimated to be issued in settlement of claimsfiled in the Company’s Chapter 11 proceeding are treated as outstanding as ofthe effective date of the Plan.  At both August 4, 2007and February 3, 2007, 201,055 common shares are estimated to be issued inconnection with the settlement of remaining claims.

 

**Note 4 – 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 another matter,a claimant has filed a priority claim allegedly arising under an agreement fora sale-leaseback transaction seeking either damages of $2.2 million orspecific performance of the agreement. The Company disputes the merits of the claim and is defending againstit.

 

During the period ended August 4,2007, the Company paid $0.2 million, in settlement of disputed claims.  The Company has established liabilities forthe estimated cash payments required to settle the remaining claims outstandingin the Chapter 11 proceedings.  Estimatedshares of common stock to be issued in settlement of claims have been accountedfor as stockholders’ equity.

 

**Note 5 – Long Term Debt**

 

On August 1, 2007,the Company’s 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 two additional stores.  Further, the availability amount, which theCompany is required to maintain under certain financial covenants, was reducedto less than $27.5 million for four consecutive days or less than $25 millionfor any one day.

 

Based on the originalmaturity date of April 13, 2008, amounts due under the revolving creditand term loan facility and the supplemental real estate credit facility havebeen classified as current maturities in the accompanying balance sheet as of May 5,2007.  In March 2008, the maturitydate 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 2,2008 for additional information.

 

**Note 6 – Acquisitions andDispositions**

 

In March and April 2006,the Company acquired two retail stores for an aggregate purchase price of $1.5million.  The cost of the acquisitionswas allocated $0.5 million to inventories and $1.0 million to equipment.

 

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 January2007, the Company recorded a liability of $1.4 million for termination benefitswhich were communicated to the distribution center’s employees at suchtime.  The Company ceased use of thefacility in March 2007, at which time the Company recorded a liability of$1.9 million, representing the present value of the remaining lease rentalsreduced by estimated sublease rentals that could be reasonably obtained for thedistribution center.  In addition, in March 2007,the Company sold its remaining inventory located in the distribution center tothe third party at current cost.  Thecarrying value of such inventory at February 3, 2007 was approximately$4.8 million.

 

No stores were closedduring the quarters ended August 4, 2007 and July 29, 2006 and the6-months ended August 4, 2007 and July 29, 2006.

 

10

----

 

**Note 7 – 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.  For the Company’s plans, normal retirementage is either 62 or 65, but provisions are made for earlier retirement.  Benefits are determined either on averageannual compensation and years of service, or as a pre-determined amount foreach year of service.  Full vestingoccurs upon completion of five years of service.  Assets of the Company’s pension plansprimarily consist of investments in publicly traded equity and debt securities.

 

The components of netperiodic benefit cost for the year to date ended August 4, 2007 and July 29,2006 is as follows (in thousands):

 
| ** **                     | ** ** | **Year to Date**   | ** ** | **Year to Date**  | ** ** |
|--------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                     | ** ** | **August 4, 2007** | ** ** | **July 29, 2006** | ** ** |
| ** **                     | ** ** | **(Unaudited)**              | ** ** |
|                           |       |                         |       |                        |       |
| Service cost                   |       | $                            | 990        |                        | $          | 991 |   |
| Interest cost                  |       | 3,118                        |       | 2,988                       |       |
| Expected return on plan assets |       | (3,193                       | )          | (2,988                      | )          |
| Amount of recognized gain      |       | (59                          | )          | —                      |       |
|                           |       |                         |       |                        |       |
|                           |       | $                            | 856        |                        | $          | 991 |   |

 

For the 6 months ended August 4,2007 and July 29, 2006, the Company contributed $3.5 million and$1.6 million, respectively, to the four defined benefit pension plans.

 

**Note 8 – 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 largely ceasedby 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. The complaint furtheralleges that the individuals deceived the Company’s accounting personnel tocarry out their fraudulent scheme and aided and abetted the Company’sviolations of the Exchange Act of 1934 and rules thereunder. In addition,on the same date, the United States Attorney for the Northern District of NewYork announced that a federal grand jury has returned an indictment against theabovementioned individuals on related criminal charges. Both the SEC and theUnited States Attorney indicated that their investigations are continuing.

 

In connection with thesematters, 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.

 

11

----

 

**Note 9 – Issuance of Stock**

 

On May 14,2007, the Company granted an aggregate of 22,685 shares of phantom stock tofive non-officer directors. On the settlement date, which is the earlier ofwhen the individual ceases to be a member of the Company’s Board of Directorsor upon the occurrence of a change in control, the awards provide for paymentin cash of the value of an equivalent number of shares of common stock. Theawards were fully vested upon the grant date, and the Company recorded acompensation charge with a corresponding liability for the fair value of theawards at date of grant totaling $0.5 million. The liability will be adjusted based on changes in value of the Company’scommon stock, with a corresponding adjustment to compensation expense, at eachperiod to settlement date.

 

**Note 10 –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 and related products and other services.

 

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

 
| ** **                                                   | ** ** | **Quarter Ended August 4, 2007** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                   | ** ** | ** **                                           | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | **Retail Food**                                 | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                         |       |                                                 |       |   |   |   |   |   |   |
| Revenues                                                     |       | $                                                    | 261,866    |   | $ | 54,014 |   | $ | 7,036 | (1)  | $ | 322,916 |   |
|                                                         |       |                                                 |       |   |   |   |   |   |   |
| Cost of sales                                                |       | (180,130                                             | )          | (50,223 | ) | (4,475 | )(2) | (234,828 | )(4) |
| Selling and administrative expense                           |       | (63,373                                              | )          | (1,217 | ) | (17,019 | )(3) | (81,609 | )(4) |
|                                                         |       |                                                 |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation and amortization |       | 18,363                                               |       | 2,574 |   | (14,458 | ) | 6,479 |   |
|                                                         |       |                                                 |       |   |   |   |   |   |   |
| Depreciation and amortization                                |       | (6,179                                               | )          | (241 | ) | (470 | ) | (6,890 | ) |
|                                                         |       |                                                 |       |   |   |   |   |   |   |
| Operating income (loss)                                      |       | $                                                    | 12,184     |   | $ | 2,333 |   | $ | (14,928 | ) | (411 | ) |
| Interest expense                                             |       |                                                 |       |   |   |   |   | (2,454 | ) |
| Reorganization and other expenses                            |       |                                                 |       |   |   |   |   | (1,989 | ) |
|                                                         |       |                                                 |       |   |   |   |   |   |   |
| Consolidated loss before income taxes                        |       |                                                 |       |   |   |   |   | $ | (4,854 | ) |

 

----

(1)                      Consists principally of approximately$4.9 million for bakery sales principally to customers other than those ofthe retail and wholesale segments, $1.6 million for trucking revenues, and$0.3 million of rental income.

 

(2)                      Consists principally of approximately$3.3 million for bakery sales and approximately $0.3 million increasein cost of sales to reconcile segment inventories on FIFO to consolidatedinventories on LIFO.

 

(3)                      Consists principally of approximately$7.7 million of payroll, benefits, and payroll taxes associated with theadministrative staff, approximately $1.9 million associated with selling andadministrative costs of the bakery, approximately $3.5 million ofprofessional fees (of which approximately $0.3 million pertained 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 $0.4 million in reserves for doubtful accounts,$0.2 million in data processing maintenance and $0.4 million for corporateinsurance costs.

 

(4)                      Excludes depreciation and amortization of$0.8 million for cost of sales and $6.1 million for selling andadministrative expenses.

 

12

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| ** **                                                   | ** ** | **Quarter Ended July 29, 2006** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                   | ** ** | ** **                                          | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | **Retail Food**                                | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                         |       |                                                |       |   |   |   |   |   |   |
| Revenues                                                     |       | $                                                   | 274,472    |   | $ | 57,067 |   | $ | 6,613 | (1) | $ | 338,152 |   |
|                                                         |       |                                                |       |   |   |   |   |   |   |
| Cost of sales                                                |       | (193,376                                            | )          | (53,657 | ) | (3,891 | )(2) | (250,924 | )(4) |
| Selling and administrative expense                           |       | (63,143                                             | )          | (1,998 | ) | (12,988 | )(3) | (78,129 | )(4) |
|                                                         |       |                                                |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation and amortization |       | 17,953                                              |       | 1,412 |   | (10,266 | ) | 9,099 |   |
|                                                         |       |                                                |       |   |   |   |   |   |   |
| Depreciation and amortization                                |       | (6,048                                              | )          | (156 | ) | (444 | ) | (6,648 | ) |
|                                                         |       |                                                |       |   |   |   |   |   |   |
| Operating income (loss)                                      |       | $                                                   | 11,905     |   | $ | 1,256 |   | $ | (10,710 | ) | 2,451 |   |
| Interest expense                                             |       |                                                |       |   |   |   |   | (2,350 | ) |
| Reorganization costs                                         |       |                                                |       |   |   |   |   | (56 | ) |
|                                                         |       |                                                |       |   |   |   |   |   |   |
| Consolidated income before income taxes                      |       |                                                |       |   |   |   |   | $ | 45 |   |

 

----

(1)                      Consists principally of approximately$4.5 million for bakery sales principally to customers other than those ofthe retail and wholesale segments and approximately $1.6 million fortrucking revenues.

 

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

 

(3)                      Consists principally of approximately$6.2 million of payroll, benefits, and payroll taxes associated with theadministrative staff, approximately $1.5 million associated with sellingand administrative costs of the bakery, approximately $1.4 million of contracthauling costs associated with trucking revenue, approximately $2.3 million ofprofessional fees (including approximately $1.2 million of legal costsassociated with the internal and SEC investigation relating to the Company’spractices regarding promotional discounts and allowances), approximately$1.0 million for data processing maintenance and $0.5 million forcorporate insurance costs.

 

(4)                      Excludes depreciation and amortization of$1.3 million for cost of sales and $5.3 million for selling andadministrative expenses.

 

13

----

 
| ** **                                                    | ** ** | **Period from February 4, 2007 to August 4, 2007** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                                                                 | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Retail Food**                                                                       | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                          |       |                                                                                       |       |   |   |   |   |   |   |
| Revenues                                                      |       | $                                                                                          | 507,098    |   | $ | 104,485 |   | $ | 13,288 | (1)  | $ | 624,871 |   |
|                                                          |       |                                                                                       |       |   |   |   |   |   |   |
| Cost of sales                                                 |       | (349,700                                                                                   | )          | (97,136 | ) | (8,289 | )(2) | (455,125 | )(4) |
| Selling and administrative expense                            |       | (124,075                                                                                   | )          | (2,642 | ) | (32,645 | )(3) | (159,362 | )(4) |
| Loss on store and distribution center closings                |       | —                                                                                     |       | — |   | (1,883 | ) | (1,883 | ) |
|                                                          |       |                                                                                       |       |   |   |   |   |   |   |
| Operating income before depreciation and amortization         |       | 33,323                                                                                     |       | 4,707 |   | (29,529 | ) | 8,501 |   |
|                                                          |       |                                                                                       |       |   |   |   |   |   |   |
| Depreciation and amortization                                 |       | (12,397                                                                                    | )          | (486 | ) | (875 | ) | (13,758 | ) |
|                                                          |       |                                                                                       |       |   |   |   |   |   |   |
| Operating income (loss)                                       |       | $                                                                                          | 20,926     |   | $ | 4,221 |   | $ | (30,404 | ) | (5,257 | ) |
|                                                          |       |                                                                                       |       |   |   |   |   |   |   |
| Interest expense                                              |       |                                                                                       |       |   |   |   |   | (4,795 | ) |
| Reorganization and other expenses                             |       |                                                                                       |       |   |   |   |   | (2,153 | ) |
|                                                          |       |                                                                                       |       |   |   |   |   |   |   |
| Consolidated loss before income taxes                         |       |                                                                                       |       |   |   |   |   | $ | (12,205 | ) |
|                                                          |       |                                                                                       |       |   |   |   |   |   |   |
| Total assets as of August 4, 2007                        |       | $                                                                                          | 213,646    | (5)  | $ | 24,714 | (5)  | $ | 49,604 | (6)  | $ | 287,964 |   |
|                                                          |       |                                                                                       |       |   |   |   |   |   |   |
| Capital expenditures for the period ended August 4, 2007 |       | $                                                                                          | 1,511      |   | $ | 139 |   | $ | 225 |   | $ | 1,875 |   |

 

----

(1)                      Consists principally of approximately$8.9 million for bakery sales principally to customers other than those ofthe retail and wholesale segments, $3.3 million for trucking revenues and$0.6 million of rental income.

 

(2)                      Consists principally of approximately$6.0 million for bakery sales and approximately $0.6 million increase incost of sales to reconcile segment inventories on FIFO to consolidatedinventories on LIFO.

 

(3)                      Consists principally of approximately$13.3 million of payroll, benefits, and payroll taxes associated with theadministrative staff, approximately $3.8 million associated with selling andadministrative costs of the bakery, approximately $7.5 million ofprofessional fees (of which approximately $0.6 million pertained to legal costsassociated with the internal and SEC investigation relating to the Company’spractices regarding promotional discounts and allowances), approximately $2.8million of contract hauling costs associated with trucking revenue,approximately $0.9 million for an increase in reserves for doubtful accounts,$0.5 million in data processing maintenance, $0.4 million for corporate insurancecosts.

 

(4)                      Excludes depreciation and amortization of$1.7 million for cost of sales and $12.1 million for selling andadministrative expenses.

 

(5)                      The warehouse and transportation assetshave been allocated using the same methodology that was used for the warehouseand transportation costs.

 

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

 

14

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| ** **                                                      | ** ** | **Period from January 29, 2006 to July 29, 2006** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | ** **                                                                                | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **Retail Food**                                                                      | ** ** | **Distribution** | ** ** | **Items** | ** ** | **Total** | ** ** |
|                                                            |       |                                                                                      |       |   |   |   |   |   |   |
| Revenues                                                        |       | $                                                                                         | 527,588    |   | $ | 109,002 |   | $ | 11,976 | (1)  | $ | 648,566 |   |
|                                                            |       |                                                                                      |       |   |   |   |   |   |   |
| Cost of sales                                                   |       | (371,770                                                                                  | )          | (102,722 | ) | (7,403 | )(2) | (481,895 | )(4) |
| Selling and administrative expense                              |       | (125,532                                                                                  | )          | (3,483 | ) | (27,378 | )(3) | (156,393 | )(4) |
|                                                            |       |                                                                                      |       |   |   |   |   |   |   |
| Operating income (loss) before depreciation  and amortization   |       | 30,286                                                                                    |       | 2,797 |   | (22,805 | ) | 10,278 |   |
|                                                            |       |                                                                                      |       |   |   |   |   |   |   |
| Depreciation and amortization                                   |       | (11,785                                                                                   | )          | (312 | ) | (889 | ) | (12,986 | ) |
|                                                            |       |                                                                                      |       |   |   |   |   |   |   |
| Operating income (loss)                                         |       | $                                                                                         | 18,501     |   | $ | 2,485 |   | $ | (23,694 | ) | (2,708 | ) |
| Interest expense                                                |       |                                                                                      |       |   |   |   |   | (4,385 | ) |
| Reorganization costs                                            |       |                                                                                      |       |   |   |   |   | (262 | ) |
|                                                            |       |                                                                                      |       |   |   |   |   |   |   |
| Consolidated loss before income taxes                           |       |                                                                                      |       |   |   |   |   | $ | (7,355 | ) |
|                                                            |       |                                                                                      |       |   |   |   |   |   |   |
| Total assets as of July 29, 2006                           |       | $                                                                                         | 261,263    | (5)  | $ | 31,070 | (5)  | $ | 33,084 | (6) | $ | 325,417 |   |
|                                                            |       |                                                                                      |       |   |   |   |   |   |   |
| Capital expenditures for year to date ended  July 29, 2006 |       | $                                                                                         | 15,509     |   | $ | — |   | $ | 1,681 |   | $ | 17,190 |   |

 

----

| (1)    |   | Consists  principally of approximately $8.2 million for bakery sales principally  to customers other than those of the retail and wholesale segments and  approximately $3.1 million for trucking revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (2)    |   | Consists  principally of approximately $5.1 million for bakery sales and  approximately $0.7 million increase in cost of sales to reconcile  segment inventories on FIFO to consolidated inventories on LIFO.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (3)    |   | Consists  principally of approximately $13.0 million of payroll, benefits, and payroll  taxes associated with the administrative staff, approximately  $3.0 million associated with selling and administrative costs of the  bakery, approximately $2.7 million of contract hauling costs associated with  trucking revenue, approximately $5.3 million of professional fees (including  approximately $3.1 million of legal costs associated with the internal and  SEC investigation relating to the Company’s practices regarding promotional  discounts and allowances), approximately $1.0 million for data  processing maintenance and $0.6 million for corporate insurance costs. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (4)    |   | Excludes  depreciation and amortization of $2.7 million for cost of sales and  $10.3 million for selling and administrative expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (5)    |   | The  warehouse and transportation assets have been allocated using the same  methodology that was used for the warehouse and transportation costs. The  effect of the change in allocation method in fiscal year 2007 increased the  assets of the wholesale food distribution segment and decreased assets of the  retail food segment by $4.3 million.                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (6)    |   | Consists  principally of fixed assets and inventory of the bakery operation and general  corporate assets (including cash and cash equivalents).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

15

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

 

**Introduction**

 

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

 

Our primary objective is to improve our long-term financialperformance and enhance the in-store experience of our customers.  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.

 

**Results of Operations**

 

The following table setsforth certain Consolidated Statement of Operations components expressed aspercentages of revenues for the quarter and year to date ended August 4,2007 and the quarter and year to date ended July 29, 2006.

 
| ** **                                      | ** ** | **Unaudited**                | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **Quarter**                  | ** ** | **Quarter** | ** ** | **Year to Date** | ** ** | **Year to Date** | ** ** |
| ** **                                      | ** ** | **Ended**                    | ** ** | **Ended** | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                                      | ** ** | **August 4, 2007** | ** ** | **July 29, 2006** | ** ** | **August 4, 2007** | ** ** | **July 29, 2006** | ** ** |
|                                            |       |                         |       |   |   |   |   |   |   |
| Revenues                                        |       | 100.0                        | %          | 100.0 | % | 100.0 | % | 100.0 | % |
|                                            |       |                         |       |   |   |   |   |   |   |
| Gross profit (1)                                |       | 27.0                         |       | 25.4 |   | 26.9 |   | 25.3 |   |
|                                            |       |                         |       |   |   |   |   |   |   |
| Selling and administrative expenses             |       | 27.1                         |       | 24.7 |   | 27.4 |   | 25.7 |   |
|                                            |       |                         |       |   |   |   |   |   |   |
| Loss on store and distribution center  closings |       | —                       |       | — |   | 0.3 |   | — |   |
|                                            |       |                         |       |   |   |   |   |   |   |
| Operating (loss) income                         |       | (0.1                         | )          | 0.7 |   | (0.8 | ) | (0.4 | ) |
|                                            |       |                         |       |   |   |   |   |   |   |
| Interest expense                                |       | 0.8                          |       | 0.7 |   | 0.8 |   | 0.7 |   |
|                                            |       |                         |       |   |   |   |   |   |   |
| Reorganization and other expenses               |       | 0.6                          |       | 0.0 |   | 0.3 |   | 0.0 |   |
|                                            |       |                         |       |   |   |   |   |   |   |
| Income tax expense                              |       | 0.0                          |       | 0.0 |   | 0.0 |   | 0.0 |   |
|                                            |       |                         |       |   |   |   |   |   |   |
| Net loss                                        |       | (1.5                         | )          | 0.0 |   | (1.9 | ) | (1.1 | ) |

 

----

(1)                                  Revenues less cost of sales.

 

16

----

 

**Fiscal Year2008 (the Quarter Ended August 4, 2007) and Fiscal Year 2007 (the QuarterEnded July 29, 2006)**

 

**Revenues**

 

Revenues for the quarterended August 4, 2007 decreased to $322.9 million from $338.2 million forthe quarter ended July 29, 2006.  The$15.3 million decrease in revenues was mainly attributable to a reduction inthe number of our corporate-owned stores, a decline in same store sales and adecrease in wholesale food distribution revenues.

 

Same store sales for thequarter ended August 4, 2007 decreased 0.6% compared to the quarter ended July 29,2006.

 

Wholesale fooddistribution revenues for the quarter ended August 4, 2007 decreased $3.1million, or 5.4%, to $54.0 million, or 16.7% of total revenues, from $57.1million, or 16.9% of total revenues, for the quarter ended August 4,2007.  The decrease in the wholesale fooddistribution revenues of $3.1 million was attributable to the loss of certainwholesale customers.

 

**GrossProfit**

 

Gross profit was $87.3million, or 27.0% of revenues, for the quarter ended August 4, 2007compared to $85.9 million, or 25.4% of revenues, for the quarter ended July 29,2006.  The increase was a result ofincreased sales of higher margin private label and signature products.

 

**Sellingand Administrative Expenses**

 

Sellingand administrative expenses for the quarter ended August 4, 2007 were$87.7 million, or 27.1% of revenues compared to $83.4 million, or 24.7% ofrevenues, for the quarter ended July 29, 2006.  The increase in selling and administrativeexpenses as a percentage of revenue was primarily due to an increase in auditand professional fees and outside services.

 

**Depreciationand Amortization**

 

Depreciation andamortization expense was $6.9 million, or 2.1% of revenues, for the quarterended August 4, 2007, compared to $6.6 million, or 2.0% of revenues,for the quarter ended July 29, 2006. The increase in depreciation and amortization during the quarter ended August 4,2007 was primarily due to additional depreciation from assets placed in servicein fiscal year 2007.

 

**Operating Loss**

 

Operating loss for thequarter ended August 4, 2007 was $0.4 million, or 0.1% of revenues,compared to the operating income of $2.5 million, or 0.7% of revenues, for thequarter ended July 29, 2006.

 

**InterestExpense**

 

Interest expense for thequarter ended August 4, 2007 was $2.5 million, or 0.8% of revenues,compared to $2.4 million, or 0.7% of revenues, for the quarter ended July 29,2006.  The $0.1 million increase ininterest expense for the quarter ended August 4, 2007 was due to anincrease in our average borrowings under our credit facilities.

 

**Reorganization and Other Expenses**

 

Reorganizationexpense for the quarter ended August 4, 2007 was $1.9 million, or 0.6% ofrevenues, compared to reorganization expense of $0.1 million, or 0.0% ofrevenues, for the quarter ended July 29, 2006.  The $1.8 million increase was primarilyattributable to $1.6 million, of expense related to a proposed acquisition thatwas not consummated.

 

**Net Loss**

 

Net loss for the quarterended August 4, 2007 was $4.9 million, or 1.5% of revenues, compared to anet loss of less than $0.1 million, or 0.0% of revenues, for the quarter ended July 29,2006.  The increase in net loss of $4.9million during the quarter ended August 4, 2007 is primarily attributableto the increase in selling and administrative expenses as explained above andthe $1.6 million of expenses incurred on a proposed acquisition that was notconsummated.

 

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**Fiscal Year2008 (the Year to Date Ended August 4, 2007) and Fiscal Year 2007 (theYear to Date Ended July 29, 2006)**

 

**Revenues**

 

Revenues for the year todate ended August 4, 2007 decreased to $624.9 million from $648.6 millionfor the year to date ended July 29, 2006. The $23.7 million decrease in revenues was mainly attributable to areduction in the number of our corporate-owned stores, a decline in same storesales and a decrease in wholesale food distribution revenues.

 

Year to date same storesales as of August 4, 2007 declined 0.2% from the year to date sales as ofJuly 29, 2006.

 

Wholesale fooddistribution revenues for year to date ended August 4, 2007 decreased $4.5million, or 4.1% to $104.5 million, or 16.7% of total revenues, from $109.0million, or 16.8% of total revenues, for year to date ended August 4,2007.  The decrease in the wholesale fooddistribution revenues of $4.5 million was attributable to the loss of certainwholesale customers.

 

**GrossProfit**

 

Gross profit was $168.1million, or 26.9% of revenues, for year to date ended August 4, 2007,compared to $163.9 million, or 25.3% of revenues, for year to date ended July 29,2006.  The increase was a result ofincreased sales of higher margin private label and signature products.

 

**Sellingand Administrative Expenses**

 

Sellingand administrative expenses for year to date ended August 4, 2007 were$171.4 million, or 27.4% of revenues, compared to $166.6 million, or 25.7% ofrevenues, for year to date ended July 29, 2006.  The increase in selling and administrativeexpenses as a percentage of revenue was principally due to an increase in auditand professional fees and outside services.

 

**Depreciationand Amortization**

 

Depreciation andamortization expense was $13.8 million, or 2.2% of revenues, for year to dateended August 4, 2007, compared to $13.0 million, or 2.0% ofrevenues.  The increase in depreciationand amortization during the year to date ended August 4, 2007 wasprimarily due to additional depreciation from assets placed in service infiscal year 2007.

 

**Loss on Store and Distribution Center Closings**

 

Losson store and distribution center closings for the year to date ended August 4,2007 was $1.9 million, or 0.3% of revenues, representing the net present valueof the remaining lease rentals associated with the closed distributioncenter.  For the year to date ended July 29,2006 no store closing costs were incurred.

 

**Operating Loss**

 

Operating loss for yearto date ended August 4, 2007 was $5.3 million, or 0.8% of revenues,compared to the operating loss of $2.7 million, or 0.4% of revenues, for yearto date ended July 29, 2006.

 

**InterestExpense**

 

Interest expense for yearto date ended August 4, 2007 was $4.8 million, or 0.8% of revenues,compared to $4.4 million, or 0.7% of revenues, for year to date ended July 29,2006.  The $0.4 million increase ininterest expense for year to date ended August 4, 2007 was due to anincrease in our average borrowings under our credit facility.

 

**NetLoss**

 

Netloss for the year to date ended August 4, 2007 was $12.3 million, or 1.9%of revenues, compared to a net loss of $7.5 million, or 1.1% of revenues,during the year to date ended July 29, 2006.  The increase in net loss of $4.8 millionduring the year to date ended August 4, 2007 is primarily attributable toincreases in selling and administrative expenses as explained above,distribution center closing costs of $1.9 million and $1.6 million of expensesincurred on a proposed transaction that was not consummated, partially offsetby a $6.5 million increase in gross profit.

 

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**Liquidity and Capital Resources**

 

Overview

 

As of August 4, 2007, we had cash and cashequivalents of $21.1 million and total debt outstanding of $64.2 million.  In addition, we have the ability to draw downon our revolving credit facilities.  Webelieve our borrowing capability under our credit facilities provides thenecessary liquidity to operate our business, invest in our core retail storeportfolio, improve our customers’ shopping experience, and improve our overalloffering in the market served.

 

Financial Results

 

*Operating Activities*

 

Cash used in operating activities for year to dateended August 4, 2007 was $1.6 million, as compared to cash provided byoperating activities of $10.8 million for year to date ended July 29,2006.  For year to date ended August 4,2007, we incurred a net loss of $12.3 million, adjustments for non cash itemsof $13.6 million, and a net increase in operating net assets of $2.9million.  For year to date ended July 29,2006, we incurred a net loss of $7.5 million, adjustments for non-cashitems of $13.6 million and a net decrease in operating net assets of$4.7 million.

 

*Investing Activities*

 

Cash used in investing activities for year to dateended August 4, 2007 and the year to date ended July 29, 2006 were$1.0 million and $17.2 million, respectively.  The $16.2 million reduction was due to lowercapital expenditures ($1.9 million for the year to date ended August 4,2007 as compared to $17.2 million for the year to date ended July 29,2006) and $1.0 million in proceeds from sales of fixed assets for year to dateended August 4, 2007.

 

*Financing Activities*

 

Cash used in financing activities for year to dateended August 4, 2007 was $1.0 million. For year to date ended July 29, 2006, cash provided by financingactivities was $3.1 million.  The $4.1million difference was primarily due to no borrowing under our revolving creditfacility for year to date ended August 4, 2007 as compared to$3.9 million of net borrowings under our revolving credit facility foryear to date ended July 29, 2006.

 

Borrowings

 

OnApril 13, 2005, upon emergence from Chapter 11 proceedings, we enteredinto a revolving credit and term loan facility with a group of financialinstitutions providing for a $130.0 million revolving credit facility anda $6.0 million term loan.  Also on April 13,2005, we entered into a supplemental real estate credit facility with anothergroup of lenders, providing for term loan borrowings of up to$28.0 million.  Availability underboth credit facilities is dependent on levels of accounts receivable, inventoryand certain other assets.  Interest rateson borrowings under the revolving credit facility vary depending upon theamount of availability.  At August 4,2007, outstanding borrowings under both facilities aggregated$48.5 million.  At such date,availability in excess of outstanding borrowings and letters of credit wasapproximately $40.2 million. Borrowings under the revolving credit and term loan facility are securedby substantially all of our assets, subject to priority 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 August 4,2007, we had stand-by letters of credit of approximately$48.3 million.  Many of thesestand-by letters of credit were required upon emergence from bankruptcy and asa result of our inability to file financial statements.

 

Provisionsof both credit facilities, among other things, require the maintenance of certainfinancial covenants (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 August 4, 2007 had we been subject to compliancewith these financial covenants because the annual available for borrowing hadnot dropped to these levels.  However,had such an event occurred, we would not have been in compliance with thefinancial covenants and would have been in default under the terms of the loanagreement at August 4, 2007.

 

Pursuantto our plan of reorganization, we entered into a collateral trust agreementwith the collateral trustee in connection with the secured trade lienprogram.  The secured trade lien programis with certain of our vendors and allows us to maintain trade terms.

 

OnDecember 26, 2006, August 1, 2007 and January 30, 2008,both the revolving credit and term loan facility and the supplemental realestate credit facility were amended to permit the disposal of assets inconnection with the closing of certain stores. In March 2008, the maturitydate 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 $4.1 million of borrowings under mortgages secured by therelated properties as of August 4, 2007.

 

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

 

Ourfinancial results are subject to risk from interest rate changes on debt thathas variable interest rates. Total variable rate debt outstanding under ourloan agreements at August 4, 2007 was $48.5 million, with a weightedaverage interest rate of 11.6%.  A1% change in interest rates would impact annual pre-tax income by$0.5 million based on the debt outstanding at August 4, 2007.  In addition to the variable rate debt we had$4.1 million of fixed rate debt outstanding at August 4, 2007, with aweighted average interest rate of 6.65%. We view the fixed rate debt as a partial hedge against interest ratefluctuations..

 

**ITEM 4.          CONTROLS AND PROCEDURES**

 

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

 

Pursuant to Rule 13a-15(e) underthe Exchange Act, our management evaluated the effectiveness of the design andoperation of our disclosure controls and procedures with the participation ofour principal executive and principal financial officers.  Based on their current observations combinedwith observations by the disclosure committee, which is comprised of members ofmanagement, members of the audit committee and external counsel, managementconcluded that our disclosure controls and procedures were ineffective as of August 4,2007, in providing reasonable assurance that material information requiringdisclosure was brought to management’s attention on a timely basis and that ourfinancial reporting was reliable.

 

**Changein our Internal Control Over Financial Reporting**

 

In May 2007, wehired an outside consulting firm to assist management in its evaluation of theeffectiveness of our internal control over financial reporting, includingdisclosure controls and procedures.  Asof August 4, 2007 they had not completed their evaluation.  They are using the framework established in “InternalControl-Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

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**PART II – OTHER INFORMATION**

 

**ITEM 1.          LEGAL PROCEEDINGS**

 

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

 

**ITEM 1A.       RISK FACTORS**

 

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

 

**ITEM 6.          EXHIBITS**

 

Thefollowing are filed as Exhibits to this Report:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.1                 |       | Form of The Penn Traffic Company Phantom Stock Award Agreement  (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on  May 18, 2007).                                                                                                                                                                                                                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2                 |       | Second Amendment, dated as of August 1, 2007, to the Credit  Agreement, among The Penn Traffic Company, Penny Curtiss Baking  Company, Inc. and Big M Supermarkets, Inc., as borrowers; the other  credit parties signatory thereto; General Electric Capital Corporation; JP  Morgan Chase Bank, N.A.; The CIT Group/Business Credit; GECC Capital Markets  Group, Inc.; and the other lenders signatory thereto from time to time  (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on  August 14, 2007). |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3                 |       | Second Amendment, dated as of August 1, 2007, to the  Supplemental Loan Credit Agreement, dated as of April 13, 2005, among  The Penn Traffic Company, Penny Curtiss Baking Company, Inc. and Big M  Supermarkets, Inc., as borrowers; the other credit parties signatory  thereto; Kimco Capital Corp.; and the other lenders signatory thereto from  time to time (incorporated by reference to Exhibit 99.2 to the  Form 8-K filed on August 14, 2007).                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1                 |       | Certification of CEO  pursuant to Rule 13a-14(a) under the Securities Exchange Act of  1934, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2                 |       | Certification of CFO  pursuant to Rule 13a-14(a) under the Securities Exchange Act of  1934, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.1                 |       | Certification of CEO  pursuant to Rule 13a-14(b) under the Securities Exchange Act of  1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the  United States Code.                                                                                                                                                                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.2                 |       | Certification of CFO  pursuant to Rule 13a-14(b) under the Securities Exchange Act of  1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the  United States Code.                                                                                                                                                                                                                                                                                                                                                                 |

 

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**Signatures**

 

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

 

 

**THE PENN TRAFFIC COMPANY**

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

 

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