SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

COMMISSION FILE NUMBER 333-168065

 

TOPS HOLDING CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		26-1252536
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
6363 Main Street,		(716) 635-5000
Williamsville, New York 14221		(Telephone Number)
(Address of principal executive office, including zip code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes þ No o

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No þ

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of March 31, 2011, 144,776 shares of common stock of the registrant were outstanding.

 

 

TOPS HOLDING CORPORATION

TABLE OF CONTENTS

PART I
ITEM 1. BUSINESS			2
ITEM 1A. RISK FACTORS			5
ITEM 1B. UNRESOLVED STAFF COMMENTS			13
ITEM 2. PROPERTIES			13
ITEM 3. LEGAL PROCEEDINGS			14
ITEM 4. (RESERVED)			14
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES			14
ITEM 6. SELECTED FINANCIAL DATA			15
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors’ Report			31
Consolidated Balance Sheets as of January 1, 2011 and January 2, 2010			32
Consolidated Statements of Operations for the years ended January 1, 2011, January 2, 2010 and December 27, 2008			33
Consolidated Statements of Changes in Shareholders’ (Deficit) Equity for the years ended January 1, 2011, January 2, 2010 and December 27, 2008			34
Consolidated Statements of Cash Flows for the years ended January 1, 2011, January 2, 2010 and December 27, 2008			35
Notes to Consolidated Financial Statements			36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			66
ITEM 9A. CONTROLS AND PROCEDURES			66
ITEM 9B. OTHER INFORMATION			66

TOPS HOLDING CORPORATION

TABLE OF CONTENTS (CONTINUED)

PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			67
ITEM 11. EXECUTIVE COMPENSATION			69
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS			81
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE			82
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES			83
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES			84
SIGNATURES			87
Exhibit 12.1
Exhibit 14.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

FORWARD-LOOKING STATEMENTS

Forward-Looking Statements

This Annual Report on Form 10-K (“10-K”) includes forward-looking statements about future events. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which generally are not historical in nature. Important assumptions relating to these forward-looking statements include, among others, assumptions regarding:

	•		risks of claims relating to the Acquisition (as defined herein) that may not have been properly discharged in the bankruptcy process;
	•		the severity of current economic conditions and the impact on consumer demand and spending and our pricing strategy;
	•		pricing and market strategies, the expansion, consolidation and other activities of competitors, and our ability to respond to the promotional practices of competitors;
	•		our ability to effectively increase or maintain our profit margins;
	•		the success of our expansion and renovation plans;
	•		fluctuations in utility, fuel and commodity prices which could impact consumer spending and buying habits and the cost of doing business;
	•		risks inherent in our motor fuel operations;
	•		our exposure to local economies and other adverse conditions due to our geographic concentration;
	•		risks of natural disasters and severe weather conditions;
	•		supply problems with our suppliers and vendors;
	•		our relationships with unions and unionized employees, and the terms of future collective bargaining agreements or labor strikes;
	•		increased operating costs resulting from rising employee benefit costs or pension funding obligations;
	•		changes in, or the failure or inability to comply with, laws and governmental regulations applicable to the operation of our pharmacy and other businesses;
	•		the adequacy of our insurance coverage against claims of our customers in connection with our pharmacy services;
	•		estimates of the amount and timing of payments under our self-insurance policies;
	•		risks of liability under environmental laws and regulations;
	•		our ability to maintain and improve our information technology systems;
	•		events that give rise to actual or potential food contamination, drug contamination or food-borne illness or any adverse publicity relating to these types of concerns, whether or not valid;
	•		threats or potential threats to security;
	•		our ability to retain key personnel;
	•		risks of data security breaches or losses of confidential customer information;
	•		risks relating to our substantial indebtedness;
	•		litigation claims or legal proceedings against us;
	•		decisions by our controlling shareholders that may conflict with the interests of the holders of our equity and debt; and
	•		other factors discussed under “Risk Factors” and elsewhere in this 10-K.

Forward-looking statements reflect our current expectations, based on currently available information, and are not guarantees of performance. Although we believe that the expectations reflected in such forward-looking statements are reasonable, these expectations could prove inaccurate as such statements involve risks and uncertainties, many of which are beyond our ability to control or predict. Should one or more of these risks or uncertainties, or other risks or uncertainties not currently known to us or that we currently deem to be immaterial, materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Important factors relating to these risks and uncertainties include, but are not limited to, those described in “Risk Factors” in Item 1A of Part I of this 10-K. We caution that one should not place undue reliance on forward-looking statements, which speak only as of the date on which they are made. We disclaim any intention, obligation or duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

PART I

ITEM 1. BUSINESS

As the parent of Tops Markets, LLC (“Tops” or “Tops Markets”), Tops Holding Corporation (“Holding” or the “Company”) is a leading supermarket retailer in our Upstate New York and Northern Pennsylvania markets. Holding was incorporated on October 5, 2007 and commenced operations on December 1, 2007. Introduced in 1962, the Tops brand is widely recognized as a strong retail supermarket brand name in Upstate New York supported by strong customer loyalty and attractive supermarket locations. The Company is headquartered in Williamsville, New York.

On January 29, 2010, the Company completed the acquisition (the “Acquisition”) of substantially all assets and certain liabilities of The Penn Traffic Company (“Penn Traffic”) and its subsidiaries, including its 79 retail supermarkets. As of the date that this 10-K is issued, the Company has retained 55 of the supermarkets purchased from Penn Traffic. These supermarkets now operate under the banners of Tops, P&C and Quality Markets in Upstate New York and Northern Pennsylvania. In August 2010, the Federal Trade Commission (“FTC”) issued a Proposed Order that would require the Company to sell seven of these retained supermarkets. The Proposed Order was subject to public comment until September 7, 2010. The Company is awaiting the approval of a Final Order by the FTC. The remaining 24 supermarkets have been closed, sold or liquidated. The Company currently operates 128 corporate retail supermarkets with an additional 5 franchise supermarkets.

The Company’s revenues are earned and cash is generated as consumer products are sold to customers in its supermarkets. The Company earns income predominantly by selling products at price levels that produce revenues in excess of its costs to make these products available to its customers. Such costs include procurement and distribution costs, facility occupancy and operational costs and overhead expenses.

EMPLOYEES

Tops employs approximately 12,700 associates. Approximately 91% of these associates are members of United Food and Commercial Workers District Union Local One (“Local One”) or two additional unions that represented certain of the employees from the retained Penn Traffic supermarkets. All other Tops’ associates are non-union serving primarily in management, field support, or pharmacist roles. Tops currently has five collective bargaining agreements with the Local One which are scheduled to expire between April 2011 and July 2011, with the two additional union agreements scheduled to expire in March 2012 and April 2013.

STORE PROFILE AND LOCATION

Tops operates 128 corporate full-service supermarkets under the Tops, P&C and Quality Markets banners with an additional 5 franchise supermarkets under the Tops banner.

Substantially all of Tops’ supermarkets are either freestanding or located in small neighborhood shopping centers. The Company believes that its stores are strategically positioned and clustered in an efficient and targeted manner, focusing on key regions in Upstate New York and Northern Pennsylvania.

Tops’ supermarkets are located in the following markets:

		Number
Market		of Stores
Buffalo, NY			54
Syracuse / Mid State, NY			34
Rochester, NY			23
Northern Pennsylvania			17
Total Supermarkets			128

Tops has a variety of store sizes that are tailored to the specific needs of the local communities in which it operates. The majority of its supermarkets are open 24 hours a day, 7 days a week. The following summarizes the number of stores by size categories as of the date that this 10-K is issued:

		Number
Square Feet		of Stores
75,000 and above			22
50,000 to 74,999			38
25,000 to 49,999			52
Under 25,000			16
Total			128

In August 2010, the FTC issued a Proposed Order that would require the Company to sell seven of the acquired Penn Traffic supermarkets. The Proposed Order was subject to public comment until September 7, 2010. As previously mentioned, the Company is awaiting the approval of a Final Order by the FTC which could result in changes to the composition of its supermarkets. Furthermore, the Company may continue to look for opportunities to further optimize its store profile. This could involve, among other things, acquisitions of, disposals of, or closing down of, additional stores and other restructuring initiatives.

COMPETITION

The supermarket industry is highly competitive. The Company competes with various types of retailers, including local, regional and national supermarket retailers, convenience stores, retail drug chains, national general merchandisers and discount retailers, membership clubs, warehouse stores and independent and specialty grocers. Some of the Company’s larger national competitors may have an advantage through stronger buying power and greater capital resources. In addition, other national or international supermarkets or comparable store operators could enter our markets.

SEGMENTS

Across all 128 retail supermarkets, the Company operates one format where each supermarket offers the same general mix of products with similar pricing to similar categories of customers. The Company has concluded that each individual supermarket is an operating segment. The Company’s retail operations, which represent substantially all of its consolidated sales, earnings and total assets, are its only reportable segment.

These 128 operating segments have been aggregated into one reportable segment because, in the Company’s judgment, the operating segments have similar historical economic characteristics and are expected to have similar economic characteristics and long-term financial performance in the future. The principal measures and factors the Company considers in determining whether the economic characteristics are similar are gross margin percentage, capital expenditures, competitive risks and employee labor agreements. In addition, each operating segment has similar products and customers, similar methods of distribution, and a similar regulatory environment.

MERCHANDISING

Tops’ supermarkets offer a wide variety of high quality nationally advertised food and non-food products, local specialties and quality private label items. In addition, the Company offers services such as full-service in-store butchers, home meal replacement items, delicatessens, bakeries, organic products, floral departments, greeting cards and a wide variety of health and beauty care items. The Company’s merchandising strategy has created strong brand recognition in the markets in which we operate. The Company positions Tops supermarkets as “one-stop shops,” including such services as pharmacies, Tops branded fuel stations, in-store banking and Tim Hortons full-service restaurants or self-service coffee and donut kiosks. As of January 1, 2011, 77 of the Company’s supermarkets offered pharmacy services and 35 offered fuel centers. Tops is the only conventional supermarket chain to offer gasoline in the Company’s Buffalo, New York and Rochester, New York markets. Additionally, the Company drives customer loyalty through Tops’ successful bonus card programs. These programs provide loyalty incentives through price discounts and special promotions, including discounts on gasoline prices at the Company’s gas stations. These loyalty card programs also provide the Company with valuable data used to identify preferences and demographics, and to optimize merchandising and inventory management.

SOURCES OF SUPPLY

For Fiscal 2010, approximately 61% of the Company’s products were supplied by C&S Wholesale Grocers Inc. (“C&S”). Although there are a limited number of distributors that can supply its stores, the Company believes that other suppliers could provide similar products on comparable terms.

In November 2009, the Company entered into a new supply agreement with C&S whereby C&S agreed to provide warehousing, logistics, procurement and purchasing services in support of the Company’s entire supply chain. The new agreement, which expires on September 24, 2016, provides that the actual costs of performing the services will be reimbursed to C&S on an “open book” or “cost-plus” basis, whereby the parties will negotiate annual budgets that will be reconciled against actual costs on a periodic basis. The parties will also annually negotiate services, specifications and performance standards that will govern warehouse operations. The agreement defines the parties’ respective responsibilities for the procurement and purchase of merchandise intended for use or resale in Tops’ stores, as well as the parties’ respective remuneration for warehousing and procurement/purchasing activities. In consideration for the services it provides under the agreement, C&S will be paid an annual fee and will have incentive income opportunities based upon its cost savings and increases in retail sales volume.

As a result of the Acquisition, all of Penn Traffic’s arrangements with C&S were replaced with the Company’s existing arrangements with C&S as described above. Due to the acquisition of incremental supermarkets, the amount of the management fee payable by the Company under its existing supply agreement with C&S increased following the closing of the Acquisition, commensurate with the supermarkets acquired from Penn Traffic. However, such fee payable decreased as some of those acquired supermarkets were subsequently sold, liquidated or closed.

Effective December 1, 2010, the Company extended the term of its existing supply contract with McKesson Corporation (“McKesson”) through January 31, 2014 for the supply of substantially all of the Company’s prescription drugs and other health and beauty care products requirements. Tops is required to purchase a minimum of $400 million of product during the period from December 1, 2010 to January 1, 2014. The Company purchased $11.2 million of product under this contract during December 2010.

LICENSES AND TRADEMARKS

The Company’s stores require a variety of licenses and permits that are renewed on a periodic basis. Payment of a fee and adherence to the licensing agency’s requirements are generally the conditions to maintaining such licenses and permits. The Company maintains registered trademarks for nearly all its store banner tradenames and private label brand names, including Tops and Tops Friendly Markets. The Company licenses the BONUSCARD trademark from Ahold IP, Inc. Trademarks are generally renewable on a 10-year cycle. In connection with the Acquisition, the Company also acquired trademarks from Penn Traffic. Substantially all of the retained Penn Traffic supermarkets have been converted to the Tops banner. The Company considers trademarks an important way to establish and protect its brands in a competitive environment.

GOVERNMENT REGULATION

The Company is subject to regulation by a variety of governmental authorities, including federal, state and local agencies that regulate trade practices, building standards, labor, health and safety matters. The Company is also subject to the oversight of government agencies that regulate the distribution and sale of alcoholic beverages, pharmaceuticals, tobacco products, milk and other agricultural products and other food items. The Company believes that its operations are in material compliance with such laws and regulations. See “Risk Factors” in Item 1A of Part I of this 10-K. The Company’s compliance with these regulations may require additional capital expenditures and could materially adversely affect the Company’s ability to conduct its business as planned.

ENVIRONMENTAL MATTERS

The Company is subject to various federal, state and local environmental laws and regulations, including those relating to underground storage tanks, the release or discharge of regulated materials into the air, water and soil, the generation, storage, handling, use, transportation and disposal of regulated materials, the exposure of persons to regulated materials, remediation of contaminated soil and groundwater and the health and safety of its employees.

Certain environmental laws, including the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”), impose strict, and under certain circumstances, joint and several, liability on the owner and operator as well as former owners and operators of properties for the costs of investigation, removal or remediation of contamination, and also impose liability for any related damages to natural resources. In addition, under CERCLA and similar state laws, as a person who arranges for the transportation, treatment or disposal of regulated materials, the Company also may be subject to similar liability at sites where such regulated materials come to be located. The Company may also be subject to third-party claims alleging property damage and/or personal injury in connection with releases of or exposure to regulated materials at, from or in the vicinity of current or formerly owned or operated properties or off-site waste disposal sites.

The Company is required to make financial expenditures to comply with regulations governing underground storage tanks which store gasoline or other regulated substances adopted by federal, state and local regulatory agencies. Pursuant to the Resource Conservation and Recovery Act of 1976, as amended, the federal Environmental Protection Agency, or EPA, has established a comprehensive regulatory program for the detection, prevention, investigation and cleanup of leaking underground storage tanks. State or local agencies are often delegated the responsibility for implementing the federal program or developing and implementing equivalent or stricter state or local regulations. The Company has a comprehensive program in place for performing routine tank testing and other compliance activities which are intended to promptly detect and investigate any potential releases. In addition, the Federal Clean Air Act and similar state laws impose requirements on emissions to the air from motor fueling activities in certain areas of the country, including those that do not meet state or national ambient air quality standards. These laws may require the installation of vapor recovery systems to control emissions of volatile organic compounds to the air during the motor fueling process. The Company believes it is in compliance in all material respects with applicable environmental requirements, including those applicable to its underground storage tanks. The Company also has an insurance program to cover cleanup costs and third-party damages resulting from certain releases of regulated materials. However, there can be no assurance that the Company’s insurance will be adequate or available to cover all costs, or that changes in existing requirements or their enforcement, or discovery of previously unknown conditions, will not result in significant costs in the future.

ITEM 1A. RISK FACTORS

The risk factors below highlight certain risks and uncertainties that could affect our business. Other risks and uncertainties are described throughout this report. Any of these risks and uncertainties, as well as other risks and uncertainties, could adversely affect our business and financial results.

We may be subject to and adversely affected by claims that were not properly discharged in the bankruptcy court order authorizing the Acquisition, amounts that we may owe in connection with the Acquisition, an inability to recover amounts owed to us in connection with the Acquisition or other post-bankruptcy operational risks.

Notwithstanding the terms of, and injunctions provided for in, the bankruptcy court order dated January 25, 2010 authorizing and approving the Acquisition (the “Acquisition Order”), a creditor (including any governmental agency) of Penn Traffic or any of its subsidiaries (collectively, the “Debtors”) may attempt to assert against us or the assets we acquired from the Debtors an existing lien, claim, interest, or encumbrance. Circumstances in which such claims and obligations that arose prior to the Acquisition Order may not have been properly discharged include, but are not limited to, instances where a claimant had inadequate notice of the bankruptcy filing.

In connection with the Acquisition, we entered into a transition services agreement, an interim operating agreement and an agency agreement, each of which governed certain post-closing matters and the allocation of responsibility for certain obligations as between the Debtors and us. A final reconciliation of the parties’ respective obligations for certain costs and expenses under these agreements is ongoing.

The Debtors’ assets are being liquidated and the proceeds will be distributed to the Debtors’ creditors in accordance with the terms of the confirmed plan. Accordingly, there can be no guarantee that any potential outstanding obligations of the Debtors will be fully satisfied. In addition, the Penn Traffic purchase agreement does not provide for any indemnification of any losses or liabilities we may incur as a result of the Acquisition. Accordingly, we may not be compensated for any losses we may suffer as a result of the foregoing, which could adversely affect our business.

Notwithstanding the terms of the Acquisition Order or the applicable provisions of the United States Bankruptcy Code, it is possible that parties-in-interest in the Debtors’ bankruptcy cases may later attempt to challenge the terms or validity of the Acquisition. In addition, we cannot assure you that having been subject to bankruptcy protection will not adversely affect the operations of our assets subject to the Acquisition Order, including our ability to negotiate favorable terms from suppliers and other counterparties and to attract and retain talent, employees and customers.

There can be no assurance that we will realize the expected long-term benefits from our acquisition of Penn Traffic.

We consummated the Acquisition with the expectation that it will result in beneficial synergies such as cost savings and enhanced growth. Success in realizing these strategic benefits and the timing of these benefits, if any, depend upon projections, assumptions and general and industry-specific economic factors, all of which are subject to change. In addition, as we continue to integrate the assets that were acquired, additional costs and expenses could arise, and unforeseen claims against the Debtors related to the Acquisition could arise. Penn Traffic’s stores suffered a significant deterioration in results of operations during its bankruptcy case and there can be no assurances that our long-term strategy to improve the performance of these stores will be successful. We therefore cannot guarantee that we will be able to achieve our expected cost savings, or any enhanced revenue and earnings, in a timely manner or that other unexpected costs will not offset these benefits. Failure to achieve our expected long-term benefits could have a material adverse effect on our business.

General economic conditions that impact consumer spending could adversely affect us.

The retail food business is sensitive to changes in general economic conditions, both nationally and locally. Recessionary economic cycles, increases in interest rates, higher prices for commodities, fuel and other energy, inflation, higher levels of unemployment and consumer debt, higher tax rates and other changes in tax laws or other economic factors that may affect consumer spending or buying habits may materially adversely affect the demand for products we sell in our supermarkets. The United States economy has recently experienced volatility due to uncertainties related to energy prices, credit availability, difficulties in the banking and financial services sectors, decreases in home values, high unemployment and falling consumer confidence. As a result, consumers are more cautious. This may lead to additional reductions in consumer spending, to consumers trading down to a less expensive mix of products or to consumers trading down to discounters for grocery items, all of which may affect our financial condition and results of operations. Food deflation could reduce sales growth, while food inflation, combined with reduced consumer spending, could reduce gross profit margins.

Furthermore, we may experience additional reductions in traffic in our supermarkets or limitations on the prices we can charge for our products, either of which may reduce our sales and profit margins and have a material adverse affect on our financial condition, results of operations and cash flows. Also, economic factors such as those listed above and increased transportation costs, higher costs of labor, insurance and healthcare, and changes in other laws and regulations may increase our costs of sales and our operating, selling, general and administrative expenses, and otherwise materially adversely affect the financial condition and results of operations of the retail food business.

Increased competition could adversely affect us.

The supermarket industry, including within our marketing areas in Upstate New York and Northern Pennsylvania, is highly competitive. We compete with various types of retailers, including local, regional, national and international supermarket retailers, convenience stores, retail drug chains, national general merchandisers and discount retailers, membership clubs, warehouse stores and “big box” retailers and independent and specialty grocers. We compete on the basis of location, quality of products, service, price, product variety and store condition and face pressure from existing competitors and the threatened entry of new competitors. Some of our competitors have attempted to increase market share through expanding their footprint and discount pricing, creating a more difficult environment in which to consistently increase year-over-year sales. Additionally, some of our competitors have greater resources and purchasing power than us and are not unionized, resulting in potentially lower labor and benefit costs. Any future consolidation within the supermarket industry could exacerbate these concerns. We also face heightened competition from restaurants and fast food chains due to the increasing portion of household food expenditures directed to the purchase of food prepared outside the home.

Low profit margins could adversely affect us.

Profit margins in the grocery industry are very low. In order to increase or maintain our profit margins, we use various strategies to reduce costs, such as productivity improvements, shrink reduction, increased distribution center efficiencies and energy efficiency programs. If we are unable to effectively implement these strategies or otherwise manage costs, there may be a material adverse effect on our business and financial performance.

Unsuccessful expansion and renovation plans could adversely affect us.

We have spent, and intend to continue to spend, significant capital and management resources on the development and implementation of our renovation and expansion plans. These plans, even if fully implemented, may not be successful and may not improve operating results. The level of sales and profit margins in our existing stores may not be duplicated in new stores and expenditures to renovate existing stores may not generate a return on that capital, depending on factors such as prevailing competition, development cost and market position in the surrounding community. These factors may also have a material adverse effect on our business due to the significant amount of capital invested and management time expended.

Increases in utility, fuel and commodity prices could adversely affect us.

We are dependent on the use of trucks to distribute goods to our markets. Therefore, fluctuations in the price of fuel affect our overall cost of doing business. Additionally, increases in the cost of electricity and other utilities affect the cost of illuminating and operating our stores and warehouse and distribution facilities, and the cost of goods sold or used by us, including plastic bags, can be significantly impacted by increases in commodity prices. Oil prices also directly affect our product transportation costs. We may not be able to recover these rising costs through increased prices charged to our customers and our results of operations and cash flows could therefore be materially adversely affected by increases in the cost of one or more of these resources.

Availability and wholesale price of gasoline and retail gasoline prices could adversely affect us.

Crude oil and domestic wholesale petroleum markets are volatile. General political conditions, acts of war or terrorism, instability in oil producing regions and disasters could significantly impact crude oil supplies and wholesale petroleum costs. Significant increases or volatility in wholesale petroleum costs could result in significant increases in our retail price of gasoline and could have an adverse effect on our total gasoline sales (both in terms of dollars and gallons sold), the profitability of gasoline sales or our plans to develop additional fuel centers. Also, retail gas price volatility could diminish customer usage of fueling centers and, thus, materially adversely affect customer traffic at our stores. We obtain gasoline and diesel fuel from a number of different suppliers for fuel stations at 38 of our store locations (including three franchise locations). Long term disruption in the availability and wholesale price of gasoline for resale could therefore adversely affect us.

The geographic concentration of our supermarkets creates a heavy exposure to the risks of the local economy and other local adverse conditions.

Our headquarters, one of the warehouse and distribution facilities that services us and all of our stores are located in Upstate New York and Northern Pennsylvania and therefore are vulnerable to economic downturns in those regions. As a result, we are more susceptible to regional conditions than the operations of more geographically diversified competitors and any unforeseen events or circumstances that affect our operating area could also materially adversely affect our revenues and profitability. These factors include, among other things, weather conditions and changes in the economy, demographics and population.

Severe weather, natural disasters and adverse climate changes may materially adversely affect our business.

Severe weather conditions and other natural disasters in areas in which we have stores or distribution facilities or from which we obtain products may materially adversely affect our results of operations. Such conditions may result in physical damage to our properties, closure of one or more of our stores or distribution facilities, inadequate work force in our markets, temporary disruption in the supply of products, delays in the delivery of goods to our stores and a reduction in the availability of products in our stores. In addition, adverse climate conditions and adverse weather patterns, such as drought or flood, that impact growing conditions and the quantity and quality of crops may materially adversely affect the availability or cost of certain products within the grocery supply chain. Any of these factors may disrupt and materially adversely affect our business.

We rely on a principal supplier for a substantial amount of our products.

Pursuant to the terms of a supply agreement, we acquire substantially all of our grocery, frozen and perishable merchandise requirements from C&S. During Fiscal 2010, products supplied from C&S accounted for approximately 61% of our inventory purchases. See “Business—Sources of Supply” in Item 1 of Part I of this 10-K. Although we have not experienced difficulty in the supply of these products to date, supply interruptions by C&S could occur in the future. Any significant interruption in this supply stream, either as a result of disruptions at C&S or if our supply agreement with C&S were terminated or not renewed for any reason, could have a material adverse effect on our business. We are therefore subject to the risks of C&S’s business, including potential labor disruptions at C&S’s facilities, increased regulatory obligations and distribution problems which may affect C&S’s ability to obtain products. Other suppliers that could provide similar products are limited in number and there is no assurance that we would be able to secure an alternative supplier on commercially reasonable terms. In addition, a change in suppliers could cause a delay in distribution and a possible loss of sales, which could materially adversely affect us.

Prolonged labor disputes with unionized employees and increases in labor costs could adversely affect us.

Our largest operating costs are attributable to labor costs and, therefore, our financial performance is greatly influenced by increases in wage and benefit costs, including pension and health care costs, a competitive labor market and the risk of labor disruption of our unionized work force.

Approximately 91% of our employees are represented by unions and covered by collective bargaining or similar agreements that are subject to periodic renegotiation. We currently have five collective bargaining agreements with the Local One, all of which are scheduled to expire in 2011. Additionally, we are a party to two collective bargaining agreements with unions that represented certain of the employees of the retained Penn Traffic stores. These agreements are scheduled to expire in March 2012 and April 2013.

We are commencing renegotiations of expiring collective bargaining agreements, and these renegotiations may not prove successful, may result in a significant increase in labor costs, or may result in a disruption to our operations. We expect that we would incur additional costs and face increased competition if we lost customers during a work stoppage or labor disturbance.

As we begin the renegotiation of our current collective bargaining agreements, rising health care and pension costs will be important issues. The terms of the renegotiated collective bargaining agreements could create either a financial advantage or disadvantage for us as compared to our major competitors and could have a material adverse effect on our results of operations and financial condition. We cannot guarantee that our labor negotiations will conclude successfully or that any work stoppage or labor disturbances will not occur. A prolonged work stoppage affecting a substantial number of stores could have a material adverse effect on our financial condition, results of operations and cash flows.

We currently contribute to an underfunded multiemployer pension plan for employees represented by the Local One.

Our contribution obligations to the Local One multiemployer pension plan to which we contribute will likely increase, and although we have no intention to withdraw from the Local One Plan, we are contingently liable for withdrawal liability to the extent we withdraw, either completely or partially, from the multiemployer plan.

We understand, based on information provided to us by the plan administrator of the Local One Plan, that as of January 1, 2010, the Local One Plan was underfunded on a current liability basis. Tops received notice from the plan administrator of the Local One Plan that, for purposes of the federal laws regulating multiemployer pension plans, the Local One Plan is in “critical status” for the plan year beginning January 1, 2009, and continues to be in critical status for the plan year beginning January 1, 2010. To comply with the rehabilitation plan adopted by the trustees of the Local One Plan, under Tops’ current collective bargaining agreements, Tops agreed to annual 10 percent increases in its contribution rates to the Local One Plan through 2011. The trustees of the Local One Plan updated the rehabilitation plan effective January 1, 2011, to provide that upon the expiration of any applicable collective bargaining agreements, Tops and other contributing employers will be subject to a 10 percent increase in contribution rates for the 2011 plan year, and five percent increases for each following year. There is no assurance that the rehabilitation plan will be sufficient to move the Local One Plan from its critical status. As noted above, benefit and contribution levels will be a key subject of the upcoming renegotiation of our collective bargaining agreements, and contribution increases and benefit reductions greater than those set forth in the rehabilitation plan may be required in future years.

We have no present intention to withdraw from the Local One Plan. If we were to withdraw, either completely or partially, we would incur withdrawal liability with respect to our share of the Local One Plan’s unfunded vested benefits. The actuary for the Local One Plan has estimated that, as of December 31, 2009, Tops’ withdrawal liability would be approximately $216.4 million in the event of its complete withdrawal from the Local One Plan during the 2010 plan year. We have not received the year-end 2010 actuarial estimates for the Local One Plan; we expect to receive updated actuarial data and withdrawal liability estimates from the plan administrator later this year. We anticipate that the estimates for withdrawals occurring in 2011 will increase from the 2010 estimates noted above. Any withdrawal liability assessed against us in connection with a complete or partial withdrawal would generally be payable to the Local One Plan over an amortization schedule under which our aggregate annual payments would be capped based on a formula that takes into account our highest contribution rates in the last ten years. These withdrawal liability payments would be in addition to pension contributions to any new pension plan adopted or contributed to by us to replace the Local One Plan.

As noted above, we have no present intention to withdraw from the Local One Plan; however, if we did withdraw, there is a risk that our complete withdrawal could be considered a mass withdrawal, in which case our aggregate withdrawal liability obligations could be higher than those described above. Changes to pension laws and regulations could alter the likelihood and amount of any liabilities arising under the Local One Plan.

Various aspects of our business are subject to federal, state and local laws and regulations. The impact of these regulations and our compliance with them may require additional capital expenditures and could materially adversely affect our ability to conduct our business as planned.

We are subject to federal, state and local laws and regulations relating to zoning, land use, environmental protection, work place safety, public health, community right-to-know, alcoholic beverage sales, tobacco sales and pharmaceutical sales. The state of New York and several local jurisdictions regulate the licensing of supermarkets, including alcoholic beverage license grants. In addition, certain local regulations may limit our ability to sell alcoholic beverages at certain times. A variety of state programs regulate the production and sale of milk, including the price of raw milk, through federal market orders and price support programs. We are also subject to laws governing our relationship with employees, including minimum wage requirements, overtime, working conditions, disabled access and work permit requirements. A number of federal, state and local laws impose requirements or restrictions on business owners with respect to access by disabled persons. Compliance with, or changes in, these laws or new laws could reduce the revenue and profitability of our supermarkets, affect our renovation plans and otherwise materially adversely affect our business.

Our pharmacy business is subject to, and influenced by, certain government laws and regulations, including those administered and enforced by Medicare, Medicaid, the Drug Enforcement Administration (the “DEA”), the Consumer Product Safety Commission, the U.S. Federal Trade Commission, the U.S. Food and Drug Administration and local regulators in the states in which we operate. In order to dispense controlled substances, we are required to register and/or license our pharmacies and pharmacists and to comply with security, recordkeeping, inventory control and labeling standards. Changes in these regulations may require operational changes or otherwise adversely affect our business. Our pharmacy sales may be reduced if various prescription drugs are converted to over-the-counter medications or if the rate at which new prescription drugs become available slows or prescription drugs are withdrawn from the market. Changes in third party reimbursement levels for prescription drugs, including changes in Medicare or state Medicaid programs, could have an adverse effect on our business. In addition, our pharmacy business is subject to state and federal prohibitions against certain payments intended to induce referrals of patients or other health care business. Failure to properly adhere to these and other applicable regulations could result in the imposition of civil, administrative and criminal penalties including suspension of payments from government programs; loss of required government certifications; loss of authorizations to participate in, or exclusion from, government reimbursement programs such as Medicare and Medicaid; loss of licenses; significant fines or monetary penalties for anti-kickback law violations, submission of false claims or other failures to meet reimbursement program requirements, and could materially adversely affect our business. Our pharmacy business is also subject to the Health Insurance Portability and Accountability Act, including its obligations to protect the confidentiality of certain patient information and other obligations. Failure to properly adhere to these requirements could result in the imposition of civil as well as criminal penalties. Ultimately, compliance with each of these regulations could impact our operations and any non-compliance could materially adversely affect our business.

Certain risks are inherent in providing pharmacy services, and our insurance may not be adequate to cover any claims against us.

Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products, such as risks of liability for products which cause harm to consumers. Although our general liability policies cover pharmacy professional liability, we cannot guarantee that the coverage limits under our insurance programs will be adequate to protect us against future claims, or that we will be able to maintain this insurance on acceptable terms in the future, or at all. Our results of operations, financial condition or cash flows may be materially adversely affected if in the future our insurance coverage proves to be inadequate or unavailable, or there is an increase in the liability for which we self-insure, or we suffer harm to our reputation as a result of an error or omission.

If the number or severity of claims for which we are self-insured increases, or we are required to accrue or pay additional amounts because the claims prove to be more severe than our recorded liabilities, we may be materially adversely affected.

We use a combination of insurance and self-insurance to provide for potential liabilities for workers’ compensation, automobile and general liability, property insurance and employee healthcare benefits. We estimate the liabilities associated with the risks retained by us, in part, by considering historical claims experience, demographic and severity factors and other actuarial assumptions which, by their nature, are subject to a degree of variability. Any actuarial projection of losses concerning workers’ compensation and general and automobile liability is subject to this variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, legal interpretations, benefit level changes and actual claim settlement patterns.

Some of the many sources of uncertainty in our reserve estimates include changes in benefit levels, medical fee schedules, medical utilization guidelines, vocation rehabilitation and apportionment. If the number or severity of claims for which we are self-insured increases, or we are required to accrue or pay additional amounts because the claims prove to be more severe than our original assessments, our business may be materially adversely affected.

Our policy is to discount our self-insurance liabilities at a risk-free interest rate, which is appropriate based on our ability to reliably estimate the amount and timing of cash payments. If, in the future, we were to experience significant volatility in the amount and timing of cash payments compared to our earlier estimates, we would assess whether it is appropriate to continue to discount these liabilities.

Compliance with and potential liability under environmental laws could have a material adverse effect on us. The storage and sale of petroleum products could cause disruptions and could expose us to potentially significant liabilities.

Our operations are subject to various laws and regulations relating to the protection of the environment, including those governing the management, disposal and cleanup of hazardous materials. Some environmental laws, such as CERCLA and similar state statutes, impose strict, and under certain circumstances joint and several, liability for costs to remediate a contaminated site, and also impose liability for damages to natural resources. Third-party claims in connection with releases of or exposure to hazardous materials relating to our current or former properties or third-party waste disposal sites can also arise. In addition, the presence of contamination at any of our properties could impair our ability to sell or lease the contaminated properties or to borrow money using any of these properties as collateral. The costs and liabilities associated with any such contamination could be substantial, and could have a material adverse effect on our business.

Refined petroleum products are stored in underground storage tanks at our warehouse and at some of our retail locations in connection with our sales of these products. Our operations are subject to related hazards and risks, including fires, explosion, spills, clean-up obligations, personal injury or wrongful death claims, property damage and potential fines and penalties.

Compliance with environmental laws may require significant capital expenditures in the future. For example, we are required to make financial expenditures to comply with regulations governing underground storage tanks adopted by federal, state and local regulatory agencies. In addition, the Federal Clean Air Act and similar state laws impose requirements on air emissions from motor fueling activities in certain areas of the country, including those that do not meet state or national ambient air quality standards. The extent to which changes in these rules or new rules regarding greenhouse gas emissions may impact our operations and results cannot be determined at this time.

Insurance is not available for all operational risks, and there is no assurance that insurance will be adequate to fully compensate us for any liability. The occurrence of a significant event that is not fully insured could have a material adverse effect on our business.

We cannot assure you that violations of environmental requirements will not occur. We may not have identified all of the environmental liabilities at our current and former locations, material environmental conditions not known to us may exist, and future laws or regulations may impose material environmental liability or compliance costs. Furthermore, new laws, new interpretations or new administration of existing laws or other developments could require us to make additional capital expenditures or incur additional liabilities. The occurrence of any of these events could have a material adverse effect on our business.

Any difficulties we experience with respect to our information technology systems could lead to significant costs or losses.

We have large, complex information technology systems that are critical to our business operations. We could encounter difficulties developing new systems or maintaining and upgrading existing systems. Such difficulties could lead to significant expenses or losses due to disruption in our business operations.

We have outsourced our information technology services to HP Enterprise Services, LLC (“HP”) (formerly known as Electronic Data Systems, LLC). Our information technology (“IT”) hub is located in North Carolina. Any disruption caused by financial distress, adverse weather conditions, any legal actions affecting HP, or other factors affecting our relationship with HP could result in disruption to our business.

Food and drug safety concerns and related unfavorable publicity may adversely affect us.

We could be materially adversely affected if consumers lose confidence in the safety and quality of the food supply chain. Adverse publicity about these concerns, whether or not ultimately based on fact, and whether or not involving products sold at our stores, could discourage consumers from buying our products. The real or perceived sale of contaminated food products by us could result in a loss of consumer confidence and product liability claims, which could have a material adverse effect on our business. To the extent that we are unable to maintain appropriate sanitation and quality standards in our stores, food safety and quality issues could involve expense and damage to our various brand names. Additionally, concerns about the safety or effectiveness of certain drugs or negative publicity surrounding certain categories of drugs may have a negative impact on our pharmacy sales.

Threats or potential threats to security may materially adversely affect us.

Data theft, information espionage or other criminal activity directed at the retail industry or computer or communications systems may materially adversely affect our businesses by causing us to implement costly security measures in recognition of actual or potential threats, by requiring us to expend significant time and expense developing, maintaining or upgrading our information technology systems or by causing us to incur significant costs to reimburse third parties for damages. Such activities may also materially adversely affect our business by reducing consumer confidence in the marketplace and by modifying consumer spending habits. Despite our efforts to secure and maintain our computer network, security could be compromised, confidential information including customer information could be misappropriated or system disruptions could occur. This could lead to disruption of operations, loss of sales or profits or cause us to incur significant costs to reimburse third parties for damages.

We are heavily dependent on our key personnel.

Our success is largely dependent upon the efforts and skills of our senior management team and other key managers. The loss of the services of one or more of such persons could have a material adverse effect on our business. In addition, we compete with other potential employers for employees, and we may not succeed in hiring or retaining the executives and other employees that we need. Our inability to retain our key personnel could have a material adverse affect on our business.

If we experience a data security breach and confidential customer information is disclosed, we may be subject to penalties and experience negative publicity, which could affect our customer relationships and have a material adverse effect on our business.

We and our customers could suffer harm if customer information were accessed by third parties due to a security failure in our systems. The collection of data and processing of transactions require us to receive and store a large amount of personally identifiable data. This type of data is subject to legislation and regulation in various jurisdictions. Recently, data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting state and federal legislative proposals addressing data privacy and security. If some of the current proposals are adopted, we may be subject to more extensive requirements to protect the customer information that we process in connection with the purchases of our products. We may also become exposed to potential liabilities with respect to the data that we collect, manage and process, and may incur legal costs if our information security policies and procedures are not effective or if we are required to defend our methods of collection, processing and storage of personal data. Future investigations, lawsuits or adverse publicity relating to our methods of handling personal data could adversely affect our business due to the potential costs and negative market reaction relating to such developments.

Our substantial indebtedness could adversely affect our financial health and our ability to operate our business.

As of January 1, 2011, we had $551.9 million of indebtedness outstanding (inclusive of $183.3 million of capital leases), and $64.2 million of unused commitments under the asset-based facility (the “ABL Facility”) (after giving effect to $12.5 million of letters of credit outstanding thereunder). Our substantial amount of indebtedness could have important consequences for our business. For example, it could:

	•		make it more difficult for us to satisfy our obligations with respect to our outstanding indebtedness;
	•		limit our ability to borrow additional funds, or to sell assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other purposes;
	•		increase our vulnerability to adverse economic and industry conditions;

	•		require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for operations, future business opportunities or other purposes, such as funding our working capital and capital expenditures;
	•		limit our flexibility in planning for, or reacting to, changes in the business and industry in which we operate;
	•		limit our ability to service our indebtedness;
	•		place us at a competitive disadvantage compared to any less leveraged competitors; and
	•		prevent us from raising the funds necessary to repurchase outstanding notes tendered to us upon the occurrence of certain changes of control, which would constitute a default under the indenture governing our outstanding notes.

The occurrence of any one of these events could have an adverse effect on our business, prospects or ability to satisfy our obligations under our outstanding indebtedness.

Litigation may materially adversely affect our businesses.

Our operations are characterized by a high volume of customer traffic and by transactions involving a wide variety of product selections. These operations carry a higher exposure to consumer litigation risk when compared to the operations of companies in many other industries. Consequently, we may be a party to individual personal injury, bad fuel, products liability and other legal actions in the ordinary course of our business, including litigation arising from food-related illness. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend future litigation may be significant. There may also be adverse publicity associated with litigation that may decrease consumer confidence in our business, regardless of whether the allegations are valid or whether we are ultimately found liable.

Morgan Stanley Private Equity (“MSPE”) and private equity affiliates of HSBC Private Equity Advisors LLC (“HSBC”) own the majority of our capital stock, which allows them to have significant influence over substantially all matters requiring shareholder approval.

Various funds affiliated with MSPE and HSBC hold 71.6% and 19.9%, respectively, of our issued and outstanding capital stock. As a result of this equity ownership and our Amended and Restated Shareholders’ Agreement dated as of January 29, 2010 with MSPE, HSBC and certain other persons named therein, MSPE and HSBC have the power to significantly influence the results of stockholder votes, as well as transactions involving a potential change of control of us. MSPE also controls the election of our Board of Directors. So long as MSPE retains sufficient ownership of our voting power, it has rights to board representation, as well as consent rights in connection with certain major company actions including changes to company policies and organizational documents, dispositions and financing activity.

The interests of MSPE and HSBC, as our controlling shareholders, could conflict with our debtholders’ interests. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of MSPE and HSBC as holders of our equity might conflict with our debtholders’ interests. MSPE and HSBC may also have an interest in pursuing acquisitions, divestitures, financings or other transactions that would enhance the value of the equity position of MSPE and HSBC in us, even though such transactions might involve risks to the debtholders. Corporate opportunities may arise in the area of potential competitive business activities that may be attractive to us as well as to MSPE, HSBC or their affiliates, including potential acquisitions by MSPE, HSBC or their affiliates of competing businesses. Any competition could intensify if an affiliate or subsidiary of MSPE or HSBC were to enter into or acquire a business similar to our business. MSPE, HSBC or their affiliates may direct relevant corporate opportunities to other entities which they control rather than to us. Further, neither MSPE nor HSBC has any obligation to provide us with any equity or debt financing in the future in excess of certain capital calls up to a cap.

Our ability to generate cash depends on many factors beyond our control, and we may not be able to generate the cash required to service our indebtedness.

Our ability to make payments on and refinance our indebtedness and to fund our operations will depend on our ability to generate cash in the future. Our historical financial results have been, and our future financial results are expected to be, subject to substantial fluctuations, and will depend upon general economic conditions and financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are unable to meet our debt service obligations or fund our other liquidity needs, we may need to refinance all or a portion of our debt before maturity, seek additional equity capital, reduce or delay scheduled expansions and capital expenditures or sell material assets or operations. We cannot assure you that we will be able to pay our debt or refinance it on commercially reasonable terms, or at all, or to fund our liquidity needs.

If for any reason we are unable to meet our debt service obligations, we would be in default under the terms of the agreements governing our outstanding debt. If such a default were to occur, the lenders under the ABL Facility could elect to declare all amounts outstanding under the ABL Facility immediately due and payable, and the lenders would not be obligated to continue to advance funds under the ABL Facility. If the amounts outstanding are accelerated, we cannot assure you that our assets will be sufficient to repay in full the money owed to the banks or to our debtholders.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

As of January 1, 2011, the Company operated 127 corporate retail supermarkets under the Tops, P&C and Quality Markets banners, with an additional 5 franchise supermarkets under the Tops banner. The Company leased 114 of the corporate supermarkets that it operated and owned the remaining 13 corporate supermarkets.

OWNED PROPERTIES

As of January 1, 2011, the Company owned nine supermarkets in Bath, Buffalo, Camden, Canastota, Fayetteville, Frewsburg, Pulaski, Randolph and Sherrill, New York, and four supermarkets in Bradford, Sayre, Sheffield and Youngsville, Pennsylvania.

LEASED PROPERTIES

The Company leases most of its supermarkets, which is typical of companies in the retail industry. The Company believes its longstanding presence in many of its locations provides it with the advantage of relatively low rents. The average remaining term on the Company’s leases, including options to renew, is 27 years.

The Company entered into an arrangement with the Town of Lancaster Industrial Development Agency (the “IDA”) relating to the Company’s warehouse and distribution facility in Lancaster, New York, to effectively maintain its ownership of this facility in a tax efficient manner. Under this arrangement, the facility was conveyed to the IDA and leased back to the Company pursuant to a lease agreement, which expires by its terms on December 31, 2012, unless terminated earlier. The lease agreement provides that, upon its termination for any reason, title to the facility will be conveyed back to the Company in exchange for $1.00 plus any outstanding amounts due and payable under the lease agreement. The lease agreement requires the Company to make a series of payments to the IDA which are effectively rent payments. Pursuant to the Company’s current supply agreement with C&S and sublease of the facility to C&S’s affiliate Buffalo Logistics LLC, the 906,600 square foot facility is operated by C&S on the Company’s behalf. C&S supplied approximately 61% of the goods sold by the Company during Fiscal 2010. The facility consists of a food distribution warehouse with refrigerated areas and ancillary buildings. Under the supply agreement, the Company is required to allow C&S to use the facility to service its supermarkets so long as the agreement is in place.

The Company leases its corporate offices and centralized mail distribution center. Its corporate offices are located in Williamsville, New York. The Company believes it has adequate facilities and space for its current and future activities. The Company’s mail center is located in Depew, New York and is the central depositary for all mail to the corporate offices and store facilities.

LOCATIONS

Substantially all of the Tops and retained Penn Traffic supermarkets are either freestanding or located in neighborhood shopping centers where it is the marquee tenant. The Company believes that its stores are strategically positioned and clustered in an efficient and targeted manner, focusing on the key regions of Upstate New York and Northern Pennsylvania. See “Business — Store Profile and Location” in Item 1 of Part I of this 10-K for more information on the locations of the Company’s stores.

ITEM 3. LEGAL PROCEEDINGS

The Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. The Company is also subject to certain environmental claims. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on our consolidated results of operations, financial position or cash flows.

ITEM 4. (RESERVED)

PART II

On January 29, 2010, Tops Holding Corporation sold an aggregate of 44,776 shares of its common stock for $30.0 million in a private placement, exempt from registration under Rule 506 of Regulation D, to certain investors.

ITEM 6. SELECTED FINANCIAL DATA

(Dollars in thousands)

		Tops Holding Corporation																	Tops Markets, LLC
														Fiscal					Fiscal
														2007					2007
		Fiscal				Fiscal				Fiscal				Successor					Predecessor				Fiscal
		2010				2009				2008				Period					Period				2006
		(52 weeks) (3)				(53 weeks)				(52 weeks)				(4 weeks)					(48 weeks) (4)				(52 weeks) (4)
Statements of Operations Data:
Inside sales		$	2,107,524			$	1,579,448			$	1,542,054			$	126,079				$	1,406,794			$	1,523,063
Gasoline sales			150,012				116,160				158,178				10,732					119,966				110,697
Net sales			2,257,536				1,695,608				1,700,232				136,811					1,526,760				1,633,760
Operating income (loss)			10,633				34,490				28,779				4,786					(6,812	)			8,741
Net (loss) income			(26,954	)			(25,693	)			(10,844	)			984					(52,097	)			(115,815	)
Balance Sheet Data:
Total assets			680,351				592,848				619,694				641,102					N/A				673,563
Long-term liabilities; including obligations under capital lease and financing obligations			561,909				486,305				400,313				407,103					N/A				458,418
Total shareholders’ (deficit) equity			(65,511	)			(38,801	)			87,729				100,581					N/A				(118,818	)
Supermarket Operating Data:
Number of supermarkets at end of fiscal year			127				71				71				71					71				72
Average weekly inside ID sales per supermarket (1)			418,465				418,511				416,434				442,668					411,752				405,161
Inside ID sales increase (1) (2)			0.1	%			0.5	%			1.2	%			N/A					N/A				N/A
Number of gas stations at end of fiscal year			35				31				28				26					26				26
Motor fuel gallons sold (in thousands)			57,079				52,540				50,124				3,668					45,793				29,681
Other Financial Data:
Net cash provided by (used in):
Operating activities		$	49,458			$	66,813			$	81,067			$	24,572				$	21,677			$	(3,491	)
Investing activities			(113,933	)			(36,693	)			(56,237	)			(298,172	)				(6,988	)			7,586
Financing activities			62,172				(40,717	)			(28,437	)			307,526					(30,141	)			(29,485	)
Total depreciation and amortization			77,315				65,285				55,530				3,760					42,368				56,048
Capital expenditures			49,663				28,080				35,298				198					7,201				41,753

(1)		We define “inside ID sales” as the change in year-over-year inside sales (net sales excluding gasoline sales), excluding franchise revenue, for “ID stores.” We include a supermarket in the “inside ID sales” base in its thirteenth full period of operation.
(2)		To calculate the “Inside ID sales increase” for Fiscal 2010 and Fiscal 2009, we have used the most comparable 52-week periods. When comparing Fiscal 2009 to Fiscal 2008, we have excluded the 53rd week of Fiscal 2009. When comparing Fiscal 2010 to Fiscal 2009, we have excluded the 1st week of Fiscal 2009.
(3)		Fiscal 2010 includes the operating results of the acquired Penn Traffic supermarkets following the January 29, 2010 Acquisition.
(4)		The operating results during these periods represent those of Tops Markets, LLC under the ownership of Koninklijke Ahold N.V.

ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this 10-K. This 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results may differ from those indicated in the forward-looking statements. See “Forward-Looking Statements” on page 1 of this 10-K and “Risk Factors” under Item 1A in Part I of this 10-K.

COMPANY OVERVIEW

We are a leading supermarket retailer in our Upstate New York and Northern Pennsylvania markets. Introduced in 1962, our Tops brand is widely recognized as a strong retail supermarket brand name in our markets supported by strong customer loyalty and attractive supermarket locations. We are headquartered in Williamsville, New York and have approximately 12,700 associates.

The terms “we,” “our,” “us” and the “Company” refer to Tops Holding Corporation and each of its consolidated subsidiaries, including its wholly-owned subsidiary Tops Markets, LLC.

On January 29, 2010, we completed the Acquisition of substantially all assets and certain specified liabilities of Penn Traffic and its subsidiaries, including its 79 retail supermarkets. As of March 31, 2011, we have retained 55 supermarkets from the Acquisition. These supermarkets now operate under the banners of Tops, P&C and Quality Markets in Upstate New York and Northern Pennsylvania. In August 2010, the FTC issued a Proposed Order that would require Tops to sell seven of these retained supermarkets. The Proposed Order was subject to public comment until September 7, 2010. We are awaiting the approval of a Final Order by the FTC. The remaining 24 supermarkets have been closed, sold or liquidated. We currently operate 128 corporate retail supermarkets with an additional 5 franchise supermarkets.

BASIS OF PRESENTATION

We operate on a 52/53 week fiscal year ending on the Saturday closest to December 31. Our fiscal years include 13 four-week reporting periods, with an additional week in the thirteenth reporting period for 53-week fiscal years. Our first quarter of each fiscal year includes four reporting periods, while the remaining quarters include three reporting periods. The period from January 3, 2010 to January 1, 2011 (“Fiscal 2010”) included 52 weeks. The period from December 28, 2008 to January 2, 2010 (“Fiscal 2009”) included 53 weeks. The period from December 30, 2007 to December 27, 2008 (“Fiscal 2008”) included 52 weeks.

RECENT AND FUTURE EVENTS AFFECTING OUR RESULTS OF OPERATIONS AND THE COMPARABILITY OF REPORTED RESULTS OF OPERATIONS

Acquisition of Penn Traffic

On January 29, 2010, we completed the Acquisition of Penn Traffic, including Penn Traffic’s 79 retail supermarkets. As of March 31, 2011, we have retained 55 of these supermarkets. In August 2010, the FTC issued a Proposed Order that would require Tops to sell seven of these retained supermarkets. The Proposed Order was subject to public comment until September 7, 2010. We are awaiting the approval of a Final Order by the FTC. Net sales and operating income for the seven supermarkets to be sold were $54.2 million and $0.8 million, respectively, for Fiscal 2010. The remaining 24 supermarkets had been closed, sold or liquidated. Net sales and operating loss for these 24 supermarkets that were not retained were $33.9 million and $2.8 million, respectively, during Fiscal 2010. Also included in our results during Fiscal 2010 were integration costs of $23.3 million and one-time legal and professional fees related to the Acquisition of $5.3 million. Additionally, we incurred $2.1 million of legal expenses associated with the FTC’s review of the acquired supermarkets during Fiscal 2010. Additional depreciation and amortization of $7.4 million was incurred during Fiscal 2010, as compared to Fiscal 2009, associated with acquired property, equipment and intangible assets.

As the values of certain assets and liabilities were preliminary in nature, such values were adjusted and finalized during Fiscal 2010 as additional information was obtained.

The excess of net assets acquired over the purchase price of $15.7 million has been recognized as a bargain purchase in the consolidated statement of operations for Fiscal 2010. This bargain purchase was attributable to the distressed status of Penn Traffic due to historical operating results, which led to a November 2009 bankruptcy filing.

Debt Refinancing

On October 9, 2009, we issued $275.0 million of senior secured notes, bearing annual interest of 10.125%. We received proceeds from the senior secured notes issuance, net of a $4.5 million original issue discount, of $270.5 million. The senior secured notes mature on October 15, 2015 and require semi-annual interest payments beginning April 15, 2010. The proceeds from the senior secured notes issued were utilized to repay the outstanding debt related to our previous first lien credit agreement and warehouse mortgage, pay a dividend to our owners, settle our outstanding interest rate swap arrangement, and pay fees and expenses related to the financing transactions.

On February 12, 2010, we issued an additional $75.0 million of senior secured notes under the same terms of the October 2009 issuance. We received proceeds of $76.1 million from this issuance, including a $1.1 million original issue premium. The proceeds were used, in part, to repay in full short-term borrowings that were entered into in order to finance the Acquisition.

Also effective October 9, 2009, we entered into a revolving ABL Facility that expires October 9, 2013. The ABL Facility allowed a maximum borrowing capacity of $70.0 million, including a sub-limit for the issuance of letters of credit, subject to a borrowing base calculation. The ABL Facility was amended on January 29, 2010 to increase the maximum borrowing capacity to $100.0 million.

Issuance of Common Stock

On January 29, 2010, we received $30.0 million of proceeds from the issuance of 44,776 shares of common stock to certain shareholders of Holding.

Dividend

On July 26, 2010, we paid a dividend to our shareholders totaling $30.0 million, or $207.22 per share of common stock outstanding.

General Economic Conditions

The United States economy and financial markets have declined and experienced volatility due to uncertainties related to energy prices, availability of credit, inflation in food prices, difficulties in the banking and financial services sectors, the decline in the housing market, falling consumer confidence and high unemployment rates. As a result, consumers are more cautious, possibly leading to additional reductions in consumer spending, to consumers trading down to a less expensive mix of products, or to consumers trading down to discounts for grocery items, all of which may affect our financial condition and results of operations.

Furthermore, because of economic conditions, we may experience reductions in traffic in our supermarkets or limitations on the prices we can charge for our products, either of which may reduce our sales and profit margins and have a material adverse affect on our financial condition and results of operations. Other economic factors such as inflation, energy costs, increased transportation costs, higher costs of labor, insurance and healthcare, and changes in laws and regulations may increase our costs of sales and our operating expenses, and otherwise adversely affect our financial condition and results of operations. In Fiscal 2010, Fiscal 2009 and Fiscal 2008, we have experienced the effects of some of these economic factors.

RESULTS OF OPERATIONS

Fiscal 2010 compared with Fiscal 2009

Executive Summary

The results of operations during Fiscal 2010 when compared with Fiscal 2009 were impacted primarily by the Acquisition. Fifty-five supermarkets acquired in the Acquisition had been retained and operated through January 1, 2011.

Net Sales

The following table includes a comparison of the components of our net sales for Fiscal 2010 and Fiscal 2009.

(Dollars in thousands)

		Fiscal 2010				Fiscal 2009
		(52 weeks)				(53 weeks)				$ Change				% Change
Inside sales		$	2,107,524			$	1,579,448			$	528,076				33.4	%
Gasoline sales			150,012				116,160				33,852				29.1	%
Net sales		$	2,257,536			$	1,695,608			$	561,928				33.1	%

Inside sales increased 33.4% in Fiscal 2010 compared with Fiscal 2009, primarily due to net sales of $560.8 million related to new supermarkets, including the acquired Penn Traffic supermarkets. Excluding the 53^rd week in Fiscal 2009, same store sales increased 0.1%. Net sales for the 24 acquired supermarkets which have been closed, sold or liquidated were $33.9 million during Fiscal 2010.

Gasoline sales increased 29.1% in Fiscal 2010 compared with Fiscal 2009 due to an 18.9% increase in the retail price per gallon. The number of gallons sold increased 8.6%, primarily due to the addition of four new fuel stations during Fiscal 2010, and a full-year of operation for three fuel stations added during Fiscal 2009.

Gross Profit

The following table includes a comparison of cost of goods sold, distribution costs and gross profit for Fiscal 2010 and Fiscal 2009.

(Dollars in thousands)

		Fiscal 2010				% of				Fiscal 2009				% of				$				%
		(52 weeks)				Net Sales				(53 weeks)				Net Sales				Change				Change
Cost of goods sold		$	(1,579,016	)			69.9	%		$	(1,185,344	)			69.9	%		$	393,672				33.2	%
Distribution costs			(44,829	)			2.0	%			(33,852	)			2.0	%			10,977				32.4	%
Gross profit		$	633,691				28.1	%		$	476,412				28.1	%		$	157,279				33.0	%

As a percentage of net sales, cost of goods sold, distribution costs and gross profit remained consistent for Fiscal 2010 compared with Fiscal 2009.

Operating Expenses

The following table includes a comparison of operating expenses for Fiscal 2010 and Fiscal 2009.

(Dollars in thousands)

		Fiscal 2010				% of				Fiscal 2009				% of				$				%
		(52 weeks)				Net Sales				(53 weeks)				Net Sales				Change				Change
Wages, salaries and benefits		$	310,800				13.8	%		$	224,958				13.3	%		$	85,842				38.2	%
Selling and general expenses			104,841				4.6	%			73,474				4.3	%			31,367				42.7	%
Administrative expenses			102,754				4.6	%			65,013				3.8	%			37,741				58.1	%
Rent expense			19,135				0.8	%			13,219				0.8	%			5,916				44.8	%
Depreciation and amortization			62,353				2.8	%			52,727				3.1	%			9,626				18.3	%
Advertising			23,175				1.0	%			12,531				0.7	%			10,644				84.9	%
Total		$	623,058				27.6	%		$	441,922				26.0	%		$	181,136				41.0	%

Wages, Salaries and Benefits

As a percentage of net sales, the increase in wages, salaries and benefits for Fiscal 2010 compared with Fiscal 2009 is largely attributable to investments in labor during the rebannering and re-openings of the retained Penn Traffic supermarkets, as well as the lower average sales base of these supermarkets. As the inside sales related to these supermarkets is expected to continue on a positive trend, we expect a similar leveraging of labor expenses in the future as compared to our legacy supermarkets. The comparative percentage is also impacted by the fact that none of the acquired Penn Traffic supermarkets have fuel stations, for which gasoline sales require less labor expense than inside sales. Furthermore, we have experienced a 10% year-over-year increase in pension and health and welfare costs, as required by our collective bargaining agreements. We expect an additional 10%, or $0.8 million, increase in pension costs, and relatively flat health and welfare costs, in 2011.

Selling and General Expenses

As a percentage of net sales, selling and general expenses increased for Fiscal 2010 compared with Fiscal 2009 due to $0.7 million of Penn Traffic integration costs included in selling and general expenses during Fiscal 2010, as well as an increase of $10.8 million in electricity costs due to the warmer temperatures in 2010 and higher commodity prices.

Administrative Expenses

The increase in administrative expenses for Fiscal 2010 compared with Fiscal 2009 was primarily attributable to a combined $22.4 million of Penn Traffic integration costs, one-time legal and professional fees related to the Acquisition and non-recurring legal expenses associated with the FTC’s review of the acquired supermarkets. Furthermore, we incurred additional labor expense of $12.8 million related to 2010 head count additions to accommodate increased corporate activities following the Acquisition, combined with normal wage rate increases.

Rent Expense

Rent expense reflects our rental expense for our supermarkets under operating lease arrangements, net of income we receive from various entities that rent space in our supermarkets under subleasing arrangements. As a percentage of net sales, rent expense remained relatively consistent for Fiscal 2010 compared with Fiscal 2009.

Depreciation and Amortization

The increase in depreciation and amortization from Fiscal 2010 compared with Fiscal 2009 was largely attributable to $7.4 million associated with assets acquired from Penn Traffic, as well as incremental depreciation related to Fiscal 2010 and Fiscal 2009 capital expenditures.

Advertising

The increase in advertising expenses for Fiscal 2010 compared with Fiscal 2009 was primarily attributable to $5.2 million in costs associated with the communication of the Acquisition to our customers and the promotion of the re-bannered supermarkets. Additionally, we incurred increased circular costs of $6.4 million due to enhancements made to our circulars, our increased store base and expanded geographic area, as well as duplicative costs of producing circulars under the P&C, Quality Markets and Bi-Lo banners subsequent to the Acquisition. In early Fiscal 2010, we incurred costs of $1.7 million associated with our Monopoly^® promotion. The increase is partially offset by a decrease in media production.

Bargain Purchase

The excess of $15.7 million of the estimated fair value of Penn Traffic net assets acquired over the purchase price has been recognized as a gain in the consolidated statement of operations for Fiscal 2010. This bargain purchase was attributable to the distressed status of Penn Traffic due to historical operating results, which led to a November 2009 bankruptcy filing.

Loss on Debt Extinguishment

On January 29, 2010, we entered into a $25.0 million bridge loan and an $11.0 million term loan and capitalized related financing costs. As both the bridge loan and term loan were repaid in full on February 12, 2010 with the proceeds from the issuance of the additional $75.0 million of senior secured notes, unamortized costs of $0.7 and $0.3 million, respectively, were recorded as a loss on debt extinguishment in our consolidated statement of operations for Fiscal 2010.

In connection with prepayments of $20.0 million related to our previous first lien credit agreement during Fiscal 2009, $0.8 million of additional debt was forgiven. This amount, net of the write-off of $0.3 million of unamortized deferred financing costs, was recorded as a gain on debt extinguishment in our consolidated statement of operations for Fiscal 2009. Effective October 9, 2009, we issued $275.0 million of senior secured notes and simultaneously entered into the $70.0 million revolving ABL Facility. The proceeds from the senior secured notes and the ABL Facility were used, in part, to retire the outstanding balances related to our previous first lien credit agreement and warehouse mortgage. In connection with these retirements, we wrote off unamortized deferred financing costs of $7.0 million and incurred additional costs of $0.3 million, which were recorded as a loss on debt extinguishment in our consolidated statement of operations for Fiscal 2009.

Interest Expense, Net

The $13.2 million increase in interest expense during Fiscal 2010 compared with Fiscal 2009 reflects an $18.7 million increase in interest on our outstanding indebtedness as a result of our October 2009 and February 2010 financing activities, as well as an increase of $1.3 million attributable to deferred financing fees and bond discount amortization (net of premium amortization). These factors were partially offset by a $6.6 million decrease in interest expense related to our interest rate swap that was settled in October 2009.

Income Tax Benefit (Expense)

The change from the income tax expense of $5.4 million in Fiscal 2009 to the income tax benefit of $9.0 million in Fiscal 2010 is primarily attributable to the higher pre-tax loss in Fiscal 2010, combined with the non-taxability of the bargain purchase related to the Acquisition. Additionally, we established a $13.9 million valuation allowance during Fiscal 2009 related to our deferred tax assets, compared to an additional valuation allowance of $11.9 million during Fiscal 2010. The resulting effective tax rate for Fiscal 2010 was 25.0% compared to an effective tax rate for Fiscal 2009 of (26.5)%.

Deferred income tax assets or liabilities reflect temporary differences between amounts of assets and liabilities, including net operating loss (“NOL”) carryforwards, for financial and tax reporting. Such amounts are adjusted as appropriate to reflect changes in the tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is established for any deferred income tax asset for which realization is uncertain.

Based on an assessment of the available positive and negative evidence, including our historical results for the preceding three years, we determined that there are uncertainties relating to our ability to utilize the net deferred tax assets. In recognition of these uncertainties, we have provided a valuation allowance of $13.9 million on the net deferred income tax assets as of January 2, 2010, representing a charge to income tax expense during Fiscal 2009. During Fiscal 2010, we established an additional valuation allowance of $11.9 million, with an offsetting charge to income tax expense. If we were to determine that we could realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance.

Net Loss

The increase in net loss from $25.7 million in Fiscal 2009 to $27.0 million in Fiscal 2010 is attributable to the factors discussed above.

Fiscal 2009 compared with Fiscal 2008

Executive Summary

Our results of operations during Fiscal 2009 when compared with Fiscal 2008 were influenced by lower selling and general expenses attributable to decreases in utility costs and legal expenses, as well as the additional week in Fiscal 2009. Net sales were primarily impacted by increased average customer order size and customer count, partially offset by lower retail gasoline prices and deflation within certain categories of inside sales.

Net Sales

The following table includes a comparison of the components of our net sales for Fiscal 2009 and Fiscal 2008.

(Dollars in thousands)

		Fiscal 2009				Fiscal 2008
		(53 weeks)				(52 weeks)				$ Change				% Change
Inside sales		$	1,579,448			$	1,542,054			$	37,394				2.4	%
Gasoline sales			116,160				158,178				(42,018	)			(26.6	)%
Net sales		$	1,695,608			$	1,700,232			$	(4,624	)			(0.3	)%

The increase in inside sales was primarily due to $29.8 million of net sales attributable to the additional week in Fiscal 2009. Adjusted to reflect a 52-week period in Fiscal 2009, inside sales increased approximately $7.6 million, or 0.5%, due to a 0.4% increase in average customer order size and a 0.1% increase in our average customer count. The increase in average order size was despite deflationary prices in certain categories.

Gasoline sales decreased 26.6% from Fiscal 2008 to Fiscal 2009 due to a 29.9% decrease in the retail price per gallon. This decrease was partially offset by a 4.8% increase in the number of gallons sold. This was primarily due to the addition of three new fuel stations in Fiscal 2009, which represented 2.1% of total gallons sold, a full-year of operation for two fuel stations added in Fiscal 2008, for which the incremental gallons represented 1.6% of total gallons sold, and the additional week of gasoline sales in Fiscal 2009, which accounted for 1.9% of total gallons sold.

Gross Profit

The following table includes a comparison of cost of goods sold, distribution costs and gross profit for Fiscal 2009 and Fiscal 2008.

(Dollars in thousands)

		Fiscal 2009				% of				Fiscal 2008				% of				$				%
		(53 weeks)				Net Sales				(52 weeks)				Net Sales				Change				Change
Cost of goods sold		$	(1,185,344	)			69.9	%		$	(1,195,850	)			70.3	%		$	(10,506	)			(0.9	)%
Distribution costs			(33,852	)			2.0	%			(32,882	)			1.9	%			970				2.9	%
Gross profit		$	476,412				28.1	%		$	471,500				27.7	%		$	4,912				1.0	%

Cost of goods sold declined as a result of a $37.7 million, or 25.9%, decrease in the cost of gasoline and a $6.7 million decrease in non-cash last-in, first-out (“LIFO”) inventory valuation adjustments from $6.9 million in Fiscal 2008 to $0.2 million in Fiscal 2009, partially offset by the impact of incremental inside sales.

Distribution costs as a percentage of net sales were consistent between Fiscal 2009 and Fiscal 2008.

The increase in gross profit was primarily the result of the $6.7 million decrease in LIFO adjustments.

Operating Expenses

The following table includes a comparison of operating expenses for Fiscal 2009 and Fiscal 2008.

(Dollars in thousands)

		Fiscal 2009				% of				Fiscal 2008				% of				$				%
		(53 weeks)				Net Sales				(52 weeks)				Net Sales				Change				Change
Wages, salaries and benefits		$	224,958				13.3	%		$	223,014				13.1	%		$	1,944				0.9	%
Selling and general expenses			73,474				4.3	%			81,587				4.8	%			(8,113	)			(9.9	)%
Administrative expenses			65,013				3.8	%			63,575				3.7	%			1,438				2.3	%
Rent expense			13,219				0.8	%			13,114				0.8	%			105				0.8	%
Depreciation and amortization			52,727				3.1	%			50,732				3.0	%			1,995				3.9	%
Advertising			12,531				0.7	%			10,699				0.6	%			1,832				17.1	%
Total		$	441,922				26.0	%		$	442,721				26.0	%		$	(799	)			(0.2	)%

Wages, Salaries and Benefits

The increase in wages, salaries and benefits was primarily attributable to a $5.0 million increase in wages related to negotiated union labor rates and the additional week in Fiscal 2009, combined with a $3.2 million increase in health and welfare benefits due to rising healthcare costs and the 53^rd week of Fiscal 2009. These factors were partially offset by a $6.3 million decrease in vacation expense due to a change in the vacation policy for union store employees.

Selling and General Expenses

The decrease in selling and general expenses was primarily attributable to a $5.4 million decrease in utility costs due to lower commodity prices and increased conservation efforts in our stores, a $4.2 million decrease in legal fees, largely associated with a potential acquisition that was not consummated in Fiscal 2008, a $2.6 million decrease in general liability and workers’ compensation insurance expense and a $0.9 million decrease in supplies expense. These factors were partially offset by a $1.2 million decrease in gift card breakage income, as $1.3 million of initial income was recognized in Fiscal 2008 upon the establishment of a new gift card company, $1.1 million of Penn Traffic acquisition costs, a $0.8 million decrease in cardboard income due to declining prices during Fiscal 2009, a $0.6 million increase in software maintenance contract expense and a combined increase of $1.4 million related to real estate taxes, store equipment and debit card fees due to the additional week of expenses in Fiscal 2009.

Administrative Expenses

The increase in administrative expenses from Fiscal 2008 to Fiscal 2009 was primarily attributable to a $6.1 million increase in depreciation expense and a $1.5 million increase in software maintenance due to our establishment of a stand alone IT infrastructure, $1.8 million of expense related to a modification of the terms of outstanding stock option grants during Fiscal 2009, a $2.1 million legal settlement gain recognized in Fiscal 2008 and an overall increase of $1.1 million attributable to the additional week in Fiscal 2009. These increases were largely offset by the reduction of duplicative or excess costs associated with the Transition Services Agreement (“TSA”) with Koninklijke Ahold N.V. (“Ahold”) of $8.1 million, a $2.0 million reduction of normal bonus expense, as well as a $1.5 million decrease in vacation expense due to a change in the vacation policy for non-union corporate employees.

Rent Expense

As a percentage of net sales, rent expense remained relatively consistent for Fiscal 2009 compared with Fiscal 2008.

Depreciation and Amortization

The increase in depreciation and amortization was due to incremental depreciation related to Fiscal 2008 and Fiscal 2009 capital expenditures, as well as the additional week of depreciation and amortization expense in Fiscal 2009.

Advertising

The increase in advertising expenses was primarily attributable to an expanded sponsorship with the Buffalo Bills National Football League franchise for the 2009-2010 season of $0.7 million, an increased investment in radio advertising of $0.5 million and $0.5 million related to enhanced circulars during Fiscal 2009. In addition, we have increased the reach of our advertising efforts to include more local newspapers and magazines.

Loss on Debt Extinguishment

In connection with prepayments of $20.0 million related to our previous first lien credit agreement during Fiscal 2009, $0.8 million of additional debt was forgiven. This amount, net of the write-off of $0.3 of unamortized deferred financing fees, was recorded as a gain on debt extinguishment. Effective October 9, 2009, we issued $275.0 million of senior secured notes and simultaneously entered into the $70.0 million revolving ABL Facility. The proceeds from the senior secured notes and the ABL Facility were used, in part, to retire the outstanding balances related to our previous first lien credit agreement and warehouse mortgage. In connection with these retirements, we wrote off unamortized deferred financing costs of $7.0 million and incurred additional costs of $0.3 million, which were recorded as a loss on debt extinguishment in our consolidated statement of operations for Fiscal 2009.

During Fiscal 2008, we recorded a $2.2 million loss on debt extinguishment related to the write-off of unamortized deferred financing costs associated with our previous second lien credit agreement, which was repaid in full.

Interest Expense, Net

The increase in interest expense from $43.7 million in Fiscal 2008 to $48.0 million in Fiscal 2009 reflects the impact of the October 2009 refinancing activities, including an increase of $4.2 million related to the amortization of the increase in the fair value of our interest rate swap that was previously recognized in Accumulated Other Comprehensive Income (“AOCI”) on our balance sheet. This increase largely resulted from the acceleration of amortization upon the settlement of the interest rate swap in October 2009.

Income Taxes (Expense) Benefit

The change from the income tax benefit of $6.3 million in Fiscal 2008 to the income tax expense of $5.4 million in Fiscal 2009 is primarily attributable to the $13.9 million valuation allowance established in Fiscal 2009 related to our deferred tax assets. The resulting effective tax rate for Fiscal 2009 was (26.5)% compared to an effective tax rate for Fiscal 2008 of 36.8%.

Deferred income tax assets or liabilities reflect temporary differences between amounts of assets and liabilities, including NOL carryforwards, for financial and tax reporting. Such amounts are adjusted as appropriate to reflect changes in the tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is established for any deferred income tax asset for which realization is uncertain.

We consider all available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income and recent financial operations, to determine whether, based on the weight of that evidence, a valuation allowance is needed for some portion or all of a net deferred income tax asset. Judgment is used in considering the relative impact of negative and positive evidence. In arriving at these judgments, the weight given to the potential effect of negative and positive evidence is commensurate with the extent to which such evidence can be objectively verified. In evaluating the objective evidence provided by historical results, we considered the past three years.

Based on an assessment of the available positive and negative evidence, including our historical results, we determined that there are uncertainties relative to our ability to utilize the net deferred tax assets. In recognition of these uncertainties, we have provided a valuation allowance of $13.9 million on the net deferred income tax assets as of January 2, 2010, representing a charge to income tax expense during Fiscal 2009. If we were to determine that we could realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance.

Net Loss

Our net loss increased $14.9 million, or 136.9%, from Fiscal 2008 to Fiscal 2009. The increase in net loss is attributable to the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

On October 9, 2009, we issued $275.0 million of senior secured notes, bearing annual interest of 10.125%. We received proceeds from the senior secured notes issuance, net of a $4.5 million original issue discount, of $270.5 million. The senior secured notes mature October 15, 2015 and require semi-annual interest payments beginning April 15, 2010. The senior secured notes are collateralized by (i) first-priority interests, subject to certain exceptions, in our warehouse distribution facility in Lancaster, New York, certain owned real property acquired by us following the issue date of the senior secured notes, intellectual property, equipment, stock of subsidiaries and substantially all of our other assets (other than leasehold interests in real property), other than assets securing the ABL Facility (as defined below) on a first priority basis (collectively, the “Notes Priority Collateral”), and (ii) second-priority interests, subject to certain exceptions and permitted liens, in our assets that secure the ABL Facility on a first-priority basis, including present and future receivables, inventory, prescription lists, deposit accounts and certain related rights and proceeds relating thereto (collectively, the “ABL Priority Collateral”).

Also effective October 9, 2009, we entered into the ABL Facility that expires on October 9, 2013. The ABL Facility allowed a maximum borrowing capacity of $70.0 million, including a sub-limit for the issuance of letters of credit, subject to a borrowing base calculation. Our ABL Facility was amended on January 29, 2010 to increase the maximum borrowing capacity to $100.0 million. As of January 1, 2011, the unused commitment under the ABL Facility was $64.2 million, after giving effect to $12.5 million of letters of credit outstanding thereunder. Revolving loans under the ABL Facility will, at our option, bear interest at either i) LIBOR plus a margin of 350 to 400 basis points, determined based on levels of borrowing availability, or ii) the prime rate plus a margin of 250 to 300 basis points, determined based on levels of borrowing availability. The ABL Facility is collateralized primarily by (i) first-priority interests, subject to certain exceptions, in the ABL Priority Collateral and (ii) second-priority interests, subject to certain exceptions, in the Notes Priority Collateral.

On January 29, 2010, we completed the acquisition of substantially all assets and certain liabilities of Penn Traffic and its subsidiaries, including Penn Traffic’s 79 retail supermarkets. In addition to cash consideration of $85.0 million paid to Penn Traffic, the Company recorded $23.3 million of integration costs and $2.1 million of legal expenses associated with the FTC’s review of the acquired supermarkets during Fiscal 2010, and $5.3 million and $1.1 million of transaction costs during Fiscal 2010 and Fiscal 2009, respectively. Of these combined expenses, $31.4 million were paid during Fiscal 2010. The Company has sold certain of the acquired assets for $20.8 million, which was all received during Fiscal 2010.

On February 12, 2010, we issued an additional $75.0 million of senior secured notes on the same terms as the October 2009 issuance. We received proceeds of $76.1 million from this issuance, including a $1.1 million original issue premium. The proceeds were used, in part, to repay in full short-term borrowings that were entered into in order to finance the Acquisition. We incurred $4.7 million of financing costs, primarily related to the additional senior secured notes issuance, all of which were capitalized in other assets in our consolidated balance sheet during Fiscal 2010.

The senior secured notes and ABL Facility contain customary affirmative and negative covenants, including restrictions on indebtedness, liens, type of business, acquisitions, investments, sale or transfer of assets, payment of dividends, transactions involving affiliates, change in control and other matters customarily restricted in such agreements. Failure to meet any of these covenants would be an event of default. As of January 1, 2011, we were in compliance with all such covenants.

On January 29, 2010, we received $30.0 million of proceeds from the issuance of 44,776 shares of common stock to certain shareholders of Holding.

On July 26, 2010, we paid a dividend to our shareholders totaling $30.0 million, or $207.22 per share of common stock outstanding. The payment of this dividend did not result in any borrowings under our ABL Facility outside of the normal course of business.

Our primary sources of cash are cash flows generated from our operations and borrowings under our ABL Facility. We believe that these sources will be sufficient to meet working capital requirements, anticipated capital expenditures and scheduled debt payments for at least the next twelve months. Our ability to satisfy debt service obligations, to fund planned capital expenditures and to make acquisitions will depend upon our future operating performance, which will be affected by prevailing economic conditions in the grocery industry and financial, business, and other factors, some of which are beyond our control. See “Risk Factors” in Item 1A of Part I of this 10-K.

Cash Flows Information

The following is a summary of cash provided by or used in each of the indicated types of activities:

(Dollars in thousands)

		Fiscal 2010				Fiscal 2009				Fiscal 2008
		(52 weeks)				(53 weeks)				(52 weeks)
Cash provided by (used in):
Operating activities		$	49,458			$	66,813			$	81,067
Investing activities			(113,933	)			(36,693	)			(56,237	)
Financing activities			62,172				(40,717	)			(28,437	)

Cash provided by operating activities during Fiscal 2010 decreased $17.4 million compared with Fiscal 2009 due to cash expenditures of $31.4 million related to integration efforts, legal expenses associated with the FTC’s review of the acquired supermarkets and other one-time legal and professional fees related to the Acquisition. These cash expenditures were partially offset by a $14.8 million improvement in cash from changes in operating assets and liabilities due to the more effective management of working capital, despite incremental working capital investment requirements related to the acquired Penn Traffic supermarkets. Additionally, Fiscal 2010 reflects incremental cash flows generated by the acquired Penn Traffic supermarkets.

Cash provided by operating activities decreased $14.3 million, or 17.6%, in Fiscal 2009 compared with Fiscal 2008. This change reflects a $20.6 million decrease in working capital during Fiscal 2008 as a result of the structure of the purchase agreement for Tops Markets, LLC between MSPE and Ahold. Pursuant to the purchase agreement, this planned cash benefit was paid to Ahold as post-closing purchase consideration and was included in our cash used in investing activities during Fiscal 2008. The partially offsetting increase is due to improved cash results from operations, net of an increase in working capital items, during Fiscal 2009.

Cash used in investing activities during Fiscal 2010 increased $77.2 million compared with Fiscal 2009, primarily due to cash consideration paid as part of the Acquisition, net of proceeds from the subsequent divestiture of certain acquired assets. Cash paid for property and equipment totaled $49.7 million and $28.1 million during Fiscal 2010 and Fiscal 2009, respectively. We expect to invest approximately $40 million in total in capital expenditures during the next twelve months.

Cash used in investing activities decreased $19.5 million in Fiscal 2009 compared with Fiscal 2008 due to the remaining purchase consideration for Tops Markets, LLC paid to Ahold during Fiscal 2008 and a decrease in capital expenditures, partially offset by the interest rate swap settlement payment of $5.6 million, and interest rate swap interest paid of $3.1 million, during Fiscal 2009. Capital expenditures were $28.1 million and $35.3 million during Fiscal 2009 and Fiscal 2008, respectively.

Cash provided by (used in) financing activities during Fiscal 2010 changed $102.9 million compared with Fiscal 2009 as a result of the issuance of an additional $75.0 million of senior secured notes and proceeds of $30.0 million from the issuance of additional shares of common stock during Fiscal 2010, as well as prepayments made on our previous senior secured credit facility during Fiscal 2009. These factors were partially offset by a dividend to our shareholders totaling $30.0 million and financing costs incurred in connection with our financing activities during Fiscal 2010.

Cash used in financing activities increased $12.3 million in Fiscal 2009 compared with Fiscal 2008 as a result of a $105.0 million dividend paid in Fiscal 2009 and a $7.1 million increase in deferred financing fees incurred, offset by net proceeds from long-term debt borrowings of $69.5 million in Fiscal 2009 compared to net repayments of long-term borrowings of $13.6 million in Fiscal 2008, as well as net ABL borrowings of $14.0 million during Fiscal 2009.

Contractual Obligations

The following table sets forth a summary of our significant contractual obligations as of January 1, 2011:

(Dollars in thousands)

		Payments due by Period
		2011				2012				2013				2014				2015				Thereafter				Total
Long-term debt:
Notes(1)		$	—			$	—			$	—			$	—			$	350,000			$	—			$	350,000
Other long-term debt			402				434				17,295				280				167				—				18,578
Interest(2)			55,647				53,612				51,481				49,361				39,213				36,329				285,643
Operating leases(3)			24,921				25,570				25,740				25,853				25,822				115,161				243,067
Capital leases(3)			11,095				12,908				14,045				12,562				12,099				120,602				183,311
Purchase obligations(4)			160,709				160,519				111,644				15,328				15,118				29,949				493,267
Other liabilities(5)			56,459				822				795				764				705				2,873				62,418
Total		$	309,233			$	253,865			$	221,000			$	104,148			$	443,124			$	304,914			$	1,636,284

(1)		No principal amounts are due on the senior secured notes until October 15, 2015. Assumes aggregate principal amount of $350.0 million of notes are outstanding until maturity.
(2)		Amount primarily includes contractual interest payments related to the senior secured notes, capital leases and other long-term debt.
(3)		Some of our lease agreements provide us with an option to renew. We have not included renewal options in our future minimum lease amounts for renewals that are not reasonably assured. Our future operating lease obligations will change if we exercise these renewal options and if we enter into additional operating or capital lease agreements.

(4)		In addition to the purchase obligations reflected in the table above, we enter into supply contracts to purchase products for resale in the ordinary course of business. This category of contracts covers a broad spectrum of products and sometimes includes specific merchandising obligations relative to those products. These supply contracts typically include either a volume commitment or a fixed expiration date, pricing terms based on the vendor’s published list price, termination provisions, and other standard contractual considerations. Our obligation related to these contracts is typically limited to return of unearned allowances and therefore no amounts have been included above. Purchase obligations above relate to the outsourcing of a major portion of our information system functions and pharmacy inventory procurement through long-term agreements, as noted below:

	•		In July 2010, we extended our existing IT outsourcing agreement with HP through December 31, 2017 to provide a wide range of information systems services. Under the agreement, HP provides data center operations, mainframe processing, business applications and systems development to enhance the our customer service and efficiency. The charges under this agreement are based upon the services requested at predetermined rates.
	•		Effective December 1, 2010, we extended the term of our existing supply contract with McKesson through January 1, 2014 for the supply of substantially all of our prescription drugs and other health and beauty care products requirements. We are required to purchase a minimum of $400 million of product during the period from December 1, 2010 to January 1, 2014.

(5)		Other liabilities include health and welfare benefits and multiemployer pension plan contributions under collective bargaining agreements, as well as other pension and post-retirement benefits.

Multiemployer Pension Plans

We contribute to the Local One Plan, a defined benefit multiemployer pension plan, under our collective bargaining agreements with the Local One. This Local One Plan generally provides retirement benefits to participants based on their service to contributing employers. During Fiscal 2010 and Fiscal 2009, we made contributions of $7.9 million and $5.7 million, respectively, to the Local One Plan.

We will be required to increase our annual contributions to the Local One Plan pursuant to our collective bargaining agreements and the Local One Plan’s rehabilitation plan. We are also contingently liable for withdrawal liability in the event that we withdraw from the Local One Plan. In accordance with applicable accounting rules, our contingent withdrawal liability is not includable in our consolidated financial statements. We have no present intention to withdraw from the Local One Plan. For more information on future increases in our annual contribution rates and our contingent withdrawal liability, see “Risk Factors—Risks Related to Our Business— We currently contribute to an underfunded multiemployer pension plan for employees represented by the Local One.”

In addition, at the time our supply arrangement was entered into with C&S, certain of our warehouse personnel became employees of C&S, with C&S assuming our obligations under several multiemployer pension plans. Although we are not a sponsoring employer of, and make no contribution payments to any of these other multiemployer pension plans, we have certain contractual indemnification obligations for withdrawal liability that may arise in the event of C&S’s withdrawal from such plans. According to estimates of the actuary for the multiemployer plan for which we indemnify C&S, the withdrawal liability for a withdrawal from such plan in 2010 would have been $107.8 million.

Off-Balance Sheet Arrangements

Other than the operating leases and multiemployer pension liabilities previously discussed, we are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, net sales, expenses, results of operations, liquidity, capital expenditures or capital resources.

Inflation

Product cost inflation could vary from our estimates due to general economic conditions, weather, availability of raw materials and ingredients in the products that we sell and their packaging, and other factors beyond our control.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. We have provided a description of all of our significant accounting policies in Note 1 to our consolidated financial statements included in Item 8 of Part II of this 10-K. We believe that of these significant accounting policies, the following may involve a higher degree of judgment or complexity.

Vendor Allowances

We receive allowances from many of the vendors whose products we stock in our supermarkets. Allowances are received for a variety of merchandising activities, which consist of the inclusion of vendor products in our advertising, placement of vendor products in prominent locations in our supermarkets, introduction of new products, slotting fees, exclusivity rights in certain categories of products and temporary price reductions offered to customers on products held for sale. We also receive vendor allowances associated with buying activities such as volume purchase rebates and rebates for purchases made during specific periods.

We record a receivable for vendor allowances for which we have fulfilled our contractual commitments but have not received payment from the vendor. When payment for vendor allowances is received prior to fulfillment of contractual terms or before the programs necessary to earn such allowances are initiated, we record such amounts as deferred income or vendor allowances received in advance, respectively, which are classified within accrued expenses and other current liabilities and other long-term liabilities in the consolidated balance sheets. Once all contractual commitments have been met, we record vendor allowances as a reduction of the cost of inventory. Due to system constraints and the nature of certain allowances, it is sometimes not practicable to apply allowances to the item cost of inventory. In those instances, the allowances are applied as a reduction of merchandise costs using a rational and systematic methodology, which results in the recognition of these incentives when the inventory related to the vendor consideration received is sold based on an inventory turns calculation. Accordingly, when the inventory is sold, the vendor allowances are recognized as a reduction of the cost of goods sold. The amount and timing of recognition of vendor allowances, as well as the amount of vendor allowances remaining as deferred income or vendor allowances received in advance, requires management judgment and estimates. Management determines these amounts based on estimates of current year purchase volume using forecasted and historical data and review of average inventory turnover. These judgments and estimates impact our reported operating earnings and accrued deferred income.

Inventory Valuation

We value inventories at the lower of cost or market using the LIFO method. Our inventory balances consist primarily of finished goods. Inventory costs include the purchase price of the product and freight charges to deliver the product and are net of certain cash or non-cash consideration received from vendors.

Cost is determined using the retail method. Under the retail method, the valuation of inventories, and the resulting gross margins, is determined by applying a cost-to-retail ratio for various groupings of similar items to the retail value of inventories. Inherent in the retail inventory method calculations are certain management judgments and estimates which could impact the ending inventory valuation at cost, as well as the resulting gross margins. Our cost to retail ratios contain uncertainties as the calculation requires management to make assumptions and apply judgment regarding inventory mix, inventory spoilage and shrink. Because of the significance of the judgments and estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change.

Physical inventory counts are taken on a cycle basis. We record an estimated inventory shrinkage reserve for the period between each store’s last physical inventory and the consolidated balance sheet date.

Valuation of Tradename

In accordance with the provisions of ASC 350, “Intangibles-Goodwill and Other” (“ASC 350”), we do not amortize the Tops tradename, which is deemed to have an indefinite useful life.

The Tops tradename is tested for impairment whenever events or circumstances make it more likely than not that an impairment may have occurred, or at least annually, in accordance with ASC 350. We have identified December 1 as the impairment test date for the Tops tradename. Our impairment review is based on a relief from royalty method that requires significant judgment with respect to future volume, revenue growth assumptions, and the selection of the appropriate discount and royalty rates.

We use estimates based on expected trends in making these assumptions. An impairment loss, if necessary, is recorded as the excess of the carrying value over the net present value of estimated cash flows, which represents the estimated fair value of the asset. We did not recognize any losses during Fiscal 2010, Fiscal 2009 or Fiscal 2008. In connection with our December 1, 2010 Tops tradename impairment review, the fair value of the tradename was approximately 60% greater than the carrying value.

Valuation of Long-lived Assets

It is our policy to review our long-lived assets for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Factors we consider important, and which could trigger an impairment review, include the following:

•

significant under-performance of a store in relation to expectations;

•

significant negative industry or economic trends; and

•

significant changes or planned changes in our use of the assets.

We determine whether the carrying value of our long-lived assets, including property and equipment, and finite-lived intangible assets may not be recoverable based upon the existence of one or more of the foregoing or other indicators of impairment. We determine if impairment exists relating to long-lived assets by comparing future undiscounted cash flows to the asset’s carrying value. If the carrying value is greater than the undiscounted cash flows, we measure the impairment as the amount by which the carrying value of the assets exceeds the fair value of the assets. The projected cash flows for each asset group considers multiple factors including store sales over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. Because of the significance of long-lived assets and finite-lived intangible assets and the judgments and estimates that go into the fair value analysis, we believe that our policies regarding impairment are critical. We did not recognize any impairment losses during Fiscal 2010, Fiscal 2009 and Fiscal 2008.

Acquisition Accounting

We account for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations” (“ASC 805”). As required by ASC 805, assets acquired and liabilities assumed in a business combination are recorded at their respective fair values as of the business combination date. The most difficult estimations of individual fair values are those involving long-lived assets, such as property, equipment and intangible assets. We use available information to make these fair value determinations and, when necessary, engage an independent valuation specialist to assist in the fair value determination of the acquired long-lived assets.

As the values of certain assets and liabilities were preliminary in nature, such values were adjusted during Fiscal 2010 as additional information was obtained.

Leases

We lease buildings and equipment under operating and capital lease arrangements. In accordance with ASC 840, “Leases,” we classify our leases as capital leases when the lease agreement transfers substantially all risks and rewards of ownership to us. For leases determined to be capital leases, the asset and liability are recognized at an amount equal either to the fair value of the leased asset or the present value of the minimum lease payments during the lease term, whichever is lower. Leases that do not qualify as capital leases are classified as operating leases, and the related lease payments are expensed on a straight-line basis (taking into account rent escalation clauses) over the lease term, including, as applicable, any rent-free period during which we have the right to use the asset. Determining whether a lease is a capital or an operating lease requires judgment on various aspects that include the fair value of the leased asset, the economic life of the leased asset, whether or not to include renewal options in the lease term and determining an appropriate discount rate to calculate the present value of the minimum lease payments.

Self-Insurance Programs

We primarily are self-insured for costs related to workers’ compensation and general liability claims. As of January 1, 2011, our workers’ compensation and general liability reserves were $10.0 million and $1.7 million, respectively. The liabilities represent our best estimates, using generally accepted actuarial reserving methods, of the ultimate obligations for reported claims plus those incurred but not reported for all claims incurred through the balance sheet date. We establish case reserves for reported claims using case-basis evaluation of the underlying claim data which is updated as new information becomes known.

For both workers’ compensation and general liability claims, we have purchased stop-loss coverage to limit our exposure to any significant exposure on a per claim basis. We are insured for covered costs in excess of established per claim limits. We account for the liabilities for workers’ compensation and general liability claims on a present value basis utilizing a risk-adjusted discount rate.

The assumptions underlying the ultimate costs of existing claim losses are subject to a high degree of unpredictability, which can affect the liability recorded for such claims. For example, variability in inflation rates of health care costs inherent in these claims can affect the amounts realized. Similarly, changes in legal trends and interpretations, as well as a change in the nature and method of how claims are settled, can affect ultimate costs. Our estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, and any changes could have a considerable effect on future claim costs and currently recorded liabilities.

Income Taxes

We account for income taxes using the liability method in accordance with ASC 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are determined based upon differences between the financial reporting and the tax basis of assets and liabilities, including NOL carry forwards and federal tax credits, and are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax assets or liabilities are expected to be realized or settled. Beginning in the Fiscal 2007 Successor Period, we adopted ASC 740 to assess and record income tax uncertainties. In relation to recording the provision for income taxes, management must estimate the future tax rates applicable to the reversal of temporary differences, make certain assumptions regarding whether book/tax differences are permanent or temporary, and if temporary, the related timing of expected reversal. Also, estimates are made as to whether taxable operating income in future periods will be sufficient to fully recognize any gross deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. Alternatively, we may make estimates about the potential usage of deferred tax assets that decrease our valuation allowances. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for uncertain tax positions when we believe that certain tax positions do not meet the more likely than not threshold. We adjust these reserves in light of changing facts and circumstances, such as the outcome of a tax audit or the lapse of the statute of limitations. The provision for income taxes includes the impact of reserve provisions and changes to the reserves that are considered appropriate.

Recent Accounting Pronouncements—Not Yet Adopted

Recent Accounting Pronouncements are included in Note 1 to the consolidated financial statements, included in Item 8 of Part II of this 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not utilize financial instruments for trading or other speculative purposes, nor do we utilize leveraged financial instruments.

We use derivative financial instruments from time to time primarily to manage our exposure to fluctuations in interest rates and, to a lesser extent, adverse fluctuations in commodity prices and other market risks. We do not enter into derivative financial instruments for trading purposes. As a matter of policy, all of our derivative positions are intended to reduce risk by hedging an underlying economic exposure. Because of the high correlation between the hedging instrument and the underlying exposure, fluctuations in the value of the instruments generally are offset by reciprocal changes in the value of the underlying exposure. The interest rate derivatives we use are straightforward instruments with liquid markets.

We manage our exposure to interest rates and changes in the fair value of our debt instruments primarily through the strategic use of variable and fixed rate debt, and interest rate swaps. As of January 1, 2011, we did not have any outstanding interest rate swaps designated as fair value or cash flow hedges. During Fiscal 2009, we terminated a cash flow interest rate swap with a notional amount of $140.0 million that was entered into during Fiscal 2007.

The table below provides information about our underlying debt portfolio as of January 1, 2011. The amounts shown for each year represent the contractual maturities of long-term debt, excluding capital leases, as of January 1, 2011. Interest rates reflect the weighted average rate for the outstanding instruments. The variable component of each variable rate debt instrument is based on the weighted average of LIBOR using the forward yield curve and the prime rate as of January 1, 2011. The Fair-Value column includes the fair-value of our debt instruments as of January 1, 2011. Refer to Note 1 of our consolidated financial statements.

(Dollars in thousands)

		Expected Fiscal Year of Maturity
		2011				2012				2013				2014				2015				Thereafter				Fair Value
Debt
Fixed rate		$	402			$	434			$	2,295			$	280			$	350,167			$	—			$	393,398
Average interest rate			10.1	%			10.1	%			10.1	%			10.1	%			10.1	%			N/A
Variable rate		$	—			$	—			$	15,000			$	—			$	—			$	—			$	15,000
Average interest rate			N/A				N/A				5.1	%			N/A				N/A				N/A

COMMODITY PRICE RISK

We purchase products that are impacted by commodity prices and are therefore subject to price volatility caused by weather, market conditions and other factors, which are not considered predictable or within our control.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following are set forth below:

Independent Auditors’ Report			31
Consolidated Balance Sheets as of January 1, 2011 and January 2, 2010			32
Consolidated Statements of Operations for the years ended January 1, 2011, January 2, 2010 and December 27, 2008			33
Consolidated Statements of Changes in Shareholders’ (Deficit) Equity for the years ended January 1, 2011, January 2, 2010 and December 27, 2008			34
Consolidated Statements of Cash Flows for the years ended January 1, 2011, January 2, 2010 and December 27, 2008			35
Notes to Consolidated Financial Statements			36

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Tops Holding Corporation
Buffalo, New York

We have audited the accompanying consolidated balance sheets of Tops Holding Corporation and subsidiaries (the “Company”) as of January 1, 2011 and January 2, 2010, and the related consolidated statements of operations, changes in shareholders’ (deficit) equity, and cash flows for the periods ended January 1, 2011, January 2, 2010, and December 27, 2008. Our audits also included the consolidated financial statement schedules listed in the Index at Item 15. These financial statements and consolidated financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 1, 2011 and January 2, 2010, and the results of their operations and their cash flows for the periods ended January 1, 2011, January 2, 2010, and December 27, 2008 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company acquired substantially all assets and certain liabilities of The Penn Traffic Company on January 29, 2010.

/s/ Deloitte & Touche LLP

Williamsville, New York
March 31, 2011

TOPS HOLDING CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share amounts)

		January 1, 2011				January 2, 2010
Assets
Current assets:
Cash and cash equivalents		$	17,419			$	19,722
Accounts receivable, net (Note 3)			57,044				49,457
Inventory, net			117,328				82,272
Prepaid expenses and other current assets			14,093				13,535
Assets held for sale			650				—
Income taxes refundable			200				760
Current deferred tax assets (Note 11)			2,265				5,986
Total current assets			208,999				171,732
Property and equipment, net (Note 4)			378,575				333,416
Intangible assets, net (Note 5)			79,072				76,356
Other assets (Note 6)			13,705				11,344
Total assets		$	680,351			$	592,848
Liabilities and Shareholders’ Deficit
Current liabilities:
Accounts payable		$	93,311			$	68,462
Accrued expenses and other current liabilities (Note 7)			79,123				68,334
Current portion of capital lease obligations (Note 8)			11,095				8,186
Current portion of long-term debt (Note 9)			402				362
Total current liabilities			183,931				145,344
Capital lease obligations (Note 8)			172,216				175,340
Long-term debt (Note 9)			365,262				288,194
Other long-term liabilities			21,099				16,785
Non-current deferred tax liabilities (Note 11)			3,354				5,986
Total liabilities			745,862				631,649
Shareholders’ deficit:
Common shares ($0.001 par value; 300,000 authorized shares at January 1, 2011, 200,000 authorized shares at January 2, 2010, 144,776 shares issued & outstanding at January 1, 2011, 100,000 shares issued & outstanding at January 2, 2010) (Note 12)			—				—
Paid-in capital			(2,668	)			(3,383	)
Accumulated deficit			(62,507	)			(35,553	)
Accumulated other comprehensive (loss) income, net of tax			(336	)			135
Total shareholders’ deficit			(65,511	)			(38,801	)
Total liabilities and shareholders’ deficit		$	680,351			$	592,848

See notes to consolidated financial statements.

TOPS HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands)

		Fiscal 2010				Fiscal 2009				Fiscal 2008
		(52 weeks)				(53 weeks)				(52 weeks)
Net sales		$	2,257,536			$	1,695,608			$	1,700,232
Cost of goods sold			(1,579,016	)			(1,185,344	)			(1,195,850	)
Distribution costs			(44,829	)			(33,852	)			(32,882	)
Gross profit			633,691				476,412				471,500
Operating expenses:
Wages, salaries and benefits			(310,800	)			(224,958	)			(223,014	)
Selling and general expenses			(104,841	)			(73,474	)			(81,587	)
Administrative expenses (inclusive of stock-based compensation expense of $715, $1,085, and $532)			(102,754	)			(65,013	)			(63,575	)
Rent expense, net			(19,135	)			(13,219	)			(13,114	)
Depreciation and amortization			(62,353	)			(52,727	)			(50,732	)
Advertising			(23,175	)			(12,531	)			(10,699	)
Total operating expenses			(623,058	)			(441,922	)			(442,721	)
Operating income			10,633				34,490				28,779
Bargain purchase			15,681				—				—
Loss on debt extinguishment			(1,041	)			(6,770	)			(2,228	)
Interest expense, net			(61,231	)			(48,028	)			(43,711	)
Loss before income taxes			(35,958	)			(20,308	)			(17,160	)
Income tax benefit (expense)			9,004				(5,385	)			6,316
Net loss		$	(26,954	)		$	(25,693	)		$	(10,844	)

See notes to consolidated financial statements.

TOPS HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ (DEFICIT) EQUITY

(Dollars in thousands, except share amounts)

										Additional				Retained				Accumulated
										Paid-In				Earnings				Other				Total
		Common Stock								(Deficit)				(Accumulated				Comprehensive				Shareholders’
		Shares				Amount				Capital				Deficit)				(Loss) Income				(Deficit) Equity
Balance at December 30, 2007			100,000			$	—			$	100,000			$	984			$	(403	)		$	100,581
Net loss			—				—				—				(10,844	)			—				(10,844	)
Change in fair value of interest rate swap through November 16, 2008, net of tax benefit of $1,796			—				—				—				—				(2,740	)			(2,740	)
Reclassification adjustment on interest rate swap, net of tax expense of $200			—				—				—				—				305				305
Retirement obligations adjustments, net of tax benefit of $69			—				—				—				—				(105	)			(105	)
Comprehensive loss			—				—				—				—				—				(13,384	)
Stock-based compensation			—				—				532				—				—				532
Balance at December 27, 2008			100,000				—				100,532				(9,860	)			(2,943	)			87,729
Net loss			—				—				—				(25,693	)			—				(25,693	)
Reclassification adjustment on interest rate swap, net of tax expense of $1,861			—				—				—				—				2,838				2,838
Retirement obligations adjustments, net of tax expense of $157			—				—				—				—				240				240
Comprehensive loss			—				—				—				—				—				(22,615	)
Dividend			—				—				(105,000	)			—				—				(105,000	)
Stock-based compensation			—				—				1,085				—				—				1,085
Balance at January 2, 2010			100,000				—				(3,383	)			(35,553	)			135				(38,801	)
Net loss			—				—				—				(26,954	)			—				(26,954	)
Retirement obligations adjustments			—				—				—				—				(471	)			(471	)
Comprehensive loss			—				—				—				—				—				(27,425	)
Issuance of common stock			44,776				—				30,000				—				—				30,000
Dividend			—				—				(30,000	)			—				—				(30,000	)
Stock-based compensation			—				—				715				—				—				715
Balance at January 1, 2011			144,776			$	—			$	(2,668	)		$	(62,507	)		$	(336	)		$	(65,511	)

See notes to consolidated financial statements.

TOPS HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

		Fiscal 2010				Fiscal 2009				Fiscal 2008
		(52 weeks)				(53 weeks)				(52 weeks)
Cash flows provided by operating activities:
Net loss		$	(26,954	)		$	(25,693	)		$	(10,844	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			77,315				65,285				55,530
Bargain purchase			(15,681	)			—				—
Deferred income taxes			(9,199	)			5,351				(6,968	)
Amortization of deferred financing costs			2,367				1,304				1,247
LIFO inventory valuation adjustment			2,055				249				6,938
Loss on debt extinguishment			1,041				6,770				2,228
Stock-based compensation expense			715				1,085				532
Interest rate swap settlement			—				5,613				—
Interest rate swap interest paid			—				3,146				—
Impact of interest rate swap on deferred tax assets			—				2,070				—
Change in fair value of interest rate swap			—				(1,256	)			1,666
Gain on legal settlement			—				—				(2,100	)
Other			988				860				151
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable			(7,382	)			(9,411	)			6,552
(Increase) decrease in inventories			(6,239	)			(594	)			1,797
Decrease (increase) in prepaid expenses and other current assets			1,796				(4,517	)			1,520
Decrease (increase) in income taxes refundable			560				(760	)			—
Increase in accounts payable			24,267				13,482				3,092
Increase in accrued expenses and other current liabilities			917				3,733				16,182
Increase in other long-term liabilities			2,892				96				3,544
Net cash provided by operating activities			49,458				66,813				81,067
Cash flows used in investing activities:
Acquisition of Penn Traffic assets (Note 2)			(85,023	)			—				—
Cash paid for property and equipment			(49,663	)			(28,080	)			(35,298	)
Proceeds from sale of assets			20,753				—				—
Interest rate swap settlement			—				(5,613	)			—
Interest rate swap interest paid			—				(3,146	)			—
Purchase of Member’s interest in Tops Markets, LLC, net of cash acquired			—				—				(20,639	)
Other			—				146				(300	)
Net cash used in investing activities			(113,933	)			(36,693	)			(56,237	)
Cash flows provided by (used in) financing activities:
Proceeds from long-term debt borrowings			112,125				270,474				35,000
Repayments of long-term debt borrowings			(36,377	)			(200,936	)			(48,633	)
Proceeds from issuance of common stock			30,000				—				—
Dividend to shareholders			(30,000	)			(105,000	)			—
Borrowings on ABL Facility			348,737				76,600				—
Repayments on ABL Facility			(347,737	)			(62,600	)			—
Deferred financing costs incurred			(5,769	)			(12,011	)			(4,871	)
Principal payments on capital leases			(9,294	)			(7,287	)			(6,434	)
Change in bank overdraft position			487				43				(3,499	)
Net cash provided by (used in) financing activities			62,172				(40,717	)			(28,437	)
Net decrease in cash and cash equivalents			(2,303	)			(10,597	)			(3,607	)
Cash and cash equivalents-beginning of period			19,722				30,319				33,926
Cash and cash equivalents-end of period		$	17,419			$	19,722			$	30,319

See notes to consolidated financial statements.

TOPS HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Tops Holding Corporation (“Holding” or “Company”), formerly known as Hank Holding Corporation, is the parent of Tops Markets, LLC (“Tops” or “Tops Markets”). Holding was incorporated on October 5, 2007 and commenced operations on December 1, 2007. Holding is owned by various funds affiliated with Morgan Stanley Private Equity, an affiliate of Morgan Stanley (“Morgan Stanley”), HSBC Private Equity Partners (“HSBC”), two minority investors and a company employee. Holding has no other business operations as its sole purpose is the ownership of Tops Markets. Tops operates as a food retailer in Upstate New York and Northern Pennsylvania under the banner Tops.

On January 29, 2010, the Company completed the acquisition (the “Acquisition”) of substantially all assets and certain liabilities of The Penn Traffic Company (“Penn Traffic”) and its subsidiaries, including Penn Traffic’s 79 retail supermarkets, in exchange for cash consideration of $85.0 million. As of March 31, 2011, the Company has retained 55 supermarkets. These supermarkets currently operate under the banners of Tops, P&C and Quality Markets in Upstate New York and Northern Pennsylvania. In August 2010, the Federal Trade Commission (“FTC”) issued a Proposed Order that would require Tops to sell seven of these retained supermarkets. The Proposed Order was subject to public comment until September 7, 2010. The Company is awaiting the approval of a Final Order by the FTC. The remaining 24 supermarkets have been closed, sold or liquidated. As of January 1, 2011, the Company operated 127 corporate retail supermarkets with an additional 5 franchise supermarkets.

Fiscal Year

The Company operates on a 52/53 week fiscal year ending on the Saturday closest to December 31. The Company’s fiscal years include 13 four-week reporting periods, with an additional week in the thirteenth reporting period for 53-week fiscal years. The Company’s first quarter of each fiscal year includes four reporting periods, while the remaining quarters include three reporting periods. The period from January 3, 2010 to January 1, 2011 (“Fiscal 2010”) includes 52 weeks. The period from December 28, 2008 to January 2, 2010 (“Fiscal 2009”) includes 53 weeks. The period from December 30, 2007 to December 27, 2008 (“Fiscal 2008”) includes 52 weeks.

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with GAAP. The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All intercompany transactions have been eliminated.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and notes thereto. The most significant estimates used by management are related to the accounting for vendor allowances, valuation of long-lived assets including intangible assets, acquisition accounting, lease classification, self-insurance reserves, inventory valuation, and income taxes. Actual results could differ from these estimates.

Consolidated Statements of Cash Flows Supplemental Disclosures