-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L7Dlk8Zx/PaalmRRULsmgOe8v0LDBn/fY8rMYlssKZqmrj/KsOzDs/WDEhyoJ3cD kAAS5FIQsQZj486qgoKdbQ== 0000912057-97-015060.txt : 19970502 0000912057-97-015060.hdr.sgml : 19970502 ACCESSION NUMBER: 0000912057-97-015060 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970201 FILED AS OF DATE: 19970501 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENN TRAFFIC CO CENTRAL INDEX KEY: 0000077155 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 250716800 STATE OF INCORPORATION: PA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09930 FILM NUMBER: 97592959 BUSINESS ADDRESS: STREET 1: 1200 STATE FAIR BLVD CITY: SRYACUSE STATE: NY ZIP: 13221-4737 BUSINESS PHONE: 8145369900 MAIL ADDRESS: STREET 1: 1200 STATE FAIR BLVD CITY: SYRACUSE STATE: NY ZIP: 13221-4737 10-K405 1 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 1, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from___________to___________ Commission file number 1-9930 THE PENN TRAFFIC COMPANY (Exact name of Registrant as specified in its charter) DELAWARE 25-0716800 -------------------------------- -------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1200 State Fair Boulevard, Syracuse, New York 13221-4737 ----------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (315) 453-7284 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------------------ ---------------------- Common Stock, $1.25 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE 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 ninety (90) days. YES X NO 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. [ X ] The aggregate market value of voting stock held by non-affiliates of the Registrant was $54,230,614 as of April 24, 1997. Common Stock $1.25 par value Shares outstanding--10,867,941 as of April 24, 1997 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement dated May 1, 1997 provided to Registrant's stockholders in connection with the annual meeting of stockholders scheduled for June 3, 1997 are incorporated by reference in Part III of this Form 10-K. FORM 10-K INDEX
- ----------------------------------------------------------------------------------------------- PART I PAGE - ----------------------------------------------------------------------------------------------- Item 1. Business 3 Item 2. Properties 13 Item 3. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Supplemental Item. Executive Officers of Registrant 14 - ----------------------------------------------------------------------------------------------- PART II - ----------------------------------------------------------------------------------------------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 17 Item 6. Selected Financial Data 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 8. Financial Statements and Supplementary Data 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18 - ----------------------------------------------------------------------------------------------- PART III - ----------------------------------------------------------------------------------------------- Item 10. Directors and Executive Officers of Registrant 58 Item 11. Executive Compensation 58 Item 12. Security Ownership of Certain Beneficial Owners and Management 58 Item 13. Certain Relationships and Related Transactions 58 - ----------------------------------------------------------------------------------------------- PART IV - ----------------------------------------------------------------------------------------------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 59
2 PART I ITEM 1. BUSINESS (AS OF FEBRUARY 1, 1997 UNLESS OTHERWISE NOTED) GENERAL The Penn Traffic Company ("Penn Traffic" or the "Company") is one of the leading food retailers in the eastern United States. Penn Traffic operates 265 supermarkets in Pennsylvania, upstate New York, Ohio and northern West Virginia under the names "Big Bear" and "Big Bear Plus" (78 stores), "Bi-Lo Foods" (40 stores), "Insalaco's" (29 stores), "P&C" (66 "P&C" stores and one "Big M" store), "Quality Markets" (42 stores) and "Riverside" (9 stores). Penn Traffic also operates a wholesale food distribution business which serves 114 licensed franchisees and 99 independent operators. Total revenues for the fiscal year ended February 1, 1997 ("Fiscal 1997") aggregated approximately $3.3 billion. Approximately 65% of Penn Traffic's retail supermarket revenues are in smaller communities where Penn Traffic believes it virtually always holds the number one or number two market position. The balance of Penn Traffic's retail supermarket revenues are in Columbus, Ohio, Buffalo and Syracuse, New York and Scranton/Wilkes-Barre, Pennsylvania. Penn Traffic's retail and wholesale operations stretch from Ohio to upstate New York. The Company operates in communities with diverse economies based primarily on manufacturing, natural resources, retailing, health care services, education and government services. No supermarket company competes against Penn Traffic supermarkets representing 25% or more of the Company's retail supermarket revenues, with the exception of The Kroger Co. and Wegmans Food Markets, Inc., which compete against supermarkets representing approximately 35% and 25% of Penn Traffic's retail supermarket revenues, respectively. In addition, Penn Traffic operates a full-service dairy business in Johnstown, Pennsylvania under the name "Sani-Dairy" and a bakery business in Syracuse, New York under the name "Penny Curtiss". Penn Traffic pursues a capital program that seeks to match store size and format to local demographics and competitive conditions. During the five fiscal years ended February 1, 1997, Penn Traffic opened or remodeled approximately 60% of its retail supermarket square footage. These larger, more modern facilities strengthen Penn Traffic's competitive position and enable it to offer its customers a broader variety of specialty departments, including pharmacies, bakeries, delicatessens, floral products, greeting cards and other general merchandise. The principal executive offices of Penn Traffic are located at 1200 State Fair Boulevard, Syracuse, New York 13221-4737. The Company's telephone number is (315) 453-7284. 3 Certain statements included in this Part I, Item 1, "Business", and elsewhere in this Annual Report on Form 10-K which are not statements of historical fact are intended to be, and are hereby identified as, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Without limiting the foregoing, the words "believe", "anticipate", "plan", "expect", "estimate", "intend" and other similar expressions are intended to identify forward-looking statements. The Company cautions readers that forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; competition; the success or failure of the Company in implementing its current business strategy; changes in the Company's business strategy; availability, location and terms of sites for store development; availability, terms of development of capital; labor relations; and labor and employee benefit costs. RETAIL FOOD DISTRIBUTION BUSINESS Penn Traffic is one of the leading supermarket retailers in its primary operating areas which include New York, Pennsylvania and Ohio. Penn Traffic's supermarkets are primarily located in towns and small cities. Penn Traffic's store sizes and formats vary widely, depending upon the demographic and competitive conditions in each location. For example, "conventional" store formats are generally more appropriate in areas of low population density, while larger areas are better served by full-service supermarkets of up to 65,000 square feet, which contain numerous specialty service departments such as bakeries, delicatessens, floral departments and fresh seafood departments. Penn Traffic's "Plus" format stores range in size from 65,000 to 140,000 square feet. These full service supermarkets carry an expanded variety of nonfood merchandise. Penn Traffic's supermarkets offer a broad selection of grocery, meat, poultry, seafood, dairy, fresh produce, delicatessen, bakery and frozen food products. The stores also offer nonfood products and services such as health and beauty products, housewares, general merchandise, floral items, video rental departments and banking services. In general, Penn Traffic's larger stores carry broader selections of merchandise and feature a larger variety of service departments. Most of the Company's supermarkets are located in shopping centers. 4 Selected statistics on Penn Traffic's retail food stores are presented below.
FISCAL YEAR ENDED --------------------------------------------------------------------------------- FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 29, JANUARY 30, 1997 1996 1995 1994 1993 ----------------- ------------- ------------- ------------- ------------- (53 WEEKS)(1) Average annual revenues per store.... $ 10,598,000 $ 10,900,000 $ 11,648,000 $ 11,428,000 $ 11,441,000 Total store area in square feet...... 10,737,891 10,424,538 9,927,633 8,803,297 7,868,411 Total store selling area in square feet............................... 7,780,811 7,527,665 7,140,390 6,333,023 5,684,179 Average total square feet per store.............................. 40,520 39,338 37,182 37,945 36,260 Average square feet of selling area per store.......................... 29,362 28,406 26,743 27,298 26,194 Annual revenues per square foot of selling area....................... $ 367.52 $ 397.13 $ 423.43 $ 427.72 $ 453.00 Number of stores: Remodels/ expansions (over $100,000)......... 7 15 9 39 12 New stores opened.................... 5 11 12 12 10 Stores acquired...................... 2 2 31(2) 19(3) 29(4) Stores closed........................ 7 15 8 16 11 Size of stores (total store area): Up to 19,999 square feet............. 37 37 39 29 33 20,000--29,999 square feet...... 52 56 67 60 63 30,000--44,999 square feet...... 93 95 96 86 73 45,000--60,000 square feet...... 55 53 48 43 36 Greater than 60,000 square feet...... 28 24 17 14 12 Total stores open at fiscal year- end................................ 265 265 267 232 217
- ------------------------ (1) Average annual revenues per store and annual revenues per square foot of selling area are calculated on a 52-week basis. (2) Includes the addition of 30 of the 45 former Acme stores acquired by the Company in January 1995 which the Company initially expected to operate. (3) Includes the addition of 12 Insalaco's stores acquired by the Company in September 1993 which the Company initially operated. (4) Includes the addition of 23 stores acquired from the Peter J. Schmitt Co., Inc. in January 1993 which the Company initially operated. 5 WHOLESALE FOOD DISTRIBUTION BUSINESS Penn Traffic licenses the use of its "Riverside", "Bi-Lo Foods" and "Big M" names to 114 independently-owned supermarkets that are required to maintain certain quality and other standards and 99 independent operators. The majority of these independent stores use Penn Traffic as their primary wholesaler and also receive advertising, accounting, merchandising, consulting and retail counseling services from Penn Traffic. Penn Traffic receives rent from 63 of the licensed independent operators which lease or sublease the supermarket buildings. In Fiscal 1997, Penn Traffic's wholesale operations accounted for $401.9 million or 12.2% of total revenues. The incremental volume provided by wholesale operations enhances Penn Traffic's purchasing power and the efficiency of its distribution system. At February 1, 1997, Penn Traffic had guaranteed obligations of $0.5 million of indebtedness of certain of such licensed independent operators. FOOD PROCESSING OPERATIONS The Company owns and operates Johnstown Sanitary Dairy ("Sani-Dairy"), a dairy processing plant in Johnstown, Pennsylvania, which is one of the largest dairies in Pennsylvania. Sani-Dairy sells its products to certain Penn Traffic-owned and licensed supermarkets and to other retail outlets located in Pennsylvania and adjoining states. Penn Traffic owns and operates Penny Curtiss Bakery ("Penny Curtiss"), a bakery processing plant in Syracuse, New York. This operation primarily supplies certain of the Company's stores and its affiliated accounts with private label fresh and frozen bakery products. In addition, Penny Curtiss supplies several other companies unrelated to Penn Traffic with bakery products. MASS MERCHANDISING BUSINESS During the second quarter of Fiscal 1996, Penn Traffic decided to close 11 of its 15 remaining stand-alone general merchandise stores (Harts) in Ohio. During Fiscal 1997, one of the four remaining Harts stores was converted to a Big Bear Plus store. The other three former Harts stores are now operated under the Company's "Plus" trade name. 6 PURCHASING AND DISTRIBUTION Penn Traffic is a large volume purchaser of products. Penn Traffic's purchases are of sufficient volume to qualify for minimum price brackets for most items. Penn Traffic purchases brand name grocery merchandise directly from national manufacturers. The Company purchases private label products and certain other grocery items from TOPCO Associates, Inc., a national products purchasing cooperative comprising 30 regional supermarket chains. In Fiscal 1997, purchases from TOPCO Associates accounted for approximately 17% of product purchases. Penn Traffic's principal Pennsylvania distribution facilities are a Company-owned 390,000-square foot distribution center in DuBois, Pennsylvania and a Company-owned 248,000-square foot distribution center in Scranton, Pennsylvania. Penn Traffic also operates 196,000-square foot and 86,000-square foot distribution centers for perishable products in DuBois and Scranton, Pennsylvania, respectively. In addition, Penn Traffic leases a 70,000-square foot warehouse in DuBois, Pennsylvania, in which Penn Traffic houses grocery products, certain store supplies and aerosol products. The principal New York distribution facilities are a Company-owned 498,000-square foot distribution center in Syracuse, New York and a Company-owned 267,000-square foot distribution center in Jamestown, New York. The Company also owns a 217,000-square foot distribution center for perishable products in Syracuse, New York. The primary Ohio distribution center is a leased 484,000-square foot dry grocery facility in Columbus, Ohio. Penn Traffic also owns a 208,000-square foot distribution facility for perishable goods in Columbus, Ohio. The Company also leases three additional warehouses totaling 603,000-square feet, in Columbus, Ohio for distribution of general merchandise and health and beauty care items to all Penn Traffic stores. Approximately 75% of the merchandise offered in Penn Traffic's retail stores is distributed from its warehouses by its fleet of 343 tractors, 439 refrigerated trailers and 520 dry trailers. Merchandise not delivered from Penn Traffic's warehouses is delivered directly to the stores by manufacturers, distributors, vendor drivers and sales representatives for such products as beverages, snack foods and bakery items. 7 COMPETITION The food retailing business is highly competitive and may be affected by general economic conditions. The number of competitors and the degree of competition experienced by Penn Traffic's supermarkets vary by location. Penn Traffic competes with several multi-regional, regional and local supermarket chains, convenience stores, stores owned and operated and otherwise affiliated with large food wholesalers, unaffiliated independent food stores, warehouse clubs, discount drug store chains, discount general merchandise chains and "supercenters" (combination supermarket and general merchandise stores). No supermarket company competes against Penn Traffic supermarkets representing 25% or more of the Company's retail supermarket revenues, with the exception of The Kroger Co. and Wegmans Food Markets, Inc., which compete against supermarkets representing approximately 35% and 25% of Penn Traffic's retail supermarket revenues, respectively. 8 EMPLOYEES Labor costs and their impact on product prices are important competitive factors in the supermarket industry. At February 1, 1997, Penn Traffic had approximately 25,500 hourly employees and 1,800 salaried employees. Approximately 55% of Penn Traffic's hourly employees belong to the United Food and Commercial Workers Union. An additional 6% of Penn Traffic's hourly employees (principally employed in the distribution function and in the Company's dairy and bakery plants) belong to five other unions. The Company competes with certain independently-owned and chain-owned supermarkets, discount drug stores, warehouse clubs, general merchandise stores, convenience stores and supercenters, whose employees are not union affiliated. The Company experienced a work stoppage at its Sani-Dairy division from August 1, 1996 through September 22, 1996 affecting approximately 200 employees. On September 16, 1996, a new five-year contract covering these employees was ratified. While management believes that the Company's relations with its employees are good, a prolonged labor dispute could have an adverse effect on the Company. GOVERNMENT REGULATION The United States Department of Agriculture and the Pennsylvania Milk Marketing Board each regulate and inspect all aspects of fluid milk and dairy product production, enforcing strict standards of sanitation, product composition, packaging and labeling, as well as regulating milk and dairy product pricing. All dairy goods producers and distributors must comply with substantially similar standards. Compliance by Penn Traffic with these standards has not had and is not expected to have a significant effect on its earnings or competitive position. SEASONALITY, CUSTOMERS AND SUPPLIERS The supermarket business of Penn Traffic is generally not seasonal in nature. During the past three fiscal years, no single customer or group of customers under common control accounted for 10% or more of Penn Traffic's consolidated revenues. Groceries, general merchandise and raw materials are available from many different sources. During the past three fiscal years, no single supplier accounted for 10% or more of Penn Traffic's cost of sales except TOPCO Associates, Inc. which accounted for approximately 17% of product purchases in Fiscal 1997. 9 HISTORY Penn Traffic is the successor to a retail business which dates back to 1854. Penn Traffic, then a publicly held corporation, was acquired in March 1987 by Riverside Acquisition Company, Limited Partnership ("RAC"), a Delaware limited partnership and an affiliate of Miller Tabak Hirsch + Co. ("MTH"). At the time of the acquisition, Penn Traffic was the largest retail and wholesale food distribution company in its principal operating area, comprising 19 counties in central and northwestern Pennsylvania and southwestern New York. In 1988, Penn Traffic again became a publicly held corporation and stated that it intended to acquire retail and wholesale food distribution companies contiguous to its operating area. In August 1988, Penn Traffic acquired P&C Food Markets, Inc. ("P&C"), which operates in a contiguous market to the east of Penn Traffic's historical marketplace. In October 1991, P&C became a wholly-owned subsidiary of the Company, and in April 1993, P&C was merged into the Company. P&C currently operates as a division of the Company. P&C is headquartered in Syracuse, New York and operates 66 "P&C" stores and one "Big M" store, franchises 64 "Big M" stores and provides wholesaling services to 70 independent supermarkets. In April 1989, Penn Traffic acquired Big Bear Stores Company ("Big Bear"), a leading food retailer in Columbus and eastern Ohio, which is to the west of Penn Traffic's traditional market area. In April 1993, Big Bear was merged into the Company. Big Bear currently operates as a division of the Company. Big Bear is headquartered in Columbus, Ohio and operates 78 retail supermarkets under the names "Big Bear" and "Big Bear Plus". In January 1993, Penn Traffic acquired 28 supermarkets located in western New York and northwestern Pennsylvania from Peter J. Schmitt Co., Inc. Seventeen of the stores are currently being operated by Penn Traffic. In September 1993, Penn Traffic acquired the operating assets of Insalaco Supermarkets, Inc. ("Insalaco's"), which consisted of 12 supermarkets in northeastern Pennsylvania. In January 1995, Penn Traffic acquired 45 supermarkets owned by American Stores Company which had operated under the Acme trade name. Eighteen of these acquired stores have been closed or sold. The Company is operating the remaining 27 stores under the Bi-Lo Foods, Insalaco's and P&C trade names. 10 RELATIONSHIP WITH GRAND UNION In April 1989, Penn Traffic acquired an indirect ownership interest in the common stock of the parent company of The Grand Union Company ("Grand Union"), which is engaged in the food retailing business. As of February 2, 1991, Penn Traffic had recorded losses which reduced the carrying value of its investment to zero. Penn Traffic's equity interest in Grand Union's parent company became worthless as the result of Grand Union's filing of a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in January 1995. In July 1990, P&C (then a subsidiary and now a division of Penn Traffic) and Grand Union entered into an operating agreement (the "New England Operating Agreement") whereby Grand Union acquired the right to operate 13 P&C stores located in New England under the Grand Union name until July 2000. Pursuant to the New England Operating Agreement, Grand Union agreed to pay Penn Traffic (as the successor to P&C, which was merged into the Company in April 1993) a minimum annual fee averaging $10.7 million per year during the 10-year term and, beginning with the year commencing July 31, 1992, to pay Penn Traffic additional contingent fees of up to $700,000 per year based upon sales performance of the stores operated by Grand Union. Pursuant to the terms of the New England Operating Agreement, a $15 million prepayment of the operating fee was made by Grand Union to Penn Traffic in July 1992. This prepayment reduced the future payments that Grand Union will make to Penn Traffic pursuant to the terms of the New England Operating Agreement by approximately $3.2 million per year. At the expiration of the 10-year term of the New England Operating Agreement, Grand Union has the right to extend the term of the New England Operating Agreement for an additional five years. In the event of such extension of the lease term, Grand Union will pay to Penn Traffic an annual fee of $13.6 million in the first year of the extended term, $14.0 million in the second year, $14.4 million in the third year, $14.9 million in the fourth year and $15.3 million in the fifth year, plus contingent fees based upon the sales performance of the stores of up to $700,000 in each year. 11 Penn Traffic also granted Grand Union an option (the "Purchase Option") to purchase the stores operated by Grand Union under the New England Operating Agreement. Grand Union paid Penn Traffic $7.5 million for the Purchase Option, which provides that (i) prior to July 30, 1998, Grand Union may purchase the stores operated under the New England Operating Agreement from Penn Traffic for a purchase price equal to $95 million and (ii) from July 30, 1998 and until the expiration of the term (or the extended term) of the New England Operating Agreement, Grand Union may purchase the stores operated under the New England Operating Agreement from Penn Traffic for a purchase price equal to the greater of $55 million or the amount produced under a formula based upon the stores' cash flow, provided that the purchase price shall not exceed $95 million. If Grand Union does not extend the initial term of the New England Operating Agreement at its expiration in July 2000, or does not exercise the Purchase Option prior to the expiration of the term (or the extended term), or in the event of a default by Grand Union in the performance of its obligations pursuant to the New England Operating Agreement, the stores operated by Grand Union pursuant to the New England Operating Agreement will be returned to operation by Penn Traffic. 12 ITEM 2. PROPERTIES Penn Traffic follows the general industry practice of leasing the majority of its retail supermarket locations. Penn Traffic presently owns 43 and leases 222 of the supermarkets that it operates. The owned supermarkets range in size from 4,300 to 123,000-square feet. The leased supermarkets range in size from 8,100 to 140,000-square feet and are held under leases expiring from 1997 to 2016, excluding option periods. Penn Traffic also owns one supermarket and leases 62 supermarkets which are leased or subleased to independent operators. Penn Traffic also owns 10 shopping centers, eight of which contain one of the Company-owned or licensed supermarkets. Penn Traffic also operates major distribution centers in DuBois and Scranton, Pennsylvania; Syracuse and Jamestown, New York; and Columbus, Ohio; a dairy plant in Johnstown, Pennsylvania; and a bakery plant in Syracuse, New York. Penn Traffic also owns a fleet of trucks and trailers, fixtures and equipment utilized in its business and other miscellaneous real estate. Penn Traffic believes that all of its properties, fixtures and equipment are well maintained and in good condition. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are involved in several lawsuits, claims and inquiries, most of which are routine to the nature of the business. Estimates of future liability are based on an evaluation of currently available facts regarding each matter. Liabilities are recorded when it is probable that costs will be incurred and can be reasonably estimated. Based on management's evaluation, the resolution of these matters will not materially affect the financial position, results of operations or liquidity of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended February 1, 1997. 13 SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF REGISTRANT Certain information regarding the executive officers of Penn Traffic is set forth as follows:
NAME AGE POSITION WITH PENN TRAFFIC - ----------------------------------------------------- --- ----------------------------------------------------- Gary D. Hirsch 47 Chairman and Director Martin A. Fox 43 Director, Vice Chairman--Finance and Assistant Secretary Phillip E. Hawkins 45 Director, President and Chief Executive Officer Stephen V. Breech 55 Senior Vice President and President of Big Bear Division Nick Campbell 38 Senior Vice President--Marketing Roy M. Flood 56 Senior Vice President and President of P&C Foods Division Eugene R. Sunderhaft 49 Senior Vice President--Finance and Secretary (Chief Financial Officer) David A. Adamsen 45 Vice President--Manufacturing Larry B. Ammons 45 Vice President and President of Riverside Markets Division Michael T. Del Viscio 48 Vice President--Nonfood Merchandising Bradley W. Melvin 47 Vice President--Operations Support Francis D. Price, Jr. 47 Vice President, General Counsel and Assistant Secretary Randall J. Sweeney 45 Vice President and General Manager of Quality Markets Division H. Phillip Williams 48 Vice President, Construction and Engineering
Each of the executive officers is a citizen of the United States. 14 Mr. Hirsch has been a Director and Chairman of Penn Traffic since 1987. Mr. Hirsch has been a general partner and the managing partner of MTH (broker-dealer) since March 1982 and a Managing Director of MTH Holdings, Inc. ("MTH Holdings") since November 1983. He is Chairman, President and a Director of RAC Partners, Inc. ("RAC Partners"), the sole general partner of Riverside Acquisition Company, Limited Partnership ("RAC"). Mr. Hirsch was Chairman and a Director of Grand Union Holdings Corporation ("Grand Union Holdings") (food distribution holding company) between 1989 and March 1996 and of certain of its subsidiaries for certain periods between 1992 and March 1996. Mr. Fox has been Director and Vice Chairman--Finance since February 1993. Mr. Fox was a Vice President of the Company from 1989 until February 1993. Mr. Fox has been Assistant Secretary of Penn Traffic since 1989. Mr. Fox has been Executive Vice President of MTH since 1988. Mr. Fox was a Vice President of Grand Union Holdings between 1989 and March 1996, a Director of Grand Union Holdings between 1992 and March 1996 and a Director and Vice President of certain of its subsidiaries for certain periods between 1989 and March 1996. Mr. Hawkins has been a Director and the President and Chief Executive Officer of the Company since April 1, 1997. Prior to joining Penn Traffic, Mr. Hawkins spent twenty-nine years at Vons Companies, where he held various management positions including Senior Vice President, Stores (from 1994 until March 1997), Group Vice President, Perishables (from 1992 until 1994), Vice President and General Manager, Pavilions Operations (from 1991 until 1992), and Vice President, Sales and Marketing (from 1989 until 1991). Mr. Breech has been Senior Vice President of Penn Traffic and President of the Big Bear division since September 1995. Mr. Breech was Senior Vice President of Store Operations of Big Bear until September 1995. He was Vice President of Construction and Real Estate of Big Bear from 1989 until 1995. Mr. Breech served in various other positions at Big Bear between 1958 and 1989. Mr. Campbell has been Senior Vice President of Marketing of Penn Traffic since April 15, 1997. Mr. Campbell was Vice President of Sales and Merchandising of the P&C division from 1995 until April 1997. Mr. Campbell served in various other positions at Big Bear between 1976 and 1995. Mr. Flood has been Senior Vice President of Penn Traffic and President of the P&C division since January 1995. Mr. Flood was Executive Vice President of Merchandising of the Big Bear division from 1990 until January 1995. He was Vice President of Sales and Merchandising of P&C from 1986 until 1990 and served in various other positions at P&C between 1977 and 1986. Mr. Sunderhaft has been Senior Vice President--Finance of Penn Traffic since January 1995 and has been Chief Financial Officer and Secretary of Penn Traffic since May 1993. Mr. Sunderhaft had been a Vice President of Penn Traffic from May 1993 until January 1995 and was Treasurer of Penn Traffic from May 1993 until April 1995. He became Vice President -Finance and Chief Financial Officer of the P&C division in 1989 and served in various other positions at P&C between 1972 and 1989. Mr. Adamsen has been Vice President of Manufacturing of Penn Traffic since September 1994 and President of Penny Curtiss since 1986. Mr. Adamsen served in various other positions at Penny Curtiss between 1974 and 1986. 15 Mr. Ammons has been Vice President of Penn Traffic and President of the Riverside division since April 1996. Mr. Ammons was Executive Vice President of Riverside from 1990 until April 1996. Mr. Ammons served in various other positions at Penn Traffic divisions between 1966 and 1990. Mr. Del Viscio has been Vice President of Nonfood Merchandising of Penn Traffic since July 1995. Mr. Del Viscio was Senior Vice President of General Merchandise for Montgomery Ward from September 1994 until July 1995. From June 1991 until September 1994, Mr. Del Viscio was Senior Vice President and General Merchandise Manager for Hess Department Stores. Mr. Melvin has been Vice President--Operations Support since April 21, 1997. Mr. Melvin was Director of Operations Support of Vons Companies from 1992 until April 1997. Mr. Melvin served in various other positions at Vons between 1970 and 1992. Mr. Price has been Vice President and General Counsel and Assistant Secretary of Penn Traffic since February 1993. He was Vice President and General Counsel of the P&C division from 1985 until April 1993 and Secretary of P&C from 1991 until April 1993. Mr. Price served in various other positions at P&C between 1978 and 1985. Mr. Sweeney has been Vice President of Penn Traffic since January 1995 and General Manager of the Quality Markets division since 1993. Mr. Sweeney served in various other positions at Quality between 1974 and 1993. Mr. Williams has been Vice President, Construction and Engineering of Penn Traffic since April 1996. He was Vice President, Construction and Engineering of the Big Bear division from October 1995 until April 1996. Mr. Williams served in various other positions at Big Bear between 1970 and 1995. In January 1995, Grand Union filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court, District of Delaware (the "Bankruptcy Court"). Grand Union emerged from Chapter 11 reorganization in June 1995. In February 1995, an involuntary Chapter 11 petition was filed in the Bankruptcy Court against Grand Union Capital Corporation ("Grand Union Capital"), of which Grand Union was a wholly-owned subsidiary. Grand Union Capital consented to the entry of an order for relief on the involuntary Chapter 11 petition and, in February 1995, Grand Union Holdings filed a voluntary Chapter 11 petition in the Bankruptcy Court. Grand Union Capital's and Grand Union Holdings' Bankruptcy Court proceedings were completed in March 1996. Following completion of these proceedings, Grand Union Capital and Grand Union Holdings were dissolved. At the time the Chapter 11 petitions were filed, Messrs. Hirsch and Fox were directors and executive officers of Grand Union, Grand Union Capital and Grand Union Holdings. Messrs. Hirsch and Fox resigned as directors and officers of Grand Union in June 1995, and ceased to be directors and executive officers of Grand Union Capital and Grand Union Holdings upon the dissolutions of these companies in March 1996. There are no family relationships between the executive officers of Penn Traffic. The term of office of executive officers is for a one-year period beginning on the date of the annual meeting of stockholders, which is normally held in June of each year. 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Penn Traffic's common stock is listed on the New York Stock Exchange and was held by approximately 491 stockholders of record on February 1, 1997. Common stock information is provided on Page 18 of this Form 10-K. ITEM 6. SELECTED FINANCIAL DATA The comparative summary of selected financial data of Penn Traffic for the five years ended February 1, 1997 appears on Pages 19 through 21 of this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations appears on Pages 22 through 29 of this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----- Report of Independent Accountants...................................................... 30 Consolidated Financial Statements: Statement of Operations for each of the three fiscal years ended February 1, 1997...... 31 Balance Sheet as of February 1, 1997 and February 3, 1996.............................. 32 Statement of Stockholders' Equity for each of the three fiscal years ended February 1, 1997................................................................................. 34 Statement of Cash Flows for each of the three fiscal years ended February 1, 1997...... 35 Notes to Consolidated Financial Statements............................................. 37 Financial Statement Schedule for the three years ended February 1, 1997: Schedule VIII--Valuation and Qualifying Accounts....................................... 68
17 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE Quarterly Financial Data (Unaudited) Summarized below is quarterly financial data for the fiscal years ended February 1, 1997 and February 3, 1996.
FISCAL 1997 FISCAL 1996 ---------------------------------------------- ---------------------------------------------- 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH (14 WEEKS) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) Total revenues............. $ 827,658 $ 842,764 $ 811,125 $ 814,915 $ 860,028 $ 884,229 $ 844,619 $ 947,766 Gross margin............... $ 191,662 $ 194,181 $ 180,682 $ 198,556 $ 197,579 $ 198,372 $ 192,647 $ 223,405 Net (loss) income applicable to common stock (1) (2)............ $ (9,029) $ (10,149) $ (15,924) $ (6,328) $ 129 $ (51,704) $ (350) $ (27,700) Per common share data: Net (loss) income.......... $ (0.83) $ (0.93) $ (1.46) $ (0.58) $ 0.01 $ (4.76) $ (0.03) $ (2.55) No dividends on common stock were paid during Fiscal 1997 and Fiscal 1996. Other data: Depreciation and amortization................ $ 22,822 $ 22,980 $ 23,397 $ 23,506 $ 23,145 $ 22,607 $ 22,347 $ 24,380 LIFO provision (benefit)...... $ 1,000 $ 825 $ 825 $ (275) $ 858 $ 859 $ (2,389) Market value per common share: High.......................... $ 16 7/8 $ 13 3/4 $ 12 5/8 $ 5 3/8 $ 37 3/4 $ 35 1/2 $ 23 1/4 $ 17 3/8 Low........................... $ 13 $ 7 1/2 $ 4 7/8 $ 2 3/8 $ 30 1/2 $ 22 1/2 $ 11 1/8 $ 10 7/8
- ------------------------ (1) During the second quarter of Fiscal 1996, the Company recorded certain expenses totaling $65.2 million ($51.9 million net of tax benefit) associated with the closure of the stand-alone general merchandise business (Harts), a write-down of assets that the Company will no longer utilize in its business and the Company's expense reduction program. (2) As of the beginning of the fourth quarter of Fiscal 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which resulted in a noncash charge of $46.8 million ($27.7 million net of tax benefit) primarily related to the write-down of a portion of the recorded asset values (including allocable goodwill) of 18 of the Company's supermarkets. 18 CONSOLIDATED FIVE-YEAR FINANCIAL SUMMARY Set forth below is selected historical consolidated financial data of Penn Traffic for the five fiscal years ended February 1, 1997. Due to the adoption of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" during the fiscal year ended February 3, 1996 ("Fiscal 1996"), and the adoption of Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" at the beginning of the fiscal year ended January 28, 1995, comparisons of the consolidated financial results among years are not necessarily meaningful. The selected historical consolidated financial data for the five fiscal years ended February 1, 1997 are derived from the consolidated financial statements of Penn Traffic which have been audited by Price Waterhouse LLP, independent accountants. The selected historical consolidated financial data should be read in conjunction with the Penn Traffic consolidated financial statements and related notes included elsewhere herein. STATEMENT OF OPERATIONS
AS OF AND FOR THE FISCAL YEAR ENDED -------------------------------------------------------------------- FEBRUARY 3, (IN THOUSANDS OF DOLLARS, FEBRUARY 1, 1996 JANUARY 28, JANUARY 29, JANUARY 30, EXCEPT PER SHARE DATA) 1997 (53 WEEKS) 1995 1994 1993 - --------------------------------------------- ------------ ------------ ------------ ------------ ------------ Total revenues............................... $ 3,296,462 $ 3,536,642 $ 3,333,225 $ 3,171,600 $ 2,832,949 Cost of sales................................ 2,531,381 2,724,639 2,570,708 2,464,853 2,230,493 Selling and administrative expenses.......... 684,558 670,387 606,782 559,729 475,839 Unusual item (1)............................. 65,237 6,400 Write-down of long-lived assets (2).......... 46,847 ------------ --------- ---------- ---------- --------- Operating income............................. 80,523 29,532 155,735 140,618 126,617 Interest expense............................. 144,854 136,359 117,859 117,423 115,814 ------------ --------- ---------- ---------- --------- (Loss) income before income taxes, extraordinary item and cumulative effect of change in accounting principle............. (64,331) (106,827) 37,876 23,195 10,803 (Benefit) provision for income taxes......... (22,901) (27,202) 15,851 15,019 6,812 ------------ --------- ---------- ---------- --------- (Loss) income before extra-ordinary item and cumulative effect of change in accounting principle.................................. (41,430) (79,625) 22,025 8,176 3,991 Extraordinary item (net of tax benefit)(3)... (3,025) (25,843) (10,823) ------------ --------- ---------- ---------- --------- (Loss) income before cumulative effect of change in accounting principle............. (41,430) (79,625) 19,000 (17,667) (6,832) Cumulative effect of change in accounting principle (net of tax benefit) (4)......... (5,790) ------------ --------- ---------- ---------- --------- Net (loss) income............................ (41,430) (79,625) 13,210 (17,667) (6,832) Preferred dividends.......................... (159) (968) ------------ --------- ---------- ---------- --------- Net (loss) income applicable to common stock...................................... $ (41,430) $ (79,625) $ 13,210 $ (17,826) $ (7,800) ------------ --------- ---------- ---------- --------- ------------ --------- ---------- ---------- --------- 19 Per Share Data: (Loss) income before extra-ordinary item and cumulative effect of change in accounting principle (after preferred dividends)...... $ (3.81) $ (7.32) $ 1.97 $ 0.76 $ 0.37 Extraordinary item........................... (0.27) (2.45) (1.31) Cumulative effect of change in accounting principle.................................. (0.52) ------------ --------- ---------- ---------- --------- Net (loss) income (5)........................ $ (3.81) $ (7.32) $ 1.18 $ (1.69) $ (0.94) ------------ --------- ---------- ---------- --------- ------------ --------- ---------- ---------- --------- No dividends on common stock have been paid during the past five fiscal years. Balance Sheet Data: Total assets....................... $1,704,119 $1,760,146 $1,793,966 $1,632,901 $1,417,230 Total funded indebtedness.......... 1,398,991 1,341,657 1,277,276 1,166,025 1,005,136 Redeemable preferred stock......... 11,477 Stockholders' equity............... (96,755) (53,271) 32,927 14,982 (40,488) Other Data: Depreciation and amortization...... 92,705 92,479 87,811 82,869 72,787 LIFO provision (benefit)........... 2,375 (672) 2,792 103 479 Capital expenditures, including capital leases and acquisitions..................... 69,785 136,139 202,357 182,730 144,718 Cash interest expense............. 140,289 132,062 113,664 113,270 111,478
20 Footnotes: (1) During Fiscal 1996, the Company recorded an unusual item of $65.2 million, which was related primarily to the closure of its stand-alone general merchandise business (Harts), a write-down of assets that the Company will no longer utilize in its business and the Company's expense reduction program. During the fiscal year ended January 29, 1994 ("Fiscal 1994"), the Company recorded certain expenses totaling $6.4 million classified as an unusual item. This unusual item was comprised of $4.0 million related to a voluntary employee separation program at the Company's P&C division and $2.4 million related to the realignment of certain operations. (2) As of the beginning of the fourth quarter of Fiscal 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, the Company recorded a noncash charge of $46.8 million related primarily to the write-down of a portion of the recorded asset values (including allocable goodwill) of 18 of the Company's supermarkets. (3) The extraordinary items (net of income tax benefit) resulted from the early retirement of debt. (4) Effective January 30, 1994, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS 112"). SFAS 112 requires employers to recognize the obligation to provide postemployment benefits on an accrual basis if certain conditions are met. The cumulative effect of the change in accounting principle determined as of January 30, 1994 reduced net income by $5.8 million, net of a $4.1 million income tax benefit, for the 52-week period ended January 28, 1995. (5) Net (loss) income per share of common stock is based on the average number of shares and equivalents, as applicable, of common stock outstanding during each period. Fully diluted (loss) income per share is not presented for each of the periods since conversion of the Company's shares under option would be anti-dilutive or the reduction from primary (loss) income per share is less than three percent. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements included in this Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Annual Report on Form 10-K which are not statements of historical fact are intended to be, and are hereby identified as, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Without limiting the foregoing, the words "believe", "anticipate", "plan", "expect", "estimate", "intend" and other similar expressions are intended to identify forward-looking statements. The Company cautions readers that forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; competition; the success or failure of the Company in implementing its current business strategy; changes in the Company's business strategy; availability, location and terms of sites for store development; availability, terms and development of capital; labor relations; and labor and employee benefit costs. RESULTS OF OPERATIONS Fiscal Year Ended February 1, 1997 ("Fiscal 1997") Compared to Fiscal Year Ended February 3, 1996 ("Fiscal 1996") Fiscal 1997 was a 52-week year and Fiscal 1996 was a 53-week year. The following table sets forth Statement of Operations components expressed as percentages of total revenues for Fiscal 1997 and Fiscal 1996:
PERCENTAGE OF TOTAL REVENUES FISCAL YEAR -------------------- 1997 1996 --------- --------- Total revenues............................................................... 100.0% 100.0% Gross profit (1)............................................................. 23.2 23.0 Selling and administrative expenses.......................................... 20.8 19.0 Unusual item................................................................. 1.9 Write-down of long-lived assets.............................................. 1.3 Operating income............................................................. 2.4 0.8 Interest expense............................................................. 4.4 3.8 (Loss) before income taxes................................................... (2.0) (3.0)
- ------------------------ (1) Total revenues less cost of goods sold. 22 Total revenues for Fiscal 1997 decreased 6.8% to $3.30 billion (52 weeks) from $3.54 billion in Fiscal 1996 (53 weeks). Same store sales for Fiscal 1997 decreased by 3.4% from Fiscal 1996 (calculated on a comparable week basis). The decrease in total revenues was primarily the result of the closure of the stand-alone general merchandise business (Harts), a decline in same store sales, a decline in wholesale revenues and the fact that Fiscal 1997 was a 52-week year while Fiscal 1996 was a 53-week year. Fiscal 1996 revenues included $44.4 million generated by 11 of the Company's former general merchandise stores (Harts) and two former Acme stores, which were closed during Fiscal 1996. Excluding these closed stores, revenues for Fiscal 1997 decreased 5.6% from Fiscal 1996. Wholesale supermarket revenues decreased in Fiscal 1997 to $401.9 million from $429.4 million in Fiscal 1996. In Fiscal 1997, gross profit as a percentage of total revenues was 23.2% compared to 23.0% in Fiscal 1996. The increase in gross profit as a percentage of total revenues primarily resulted from the positive impact of the Company's merchandising initiatives implemented during Fiscal 1997 and the classification of certain expenses (approximately $9.7 million) as selling and administrative expenses in Fiscal 1997 which had been recorded in cost of goods sold in Fiscal 1996. These factors were partially offset by an increase in certain buying and occupancy costs as a percentage of revenues during a period of low price inflation and a decline in same store sales. Selling and administrative expenses as a percentage of total revenues increased to 20.8% for Fiscal 1997 from 19.0% in Fiscal 1996. The increase in selling and administrative expenses as a percentage of total revenues in Fiscal 1997 primarily resulted from (1) increased payroll related to the Company's repositioning program which emphasizes increased levels of customer service and enhanced perishables departments in stores, (2) an increase in fixed and semi-fixed expenses as a percentage of total revenues during a period of low price inflation and a decrease in same store sales and (3) the classification of certain expenses (approximately $9.7 million) as selling and administrative expenses in Fiscal 1997 which had been recorded in cost of goods sold in Fiscal 1996. During the second quarter of Fiscal 1996, the Company recorded certain expenses totaling $65.2 million ($51.9 million net of tax benefit) classified as an unusual item. The unusual item was related to the closure of the stand-alone general merchandise business (Harts), the write-off of equipment which the Company determined would no longer utilize in its business, costs incurred in connection with the Company's expense reduction program and an increase in the Company's closed store reserve (Note 6). 23 As of the beginning of the fourth quarter of Fiscal 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). As a result of this adoption, the Company recorded a noncash charge of $46.8 million. This charge primarily related to the write-down of a portion of the recorded asset values (including allocable goodwill) of 18 of the Company's 265 supermarkets. No assets were written down in Fiscal 1997 (Note 7). Depreciation and amortization expense of $92.7 million in Fiscal 1997 and $92.5 million in Fiscal 1996 represented 2.8% and 2.6% of total revenues, respectively. The Company experienced a work stoppage at its Sani-Dairy division from August 1, 1996 through September 22, 1996. Operating income was reduced by approximately $2.5 million for Fiscal 1997 as a result of this work stoppage. Operating income for Fiscal 1997 was $80.5 million or 2.4% of total revenues compared to $29.5 million or 0.8% of total revenues in Fiscal 1996. Excluding the effect of the unusual item and the write-down of certain impaired long-lived assets, operating income for Fiscal 1996 was $141.6 million or 4.0% of total revenues. The decrease in operating income (excluding the effect of the unusual item and the write-down of certain impaired long-lived assets in Fiscal 1996) as a percentage of total revenues in Fiscal 1997 was the result of an increase in selling and administrative expenses as a percentage of total revenues partially offset by an increase in gross profit as a percentage of total revenues. Interest expense for Fiscal 1997 and Fiscal 1996 was $144.9 million and $136.4 million, respectively. The increase in interest expense primarily resulted from the higher debt levels outstanding during Fiscal 1997. Loss before income taxes was $64.3 million for Fiscal 1997 compared to a loss of $106.8 million for Fiscal 1996. Excluding the effect of the unusual item and the write-down of certain impaired long-lived assets, income before income taxes was $5.3 million in Fiscal 1996. The reason for the increase in loss before income taxes in Fiscal 1997 (excluding the effect of the unusual item and the write-down of certain impaired long-lived assets in Fiscal 1996) was the decrease in operating income in Fiscal 1997 combined with an increase in interest expense. The income tax benefit for Fiscal 1997 was $22.9 million compared to a benefit of $27.2 million in Fiscal 1996. The income tax benefit for Fiscal 1996 included a $32.4 million benefit associated with the unusual item and the write-down of certain impaired long-lived assets. The effective tax rates vary from the statutory rates due to differences between income for financial reporting and tax reporting purposes that result primarily from the amortization of nondeductible goodwill (Note 4). 24 Fiscal Year Ended February 3, 1996 ("Fiscal 1996") Compared to Fiscal Year Ended January 28, 1995 ("Fiscal 1995") Fiscal 1996 was a 53-week year and Fiscal 1995 was a 52-week year. The following table sets forth Statement of Operations components expressed as percentages of total revenues for Fiscal 1996 and Fiscal 1995:
PERCENTAGE OF TOTAL REVENUES FISCAL YEAR -------------------- 1996 1995 --------- --------- Total revenues............................................................... 100.0% 100.0% Gross profit (1)............................................................. 23.0 22.9 Selling and administrative expenses.......................................... 19.0 18.2 Unusual item................................................................. 1.9 Write-down of long-lived assets.............................................. 1.3 Operating income............................................................. 0.8 4.7 Interest expense............................................................. 3.8 3.6 (Loss) income before income taxes, extraordinary item and cumulative effect of change in accounting principle.......................................... (3.0) 1.1
- ------------------------ (1) Total revenues less cost of goods sold. Total revenues for Fiscal 1996 increased 6.1% to $3.54 billion (53 weeks) from $3.33 billion in Fiscal 1995 (52 weeks). The change in total revenues is the result of the increase in retail supermarket sales resulting from the acquisition of 45 former Acme stores (29 of which the Company is currently operating) in January 1995 and the fact that Fiscal 1996 was a 53-week year. Wholesale revenues decreased in Fiscal 1996 to $429.4 million from Fiscal 1995 revenues of $442.6 million. Same store sales for Fiscal 1996 decreased by 1.8% from Fiscal 1995 (calculated on a comparable week basis). The Company's total revenues and same store sales results for Fiscal 1996 were adversely affected by weak consumer spending and competitive promotional activity. 25 In Fiscal 1996, gross profit as a percentage of total revenues was 23.0% compared to 22.9% in Fiscal 1995. The increase in gross profit as a percentage of total revenues resulted from a reduced LIFO provision and the relative increase in retail revenues compared to wholesale revenues, which were partially offset by the cost of the Company's response to increased competitor promotional and price initiatives. Selling and administrative expenses as a percentage of total revenues increased to 19.0% for Fiscal 1996 from 18.2% in Fiscal 1995. The increase in selling and administrative expenses as a percentage of total revenues resulted primarily from the relative increase in retail revenues compared to wholesale revenues, increased promotional expenses and increases in fixed and semi-variable expenses as a percentage of total revenues during a period with low food price inflation and a decline in same store sales. During the second quarter of Fiscal 1996, the Company recorded an unusual item (charge) of $65.2 million. This unusual item was comprised of $50.6 million related to the closure of the stand-alone general merchandise business (Harts) and $14.6 million related to the noncash write-off of certain fixed assets which the Company determined during the second quarter that it will no longer utilize in its business, costs incurred in connection with the Company's expense reduction programs and an increase in the Company's closed store reserve (Note 6). As of the beginning of the fourth quarter of Fiscal 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). As a result of this adoption, the Company recorded a noncash charge of $46.8 million. This charge primarily related to the write-down of a portion of the recorded asset values (including allocable goodwill) of 18 of the Company's 265 supermarkets. The adoption of SFAS 121 will result in reduced depreciation and amortization expense in future years (Note 7). Depreciation and amortization expense of $92.5 million in Fiscal 1996 and $87.8 million in Fiscal 1995 represented 2.6% of total revenues in both years. The increase in depreciation and amortization expense is the result of the Company's capital investment program and the acquisition of 45 former Acme stores. 26 Operating income for Fiscal 1996 was $29.5 million or 0.8% of total revenues compared to $155.7 million or 4.7% of total revenues in Fiscal 1995. Excluding the effect of the unusual item and write-down of long-lived assets, operating income for Fiscal 1996 was $141.6 million or 4.0% of total revenues, compared to $155.7 million or 4.7% of total revenues in Fiscal 1995. The decrease in operating income (excluding the effect of the unusual item and the write-down of certain impaired long-lived assets) as a percentage of total revenues in Fiscal 1996 was the result of increased selling and administrative expenses as a percentage of total revenues, partially offset by increased gross profit as a percentage of total revenues. Interest expense for Fiscal 1996 and Fiscal 1995 was $136.4 million and $117.9 million, respectively. The increase in interest expense was due to the higher debt levels outstanding during Fiscal 1996, which were the result of funding the acquisition of 45 stores from American Stores Company in January 1995 and the Company's capital investment program. Loss before income taxes, extraordinary item and the cumulative effect of change in accounting principle was $106.8 million for Fiscal 1996 compared to income of $37.9 million for Fiscal 1995. The reason for the decline is the decrease in operating income (excluding the unusual item and the write-down of certain long-lived assets), the unusual item, the write-down of certain long-lived assets and the increase in interest expense. The income tax benefit for Fiscal 1996 was $27.2 million compared to a provision of $15.9 million in Fiscal 1995. The income tax benefit for Fiscal 1996 included a $32.4 million benefit associated with the unusual item and the write-down of certain long-lived assets. The effective tax rates vary from the statutory rates due to differences between income for financial reporting and tax reporting purposes that result primarily from the amortization of nondeductible goodwill (Note 4). The extraordinary item for Fiscal 1995 was a $3.0 million charge (net of $2.0 million income tax benefit) related to the early retirement of debt. During the first quarter of Fiscal 1995, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits". The cumulative effect of this change in accounting principle was a charge of $5.8 million (net of $4.1 million income tax benefit) (Note 3). 27 LIQUIDITY AND CAPITAL RESOURCES Payments of interest and principal on the Company's approximately $1.3 billion of long-term debt (excluding capital leases) will restrict funds available to the Company to finance capital expenditures and working capital. Principal payments of long-term debt due during Fiscal 1998, 1999 and 2000 total $3.7 million, $3.0 million and $2.5 million, respectively. During Fiscal 1997, the Company's internally generated funds from operations and amounts available under the revolving credit facility described below, provided sufficient liquidity to meet the Company's operating, capital expenditure and debt service needs. The Company has a revolving credit facility (the "Revolving Credit Facility") which provides for borrowings of up to $250 million, subject to a borrowing base limitation measured by eligible inventory and accounts receivable of the Company. The Revolving Credit Facility matures in April 2000 and is secured by a pledge of the Company's inventory, accounts receivable and related assets. The interest rate on borrowings as to which the Company elects a LIBOR-based rate option is LIBOR plus 2.75%, and the interest rate on borrowings as to which the Company elects a prime-based rate option is prime plus 1.5%. As of February 1, 1997, additional availability under the Revolving Credit Facility was $108.3 million. In April 1996, the Company issued $100 million of 11.50% Senior Notes due April 15, 2006 (the "11.50% Senior Notes") in an underwritten public offering. During the first quarter of Fiscal 1997, the Company elected to use the proceeds of the issuance of the 11.50% Senior Notes to repay indebtedness then outstanding under the Revolving Credit Facility. The Company has two interest rate swap agreements outstanding, both of which expire within the next two years, that effectively convert $75 million of its fixed rate borrowings into variable rate obligations. Under the terms of these agreements, the Company makes payments at variable rates which are based on LIBOR and receives payments at fixed interest rates. The net amount paid or received is included in interest expense. For Fiscal 1997, the Company recorded $0.2 million of net interest income related to these agreements and an additional interest rate swap agreement that expired during Fiscal 1997. In October 1995, Penn Traffic's Board of Directors authorized the repurchase by the Company of up to 500,000 shares of its outstanding common stock, of which 45,200 shares were repurchased in Fiscal 1996. No shares of common stock were repurchased during Fiscal 1997. Penn Traffic's debt agreements contain limitations on the Company's ability to repurchase its common stock which currently prohibit it from repurchasing any additional shares of its common stock. 28 Cash flows to meet the Company's requirements for operating, investing and financing activities during Fiscal 1997 are reported in the Consolidated Statement of Cash Flows. During the fiscal year ended February 1, 1997, the Company's net cash used in operating activities was $1.3 million and net cash used in investing activities was $33.3 million. These amounts were financed by net cash provided by financing activities of $29.2 million and a decrease in cash of $5.3 million. During the fiscal year ended February 3, 1996, the Company's net cash used in investing activities was $121.5 million and the Company had a $12.1 million increase in cash. These amounts were financed by net cash provided by operating activities of $80.7 million and net cash provided by financing activities of $52.9 million. During the fiscal year ended January 28, 1995, the Company's net cash used in investing activities was $194.8 million. This amount was financed by net cash provided by operating activities of $56.2 million, net cash provided by financing activities of $102.6 million and a decrease in cash of $35.9 million. Working capital increased $15.2 million from February 3, 1996 to February 1, 1997. The Company is in compliance with all terms and restrictive covenants of its long-term debt agreements for the fiscal year ended and as of February 1, 1997. The Company's debt agreements provide restrictive covenants on the payment of dividends to its stockholders. As of February 1, 1997, no dividend payments to the Company's stockholders could have been made under the most restrictive of these limitations. During Fiscal 1997, the Company opened two new stores, acquired two stores, opened three replacement stores and completed seven remodels. Capital expenditures (including capitalized leases) were approximately $69.8 million for Fiscal 1997. During the fiscal year ending January 31, 1998, the Company expects to invest approximately $40 million on capital expenditures (including capital leases). Penn Traffic expects to finance such capital expenditures (including capital leases) through cash generated from operations, as well as amounts available under the Revolving Credit Facility and additional capital lease obligations. Capital expenditures will be principally for new stores, store remodels and investments in technology. 29 (Price Waterhouse LLP Letterhead) REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of The Penn Traffic Company In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The Penn Traffic Company and its subsidiaries (the "Company") at February 1, 1997 and February 3, 1996, and the results of their operations and their cash flows for each of the three years in the period ended February 1, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit 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 managements, and evaluating the overall fianncial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the consolidated financial statements, the Company changed its method for measuring the impairment of long-lived assets to adopt the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, effective October 29, 1995 and as discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for postemployment benefits to adopt the provisions of Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits, effective January 30, 1994. /s/ Price Waterhouse LLP - ------------------------- PRICE WATERHOUSE LLP Syracuse, New York March 4, 1997 30 THE PENN TRAFFIC COMPANY CONSOLIDATED STATEMENT OF OPERATIONS
52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED FEBRUARY 1, FEBRUARY 3, JANUARY 28, 1997 1996 1995 --------------- --------------- --------------- (ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Total Revenues............................................... $ 3,296,462 $ 3,536,642 $ 3,333,225 Costs and Operating Expenses: Cost of sales (including buying and occupancy cost).......... 2,531,381 2,724,639 2,570,708 Selling and administrative expenses.......................... 684,558 670,387 606,782 Unusual item (Note 6)........................................ 65,237 Write-down of long-lived assets (Note 7)..................... 46,847 --------------- --------------- --------------- Operating Income............................................. 80,523 29,532 155,735 Interest expense............................................. 144,854 136,359 117,859 --------------- --------------- --------------- (Loss) Income Before Income Taxes, Extraordinary Item and Cumulative Effect of Change in Accounting Principle........ (64,331) (106,827) 37,876 (Benefit) provision for income taxes (Note 4)................ (22,901) (27,202) 15,851 --------------- --------------- --------------- (Loss) Income Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle.......................... (41,430) (79,625) 22,025 Extraordinary item (net of tax benefit) (Note 12)............ (3,025) --------------- --------------- --------------- (Loss) Income Before Cumulative Effect of Change in Accounting Principle....................................... (41,430) (79,625) 19,000 Cumulative effect of change in accounting principle (net of tax benefit) (Note 3)...................................... (5,790) --------------- --------------- --------------- Net (Loss) Income............................................ $ (41,430) $ (79,625) $ 13,210 --------------- --------------- --------------- --------------- --------------- --------------- Per Share Data: (Loss) Income before extraordinary item and cumulative effect of change in accounting principle.......................... $ (3.81) $ (7.32) $ 1.97 Extraordinary item........................................... (0.27) Cumulative effect of change in accounting principle.......... (0.52) --------------- --------------- --------------- Net (loss) income............................................ $ (3.81) $ (7.32) $ 1.18 --------------- --------------- --------------- --------------- --------------- --------------- Average number of common shares and equivalents outstanding................................................ 10,864,916 10,870,418 11,169,337 --------------- --------------- --------------- --------------- --------------- ---------------
The accompanying notes are an integral part of these statements. 31 THE PENN TRAFFIC COMPANY CONSOLIDATED BALANCE SHEET
FEBRUARY 1, FEBRUARY 3, 1997 1996 ------------ ------------ (IN THOUSANDS OF DOLLARS) ASSETS Current Assets: Cash and short-term investments (Note 1)... $ 53,240 $ 58,585 Accounts and notes receivable (less allowance for doubtful accounts of $2,867 and $1,483, respectively)................ 71,874 83,519 Inventories (Note 1)....................... 340,009 356,309 Prepaid expenses and other current assets................................... 17,266 15,717 ------------ ---------- 482,389 514,130 ------------ ---------- Facilities Under Capital Leases (Note 5): Capital leases............................. 201,154 183,654 Less: Accumulated amortization............. (69,083) (61,125) ------------ ---------- 132,071 122,529 ------------ ---------- Fixed Assets (Note 1): Land....................................... 24,602 29,306 Buildings.................................. 204,755 195,042 Furniture and fixtures..................... 483,799 448,206 Vehicles................................... 17,775 18,262 Leaseholds and improvements................ 210,171 222,133 ------------ ---------- 941,102 912,949 Less: Accumulated depreciation............. (369,796) (310,509) ------------ ---------- 571,306 602,440 ------------ ---------- Other Assets: Goodwill, net (Note 1)..................... 422,816 431,394 Other assets and deferred charges, net..... 95,537 89,653 ------------ ---------- 518,353 521,047 ------------ ---------- Total Assets............................... $1,704,119 $ 1,760,146 ------------ ---------- ------------ ----------
The accompanying notes are an integral part of these statements. 32 THE PENN TRAFFIC COMPANY CONSOLIDATED BALANCE SHEET
FEBRUARY 1, FEBRUARY 3, 1997 1996 ------------ ------------ (IN THOUSANDS OF DOLLARS) LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of obligations under capital leases (Note 5)........................... $ 13,541 $ 11,735 Current maturities of long-term debt (Note 2)........................................ 3,736 2,728 Trade accounts and drafts payable........... 159,579 208,880 Payroll and other accrued liabilities....... 82,654 82,154 Accrued interest expense.................... 35,664 33,812 Payroll taxes and other taxes payable....... 13,476 16,880 Deferred income taxes (Note 4).............. 31,029 30,385 ------------ ------------ 339,679 386,574 ------------ ------------ Noncurrent Liabilities: Obligations under capital leases (Note 5)... 134,976 126,197 Long-term debt (Note 2)..................... 1,246,738 1,200,997 Deferred income taxes (Note 4).............. 23,876 38,789 Other noncurrent liabilities................ 55,605 60,860 ------------ ------------ 1,461,195 1,426,843 ------------ ------------ Total Liabilities........................... 1,800,874 1,813,417 ------------ ------------ Stockholders' Equity (Note 8): Preferred stock--authorized 10,000,000 shares, $1.00 par value; none issued Common stock--authorized 30,000,000 shares, $1.25 par value; 10,869,441 shares and 10,840,849 shares issued and outstanding, respectively.............................. 13,641 13,606 Capital in excess of par value.............. 180,412 180,029 Retained deficit............................ (280,668) (235,223) Minimum pension liability adjustment (Note 3)........................................ (8,730) (6,606) Unearned compensation (Note 8).............. (785) (4,452) Treasury stock, at cost (Note 8)............ (625) (625) ------------ ------------ Total Stockholders' Equity.................. (96,755) (53,271) ------------ ------------ Total Liabilities and Stockholders' Equity.................................... $1,704,119 $ 1,760,146 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these statements. 33 THE PENN TRAFFIC COMPANY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
MINIMUM CAPITAL IN PENSION TOTAL COMMON EXCESS OF RETAINED LIABILITY UNEARNED TREASURY STOCKHOLDERS' STOCK PAR VALUE DEFICIT ADJUSTMENT COMPENSATION STOCK EQUITY --------- ---------- ----------- ----------- ------------- --------- ------------ (IN THOUSANDS OF DOLLARS) January 29, 1994.................. $ 13,550 $ 179,087 $ (162,924) $ (4,963) $ (9,768) $ 14,982 Net income........................ 13,210 13,210 Exercise of 7,550 common stock option shares (Note 8).......... 9 119 128 Cancellation of 1,000 restricted stock shares (Note 8)........... (1) (41) 42 Minimum pension liability adjustment (Note 3)............. 4,607 4,607 Unearned compensation adjustment (Note 8)........................ (9) 9 --------- ---------- ----------- ----------- ------------- --------- ------------ January 28, 1995.................. 13,558 179,165 (149,681) (356) (9,759) 32,927 Net loss.......................... (79,625) (79,625) Exercise of 24,348 common stock option shares (Note 8).......... 31 271 302 Issuance of 23,500 restricted stock shares (Note 8)........... 29 849 (878) Cancellation of 9,500 restricted stock shares (Note 8)........... (12) (256) 268 Minimum pension liability adjustment (Note 3)............. (6,250) (6,250) Unearned compensation adjustment (Note 8)........................ (6,185) 6,185 Treasury stock, at cost (Note 8).............................. $ (625) (625) --------- ---------- ----------- ----------- ------------- --------- ------------ February 3, 1996.................. 13,606 180,029 (235,223) (6,606) (4,452) (625) (53,271) Net loss.......................... (41,430) (41,430) Exercise of 5,592 common stock option shares (Note 8).......... 7 63 70 Issuance of 23,500 restricted stock shares (Note 8)........... 29 323 (352) Cancellation of 500 restricted stock shares (Note 8)........... (1) (3) 4 Minimum pension liability adjustment (Note 3)............. (2,124) (2,124) Unearned compensation adjustment (Note 8)........................ (4,019) 4,019 --------- ---------- ----------- ----------- ------------- --------- ------------ February 1, 1997.................. $ 13,641 $ 180,412 $ (280,668) $ (8,730) $ (785) $ (625) $ (96,755) --------- ---------- ----------- ----------- ------------- --------- ------------ --------- ---------- ----------- ----------- ------------- --------- ------------
The accompanying notes are an integral part of these statements. 34 THE PENN TRAFFIC COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS
52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED FEBRUARY 1, FEBRUARY 3, JANUARY 28, 1997 1996 1995 --------------- --------------- --------------- (IN THOUSANDS OF DOLLARS) Operating Activities: Net (loss) income............................................ $ (41,430) $ (79,625) $ 13,210 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Cumulative effect of change in accounting principle.......... 5,790 Depreciation and amortization................................ 76,328 75,375 72,853 Amortization of intangibles.................................. 16,377 17,104 14,958 (Decrease) increase in deferred taxes........................ (12,792) (31,808) 3,902 Write-off of fixed assets.................................... 16,416 Write-off of intangible assets............................... 32,809 Write-down of long-lived assets.............................. 46,847 Other--net................................................... (9,468) (13,888) (8,147) Net change in assets and liabilities: Accounts receivable and prepaid expenses..................... 7,872 (3,894) (24,031) Inventories.................................................. 16,568 29,659 (37,513) Accounts payable and accrued expenses........................ (50,388) (6,653) 11,637 Deferred charges and other assets............................ (4,361) (1,649) 3,577 --------------- --------------- --------------- Net Cash (Used in) Provided by Operating Activities.......... (1,294) 80,693 56,236 --------------- --------------- --------------- Investing Activities: Capital expenditures......................................... (67,828) (124,963) (121,324) Proceeds from sale-and-leaseback transactions................ 22,151 Proceeds from sale of assets................................. 12,297 3,423 2,020 Acquisition of Acme stores................................... (75,500) Other--net................................................... 96 (2) --------------- --------------- --------------- Net Cash (Used in) Investing Activities...................... (33,284) (121,540) (194,806) --------------- --------------- --------------- (continued)
35
52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED FEBRUARY 1, FEBRUARY 3, JANUARY 28, 1997 1996 1995 --------------- --------------- --------------- (IN THOUSANDS OF DOLLARS) Financing Activities: Increase in long-term debt................................... 106,840 100,000 Payments to settle long-term debt............................ (3,258) (4,095) (62,384) Borrowing of revolver debt................................... 430,200 588,300 476,000 Repayment of revolver debt................................... (487,500) (520,900) (399,300) Reduction of capital lease obligations....................... (13,523) (9,889) (8,598) Payment of debt issuance costs............................... (3,596) (225) (3,224) Purchase of treasury stock................................... (625) Other--net................................................... 70 347 128 --------------- --------------- --------------- Net Cash Provided by Financing Activities.................... 29,233 52,913 102,622 --------------- --------------- --------------- (Decrease) Increase in Cash and Cash Equivalents............. (5,345) 12,066 (35,948) --------------- --------------- --------------- Cash and cash equivalents at beginning of year............... 58,585 46,519 82,467 --------------- --------------- --------------- Cash and Cash Equivalents at End of Year..................... $ 53,240 $ 58,585 $ 46,519 --------------- --------------- --------------- --------------- --------------- ---------------
The accompanying notes are an integral part of these statements. 36 THE PENN TRAFFIC COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1--Business Description and Summary of Significant Accounting Policies: The Penn Traffic Company ("Penn Traffic" or the "Company") is primarily engaged in retail and wholesale food distribution. As of February 1, 1997, the Company operated 265 supermarkets in Pennsylvania, New York, Ohio and West Virginia and supplied 114 franchise supermarkets and 99 independent wholesale accounts. The Company also operated 13 modern distribution centers with approximately 3.3 million square feet of combined space, a bakery and a dairy. Basis of Presentation All significant intercompany transactions and accounts have been eliminated in consolidation. The Company is principally involved in the distribution and retail sale of food and related products, which constitutes a single significant business segment. Certain prior year amounts have been reclassified on the Consolidated Statement of Cash Flows for comparative purposes. Fiscal Year The fiscal year of the Company ends on the Saturday nearest to January 31. Cash and Short-term Investments Short-term investments are classified as cash and are stated at cost, which approximates market value. For the purpose of the Consolidated Statement of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. INVENTORIES Inventories are valued at the lower of cost or market. The Company's inventories, representing grocery and certain general merchandise and manufactured inventories, are stated at cost using the last-in, first-out (LIFO) method of valuation. Inventories stated on the LIFO basis were $20,223,000 and $17,848,000 below replacement cost at February 1, 1997 and February 3, 1996, respectively. During Fiscal 1997 and Fiscal 1996, inventory quantities were reduced, which resulted in a liquidation of certain LIFO inventory layers carried at lower costs which prevailed in prior years. The effect for Fiscal 1997 was to decrease cost of goods sold by $745,000 and to decrease net loss by $440,000 or $0.04 per share. The effect for Fiscal 1996 was to decrease cost of goods sold by $1,474,000 and to decrease net loss by $869,000, or $.08 per share. 37 Fixed Assets and Capital Leases Major renewals and betterments are capitalized, whereas maintenance and repairs are charged to operations as incurred. Depreciation and amortization for financial accounting purposes are provided on the straight-line method. For income tax purposes, the Company principally uses accelerated methods. For financial accounting purposes, depreciation and amortization are provided over the following useful lives or lease term: Buildings ...................................... 16 to 40 years Furniture and fixtures.......................... 4 to 15 years Vehicles........................................ 3 to 8 years Leaseholds and improvements..................... 5 to 30 years Capital leases.................................. lease term
INTANGIBLES The excess of the costs over the amounts attributed to the fair value of net assets acquired (goodwill) is being amortized primarily over 40 years using the straight-line method. In addition, certain other nonfinancing costs resulting from acquisitions have been capitalized as other assets and deferred charges. For Fiscal 1997, 1996 and 1995, amortization of intangibles was $16,377,000, $17,104,000 and $14,958,000, respectively. IMPAIRMENT OF LONG-LIVED ASSETS As of the beginning of the fourth quarter of Fiscal 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, commencing with the fourth quarter of Fiscal 1996, assets are generally evaluated on a market-by-market basis in making a determination as to whether such assets are impaired. At each year-end, the Company reviews its long-lived assets (including goodwill) for impairment based on estimated future nondiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values. Previously, this evaluation was based on cash flows and assets aggregated principally by the operating divisions of the Company (Note 7). INVESTMENT IN AFFILIATED COMPANY Until March 1995, the Company had a minority interest investment in The Grand Union Company which was carried on the equity basis (Note 9). DEFERRED CHARGES Deferred charges consist of debt issuance costs, prepaid pension expense and the value of leasehold interests that were recorded in conjunction with acquisitions. These deferred charges are being amortized primarily on a straight-line basis over the life of the related debt, the remaining service lives of employees and the lives of the related leases, respectively. 38 Store Pre-opening Costs Store pre-opening costs are generally charged to expense as incurred. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INCOME TAXES Income taxes are provided based on the liability method of accounting pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end. NET INCOME (LOSS) PER SHARE Net income (loss) per share of common stock is based on the average number of shares and equivalents, as applicable, of common stock outstanding during each period. Fully diluted income (loss) per share is not presented for each of the periods since conversion of the Company's shares under option would be anti-dilutive or the reduction from primary income (loss) per share is less than three percent. 39 NOTE 2--LONG-TERM DEBT: The long-term debt of Penn Traffic consists of the obligations described below:
FEBRUARY 1, FEBRUARY 3, 1997 1996 -------------- ------------ (IN THOUSANDS OF DOLLARS) Secured Revolving Credit Facility................. $ 86,800 $ 144,100 Other Secured Debt................................ 31,434 27,385 11 1/2% Senior Notes due October 15, 2001......... 107,240 107,240 10 1/4% Senior Notes due February 15, 2002........ 125,000 125,000 8 5/8% Senior Notes due December 15, 2003........ 200,000 200,000 10 3/8% Senior Notes due October 1, 2004.......... 100,000 100,000 10.65% Senior Notes due November 1, 2004......... 100,000 100,000 11 1/2% Senior Notes due April 15, 2006........... 100,000 9 5/8% Senior Subordinated Notes due April 15, 2005........................... 400,000 400,000 ---------------- ------------- TOTAL DEBT ....................................... 1,250,474 1,203,725 Less: Amounts due within one year ............... 3,736 2,728 ---------------- ------------- TOTAL LONG-TERM DEBT ............................. $1,246,738 $1,200,997 ---------------- ------------- ---------------- -------------
Amounts maturing during each of the next five fiscal years are: $3,736,000 (Fiscal 1998), $2,962,000 (Fiscal 1999), $2,512,000 (Fiscal 2000), $94,309,000 (includes $86,800,000 outstanding as of February 1, 1997 under the Company's secured revolving credit facility which matures in April 2000)(Fiscal 2001), and $108,078,000 (Fiscal 2002). The Company incurred interest expense of $144,854,000, $136,359,000 and $117,859,000, including noncash amortization of deferred financing costs of $4,565,000, $4,297,000 and $4,195,000, for Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively. Interest paid amounted to $138,437,000, $128,936,000 and $111,669,000 for Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively. The estimated fair value of the Company's long-term debt, including current maturities, was $820 million at February 1, 1997 and $1.11 billion at February 3, 1996. The estimated fair value of the Company's long-term debt has been determined by the Company using market information provided by an investment banking firm as to the market value of such debt amounts. The estimated fair market value of the Company's long-term debt does not necessarily reflect the amount at which the debt would be settled. The Company's secured revolving credit facility (the "Revolving Credit Facility") provides for borrowings of up to $250 million, subject to a borrowing base limitation measured by eligible inventory and accounts receivable of the Company. The Revolving Credit Facility matures in April 2000 and is secured by a pledge of the Company's inventory, accounts receivable and related assets. Additional availability under the Revolving Credit Facility was $108.3 million at February 1, 1997. The interest rate on borrowings as to which the Company elects a LIBOR-based rate option is LIBOR plus 2.75%, and the interest rate on borrowings as to which the Company elects a prime-based rate option is prime plus 1.5%. At February 1, 1997, the weighted average rate of interest on the Revolving Credit Facility was 8.3%. 40 The 11 1/2% Senior Notes due 2001, the 10 1/4% Senior Notes due 2002, the 8 5/8% Senior Notes due 2003, the 10 3/8% Senior Notes due 2004, the 10.65% Senior Notes due 2004 and the 11 1/2% Senior Notes due 2006 (collectively, the "Senior Notes") are unsecured obligations of Penn Traffic which rank PARI PASSU with each other and with indebtedness under the Revolving Credit Facility. However, indebtedness under the Revolving Credit Facility is secured by certain assets of the Company. The 9 5/8% Senior Subordinated Notes due 2005 (the "Senior Subordinated Notes") are subordinated to all existing and future senior indebtedness. The Senior Notes, the Senior Subordinated Notes and the Revolving Credit Facility each contain certain covenants, including restrictions on incurrence of indebtedness by Penn Traffic and limitations on the payment of dividends to Penn Traffic's common stockholders. The Company is in compliance with all terms and covenants of its long-term debt agreements as of and for the fiscal year ended February 1, 1997. The Company has two interest rate swap agreements outstanding, each of which expires within the next two years, that effectively convert $75 million of its fixed rate borrowings into variable rate obligations. Under the terms of these agreements, the Company makes payments at variable rates which are based on LIBOR and receives payments at fixed interest rates. The net amount paid or received is included in interest expense. The estimated fair value of the Company's interest rate swap agreements at February 1, 1997 was a $0.4 million liability and at February 3, 1996 was a $1.2 million asset, neither of which has been recorded on the books of the Company. The estimated fair value of these interest rate agreements has been determined by the Company using market information available to the Company, based on information provided by the counterparty to each interest rate agreement. 41 NOTE 3--EMPLOYEE BENEFIT PLANS: Substantially all of the Company's employees are covered by either defined benefit plans or defined contribution plans. The following sets forth the net pension expense recognized for the defined benefit pension plans and the status of the Company's defined benefit plans:
FISCAL YEAR ENDED ------------------------------------------ FEBRUARY 1, FEBRUARY 3, JANUARY 28, 1997 1996 1995 ------------- ----------- ------------ (IN THOUSANDS OF DOLLARS) Service cost--benefits earned during the period ......................... $ 5,841 $ 4,572 $ 4,617 Interest cost on projected benefit obligation.......................... 10,639 9,671 9,207 Actual return on plan assets......... (15,777) (22,634) (2,117) Net amortization and deferral........ 42 9,990 (9,365) ----------- ---------- ------------- Net pension expense ................. $ 745 $ 1,599 $ 2,342 ----------- ---------- ------------- ----------- ---------- -------------
FEBRUARY 1, 1997 FEBRUARY 3, 1996 PLANS IN WHICH PLANS IN WHICH ------------------------ ------------------------ ASSETS ACCUMULATED ASSETS ACCUMULATED EXCEED BENEFITS EXCEED BENEFITS ACCUMULATED EXCEED ACCUMULATED EXCEED BENEFITS ASSETS BENEFITS ASSETS ---------- ------------ ---------- ------------ (IN THOUSANDS OF DOLLARS) Actuarial present value of vested benefit obligation........ $ (56,417) $ (77,826) $ (54,802) $ (73,562) ---------- ------------ ---------- ------------ Accumulated benefit obligation ............................. $ (63,729) $ (83,781) $ (58,104) $ (78,762) ---------- ------------ ---------- ------------ Projected benefit obligation ............................... $ (73,099) $ (88,153) $ (68,799) $ (83,840) Plan assets at fair value................................... 98,507 70,633 81,001 66,344 ---------- ------------ ---------- ------------ Plan assets in excess of (less than) projected benefit obligation................................................ 25,408 (17,520) 12,202 (17,496) Unrecognized net transition (asset) liability .............. (1,535) 97 (1,654) 108 Unrecognized net (gain) loss ............................... (9,661) 18,910 239 16,280 Unrecognized prior service cost............................. 1,584 11,330 1,632 9,783 Minimum liability........................................... (25,965) (21,093) ---------- ------------ ---------- ------------ Net pension asset (liability)............................... $ 15,796 $ (13,148) $ 12,419 $ (12,418) ---------- ------------ ---------- ------------ ---------- ------------ ---------- ------------
In calculating benefit obligations and plan assets for Fiscal 1997, the Company assumed a weighted average discount rate of 7.75%, compensation increase rates ranging from 3.0% to 3.5% and an expected long-term rate of return on plan assets of 10.5%. During Fiscal 1997, the discount rate used to measure pension expense was increased to 8.5% from 7.5% to reflect current market conditions. This change in the discount rate assumption reduced net pension expense by approximately $2.7 million in Fiscal 1997. For Fiscal 1996, the Company assumed a weighted average discount rate of 7.5%, compensation increase rates ranging from 2.0% to 3.5% and expected long-term rates of return on plan assets ranging from 10.5% to 10.75%. 42 The Company's defined benefit plans generally provide a retirement benefit to employees based on specified percentages applied to final average compensation, as defined, coupled with years of service earned to the date of retirement. All pension plans comply with the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). Penn Traffic's defined benefit plans' assets are maintained in separate trusts and are managed by independent investment managers. The assets are invested primarily in equity, debt and short-term cash securities. The Company also contributes to multi-employer pension funds, which cover certain union employees under collective bargaining agreements. Such contributions aggregated $3,933,000, $4,521,000 and $4,297,000 in Fiscal 1997, 1996 and 1995, respectively. The applicable portion of the total plan benefits and net assets of these plans is not separately identifiable. The Company contributes to profit-sharing plans for certain union employees. There was no expense for these profit-sharing plans for Fiscal 1997, Fiscal 1996 and Fiscal 1995. In addition, the Company sponsors a deferred profit-sharing plan for certain salaried employees. Contributions and costs totaled $750,000, $998,000 and $845,000 in Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively. Pursuant to the provisions of Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions" ("SFAS 87"), the Company recorded in other noncurrent liabilities an additional minimum pension liability adjustment of $25,965,000 as of February 1, 1997, $21,093,000 as of February 3, 1996 and $7,023,000 as of January 28, 1995, representing the amount by which the accumulated benefit obligation exceeded the fair value of plan assets plus accrued amounts previously recorded. The additional liability has been offset by an intangible asset to the extent of previously unrecognized prior service cost. The amount in excess of previously unrecognized prior service cost (after tax) is recorded as a reduction of stockholders' equity in the amount of $8,730,000 as of February 1, 1997, $6,606,000 as of February 3, 1996 and $356,000 as of January 28, 1995. Effective January 30, 1994, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS 112"). SFAS 112 requires employers to recognize the obligation to provide postemployment benefits on an accrual basis if certain conditions are met. The cumulative effect of the change in accounting principle determined as of January 30, 1994 reduced net income $5.8 million (net of a $4.1 million income tax benefit) for the fiscal year ended January 28, 1995. 43 NOTE 4--INCOME TAXES: The provision for income taxes charged to continuing operations was provided as follows:
FISCAL YEAR ENDED ------------------------------------------------ FEBRUARY 1, FEBRUARY 3, JANUARY 28, 1997 1996 1995 -------------- ---------------- ------------ (IN THOUSANDS OF DOLLARS) Current Tax (Benefit) Expense: Federal income $(8,177) $ (2,126) $ 10,330 State income 233 2,682 -------------- ---------------- ------------ (7,944) (2,126) 13,012 -------------- ---------------- ------------ Deferred Tax (Benefit) Expense: Federal income (9,697) (18,922) 2,895 State income (5,260) (6,154) (56) -------------- ---------------- ------------ (14,957) (25,076) 2,839 -------------- ---------------- ------------ (Benefit) provision for income taxes $(22,901) $ (27,202) $ 15,851 -------------- ---------------- ------------ -------------- ---------------- ------------
The differences between income taxes computed using the statutory federal income tax rate and those shown in the Consolidated Statement of Operations are summarized as follows:
FISCAL YEAR ENDED ------------------------------------------------ FEBRUARY 1, FEBRUARY 3, JANUARY 28, 1997 1996 1995 -------------- ---------------- ------------ (IN THOUSANDS OF DOLLARS) Federal (benefit) tax at statutory rates.......................... $ (22,516) $ (37,389) $13,254 State income taxes net of federal income tax effect............... (3,268) (3,850) 2,722 Nondeductible goodwill amortization and write-off................. 2,926 14,724 3,343 Capital loss carryforward......................................... (992) Miscellaneous items............................................... 27 331 639 Decrease in deferred income taxes due to changes in state income tax rates ....................................................... (232) (997) State net operating loss carryforwards............................ (726) Tax credits....................................................... (70) (786) (1,392) -------------- ---------------- ------------ (Benefit) provision for income taxes.............................. $ (22,901) $ (27,202) $ 15,851 -------------- ---------------- ------------ -------------- ---------------- ------------
44 Components of deferred income taxes at February 1, 1997 and February 3, 1996 were as follows:
FEBRUARY 1, FEBRUARY 3, 1997 1996 ----------- ----------- (IN THOUSANDS OF DOLLARS) Deferred Tax Liabilities: Fixed assets........................................................ $ 87,502 $ 85,038 Inventory........................................................... 30,394 30,132 Prepaid expenses and other current assets........................... 960 668 Goodwill amortization............................................... 4,382 2,539 Pensions............................................................ 4,952 4,202 Deferred charges and other assets................................... 10,139 9,228 ----------- ----------- $ 138,329 $ 131,807 ----------- ----------- ----------- ----------- Deferred Tax Assets: Nondeductible accruals............................................. $ 14,837 $ 15,784 Prepaid operating fee.............................................. 4,160 4,160 Capital leases..................................................... 5,531 4,887 Net operating loss carryforwards................................... 39,804 5,553 Capital loss carryforward.......................................... 5,375 7,074 Tax credit carryforwards........................................... 16,015 30,749 Valuation allowance--capital loss carryforward..................... (2,298) (5,574) ----------- ----------- $ 83,424 $ 62,633 ----------- ----------- ----------- ----------- Net Deferred Tax Liability.......................................... $ 54,905 $ 69,174 ----------- ----------- ----------- -----------
At February 1, 1997, Penn Traffic had deferred tax assets of approximately $31,818,000 due to federal net operating loss carryforwards which begin to expire in 2011, and various state net operating loss carryforwards, tax-effected for federal income tax purposes, of approximately $7,986,000, which begin to expire in 2004. In addition, the Company has alternative minimum tax credit carryforwards of $10,820,000, general business tax credit carryforwards of $3,754,000 and various state tax credits, tax-effected for federal income tax purposes, of $1,441,000 available to offset the Company's regular income tax liability in future years. The general business tax credit carryforwards begin to expire in 2004 and the alternative minimum tax credit carryforwards have no expiration date. 45 NOTE 5--LEASES: The following is a schedule by year of future gross minimum rental payments for all leases with terms greater than one year reconciled to the present value of net minimum capital lease payments as of February 1, 1997:
FISCAL YEARS ENDING IN TOTAL OPERATING CAPITAL - -------------------------- ---------- ---------- ---------- (IN THOUSANDS OF DOLLARS) 1998 ............................................................. $ 72,249 $ 43,344 $ 28,905 1999 ............................................................. 67,927 40,241 27,686 2000 ............................................................. 63,716 37,834 25,882 2001 ............................................................. 59,343 35,723 23,620 2002 ............................................................. 54,666 33,689 20,977 Later years....................................................... 429,914 292,010 137,904 ---------- ----------- ---------- Total minimum lease payments $ 747,815 $ 482,841 264,974 ----------- ----------- ----------- ----------- Less: Executory costs (885) ---------- Net minimum capital lease payments 264,089 Less: Estimated amount representing interest (115,572) ---------- Present value of net minimum capital lease payments 148,517 Less: Current portion (13,541) ------------- Long-term obligations under capital lease at February 1, 1997 $ 134,976 -------------- --------------
The Company principally operates in leased store facilities with terms of up to 20 years and renewable options for additional periods. The Company follows the provisions of Statement of Financial Accounting Standards No. 13, "Accounting for Leases" ("SFAS 13"), in determining the criteria for capital leases. Leases that do not meet such criteria are classified as operating leases and related rentals are charged to expense in the year incurred. During Fiscal 1997, 1996 and 1995, the Company incurred capital lease obligations of $24,109,000, $11,176,000 and $5,533,000, respectively, in connection with lease agreements for buildings and equipment. For Fiscal 1997, 1996 and 1995, capital lease amortization expense was $14,463,000, $12,485,000 and $11,887,000, respectively. Future minimum rentals have not been reduced by minimum sublease rentals of $49,781,000 due in the future under noncancelable subleases. In addition to minimum rentals, some leases provide for the Company to pay real estate taxes and other expenses and, in many cases, contingent rentals based on sales. 46 Minimum rental payments and related executory costs for operating leases were as follows:
FISCAL YEAR ENDED ------------------------------------- FEBRUARY 1, FEBRUARY 3, JANUARY 28, 1997 1996 1995 ----------- ----------- ----------- (IN THOUSANDS OF DOLLARS) Minimum rentals and executory costs........ $ 45,067 $ 40,806 $ 35,863 Contingent rentals......................... 2,760 2,264 1,874 Less: Sublease payments.................... (10,086) (9,946) (9,607) ------------ ------------ ---------- Net rental payments........................ $ 37,741 $ 33,124 $ 28,130 ------------ ------------ ----------- ------------ ------------ -----------
47 NOTE 6--UNUSUAL ITEM: During Fiscal 1996, the Company recorded an unusual item (charge) of $65.2 million. The Company also recorded a tax benefit of $13.3 million in connection with this charge. During the second quarter of Fiscal 1996, the Company decided to close 11 of its 15 remaining stand-alone general merchandise stores (Harts) in Ohio and convert the other four stores to the Company's "Plus" format. During Fiscal 1996 and Fiscal 1995, these 11 stores generated 1.1% and 1.8%, respectively, of the total revenues of the Company. The impact of these stores on the operating income of the Company was immaterial in Fiscal 1996 and Fiscal 1995. As a result of the decision to close the 11 Harts stores and convert the remaining four stores during the second quarter of Fiscal 1996, the Company recorded an unusual item (charge) of $50.6 million. This charge specifically relates to the write-off of goodwill ($32.8 million), the write-off of fixed assets ($8.4 million) and store closing costs consisting principally of inventory markdowns ($9.4 million). The unusual item also included $14.6 million in connection with the noncash write-off of certain fixed assets which the Company determined during the second quarter of Fiscal 1996 it would no longer utilize in its business ($8.0 million), costs incurred in connection with the implementation of the Company's expense reduction programs ($4.0 million), and an increase in the Company's closed store reserve ($2.6 million). The noncash portion of the unusual item was approximately $57.5 million and the cash portion was approximately $7.7 million. All costs related to the unusual item were incurred during Fiscal 1996 with the exception of certain facility carrying costs (primarily lease payments) for stores that have been closed, inventory markdowns and the write-down of fixed assets for the remaining four stores to be converted to the Company's "Plus" format. The last scheduled lease payment will occur in 2001. The accrued liability related to the unusual item was $8.9 million at February 1, 1997 and $10.5 million at February 3, 1996. 48 NOTE 7--ACCOUNTING FOR CERTAIN LONG-LIVED ASSETS: As of the beginning of the fourth quarter of Fiscal 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). Accordingly, the Company periodically reviews the recorded value of its stores and other assets to determine if the future nondiscontinued cash flows from these properties are expected to be sufficient to recover the remaining recorded asset values. Based upon a comprehensive review of the Company's long-lived assets, the Company recorded a noncash charge of $46.8 million in Fiscal 1996. This charge primarily related to the write-down of a portion of the recorded asset values (including allocable goodwill) of 18 of the Company's 265 retail supermarkets that were in operation as of February 3, 1996. These 18 supermarkets were located throughout the Company's trading area and generated approximately 5% of the Company's total revenues in Fiscal 1996. As of February 1, 1997, the Company has not closed any of these stores. The write-down of these assets resulted in reduced depreciation and amortization expense in Fiscal 1997 of approximately $2.7 million and will reduce depreciation and amortization expense in future years. The Company performed a comprehensive review of its long-lived assets as of the end of Fiscal 1997. Based on this review, no additional assets were deemed to be impaired. 49 NOTE 8--STOCKHOLDERS' EQUITY: The Company has a Long-term Incentive Plan (the "1993 Plan") which provides for long-term incentives based upon objective, quantifiable measures of the Company's performance over time through the payment of incentive compensation of the types commonly known as stock options, restricted stock, performance shares, other forms of stock-based incentives such as phantom stock and cash awards. The 1993 Plan was adopted in Fiscal 1994 as the successor to the Company's 1988 Stock Option Plan (the "1988 Plan"). A maximum of 350,000 shares of common stock may be paid to participants under the 1993 Plan and/or purchased pursuant to stock options granted under the 1993 Plan subject to antidilution and other adjustments specified in the 1993 Plan. As of February 1, 1997, a total of 299,100 shares of restricted stock and 3,000 options (with an exercise price of $18.19 per option share of which 1,200 are exercisable) to purchase shares of the Company's common stock are outstanding under the Company's 1993 Plan. A total of 72 current and former directors, officers and employees own the restricted stock and options as of February 1, 1997. At February 1, 1997, an additional 36,900 shares of common stock were reserved for future grants under the 1993 Plan. For all awards of restricted stock made prior to January 29, 1995, vesting of the shares granted pursuant to such awards is contingent upon attainment, subsequent to the date of grant, of EBITDA (as defined) levels of $265 million in any four consecutive fiscal quarter period, or $500 million in any eight consecutive fiscal quarter period. Such shares will be forfeited if such levels are not achieved by the quarter ending May 2, 1998. Vesting of awards of restricted stock that have been made subsequent to the end of Fiscal 1995 is also conditioned upon the recipient's remaining in the employ of the Company for an additional two years following the last fiscal quarter in which the required EBITDA performance level was attained. To encourage retention of such shares by the participants, upon vesting of the restricted stock the Company will make a cash payment to each participant equal to the amount of income tax payable by such participant in respect of the award and the cash payment, if such participant agrees not to sell his shares for at least two years beyond vesting and to refund the payment if he resigns within such two-year period. As of February 1, 1997, unearned compensation was debited in the amount of $785,000 to reflect the impact of the outstanding restricted shares. Unearned compensation, which is shown as a separate component of stockholders' equity, will be expensed as the compensation is earned. 50 The Company also has a stock option plan for directors (the "Directors' Plan") pursuant to which each director of the Company who is not an employee of the Company receives as of the date of appointment to the Board of Directors, and thereafter annually, as of the first business day after the conclusion of each Annual Meeting of Stockholders of the Company, an option to purchase 1,500 shares of common stock (subject to antidilution adjustments) at a price equal to the fair market value (as defined in the Directors' Plan) of such shares on the date of grant. At February 1, 1997, an additional 44,000 shares of common stock are reserved for issuance under the Directors' Plan. Under each of the plans, option prices are 100% of the "fair market value" of the shares on the date granted and expire ten years after the date of grant. Under terms of the Directors' Plan, the options are immediately exercisable. The 1988 and 1993 Plan options generally vest 20% on the date of grant and 20% on each of the next four anniversary dates. A summary of the status of the Company's 1988 Plan as of January 28, 1995, February 3, 1996 and February 1, 1997, and changes during the years ending on those dates is presented below:
FISCAL 1995 FISCAL 1996 FISCAL 1997 ---------------------- ---------------------- ---------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE 1988 PLAN OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE - ------------------- --------- ----------- --------- ----------- --------- ----------- Outstanding at beginning of year....................... 252,252 $ 18.98 244,442 $ 19.06 223,094 $ 19.59 Granted................................................ 0 0 0 Exercised.............................................. (7,550) 16.54 (21,348) 13.56 (5,592) 12.50 Forfeited.............................................. (260) 12.50 0 (9,519) 17.14 --------- --------- --------- Outstanding at end of year............................. 244,442 $ 19.06 223,094 $ 19.59 207,983 $ 19.89 --------- --------- --------- --------- --------- --------- Options exercisable at year-end........................ 227,542 $ 18.56 222,094 $ 19.55 207,983 $ 19.89 --------- --------- --------- --------- --------- ---------
As of February 1, 1997, the 207,983 options outstanding under the 1988 Plan have exercise prices between $12.50 and $28.13 and a weighted-average remaining contractual life of 3.1 years. 51 A summary of the status of the Company's Directors' Plan as of January 28, 1995, February 3, 1996 and February 1, 1997, and changes during the years ending on those dates is presented below:
FISCAL 1995 FISCAL 1996 FISCAL 1997 ---------------------- ---------------------- ---------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE DIRECTORS' PLAN EXERCISE EXERCISE EXERCISE OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE - ---------------------- --------- ----------- --------- ----------- --------- ----------- Outstanding at beginning of year .................. 31,500 $ 28.12 39,000 $ 29.65 42,000 $ 30.97 Granted............................................ 7,500 36.06 6,000 33.81 6,000 10.63 Exercised.......................................... 0 (3,000) 19.47 0 Forfeited.......................................... 0 0 0 --------- ---------- ---------- Outstanding at end of year......................... 39,000 $ 29.65 42,000 $ 30.97 48,000 $ 28.43 --------- ---------- ---------- --------- ---------- ---------- Options exercisable at year-end.................... 39,000 $ 29.65 42,000 $ 30.97 48,000 $ 28.43 --------- ---------- ---------- --------- ---------- ---------- Weighted-average fair value of options granted during the year.......................................... $ 36.06 $ 33.81 $ 10.63 --------- ---------- ---------- --------- ---------- ----------
As of February 1, 1997, the 48,000 options outstanding under the Directors' Plan have exercise prices between $10.63 and $42.00 and a weighted-average remaining contractual life of 6.2 years. 52 At February 1, 1997, certain persons affiliated with Miller Tabak Hirsch + Co. ("MTH") held warrants to purchase 289,000 shares at $14.00 per share. These warrants were issued in June 1988 and were exercisable on the date of grant. None of these option shares have been exercised or forfeited since the date of grant. In November 1996, the Board of Directors of the Company adopted a new stock-based incentive compensation plan (the "Performance Incentive Plan") which will replace the 1993 Plan. As of February 1, 1997, no awards have been made under the Performance Incentive Plan. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for these plans. Had the Company applied the applicable provisions of Statement of Financial Accounting Standards No. 123, "Accounting and Disclosure of Stock-Based Compensation" ("SFAS 123") for the fiscal years ended February 1, 1997 and February 3, 1996, the impact on the Company's net income and earnings per share for each of these fiscal years would have been immaterial. In October 1995, the Company's Board of Directors authorized the repurchase by the Company of up to 500,000 shares of its outstanding common stock, either in the open market or in private transactions. Shares which are repurchased will be available for issuance upon exercise of outstanding options which have been granted under the Company's equity incentive programs as well as for other corporate purposes. The Company did not purchase any shares during Fiscal 1997. During Fiscal 1996, the Company purchased 45,200 shares at a cost of $625,000, which shares are being held in treasury. Penn Traffic's debt agreements contain limitations which currently prohibit it from repurchasing any additional shares of its common stock. NOTE 9--EQUITY INVESTMENT: In July 1989, Penn Traffic acquired an indirect ownership interest in the common stock of Grand Union Holdings Corporation ("Grand Union Holdings"), which was the corporate parent of The Grand Union Company ("Grand Union"). The Company accounted for its investment in Grand Union under the equity method. The investment was recorded originally at a cost of $18,250,000. The carrying value of the investment was reduced to zero as of February 2, 1991. 53 On January 25, 1995, Grand Union filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court, District of Delaware (the "Bankruptcy Court"). On February 16, 1995, Grand Union Holdings filed a voluntary Chapter 11 petition with the Bankruptcy Court. As a result of these bankruptcy proceedings, Penn Traffic's equity ownership interest in Grand Union Holdings, which as of the dates of filing of the Chapter 11 petitions was approximately 17.8% on a fully diluted basis, became worthless. See Note 10--Related Parties for a description of certain relationships between Penn Traffic and Grand Union. NOTE 10--RELATED PARTIES: During Fiscal 1997, the Company had an agreement for financial consulting and business management services to be provided by MTH pursuant to which the Company paid MTH fees of $1,405,600. The fee payable to MTH for Fiscal 1998 will be approximately $1,437,000. During Fiscal 1996 and Fiscal 1995, the amounts of the annual fees paid to MTH under the financial consulting and business management services agreement were $1,395,100 and $1,357,100, respectively. During Fiscal 1995, the Company paid MTH an additional fee of $500,000 for its services in connection with assisting the Company with the acquisition of 45 former Acme stores and the public offering of $100 million in principal amount of Penn Traffic 10.65% Senior Notes due 2004. On July 30, 1990, P&C (then a subsidiary and now a division of Penn Traffic) and Grand Union entered into an agreement (the "New England Operating Agreement") whereby Grand Union acquired the right to operate 13 P&C stores located in New England under the Grand Union name until July 2000. Pursuant to the New England Operating Agreement, Grand Union agreed to pay Penn Traffic (as the successor of P&C, which was merged into the Company in April 1993) a minimum annual fee averaging $10.7 million per year during the 10-year term and, beginning with the year commencing July 31, 1992, to pay Penn Traffic additional contingent fees of up to $700,000 per year based on sales performance of the stores operated by Grand Union. As a result of the recapitalization of Grand Union in July 1992, Penn Traffic received a $15 million prepayment of an operating fee from Grand Union pursuant to the terms of the New England Operating Agreement. This prepayment reduced the future payments that Grand Union will make to Penn Traffic pursuant to the terms of the New England Operating Agreement by approximately $3.2 million per year. The Total Revenues line of the Consolidated Statement of Operations includes pretax operating fees of $11.2 million for the fiscal year ended February 1, 1997, $11.4 million for the fiscal year ended February 3, 1996 and $11.2 million for the fiscal year ended January 28, 1995. 54 At the expiration of the 10-year term of the New England Operating Agreement, Grand Union has the right to extend the term of the New England Operating Agreement for an additional five years. In the event of such extension of the lease term, Grand Union would pay Penn Traffic an annual fee of $13.6 million in the first year of the extended term, $14.0 million in the second year, $14.4 million in the third year, $14.9 million in the fourth year and $15.3 million in the fifth year, plus contingent fees based on the sales performance of the stores of up to $700,000 each year. Penn Traffic also granted Grand Union an option (the "Purchase Option") to purchase the stores operated by Grand Union under the New England Operating Agreement. Grand Union paid Penn Traffic $7.5 million for the Purchase Option. If Grand Union does not extend the initial term of the New England Operating Agreement at its expiration in July 2000 or does not exercise the Purchase Option prior to the expiration of the term (or the extended term), or in the event of a default by Grand Union in the performance of its obligations pursuant to the New England Operating Agreement, the stores operated by Grand Union pursuant to the New England Operating Agreement will be returned to operation by Penn Traffic. From September 1993 until September 1995, Penn Traffic and Grand Union participated in a consolidated health and beauty care and general merchandise purchasing and distribution program. NOTE 11--COMMITMENTS AND CONTINGENCIES: The Company enters into various purchase commitments in the normal course of business. No losses are expected to result from these purchase commitments. The Company and its subsidiaries are involved in several lawsuits, claims and inquiries, most of which are routine to the nature of the business. Estimates of future liability are based on an evaluation of currently available facts regarding each matter. Liabilities are recorded when it is probable that costs will be incurred and can be reasonably estimated. Based on management's evaluation, the resolution of these matters will not materially affect the financial position, results of operations or liquidity of the Company. NOTE 12--EXTRAORDINARY ITEM: During Fiscal 1995, the Company had an extraordinary item of $3,025,000 (net of $2,045,000 income tax benefit) related to the early retirement of debt. 55 NOTE 13--ACQUISITIONS: On January 19, 1995, the Company acquired 45 food stores from American Stores Company. The stores are located in north central and northeastern Pennsylvania and in south central New York. The acquisition cost of $91,570,000 was attributed to major categories of assets obtained and obligations assumed as follows: inventories $15,502,000; property, plant and equipment $9,638,000; other assets (goodwill) $81,217,000; cash $566,000 and other noncurrent liabilities $15,353,000. The unaudited consolidated results of operations on a pro forma basis as though the American Stores Company stores had been acquired on January 30, 1994 are as follows:
FOR THE 52 WEEKS ENDED JANUARY 28, 1995 ------------------------ (UNAUDITED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNT) Total revenues............................. $ 3,599,513 Net income applicable to common stock...... $ 13,303 Net income per common share................ $ 1.19
The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the purchase been made at the beginning of the period or of the future results of the combined operations. 56 REPORT OF MANAGEMENT Penn Traffic's management has prepared the financial statements presented in this annual report and is responsible for the integrity of all information contained herein. The financial statements presented in this report have been audited by the independent accountants appointed by the Board of Directors on the recommendation of its Audit Committee and management. The Company maintains an effective system of internal accounting controls. The independent accountants obtain and maintain an understanding of the Company's internal accounting controls and conduct such tests and related procedures as they deem necessary to express an opinion on the fairness of the presentation of the financial statements. The Audit Committee, composed solely of outside directors, meets periodically with management and independent accountants to review auditing and financial reporting matters and to ensure that each group is properly discharging its responsibilities. We rely on our internal and external auditors to assist us in fulfilling our responsibility for the fairness of the Company's financial reporting and monitoring the effectiveness of our system of internal accounting controls. 57 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT As permitted by General Instruction G(3), information concerning the executive officers of Penn Traffic is set forth as a supplemental item included in Part I of the Form 10-K Report under the caption "Executive Officers of Registrant." The information required by this item is incorporated herein by reference to the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement dated May 1, 1997, filed or to be filed in connection with the Company's Annual Meeting of Stockholders to be held on June 3, 1997. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the caption "Executive Compensation" in the Company's Proxy Statement dated May 1, 1997, filed or to be filed in connection with the Company's Annual Meeting of Stockholders to be held on June 3, 1997. The information set forth in "Compensation Committee Report" and "Performance Graph" of the Company's Proxy Statement dated May 1, 1997, filed or to be filed in connection with the Company's Annual Meeting of Stockholders to be held on June 3, 1997, is not "filed" as a part hereof. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement dated May 1, 1997, filed or to be filed in connection with the Company's Annual Meeting of Stockholders to be held on June 3, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the captions "Certain Transactions" and "Compensation of Directors" in the Company's Proxy Statement dated May 1, 1997, filed or to be filed in connection with the Company's Annual Meeting of Stockholders to be held on June 3, 1997. 58 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The index for Financial Statements and Supplementary Data is on page 17 under Item 8 of this Form 10-K. EXHIBITS: The following are filed as Exhibits to this Report:
EXHIBIT NO. DESCRIPTION - ------------- ---------------------------------------------------------------------------- 2.1 Certificate of Merger for merger of Penn Traffic Acquisition Corporation into Penn Traffic dated April 14, 1993 (incorporated by reference to Exhibit No. 2.5 to Penn Traffic's Registration Statement on Form S-3 (Reg. No. 33-51213) filed on December 8, 1993 with the Securities and Exchange Commission (the "SEC") and referred to herein as the "December 1993 Registration Statement"). 2.2 Plan of Merger dated as of February 25, 1993 for the merger of P&C Food Markets, Inc. ("P&C") into Penn Traffic (incorporated by reference to Exhibit No. 2.6 to Penn Traffic's Registration Statement on Form S-3 (Reg. No. 33-58918) filed on April 7, 1993 with the SEC and referred to herein as the "April 1993 Registration Statement"). 2.3 Certificates of Merger for merger of P&C into Penn Traffic dated April 14, 1993 (incorporated by reference to Exhibit No. 2.7 to the December 1993 Registration Statement). 2.4 Agreement and Plan of Merger dated as of February 25, 1993 by and among Penn Traffic, Penn Traffic Acquisition Corporation and Big Bear Stores Company ("Big Bear") (incorporated by reference to Exhibit No. 2.8 to the April 1993 Registration Statement). 2.5 Certificate of Merger for merger of Big Bear into Penn Traffic Acquisition Corporation dated April 14, 1993 (incorporated by reference to Exhibit No. 2.9 to the December 1993 Registration Statement). 2.6 Asset Purchase Agreement dated as of December 9, 1992 between Penn Traffic and Peter J. Schmitt Co., Inc. (the "December 9, 1992 Asset Purchase Agreement") (incorporated by reference to Exhibit No. 2.1 to Penn Traffic's Current Report on Form 8-K filed on January 18, 1993 with the SEC and referred to herein as the "Penn Traffic 1993 8-K"). 2.6A Letter Agreement dated December 31, 1992 with respect to the December 9, 1992 Asset Purchase Agreement (incorporated by reference to Exhibit No. 2.1A to the Penn Traffic 1993 8-K).
59 Exhibits (continued):
EXHIBIT NO. DESCRIPTION - ------------- ----------------------------------------------------------------------------------------------------- 2.7 Asset Purchase Agreement dated as of December 29, 1992 between Penn Traffic and Peter J. Schmitt Co., Inc. (the "December 29, 1992 Asset Purchase Agreement") (incorporated by reference to Exhibit No. 2.2 to the Penn Traffic 1993 8-K). 2.7A Letter Agreement dated December 30, 1992 with respect to the December 29, 1992 Asset Purchase Agreement (incorporated by reference to Exhibit No. 2.2A to the Penn Traffic 1993 8-K). 2.8 Agreement of Purchase and Sale, dated as of August 27, 1993, by and between Insalaco Markets, Inc., Insalaco's Old Forge, Inc., Insalaco's Clarks Green, Inc., Insalaco's Supermarkets Warehouse, Insalaco Enterprises, Insalaco's Real Estate, Insalaco's Foodliner, Eagle Valley Realty, Tannersville Realty Company and Penn Traffic (incorporated by reference to Exhibit No. 10.23 to Penn Traffic's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1993 and referred to herein as the "Penn Traffic July 1993 10-Q"). 2.9 Asset Purchase Agreement by and among Acme Markets, Inc., American Stores Properties, Inc., American Stores Realty Corp. and The Penn Traffic Company, dated as of September 30, 1994 (incorporated by reference to Exhibit 2.13 to Penn Traffic's Report on Form 8-K dated October 12, 1994 and referred to herein as the "1994 8-K"). 3.1 Certificate of Incorporation of Penn Traffic (incorporated by reference to Exhibit No. 3.1 to Penn Traffic's Registration Statement on Form S-3 (Reg. No. 33-51824) filed on October 2, 1992 with the SEC and referred to herein as the "October 1992 Registration Statement"). 3.2 By-Laws of Penn Traffic as amended through April 2, 1996 (incorporated by reference to Exhibit No. 3.2 to Penn Traffic's Annual Report on Form 10-K for the fiscal year ended February 3, 1996 and referred to herein as the "1996 10-K"). 4.1 Certificate of Incorporation of Penn Traffic (filed as Exhibit No. 3.1). 4.2 By-Laws of Penn Traffic (filed as Exhibit No. 3.2). 4.3 Form of Common Stock Certificate (incorporated by reference to Exhibit No. 4.2 to Penn Traffic's Annual Report on Form 10-K for the fiscal year ended January 28, 1995 and referred to herein as the "1995 10-K").
60 Exhibits (continued):
EXHIBIT NO. DESCRIPTION - ------------- ----------------------------------------------------------------------------------------------------- 4.4 Indenture, including form of 11 1/2% Senior Note Due 2001, dated as of October 16, 1991 between P&C and Bankers Trust Company ("Bankers Trust"), as Trustee (incorporated by reference to Exhibit No. 10.25 to P&C's quarterly report on Form 10-Q for the fiscal quarter ended November 2, 1991 and referred to herein as the "P&C November 1991 10-Q"). 4.4A First Supplemental Indenture dated as of April 15, 1993 between the Company and Bankers Trust, as Trustee, relating to the 11 1/2% Senior Notes Due 2001 (incorporated by reference to Exhibit No. 4.10A to Penn Traffic's Quarterly Report on Form 10-Q for the fiscal quarter ended May 1, 1993 and referred to herein as the "Penn Traffic May 1993 10-Q"). 4.5 Indenture, including form of 10 1/4% Senior Note Due February 15, 2002, dated as of February 18, 1992 between Penn Traffic and Marine Midland Bank, N.A., Trustee (incorporated by reference to Exhibit No. 4.13 to Penn Traffic's Annual Report on Form 10-K for the fiscal year ended February 1, 1992 and referred to herein as the "Penn Traffic 1992 10-K"). 4.5A First Supplemental Indenture dated as of June 10, 1992 to the Indenture dated as of February 18, 1992, relating to the 10 1/4% Senior Notes Due 2002, between Penn Traffic and Marine Midland Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.15A to the October 1992 Registration Statement). 4.5B Second Supplemental Indenture dated as of September 18, 1992 to the Indenture dated as of February 18, 1992, relating to the 10 1/4% Senior Notes Due 2002, between Penn Traffic and Marine Midland Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.15B to the October 1992 Registration Statement). 4.6 Indenture, including form of 10 3/8% Senior Note Due October 1, 2004, dated as of October 1, 1992, between Penn Traffic and United States Trust Company of New York, as Trustee (incorporated by reference to Exhibit No. 4.16 to Penn Traffic's Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1992). 4.7 Indenture, including form of 9 5/8% Senior Subordinated Note Due April 15, 2005, dated as of April 15, 1993, between Penn Traffic and First Trust of California, National Association, as Trustee (incorporated by reference to Exhibit No. 4.14 to the Penn Traffic May 1993 10-Q).
61 Exhibits (continued):
EXHIBIT NO. DESCRIPTION - ------------- ----------------------------------------------------------------------------------------------------- 4.8 Indenture dated as of December 15, 1993, between Penn Traffic and United States Trust Company of New York, as Trustee (incorporated by reference to Exhibit No. 4.9 to Penn Traffic's Form 10-K for the fiscal year ended January 29, 1994, and referred to herein as the "1994 10-K"). 4.8A Officer's Certificate pursuant to the Indenture filed as Exhibit 4.8, dated December 21, 1993, establishing the terms of the 8 5/8% Senior Notes due December 15, 2003 (incorporated by reference to Exhibit 4.8A to the 1995 10-K). 4.8B Officer's Certificate pursuant to the Indenture filed as Exhibit 4.8, dated October 20, 1994, establishing the terms of the 10.65% Senior Notes due November 1, 2004 (incorporated by reference to Exhibit 4.8B to the 1995 10-K). 4.8C Officer's Certificate pursuant to the Indenture filed as Exhibit 4.8, dated April 23, 1996, establishing the terms of the 11.50% Senior Notes due April 15, 2006 (incorporated by reference to Exhibit 4.8C to Penn Traffic's Quarterly Report on Form 10-Q for the fiscal quarter ended May 4, 1996 (the "May 1996 10-Q")). 10.1 Membership and Licensing Agreement dated April 18, 1982 among TOPCO Associates, Inc. (Cooperative), Kingston Marketing Co. and Penn Traffic (incorporated by reference to Exhibit No. 10.2 to Penn Traffic's Registration Statement on Form S-1 (Reg. No. 33-12926) filed on March 27, 1987 with the SEC and referred to herein as the "1987 Registration Statement"). *10.2 The Penn Traffic Company Incentive Compensation Plan (incorporated by reference to Exhibit No. 10.3 to the 1987 Registration Statement). *10.3 The Penn Traffic Company Severance Pay Plan (incorporated by reference to Exhibit No. 10.5 to the 1987 Registration Statement). *10.4 Quality Markets, Inc. ("Quality") Profit Sharing Plan (incorporated by reference to Exhibit No. 10.11 to the 1987 Registration Statement). 10.5 Loan and Security Agreement (the "Loan and Security Agreement") among Penn Traffic, Quality, Dairy Dell, Big M Supermarkets, Inc. ("Big M"), Penny Curtiss Baking Company Inc. ("Penny Curtiss"), and Hart Stores, Inc. ("Hart"), the lenders party thereto and NatWest USA Credit Corp., as Agent, dated March 5, 1993 (incorporated by reference to Exhibit No. 10.2 to the April 1993 Registration Statement).
- ------------------------ * Management contract, compensatory plan or arrangement. 62 Exhibits (continued):
EXHIBIT NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 10.5A Amendment No. 1, dated March 12, 1993, to the Loan and Security Agreement (incorporated by reference to Exhibit No. 10.2A to the April 1993 Registration Statement). 10.5B Amendment No. 2, dated as of March 24, 1993, to the Loan and Security Agreement (incorporated by reference to Exhibit No. 10.2B to the April 1993 Registration Statement). 10.5C Waiver Letter dated as of April 14, 1993, among the lenders under the Loan and Security Agreement, Penn Traffic, Quality, Dairy Dell, Big M, Penny Curtiss and Hart (incorporated by reference to Exhibit No. 10.22C to the Penn Traffic May 1993 10-Q). 10.5D Amendment No. 3, dated as of April 15, 1993, to the Loan and Security Agreement (incorporated by reference to Exhibit No. 10.22D to the Penn Traffic May 1993 10-Q). 10.5E Amendment No.4, dated as of August 20, 1993, to the Loan and Security Agreement (incorporated by reference to Exhibit No. 10.22E to the Penn Traffic July 1993 10-Q). 10.5F Amendment No. 5, dated as of August 24, 1994, to the Loan and Security Agreement (incorporated by reference to Exhibit 10.9F to Penn Traffic's Report on Form 10-Q for the fiscal quarter ended July 30, 1994 and referred to herein as the "July 1994 10-Q"). 10.5G Amendment No. 6, dated as of August 24, 1994, to the Loan and Security Agreement (incorporated by reference to Exhibit 10.9G to the July 1994 10-Q). 10.5H Consent and Amendment to the Loan and Security Agreement, dated as of September 29, 1994 (incorporated by reference to Exhibit 10.9H to the 1994 Form 8-K). 10.5I Amendment No. 8, dated as of November 4, 1994, to the Loan and Security Agreement (incorporated by reference to Exhibit No. 10.9I to Penn Traffic's Quarterly Report on Form 10-Q for the fiscal quarter ended April 29, 1995 and referred to herein as the "April 1995 10-Q"). 10.5J Amendment No. 9, dated as of May 10, 1995, to the Loan and Security Agreement (incorporated by reference to Exhibit No. 10.9J to the April 1995 10-Q). 10.5K Amendment No. 10, dated as of August 31, 1995, to the Loan and Security Agreement (incorporated by reference to Exhibit No. 10.9K to Penn Traffic's Quarterly Report on Form 10-Q for the fiscal quarter ended July 29, 1995). 10.5L Amendment No. 11, dated as of October 16, 1995, to the Loan and Security Agreement (incorporated by reference to Exhibit No. 10.9L to Penn Traffic's Quarterly Report on Form 10-Q for the fiscal quarter ended October 28, 1995).
63 Exhibits (continued):
EXHIBIT NO. DESCRIPTION - ------------- ----------------------------------------------------------------------------------------------------- 10.5M Amendment No. 12, dated as of March 7, 1996, to the Loan and Security Agreement (incorporated by reference to Exhibit No. 10.5M to the 1996 10-K). 10.5N Amendment No. 13, dated as of May 31, 1996, to the Loan and Security Agreement (incorporated by reference to Exhibit No. 10.5N to the May 1996 10-Q). 10.5O Amendment No. 14, dated as of October 16, 1996, to the Loan and Security Agreement (incorporated by reference to Exhibit No. 10.5O to Penn Traffic's Current Report on Form 8-K dated October 16, 1996). 10.6 Engagement Letter dated as of January 30, 1994 by and among Penn Traffic and Miller Tabak Hirsch + Co. (incorporated by reference to Exhibit 10.10 to the 1994 10-K). *10.7 The Penn Traffic Company Amended and Restated Directors' Stock Option Plan (filed as Exhibit "A" to Penn Traffic's Proxy Statement filed with the SEC on May 1, 1996 and incorporated herein by reference). 10.8 Agreement and Master Sublease dated as of July 30, 1990, by and between The Grand Union Company and P&C (incorporated by reference to Exhibit No. 10.24 to Penn Traffic's Quarterly Report on Form 10-Q for the Fiscal Quarter ended August 4, 1990 (Securities and Exchange Commission File No. 1-9930) and referred to herein as the "Penn Traffic August 1990 10-Q"). 10.9 Interest Rate and Currency Exchange Agreement dated as of October 16, 1991 between Salomon Brothers Holding Company, Inc. ("SBHC") and P&C (incorporated by reference to Exhibit No. 10.27 to the P&C November 1991 10-Q). *10.10 Employment Agreement, dated as of February 2, 1992, among Penn Traffic, P & C and Claude J. Incaudo (incorporated by reference to Exhibit No. 10.37 to the Penn Traffic 1992 10-K). *10.11 The Penn Traffic Company's 1993 Long Term Incentive Plan (filed as Exhibit "A" to Penn Traffic's Proxy Statement filed with the SEC on May 1, 1993 and incorporated herein by reference).
- ------------------------ * Management contract, compensatory plan or arrangement. 64 Exhibits (continued):
EXHIBIT NO. DESCRIPTION - ------------- ----------------------------------------------------------------------------------------------------- 10.12 First Mortgage, Security Agreement, Financing Statement and Assignment of Leases and Rents dated as of October 25, 1993 by and among Penn Traffic and Onondaga County Industrial Development Agency, as mortgagor and NatWest USA Credit Corp., as mortgagee (incorporated by reference to Exhibit No. 10.24 to Penn Traffic's Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1993). 10.13 Agreement Containing Consent Order dated January 9, 1995 by and between Penn Traffic and the Federal Trade Commission entered into in the matter of The Penn Traffic Company (incorporated by reference to Exhibit 10.25 to Penn Traffic's Report on Form 8-K dated January 19, 1995). 10.14 Agreement, dated November 18, 1994, between Penn Traffic and Grand Union relating to the Grand Union warehouse in Montgomery, New York (incorporated by reference to Exhibit No. 10.21 to the 1995 10-K). *10.15 Employment Agreement, dated as of January 29, 1995, between John T. Dixon and Penn Traffic (incorporated by reference to Exhibit No. 10.22 to the 1995 10-K). *10.16 Agreement dated October 5, 1996, between John T. Dixon and Penn Traffic. *10.17 Employment Agreement, dated as of March 11, 1997, between Phillip E. Hawkins and Penn Traffic. *10.18 Penn Traffic's 1997 Performance Incentive Plan. *10.19 Penn Traffic's Supplemental Retirement Income Plan. 21.1 Subsidiaries of Penn Traffic (incorporated by reference to Exhibit 21.1 to Penn Traffic's 1994 10-K). 27.1 Financial Data Schedule.
- ------------------------ * Management contract, compensatory plan or arrangement. 65 Copies of the above exhibits will be furnished without charge to any shareholder by writing to Treasurer, The Penn Traffic Company, 1200 State Fair Boulevard, Syracuse, New York 13221. REPORTS ON FORM 8-K No reports on Form 8-K were filed during the fiscal quarter ended February 1, 1997. 66 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE PENN TRAFFIC COMPANY April 30, 1997 By: /s/ Phillip E. Hawkins - --------------------------- -------------------------- DATE Phillip E. Hawkins, President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Gary D. Hirsch /s/ Eugene R. Sunderhaft - ----------------------- ---------------------- Gary D. Hirsch, Eugene R. Sunderhaft, Chairman of the Board and Director Senior Vice President and Secretary (Principal Financial Officer and Principal April 30, 1997 Accounting Officer) - -------------- DATE April 30, 1997 ------------------ DATE /s/ Eugene A. DePalma /s/ Susan E. Engel - ------------------------- ------------------------ Eugene A. DePalma, Director Susan E. Engel, Director April 30, 1997 April 30, 1997 - --------------- --------------- DATE DATE /s/ Martin A. Fox /s/ Claude J. Incaudo - -------------------- ------------------------- Martin A. Fox, Director Claude J. Incaudo, Director April 30, 1997 April 30, 1997 - --------------------- ------------------ DATE DATE /s/ James A. Lash /s/ Harold S. Poster - --------------------------- -------------------------- James A. Lash, Director Harold S. Poster, Director April 30, 1997 April 30, 1997 - --------------- ----------------- DATE DATE /s/ Richard D. Segal - ---------------------------- Richard D. Segal, Director April 30, 1997 - ------------------- DATE 67 THE PENN TRAFFIC COMPANY SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS (In thousands of dollars)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------------- ------------ ------------- ---------- ----------- ADDITIONS BALANCE CHARGED DEDUCTIONS BALANCE AT BEGINNING TO COSTS FROM AT END DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS OF PERIOD - -------------------------------------------------------------- ------------- ------------- ----------- ----------- Reserve deducted from asset to which it applies: For the 52 Weeks Ended February 1, 1997 Provision for doubtful accounts............................. $ 1,483 $ 8,414 $ 7,030(a) $ 2,867 ------ ------ ----------- ----------- ------ ------ ----------- ----------- For the 53 Weeks Ended February 3, 1996 Provision for doubtful accounts............................. $ 1,374 $ 3,926 $ 3,817(a) $ 1,483 ------ ------ ----------- ----------- ------ ------ ----------- ----------- For the 52 Weeks Ended January 28, 1995 Provision for doubtful accounts............................. $ 740 $ 2,782 $ 2,148(a) $ 1,374 ------ ------ ----------- ----------- ------ ------ ----------- -----------
- ------------------------ (a) Uncollectible receivables written off net of recoveries. 68 EX-10.16 2 EX-10.16 Exhibit 10.16 EARLY RETIREMENT AGREEMENT AND RELEASE The Penn Traffic Company, including all of its divisions (hereinafter referred to as "Penn Traffic" or the "Company"), and John T. Dixon ("Employee"), of 37 West Lake Road, Skaneateles, New York 13152, hereby enter into this EARLY RETIREMENT AGREEMENT AND RELEASE ("Agreement"), effective September 3, 1996, and the Company and Employee each hereby agree as follows: 1. The Employee will be entitled to all employee benefits, including, but not limited to pension, for the period through January 17, 1998, which shall be considered his normal retirement date. 2. The Employee's last day of active employment with the Company is September 30, 1996. The Employee hereby resigns as a Director of the Company, effective September 3, 1996, and as an Officer of the Company and all of its subsidiaries and divisions on which he serves, including as a director, effective September 30, 1996, 3. The terms and conditions of this Agreement have been fully explained to the Employee. 4. The Employee has been advised that he may take up to twenty-one (21) days to review and consider entering into this Early Retirement Agreement and Release and has been advised that he may consult with an attorney or anyone of his choosing and, by executing same, has decided he wants to sign it. 5. The Employee is entitled to change his mind and revoke this Agreement within seven (7) days of signing it. This Agreement will not become effective until the eighth (8th) day after he signs it. 6. In consideration of the execution by the Employee of this Early Retirement Agreement and Release and compliance with the promises made herein, the Company will pay the Employee the following amounts and provide the following benefits: (a) Salary Continuation. The Employee shall receive a sum equal to his weekly salary for the period through January 17, 1998, with normal payroll deductions being withheld. This sun shall be paid as follows: (1) $365,000, with normal payroll deductions being withheld, within fourteen (14) days of the execution of this Early Retirement Agreement, and (2) the balance in weekly payments of $2,622.86 through January 17, 1998, with normal payroll deductions being withheld. (b) Insurance Benefits: (1) The Company will provide coverage for the Employee and his spouse in the Company Health Care Plan for the period through November 30, 2004, or until the Employee becomes employed and has comparable insurance coverage. Such coverage will be subject to the same terms and conditions that apply to all non-union covered employees of the Company. After November 30, 2004, the Company will extend the Company's group health care benefits to Employee and his spouse, at his cost, but at Company's group rate, as provided under COBRA, if the Employee does not already have insurance coverage through a new employer. (2) The Company will provide group term life insurance in the amount of $500,000 for the Employee for the period through November 30, 1999. (c) Incentive Compensation. The Employee will be eligible for a prorated Incentive Compensation Bonus for Calendar 1996. Penn Traffic agrees to pay the Employee said applicable Calendar 1996 bonus, if any, minus withholding and other normal deductions, all in accordance with the terms and provisions of the Penn Traffic Incentive Compensation Plan. The Employee shall not be eligible for any Incentive Compensation for any period after September 30, 1996. (d) Stock Options. The Employee shall have, unless earlier terminated pursuant to the normal terms of the Plan, until January 17, 2003, whichever occurs first, to exercise any of his stock options, as applicable under the respective Stock Option Plans. (e) Restricted Stock. The Employee shall continue to retain his 27,500 shares of restricted stock, which shall not terminate as a result of this resignation and early retirement. The Employee shall not be entitled to any loan from the Company under any circumstances, and the restricted stock shall otherwise be governed by the terms and conditions of The Penn Traffic Company 1993 Long Term Incentive Plan as though the Employee were still employed by the Company. (f) Company Vehicle. The Employee agrees to return all gas, credit and other cards associated with the Company vehicle to the Company on or before September 30, 1996. The Company shall transfer ownership of the 1995 Cadillac which has been assigned to the Employee as a Company car within thirty (30) days of the execution of this Early Retirement Agreement. The book value of this car at that time, approximately $30,000, will be reported as compensation to the Employee on his W-2 Form for 1996. (g) Moving Expenses. The Employee intends to sell his residence in Skaneateles, New York and plans on moving to the State of Tennessee. The Company agrees to reimburse the Employee in connection with real estate brokers' commissions, attorneys' fees, other related expenses with regard to the sale of his Skaneateles, New 2 York residence and transportation and moving expenses to the State of Tennessee up to an aggregate amount not to exceed $35,000, (h) Pension. The Employee is eligible under the Company's Supplemental Retirement Income Plan to receive an annual pension benefit for an eligible Employee with at least thirty (30) years of credited service equal to forty percent (40%) of the yearly average of the highest aggregate compensation received by the Employee during a period of five (5) consecutive years of employment, less offsets for benefits paid under the Company's other retirement plans and for Social Security benefits. 7. The Employee acknowledges that he knows there are various State and Federal laws which prohibit employment discrimination on the basis of race, color, creed, sex, age, national origin, marital status, religion, disability or veteran status. In consideration for the Company's making the payments listed in this Agreement, which it is not otherwise required to make, the Employee intends to voluntarily give up any rights he may have under these or any other laws with respect to his employment with the Company or the retirement and termination of his employment, including his rights under the Age Discrimination in Employment Act and Title VII of the Civil Rights Act of 1964. 8. The Employee agrees not to disclose, either directly or indirectly, to any person or entity, any information whatsoever regarding the existence or substance of this Early Retirement Agreement and Release. The Employee also agrees not to disclose, either directly or indirectly, to any person or entity, any information concerning the business, operations or condition (financial or otherwise) of the Company. Employee will effect and will provide all reasonable cooperation in effecting a prompt and orderly transition of his responsibilities at the Company. Employee agrees to cooperate fully with the Company in connection with litigations, arbitrations and governmental or other proceedings to which the Company is or may be from time to time a party, without compensation, provided that the Company's requests for such cooperation are reasonable under the circumstances. 9. The Employee hereby agrees that he will not compete in any capacity whatsoever, directly or indirectly, with the Company in any area in which the Company presently conducts its business for the period through January 17, 2000. In the event Employee breaches this Agreement, he shall no longer be entitled to any of the benefits and payments set forth in this Agreement. 10. In exchange for the payments the Employee will receive under this Early Retirement Agreement and Release, the Employee, on behalf of himself, his heirs, executors, administrators, successors and assigns, hereby releases and forever discharges the Company from any and all causes of action, charges or claims and/or damages of any kind arising out of employment, including the January 29, 1995 Employment Agreement between the Employee and the Company, and retirement from the beginning of his employment to and including the effective date of this Agreement. This includes, but is not limited to, claims arising under the 3 Federal Age Discrimination in Employment Act of 1967 and Title VII of the Civil Rights Act of 1964, as amended, and claims of discrimination based on race, creed, color, sex, age, national origin, disability or marital status. 11. This Early Retirement Agreement and Release sets forth the entire agreement between the Company and the Employee and shall supersede any and all prior agreements or understandings between the parties, except as otherwise specified in this Early Retirement Agreement and Release. It may not be amended, except by a written agreement signed by both parties. 12. BY SIGNING THIS AGREEMENT AND GENERAL RELEASE AND WAIVER, THE EMPLOYEE STATES THAT: HE HAS READ IT; HE UNDERSTANDS IT; HE AGREES WITH EVERYTHING IN IT; HE WAS TOLD, IN WRITING, TO CONSULT AN ATTORNEY BEFORE SIGNING IT; HE HAS BEEN GIVEN TWENTY-ONE (21) DAYS TO REVIEW THE AGREEMENT AND TO THINK ABOUT WHETHER OR NOT HE WANTS TO SIGN IT; AND HAS SIGNED IT KNOWINGLY AND VOLUNTARILY. THE PENN TRAFFIC COMPANY By: /s/ Gary D. Hirsch ---------------------- Gary D. Hirsch, Chairman AGREED: /s/ John T. Dixon - -------------------- John T. Dixon Dated: October 5, 1996 4 EX-10.17 3 EX-10.17 Exhibit 10.17 EMPLOYMENT AGREEMENT AGREEMENT, made as of March 11, 1997 (the "Effective Date"), by and between The Penn Traffic Company, a Delaware corporation (the "Company") and Phillip E. Hawkins ("Executive"). R E C I T A L S: In order to induce Executive to serve as the President and Chief Executive Officer of the Company, the Company desires to provide Executive with compensation and other benefits on the terms and conditions set forth in this Agreement. Executive is willing to accept such employment and perform services for the Company, on the terms and conditions hereinafter set forth. It is therefore hereby agreed by and between the parties as follows: 1. Employment. 1.1 Subject to the terms and conditions of this Agreement, the Company agrees to employ Executive as an employee as of the date of this Agreement and, during the Executive Term hereof (as that term is defined in Section 2), as its President and Chief Executive Officer. 1.2 Subject to the terms and conditions of this Agreement, Executive hereby accepts employment as the President and Chief Executive Officer of the Company during the Executive Term and agrees to devote his full working time and efforts (except for permitted vacation periods and periods of illness and other incapacity), to the best of his ability, experience and talent, to the performance of services, duties and responsibilities of the President and Chief Executive Officer in connection therewith. During the Executive Term, Executive shall perform such duties and exercise such powers as are consistent with his position as President and Chief Executive Officer and perform such other duties and exercise such other powers as the Board of Directors (the "Board") may from time to time delegate to him. 1.3 The Company hereby agrees to take all reasonable and necessary corporate action to cause Executive to be appointed or elected to the Board of Directors as soon as is practicable and, if so appointed or elected, the Executive agrees to serve as a director of the Company, so long as Executive holds the position of President and Chief Executive Officer, without additional compensation. 1.4 Executive may, while serving as President and Chief Executive Officer, (and so long as such activities do not materially interfere with his duties and responsibilities hereunder) engage in charitable and community affairs, may manage any passive investment made by him in publicly traded equity securities or other property (provided that no such investment may exceed 2% of the equity of any operating entity without the prior approval of the Board) and may, subject to the prior approval of the Board, serve as a member of the board of directors or as a trustee of any other corporation, association or entity. 2. Term of Employment. Executive's term of employment under this Agreement as President and Chief Executive Officer (the "Executive Term") shall commence on April 1, 1997 or on such earlier date following the Effective Date as Executive may elect and, subject to the terms hereof, shall terminate (the "Termination Date") on the earlier of (i) January 31, 2001 or (ii) termination of Executive's employment pursuant to this Agreement. 3. Compensation. 3.1 Salary. The Company shall pay Executive a base salary ("Base Salary") of (a) $1,000 per week for the period from the Effective Date to the beginning of the Executive Term, such amount to be paid in a lump sum upon the commencement of the Executive Term, and (b) at the rate of $450,000 per annum for the period commencing at the beginning of the Executive Term and ending on the Termination Date. Base Salary shall be payable in accordance with the ordinary payroll practices of the Company. Any increase in Base Salary shall be in the discretion of the Board and Executive's salary, after giving effect to any such increase, shall constitute "Base Salary" hereunder. 3.2 Annual Bonus. In addition to his Base Salary, Executive shall be eligible to be paid an annual cash bonus (the "Bonus") during the term of his employment hereunder. The bonus payable in respect of any year shall be paid, on a -2- date to be determined by the Board, during the first quarter of the next fiscal year. The Bonus which may range from 0% to 100% of Base Salary depending on the performance of the Company each fiscal year. Executive shall receive not less than 50% of Base Salary (the "Target Bonus") in respect of any fiscal year during the Executive Term hereof in which the Company shall have reached its budgeted goals for the year as determined by the Board and communicated to Executive in writing (the "Performance Target"). The budgeted goals for determining eligibility for the Target Bonus in any year, and the criteria for determining deviations from the Target Bonus amount if budgeted goals are exceeded or not attained, shall be determined by the Board in advance of the year in respect of which the Bonus is to be paid. For the fiscal year ending approximately January 31, 1998, Executive's Bonus shall be $225,000 and shall be paid to Executive without regard to the achievement of the Performance Target. 3.3 Supplemental Payment. On April 2, 1997, unless Executive shall have failed or refused to begin performance of the Executive Term as set forth in this Agreement, and in consideration and full satisfaction of (i) such loss of present benefits and other incidental costs which Executive may incur as a result of his entering into this Agreement and being employed by the Company and (ii) the covenants and agreements of Executive in Section 5 hereof, the Company shall pay to Executive $2,300,000 less the minimum amount required to be withheld by applicable statutes by check or any other method of payment acceptable to Executive and the Company, provided, however, that such amount will be adjusted (either by reduction before the payment is made or by refund after it is made) by an amount equal to 47.7% of the aggregate amount which Executive receives, either before or after the Effective Date, with respect to his present employer's Amended and Restated Severance Plan for Senior Management and Key Employees and with respect to his present employer's supplemental retirement plan, as well as by 47.5% of the fair market value (on the date of vesting) of all stock options from his present employer which become vested after March 1, 1998 or by 47.5% of any amounts received by Executive in lieu of such payments or stock options; and provided further that if the Executive Term does not commence because of any action or refusal on the part of Executive, then the entire amount of the payment made to Executive pursuant to this Section 3.3 shall be refunded by Executive to the Company. -3- 3.4 Compensation Plans and Programs. Executive shall be eligible to participate in any compensation plan or program maintained by the Company for its senior executives as a group, on terms at least as favorable as those applicable to such other senior executives. 3.5 Relocation and Payment of Relocation Expenses. During the Executive Term, the Executive shall perform his duties in the Syracuse, New York area, except that the Executive agrees to make such business trips to such other locations as may be reasonably necessary and appropriate in the performance of his duties. Executive agrees that he shall relocate to the Syracuse, New York area no later than the commencement of the Executive Term and shall use his best efforts to relocate his family to the Syracuse, New York area no later than September 1, 1997. To assist the Executive with his relocation to the Syracuse, New York area, the Company agrees to provide Executive with the benefits and reimbursements set forth on Schedule A hereto to the extent actually incurred by Executive in connection with his relocation from his present home. 4. Employee Benefits. 4.1 Employee Benefit Programs, Plans and Practices. The Company shall provide Executive during the term of his employment hereunder with coverage under all employee pension and welfare benefit programs, plans and practices (commensurate with his position in the Company and to the extent permitted under any such employee benefit plan) in accordance with the terms thereof, which the Company makes available to its senior executives as a group. 4.2 Vacation and Fringe Benefits. During the Executive Term, Executive shall be entitled to four weeks of paid vacation in each calendar year, which shall be taken at such times as are consistent with Executive's responsibilities hereunder. Executive shall also be entitled to the perquisites and other fringe benefits made available to senior executives of the Company as a group, commensurate with his position with the Company. 4.3 Expenses. Executive is authorized to incur reasonable expenses in carrying out his duties and responsibilities under this Agreement, including, without limitation, expenses for travel (including reasonable travel expenses for Executive's spouse for relevant industry -4- meetings) and similar items related to such duties and responsibilities. The Company will reimburse Executive for all such expenses upon presentation by Executive from time to time of appropriately itemized and approved (consistent with the Company's policy) accounts of such expenditures. 5. No Competition; Confidentiality. (a) The Executive agrees that while this Agreement is in effect and for a period of three (3) years after the Termination Date, the Executive will not without the prior written consent of the Company, as principal, agent, employee, employer, consultant, stockholder (other than as the holder of shares of capital stock of the Company or of not more than 2% of the shares of any other corporation), director or co-partner, or in any other individual or representative capacity whatever, directly or indirectly: (i) engage in any way in any wholesale and/or retail food business which operates in any state in the United States in which the Company operates during the Executive Term; (ii) induce or attempt to induce any person who is in the employ of the Company or any subsidiary thereof to leave the employ of the Company or such subsidiary, or employ or attempt to employ any such person or any person who at any time during the preceding twelve (12) months was in the employ of the Company or any subsidiary thereof; or (iii)induce or attempt to induce or assist any other person, firm or corporation to do any of the actions referred to in (i) or (ii) above (provided, that this Section 5 shall not be interpreted so as to prohibit the Executive from providing references for employees of the Company or its subsidiaries or Affiliates who have been solicited by an employee or prospective employer without violation of (ii) above. (b) The Executive agrees that while this Agreement is in effect and for a period of three years following the Termination Date he will not at any time from and after the date hereof, divulge, furnish or make accessible to any person, or himself make use of other than for the sole benefit of the Company, any confidential or -5- proprietary information of the Company obtained by him while in the employ of the Company other than in connection with his employment with the Company as provided hereunder, including, without limitation, information with respect to any products, services, improvements, formulas, designs, styles, processes, research, analyses, suppliers, customers, methods of distribution or manufacture, contract terms and conditions, pricing, financial condition, organization, personnel, business activities, budgets, plans, objectives or strategies of the Company or its proprietary products or of any subsidiary or Affiliate of the Company and that he will, prior to or upon the termination of his employment with the Company, return to the Company all such confidential or non-public information, whether in written or other physical form or stored electronically on computer disks or tapes or any other storage medium, and all copies thereof, in his possession or custody or under his control; provided, however, that (x) the restrictions of this paragraph shall not apply to publicly available information or information known generally to the public (without any action on the part of the Executive prohibited by the restrictions of this paragraph), and (y) the Executive may disclose such information as may be required pursuant to any subpoena or other lawful process issued pursuant to any applicable law, rule or regulation. Notwithstanding the foregoing, in the event that the Executive receives a subpoena or other process or order which may require him to disclose any confidential information, the Executive agrees (i) to notify the Company promptly of the existence, terms and circumstances surrounding such process or order, and (ii) to cooperate with the Company, at the Company's request and at its expense including but not limited to attorneys' fees and expenses, in taking legally available steps to resist or narrow such process or order and to obtain an order (or other reliable assurance reasonably satisfactory to the Company) that confidential treatment will be given to such information as is required to be disclosed. As used in this Section 5, "Affiliate" shall have the meaning set forth in Section 6.4 hereof. (c) In view of the services which the Executive will perform for the Company and its subsidiaries and Affiliates, which are special, unique, extraordinary and intellectual in character and will place him in a position of confidence and trust with the customers and employees of the -6- Company and its subsidiaries and Affiliates and will provide him with access to confidential financial information, trade secrets, "know-how" and other confidential and proprietary information of the Company and its subsidiaries and Affiliates, and recognizing the substantial sums paid and to be paid to the Executive pursuant to the terms hereof, the Executive expressly acknowledges that the restrictive covenants set forth in this Section 5 are necessary in order to protect and maintain the proprietary interests and other legitimate business interests of the Company and its subsidiaries and Affiliates and that the enforcement of such restrictive covenants will not prevent him from earning a livelihood. The Executive acknowledges that the remedy at law for any breach or threatened breach of this Section 5 will be inadequate and, accordingly, that the Company shall, in addition to all other available remedies (including, without limitation, seeking damages sustained by reason of such breach), be entitled to specific performance or injunctive relief without being required to post bond or other security and without having to prove the inadequacy of the available remedies at law. 6. Termination. 6.1 Death of the Executive. The Executive Term hereof shall automatically terminate upon the death of the Executive. 6.2 By the Executive. The Executive shall be entitled to terminate the Executive Term (i) for Good Reason (as defined in Section 6.4 below) following a Change of Control (as defined in Section 6.4 below) by giving to the Company ten (10) days' prior written notice, (ii) in the event of Executive's Disability (as defined in Section 6.4 below), or (iii) at any time after the Effective Date by giving to the Company thirty (30) days prior written notice of his intention to terminate. 6.3 By the Company. The Company shall be entitled to terminate the Executive Term (i) in the event of the Executive's Disability (as defined in Section 6.4 below); (ii) for Cause (as defined in Section 6.4 below) by giving to Executive ten (10) days' prior written notice thereof; or (iii) at the Company's sole discretion for any reason other than Disability or Cause by giving to Executive thirty (30) days' prior written notice thereof. -7- 6.4 Definitions. For purposes of this Agreement, the following terms shall have the following meanings: (a) Affiliate. "Affiliate" shall mean, with respect to any person, a person (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such person, (ii) which directly or indirectly through one or more intermediaries beneficially owns or holds 5% or more of the combined voting power of the total voting securities of such person or (iii) of which 5% or more of the combined voting power of the total voting securities (or in the case of a person which is not a corporation, 5% or more of the equity interest) directly or indirectly through one or more intermediaries is beneficially owned or held by such person, or a subsidiary of such person. (b) Cause. "Cause" shall mean (x) indictment of the Executive for a felony, provided, however, that in the event Executive is subsequently found not guilty or the charges against Executive are dismissed, any amounts that would have been due Executive hereunder if he had been terminated without Cause shall be paid to Executive on the same basis as if a termination without Cause had occurred on the date he was actually terminated, or (y) intentional misappropriation of property of the Company or any subsidiary thereof or other intentional dishonesty or intentional fraud with respect to the Company or any subsidiary thereof, or (z) the Executive's willful malfeasance or willful misconduct in the performance of his obligations under this Agreement, or any intentional breach of Section 5 hereof. (c) Disability. "Disability" shall mean (i) the Executive's failure substantially to perform his services hereunder on a full-time basis for a period of six consecutive months, or for shorter periods aggregating six months in any twelve-month period, as a result of incapacity due to physical or mental illness, or (ii) if the Executive becomes disabled to an extent which entitles him to long-term benefits under the -8- Company's long-term disability benefit plan applicable to senior executive officers as in effect on the first date of such entitlement. (d) Good Reason. "Good Reason" shall mean the occurrence of any of the following events following a Change in Control of the Company: (i) The assignment to the Executive of any duties inconsistent with the Executive's positions, duties, responsibilities and status with the Company prior to the Change in Control, or a substantial diminution in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control; (ii) The taking of any action by the Company which would materially reduce Executive's compensation or his participation in or his benefits under, any of plans, programs or arrangements enjoyed by the Executive (or deprive the Executive of any material fringe benefit) pursuant hereto immediately prior to the Change in Control; or (iii) The requirement subsequent to a Change of Control that the Executive be based at a location more than 25 miles from the location where the Executive is based immediately prior to the Change in Control. (e) Change in Control. A "Change in Control" shall mean an event or series of events by which (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) (other than Riverside Acquisition Company, Limited Partnership ("RAC"), Miller Tabak Hirsch + Co. ("MTH") or any Affiliate of either thereof) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all shares that any -9- such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 50% or more of the outstanding shares of common stock of the Company or securities representing 50% or more of the combined voting power of the Company's voting securities, (ii) the Company consolidates with or merges into another corporation or conveys, transfers or leases all or substantially all of its assets to any person, or any corporation consolidates with or merges into the Company, in each case pursuant to a transaction (other than a transaction between the Company and its subsidiaries) (A) after giving effect to which persons who were Directors of the Company immediately prior to the transaction do not constitute a majority of the Board of Directors of the successor or survivor entity and (B) in which the outstanding voting securities of the Company are changed into or exchanged for cash, securities or other property, with the effect that all or substantially all of the individuals and entities who were the respective beneficial owners of the common stock and voting securities of the Company immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than fifty percent (50%) of the then outstanding shares of common stock and of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the corporation resulting from such reorganization, merger or consolidation, or (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Company's Board of Directors (together with any new or replacement directors whose election by the Company's Board of Directors, or whose nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for -10- any reason to constitute a majority of the directors then in office. 7. Payments to Executive Upon Early Termination of Employment. 7.1 Termination Not for Cause or for Good Reason. If during the Executive Term Executive's employment is (x) terminated by the Company other than for Cause or Disability (as defined in Section 6.4 hereof) or (y) if Executive terminates his employment for Good Reason (as defined in Section 6.4 hereof): (a) if such termination occurs on or prior to February 1, 2000, Executive shall receive, in cash, on the date of termination such Base Salary and Target Bonus payments as he would have been entitled to receive in accordance with normal payroll practices of the Company if termination had not occurred and the Company had attained a Target Performance in the year of termination and in each succeeding twelve month period up to and including the period ending February 1, 2001; (b) if such termination occurs subsequent to February 1, 2000, Executive shall receive, in cash, on the date of termination a lump-sum payment equal to one year's Base Salary and the Target Bonus in respect thereof which he would have been entitled to receive if the Company had attained a Target Performance for the fiscal year ending February 1, 2001; or (c) whether such termination occurs prior or subsequent to February 1, 2000, Executive shall receive for the greater of the remainder of the Executive Term or a period of twelve months following the date of termination such payments, if any, under applicable benefit plans or programs of the type referred to in Section 4.1 hereof, to which he would be entitled pursuant to the terms of such plans or programs, as well as a cash lump sum payment in respect of accrued but unused vacation days (the "Vacation Payment") and all compensation earned but not yet paid (including any deferred Bonus payments ) (the "Compensation Payment"). -11- 7.2 Disability. If Executive suffers a Disability (as defined in Section 6.4) during the Executive Term, the Company or Executive may terminate Executive's employment on written notice thereof to the other, and Executive shall receive in cash, in addition to Base Salary through the date of termination and in accordance with normal payroll practices of the Company: (a) the Target Bonus in respect of the fiscal year in which his termination occurs, prorated by a fraction the numerator of which is the number of days of the fiscal year elapsed prior to the date of termination and the denominator of which is 365; (b) the Vacation Payment and the Compensation Payment; and (c) such payments under applicable plans or programs of the type referred to in Section 4.1 hereof to which he is entitled pursuant to the terms of such plans or programs. 7.3 Death. In the event of Executive's death during the Executive Term hereunder, Executive's estate or designated beneficiaries shall receive in cash, in addition to Base Salary through the date of death and in accordance with normal payroll practices of the Company: (a) the Target Bonus in respect of the fiscal year in which his death occurs, prorated by a fraction, the numerator of which is the number of days of the fiscal year elapsed prior to the date of his death and the denominator of which is 365; (b) any death benefits provided under the employee benefit programs, plans and practices referred to in Section 4.1 hereof, in accordance with their terms; and (c) the Vacation Payment and the Compensation Payment. 7.4 Voluntary Termination by Executive; Discharge for Cause. The Company shall have the right to terminate the employment of Executive for Cause (as defined in Section -12- 6.4). In the event that Executive's employment is terminated by the Company for Cause or by Executive other than (x) for Good Reason or (y) as a result of the Executive's Disability or death, Executive shall be entitled to receive in cash only his Base Salary through the date of termination in accordance with normal payroll practices, the Compensation Payment, the Vacation Payment and any other benefits which Executive is entitled to receive on the date of termination (whether or not payable on that date or a deferred or future date) pursuant to the employee benefit program plans and practices referred to in Section 4.1 hereof. Executive shall not be entitled, among other things, to the payment of any Bonus in respect of all or any portion of the fiscal year in which such termination occurs. After the termination of Executive's employment under this Section 7.4, the obligations of the Company under this Agreement to make any further payments, or provide any benefits specified herein, to Executive shall thereupon cease and terminate. 8. Stock Arrangements. 8.1 Grant of Options. Executive shall be granted on the Effective Date options to purchase 400,000 shares of Common Stock, par value $1.25, of the Company with an exercise price equal to the Fair Market Value thereof as defined in the Plans. Such options may be granted, at the Company's election, under the 1993 Long Term Incentive Plan and/or the Performance Incentive Plan of the Company (together, the "Plans") and shall vest in five (5) substantially equal annual increments on the date of commencement of the Executive Term and on each of the first four anniversaries of the commencement of the Executive Term on which Executive is still employed as President and Chief Executive Officer. To the extent lawful, the Company shall grant options which will qualify as incentive stock options under the Internal Revenue Code. 8.2 Option Agreements. As soon as practicable, Executive and the Company will enter into option agreements, in the form contemplated under the Plans, with respect to the award of options referred to in Section 8.1. 8.3 Stockholder Action. At its Annual Meeting of Stockholders in 1997, the Company will submit the Performance Incentive Plan to the stockholders of the Company for approval. In the event of disapproval of the Plan by the stockholders, however, the options granted to Executive shall -13- continue to be valid and subsisting and enforceable by Executive and the Company in accordance with their terms. 9. Mitigation of Damages. Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise after the termination of his employment hereunder. 10. Notices. All notices or communications hereunder shall be in writing, addressed as follows: To the Company: Gary D. Hirsch Chairman The Penn Traffic Company 411 Theodore Fremd Avenue Rye, New York 10580 with a copy to: Francis D. Price, Esq. Vice President, General Counsel and Secretary The Penn Traffic Company P.O. Box 4737 1200 State Fair Blvd. Syracuse, New York 13221-4737 To Executive: Phillip E. Hawkins 1817 Via Arriba Palos Verdes Estates, California 90274 with a copy to: Ronald L. Fein, Esq. Stutman, Treister & Glatt 3699 Wilshire Boulevard Suite 900 Los Angeles, California 90010-2739 Any such notice or communication shall be delivered by hand or by courier or sent certified or registered mail, return receipt requested, postage prepaid, addressed as above (or to such other address as such party may designate in a -14- notice duly delivered as described above) and, if mailed, the fifth business day after the actual date of mailing shall constitute the time at which notice was given. 11. Separability; Legal Fees. (a) If any provision of this Agreement shall be declared to be invalid or unenforceable, in whole or in part, such invalidity or unenforceability shall not affect the remaining provisions hereof which shall remain in full force and effect. Each party shall bear the costs of any legal fees and other fees and expenses which may be incurred in respect of enforcing its respective rights under this Agreement. The Company shall, however, reimburse Executive for the reasonable fees and disbursements (not in excess of $10,000) of Executive's legal counsel in connection with the negotiation and execution of this Agreement and the other documents contemplated hereby; provided, however, that no such payment shall be made without reasonable substantiation of the amounts. 12. Assignment. This contract shall be binding upon and inure to the benefit of the heirs and representatives of Executive and the assigns and successors of the Company, but neither this Agreement nor any rights or obligations hereunder shall be assignable or otherwise subject to hypothecation by Executive (except by will or by operation of the laws of intestate succession) or by the Company, except that the Company may assign this Agreement to any successor (whether by merger, purchase or otherwise) to all or substantially all of the stock, assets or businesses of the Company, if such successor expressly agrees to assume the obligations of the Company hereunder. 13. Amendment. This Agreement may only be amended by written agreement of the parties hereto. 14. Beneficiaries; References. Executive shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following Executive's death, and may change such election, in either case by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of his incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to his beneficiary, estate or other legal representative. Any reference to the masculine gender in this Agreement shall include, where appropriate, the feminine. -15- 15. Survivorship. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. The provisions of this Section 15 are in addition to the survivorship provisions of any other section of this Agreement. 16. Governing Law. This Agreement shall be construed, interpreted and governed in accordance with the laws of the state of New York, without reference to rules relating to conflicts of law. 17. Effect on Prior Agreements. This Agreement contains the entire understanding between the parties hereto and supersedes in all respects any prior or other agreement or understanding between the Company or any affiliate of the company and Executive. 18. Withholding. The Company shall be entitled to withhold from payment any amount of withholding required by law. 19. Survival. Notwithstanding the expiration of the Term of this Agreement, the provisions of Section 5 hereof shall remain in effect as long as is necessary to give effect thereto. 20. Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original. THE PENN TRAFFIC COMPANY By: /s/ Martin A. Fox ------------------------------ Name: Martin A. Fox Title: Vice Chairman - Finance /s/ Phillip E. Hawkins ------------------------------- Phillip E. Hawkins -16- Schedule A Relocation Assistance The Company will pay, or reimburse Executive for, the following costs upon presentation of invoices or other satisfactory evidence thereof. 1. The cost of packing, moving and unpacking (together with the cost of temporary storage, if required) of the household possessions of Executive and his family. 2. Executive's closing costs relating to the sale of Executive's present home at 1817 Via Arriba, Palos Verdes Estates, California including a selling broker's commission equal to not more than 6% of the sale price. 3. Executive's closing costs relating to the purchase of a new home in the Syracuse area, including reimbursement of a loan origination fee or "points" equal to not more than 1% of the amount of any first mortgage loan obtained by Executive. 4. The cost for Executive and his family to make a reasonable number of trips of reasonable and appropriate duration to the Syracuse, New York area to make arrangements for permanent housing. 5. The cost of suitable temporary living quarters for Executive and his family, as needed, until September 1, 1997. 6. If Executive closes the purchase of a new home in Syracuse before closing the sale of his present home, the interest cost and property taxes on his present home for a period not to exceed 12 months from September 1, 1997. EX-10.18 4 EX-10.18 Exhibit 10.18 The Penn Traffic Company 1997 Performance Incentive Plan 1. Purposes of the Plan. This Performance Incentive Plan, first adopted November 21, 1996 and amended and restated as of April 1, 1997, shall be known as "The Penn Traffic Company 1997 Performance Incentive Plan" (hereinafter referred to as the "Plan"). The purposes of the Plan are to further the long-term growth of The Penn Traffic Company (the "Corporation"), to the benefit of its stockholders, by providing incentives to the officers, employees and independent contractors of the Corporation and its subsidiaries who will be largely responsible for such growth, and to assist the Corporation and its subsidiaries in attracting and retaining executives of experience and ability on a basis competitive with industry practices. The Plan permits the Corporation to provide incentive compensation of the types commonly known as restricted stock, stock options and phantom stock, as well as other types of incentive compensation. For purposes of this Plan, "Award" shall mean and include any Option, SAR, Restricted Stock, Common Stock granted as a bonus or in lieu of other awards, other Stock-Based Award, Tax Bonus, or other cash payments granted to a participant under the Plan. 2. Administration of the Plan. The Plan shall be administered by the Personnel and Compensation Committee of the Board of Directors of the Corporation (the "Committee"). Subject to the provisions of the Plan, the Committee shall have exclusive power to select the officers, employees and independent contractors of the Corporation and its subsidiaries to participate in the Plan; to determine the type, size and terms of Awards to be made to each participant selected, to determine whether, to what extent, and under what circumstances an Award may be settled, or the exercise price of an Award may be paid, in cash, Common Stock, other Awards or other property, or an Award may be cancelled, forfeited, or surrendered; to determine whether, and to certify that, performance goals to which the settlement of an Award is subject are satisfied; to correct any defect or supply any omission or reconcile any inconsistency in the Plan, and to adopt, amend and rescind such rules and regulations as, in its opinion, may be advisable in the administration of the Plan; and to make all other determinations as it may deem necessary or advisable for the administration of the Plan. The Committee's interpretation of the Plan, any Awards granted thereunder or any Award Agreements shall be final and binding on all parties concerned, including the Corporation and any participant. Any action of the Committee in administering the Plan shall be final, conclusive and binding on all persons, including the Corporation, its subsidiaries, employees, participants, persons claiming rights from or through participants and stockholders of the Corporation. 3. Participation. Participants in the Plan shall be selected by the Committee from among the officers, employees and independent contractors of the Corporation and its subsidiaries. The term "subsidiary" shall mean any corporation, partnership, joint venture or other business entity a majority of whose outstanding voting securities is beneficially owned, directly or indirectly, by the Corporation. Participants may receive multiple Awards under the Plan. 4. Awards. (a) Types. Awards under the Plan may include, but need not be limited to, cash and/or shares of the Corporation's common stock, $1.25 par value ("Common Stock"), rights to receive cash and/or shares of Common Stock, and options ("Options") to purchase shares of Common Stock, including options designated as qualifying as incentive stock options ("Incentive Stock Options" or "ISOs") under Section 422 of the Internal Revenue Code of 1986, as amended ("Code"), and options not intended so to qualify. The terms of any Option granted under the Plan as an ISO shall comply in all respects with the provisions of Section 422 of the Code, including, but not limited to, the requirement that no ISO shall be granted more than ten years after the effective date of the Plan. The Committee may also make any other type of Award deemed by it to be consistent with the purposes of the Plan. (b) Vesting, Performance Requirements and Forfeiture. In granting any Awards, the Committee (1) may specify that the right to exercise such Awards or the right to receive payment of such cash and/or shares of Common Stock or to retain any shares of Common Stock so transferred shall be conditional upon the fulfillment of specified conditions, including, without limitation, completion of specified periods of service in the employ of the Corporation or its subsidiaries, and the achievement of specified business and/or personal performance goals, and (2) may provide for the forfeiture of all or any portion of any such Awards in specified circumstances. The Committee may also specify by whom and/or in what manner the accomplishment of any such performance goals shall be determined. (c) Agreements. Awards under the Plan shall be evidenced by an agreement (an "Award Agreement"), which, subject to the provisions of the Plan, may contain such terms and conditions as may be approved by the Committee, and shall be executed by an officer on behalf of the Corporation and by the recipient of the Award. 5. Shares of Stock Subject to the Plan. Subject to adjustment as provided in Section 7(a) hereof, the number of shares of Common Stock which may be paid to participants under the Plan and/or purchased pursuant to Options granted under the Plan shall not exceed an aggregate of one million five hundred thousand (1,500,000) shares. In the event that any shares of Common Stock subject to an Award are forfeited or such Award is settled in cash or otherwise terminated for any reason without an actual distribution of shares of Common Stock to the participant, such shares may again be awarded under the Plan. If the terms of any Award allow a participant to acquire or receive payment with regard to a stated number or maximum number of shares of Common Stock by alternatively exercising Options or receiving cash and/or shares pursuant to other forms of Awards or forfeiting without consideration any Restricted Stock (whether or not any of the foregoing shall have been granted at the same or at a different time), the total number of shares of Common Stock which shall be deemed granted shall be limited to only the maximum number which can be so acquired or received. Shares to be delivered or purchased under the Plan may be either authorized but unissued shares of Common Stock or shares of Common Stock held by the Corporation as treasury shares. -2- 6. Options and Other Awards. (a) Term of Options. The term of any Option shall be determined by the Committee, but in no event shall any Option designated as an Incentive Stock Option be exercisable more than ten years after the date on which it was granted. (b) Option Price; Fair Market Value. The price ("Option Price") at which shares of Common Stock may be purchased pursuant to any Option shall be determined by the Committee at the time the Option is granted, but in no event shall the Option Price be less than 100 per cent of the Fair Market Value of such shares on the date the Option is granted. For all purposes of the Plan, "Fair Market Value" is the mean of the high and low sales prices of the Common Stock on the relevant date as reported on the stock exchange or market on which the Common Stock is primarily traded, or, if no sale is made on such date, then "Fair Market Value" is a weighted average of the mean of the high and low sales prices of the Common Stock on the next preceding day and the next succeeding day on which such sales were made as reported on the stock exchange or market on which the Common Stock is primarily traded. (c) Payment Upon Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole or in part, whether the Option Price shall be paid in cash or by the surrender at Fair Market Value of Common Stock, or by any combination of cash and shares of Common Stock, including, without limitation, cash, Common Stock, other Awards, or other property (including notes or other contractual obligations of participants to make payment on a deferred basis, such as through "cashless exercise" arrangements, to the extent permitted by applicable law), and the methods by which Common Stock will be delivered or deemed to be delivered to participants. Upon exercise of an Option, the Option Price shall be payable to the Corporation in cash, or, at the discretion of the Committee, in shares of Common Stock valued at the Fair Market Value thereof on the date of payment, or in a combination of cash and shares of Common Stock. (d) Surrender of Options. The Corporation may, if the Committee so determines, accept the surrender by a participant, or the personal representative of a participant, of an Option, in consideration of a cash payment by the Corporation equal to the difference obtained by subtracting the aggregate Option Price from the aggregate Fair Market Value of the Common Stock covered by the Option on the date of such surrender, or partly in shares of Common Stock and partly in cash. (e) Restricted Stock. The Committee is authorized to award shares of Common Stock which are, in accordance with this Section 6(e), subject to restrictions and a risk of forfeiture ("Restricted Stock") to participants on the following terms and conditions: (i) Restricted Period. Restricted Stock awarded to a participant shall be subject to such restrictions on transferability and other restrictions for such periods as shall be established by the Committee, in its discretion, at the time of such Award, which restrictions may lapse separately or in combination at such times, under such circumstances, or otherwise, as the Committee may determine. (ii) Forfeiture. Restricted Stock shall be forfeitable to the Corporation upon termination of employment during the applicable restricted periods. The Committee, in its -3- discretion, whether in an Award Agreement or anytime after an Award is made, may accelerate the time at which restrictions or forfeiture conditions will lapse or remove any such restrictions, including upon death, disability or retirement, whenever the Committee determines that such action is in the best interests of the Corporation. (iii) Certificates for Stock. Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Stock are registered in the name of the participant, such certificates may bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock. (iv) Rights as a Shareholder. Subject to the terms and conditions of the Award Agreement, the participant shall have all the rights of a stockholder with respect to shares of Restricted Stock awarded to him or her, including, without limitation, the right to vote such shares and the right to receive all dividends or other distributions made with respect to such shares. If any such dividends or distributions are paid in Common Stock, the Common Stock shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which the Common Stock has been distributed. (f) Stock Appreciation Rights. The Committee is authorized to grant to participants a right ("Stock Appreciation Rights" or "SARs") to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one share of Common Stock on the date of exercise over (B) the grant price of the SAR as determined by the Committee as of the date of grant of the SAR, which grant price (except as provided in Section 6(j)) shall not be less than the Fair Market Value of one share of Common Stock on the date of grant. The Committee shall determine the time or times at which an SAR may be exercised in whole or in part, the method of exercise, method of settlement, form of consideration payable in settlement, method by which Common Stock will be delivered or deemed to be delivered to participants, whether or not an SAR shall be in tandem with any other Award, and any other terms and conditions of any SAR. (g) Bonus Stock and Awards in Lieu of Cash Obligations. The Committee is authorized to grant Common Stock as a bonus, or to grant Common Stock or other Awards in lieu of Corporation or subsidiary obligations to pay cash or deliver other property under other plans or compensatory arrangements; provided that, in the case of participants subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), such cash amounts are determined under such other plans in a manner that complies with applicable requirements thereof and of the rules promulgated pursuant thereto so that the acquisition of Common Stock or Awards hereunder shall be exempt from Section 16(b) liability. Common Stock or Awards granted hereunder shall be subject to such other terms as shall be determined by the Committee. (h) Other Stock-Based Awards. The Committee is authorized, subject to limitations under applicable law, to grant to participants rights denominated or payable in, or valued in whole or in part by reference to the market value of, Common Stock ("Stock-Based Awards"), including, but not limited to, any Option, SAR, Restricted Stock, Common Stock granted as a bonus or Awards in lieu of cash obligations, as deemed by the Committee to be consistent with the purposes of the Plan. The Committee shall determine the terms and conditions of such Stock-Based Awards. Common Stock delivered pursuant to an Award in the nature of a purchase right granted under this Section 6(h) shall be purchased for such -4- consideration and paid for at such times, by such methods, and in such forms including, without limitation, cash, Common Stock, other Awards, or other property, as the Committee shall determine. (i) Cash Payments and Tax Bonuses. The Committee is authorized to grant cash payments to participants, whether awarded separately or as a supplement to any Award. The Committee is further authorized, subject to limitations under applicable law, to grant to a participant a payment in cash, in the year in which an amount is included in the gross income of a participant in respect of an Award, of an amount equal to the federal, foreign, if any, and applicable state and local income and employment tax liabilities payable by the participant as a result of (i) the amount included in gross income in respect of the Award and (ii) the payment of the amount in clause (i) and the amount in this clause (ii) (a "Tax Bonus"). For purposes of determining the amount to be paid to a participant as a Tax Bonus, the participant shall be deemed to pay federal, foreign, if any, and state and local income taxes at the highest marginal rate of tax imposed upon ordinary income for the year in which an amount in respect of the Award is included in gross income, after giving effect to any deductions therefrom or credits available with respect to the payment of any such taxes. The Committee shall determine the terms and conditions of such Awards of Tax Bonuses and other cash payments. (j) Additional Provisions Applicable to Awards (i) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution for, any other Award granted under the Plan or any award granted under any other plan of the Corporation or any subsidiary, or any business entity acquired by the Corporation or any subsidiary, or any other right of a participant to receive payment from the Corporation or any subsidiary (all of the foregoing being referred to for purposes of this subparagraph (j) as "Awards"). If an Award is granted in substitution for another Award, the Committee shall require the surrender of such other Award in consideration for the grant of the new Award. Awards granted in addition to, or in tandem with other Awards may be granted either as of the same time as, or a different time from, the grant of such other Awards. The per share Option Price of any Option, grant price of any SAR, or purchase price of any other Award conferring a right to purchase Common Stock: (A) granted in substitution for an outstanding Award, shall be not less than the lesser of (A) the Fair Market Value of a share of Common Stock at the date such substitute Award is granted or (B) such Fair Market Value at that date, reduced to reflect the Fair Market Value at that date of the Award required to be surrendered by the participant as a condition to receipt of the substitute Award; or (B) retroactively granted in tandem with an outstanding Award, shall not be less than the lesser of the Fair Market Value of a share of Common Stock at the date of grant of the later Award or at the date of grant of the earlier Award. (ii) Exchange and Buy Out Provisions. The Committee may at any time offer to exchange or buy out any previously granted Award for a payment in cash, Common Stock, other Awards (subject to clause (i) of this Section 6(j)), or other property based on -5- such terms and conditions as the Committee shall determine and communicate to a participant at the time that such offer is made. (iii) Performance Conditions. The right of a participant to exercise or receive a grant or settlement of any Award, and the timing thereof, may be subject to such performance conditions as may be specified by the Committee. (iv) Term of Awards. The term of each Award shall, except as provided herein, be for such period as may be determined by the Committee; provided, however, that in no event shall the term of any ISO, or any SAR granted in tandem therewith, exceed a period of ten years from the date of its grant (or such shorter period as may be applicable under Section 422 of the Code). (v) Form of Payment. Subject to the terms of the Plan and any applicable agreement with a participant, payments or transfers to be made by the Corporation or a subsidiary upon the grant or exercise of an Award may be made in such forms as the Committee shall determine, including, without limitation, cash, Common Stock, other Awards, or other property (and may be made in a single payment or transfer, in installments, or on a deferred basis), in each case determined in accordance with rules adopted by, and at the discretion of, the Committee. (Such payments may include, without limitation, provisions for the payment or crediting of reasonable interest on installments or deferred payments.) The Committee, in its discretion, may accelerate any payment or transfer upon a change in control as defined by the Committee. The Committee may also authorize payment upon the exercise of an Option by net issuance or other cashless exercise methods. (vi) Loan Provisions. With the consent of the Committee, and subject at all times to laws and regulations and other binding obligations or provisions applicable to the Corporation, the Corporation may make, guarantee, or arrange for a loan or loans to a participant with respect to the exercise of any Option or other payment in connection with any Award, including the payment by a participant of any or all federal, foreign, if any, state, or local income or other taxes due in connection with any Award. Subject to such limitations, the Committee shall have full authority to decide whether to make a loan or loans hereunder and to determine the amount, terms, and provisions of any such loan or loans, including the interest rate to be charged in respect of any such loan or loans, whether the loan or loans are to be with or without recourse against the borrower, the terms on which the loan is to be repaid and the conditions, if any, under which the loan or loans may be forgiven. (vii) Change of Control. In the event of a Change of Control of the Corporation, all Awards granted under the Plan (including Performance-Based Awards, as defined below) that are still outstanding and not yet vested or exercisable or which are subject to restrictions shall become immediately 100% vested in each participant or shall be free of any restrictions, as of the first date that the definition of Change of Control has been fulfilled, and shall be exercisable for the remaining duration of the Award. All Awards that are exercisable as of the effective date of the Change of Control will remain exercisable for the remaining duration of the Award. A "Change of Control" shall mean an event or series of events by which (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) (other than Riverside Acquisition Company, Limited Partnership ("RAC"), Miller Tabak Hirsch + Co. ("MTH") or any Affiliate of either thereof) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all shares that any such person -6- has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 50% or more of the outstanding shares of Common Stock of the Corporation or securities representing 50% or more of the combined voting power of the Corporation's voting securities, (ii) the Corporation consolidates with or merges into another corporation or conveys, transfers or leases all or substantially all of its assets to any person, or any corporation consolidates with or merges into the Corporation, in each case pursuant to a transaction (other than a transaction between the Corporation and its subsidiaries) (A) after giving effect to which persons who were Directors of the Corporation immediately prior to the transaction do not constitute a majority of the Board of Directors of the successor or survivor entity and (B) in which the outstanding voting securities of the Corporation are changed into or exchanged for cash, securities or other property, with the effect that all or substantially all of the individuals and entities who were the respective beneficial owners of the common stock and voting securities of the Company immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than fifty percent (50%) of the then outstanding shares of common stock and of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the corporation resulting from such reorganization, merger or consolidation, or (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Corporation's Board of Directors (together with any new or replacement directors whose election by the Corporation's Board of Directors, or whose nomination for election by the Corporation's shareholders was approved by a vote of at least a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved), cease for any reason to constitute a majority of the directors then in office. (viii) Awards to Comply with Section 162(m). The Committee may (but is not required to) grant an Award pursuant to the Plan to a participant who, in the year of grant, may be a "covered employee," within the meaning of Section 162(m) of the Code, which is intended to qualify as "performance-based compensation" under Section 162(m) of the Code (a "Performance-Based Award"). The right to receive a Performance-Based Award, other than Options and SARs granted at not less than Fair Market Value, shall be conditional upon the achievement of performance goals established by the Committee in writing at the time such Performance-Based Award is granted. Such performance goals, which may vary from participant to participant and from Performance-Based Award to Performance-Based Award, shall be based upon the attainment by the Corporation or any subsidiary, division or department of specific amounts of, or increases in, one or more of the following, any of which may be measured either in absolute terms or as compared to another company or companies: revenues, earnings, earnings per share, operating income, cash flow, net worth, book value, stockholders' equity, financial return ratios, market performance and/or total stockholder return. Before any compensation pursuant to a Performance-Based Award is paid, the Committee shall certify in writing that the performance goals applicable to the Performance-Based Award were in fact satisfied. -7- The maximum amount which may be granted as Performance-Based Awards to any participant in any calendar year shall not exceed (i) Stock-Based Awards for 500,000 shares of Common Stock (whether payable in cash or Common Stock), subject to adjustment as provided in Section 7(a) hereof, (ii) a Tax Bonus payable with respect to the Stock-Based Awards described in clause (i) and (iii) cash payments (other than Tax Bonuses) of $500,000. 7. Dilution and Other Adjustments. (a) Changes in Capital Structure. In the event of any subdivision or combination of the outstanding shares of Common Stock, stock dividend, capital reorganization, liquidation, reclassification of shares, merger, consolidation, or sale, lease or transfer of substantially all of the assets of the Corporation, the Board of Directors of the Corporation shall make such equitable adjustments as it may deem appropriate in the Plan and the Awards thereunder, including, without limitation, any adjustment in the total number of shares of Common Stock which may thereafter be delivered or purchased under the Plan. Agreements evidencing Options may include such provisions as the Committee may deem appropriate with respect to the adjustments to be made to the terms of such Options upon the occurrence of any of the foregoing events. (b) Tender Offers and Exchange Offers. In the event of any tender offer or exchange offer, by any person other than the Corporation, for shares of Common Stock, the Committee may make such adjustments in outstanding Awards and authorize such further action as it may deem appropriate to enable the recipients of outstanding awards to avail themselves of the benefits of such offer, including, without limitation, acceleration of the exercise date of outstanding Options so that they become immediately exercisable in whole or in part, or offering to acquire all or any portion of specified categories of Options for a price determined pursuant to Section 6(d) hereof, or acceleration of the payment of outstanding awards payable, in whole or in part, in shares of Common Stock. (c) Other Events. In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, events described in the preceding subparagraphs) affecting the Corporation or any subsidiary, or in response to changes in applicable laws, regulations, or accounting principles. Notwithstanding the foregoing, no adjustment shall be made which would cause the Plan or any outstanding Option to violate Section 422(b)(1) of the Code with respect to ISOs or would adversely affect the status of a Performance-Based Award as "performance-based compensation" under Section 162(m) of the Code. 8. Miscellaneous Provisions. (a) Right to Awards. No employee or other person shall have any claim or right to be granted any Award under the Plan. (b) No Assurance of Employment. Neither the Plan nor any action taken thereunder shall be construed as giving any employee any right to be retained in the employ of the Corporation or any subsidiary. -8- (c) Costs and Expenses. All costs and expenses incurred in administering the Plan shall be borne by the Corporation. (d) Unfunded Plan. The Plan shall be unfunded. The Corporation shall not be required to establish any special or separate fund nor to make any other segregation of assets to assure the payment of any Award under the Plan. (e) Withholding Taxes. The Corporation shall have the right to deduct from all Awards hereunder paid in cash any federal, state, local or foreign taxes required by law to be withheld with respect to such payments and, with respect to Awards paid in Common Stock, to require the payment (through withholding from the employee's salary or otherwise) of any such taxes, but the Committee may make such arrangements for the payment of such taxes as the Committee in its discretion shall determine, including payment with shares of Common Stock. (f) Assignment or Transfer. No Awards under the Plan nor any rights or interests therein shall be assignable or transferable by the recipient thereof except, in the event of a participant's death, to his designated beneficiary as hereinafter provided, or by will or the laws of descent and distribution. During the lifetime of the participant, Awards under the Plan requiring exercise shall be exercisable only by such holder or by the guardian or legal representative of such holder. Notwithstanding the foregoing, the Committee may, in its discretion, provide that Awards or other rights or interests of a participant granted pursuant to the Plan (other than an ISO) be transferable, without consideration, to immediate family members (i.e., children, grandchildren or spouse), to trusts for the benefit of such immediate family members and to partnerships in which such family members are the only partners. The Committee may attach to such transferability feature such terms and conditions as it deems advisable. In addition, a participant may, in the manner established by the Committee, designate a beneficiary (which may be a person or a trust) to exercise the rights of the participant, and to receive any distribution, with respect to any Award upon the death of the participant. A beneficiary, guardian, legal representative or other person claiming any rights under the Plan from or through any participant shall be subject to all terms and conditions of the Plan and any Award Agreement applicable to such participant, except as otherwise determined by the Committee, and to any additional restrictions deemed necessary or appropriate by the Committee. (g) Nature of Benefits. Awards under the Plan, and payments made pursuant thereto, are not a part of salary or base compensation. (h) Compliance with Legal Requirements. The obligation of the Corporation to issue or deliver shares of Common Stock upon exercise of Options or otherwise shall be subject to satisfaction of all applicable legal and securities exchange requirements, including, without limitation, the provisions of the Securities Act of 1933, as amended, and the Exchange Act. The Corporation shall endeavor to satisfy all such requirements in such a manner as to permit at all times the exercise of all outstanding Options in accordance with their terms and to permit the issuance and delivery of shares of Common Stock whenever provided for by the terms of any award made under the Plan. -9- (i) Discretion. In exercising, or declining to exercise, any grant of authority or discretion hereunder, the Committee may consider or ignore such factors or circumstances and may accord such weight to such factors and circumstances as the Committee alone and in its sole judgment deems appropriate and without regard to the effect such exercise, or declining to exercise such grant of authority or discretion, would have upon the affected participant, any other participant, any employee, the Corporation, any subsidiary, any stockholder or any other person. 9. Amendment or Termination of the Plan. The Board of Directors of the Corporation, without the consent of any participant, may at any time terminate or from time to time amend the Plan in whole or in part, provided, however, that no such action shall adversely affect any rights or obligations with respect to any Awards theretofore made under the Plan, and provided further, that no amendment, without approval of the holders of Common Stock by an affirmative vote of a majority of the shares of Common Stock voted thereon in person or by proxy, shall (i) increase the aggregate number of shares subject to the Plan (other than increases pursuant to Section 7 hereof), (ii) increase the maximum term for which Options may be issued under the Plan, (iii) decrease the minimum Option Price at which ISOs may be issued under the Plan, or (iv) materially modify the requirements for eligibility to participate in the Plan. The Committee may amend outstanding agreements evidencing Awards under the Plan, and may amend the terms of Awards not evidenced by such agreements, in any manner not inconsistent with the terms of the Plan. The Committee may waive any conditions or rights under, or amend, alter, suspend, discontinue, or terminate, any Award theretofore granted and any Award Agreement relating thereto; provided, however, that without the consent of an affected participant, no such amendment, alteration, suspension, discontinuation, or termination of any Award may materially and adversely affect the rights of such participant under such Award. The foregoing notwithstanding, any performance condition specified in connection with an Award shall not be deemed a fixed contractual term, but shall remain subject to adjustment by the Committee, in its discretion at any time in view of the Committee's assessment of the Corporation's strategy, performance of comparable companies, and other circumstances, except to the extent that any such adjustment to a performance condition would adversely affect the status of a Performance-Based Award as "performance-based compensation" under Section 162(m) of the Code. 10. Effective Date and Term of Plan. This Plan shall be effective as of November 21, 1996, and shall be submitted for approval by the stockholders of the Corporation at the 1997 Annual Meeting of Stockholders. Unless otherwise specified in the terms of any particular Award when such Award is made, any Award granted after the effective date hereof and prior to the submission of this Plan for approval by the stockholders of the Corporation at the 1997 Annual Meeting of Stockholders shall continue to be outstanding and may be exercised in accordance with its terms; provided, however, that if this Plan shall be disapproved by the stockholders of the Corporation at the 1997 Annual Meeting of Stockholders, no Award shall be made hereunder after the date of such disapproval. The Plan shall terminate at the close of business on the date on which all of the shares of Common Stock provided for under the Plan have been used, unless sooner terminated by action of the Board of Directors of the Corporation. No -10- Award may be granted hereunder after termination of the Plan, but such termination shall not affect the validity of any award then outstanding. 11. Law Governing. The validity and construction of the Plan and any agreements entered into thereunder shall be governed by the laws of the State of New York, but without regard to the conflict laws of the State of New York, except to the extent that such conflict laws require application of the laws of the State of Delaware. -11- EX-10.19 5 EX-10.19 The Penn Traffic Company Supplemental Retirement Income Plan July 1, 1996 TABLE OF CONTENTS Page ---- Article I. ......................................................1 1.1 Establishment...........................................1 1.2 Purpose.................................................1 1.3 Effective Date..........................................1 Article II.......................................................1 2.1 Definitions.............................................1 2.2 Other Defined Terms.....................................3 2.3 Gender and Number.......................................3 Article III......................................................3 3.1 Vesting Schedule........................................3 Article IV.......................................................3 4.1 Amount..................................................3 4.2 Form of Benefit.........................................5 4.3 Payment of Normal Retirement Benefit....................5 4.4 Termination Prior to Normal Retirement..................6 Article V........................................................7 5.1 Written Request.........................................7 5.2 Notice of Denial........................................7 5.3 Content of Notice.......................................8 5.4 Review Procedures.......................................8 5.5 Decision on Review......................................8 Article VI.......................................................9 6.1 Administration..........................................9 6.2 Funding.................................................9 6.3 No Employment Contract..................................9 6.4 Spendthrift Provision...................................9 6.5 Binding Effect..........................................9 6.6 Applicable Law.........................................10 6.7 Administrative Discretion..............................10 6.8 Withholding............................................10 6.9 Severability...........................................10 6.10 Amendment and Termination..............................10 6.11 Titles and Headings Not to Control.....................11 6.12 Small Benefits.........................................11 Exhibit A -- Plan Participants.............................. Exhibit B -- Beneficiary Designations.......................13 3 THE PENN TRAFFIC COMPANY SUPPLEMENTAL RETIREMENT INCOME PLAN Article I. Establishment, Purpose and Effective Date of Plan 1.1 Establishment. The Penn Traffic Company, a Delaware corporation, hereby establishes a supplemental executive retirement program, which shall be known as The Penn Traffic Company Supplemental Retirement Income Plan ("Plan"). 1.2 Purpose. The purpose of the Plan is to provide to the Executives named in Exhibit "A," as amended from time to time, supplemental retirement income in excess of the retirement benefits otherwise provided to employees under the Company's Qualified Retirement Plans. Payment of the retirement benefits under this Plan shall be made from the general assets of Company, or by such other method as is consistent with Section 6.2 of this Plan and which is agreed to by the Executives and the Company. 1.3 Effective Date. The Plan shall be effective as of July 1, 1996. Article II. Definitions 2.1 Definitions. Whenever used herein, the following terms shall have their respective meanings set forth below: (A) "Actuarial Equivalent" means a benefit payable in a different form, but having the same value when computed using the mortality and interest rate assumptions set forth in Attachment A to the Corporate Plan for determining distributions other than lump sums. (B) "Average Annual Compensation" means the annual amount determined by averaging an Executive's annual Compensation for the five (5) consecutive Years of Service that produce the highest average. (C) "Beneficiary" means the person(s) properly designated to receive, under provisions of the Plan, benefits payable in the event of the Executive's death. (D) "Board" means the Board of Directors of The Penn Traffic Company. (E) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any regulations relating thereto. (F) "Committee" means the Personnel and Compensation Committee of the Board. (G) "Company" means The Penn Traffic Company and all Subsidiaries, with the following exception. The Penn Traffic Company shall retain full authority to administer, amend and terminate the Plan without the consent of any Subsidiary. Therefore, in applying all Plan provisions that relate to these functions and responsibilities, as opposed to substantive benefit provisions, the term "Company" shall be read to refer only to The Penn Traffic Company. In this regard, the term "Board" refers specifically to the Board of Directors of The Penn Traffic Company, as stated in Section 2.1(D). (H) "Compensation" means the total income paid to the Executive by the Company as reported on Form W-2, plus any amounts of income deferred under a qualified or non-qualified deferred compensation plan and including bonuses. Compensation shall not include any contributions to a plan of nontaxable fringe benefits, employer matching contributions to a qualified or non-qualified deferred compensation plan, contributions to or payments from a pension, profit-sharing or similar plan, and moving expenses. For purposes of this Plan, Compensation shall not be limited by Section 401(a)(17) of the Code. If an Executive is credited with Years of Service during an absence, in accordance with the provisions of Section 2. 1 (S), the Executive's Compensation during that absence shall be assumed to be equal to the Compensation that would have been credited if the Executive had remained employed at the rate of Compensation that was in effect when the absence began. (I) "Corporate Plan" means The Penn Traffic Corporate/P & C Foods Pension Plan. (J) "Executive" means those select management and/or highly compensated employees designated from time to time by the Committee to participate in the Plan as named in Exhibit "A," which is attached to this Plan. (K) "Normal Retirement" means the termination of the Executive's employment upon attaining age 65 and after having completed five (5) Years of Service. (L) "Normal Retirement Date" means the first day of the month coinciding with or next following the date the Executive attains age 65 and completes five (5) Years of Service. (M) "Plan" means The Penn Traffic Company Supplemental Retirement Income Plan, as amended from time to time. (N) "Plan Year" means the twelve-month period from January I through December 31. (0) "Qualified Retirement Plan" means the Corporate Plan and any other tax-qualified retirement plan maintained by the Company for the benefit of its employees including the Executives. 2 (P) "Subsidiary" means any corporation or other entity in which The Penn Traffic Company directly or indirectly has at least a 51% ownership interest. (Q) "Supplemental Retirement Benefit" means the benefit payable to the Executive pursuant to Article IV of the Plan by reason of his termination of employment with the Company for any reason other than death. In the case of the Executive's death, a benefit shall be payable as described in Section 4.4(b). (R) "Surviving Spouse" means a person who is married to the Executive at the date of his death, provided the Executive was married to that person throughout the one-year period ending on the date of death. (S) "Years of Service" means the number of twelve-month periods (and fractions thereof) of time (whether before or after the Effective Date) commencing upon an Executive's employment with the Company, and ending on the Executive's termination of employment with the Company for any reason. (Since the term "Company" refers to The Penn Traffic Company and Subsidiaries, service with all "Companies" is added to determine total "Years of Service.") Years of Service also shall be credited during absences from work occasioned by temporary illness or accident, Total and Permanent Disability or service with the Armed Forces of the United States, as and to the extent provided in the Corporate Plan. 2.2 Other Defined Terms. Any capitalized terms that are used in the Plan, which are not defined in this Article, shall have the meaning stated in the Corporate Plan. 2.3 Gender and Number. Except when otherwise indicated by the context, words in the masculine gender when used in the Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. Article III. Vesting 3.1 Vesting Schedule. All benefits under this Plan shall be fully vested upon the Executive's completion of five (5) Years of Service. Article IV. Supplemental Retirement Benefit 4.1 Amount. In general, the Supplemental Retirement Benefit payable to the Executive at his Normal Retirement Date, in the form provided in Section 4.2, shall be equal to (a) minus (b): 3 (a) a monthly benefit payable as a single life annuity equal to 40% of the Executive's Average Annual Compensation divided by 12, reduced proportionately for Years of Service less than 30. (b) the sum of the following amounts, if any, payable to the Executive: (i) the monthly Company-provided normal retirement benefit(s) which the Executive has accrued under any Qualified Retirement Plan that is a defined benefit plan, calculated in accordance with that plan as of his date of termination (no reduction shall be made for any supplements that are paid under the Corporate Plan to an Executive who qualifies for early retirement benefits under the Rule of 85); (ii) the monthly amount that would be payable to the Executive as a single life annuity that is the Actuarial Equivalent of the Executive's "Account balance" under any Qualified Retirement Plan that is a defined contribution plan, determined by employing the assumptions set forth in Section 2. 1 (A). In making the foregoing calculation, the following rules shall apply, as pertinent: (A) the term "Account balance" (1) shall not include amounts attributable to: "employee contributions; rollover or transfer contributions from plans not maintained by the Company; or elective deferrals under a cash or deferred arrangement within the meaning of Code Section 401(k); but (II) shall include all other Company contributions, including matching contributions within the meaning of Code Section 401(m); and (B) the Account balance shall be determined as of the date that the Executive begins to receive a benefit under this Plan ("Determination Date"), subject to the following adjustment. If the Executive has received any full or partial distribution of his Account balance before the Determination Date (including in-service withdrawals), the value of the Executive's Account balance shall be determined by including the amounts received and assuming that such amounts would have earned interest at an annual rate of 8% from the date received to the Determination Date; and (iii)the monthly benefits that the Executive would be entitled to receive pursuant to the Federal Social Security Act ("Social Security Benefits"), as of the Determination Date, if the Executive timely filed an application, whether or not the Executive actually 4 receives Social Security benefits at that time. If the Executive is not eligible to receive Social Security Benefits as of the Determination Date, the determination of the Social Security Benefits, and the reduction of the Executive's monthly Supplemental Retirement Benefit by the amount of the Executive's Social Security Benefits, shall be made as of the monthly payment hereunder for the first month for which the Executive would be entitled to begin receiving Social Security Benefits, upon timely filing an application. However, the reduction for Social Security Benefits described in this subsection (iii) shall not apply when calculating the death benefit under this Plan pursuant to Section 4.4(b). The Executive shall provide such financial and other information as the Company may reasonably require to determine amounts payable under other Qualified Retirement Plans and the Federal Social Security Act. 4.2 Form of Benefit. The Supplemental Retirement Benefit payable to the Executive shall be paid in any one of the following forms as determined by the Committee, in its sole discretion, after non-binding consultation with the Executive: (a) a single life annuity, payable monthly, (b) a 50% joint and survivor annuity, payable monthly, (c) a 100% joint and survivor annuity, payable monthly, or (d) a single life annuity, payable monthly, with 10 years certain. Each of the optional forms of benefit under Sections 4.2(b) through (d) shall be the Actuarial Equivalent of a single life annuity, determined by employing the assumptions set forth in Section 2.1(A). For the joint and survivor options in Section 4.2(b) and (c) above, the Executive shall designate a single Beneficiary before the commencement date described in Section 4.3 ("commencement date"). The designation may be changed up to the commencement date, but not thereafter. Thus, no survivor benefits shall be payable if the Beneficiary predeceases the Executive after the commencement date. For the 10-year certain option in Section 4.2(d), (i) the Executive may designate one or more primary Beneficiaries and one or more secondary Beneficiaries; (ii) the designation may be changed up to the Executive's date of death; and (iii) if no designated Beneficiary survives the Executive, any payments due for the 10-year period shall be paid to the Executive's estate. Sample Beneficiary designations are attached at Exhibit B. 4.3 Payment of Normal Retirement Benefit. Once the Executive has reached the Executive's Normal Retirement Date, payment of the Supplemental Retirement Benefit shall 5 commence on the first day of the month following the month in which termination of employment occurs. Payment of the Supplemental Retirement Benefit shall cease as of the first day of the month following the death of the Executive or the Executive's Beneficiary, as the case may be, except when paid in the form of a single life annuity with 10 years certain and the Executive dies prior to the receipt of 120 monthly payments, in which case payments shall cease upon payment of the 120th monthly payment. 4.4 Termination Prior to Normal Retirement. In the event the Executive terminates employment prior to the Executive's Normal Retirement Date, the Executive shall be entitled to be paid his Supplemental Retirement Benefit pursuant to this Article IV as follows: (a) Early Retirement. In the event the Executive has attained at least age fifty-five (55), has ten (10) Vesting Years of Service, and terminates employment for any reason other than death, the Executive shall be entitled to receive his Supplemental Retirement Benefit. The Supplemental Retirement Benefit shall be determined by: (i) applying the formula in Section 4.1 as of the date benefits commence ("early retirement date"), including all reductions that then apply under Section 4. 1 (b); and (ii) reducing the resulting amount by one-third of one percent (1 /3 %) for each month by which the early retirement date precedes the Executive's sixty-fifth (65th) birthday, with the following exception. The reduction for age described in clause (ii) shall not apply if the Executive's age plus Years of Service equals or exceeds 85. If the early retirement benefit initially payable to the Executive under the rules in the preceding paragraph does not include a reduction for Social Security Benefits because the Executive is not yet eligible for Social Security Benefits, the early retirement benefit shall be redetermined as of the monthly payment for the first month for which the Executive is eligible to receive Social Security Benefits, as provided in Section 4. 1 (b)(iii). As of that month, the Executive's early retirement benefit shall be recalculated by subtracting the Social Security Benefits from the amount previously determined under Section 4. 1 (a)(i), and the new resulting amount shall be reduced for age under Section 4. 1 (a)(ii), based on the Executive's age at the early retirement date. (No reduction for age shall be made if the "rule of 85" described in the preceding paragraph applied at the Executive's early retirement date.) In the event the Executive terminates employment before reaching age 55, but has ten (10) Vesting Years of Service, the Executive shall be entitled to receive, upon reaching age 55, the reduced Supplemental Retirement Benefit described in the preceding paragraphs of this Section 4.4(a), except that the foregoing shall not apply to determine an Executive's eligibility for an unreduced early retirement benefit under the "rule of 85". 6 (b) Death. If the Executive dies prior to the commencement of any benefit payments under this Plan and after attaining his "earliest retirement age, " the Executive's Surviving Spouse shall receive the same benefit that would have been payable had the Executive terminated employment the day before the Executive's death and elected a 50% joint and survivor annuity, except that the benefit formula in Section 4.1 shall be applied without any reduction for Social Security Benefits, as stated in Section 4. l(b)(iii). The Executive's "earliest retirement age" is age 55 if the Executive had ten (10) Vesting Years of Service, and age 65 if the Executive had at least five (5) Years of Service, but did not have ten (10) Vesting Years of Service. If the Executive dies prior to the commencement of any benefit payments under this Plan but prior to attaining his earliest retirement age, the Executive's Surviving Spouse shall receive the same benefit that would have been payable, had the Executive terminated employment on the date of his death, survived until Ms earliest retirement age, and then retired on that date, elected a 50% joint and survivor annuity, and then died. The Surviving Spouse shall begin to receive payments as of the date when the Executive would have reached his earliest retirement age. The foregoing rules regarding the payment of death benefits under the Plan also shall apply if the Executive terminates employment after his Normal Retirement Date, if the Executive dies before the commencement of benefit payments under the Plan. (c) Before Vesting. If the Executive terminates his employment with the Company before he has completed 5 Years of Service, no benefits shall be payable pursuant to this Plan to such Executive or his Surviving Spouse. (d) No Survivors. If the Executive dies prior to the commencement of any benefit payments under this Plan, without being survived by a Surviving Spouse, no benefits shall be payable pursuant to this Plan. If the Executive dies after the commencement of benefit payments under this Plan, benefits shall continue to the extent called for under the optional form of benefit which had previously commenced. Article V. Claims Procedure 5.1 Written Request. Any claim for benefits by the Executive or his Beneficiaries shall be made in writing to the Committee. In this Article V, the Executive and his Beneficiaries are referred to collectively as claimants. 5.2 Notice of Denial. If the Committee denies a claim in whole or in part, it shall send the claimant a written notice of the denial within 90 days after the date it receives a claim, 7 unless it needs additional time to make its decision. In that case, the Committee may authorize an extension of up to an additional 90 days, if it notifies the claimant of the extension within the initial 90-day period. The extension notice shall state the reasons for the extension and the expected decision date. 5.3 Content of Notice. A denial notice shall be written in a manner calculated to be understood by the claimant and shall contain: (a) the specific reason or reasons for the denial of the claim; (b) specific reference to pertinent Plan provisions upon which the denial is based; (c) a description of any additional material or information necessary to perfect the claim, with an explanation of why the material or information is necessary; and (d) an explanation of the review procedures provided below. 5.4 Review Procedures. (a) Within 60 days after the claimant receives a denial notice, the claimant may file a request for review with the Committee. Any such request must be made in writing. (b) A claimant who timely requests a review shall have the right to review pertinent documents, to submit additional information or written comments, and to be represented. 5.5 Decision on Review. (a) The Committee shall send the claimant a written decision on any request for review within 60 days after the date it receives a request for review, unless an extension of time is needed, due to special circumstances. In that case, the Committee may authorize an extension of up to an additional 60 days, provided it notifies the claimant of the extension within the initial 60-day period. (b) The review decision shall be written in a manner calculated to be understood by the claimant and shall contain: (i) the specific reason or reasons for the decision; and (ii) specific reference to the pertinent Plan provisions upon which he decision is based. 8 (c) If the Committee does not send the claimant a review decision within the applicable time period, the claim shall be deemed denied on review. (d) The review decision (including a deemed decision) shall be the Committee final decision. Article VI. General Provisions 6.1 Administration. The Committee shall be responsible for the general operation and administration of the Plan and for carrying out the provisions hereof. The Committee shall be entitled to rely conclusively upon all tables, valuations certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Company with respect to the Plan. 6.2 Funding. The Board, in its sole discretion, may elect to fund the benefits payable under the Plan, through various investments. However, any such investment shall remain the property of the Company and be subject to the claims of general creditors of the Company. The Executive shall have only the rights of a general unsecured creditor of the Company with respect to any rights under this Plan. The Executive may not pledge as collateral any investments purchased to fund benefits under the Plan. Nothing contained in the Plan shall constitute a guaranty by the Company or any other entity or person that assets of the Company will be sufficient to pay any benefit hereunder. It is the intention of the parties that this Plan will be an unfunded deferred compensation plan solely for the benefit of management and highly compensated employees for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). 6.3 No Employment Contract. Nothing contained in this Plan shall be construed as a contract of employment between the Company and the Executive or as a right of the Executive to be continued in the employment of the Company or as a limitation on the right of the Company to discharge the Executive at any time with or without cause and without regard to the effect that such discharge may have upon the Executive's rights or potential rights, if any, under this Plan. 6.4 Spendthrift Provision. No interest of any person or entity in, or right to receive a benefit under, the Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind; nor may such interest or right to receive a benefit be taken, either voluntarily or involuntarily, for the satisfaction of the debts of or other obligations or claims against, such person or entity, including claims or alimony, support, separate maintenance and claims in bankruptcy proceedings. 6.5 Binding Effect. This Plan shall be binding upon and inure to the benefit of the Executives, their Surviving Spouses and Beneficiaries, the Company and any successor to the Company, whether by merger, consolidation, purchase, or otherwise. 9 6.6 Applicable Law. The Plan shall be governed by and construed in accordance with the laws of the State of New York, except to the extent preempted by ERISA. 6.7 Administrative Discretion. The Committee shall have the exclusive authority and discretion to interpret this Plan, and shall have the authority and discretion to construe any uncertain or disputed term or provision in this Plan. The Committee's exercise of its discretionary authority to construe the terms and provisions of this Plan, and all its interpretations and determinations, shall be conclusive and binding upon the Company, the Executive and all other persons having or claiming an interest under this Plan, shall be entitled to deference upon review by any court, agency or other entity empowered to review its decisions, and shall not be overturned or set aside by any court, agency or other entity unless found to be arbitrary, capricious or made in bad faith. 6.8 Withholding. Any payment made pursuant to this Plan shall be reduced by federal and state income, FICA or other employee payroll, withholding or other similar taxes that the Company may be required to withhold. In addition, as the Supplemental Retirement Benefit accrues during the Executive's employment with the Company, the Company may withhold from the Executive's regular compensation from the Company any FICA or other employee payroll, withholding or other similar taxes the Company may be required to withhold on the accrual of benefits. 6.9 Severability. If one or more provisions of this Plan, or any part thereof, shall be determined by a court of competent jurisdiction to be invalid or unenforceable, then the Plan shall be administered as if such invalid or unenforceable provision had not been contained in the Plan. The invalidity or unenforceability of any Plan provision, or any part thereof, shall not effect the validity and enforceability of any other Plan provision or any part thereof. 6.10 Amendment and Termination. The Company intends to maintain this Plan until all benefit payments are made pursuant to the Plan. However, the Plan is entirely voluntary on the part of the Company, continuation of the Plan is not a contractual obligation of the Company, and the Company reserves the right, in its sole discretion, to amend, suspend, or terminate the Plan at any time or from time to time, in whole or in part. Any such amendment, suspension or termination shall be made pursuant to resolutions of the Board. No amendment, suspension, or termination of the Plan shall affect directly or indirectly the rights of an Executive who has become vested in his Plan benefits prior to the effective date of the resolution amending, suspending, or terminating the Plan. (However, if the Plan is terminated, an Executive's benefit shall be based on Compensation and Years of Service as of the termination date.) Further, the Company, in the sole discretion of the Board, may pay such Executive, in a lump sum, the actuarial equivalent of the benefit provided by the Plan in complete satisfaction of its obligations under the Plan. For this purpose, actuarial equivalence shall be determined by applying the interest rate and mortality assumptions that are used to determine lump sums under the Corporate Plan. Notwithstanding any other provision in the Plan to the contrary, the 10 Plan shall terminate automatically upon the final payment of all amounts payable hereunder. 6.11 Titles and Headings Not to Control. The titles to the Articles and the headings of Sections in the Plan are placed herein for convenience of reference only, and in case of any conflict, the text of this instrument, rather that such titles or headings, shall control. 6.12 Small Benefits. If any monthly benefit that shall be payable to any person under the Plan shall be less than $400, then, if the Committee shall so direct, the aggregate of the amounts which shall be payable to such person in any year shall be paid in quarterly, semiannual or annual installments. If the present value of the nonforfeitable accrued benefit of any Executive who has terminated his employment prior to age 55 is less than $3,500, then the Committee may at any time direct that the actuarial equivalent of such benefits (determined using the assumptions under Section 6. 10 hereof) shall be paid to him in a lump sum in lieu of any benefits to which he may be entitled under this Plan. IN WITNESS WHEREOF, the Company has executed this Agreement this 29th of August, 1996. THE PENN TRAFFIC COMPANY By: /s/ John T. Dixon -------------------- John T. Dixon President 11 EX-27.1 6 FDS SCHEDULE
5 1,000 YEAR FEB-01-1997 FEB-04-1996 FEB-01-1997 53,240 0 71,874 2,867 340,009 482,389 941,102 369,796 1,704,119 339,679 1,398,991 0 0 13,641 (110,396) 1,704,119 3,242,918 3,296,462 2,531,381 2,531,381 684,558 8,414 144,854 (64,331) (22,901) (41,430) 0 0 0 (41,430) (3.81) 0
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