-----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, C6jhS/p0stLPYN236MUUgaAn+23JkTQ60bKzoOulrzZ49Y6KHdWQI05dR37k9cyh lzrbJMfMKo+CYQ1JBl5bBg== 0000912057-00-020200.txt : 20000501 0000912057-00-020200.hdr.sgml : 20000501 ACCESSION NUMBER: 0000912057-00-020200 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000129 FILED AS OF DATE: 20000428 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: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09930 FILM NUMBER: 611494 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-K 1 10-K 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 January 29, 2000 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 0-8858 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: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Warrants to purchase Common Stock 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. [ ] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES |X| NO |_| The aggregate market value of voting stock held by non-affiliates of the registrant was $68,457,139 as of April 21, 2000. COMMON STOCK, PAR VALUE $.01 PER SHARE: 20,106,955 SHARES OUTSTANDING AS OF APRIL 21, 2000 FORM 10-K INDEX PAGE - -------------------------------------------------------------------------------- PART I - -------------------------------------------------------------------------------- Item 1. Business 3 Item 2. Properties 14 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 - -------------------------------------------------------------------------------- PART II. - -------------------------------------------------------------------------------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 15 Item 6. Selected Financial Data 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 33 Item 8. Financial Statements and Supplementary Data 34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 68 - -------------------------------------------------------------------------------- PART III. - -------------------------------------------------------------------------------- Item 10. Directors and Executive Officers of Registrants 69 Item 11. Executive Compensation 69 Item 12. Security Ownership of Certain Beneficial Owners and Management 69 Item 13. Certain Relationships and Related Transactions 69 - -------------------------------------------------------------------------------- PART IV. - -------------------------------------------------------------------------------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 70 - 2 - Certain statements included in this 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. Penn Traffic (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 other things, the success or failure of the Company in implementing its current business and operational strategies; general economic and business conditions; competition; availability, location and terms of sites for store development; the successful implementation of the Company's capital expenditure program (including store remodeling); labor relations; labor and employee benefit costs; the status of the stores under the New England Operating Agreement; availability, terms and access to capital; liquidity and other financial considerations; and the outcome of pending or yet-to-be instituted legal proceedings. PART I ITEM 1. BUSINESS (AS OF JANUARY 29, 2000 UNLESS OTHERWISE NOTED) GENERAL Penn Traffic is one of the leading food retailers in the eastern United States. The Company operates 210 supermarkets in New York, Pennsylvania, Ohio and West Virginia under the "Big Bear" and "Big Bear Plus" (70 stores), "Bi-Lo" (43 stores), "P&C" (63 stores) and "Quality" (34 stores) trade names. Penn Traffic also operates wholesale food distribution businesses serving 85 licensed franchises and 71 independent operators. The majority of Penn Traffic's retail supermarket revenues are generated in smaller communities where Penn Traffic believes it generally holds the number one or number two market position. The balance of Penn Traffic's retail supermarket revenues are derived from the Columbus, Ohio, and Buffalo and Syracuse, New York metropolitan areas. On March 1, 1999 (the "Petition Date"), Penn Traffic and certain of its subsidiaries filed petitions for relief (the "Bankruptcy Cases") under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The Bankruptcy Cases were commenced in order to implement a prenegotiated financial restructuring of the Company. On May 27, 1999, the Bankruptcy Court confirmed the Company's Chapter 11 plan of reorganization (the "Plan") and on June 29, 1999 (the "Effective Date"), the Plan became effective in accordance with its terms. See "Reorganization" and Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations." - 3 - BUSINESS STRATEGY Since the second half of 1998, Penn Traffic has been implementing a strategy designed to generate sales and operating income growth in an evolving competitive environment. This strategy builds on the Company's objective of operating conveniently located modern supermarkets with a strong emphasis on customer service and quality perishables. The major components of the Company's strategy are: o Reestablish a strong capital investment program o Enhance the Company's merchandising o Improve store operations o Reduce and contain costs The following is a description of each major component of the Company's business strategy: 1. REESTABLISH A STRONG CAPITAL INVESTMENT PROGRAM In 1997, 1998 and the first half of 1999 (prior to Penn Traffic's financial restructuring) the Company curtailed its capital investment program. Due to significant investments in the Company's store base prior to 1997, the Company believes that most of its stores are modern and well maintained. Nevertheless, management believes that Penn Traffic has a significant number of opportunities to invest in the Company's core markets where it already has strong market positions, and thereby increase sales and operating income or, in some circumstances, mitigate the potential adverse effect of the entry of a new competitor. Additionally, the Company believes that it has opportunities to build new stores in communities contiguous to existing markets, particularly in the growing central Ohio marketplace. As the initial phase of reestablishing a strong capital investment program, the Company developed a $100 million capital expenditure program for the 18-month period from August 1999 to February 2001. During this period, the Company expects to complete approximately 30 major capital projects and several minor remodels, and continue to make investments in the Company's distribution and technology infrastructure. These 30 major capital projects include the remodel of 27 stores and the replacement of 3 existing stores. Penn Traffic expects that this capital program will result in the remodeling or replacement of approximately 20% of the Company's total store square footage. Penn Traffic expects to continue to make significant investments in its store base after February 2001. In addition to improving existing facilities, the Company plans to build several new or replacement stores in or contiguous to existing markets. - 4 - 2. ENHANCE THE COMPANY'S MERCHANDISING Penn Traffic has implemented or plans to implement programs designed to (i) refine the assortment and enhance the quality and presentation of products offered in each of its stores, (ii) improve the return from promotional expenditures, (iii) more effectively respond to regional differences and (iv) introduce products and services to address the evolving lifestyles of the Company's customers. Key components of these programs are: A. CATEGORY MANAGEMENT AND REGIONAL MARKETING During 1999, Penn Traffic continued the rollout of a category management program designed to analyze individual product movement and the impact of promotional decisions. With this process, category managers can design category plans that improve assortment and pricing decisions. By the end of 2000, Penn Traffic expects to have developed category plans for products comprising the vast majority of the Company's total retail sales of grocery, dairy and frozen food products. Commencing in 2001, the Company plans to apply the category management process to Penn Traffic's perishable departments (produce, meat, seafood, deli and bakery). In the middle of 1997, Penn Traffic centralized its merchandising and procurement activities. While this organizational change has benefited Penn Traffic in many respects, the Company believes that it has not sufficiently tailored its product offerings and marketing programs to address regional differences across its marketing areas. The Company has been adjusting its organizational structure and management practices to more effectively address differing consumer preferences and competitive environments. B. ENHANCED PERISHABLE DEPARTMENTS Penn Traffic plans to continue to enhance presentation, quality and variety in its perishable departments. During 1999, Penn Traffic introduced its new "Gold Label" meat program, which features a broader assortment of high quality branded meat products. The Company expects to introduce other enhanced perishable department programs in 2000 and thereafter. C. NEW BIG BEAR PLUS FORMAT Penn Traffic operates 15 Big Bear Plus stores (combination supermarket and general merchandise stores) in Ohio and West Virginia, which range in size from 70,000 to 140,000 square feet. During 1999, Penn Traffic began a process to (1) refine the scope of the nonfood merchandise offered to a smaller number of key growth categories with a greater depth of variety in each category and (2) utilize the space no longer required for the merchandising of nonfood products in the new format to improve the presentation and assortment of both perishable and nonperishable food products. - 5 - In connection with this program, which is expected to be completed in 2001, the Company is making significant investments in the remodeling of most of its Big Bear Plus facilities. Certain merchandising concepts developed for these stores have been and are expected to be utilized in Penn Traffic's other stores to generate additional general merchandise sales. D. NEW PRODUCTS AND SERVICES Penn Traffic will continue to introduce new merchandising concepts into its stores to respond to evolving customer lifestyles. For example, to provide more of a one-stop shopping experience for today's busy customers, Penn Traffic has been adding more in-store pharmacies and expanded health and wellness departments to its stores. The pharmacy and health and beauty care business is an important and growing part of the Company's business. Penn Traffic currently operates 85 in-store pharmacies. 3. IMPROVE STORE OPERATIONS The Company is continuing to focus on providing the consumer with high quality products and excellent customer service in a pleasant shopping environment. Management believes that efficient store-level execution of the Company's operating standards and merchandising programs is a critical factor in achieving future sales and profit improvements. 4. REDUCE AND CONTAIN COSTS Penn Traffic has been working on developing plans to reduce costs throughout the Company's operations, while maintaining the Company's quality and service goals. For example, during 1999 the Company successfully implemented a program to reduce nonperishable shrink expense. In late 1999, the Company also initiated a program to reduce perishable product shrink. During 2000, the Company will be completing a warehouse consolidation project which is expected to result in annual savings of $2 million starting in the third quarter of the fiscal year ending February 3, 2001 (see "Purchasing and Distribution"). The Company is implementing and plans to continue to implement a number of other cost reduction and cost containment programs. - 6 - RETAIL FOOD BUSINESS Penn Traffic is one of the leading supermarket retailers in its primary operating areas, which include upstate New York, Ohio, northern West Virginia and western Pennsylvania. 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 populations are better served by full-service supermarkets of up to 75,000 square feet, which contain numerous specialty service departments such as bakeries, delicatessens, floral departments and fresh seafood departments. Penn Traffic's 15 Big Bear Plus stores range in size from 70,000 to 140,000 square feet. These full service supermarkets carry an expanded variety of nonfood merchandise. During 1999, Penn Traffic began a process to refine the scope of this nonfood merchandise to a smaller number of key growth categories with a greater depth of variety in each category. This process is expected to be completed in 2001. 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 care products, housewares, general merchandise, and in many cases, pharmacies, floral items 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. The Company believes that its store base is generally modern and provides a pleasant shopping experience for Penn Traffic customers. Between the middle of 1998 and May 1999, Penn Traffic implemented a store rationalization program (the "Store Rationalization Program") to divest itself of certain marketing areas, principally in northeastern Pennsylvania, where performance and market position were the weakest relative to Penn Traffic's other retail stores, and to close other underperforming stores. In connection with the Store Rationalization Program, Penn Traffic sold 21 stores and closed 29 stores. The sale of the 21 stores generated net cash proceeds of approximately $40 million (after the payment of transaction costs and other costs of sale such as inventory markdowns). The Store Rationalization Program has enabled Penn Traffic to focus the Company's management and capital resources on a less geographically diverse store base located in upstate New York, Ohio, western Pennsylvania and northern West Virginia. - 7 - Selected statistics on Penn Traffic's retail food stores are presented below.
FISCAL YEAR ENDED - ------------------------------------------------------------------------------- January 29, January 30, January 31, February 1, February 3, 2000 1999 1998 1997 1996 (1) (1) (53 WEEKS)(2) - -------------------------------------------------------------------------------- Average annual revenues per store $ 9,965,000 $ 9,594,000 $ 9,811,000 $10,598,000 $10,900,000 Total store area in square feet 8,910,898 9,796,604 10,787,686 10,737,891 10,424,538 Total store selling area in square feet 6,455,352 7,086,099 7,812,114 7,780,811 7,527,665 Average total square feet per store 42,433 42,046 40,862 40,520 39,338 Average square feet of selling area per store 30,740 30,412 29,591 29,362 28,406 Annual revenues per square foot of selling area $327 $321 $333 $368 $397 Number of stores: Remodels/expansions (over $100,000) 13 5 3 7 15 New stores opened 1 1 1 5 11 Stores acquired 2 0 1 2 2 Stores closed/sold 26 32 3 7 15 Size of stores (total store area): Up to 19,999 square feet 28 29 36 37 37 20,000 - 29,999 square feet 36 42 50 52 56 30,000 - 44,999 square feet 72 81 92 93 95 45,000 - 60,000 square feet 45 50 55 55 53 Greater than 60,000 square feet 29 31 31 28 24 Total stores open at fiscal year-end 210 233 264 265 265
(1) Includes revenues and square footage amounts from stores disposed of as part of the Store Rationalization Program. (2) Average annual revenues per store and annual revenues per square foot of selling area are calculated on a 52-week basis. - 8 - WHOLESALE FOOD DISTRIBUTION BUSINESS Penn Traffic licenses, royalty-free, the use of its "Riverside," "Bi-Lo Foods" and "Big M" names to 85 independently-owned supermarkets that are required to maintain certain quality and other standards. 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. In addition, Penn Traffic receives rent from 43 of the licensed independent operators which lease or sublease their supermarkets from Penn Traffic. The Company also acts as a food distributor to 71 other independent supermarkets. In addition to contributing to the Company's operating income, the wholesale food distribution business enables the Company to spread fixed and semi-fixed procurement and distribution costs over additional revenues. BAKERY OPERATION Penn Traffic owns and operates Penny Curtiss, a bakery processing plant in Syracuse, New York. Penny Curtiss manufactures and distributes fresh and frozen bakery products for distribution to Penn Traffic's stores as well as to unrelated third parties, including customers of its wholesale food distribution business. PURCHASING AND DISTRIBUTION Penn Traffic is a large volume purchaser of products. Penn Traffic's purchases are generally 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 also purchases private label products and certain other grocery items from TOPCO Associates, Inc., a national products purchasing cooperative comprising 29 regional supermarket chains. For the fiscal year ended January 29, 2000, purchases from TOPCO Associates accounted for approximately 21% of product purchases. In the later part of calendar year 1998 and the early portion of calendar year 1999 as the Company's need to restructure its capital structure became apparent, certain of Penn Traffic's suppliers reduced credit limits to Penn Traffic which had reduced Penn Traffic's ability to supply its stores with a full variety of products or earn promotional discounts or allowances on certain products. Since the middle of 1999, however, the Company believes that its vendors have been offering Penn Traffic promotional allowance opportunities that are generally consistent with industry norms for a company of its size and geographic scope. Penn Traffic's principal Pennsylvania distribution facility is a company-owned 390,000 square foot distribution center in DuBois, Pennsylvania. Penn Traffic also owns and operates a 196,000 square foot distribution center for perishable products in DuBois. The principal New York distribution facility is a company-owned 498,000 square foot distribution center in Syracuse, New York. The Company also owns a 217,000 square foot distribution center for perishable products in Syracuse. - 9 - The Company's 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 and leases two additional warehouses totaling 430,000 square feet in Columbus for distribution of general merchandise and health and beauty care items to all Penn Traffic stores. In January 2000, Penn Traffic began a process to (1) reduce the number of distribution centers the Company utilizes for nonperishable grocery products from 4 to 3 and (2) transfer the distribution of general merchandise and health and beauty care items from a leased facility in Columbus, Ohio to the Company's Jamestown, New York facility (an owned 267,000 square foot facility which had supplied grocery products to certain stores in upstate New York and northern Pennsylvania until January 2000). When this process is completed, which is currently anticipated to be in the summer of 2000, Penn Traffic will cancel its lease on a 205,000 square foot distribution center in Columbus, Ohio. Approximately three-quarters of the merchandise offered in Penn Traffic's retail stores is distributed from its warehouses by its fleet of tractors, refrigerated trailers and 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. 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 encountered by Penn Traffic's supermarkets vary by location. Penn Traffic competes with several multiregional, 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, "supercenters" (combination supermarket and general merchandise stores) and other retailers. Many of these competitors are significantly larger than Penn Traffic, have vastly greater resources and purchasing power than Penn Traffic, are better capitalized than Penn Traffic and do not have employees affiliated with unions. EMPLOYEES Labor costs and their impact on product prices are important competitive factors in the supermarket industry. Penn Traffic has approximately 16,000 hourly employees and 1,400 salaried employees. Approximately 54% of Penn Traffic's hourly employees belong to the United Food and Commercial Workers Union. An additional 7% of Penn Traffic's hourly employees (principally employed in the distribution function and in the Company's bakery plant) belong to four other unions. - 10 - GOVERNMENT REGULATION Penn Traffic's food and drug business requires it to hold various licenses and to register certain of its facilities with state and federal health, drug and alcoholic beverage regulatory agencies. By virtue of these licenses and registration requirements, Penn Traffic is obligated to observe certain rules and regulations; and a violation of such rules and regulations could result in a suspension or revocation of licenses or registrations. Most of Penn Traffic's licenses require periodic renewals. Penn Traffic has experienced no material difficulties with respect to obtaining, effecting, retaining or renewing its licenses and registrations. 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 21%, 21% and 16% of product purchases in the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998. HISTORY Penn Traffic is the successor to a retail business which dates back to 1854. In August 1988, Penn Traffic acquired P&C Food Markets, Inc. ("P&C"), which operated a retail and wholesale grocery business 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. In April 1989, Penn Traffic acquired Big Bear Stores Company ("Big Bear"), a leading food retailer in Ohio and northern West Virginia. In April 1993, Big Bear was merged into the Company. In January 1998, Penn Traffic sold Sani-Dairy, its former dairy manufacturing operation. Concurrent with the completion of the transaction, the Company entered into a 10-year supply agreement with the acquirer for the purchase of products that were supplied by Sani-Diary and two other dairies. Between the middle of 1998 and May 1999, Penn Traffic implemented the Store Rationalization Program which involved the sale or closure of 50 stores (see "Retail Food Business"). As described above, on the Petition Date, Penn Traffic and certain of its subsidiaries commenced the Bankruptcy Cases in the Bankruptcy Court for the District of Delaware. On May 27, 1999, the Bankruptcy Court confirmed the Plan and on June 29, 1999, the Plan became effective in accordance with its terms. - 11 - NEW ENGLAND STORES In July 1990, the Company entered into a 10-year operating agreement (the "New England Operating Agreement") with The Grand Union Company ("Grand Union") pursuant to which Grand Union acquired the right to operate 13 stores in Vermont and New Hampshire under the "Grand Union" trade name until July 31, 2000. Prior to July 1990, these stores had been operated by Penn Traffic under the Company's "P&C" trade name. The Total Revenues account of the Company's Statement of Operations for Fiscal 2000 includes approximately $13 million of income allocable to payments made by Grand Union to the Company pursuant to the New England Operating Agreement. Grand Union had the right to extend the term of the New England Operating Agreement for an additional five years after the ten year term, at set operating fees. Penn Traffic also granted Grand Union the option to purchase such stores based on a formula set forth in the New England Operating Agreement. The Company believes that it will regain operating control of the stores operated by Grand Union pursuant to the New England Operating Agreement (currently 9 stores) on August 1, 2000. The Company currently plans to operate such stores under its "P&C" trade name. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." REORGANIZATION As described above, on the Petition Date, Penn Traffic and certain of its subsidiaries commenced the Bankruptcy Cases in the Bankruptcy Court to implement a prenegotiated financial restructuring of the Company. On May 27, 1999, the Bankruptcy Court confirmed the Plan and on June 29, 1999, the Plan became effective in accordance with its terms. Consummation of the Plan has resulted in (a) the former $732.2 million principal amount of the Company's senior notes being exchanged for $100 million of new senior notes (the "New Senior Notes") and 19,000,000 shares of newly issued common stock (the "New Common Stock"), (b) the former $400 million principal amount of senior subordinated notes being exchanged for 1,000,000 shares of New Common Stock and six-year warrants to purchase 1,000,000 shares of New Common Stock having an exercise price of $18.30 per share, (c) holders of Penn Traffic's formerly issued common stock receiving one share of New Common Stock for each 100 shares of common stock held immediately prior to the Petition Date, for a total of 106,955 new shares and (d) the cancellation of all outstanding options and warrants to purchase shares of the Company's former common stock. The Plan also provides for the issuance to officers and key employees options to purchase up to 2,297,000 shares of New Common Stock. The Company's New Common Stock and warrants to purchase common stock are currently trading on the Nasdaq National Market under the symbols "PNFT" and "PNFTW," respectively. - 12 - The Plan also provided for payment in full of all of the Company's obligations to its other creditors. On the Effective Date, in connection with the consummation of the Plan, the Company entered into a new $320 million secured credit facility (the "New Credit Facility"). The New Credit Facility includes (a) a $205 million revolving credit facility (the "New Revolving Credit Facility") and (b) a $115 million term loan (the "Term Loan"). The lenders under the New Credit Facility have a first priority perfected security interest in substantially all of the Company's assets. Proceeds from the New Credit Facility were used to satisfy the Company's obligations under its debtor-in-possession financing (the "DIP Facility"), pay certain costs of the reorganization process and are available to satisfy the Company's ongoing working capital and capital expenditure requirements. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." - 13 - ITEM 2. PROPERTIES Penn Traffic follows the general industry practice of leasing the majority of its retail supermarket locations. Penn Traffic presently owns 25 and leases 185 of the supermarkets that it operates. The leased supermarkets are held under leases expiring from 2000 to 2024, excluding option periods. Penn Traffic owns or leases 43 supermarkets which are leased or subleased to independent operators. Penn Traffic also owns five shopping centers which contain company-owned or licensed supermarkets. Penn Traffic also operates distribution centers in DuBois, Pennsylvania; Syracuse and Jamestown, New York; and Columbus, Ohio; 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 certain miscellaneous real estate. ITEM 3. LEGAL PROCEEDINGS As a result of the consummation of the Plan, the automatic stay imposed by the Bankruptcy Code terminated on June 29, 1999. Accordingly, all litigation previously subject to the automatic stay as a result of the filing of the Bankruptcy Cases no longer are stayed. The Plan provides for the payment of all litigation claims as and when such claims are resolved. 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 is not expected to materially affect the financial position, results of operations or liquidity of the Company. Also see Item 1 - "Business -- Reorganization" for a description of the consummation of the Plan. 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 January 29, 2000. - 14 - PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since September 15, 1999, Penn Traffic's New Common Stock and warrants are listed on the Nasdaq National Market under the symbols "PNFT" and "PNFTW," respectively, and were held by approximately 2,685 stockholders and 109 warrant holders, respectively, of record on January 29, 2000. Common stock information is provided on Pages 75 and 76 of this Form 10-K. ITEM 6. SELECTED FINANCIAL DATA CONSOLIDATED FIVE-YEAR FINANCIAL SUMMARY Set forth below is selected historical consolidated financial data of Penn Traffic for the five fiscal years ended January 29, 2000. As a result of the consummation of the Plan, Penn Traffic adopted "fresh-start reporting" as of June 26, 1999. The accounting periods ended on or prior to June 26, 1999, have been designated "Predecessor Company" and the 31-week period ended January 29, 2000, has been designated "Successor Company." In accordance with the implementation of fresh-start reporting, the Company's assets, liabilities and stockholders' (deficit) equity have been revalued as of June 26, 1999. In addition, as a result of the consummation of the Plan, the amount of the Company's indebtedness has been substantially reduced. Accordingly, the Consolidated Statements of Operations for periods ended on or prior to June 26, 1999, are not comparable to the 31-week period ended January 29, 2000. The selected historical consolidated financial data for the 31-week period ended January 29, 2000, the 21-week period ended June 26, 1999, and the four fiscal years ended January 30, 1999, are derived from the consolidated financial statements of Penn Traffic, which have been audited by PricewaterhouseCoopers 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. - 15 - CONSOLIDATED STATEMENT OF OPERATIONS
Successor Company Predecessor Company ---------- -------------------------- For the For the For the 31 Weeks 21 Weeks 52 Weeks Ended Ended Ended (In thousands of dollars, January 29, June 26, January 30, except per share data) 2000 1999 1999 ---------- ---------- ---------- TOTAL REVENUES $1,477,219 $1,006,804 $2,828,109 COSTS AND OPERATING EXPENSES: Cost of sales (including buying and occupancy costs)(1) (2) 1,124,755 781,342 2,213,801 Selling and administrative expenses 312,154 226,430 602,382 Amortization of excess reorganization value 65,132 Unusual items (2) 7,408 (4,631) 61,355 Write-down of long-lived assets (3) 143,842 ---------- ---------- ---------- OPERATING (LOSS) INCOME (32,230) 3,663 (193,271) Interest expense (4) 22,923 21,794 147,737 Reorganization items (5) 167,031 ---------- ---------- ---------- (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS (55,153) (185,162) (341,008) Provision (benefit) for income taxes (6) 4,940 60 (23,914) ---------- ---------- ---------- (LOSS) BEFORE EXTRAORDINARY ITEMS (60,093) (185,222) (317,094) Extraordinary items (7) (654,928) ---------- ---------- ---------- NET (LOSS) INCOME $ (60,093) $ 469,706 $ (317,094) ========== ========== ========== NET (LOSS) PER SHARE (BASIC AND DILUTED) $ (2.99) ==========
No dividends on common stock have been paid during the past five fiscal years. Per share data is not presented for periods prior to June 26, 1999 because of the general lack of comparability as a result of the revised capital structure of the Company. BALANCE SHEET DATA: Total assets $1,020,457 $1,228,061 Total funded indebtedness 320,174 1,377,358 Stockholders' equity (deficit) 363,564 (469,706) OTHER DATA: EBITDA (8) 67,380 29,772 99,450 Depreciation and amortization 26,176 25,832 77,179 LIFO provision 892 1,009 2,376 Capital expenditures, including capital leases and acquisitions 31,468 6,279 14,368 Cash interest expense 22,405 20,393 143,411
- 16 - FOOTNOTES: (1) During the 21-week period ended June 26, 1999, the Company recorded a special charge of $3.9 million associated with the repositioning of its 15 Big Bear Plus stores. This charge, which consists of estimated inventory markdowns for discontinued product lines, is included in cost of sales. (2) During the 31-week period ended January 29, 2000, the Company recorded an unusual item of $5.5 million associated with the restructuring of certain executive compensation agreements and an unusual item of $1.9 million associated with an early retirement program for certain eligible employees. During the 21-week period ended June 26, 1999, the Company recorded an unusual item (income) of $4.6 million related to the Store Rationalization Program. During the 52-week period ended January 30, 1999 ("Fiscal 1999"), the Company recorded a special charge of $68.2 million related to the Store Rationalization Program ($60.2 million of this charge is included in the unusual item account; $8.0 million of this charge, representing inventory markdowns, is included in cost of sales). The unusual item account for Fiscal 1999 also includes $1.1 million of professional fees and other miscellaneous costs associated with the Company's financial restructuring. (3) The Company periodically reviews the recorded value of its long-lived assets to determine if the future cash flows to be derived from these properties will be sufficient to recover the remaining recorded asset values. In accordance with Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), during Fiscal 1999 the Company recorded noncash charges of (a) $52.3 million primarily related to the write-down of the recorded asset values of 14 of the Company's stores (including allocable goodwill) to estimated realizable value and (b) $91.5 million to write down the carrying amounts (including allocable goodwill) of property held for sale in connection with the Store Rationalization Program to estimated realizable value. (4) As a result of the Company's Chapter 11 filing on the Petition Date, no principal or interest payments were made on or after the Petition Date on the Company's formerly outstanding senior and senior subordinated notes. Accordingly, no interest expense for these obligations has been accrued on or after the Petition Date. Had such interest been accrued, interest expense for the 21-week period ended June 26, 1999, would have been approximately $58.8 million. (5) The reorganization items for the 21-week period ended June 26, 1999, include (a) adjustments associated with the implementation of fresh-start reporting, (b) professional fees associated with the implementation of the Plan, (c) the write-off of unamortized deferred financing fees for the Company's former notes and (d) a gain related to the difference between the estimated allowed claims for rejected leases and the liabilities previously recorded for such leases. - 17 - (6) The tax provision for the 31-week period ended January 29, 2000, is not recorded at statutory rates due to differences between income calculations for financial reporting and tax reporting purposes that result primarily from the nondeductible amortization of excess reorganization value. The tax provision for the 21-week period ended June 26, 1999 and the tax benefit for the 52-week period ended January 30, 1999, are not recorded at statutory rates due to (a) differences between the income calculations for financial reporting and tax reporting purposes and (b) the recording of a valuation allowance. A valuation allowance is required when it is more likely than not that the recorded value of a deferred tax asset will not be realized. (7) The extraordinary items for the 21-week period ended June 26, 1999, are (a) a gain on debt discharge recorded in connection with the consummation of the Plan and (b) the write-off of unamortized deferred financing fees associated with the repayment of the Company's pre-petition revolving credit facility. (8) "EBITDA" is earnings before interest, depreciation, amortization, amortization of excess reorganization value, LIFO provision, special charges, unusual items, the write-down of impaired long-lived assets, reorganization items, extraordinary items, the cumulative effect of change in accounting principle and taxes. EBITDA should not be interpreted as a measure of operating results, cash flow provided by operating activities, a measure of liquidity, or as an alternative to any generally accepted accounting principle measure of performance. The Company is reporting EBITDA because it is a widely used financial measure of the potential capacity of a company to incur and service debt. Penn Traffic's reported EBITDA may not be comparable to similarly titled measures used by other companies. - 18 - CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
PREDECESSOR COMPANY ------------------------------------------ As of and for the Fiscal Year Ended (In thousands of dollars) February 3, January 31, February 1, 1996 1998 1997 (53 Weeks) ---------- ---------- ---------- TOTAL REVENUES $3,010,065 $3,296,462 $3,536,642 COSTS AND OPERATING EXPENSES: Cost of sales (including buying and occupancy costs) 2,317,847 2,531,381 2,724,639 Selling and administrative expenses (1) 625,731 684,558 670,387 Restructuring charges (1) 10,704 Gain on sale of Sani-Dairy (2) (24,218) Unusual items (3) 65,237 Write-down of long-lived assets (4) 26,982 46,847 --------- ---------- ---------- OPERATING INCOME 53,019 80,523 29,532 Interest expense 149,981 144,854 136,359 ---------- ---------- ---------- (LOSS) BEFORE INCOME TAXES (96,962) (64,331) (106,827) (Benefit) for income taxes (35,836) (22,901) (27,202) ---------- ---------- ---------- NET (LOSS) $ (61,126) $ (41,430) $ (79,625) ========== ========== ==========
No dividends on common stock have been paid during the past five fiscal years. Per share data is not presented for periods prior to June 26, 1999 because of the general lack of comparability as a result of the revised capital structure of the Company. BALANCE SHEET DATA: Total assets $1,563,586 $1,704,119 $1,760,146 Total funded indebtedness 1,373,607 1,398,991 1,341,657 Stockholders' (deficit) (159,809) (96,755) (53,271) OTHER DATA: EBITDA (5) 165,283 175,603 233,424 Depreciation and amortization 88,966 92,705 92,479 LIFO provision (benefit) 2,343 2,375 (672) Capital expenditures, including capital leases and acquisitions 22,272 69,785 136,139 Cash interest expense 145,177 140,289 132,062
- 19 - FOOTNOTES: (1) For the 52-week period ended January 31, 1998 ("Fiscal 1998"), the Company recorded pretax special charges totaling $18.2 million ($10.7 million, net of tax). These special charges consist of (a) $12.6 million associated with a management reorganization and related corporate actions ($10.7 million of this charge is included in a restructuring charge and $1.9 million is included in selling and administrative expenses) and (b) $5.6 million associated with the retention of certain corporate executives, which is included in selling and administrative expenses. (2) During Fiscal 1998, the Company recorded a gain totaling $24.2 million ($14.3 million, net of tax) related to the sale of Sani-Dairy, the Company's dairy manufacturing operation, for cash consideration of approximately $37 million. (3) During the fiscal year ended February 3, 1996 ("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 could no longer utilize in its business and the Company's expense reduction program. (4) In accordance with SFAS 121, during Fiscal 1998 the Company recorded a noncash charge of $27.0 million primarily related to the write-down of a portion of the recorded asset values of 12 of the Company's stores (including allocable goodwill), as well as miscellaneous real estate, to estimated realizable values. During Fiscal 1996, the Company recorded a noncash charge of $46.8 million primarily related to the write-down of a portion of the recorded asset values (including allocable goodwill) of 18 of the Company's stores. (5) "EBITDA" is earnings before interest, depreciation, amortization, LIFO provision, unusual items, restructuring charges, the write-down of impaired long-lived assets, extraordinary items, the cumulative effect of change in accounting principle and taxes. EBITDA should not be interpreted as a measure of operating results, cash flow provided by operating activities, a measure of liquidity, or as an alternative to any generally accepted accounting principle measure of performance. The Company is reporting EBITDA because it is a widely used financial measure of the potential capacity of a company to incur and service debt. Penn Traffic's reported EBITDA may not be comparable to similarly titled measures used by other companies. - 20 - ITEM 7. 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 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 other things, the success or failure of the Company in implementing its current business and operational strategies; general economic and business conditions; competition; availability, location and terms of sites for store development; the successful implementation of the Company's capital expenditure program (including store remodeling); labor relations; labor and employee benefit costs; the status of the stores under the New England Operating Agreement; availability, terms and access to capital; liquidity and other financial considerations; and the outcome of pending or yet-to-be instituted legal proceedings. OVERVIEW As discussed in Note 2 to the accompanying Consolidated Financial Statements, the Company emerged from its Chapter 11 proceedings on the Effective Date. For financial reporting purposes, the Company accounted for the consummation of the Plan as of June 26, 1999. In accordance with the American Institute of Certified Public Accountant's Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company has applied fresh-start reporting as of June 26, 1999, which has resulted in significant changes to the valuation of certain of the Company's assets and liabilities, and to its stockholders' equity. In connection with the adoption of fresh-start reporting, a new entity has been deemed created for financial reporting purposes. The periods presented prior to June 26, 1999, have been designated "Predecessor Company" and the periods subsequent to June 26, 1999, have been designated "Successor Company." For purposes of the discussion of Results of Operations for the 52-week period ended January 29, 2000, the results of the Predecessor Company and Successor Company have been combined since separate discussions of these periods are not meaningful in terms of their operating results or comparisons to the prior year. - 21 - RESULTS OF OPERATIONS FISCAL YEAR ENDED JANUARY 29, 2000 ("FISCAL 2000") COMPARED TO FISCAL YEAR ENDED JANUARY 30, 1999 ("FISCAL 1999") The following table sets forth certain Statement of Operations components expressed as percentages of total revenues for Fiscal 2000 and Fiscal 1999:
PERCENTAGE OF TOTAL REVENUES FISCAL YEAR ---------------------------- 2000 1999 ------ ------ Total revenues 100.0% 100.0% Gross profit (1) 23.3 21.7 Gross profit excluding special charges (2) 23.4 22.0 Selling and administrative expenses 21.7 21.3 Unusual items (3) 0.1 2.2 Write-down of long-lived assets 5.1 Amortization of excess reorganization value 2.6 Operating (loss) (1.2) (6.8) Operating income excluding unusual items, special charges and amortization of excess reorganization value (4) 1.7 0.7 Interest expense 1.8 5.2 Reorganization items 6.7 Net income (loss) 16.5 (11.2) Net (loss) excluding unusual items, special charges, amortization of excess reorganization value, reorganization items and extraordinary items (5) (0.4) (3.7)
(1) Total revenues less cost of sales. (2) Gross profit excluding special charges of $3.9 million and $8.0 million for Fiscal 2000 and Fiscal 1999, respectively (see Notes 4 and 7). - 22 - (3) Unusual items of $2.8 million and $61.4 million for Fiscal 2000 and Fiscal 1999, respectively (see Note 7). (4) Operating (loss) for Fiscal 2000 excluding unusual items of $2.8 million, a special charge of $3.9 million and amortization of excess reorganization value of $65.1 million. Operating (loss) for Fiscal 1999, excluding special charges of $69.3 million and the write-down of long-lived assets of $143.8 million (see Notes 3, 4, 7 and 8). (5) Net income for Fiscal 2000, excluding unusual items of $2.8 million, a special charge of $3.9 million, amortization of excess reorganization value of $65.1 million, reorganization items (expense) of $167.0 million and extraordinary items (income) of $654.9 million. Net (loss) for Fiscal 1999 excluding special charges of $69.3 million and the write-down of long-lived assets of $143.8 million (see Notes 3, 4, 7, 8, 10 and 12). Total revenues for Fiscal 2000 decreased 12.2% to $2.48 billion from $2.83 billion in Fiscal 1999. The decrease in revenues for Fiscal 2000 is primarily attributable to (1) a reduction in the number of stores the Company operated in Fiscal 2000 as compared to Fiscal 1999 resulting from the Company's decision to close or sell certain stores, most of which were underperforming, as part of the Store Rationalization Program, (2) a decline in same store sales and (3) a decline in wholesale revenues. For Fiscal 2000, same store sales decreased 1.5% compared to the prior year. Wholesale supermarket revenues were $295.0 million in Fiscal 2000 compared to $328.7 million in Fiscal 1999. The decrease in wholesale revenues resulted primarily from a reduction in the number of customers of the Company's wholesale/franchise business. Gross profit for Fiscal 2000 was 23.3% of revenues compared to 21.7% of revenues in Fiscal 1999. Gross profit excluding special charges in Fiscal 2000 was 23.4% of revenues compared to 22.0% of revenues in Fiscal 1999. The increase in gross profit excluding special charges as a percentage of revenues for Fiscal 2000 was primarily due to (1) the positive effect of re-establishing the Company's traditional high/low pricing strategy in the second half of Fiscal 1999, (2) reduced inventory shrink expense as a percentage of revenues, (3) the positive effect of the sale or closure of 50 stores which generally had lower gross margins than the average for the Company as part of the Store Rationalization Program and (4) a reduction in depreciation and amortization expense (as described below). These improvements in gross profit as a percentage of revenues were partially offset by an increase in distribution expenses as a percentage of revenues. - 23 - Selling and administrative expenses for Fiscal 2000 were 21.7% of revenues compared to 21.3% of revenues in Fiscal 1999. The increase in selling and administrative expenses as a percentage of revenues for Fiscal 2000 was primarily due to (1) the Company's investment in store labor as part of its plan to improve operations and focus on customer service and (2) the spreading of certain fixed and semi-fixed costs over reduced revenues. These increases in selling and administrative expenses were partially offset by (1) a reduction in bad debt expense, (2) a reduction in depreciation expense (as described below) and (3) a reduction in goodwill amortization resulting from (a) the Store Rationalization Program, which involved the sale or closure of stores and the write-off of related goodwill and (b) the elimination of Goodwill on June 26, 1999 in connection with the implementation of fresh-start reporting (see Note 3). Depreciation and amortization expense was $52.0 million in Fiscal 2000 and $77.2 million in Fiscal 1999, representing 2.1% and 2.7% of total revenues, respectively. Depreciation and amortization expense decreased in Fiscal 2000 primarily due to (1) a reduction in the Company's capital expenditure program in Fiscal 1998 and Fiscal 1999 from the recent previous fiscal years, (2) the Store Rationalization Program, which involved the sale or closure of certain stores, (3) the write-down of long-lived assets recorded in Fiscal 1999 in accordance with SFAS 121, (4) a reduction in the carrying value of property, plant and equipment associated with the implementation of fresh-start reporting and (5) the elimination of Goodwill on June 26, 1999 associated with the implementation of fresh-start reporting. During Fiscal 2000, amortization of excess reorganization value was $65.1 million. The Excess reorganization value asset of $327.8 million is being amortized on a straight-line basis over a three-year period (see Note 3). During Fiscal 2000, the Company recorded unusual items of (1) $5.5 million associated with the restructuring of certain executive compensation agreements, (2) $1.9 million associated with an early retirement program for certain eligible employees and (3) $4.6 million (income) related to the Store Rationalization Program (see Note 7). During Fiscal 1999, the Company recorded special charges of $68.2 million associated with the Store Rationalization Program and $1.1 million associated with the Company's financial restructuring. $61.3 million of these charges are included in the unusual items account and $8.0 million (inventory markdowns) is included in the cost of sales account (see Note 7). In accordance with SFAS 121, during Fiscal 1999, the Company recorded noncash charges of (1) $52.3 million primarily related to the write down of a portion of the recorded asset values of 14 of the Company's stores (including allocable goodwill) to estimated realizable values and (2) $91.5 million to write-down the carrying amounts (including allocable goodwill) of property held for sale in connection with the Store Rationalization Program to estimated realizable value (see Note 8). - 24 - Operating (loss) for Fiscal 2000 was $28.6 million or 1.2% of total revenues compared to an operating (loss) of $193.3 million or 6.8% of total revenues for Fiscal 1999. The Company had an operating (loss) in Fiscal 2000 due to the amortization of excess reorganization value of $65.1 million which is a noncash charge which will end in the middle of the fiscal year ending February 1, 2003. Operating income excluding unusual items, special charges and amortization of excess reorganization value for Fiscal 2000 was $43.2 million or 1.7% of revenues. Operating income excluding special charges and a write-down of long-lived assets for Fiscal 1999 was $19.9 million or 0.7% of revenues. Operating income excluding unusual items, special charges and amortization of excess reorganization value as a percentage of revenues increased in Fiscal 2000 due to an increase in gross profit excluding special charges as a percentage of revenues partially offset by an increase in selling and administrative expenses as a percentage of revenues. Interest expense for Fiscal 2000 and Fiscal 1999 was $44.7 million and $147.7 million, respectively. Interest expense for Fiscal 2000 decreased primarily due to (1) the discontinuance of the accrual of interest on the Company's former senior and senior subordinated notes on the Petition Date and (2) the implementation of the Plan on June 29, 1999, which has substantially reduced the Company's debt. During Fiscal 2000, the Company recorded reorganization items (expense) of $167.0 million (see Note 10). Income tax provision for Fiscal 2000 was $5.0 million compared to a tax benefit of $23.9 million for Fiscal 1999. The effective tax rate for Fiscal 2000 varies from statutory rates due to (1) differences in income for financial reporting and tax reporting purposes for the 31-week period ended January 29, 2000 that result primarily from the nondeductible amortization of excess reorganization value and (2) the fact the Company recorded a valuation allowance for all income tax benefits generated in the 21-week period ended June 26, 1999. Although the Company recorded an income tax provision for the 31-week period ended January 30, 2000, the Company does not expect to pay any income taxes for the fiscal year ended January 29, 2000 (other than $0.2 million of franchise taxes) due to the utilization of net operating loss carryforwards (see Note 11). At January 30, 1999, the Company had approximately $300 million of federal net operating loss carryforwards as well as certain state net operating loss carryforwards and various tax credits. On January 30, 2000 all such net operating loss and tax credit carryforwards were eliminated due to the implementation of the Plan. In addition, as a result of the implementation of the Plan, on January 30, 2000, the Company lost the vast majority of the tax basis of its long-lived assets (which was approximately $350 million as of January 29, 2000), significantly reducing the amount of tax depreciation and amortization that the Company will be able to utilize on its tax returns starting in the fiscal year ending February 3, 2001. - 25 - During Fiscal 2000, the Company recorded an extraordinary gain of $654.9 million associated with the Company's financial restructuring (see Note 12). Net income for Fiscal 2000 was $409.6 million compared to a net (loss) of $317.1 million for Fiscal 1999. Net (loss) excluding unusual items, special charges, amortization of excess reorganization value, reorganization items and extraordinary items was $9.3 million for Fiscal 2000. Net (loss) excluding special charges and a write-down of long-lived assets was $103.9 million for Fiscal 1999. These amounts are not comparable due to the consummation of the Plan and the implementation of fresh-start reporting in Fiscal 2000. - 26 - FISCAL YEAR ENDED JANUARY 30, 1999 ("FISCAL 1999") COMPARED TO FISCAL YEAR ENDED JANUARY 31, 1998 ("FISCAL 1998") The following table sets forth certain Statement of Operations components expressed as percentages of total revenues for Fiscal 1999 and Fiscal 1998:
PERCENTAGE OF TOTAL REVENUES FISCAL YEAR ---------------------------- 1999 1998 ------ ------ Total revenues 100.0% 100.0% Gross profit (1) 21.7 23.0 Gross profit excluding special charges (1) (2) 22.0 23.0 Selling and administrative expenses 21.3 20.8 Selling and administrative expenses excluding special charges (3) 21.3 20.5 Restructuring charges 0.3 Unusual items 2.2 (0.8) Write-down of long-lived assets 5.1 0.9 Operating (loss) income (6.8) 1.8 Operating income excluding unusual charges (4) 0.7 2.5 Interest expense 5.2 5.0 Net (loss) (11.2) (2.0) Net (loss) excluding unusual charges (4) (3.7) (1.6)
(1) Total revenues less cost of sales. (2) Gross profit excluding special charges for Fiscal 1999 of $8.0 million for inventory markdowns associated with the Store Rationalization Program (see Notes 4 and 7). (3) Selling and administrative expenses excluding special charges for Fiscal 1998 of (a) $5.6 million associated with the retention of certain corporate executives and (b) $1.9 million of other costs associated with a management reorganization and related corporate actions (see Note 5). - 27 - (4) Operating income and Net (loss) for Fiscal 1999 excluding (a) special charges of $68.2 million associated with the Store Rationalization Program, (b) special charges of $1.1 million associated with the Company's proposed debt restructuring and (c) $143.8 million charge associated with the write-down of long-lived assets (see Notes 4, 7 and 8). Operating income and Net (loss) for Fiscal 1998 excluding (a) pretax special charges of $18.2 million, (b) the gain on the sale of Sani-Dairy of $24.2 million and (c) the write-down of certain impaired long-lived assets of $27.0 million (see Notes 5, 6 and 8). Total revenues for Fiscal 1999 decreased 6.0% to $2.83 billion from $3.01 billion in Fiscal 1998. Same store sales for Fiscal 1999 decreased by 4.0% from Fiscal 1998. Wholesale supermarket revenues decreased in Fiscal 1999 to $328.7 million from $357.5 million in Fiscal 1998. Gross profit in Fiscal 1999 was $614.3 million or 21.7% of revenues compared to $692.2 million or 23.0% of revenues in Fiscal 1998. In Fiscal 1999, gross profit excluding special charges was $622.3 million or 22.0% of revenues. The decrease in gross profit excluding special charges as a percentage of revenues for Fiscal 1999 resulted from investments in gross margins associated with the Company's prior marketing program (initiated in the later part of Fiscal 1998), an increase in inventory shrink expense and a reduction in allowance income. Selling and administrative expenses for Fiscal 1999 were $602.4 million or 21.3% of revenues compared to $625.7 million or 20.8% of revenues for Fiscal 1998. For Fiscal 1998, selling and administrative expenses excluding special charges were $618.2 million or 20.5% of revenues. The increase in selling and administrative expenses excluding special charges as a percentage of revenues in Fiscal 1999 primarily due to increased promotional expenses (Penn Traffic accounts for certain promotional expenses in the selling and administrative expenses line of the Consolidated Statement of Operations) and an increase in bad debt expense. These additional expenses were partially offset by a decrease in costs associated with the implementation of the Company's cost reduction programs. During Fiscal 1999, the Company recorded special charges of $68.2 million associated with the Store Rationalization Program and $1.1 million associated with the Company's proposed debt restructuring. $61.3 million of these charges are included in the unusual items account and $8.0 million (inventory markdowns) is included in the cost of sales account (see Notes 4 and 7). During Fiscal 1998, the Company recorded special charges of $18.2 million ($10.7 million, net of tax) in connection with the management reorganization and related corporate actions and the retention of certain corporate executives. Of this charge, $7.5 million is included in selling and administrative expenses and $10.7 million is included in restructuring charges (see Note 5). - 28 - During Fiscal 1998, the Company recorded a gain totaling $24.2 million ($14.3 million, net of tax) related to the sale of Sani-Dairy for cash consideration of approximately $37 million (Note 6). In accordance with SFAS 121, during Fiscal 1999 the Company recorded noncash charges of (1) $52.3 million primarily related to the write-down of the recorded asset values of 14 of the Company's stores (including allocable goodwill) to estimated realizable value and (2) $91.5 million to write down the carrying amounts (including allocable goodwill) of property held for sale in connection with the Store Rationalization Program to estimated realizable values. In accordance with SFAS 121, during Fiscal 1998 the Company recorded a noncash charge of $27.0 million. This charge primarily related to the write-down of a portion of the recorded asset values (including allocable goodwill) of 12 of the Company's supermarkets that were in operation as of January 31, 1998, as well as certain other real estate. Depreciation and amortization expense was $77.2 million in Fiscal 1999 and $89.0 million in Fiscal 1998, representing 2.7% and 3.0% of total revenues, respectively. The decrease in depreciation and amortization expense is due to (a) a reduction in the Company's capital expenditure program, (b) the Store Rationalization Program which involved the sale or closure of several stores and (c) the write-down of long-lived assets in Fiscal 1998 and Fiscal 1999. Operating loss for Fiscal 1999 was $193.3 million or 6.8% of revenues compared to operating income of $53.0 or 1.8% of total revenues for Fiscal 1998. Operating income excluding unusual charges for Fiscal 1999 was $19.9 million or 0.7% of revenues compared to $74.0 million or 2.5% of revenues for Fiscal 1998. Operating income excluding unusual charges as a percentage of revenues declined due to a decrease in gross profit as a percentage of revenues and an increase in selling and administrative expenses as a percentage of revenues. Interest expense for Fiscal 1999 and Fiscal 1998 was $147.7 million and $150.0 million, respectively. The income tax benefit for Fiscal 1999 was $23.9 million compared to a benefit of $35.8 million in Fiscal 1998. The effective tax rates vary from the statutory rates due to (a) differences between income for financial reporting and tax reporting purposes that result primarily from the amortization of nondeductible goodwill and (b) the recording of a valuation allowance. A valuation allowance is required when it is more likely than not that the recorded value of a deferred tax asset will not be realized. Net loss for Fiscal 1999 was $317.1 million compared to a net loss of $61.1 million for Fiscal 1998. Net loss excluding unusual charges was $103.9 million for Fiscal 1999 compared to a $48.8 million net loss excluding unusual charges for Fiscal 1998. - 29 - LIQUIDITY AND CAPITAL RESOURCES As a result of the consummation of the Plan, the Company substantially reduced the amount of its total indebtedness. In connection with the Plan, approximately $1.13 billion of senior notes and senior subordinated notes were converted into $100 million of New Senior Notes due 2009, approximately 99.5% of the shares of the New Common Stock outstanding on the Effective Date and warrants to purchase additional shares of New Common Stock. Upon consummation of the Plan on June 29, 1999, the Company had approximately $326 million of outstanding indebtedness (including capital leases). The New Senior Notes mature on June 29, 2009 and do not contain any mandatory redemption or sinking fund requirement provisions (other than pursuant to certain customary exceptions including, without limitation, requiring the Company to make an offer to repurchase the New Senior Notes upon the occurrence of a change of control), and are optionally redeemable at prices at 106% of par beginning in the year 2004 and declining annually thereafter to par in 2008, and at 111% of par under other specified circumstances. Pursuant to the terms of the indenture for the New Senior Notes (the "Indenture"), the Company, at its election, can choose to pay interest on the New Senior Notes, at the rate of 11% per annum, for the first two years (i.e., the first four semi-annual interest payments) through the issuance of additional notes; thereafter, interest on the New Senior Notes will be payable at the rate of 11% per annum, in cash. Any notes issued in lieu of interest would also mature on June 29, 2009 and bear interest at 11% per annum. The Company paid the interest on the New Senior Notes in cash for the initial interest period ended December 29, 1999. The Company also currently expects to make all future interest payments on the New Senior Notes in cash instead of through the issuance of any additional notes. The Indenture contains certain negative covenants that, among other things, restrict the Company's ability to incur additional indebtedness, permit additional liens and make certain restricted payments. Prior to the Petition Date, the Company had a revolving credit facility (the "Pre-petition Revolving Credit Facility") which provided for borrowings of up to $250 million, subject to a borrowing base limitation measured by eligible inventory and accounts receivable of the Company. After the Petition Date, the Bankruptcy Court approved the $300 million DIP Facility. A portion of the proceeds of the DIP Facility was used to repay, in full, the Pre-petition Revolving Credit Facility and a mortgage on one of the Company's distribution facilities, and to finance its working capital and capital expenditure requirements. The DIP Facility matured on June 29, 1999, the Effective Date. - 30 - On June 29, 1999, in connection with the consummation of the Plan, the Company entered into the $320 million New Credit Facility. The New Credit Facility includes (a) the $205 million New Revolving Credit Facility and (b) the $115 million Term Loan. The lenders under the New Credit Facility have a first priority perfected security interest in substantially all of the Company's assets. The New Credit Facility contains a variety of operational and financial covenants intended to restrict the Company's operations. Proceeds from the New Credit Facility were used to satisfy the Company's obligations under its DIP Facility, pay certain costs of the reorganization process and are available to satisfy the Company's ongoing working capital and capital expenditure requirements. The Term Loan will mature on June 30, 2006. Amounts of the Term Loan maturing in future fiscal years are outlined in the following table (in thousands):
FISCAL YEAR ENDING AMOUNT MATURING -------------------- ----------------- February 3, 2001 $ 2,000 February 2, 2002 4,750 February 1, 2003 6,750 January 31, 2004 9,750 January 29, 2005 12,750 January 28, 2006 7,750 February 3, 2007 71,250 -------- $115,000 ==========
Availability under the New Revolving Credit Facility is calculated based on a specified percentage of eligible inventory and accounts receivable of the Company. The New Revolving Credit Facility will mature on June 30, 2005. As of January 29, 2000, there were no borrowings under the New Revolving Credit Facility. Availability under the New Revolving Credit Facility was approximately $141 million as of January 29, 2000 (see Note 15). During April 2000, the Company entered into interest rate swap agreements, which expire in five years, that effectively convert $50 million of its variable rate borrowings into fixed rate obligations. Under the terms of these agreements, the Company makes payments at a fixed interest rate of 7.08% per annum and receives payments at variable interest rates based on LIBOR. During the 31-week period ended January 29, 2000, the Company's internally generated funds from operations, proceeds from asset sales and amounts available under the New Credit Facility provided sufficient liquidity to meet the Company's operating, capital expenditure and debt service needs and pay expenditures related to the Company's debt restructuring. The Company expects to utilize internally generated funds from operations and amounts available under the New Credit Facility to satisfy its operating, capital expenditure and debt service needs and pay expenditures related to the Company's debt restructuring for Fiscal 2001. - 31 - Cash flows used to meet the Company's operating requirements during Fiscal 2000 are reported in the Consolidated Statement of Cash Flows. During the 31-week period ended January 29, 2000, the Company's net cash provided by operating activities was $15.7 million. This amount was partially offset by net cash used in investing activities and financing activities of $26.2 million and $9.3 million, respectively. During the 21-week period ended June 26, 1999, the Company's net cash provided by operating activities and net cash provided by investing activities were $43.6 million and $11.0 million, respectively. These amounts were partially offset by net cash used in financing activities of $26.6 million. As of January 29, 2000, the Company had not paid approximately $6 million of expenditures related to its financial restructuring. As described above in Item 1 - "Business -- New England Stores," the Company is currently a party to the New England Operating Agreement with Grand Union. The Company believes that it will regain operating control of the 9 stores that are currently subject to the New England Operating Agreement on August 1, 2000. The Company plans to begin operating these stores as P&C supermarkets shortly thereafter. The Total Revenues account of the Company's Statement of Operations for Fiscal 2000 includes approximately $13 million of income allocable to payments made by Grand Union to the Company pursuant to the New England Operating Agreement. The Company expects to record approximately $2.9 million of income related to the New England Operating Agreement in each of the first and second quarters of the fiscal year ending February 3, 2001. Based upon the operation of these stores by Grand Union and other relevant factors, the Company believes that after the Company regains operating control of these stores on August 1, 2000, the operating income allocable from such stores will be substantially less, on an annual basis, than the income received pursuant to the New England Operating Agreement. During Fiscal 2001, the Company expects to make capital expenditures (including capital leases) totaling approximately $70 million. The Company expects to finance such capital expenditures through cash generated from operations and amounts available under the New Credit Facility. Capital expenditures will be principally for new stores, store remodels (including for the New England stores) and investments in the Company's distribution infrastructure and technology. - 32 - YEAR 2000 Year 2000 exposures arose from the inability of some computer-based systems and equipment to correctly interpret and process dates after December 31, 1999. The basis for the exposure was that many systems and equipment carried only the last two digits of the year field. With the year 2000, these systems and equipment might not have been able to distinguish between the year 1900 and 2000. For those processes and procedures that use the date in calculations, significant problems could have occurred. For approximately three years preceding December 31, 1999, the Company expended significant resources implementing strategies to address these issues. This involved system replacement and remediation of legacy systems. In addition, in the days preceding December 31, 1999, the Company executed contingency plans which included posting personnel in key locations to perform equipment and system validation on December 31, 1999, and January 1, 2000. In general, the transition to the year 2000 was very successful. As expected with a change of such magnitude, some minor problems surfaced on or about January 1, 2000, related to year 2000 date processing. These issues were resolved quickly with no delay in the functioning of the Company's distribution centers and stores, and with no material adverse financial impact. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See information set forth above in Item 7 - "Managements Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 15 to the Consolidated Financial Statements. - 33 - ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Page ---- Reports of Independent Accountants 35 Consolidated Financial Statements: Statement of Operations 37 Balance Sheet 38 Statement of Stockholders' Equity (Deficit) 40 Statement of Cash Flows 41 Notes to Consolidated Financial Statements 42 Financial Statement Schedules Schedule II -- Valuation and Qualifying Accounts 74 Supplementary Data - Quarterly Financial Data (Unaudited) 75 - 34 - REPORT OF INDEPENDENT ACCOUNTANTS (Post Emergence) To the Stockholders and the Board of Directors of The Penn Traffic Company In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of The Penn Traffic Company and its subsidiaries at January 29, 2000 and the results of its operations and its cash flows for the 31-weeks ended January 29, 2000 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States 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 management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 2 to the consolidated financial statements, on May 27, 1999, the United States Bankruptcy Court for the District of Delaware confirmed the Company's Plan of Reorganization (the "Plan"). The Plan became effective on June 29, 1999 and the Company emerged from Chapter 11. In connection with its emergence from Chapter 11, the Company adopted Fresh -Start Reporting as of June 26, 1999 as further described in Note 3 to the consolidated financial statements. PricewaterhouseCoopers LLP Syracuse, New York March 10, 2000 - 35 - REPORT OF INDEPENDENT ACCOUNTANTS (Pre-Emergence) To the Stockholders and the Board of Directors of The Penn Traffic Company In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of The Penn Traffic Company and its subsidiaries at January 30, 1999 and the results of operations and cash flows for the 21-weeks ended June 26, 1999, and for each of the two years in the period ended January 30, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth herein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with standards generally accepted in the United States which require that we plan and perform an 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 significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 2 to the consolidated financial statements, on May 27, 1999, the United States Bankruptcy Court for the District of Delaware confirmed the Company's Plan of Reorganization (the "Plan"). The Plan became effective on June 29, 1999 and the Company emerged from Chapter 11. In connection with its emergence from Chapter 11, the Company adopted Fresh-Start Reporting as of June 26, 1999 as further described in Note 3 to the consolidated financial statements. PricewaterhouseCoopers LLP Syracuse, New York March 10, 2000 - 36 - THE PENN TRAFFIC COMPANY CONSOLIDATED STATEMENT OF OPERATIONS
Successor Company Predecessor Company ---------- ------------------------------------ 31 Weeks 21 Weeks 52 Weeks 52 Weeks Ended Ended Ended Ended January 29, June 26, January 30, January 31, 2000 1999 1999 1998 ---------- ---------- ---------- ---------- (All dollar amounts in thousands, except per share data) TOTAL REVENUES $1,477,219 $1,006,804 $2,828,109 $3,010,065 COSTS AND OPERATING EXPENSES: Cost of sales (including buying and occupancy costs) (Notes 4 and 7) 1,124,755 781,342 2,213,801 2,317,847 Selling and administrative expenses (Note 5) 312,154 226,430 602,382 625,731 Restructuring charges (Note 5) 10,704 Gain on sale of Sani-Dairy (Note 6) (24,218) Amortization of excess reorganization value (Note 3) 65,132 Unusual items (Note 7) 7,408 (4,631) 61,355 Write-down of long-lived assets (Note 8) 143,842 26,982 ---------- ---------- ---------- ---------- OPERATING (LOSS) INCOME (32,230) 3,663 (193,271) 53,019 Interest expense (Note 9) 22,923 21,794 147,737 149,981 Reorganization items (Note 10) 167,031 ---------- ---------- ---------- ---------- (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS (55,153) (185,162) (341,008) (96,962) Provision (benefit) for income taxes (Note 11) 4,940 60 (23,914) (35,836) ---------- ---------- ---------- ---------- (LOSS) BEFORE EXTRAORDINARY ITEMS (60,093) (185,222) (317,094) (61,126) Extraordinary items (Note 12) (654,928) ---------- ---------- ---------- ---------- NET (LOSS) INCOME $ (60,093) $ 469,706 $ (317,094) $ (61,126) ========== ========== ========== ========== PER SHARE DATA (BASIC AND DILUTED): Net (loss) (Note 13) $ (2.99) ==========
The accompanying notes are an integral part of these statements. Per share data is not presented for periods prior to June 26, 1999, because of the general lack of comparability as a result of the revised capital structure of the Company. - 37 - THE PENN TRAFFIC COMPANY CONSOLIDATED BALANCE SHEET
Successor Predecessor Company Company January 29, January 30, 2000 1999 ---------- ---------- (In thousands of dollars) ASSETS CURRENT ASSETS: Cash and short-term investments (Note 1) $ 51,759 $ 43,474 Accounts and notes receivable (less allowance for doubtful accounts of $10,561 and $5,731, respectively) 49,722 62,420 Inventories (Note 1) 268,550 283,631 Prepaid expenses and other current assets 8,335 14,619 Deferred income tax (Note 11) 8,993 ---------- ---------- 387,359 404,144 ---------- ---------- CAPITAL LEASES (NOTES 1 AND 14): Capital leases 66,119 157,667 Less: Accumulated amortization (5,052) (66,735) ---------- ---------- 61,067 90,932 ---------- ---------- FIXED ASSETS (NOTE 1): Land 39,978 16,525 Buildings 84,171 183,660 Furniture and fixtures 110,298 455,592 Vehicles 2,394 16,792 Leaseholds and improvements 6,649 171,007 ---------- ---------- 243,490 843,576 Less: Accumulated depreciation (17,459) (463,433) ---------- ---------- 226,031 380,143 ---------- ---------- OTHER ASSETS (NOTES 1 AND 3): Goodwill, net 8,506 269,894 Beneficial leases, net 56,594 14,785 Excess reorganization value, net 262,685 Other assets and deferred charges, net 18,215 68,163 ---------- ---------- $1,020,457 $1,228,061 ========== ==========
The accompanying notes are an integral part of these statements. - 38 - THE PENN TRAFFIC COMPANY CONSOLIDATED BALANCE SHEET
Successor Predecessor Company Company January 29, January 30, 2000 1999 ---------- ---------- (In thousands of dollars) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of obligations under capital leases (Note 14) $ 9,667 $ 11,516 Current maturities of long-term debt (Note 15) 2,292 1,267,813 Trade accounts and drafts payable (Note 1) 124,556 134,432 Payroll and other accrued liabilities 88,916 81,867 Accrued interest expense 2,863 42,783 Payroll taxes and other taxes payable 12,637 15,420 ---------- ---------- 240,931 1,553,831 ---------- ---------- NONCURRENT LIABILITIES: Obligations under capital leases (Note 14) 82,537 98,029 Long-term debt (Note 15) 225,678 Deferred income tax 80,581 Other noncurrent liabilities 27,166 45,907 STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 17): Preferred stock (Successor Company) - authorized 1,000,000 shares, $.01 par value; none issued Common stock (Successor Company) - authorized 30,000,000 shares, $.01 par value; 20,106,955 shares issued and outstanding 201 Common stock (Predecessor Company) - authorized 30,000,000 shares $1.25 par value; 10,824,591 shares issued and outstanding 13,425 Capital in excess of par value 416,207 179,882 Stock warrants 7,249 Retained deficit (60,093) (658,820) Minimum pension liability adjustment (Note 16) (3,470) Unearned compensation (98) Treasury stock, at cost (625) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 363,564 (469,706) ---------- ---------- $1,020,457 $1,228,061 ========== ==========
The accompanying notes are an integral part of these statements. - 39 -
THE PENN TRAFFIC COMPANY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) Minimum Capital in Pension Total Common Excess of Stock Retained Liability Unearned Treasury Stockholders' Stock Par Value Warrants Deficit Adjustment Compensation Stock Equity(Deficit) ----- --------- -------- ------- ---------- ------------ ----- --------------- (In thousands of dollars) PREDECESSOR COMPANY: FEBRUARY 1, 1997 $13,641 $ 180,412 $ 0 $(280,668) $ (8,730) $ (785) $ (625) $ (96,755) Comprehensive (loss): Net (loss) (61,126) Minimum pension liability adjustment (1,937) Total comprehensive (loss) (63,063) Exercise of 1,150 common stock option shares 3 6 9 Cancellation of 46,000 restricted stock shares (58) (358) 416 Unearned compensation adjustment 908 (908) ------- --------- ------- --------- ------- -------- ------- --------- JANUARY 31, 1998 13,586 180,060 0 (340,470) (10,667) (1,693) (625) (159,809) Comprehensive (loss): Net (loss) (317,094) Minimum pension liability adjustment 7,197 Total comprehensive (loss) (309,897) Cancellation of 129,100 restricted stock shares (161) (178) 339 Unearned compensation adjustment (1,595) 1,595 ------- --------- ------- --------- ------- -------- ------- --------- JANUARY 30, 1999 13,425 179,882 0 (658,820) (3,470) (98) (625) (469,706) Comprehensive income: Net income for the 21-week period ended June 26, 1999 469,706 Total comprehensive income 469,706 Adjustments to Stockholders' Equity in connection with reorganization (Notes 2 and 3)(13,425) (179,882) 189,114 3,470 98 625 Issuance of Common Stock and Stock Warrants in connection with reorganization (Notes 2 and 3) 201 416,207 7,249 423,657 ------- --------- ------- --------- ------- -------- ------- --------- JUNE 26, 1999 201 416,207 7,249 0 0 0 0 423,657 SUCCESSOR COMPANY: Comprehensive (loss): Net (loss) for the 31-week period ended January 29, 2000 (60,093) Total comprehensive (loss) (60,093) ------- --------- ------- ---------- ------- -------- ------- ---------- JANUARY 29, 2000 $ 201 $ 416,207 $ 7,249 $ (60,093) $ 0 $ 0 $ 0 $ 363,564 ======= ========= ======= ========= ======== ========= ======= =========
The accompanying notes are an integral part of these statements. - 40 - THE PENN TRAFFIC COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS
Successor Company Predecessor Company ---------- ------------------------------------ 31 Weeks 21 Weeks 52 Weeks 52 Weeks Ended Ended Ended Ended January 29, June 26, January 30, January 31, 2000 1999 1999 1998 ---------- ---------- ---------- ---------- (In thousands of dollars) OPERATING ACTIVITIES: Net (loss) income $ (60,093) $ 469,706 $ (317,094) $ (61,126) Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization 26,176 25,832 77,179 88,966 Amortization of excess reorganization value 65,132 (Gain) loss on sold / closed stores (2,921) 23,285 Gain on sale of Sani-Dairy (24,218) Write-down of long-lived assets 143,842 26,982 Reorganization Items: Gain from rejected leases (12,830) Write-off of unamortized deferred financing fees 16,591 Fresh-start adjustments 151,161 Extraordinary items (654,928) Adjustment to excess reorganization value 14,811 Other-net (941) 120 9,559 1,127 NET CHANGE IN ASSETS AND LIABILITIES: Accounts receivable and prepaid expenses 2,445 15,437 7,356 2,758 Inventories (11,423) 22,321 43,758 9,136 Payables and accrued expenses (9,754) 16,477 2,569 (5,793) Deferred taxes (9,979) (16,671) (38,234) Deferred charges and other assets 2,403 1,464 3,218 2,178 Other noncurrent liabilities (3,067) (4,797) 612 (6,886) ---------- ---------- ---------- ---------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 15,710 43,633 (22,387) (5,110) ---------- ---------- ---------- ---------- INVESTING ACTIVITIES: Capital expenditures (31,468) (6,279) (14,368) (21,833) Proceeds from sale of Sani-Dairy 37,067 Proceeds from sale of assets 5,251 17,273 39,145 9,880 ---------- ---------- ---------- ---------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (26,217) 10,994 24,777 25,114 ---------- ---------- ---------- ---------- FINANCING ACTIVITIES: Net (decrease) increase in drafts payable (3,332) (2,677) (11,762) 580 Payments to settle long-term debt (162) (9,598) (6,157) (2,231) Borrowing of revolver debt 33,100 31,100 122,200 369,483 Repayment of revolver debt (33,100) (144,000) (86,883) (378,700) Borrowing of DIP revolver debt 166,751 Repayment of DIP revolver debt (166,751) Borrowing of new term loan 115,000 Reduction of capital lease obligations (5,773) (8,487) (25,409) (13,290) Payment of debt issuance costs (7,906) Other - net 9 ---------- ---------- ---------- ---------- NET CASH (USED IN) FINANCING ACTIVITIES (9,267) (26,568) (8,011) (24,149) ---------- ---------- ---------- ----------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (19,774) 28,059 (5,621) (4,145) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 71,533 43,474 49,095 53,240 ---------- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 51,759 $ 71,533 $ 43,474 $ 49,095 ========== ========== ========== ==========
The accompanying notes are an integral part of these statements. - 41 - 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 January 29, 2000, the Company operated 210 supermarkets in New York, Ohio, Pennsylvania and West Virginia, and supplied 85 franchise supermarkets and 71 independent wholesale accounts. The Company also operated 9 distribution centers and a bakery. BASIS OF PRESENTATION All significant intercompany transactions and accounts have been eliminated in consolidation. Effective June 26, 1999, the Company adopted fresh-start reporting (see Notes 2 and 3). Certain amounts in the January 30, 1999 Consolidated Balance Sheet and the Consolidated Statement of Cash Flows for the 52-week periods ended January 30, 1999 ("Fiscal 1999"), and January 31, 1998 ("Fiscal 1998"), have been reclassified for comparative purposes. The Company is principally involved in the distribution and retail sale of food and related products, which constitutes a single significant business segment. 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 with a maturity, at the date of purchase, of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market using the last-in, first-out ("LIFO") method of valuation for the vast majority of the Company's inventories. If the first-in, first-out ("FIFO") method had been used by the Company, inventories would have been $0.9 million and $23.6 million higher than reported at January 29, 2000 and January 30, 1999, respectively. In connection with the implementation of fresh-start reporting, the Company adjusted the value of its LIFO inventories on June 26, 1999 to be equal to fair value which approximates the FIFO value of inventories. - 42 - During Fiscal 1999 and Fiscal 1998 inventory quantities were reduced, which resulted in a liquidation of certain LIFO inventory layers carried at lower costs which prevailing in prior years. The effect for Fiscal 1999 was to decrease cost of goods sold by approximately $1.6 million and net loss by $1.6 million. The effect for Fiscal 1998 was to decrease cost of goods sold by approximately $0.6 million and net loss by $0.3 million. 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 15 to 40 years Furniture and fixtures 4 to 15 years Vehicles 3 to 8 years Leasehold improvements 10 to 40 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, as of January 30, 1999, certain other nonfinancing costs resulting from acquisitions had been capitalized as other assets and deferred charges. As a result of the adoption of fresh-start reporting, Goodwill and other intangible acquisition costs existing at June 26, 1999, have been eliminated (see Note 3). Beneficial leases, representing the present value of the difference between market value rent and contract rent over the remaining term of the lease, are being amortized over the remaining lease term ranging from 4 to 19 years using the straight-line method. Excess reorganization value is being amortized on a straight-line basis over a three-year period (see Note 3). For the 31-week period ended January 29, 2000, the 21-week period ended June 26, 1999, Fiscal 1999 and Fiscal 1998, amortization of intangibles was $68.8 million, $3.9 million, $14.1 million and $15.1 million, respectively. TRADE ACCOUNTS AND DRAFTS PAYABLE Trade accounts and drafts payable includes drafts payable of $32.5 million and $38.5 million at January 29, 2000, and January 30, 1999, respectively. - 43 - IMPAIRMENT OF LONG-LIVED ASSETS In accordance with 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"), 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 (see Note 8). DEFERRED CHARGES Deferred charges consist of debt issuance costs and prepaid pension expense. The debt issuance costs are being amortized primarily on a straight-line basis over the life of the related debt. STORE PRE-OPENING COSTS Store pre-opening costs are 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 disclosures 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 in future years of temporary differences between the tax basis of assets and liabilities and their corresponding financial reporting amounts at each year-end. - 44 - NOTE 2 -- REORGANIZATION: On March 1, 1999 (the "Petition Date"), the Company and certain of its subsidiaries filed petitions for relief (the "Bankruptcy Cases") under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). On May 27, 1999, the Bankruptcy Court confirmed the Company's Chapter 11 plan of reorganization (the "Plan") and on June 29, 1999 (the "Effective Date"), the Plan became effective in accordance with its terms. Consummation of the Plan has resulted in (a) the former $732.2 million principal amount of the Company's senior notes being exchanged for $100 million of new senior notes (the "New Senior Notes") and 19,000,000 shares of newly issued common stock (the "New Common Stock"), (b) the former $400 million principal amount of senior subordinated notes being exchanged for 1,000,000 shares of New Common Stock and six-year warrants to purchase 1,000,000 shares of New Common Stock having an exercise price of $18.30 per share, (c) holders of Penn Traffic's formerly issued common stock receiving one share of New Common Stock for each 100 shares of common stock held immediately prior to the Petition Date, for a total of 106,955 new shares and (d) the cancellation of all outstanding options and warrants to purchase shares of the Company's former common stock. The Plan also provides for issuance to officers and key employees options to purchase up to 2,297,000 shares of New Common Stock. The Company's New Common Stock and warrants to purchase common stock are currently trading on the Nasdaq National Market under the symbols "PNFT" and "PNFTW," respectively. The Plan also provided for payment in full of all of the Company's obligations to its other creditors. On the Effective Date, in connection with the consummation of the Plan, the Company entered into a new $320 million secured credit facility (the "New Credit Facility"). The New Credit Facility includes (a) a $205 million revolving credit facility (the "New Revolving Credit Facility") and (b) a $115 million term loan (the "Term Loan"). The lenders under the New Credit Facility have a first priority perfected security interest in substantially all of the Company's assets. Proceeds from the New Credit Facility were used to satisfy the Company's obligations under its debtor-in-possession financing (the "DIP Facility"), pay certain costs of the reorganization process and are available to satisfy the Company's ongoing working capital and capital expenditure requirements. - 45 - NOTE 3 -- FRESH-START REPORTING: As of the Effective Date, the Company adopted fresh-start reporting pursuant to the guidance provided by the American Institute of Certified Public Accountant's Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). In connection with the adoption of fresh-start reporting, a new entity has been created for financial reporting purposes. The Effective Date is considered to be the close of business on June 26, 1999, for financial reporting purposes. The periods presented prior to June 26, 1999, have been designated "Predecessor Company" and the periods subsequent to June 26, 1999, have been designated "Successor Company." As a result of the implementation of fresh-start reporting, the financial statements of the Company after the Effective Date are not comparable to the Company's financial statements for prior periods. In accordance with fresh-start reporting, all assets and liabilities are recorded at their respective fair values. The fair value of the Company's long-lived assets was determined, in part, using information provided by third-party appraisers. The reorganization value of the Company is reflected as the debt and equity value of the new company, as of the Effective Date. To facilitate the calculation of the reorganization value, the Company developed a set of financial projections. Based on these financial projections, the reorganization value was determined by the Company with assistance of a financial advisor using various valuation methods, including (i) a comparison of the Company and its projected performance to how the market values comparable companies, (ii) a calculation of the present value of the free cash flows under the projections, including an assumption for a terminal value and (iii) negotiations with an informal committee of the Company's noteholders. The estimated enterprise value is highly dependent upon achieving the future financial results set forth in the projections, as well as the realization of certain other assumptions which are not guaranteed. The total reorganization value as of the Effective Date was approximately $750 million, which was approximately $342.6 million in excess of the aggregate fair value of the Company's tangible and identifiable intangible assets less non-interest bearing liabilities. Such excess is classified as "Excess reorganization value" in the accompanying Consolidated Balance Sheet. Subsequent to the fresh-start date, the Company's deferred tax liabilities as of the Effective Date were reduced by $14.8 million and, as a result, Excess reorganization value was reduced to $327.8 million as of the Effective Date. Such amount is being amortized on a straight-line basis over a three-year period. The total outstanding indebtedness (including capital leases) as of the Effective Date was approximately $326.3 million. The Stockholders' Equity on the Effective Date of approximately $423.7 million was established by deducting such total outstanding indebtedness of $326.3 million from the reorganization value of $750 million. Stockholders' Equity includes $7.2 million representing the fair value of the warrants to purchase shares of New Common Stock distributed in conjunction with the consummation of the Plan. - 46 - The reorganization and the adoption of fresh-start reporting resulted in the following adjustments to the Company's Consolidated Balance Sheet as of the Effective Date, as adjusted (in thousands):
Predecessor Reorganized Balance Sheet Reorganization Fresh-Start Balance Sheet June 26, 1999 Adjustments Adjustments(i) June 26, 1999 ------------- -------------- -------------- ------------- ASSETS CURRENT ASSETS: Cash and short-term investments $ 40,776 $ 30,757 (a) $ 71,533 Accounts and notes receivable - net 50,266 50,266 Inventories 261,310 $ (4,183)(j) 257,127 Prepaid expenses and other current assets 10,369 10,369 ---------- ---------- ---------- ---------- Total Current Assets 362,721 30,757 (4,183) 389,295 NONCURRENT ASSETS: Capital leases - net 82,055 (16,127)(j) 65,928 Property, plant and equipment - net 359,556 (137,232)(j) 222,324 Beneficial leases - net 14,610 46,588 (j) 61,198 Goodwill - net 266,434 (266,434)(k) Excess reorganization value - net 327,817 (l) 327,817 Other assets and deferred charges - net 52,127 2,201 (b) (33,710)(j) 20,618 ---------- ---------- ---------- ---------- Total Assets $1,137,503 $ 32,958 $ (83,281) $1,087,180 ========== ========== ========== ========== LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY CURRENT LIABILITIES: Current portion of obligations under capital leases $ 9,598 $ 9,598 Current maturities of long-term debt 493 $ (214)(c) 279 Trade accounts and drafts payable 134,033 134,033 Payroll and other accrued liabilities 78,721 13,878 (d) $ 1,578 (m) 94,177 Accrued interest expense 1,135 (766)(e) 369 Payroll taxes and other taxes payable 12,531 863 (n) 13,394 ---------- ---------- ---------- ---------- Total Current Liabilities 236,511 12,898 2,441 251,850 NONCURRENT LIABILITIES: Obligations under capital leases 88,613 88,613 Long-term debt 93,019 134,834 (f) 227,853 Deferred taxes 66,392 (n) 66,392 Other noncurrent liabilities 29,768 (953)(m) 28,815 ---------- ---------- ---------- ---------- Total liabilities not subject to compromise 447,911 147,732 67,880 663,523 LIABILITIES SUBJECT TO COMPROMISE 1,194,888 (1,194,888)(g) ---------- ---------- ---------- ---------- Total Liabilities 1,642,799 (1,047,156) 67,880 663,523 ---------- ---------- ---------- ---------- TOTAL STOCKHOLDERS' (DEFICIT) EQUITY (505,296) 1,080,114 (h) (151,161)(o) 423,657 ---------- ---------- ---------- ---------- Total Liabilities and Stockholders' (Deficit) Equity $1,137,503 $ 32,958 $ (83,281) $1,087,180 ========== ========== ========== ==========
- 47 - The explanation of the reorganization and fresh-start adjustment columns of the Consolidated Balance Sheet as of the Effective Date are as follows: (a) Reflects the proceeds of the New Credit Facility net of (1) the repayment of the Company's obligations under the DIP Facility, (2) certain mortgages repaid in connection with the reorganization and (3) the deferred financing costs of the New Credit Facility. (b) Reflects (1) the establishment of deferred financing costs for the New Credit Facility and (2) the elimination of unamortized deferred financing costs related to the DIP Facility and certain mortgages repaid in connection with the reorganization. (c) Reflects the repayment of certain mortgages in connection with the reorganization. (d) Reflects (1) the reclassification of a liability for rejected leases (which was included in Liabilities Subject to Compromise prior to the effectiveness of the Plan) to Payroll and other accrued liabilities and (2) the accrual of certain deferred financing costs of the New Credit Facility not paid as of the Effective Date. (e) Reflects the payment of the accrued interest on the DIP Facility and certain mortgages repaid in connection with the reorganization. (f) Reflects (1) the issuance of the New Senior Notes ($100 million), (2) borrowings under the New Credit Facility on the Effective Date ($115 million Term Loan) and (3) the repayment of the DIP Facility and certain mortgages. (g) Reflects (1) the conversion of all the Company's obligations under its pre-petition senior and senior subordinated notes into $100 million of New Senior Notes, approximately 99.5% of the shares of the New Common Stock of reorganized Penn Traffic and warrants to purchase additional shares of New Common Stock and (2) the reclassification of a liability for rejected leases to Payroll and other accrued liabilities. (h) Reflects the adjustment to Stockholders' (Deficit) Equity in connection with the consummation of the Plan. (i) Includes adjustments made to deferred tax liability and Excess reorganization value subsequent to the fresh-start date. (j) Reflects the adjustment of Inventories, Capital leases, Property, plant and equipment, Beneficial leases and Other assets and deferred charges to fair value. The adjustment includes a provision for a change in the method of accounting for inventories. Inventory values in the Successor Company have been reduced for certain related periodic vendor promotional discounts whereas the Predecessor Company recorded inventories without reducing the value for such promotional discounts. - 48 - (k) Reflects the elimination of Goodwill. (l) Reflects the establishment of Excess reorganization value (the reorganization value ($750 million) in excess of the aggregate fair value of the Company's tangible and identifiable intangible assets less non-interest bearing liabilities). (m) Reflects (1) the elimination of a pension liability in connection with the adjustment of pension assets and liabilities to fair value and (2) a revaluation of the Company's workmens compensation liabilities. (n) Reflects the recording of deferred tax assets and liabilities associated with the difference between the book and tax base of the Company's assets and liabilities. (o) Reflects the net effect on Stockholders' (Deficit) Equity of fresh-start adjustments to the Company's assets and liabilities. NOTE 4 -- SPECIAL CHARGES: During the 21-week period ended June 26, 1999, the Company decided to begin a process to refine the scope of the nonfood merchandise carried in its 15 Big Bear Plus combination stores to a smaller number of key growth categories with a greater depth of variety in each category. Accordingly, during the 21-week period ended June 26, 1999, the Company recorded a special charge of $3.9 million associated with this repositioning of these 15 Big Bear Plus combination stores. This charge, which consists of estimated inventory markdowns for discontinued product lines, is included in cost of sales. As described in Note 7 below, during Fiscal 1999 the Company recorded a special charge of $68.2 million related to a store rationalization program (net of a $12.7 million gain on the sale of assets in connection with this program). $60.2 million of the charge is included in the unusual item account; $8.0 million of this charge, representing inventory markdowns, is included in cost of sales. At January 29, 2000, and January 30, 1999, the accrued liability related to these charges was $9.5 million and $37.4 million, respectively. - 49 - NOTE 5 -- RESTRUCTURING CHARGES: During Fiscal 1998 the Company recorded pretax charges of $18.2 million ($10.7 million, net of tax). The special charges consist of (a) $12.6 million associated with a management reorganization and related corporate actions and (b) $5.6 million associated with the retention of corporate executives. These charges are included in the Restructuring charges and Selling and administrative expenses accounts of the Consolidated Statement of Operations as described below. The management reorganization included the centralization of management in the Company's Syracuse, New York, headquarters and other actions to streamline the Company's organizational structure. It resulted in the layoff of approximately 375 employees, with most of the layoffs coming in the Company's Columbus, Ohio and DuBois, Pennsylvania divisional headquarters. The restructuring charges of $10.7 million for Fiscal 1998 included $9.7 million of severance costs and $1.0 million of miscellaneous other costs recorded in connection with the management reorganization. Selling and administrative expenses for Fiscal 1998 included pretax special charges of (a) $5.6 million incurred in connection with the retention of corporate executives (consisting of $3.4 million paid to hired executives primarily to reimburse them for loss of benefits under arrangements with their prior employers and $2.2 million of relocation and other miscellaneous expenses associated with their retention) and (b) $1.9 million of other costs recorded in connection with management reorganization and related corporate actions. NOTE 6 -- GAIN ON SALE OF SANI-DAIRY: During Fiscal 1998, the Company recorded a gain of approximately $24.2 million ($14.3 million, net of tax) related to the sale of Sani-Dairy, the Company's dairy manufacturing operation, for cash consideration of approximately $37 million. Concurrent with the completion of the transaction, the Company entered into a 10-year supply agreement with the acquirer for the purchase of products that were supplied by Sani-Dairy and two other dairies. - 50 - NOTE 7 -- UNUSUAL ITEMS: During the 31-week period ended January 29, 2000, the Company recorded unusual items of (1) $5.5 million associated with the restructuring of certain executive compensation agreements and (2) $1.9 million associated with an early retirement program for certain eligible employees. During the 21-week period ended June 26, 1999, the Company recorded unusual items (income) of $4.6 million related to (1) a reduction of closed store reserves previously accrued in connection with the Company's store rationalization program ("Store Rationalization Program") and (2) a gain on the disposition of certain assets sold in connection with the Store Rationalization Program, as described below. Between the middle of 1998 and May 1999, Penn Traffic implemented the Store Rationalization Program to divest itself of certain marketing areas, principally in northeastern Pennsylvania where performance and market position were the weakest relative to Penn Traffic's other retail stores, and to close other underperforming stores. In connection with the Store Rationalization Program, Penn Traffic sold 21 stores and closed 29 stores. The Store Rationalization Program has allowed management to focus the Company's management and capital resources on a less geographically diverse store base located in upstate New York, Ohio, western Pennsylvania and northern West Virginia. During Fiscal 1999, the Company recorded a special charge of $68.2 million related to the Store Rationalization Program ($60.2 million of this charge is included in the unusual item account; $8.0 million of this charge, representing inventory markdowns, is included in cost of sales). The unusual item account for Fiscal 1999 also includes $1.1 million of professional fees and other miscellaneous costs associated with the Company's financial restructuring. NOTE 8 -- ACCOUNTING FOR CERTAIN LONG-LIVED ASSETS: The Company periodically reviews the recorded value of its long-lived assets to determine if the future cash flows to be derived from these properties will be sufficient to recover the remaining recorded asset values. In accordance with SFAS 121, the Company performed a comprehensive review of its long-lived assets as of the end of the 31-week period ended January 29, 2000. Based on this review, no additional assets were deemed to be impaired. In accordance with SFAS 121, during Fiscal 1999 the Company recorded noncash charges of (1) $52.3 million primarily related to the write-down of the recorded asset values of 14 of the Company's stores (including allocable goodwill) to estimated realizable value and (2) $91.5 million to write down the carrying amounts (including allocable goodwill) of property held for sale in connection with the Store Rationalization Program to estimated realizable values. In accordance with SFAS 121, during Fiscal 1998 the Company recorded a noncash charge of $27.0 million. This charge primarily related to the write-down of a portion of the recorded asset values (including allocable goodwill) of 12 of the Company's supermarkets that were in operation as of January 31, 1998, as well as certain other real estate. - 51 - NOTE 9 - INTEREST EXPENSE: As a result of the Bankruptcy Cases, on and after the Petition Date no principal or interest payments were made on the $1.132 billion of the Company's former senior and senior subordinated notes. Accordingly, no interest expense for these obligations has been accrued on or after the Petition Date. Had such interest been accrued, interest expense for the 21-week period ended June 26, 1999 would have been approximately $58.8 million. NOTE 10 - REORGANIZATION ITEMS: Reorganization items (expense) consist of the following items (in thousands):
PREDECESSOR COMPANY -------------- 21 WEEKS ENDED JUNE 26, 1999 -------------- Fresh-start adjustments $ 151,161 Gain from rejected leases (12,830) Write-off of unamortized deferred financing fees 16,591 Professional fees 12,109 --------- Total Expense $ 167,031 =========
The gain from rejected leases listed above is the difference between the estimated allowed claims for rejected leases and liabilities previously recorded for such leases. The professional fees listed above include accounting, legal, consulting and other miscellaneous services associated with the implementation of the Plan. - 52 - NOTE 11 -- INCOME TAXES: The provision (benefit) for income taxes was as follows:
SUCCESSOR COMPANY PREDECESSOR COMPANY --------- ------------------------------------- 31 WEEKS 21 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ENDED JANUARY 29, JUNE 26, JANUARY 30, JANUARY 31, 2000 1999 1999 1998 --------- --------- --------- --------- (IN THOUSANDS OF DOLLARS) Current Tax Provision (Benefit): Federal income $ (44) $ $ $ State income 90 60 150 250 --------- --------- --------- --------- 46 60 150 250 --------- --------- --------- --------- Deferred Tax Provision (Benefit): Federal income 3,787 (18,642) (27,894) State income 1,107 (5,422) (8,192) --------- --------- --------- --------- 4,894 (24,064) (36,086) --------- --------- --------- --------- Provision (benefit) for income taxes $ 4,940 $ 60 $ (23,914) $ (35,836) ========= ========= ========= =========
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:
SUCCESSOR COMPANY PREDECESSOR COMPANY --------- ------------------------------------- 31 WEEKS 21 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ENDED JANUARY 29, JUNE 26, JANUARY 30, JANUARY 31, 2000 1999 1999 1998 --------- --------- --------- --------- (IN THOUSANDS OF DOLLARS) Federal (benefit) at statutory rates $ (19,304) $ (64,807) $(119,353) $ (33,937) State income taxes net of federal income tax effect 778 (10,870) (3,427) (5,162) Nondeductible goodwill amortization and write-off 22,796 1,303 9,771 3,312 Miscellaneous items 714 62 35 Tax credits (44) (84) Valuation allowance 74,434 89,033 --------- --------- --------- -------- Provision (benefit) for income taxes $ 4,940 $ 60 $ (23,914) $ (35,836) ========= ========= ========= =========
- 53 - Components of deferred income taxes at January 29, 2000, and January 30, 1999, were as follows:
FISCAL YEAR ENDED ---------------------------- SUCCESSOR PREDECESSOR COMPANY COMPANY JANUARY 29, JANUARY 30, 2000 1999 ---------- ---------- (IN THOUSANDS OF DOLLARS) Deferred Tax Liabilities: Fixed assets $ 73,370 $ 20,498 Inventory 27,735 30,435 Prepaid expenses and other current assets 959 Beneficial leases and goodwill amortization 22,901 2,010 Pensions 4,449 7,240 Deferred charges and other assets 11,725 --------- --------- $ 128,455 $ 72,867 ========= ========= Deferred Tax Assets: Nondeductible accruals $ 44,097 $ 29,662 Capital leases 12,770 4,942 Net operating loss carryforwards 125,121 Tax credit carryforwards 17,463 Valuation allowance (104,321) --------- --------- $ 56,867 $ 72,867 ========= ========= Net Deferred Tax Liability $ 71,588 $ 0 ========= =========
The Company recorded a provision for income taxes of approximately $4.9 million for the 31-week period ended January 29, 2000. The Company recorded no income tax benefit relating to the net operating loss generated during the 21-week period ended June 26, 1999, as such loss was offset by a valuation allowance. A valuation allowance is required when it is more likely than not that the recorded value of a deferred tax asset will not be realized. The Company has not and will not pay any income taxes for the 52-week period ended January 29, 2000 (other than $0.2 million of franchise taxes). At January 30, 1999, the Company had approximately $300 million of federal net operating loss carryforwards, certain state net operating loss carryforwards and various tax credits. These amounts were available to reduce taxes payable otherwise arising through January 29, 2000. On January 30, 2000, all such net operating loss and tax credit carryforwards were eliminated due to the implementation of the Plan. In addition, as a result of the implementation of the Plan, on January 30, 2000, the Company lost the vast majority of the tax basis of its long-lived assets (which was approximately $350 million as of January 29, 2000), significantly reducing the amount of tax depreciation and amortization that the Company will be able to utilize on its tax returns starting in the fiscal year ending February 3, 2001. - 54 - NOTE 12 - EXTRAORDINARY ITEMS: The extraordinary items recorded for the 21-week period ended June 26, 1999, are comprised of the write-off of unamortized deferred financing fees associated with the early retirement of the Company's revolving credit facility prior to the Petition Date (the "Pre-petition Revolving Credit Facility") and the extraordinary gain on debt discharge recognized as a result of the consummation of the Plan as follows (in millions): Write-off of the unamortized deferred financing fees for the Pre-petition Revolving Credit Facility $ (1.5) Elimination of the former senior and senior subordinated notes including accrued interest 1,182.2 Write-off of unamortized deferred financing fees for debt repaid in connection with the Plan (2.1) Issuance of New Senior Notes (100.0) Issuance of New Common Stock and warrants (423.7) -------- Total extraordinary gain $ 654.9 ========
No corresponding tax provision has been recorded. NOTE 13 -- NET (LOSS) PER SHARE Net (loss) per share is computed based on the requirements of Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). This standard requires presentation of basic earnings per share ("EPS"), computed based on the weighted average number of common shares outstanding for the period, and diluted EPS, which gives effect to all dilutive potential shares outstanding (i.e., options and warrants) during the period. Income used in the EPS calculation is net (loss) for the 31-week period ended January 29, 2000. Shares used in the calculation of basic and diluted EPS were (in thousands):
SUCCESSOR COMPANY ----------- 31 WEEKS ENDED JANUARY 29, 2000 ----------- Shares used in the calculation of Basic EPS (weighted average shares outstanding) 20,107 Effect of dilutive potential securities 0 ------ Shares used in the calculation of Diluted EPS 20,107 ======
There were no incremental dilutive potential securities for the 31-week period ended January 29, 2000, as the exercise price for outstanding warrants (1,000,000 shares) and options (1,459,500 shares) was greater than the average market price of the New Common Stock. Net (loss) per share data is not presented for periods prior to June 26, 1999 because of the general lack of comparability as a result of the revised capital structure of the Company. - 55 - NOTE 14 -- LEASES: The Company principally operates in leased store facilities with terms of up to 20 years with 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. In addition to minimum rentals, substantially all store leases provide for the Company to pay real estate taxes and other expenses. The majority of store leases also provide for the Company to pay contingent rentals based on a percentage of the store's sales in excess of stipulated amounts. For the 31-week period ended January 29, 2000, the 21-week period ended June 26, 1999, Fiscal 1999 and Fiscal 1998, capital lease amortization expense was $5.1 million, $3.9 million, $11.8 million and $13.8 million, respectively. The following is an analysis of the leased property under capital leases by major classes:
ASSET BALANCES AT: --------------------------- SUCCESSOR PREDECESSOR COMPANY COMPANY JANUARY 29, JANUARY 30, 2000 1999 ---------- ---------- (IN THOUSANDS OF DOLLARS) Store facilities $ 56,099 $ 124,896 Warehousing and distribution 9,372 30,382 Other 648 2,389 --------- --------- Total $ 66,119 $ 157,667 Less: Accumulated amortization (5,052) (66,735) --------- --------- Capital lease assets, net $ 61,067 $ 90,932 ========= =========
The following is a summary by year of future minimum rental payments for capitalized leases and for operating leases that have initial or remaining noncancelable terms in excess of one year as of January 29, 2000:
FISCAL YEARS ENDING: TOTAL OPERATING CAPITAL -------------------- ----- --------- ------- (IN THOUSANDS OF DOLLARS) February 3, 2001 $ 55,037 $ 35,533 $ 19,504 February 2, 2002 50,346 33,516 16,830 February 1, 2003 45,175 29,132 16,043 January 31, 2004 39,977 26,326 13,651 January 29, 2005 37,709 24,340 13,369 Later years 271,749 192,252 79,497 -------- -------- -------- Total minimum lease payments $499,993 $341,099 158,894 ======== ======== Less: Executory costs (71) -------- Net minimum capital lease payments 158,823 Less: Estimated amount representing interest (66,619) -------- Present value of net minimum capital lease payments 92,204 Less: Current portion (9,667) -------- Long-term obligations under capital lease at January 29, 2000 $ 82,537 ========
- 56 - Future minimum rentals have not been reduced by minimum sublease rental income of $28.7 million due in the future under noncancelable subleases. The Company incurred no new capital lease obligations in the 52-week period ended January 29, 2000 ("Fiscal 2000") and Fiscal 1999, and $0.4 million in Fiscal 1998 in connection with lease agreements for equipment. Minimum rental payments and related executory costs for operating leases were as follows:
SUCCESSOR COMPANY PREDECESSOR COMPANY -------- ---------------------------------- 31 WEEKS 21 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ENDED JANUARY 29, JUNE 26, JANUARY 30, JANUARY 31, 2000 1999 1999 1998 -------- -------- -------- -------- (IN THOUSANDS OF DOLLARS) Minimum rentals and executory costs $ 23,175 $ 17,453 $ 46,250 $ 44,560 Contingent rentals 1,579 1,281 3,082 2,691 Less: Sublease payments (6,443) (4,788) (10,865) (9,577) -------- -------- -------- -------- Net rental payments $ 18,311 $ 13,946 $ 38,467 $ 37,674 ======== ======== ======== ========
- 57 - NOTE 15 -- LONG-TERM DEBT: The long-term debt of Penn Traffic consisted of the obligations described below as of the dates set forth:
JANUARY 29, JANUARY 30, 2000 1999 ---------- ---------- (IN THOUSANDS OF DOLLARS) Secured Term Loan $ 115,000 Secured Revolving Credit Facility $ 112,900 Other Secured Debt 12,970 22,673 11% Senior Notes due June 28, 2009 100,000 11 1/2% Senior Notes due October 15, 2001 107,240 10 1/4% Senior Notes due February 15, 2002 125,000 8 5/8% Senior Notes due December 15, 2003 200,000 10 3/8% Senior Notes due October 1, 2004 100,000 10.65% Senior Notes due November 1, 2004 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 ---------- ---------- TOTAL DEBT 227,970 1,267,813 Less: Amounts due within one year (2,292) (1,267,813) ---------- ---------- TOTAL LONG-TERM DEBT $ 225,678 $ 0 ========== ==========
Amounts maturing during each of the next five fiscal years (including amounts maturing under the New Credit Facility) are: $2.3 million (Fiscal 2001); $5.0 million (Fiscal 2002); $7.1 million (Fiscal 2003); $10.0 million (Fiscal 2004); and $13.0 million (Fiscal 2005). The Company incurred interest expense of $22.9 million, $21.8 million, $147.7 million and $150.0 million, including noncash amortization of deferred financing costs of $0.5 million, $1.4 million, $4.3 million and $4.8 million for the 31-week period ended January 29, 2000, the 21-week period ended June 26, 1999, Fiscal 1999 and Fiscal 1998, respectively. Interest paid was $21.0 million, $11.7 million, $136.0 million and $145.5 million for the 31-week period ended January 29, 2000, the 21-week period ended June 26, 1999, Fiscal 1999 and Fiscal 1998, respectively. The estimated fair value of the Company's long-term debt, including current maturities, was $215 million at January 29, 2000, and $514 million at January 30, 1999. 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. Prior to the Petition Date, the Company had the Pre-petition Revolving Credit Facility which provided for borrowings of up to $250 million, subject to a borrowing base limitation measured by eligible inventory and accounts receivable of the Company. After the Petition Date, the Bankruptcy Court approved the DIP Facility. A portion of the proceeds of the DIP Facility was used to repay, in full, the Company's Pre-petition Revolving Credit Facility and a mortgage on one of the Company's distribution facilities and to finance its working capital and capital expenditure requirements. The DIP Facility matured on June 29, 1999, the Effective Date. - 58 - The consummation of the Plan has resulted in the holders of Penn Traffic's former senior and senior subordinated notes exchanging their notes in the following manner: (a) the holders of the former outstanding $732.2 million of senior notes received their pro rata share of $100 million of New Senior Notes and 19,000,000 shares of New Common Stock and (b) the holders of the former outstanding $400 million of senior subordinated notes received their pro rata share of 1,000,000 shares of New Common Stock and six-year warrants to purchase 1,000,000 shares of New Common Stock having an exercise price of $18.30 per share. The New Senior Notes mature on June 29, 2009, and do not contain any mandatory redemption or sinking fund requirement provisions (other than pursuant to certain customary exceptions including, without limitation, requiring the Company to make an offer to repurchase the New Senior Notes upon the occurrence of a change of control), and are optionally redeemable at prices beginning at 106% of par in 2004 and declining annually thereafter to par in 2008, and at 111% of par under other specified circumstances as dictated by the Plan. Pursuant to the terms of the indenture for the New Senior Notes (the "Indenture"), the Company, at its election, can choose to pay interest on the New Senior Notes, at the rate of 11% per annum, for the first two years (i.e., the first four interest payments) through the issuance of additional notes; thereafter, interest on the New Senior Notes will be payable at the rate of 11% per annum, in cash. Any notes issued in lieu of interest would also mature on June 29, 2009 and bear interest at 11% per annum. The Company paid the interest on the New Senior Notes in cash for the initial interest period ended December 29, 1999. The Indenture contains certain negative covenants that, among other things, restrict the Company's ability to incur additional indebtedness, permit additional liens and make certain restricted payments. On the Effective Date, the Company entered into the New Credit Facility. The New Credit Facility includes (a) the $205 million New Revolving Credit Facility and (b) the $115 million Term Loan. The lenders under the New Credit Facility have a first priority perfected security interest in substantially all of the Company's assets. Proceeds from the New Credit Facility were used to satisfy the Company's obligations under its DIP Facility, pay certain costs of the reorganization process and are available to satisfy the Company's ongoing working capital and capital expenditure requirements. The Term Loan will mature on June 30, 2006. The Term Loan consists of a $40 million Tranche A Term Loan and a $75 million Tranche B Term Loan. Amounts of the Term Loan maturing in future fiscal years are outlined in the following table (in thousands):
FISCAL YEAR ENDING AMOUNT MATURING ------------------ --------------- February 3, 2001 $ 2,000 February 2, 2002 4,750 February 1, 2003 6,750 January 31, 2004 9,750 January 29, 2005 12,750 January 28, 2006 7,750 February 3, 2007 71,250 -------- $115,000 ========
- 59 - Availability under the New Revolving Credit Facility is calculated based on a specified percentage of eligible inventory and accounts receivable of the Company. The New Revolving Credit Facility will mature on June 30, 2005. As of January 29, 2000, there were no borrowings and approximately $43 million of letters of credit outstanding under the New Revolving Credit Facility. Availability under the New Revolving Credit Facility was approximately $141 million as of January 29, 2000. Between the Effective Date and May 1, 2000 the interest rate on borrowings under the New Credit Facility is as presented below:
LIBOR-based Prime-based Borrowings Borrowings ---------- ---------- Revolving Credit LIBOR + 2.375% PRIME + 1.375% Term Loan A LIBOR + 2.375% PRIME + 1.375% Term Loan B LIBOR + 3.0% PRIME + 2.0%
Commencing May 1, 2000, the interest rate on borrowings under the New Credit Facility will be adjusted on a quarterly basis depending upon the ratio of the Company's total debt (including capital leases) to Consolidated EBITDA (as defined). Such adjusted interest rates will not be greater than the amounts presented above. At January 29, 2000, the weighted average interest rate on borrowings under the New Credit Facility was 8.9%. At January 30, 1999, the weighted average rate of interest on borrowings under the Pre-petition Revolving Credit Facility was 8.1%. - 60 - NOTE 16 -- EMPLOYEE BENEFIT PLANS: The majority of the Company's employees are covered by either defined benefit plans or defined contribution plans. The financial statements and related disclosures reflect Statement of Financial Accounting Standard No. 132 "Employers' Disclosure About Pensions and Other Postretirement Benefits" and No. 87 "Employers' Accounting for Pensions" for defined benefit pension 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:
SUCCESSOR COMPANY PREDECESSOR COMPANY ---------- ------------------------------------ 31 WEEKS 21 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ENDED JANUARY 29, JUNE 26, JANUARY 30, JANUARY 31, 2000 1999 1999 1998 ---------- ---------- ---------- ---------- (IN THOUSANDS OF DOLLARS) Service cost -- benefits earned during the period $ 3,171 $ 2,230 $ 6,430 $ 6,474 Interest cost on projected benefit obligation 7,608 5,385 12,434 12,371 Expected return on plan assets (12,139) (8,714) (19,556) (17,860) Net amortization and deferral (46) 484 596 1,961 ---------- ---------- ---------- ---------- Net pension (income) expense $ (1,406) $ (615) $ (96) $ 2,946 ========== ========== ========== ==========
PENSION BENEFITS ------------------------- SUCCESSOR PREDECESSOR COMPANY COMPANY FISCAL 2000 FISCAL 1999 ----------- ----------- (IN THOUSANDS OF DOLLARS) Change in benefit obligation: Benefit obligation at beginning of year $ 185,364 $ 180,429 Service cost 5,401 6,430 Interest cost 12,993 12,434 Actuarial (gain) loss (13,681) 8,832 Benefits paid (15,780) (16,007) Special termination benefits 2,371 Plan amendments (6,280) Settlements (465) Curtailments (360) (474) ---------- ---------- Benefit obligation at end of year $ 175,843 $ 185,364 ========== ========== Change in plan assets: Fair value of plan assets at beginning of year $ 200,553 $ 185,559 Actual return on plan assets 16,101 24,248 Company contributions 1,144 6,753 Benefits paid (15,780) (16,007) Settlements (465) ---------- ---------- Fair value of plan assets at end of year $ 201,553 $ 200,553 ========== ========== Funded status of the plans $ 25,710 $ 15,189 Unrecognized actuarial (gain) loss (14,908) 19,484 Unrecognized prior service cost 4,145 Unrecognized net transition (asset) (1,283) ---------- ---------- Net prepaid benefit cost $ 10,802 $ 37,535 ========== ==========
- 61 - Amounts included in the Other assets and deferred charges account of the Consolidated Balance Sheet consist of:
PENSION BENEFITS ------------------------ SUCCESSOR PREDECESSOR COMPANY COMPANY FISCAL 2000 FISCAL 1999 ----------- ----------- (IN THOUSANDS OF DOLLARS) Prepaid benefit cost $ 16,573 $ 34,906 Accrued benefit liability (5,771) (5,316) Intangible asset 4,475 Accumulated other comprehensive income 3,470 ---------- ---------- Net amount recognized $ 10,802 $ 37,535 ========== ==========
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $1.6 million, $1.6 million and $0 million, respectively, as of January 29, 2000. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $39.7 million, $39.5 million and, $34.2 million, respectively, as of January 30, 1999. 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 $7.9 million as of January 30, 1999, and $27.7 million as of January 31, 1998, 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 $3.5 million as of January 30, 1999, and $10.7 million as of January 31, 1998. There was no additional minimum pension liability adjustment as of January 29, 2000. In calculating benefit obligations and plan assets for the 31-week period ended January 29, 2000 and the 21-week period ended June 26, 1999, the Company assumed a weighted average discount rate of 8.00%, compensation increase rate of 3.5% and an expected long-term rate of return on plan assets of 10.5%. In calculating benefit obligations and plan assets for Fiscal 1999, the Company assumed a weighted average discount rate of 6.75%, compensation increase rates ranging from 3.0% to 3.5% and an expected long-term rate of return on plan assets of 10.5%. In calculating benefit obligations and plan assets for Fiscal 1998, the Company assumed a weighted average discount rate of 7.25%, compensation increase rates ranging from 3.0% to 3.5% and an expected long-term rate of return on plan assets of 10.5%. - 62 - The Company's defined benefit plans, other than the Penn Traffic Cash Balance Plan (the "Cash Balance Plan"), other than the Penn Traffic Cash Balance Plan (the "Cash Balance Plan"), 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 and long-term and short-term debt securities. In Fiscal 1999, the Company merged several of its defined benefit plans together to form the Cash Balance Plan. The Cash Balance Plan is a defined benefit plan which assigns account balances to the individual participants. Account balances are credited based on a fixed percentage of each participant's compensation paid for the year, plus interest at a rate comparable to the yield on long-term treasury securities. Upon retirement, employees are permitted to take a lump-sum distribution equal to their account balance, or receive an annuity benefit based on formulas set forth in the Plan. The net impact of merging several of the defined benefit plans into the Cash Balance Plan was to reduce the minimum pension liability previously reported by those plans by $19.6 million, and the related pretax charge to equity by $14.7 million. In connection with the implementation of the new Cash Balance Plan, the Company began contributing to its 401(K) Plan in Fiscal 1999. Contributions by the Company totaled approximately $0.4 million, $0.7 million and $0.4 million in the 31-week period ended January 29, 2000, the 21-week period ended June 26, 1999 and Fiscal 1999, respectively. The Company also contributes to multiemployer pension funds, which cover certain union employees under collective bargaining agreements. Such contributions aggregated $1.6 million, $2.1 million, $4.5 million and $4.8 million in the 31-week period ended January 29, 2000, the 21-week period ended June 26, 1999, Fiscal 1999 and Fiscal 1998, respectively. The applicable portion of the total plan benefits and net assets of these plans is not separately identifiable. The Company is currently the majority contributor to a multiemployer plan covering substantially all of its employees in eastern Pennsylvania. Due to the Company's decision to exit certain markets (see Notes 4 and 7), the Company may be liable for a withdrawal liability to cover its pro rata portion of the unfunded vested benefit obligations in this plan. The Company sponsors a deferred profit-sharing plan for certain salaried employees. There were no contributions by the Company in Fiscal 2000 and Fiscal 1999. Contributions and costs totaled approximately $0.1 million in Fiscal 1998. - 63 - NOTE 17 -- STOCKHOLDERS' EQUITY: Pursuant to the Plan, the 1999 Equity Incentive Plan (the "Equity Plan") was adopted on the Effective Date. The Equity Plan 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. The Equity Plan makes available the granting of options to acquire an aggregate of 2,297,000 shares of New Common Stock. All of the Company's officers and employees are eligible to receive options under the Equity Plan. The options expire 10 years after the date of grant and generally vest 20% on the date of grant and 20% on each of the next four anniversary dates. Options to acquire an additional 977,500 shares may be granted by the Board of Directors' Compensation Committee. In July 1999, the Company adopted the 1999 Directors' Stock Option Plan (the "Directors Plan"). The Directors Plan makes available to the Company's directors, who are not employees of the Company, options to acquire in the aggregate up to 250,000 shares of New Common Stock. Under the terms of the Directors Plan, each eligible director receives as of the date of appointment to the Board of Directors, an option to purchase 20,000 shares of New 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. The Directors Plan also provides for the issuance of additional options annually thereafter as of the first business day after the conclusion of each Annual Meeting of Stockholders of the Company. The options expire 10 years after the date of grant and vest immediately upon issuance. Options to acquire an additional 110,000 shares may be granted under the Directors Plan. A summary of the status of the Company's Equity and Directors Plan as of January 29, 2000, and the changes during the 31-week period ended January 29, 2000, are presented below:
Equity Plan Directors Plan ------------------ ------------------ Weighted- Weighted- Average Average Exercise Exercise Plan Options Shares Price Shares Price ------------ ------ ----- ------ ----- Outstanding at June 26, 1999 0 0 Granted 2,164,500 $14.53 140,000 $12.13 Exercised Forfeited (845,000) 15.55 ---------- --------- Outstanding at January 29, 2000 1,319,500 $13.87 140,000 $12.13 ========= ========= Options exercisable at January 29, 2000 557,100 $16.50 140,000 $12.13 ========= =========
- 64 - The options outstanding at January 29, 2000 under the Equity Plan exclude 840,000 shares which were canceled or repurchased in February 2000 in connection with the restructuring of certain executive compensation agreements (see Note 7). As of January 29, 2000, the 1,319,500 options outstanding under the Equity Plan have exercise prices between $8.75 and $18.30 and a weighted-average remaining contractual life of 9.5 years. As of January 29, 2000, the 140,000 options outstanding under the Directors Plan have an exercise price of $12.13 and a weighted-average remaining contractual life of 9.4 years. The options granted under the Equity Plan include 1,097,000 options which were granted at a price in excess of the market price at the date of grant and have a weighted average exercise price of $18.30 per share (600,000 of such shares have been forfeited). The following table summarizes information about stock options outstanding at January 29, 2000:
Options Outstanding Options Exercisable ------------------- ------------------- Weighted- Weighted- Exercise Average Remaining Average Price Shares Price Life Shares Price ----- ------ ----- ---- ------ ----- $ 8.75 227,000 $ 8.75 9.6 28,000 $ 8.75 12.13 735,500 12.13 9.4 259,100 12.13 18.30 497,000 18.30 9.4 410,000 18.30
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), defines a fair value based method of accounting for an employee stock option by which compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period. A company may elect to adopt SFAS 123 or elect to continue accounting for its stock option or similar equity awards using the method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), by which compensation cost is measured at the date of grant based on the excess of the market value of the underlying stock over the exercise price. The Company has elected to continue to account for its stock-based compensation plans under the provisions of APB 25. No compensation expense has been recognized in the accompanying financial statements relative to the Company's Equity Plan or Directors Plan. Prior to the Effective Date, the Company had a 1988 Stock Option plan, a Performance Incentive Plan and a stock option plan for directors. Prior to the Effective Date, there were stock options outstanding under each of these plans. In addition, certain persons previously affiliated with Miller Tabak Hirsch + Co. ("MTH") held warrants to purchase 289,000 shares of common stock ("Old Warrants"). On the Effective Date, pursuant to the Plan the Company's former common stock was canceled. As a result, all stock options and warrants outstanding as of the Effective Date were canceled. - 65 - Pro forma information regarding Net (loss) and Net (loss) per share is required by SFAS 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The weighted average fair value of options granted during the 31-week period ended January 29, 2000 with an exercise price equal to market price was $4.89. The weighted average fair value of options granted during the 31-week period ended January 29, 2000 with an exercise price in excess of market price was $0.30. The fair value of these options was estimated at the date of grant using the Black-Scholes options pricing model with the following weighted-average assumptions: Risk-free interest rate of 5.77%; volatility factor of the expected market price of the Company's common stock of 40%; a weighted-average expected life of the option of 3.95 years; and no payment of dividends on common stock. For purpose of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. This pro forma information is as follows (in thousands, except for Net (loss) per share information):
SUCCESSOR COMPANY ---------- 31 WEEKS ENDED JANUARY 29, 2000 ---------- Net (loss) - as reported $ (60,093) Net (loss) - pro forma (61,385) Net (loss) per share - as reported: Basic and diluted (2.99) Net (loss) per share - pro forma: Basic and diluted (3.05)
Net (loss) and Net (loss) per share pro forma disclosures are not presented for periods prior to June 26, 1999 because of the revised capital structure of the Company. - 66 - NOTE 18 -- RELATED PARTIES: During Fiscal 1998, Fiscal 1999 and the first month of Fiscal 2000, the Company's former Chairman and current Chief Financial Officer served as general partner of the managing partner of MTH and Executive Vice President of MTH, respectively. During Fiscal 1998, Fiscal 1999 and the first month of Fiscal 2000, MTH provided financial consulting and business management services to the Company. During Fiscal 1998 and 1999 the Company paid MTH fees of $1.44 million in each year for such services. During Fiscal 1998, in consideration for services rendered in connection with the sale of the Company's Sani-Dairy operation, the Company agreed to extend the expiration date of the Old Warrants from June 1998 to June 2001. On the Effective Date, the Old Warrants were canceled. On February 28, 1999, the Company terminated its agreement with MTH. On March 1, 1999, the Company engaged the services of Hirsch & Fox LLC (an entity formed by the Company's former Chairman and current Chief Financial Officer) to provide financial consulting and business management services during the pendency of the Bankruptcy Cases, for which the Company agreed to pay Hirsch & Fox LLC a management fee at an annual rate of $1.45 million. On the Effective Date, the Company and Hirsch & Fox LLC entered into a new two-year management agreement pursuant to which Hirsch & Fox LLC provided the services of the principals of Hirsch & Fox LLC as Chairman and Vice Chairman, respectively, of the Executive Committee of the Company. In return for these services, Hirsch & Fox LLC received management fees at an annual rate of $1.45 million. As a result of the foregoing, during Fiscal 2000 the Company paid Hirsch & Fox LLC fees of $1.33 million. At the end of Fiscal 2000, the Company and Hirsch & Fox LLC agreed to terminate the management agreement prior to its expiration and the Company made a payment of $4.90 million to Hirsch & Fox LLC in full satisfaction of all amounts payable under such agreement and in return for the cancellation of options to purchase 840,000 shares of Common Stock held by one of the members of Hirsch & Fox LLC. Such agreement was executed on February 1, 2000. Simultaneous with the termination of the management agreement, the Company entered into an employment agreement with Martin A. Fox, one of the members of Hirsch & Fox LLC, pursuant to which the Company agreed to employ Mr. Fox as the Company's Executive Vice President and Chief Financial Officer. NOTE 19 -- 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 of these matters 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. - 67 - REPORT OF MANAGEMENT Penn Traffic's management has prepared the financial statements presented in this Annual Report on Form 10-K 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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None - 68 - PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required by this Item is incorporated herein by reference to the captions "Election of Directors" and "Executive Officers" in the Company's Proxy Statement to be filed in connection with the Company's Annual Meeting of Stockholders to be held on or about July 12, 2000. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the caption "Executive Compensation" in the Company's Fiscal 2000 Proxy Statement to be filed in connection with the Company's Annual Meeting of Stockholders to be held on or about July 12, 2000. The information set forth in "Compensation Committee Report" and "Performance Graph" in the Company's Proxy Statement to be filed in connection with the Company's Annual Meeting of Stockholders to be held on or about July 12, 2000, is not deemed "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 to be filed in connection with the Company's Annual Meeting of Stockholders to be held on or about July 12, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the captions "Compensation of Directors" and "Certain Transactions" in the Company's Proxy Statement to be filed in connection with the Company's Annual Meeting of Stockholders to be held on or about July 12, 2000. - 69 - 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 34 under Item 8 of this Form 10-K. EXHIBITS: The following are filed as Exhibits to this Report: Exhibit No. Description - ----------- ----------- 2.1 Joint Plan of Reorganization of Penn Traffic and certain of its subsidiaries under Chapter 11 of The U.S. Bankruptcy Code (the "Joint Plan") (incorporated by reference to Exhibit 2.1 to Form 8-K filed on June 11, 1999). 3.1 Amended and Restated Certificate of Incorporation of Penn Traffic (incorporated by reference to Exhibit 1 to Form 8-A12G/A filed on June 29, 1999). 3.2 Amended and Restated By-Laws of Penn Traffic (incorporated by reference to Exhibit 2 to Form 8-A12G/A filed on June 29, 1999). 4.1 Indenture, including form of 11% Senior Note due June 29, 2009, dated as of June 29, 1999, between Penn Traffic and IBJ Whitehall Bank and Trust Company, as Trustee (incorporated by reference to Exhibit 3 to Form 8-A12G/A filed on June 29, 1999). 4.2 Warrant Agreement, dated June 29, 1999, between Penn Traffic and Harris Trust and Savings Bank (incorporated by reference to Exhibit 1 to Form 8-A12G filed on June 29, 1999). 4.3 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.2 to Form 10-K filed on April 30, 1999). 4.4 Form of Warrant Certificate adopted as part of Joint Plan (incorporated by reference to Exhibit 1 to Form 8-A12G filed on June 29, 1999). 10.1 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). - 70 - EXHIBITS (CONTINUED): Exhibits No. - ------------ 10.2 Employment Agreement, dated as of October 30, 1998, between Joseph V. Fisher and Penn Traffic (incorporated by reference to Exhibit 10.21 to Form 10-K filed on April 30, 1999). 10.2A Amendment to Employment Agreement of Joseph V. Fisher, dated June 29, 1999 (incorporated by reference to Exhibit 10.21A to Form 10-Q filed on September 14, 1999). 10.2B Amendment No. 2 to Employment Agreement of Joseph V. Fisher, dated December 2, 1999 (incorporated by reference to Exhibit 10.21B to Form 10-Q filed on December 14, 1999). *10.2C Amended and Restated Employment Agreement of Joseph V. Fisher, dated January 31, 2000. 10.3 Management Agreement of Hirsch & Fox LLC, dated June 29, 1999 (incorporated by reference to Exhibit 10.23 to Form 10-Q filed on September 14, 1999). 10.3A Amended and Restated Management Agreement of Hirsch & Fox LLC, dated December 2, 1999 (incorporated by reference to Exhibit 10.23A to Form 10-Q filed on December 14, 1999). *10.3B Termination of Management Agreement dated January 31, 2000 among Hirsch & Fox LLC, Gary D. Hirsch, Martin A. Fox and Penn Traffic. *10.4 Employment Agreement dated January 31, 2000 between Martin A. Fox and Penn Traffic. 10.5 Employment Agreement of Leslie Knox, dated August 14, 1999 (incorporated by reference to Exhibit 10.22 to Form 10-Q filed on September 14, 1999). 10.6 1999 Equity Incentive Plan (incorporated by reference to Exhibit 10.24 to Form 10-Q filed on September 14, 1999). 10.7 1999 Directors' Stock Option Plan (incorporated by reference to Exhibit 10.25 to Form 10-Q filed on September 14, 1999). 10.8 Supplemental Retirement Plan for Non-Employee Executives (incorporated by reference to Exhibit 10.26 to Form 10-Q filed on September 14, 1999). 10.9 Registration Rights Agreement (incorporated by reference to Exhibit 10.27 to Form 10-Q filed on September 14, 1999). 10.10 Revolving Credit and Tern Loan Agreement dated as of June 29, 1999, by and among Penn Traffic, certain of its subsidiaries, Fleet Capital Corporation and the Lenders party thereto (incorporated by reference to Exhibit 10.1 to Form 8-K filed on July 14, 1999). - 71 - EXHIBITS (CONTINUED): Exhibits No. - ------------ 10.11 Collateral and Security Agreement, dated as of June 29, 1999, made by Penn Traffic and certain of its subsidiaries in favor of Fleet Capital Corporation (incorporated by reference to Exhibit 10.2 to Form 8-K filed on July 14, 1999). 21.1 Subsidiaries of Penn Traffic (incorporated by reference to Exhibit 21.1 to Penn Traffic's 1994 10-K). *23.1 Consent of Independent Accountants. *27.1 Financial Data Schedule. - ---------------------- * Filed herewith. Copies of the above exhibits will be furnished without charge to any shareholder by writing to Vice President of Finance and Chief Accounting Officer, The Penn Traffic Company, 1200 State Fair Boulevard, Syracuse, New York 13221-4737. REPORTS ON FORM 8-K On June 11, 1999, the Company filed a report on Form 8-K relating to the confirmation of the Company's and certain of its subsidiaries Joint Plan of Reorganization under Chapter 11 of the U.S. Bankruptcy Code. On July 14, 1999, the Company filed a report on Form 8-K relating to the consummation of the Company's and certain of its subsidiaries Joint Plan of Reorganization under Chapter 11 of the U.S. Bankruptcy Code. - 72 - 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 27, 2000 By: /s/ JOSEPH V. FISHER -------------- ----------------------------- DATE Joseph V. Fisher, 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/ MARTIN A. FOX /s/ RANDY P. MARTIN - ------------------------------- ------------------------------- Martin A. Fox, Randy P. Martin, Executive Vice President, Chief Vice President - Finance and Financial Officer and Director Chief Accounting Officer APRIL 27, 2000 APRIL 27, 2000 -------------- -------------- DATE DATE /s/ BYRON E. ALLUMBAUGH /s/ KEVIN P. COLLINS - ------------------------------- ------------------------------- Byron E. Allumbaugh, Director Kevin P. Collins, Director APRIL 27, 2000 APRIL 27, 2000 -------------- -------------- DATE DATE /s/ GABRIEL S. NECHAMKIN /s/ LIEF D. ROSENBLATT - ------------------------------- ------------------------------- Gabriel S. Nechamkin, Director Lief D. Rosenblatt, Director APRIL 27, 2000 APRIL 27, 2000 -------------- -------------- DATE DATE /s/ MARK D. SONNINO /s/ PETER L. ZURKOW - ------------------------------- ------------------------------- Mark D. Sonnino, Director Peter L. Zurkow, Chairman of the Board of Directors APRIL 27, 2000 APRIL 27, 2000 -------------- -------------- DATE DATE - 73 - THE PENN TRAFFIC COMPANY SCHEDULE II 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: SUCCESSOR COMPANY: FOR THE 31 WEEKS ENDED JANUARY 29, 2000 Provision for doubtful accounts $ 8,650 $ 1,965 $ 54(a) $ 10,561 ======== ======== ======== ======== Tax valuation allowance $104,321 $ 0 $104,321(d) $ 0 ======== ======== ======== ======== PREDECESSOR COMPANY: FOR THE 21 WEEKS ENDED JUNE 26, 1999 Provision for doubtful accounts $ 5,731 $ 3,598 $ 679(a) $ 8,650 ======== ======== ======== ======== Tax valuation allowance $104,321 $ 0 $ 0 $104,321 ======== ======== ======== ======== FOR THE 52 WEEKS ENDED JANUARY 30, 1999 Provision for doubtful accounts $ 3,597 $ 7,055 $ 4,921(a) $ 5,731 ======== ======== ======== ======== Tax valuation allowance $ 0 $104,321(b) $ 0 $104,321 ======== ======== ======== ======== FOR THE 52 WEEKS ENDED JANUARY 31, 1998 Provision for doubtful accounts $ 2,867 $ 2,585 $ 1,855(a) $ 3,597 ======== ======== ======== ======== Tax valuation allowance $ 2,298(c) $ 0 $ 2,298 $ 0 ======== ======== ======== ========
(a) Uncollectible receivables written off, net of recoveries. (b) Valuation allowance established for tax benefit generated by net operating loss carryforward. (c) Valuation allowance established for tax benefit generated by capital loss carryforward. (d) Valuation allowance eliminated due to the implementation of fresh-start reporting. - 74 - THE PENN TRAFFIC COMPANY SUPPLEMENTARY DATA QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized below is quarterly financial data for the fiscal years ended January 29, 2000 ("Fiscal 2000"), and January 30, 1999 ("Fiscal 1999"):
Predecessor Company Successor Company Fiscal 2000 (1) Fiscal 2000 (1) -------------------------------------------------------------- 1ST 2ND 3RD 4TH ---------- ----------------------- ---------- ---------- 13 weeks 8 weeks 5 weeks 13 weeks 13 weeks Ended Ended Ended Ended Ended May 1, June 26, July 31, October 30, January 29, 1999 1999 1999 1999 2000 --------- --------- --------- --------- --------- (In thousands of dollars, except per share data) Total revenues $ 615,045 $ 391,759 $ 240,966 $ 610,563 $ 625,690 Gross margin (2) 136,740 88,722 56,205 144,521 151,738 (Loss) before extra- ordinary items (2)(3)(4) (21,584) (163,638) (8,762) (27,126) (24,205) Net (loss) (2)(3)(4)(5) (23,091) 492,797 (8,762) (27,126) (24,205) Per common share data (Basic and Diluted): Net (loss) (3)(6) $ (0.44) $ (1.34) $ (1.21) No dividends on common stock were paid during Fiscal 2000. Per share data is not presented for periods prior to June 26, 1999 due to the general lack of comparability as a result of the revised capital structure of the Company. OTHER DATA: EBITDA (7) $ 15,351 $ 14,421 $ 10,611 $ 25,231 $ 31,538 Depreciation and amortization 16,535 9,297 4,615 10,838 10,723 LIFO provision 625 384 241 625 26 Capital expenditures, including capital leases and acquisitions 3,314 2,965 3,296 11,015 17,157 MARKET VALUE PER COMMON SHARE (8): High $ 8.125 $ 0.360 $ 13.000 $ 9.938 $ 9.625 Low 0.220 0.160 9.500 6.250 6.375
- 75 - QUARTERLY FINANCIAL DATA (UNAUDITED) CONTINUED:
Predecessor Company Fiscal 1999 ------------------------------------------------ 1st 2nd 3rd 4th --------- --------- --------- --------- 13 weeks 13 weeks 13 weeks 13 weeks Ended Ended Ended Ended May 2, August 1, October 31, January 30, 1998 1998 1998 1999 --------- --------- --------- --------- (In thousands of dollars, except per share data) Total revenues $ 716,799 $ 730,223 $ 690,591 $ 690,496 Gross margin (3) 157,409 161,594 142,057 153,248 Net (loss) (3)(6)(9) (17,058) (23,498) (182,958) (93,580) No dividends on common stock were paid during Fiscal 1999. Per share data is not presented for periods prior to June 26, 1999 due to the general lack of comparability as a result of the revised capital structure of the Company. OTHER DATA: EBITDA (7) $ 30,128 $ 28,033 $ 16,137 $ 25,153 Depreciation and amortization 20,048 19,894 19,360 17,877 LIFO provision 625 625 625 501 Capital expenditures, including capital leases and acquisitions 4,434 3,594 3,303 3,037 MARKET VALUE PER COMMON SHARE (8): High $ 6.688 $ 5.063 $ 3.063 $ 2.490 Low 4.000 2.563 1.000 0.470
- 76 - FOOTNOTES: (1) As a result of the completion of the Company's plan of reorganization, Penn Traffic adopted "fresh-start reporting" on June 26, 1999. The accounting periods ended on or prior to June 26, 1999, have been designated "Predecessor Company" and the periods subsequent to June 26, 1999, have been designated "Successor Company." In accordance with the implementation of fresh-start reporting, the Company's assets, liabilities and stockholders' (deficit) equity have been revalued as of June 26, 1999. In addition, as a result of the consummation of the Plan, the amount of the Company's indebtedness has been substantially reduced. Accordingly, the Consolidated Statements of Operations for periods ended on or prior to June 26, 1999, are not comparable to those subsequent to June 26, 1999. (2) During the 8-week period ended June 26, 1999, the Company recorded a special charge of $3.9 million associated with the repositioning of its 15 Big Bear Plus stores. (3) During the fourth quarter of Fiscal 2000, the Company recorded an unusual item of $5.5 million associated with the restructuring of certain executive compensation agreements. During the third quarter of Fiscal 2000, the Company recorded an unusual item of $1.9 million associated with an early retirement program for certain eligible employees. During Fiscal 2000, the Company recorded unusual items (income) of $4.6 million related to the store rationalization program ("Store Rationalization Program"). The Company recorded $3.6 million of this unusual item (income) during the first quarter of Fiscal 2000 and $1.0 million of this unusual (income) during the 8-week period ended June 26, 1999. During Fiscal 1999, the Company recorded a special charge of $68.2 million related to the Store Rationalization Program ($60.2 million of this charge is included in the unusual item account; $8.0 million of this charge, representing inventory markdowns, is included in cost of sales). The unusual item account for Fiscal 1999 also includes $1.1 million of professional fees and other miscellaneous costs associated with the Company's financial restructuring. The Company recorded $50.4 million of this charge during the third quarter and $18.9 million of this charge during the fourth quarter of Fiscal 1999. $5.3 million of this charge in the third quarter and $2.7 million of this charge in the fourth quarter were inventory markdowns included in cost of sales. (4) The Company recorded reorganization items during Fiscal 2000 that include (a) adjustments associated with the implementation of fresh-start reporting, (b) professional fees associated with the implementation of the Plan, (c) the write-off of unamortized deferred financing fees for the Company's former notes and (d) a gain related to the difference between the estimated allowed claims for rejected leases and the liabilities previously recorded for such leases. The Company recorded $6.9 million of this charge during the first quarter of Fiscal 2000 and $160.1 million of this charge during the 8-week period ended June 26, 1999. - 77 - (5) During the first quarter of Fiscal 2000, the Company recorded an extraordinary item (expense) of $1.5 million resulting from the write-off of unamortized deferred financing fees associated with the repayment of the Company's pre-petition revolving credit facility. The Company recorded an extraordinary item (income) of $656.4 million for the 8-week period ended June 26, 1999 resulting from a gain on debt discharge recorded in connection with the consummation of the Plan. (6) The tax provision for the 5-week period ended July 31, 1999, and for the third and fourth quarters of Fiscal 2000 is not recorded at statutory rates due to differences between income calculations for financial reporting and tax reporting purposes that result primarily from the nondeductible amortization of excess reorganization value. The tax provision (benefit) for the first quarter of Fiscal 2000, the 8-week period ended June 26, 1999, and Fiscal 1999, are not recorded at statutory rates due to (a) differences between the income calculations for financial reporting and tax reporting purposes and (b) the recording of a valuation allowance. A valuation allowance is required when it is more likely than not that the recorded value of a deferred tax asset will not be realized. (7) "EBITDA" is earnings before interest, depreciation, amortization, amortization of excess reorganization value, LIFO provision, special charges, unusual items, the write-down of impaired long-lived assets, reorganization items, extraordinary items, the cumulative effect of change in accounting principle and taxes. EBITDA should not be interpreted as a measure of operating results, cash flow provided by operating activities, a measure of liquidity, or as an alternative to any generally accepted accounting principle measure of performance. The Company is reporting EBITDA because it is a widely used financial measure of the potential capacity of a company to incur and service debt. Penn Traffic's reported EBITDA may not be comparable to similarly titled measures used by other companies. (8) As a result of the issuance of the New Common Stock in connection with the implementation of the Plan on June 29, 1999, the market value of the common stock for periods on or prior to June 26, 1999, is not comparable to the market value for periods subsequent to such date. (9) The Company periodically reviews the recorded value of its long-lived assets to determine if the future cash flows to be derived from these properties will be sufficient to recover the remaining recorded asset values. In accordance with SFAS 121, during the third quarter of Fiscal 1999, the Company recorded a noncash charge of $91.5 million to write-down the carrying amounts (including allocable goodwill) of property held for sale in connection with the Store Rationalization Program to estimated realizable value. In accordance with SFAS 121, during the fourth quarter of Fiscal 1999, the Company recorded a noncash charge of $52.3 million primarily related to the write-down of a portion of the recorded asset values of 14 of the Company's stores (including allocable goodwill) to estimated realizable values. - 78 - EX-10.2C 2 EXHIBIT 10.2C Exhibit 10.2c EXECUTION COPY AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amended and Restated Employment Agreement ("AGREEMENT") is entered into as of this 31st day of January, 2000, by and between The Penn Traffic Company (the "COMPANY") and Joseph V. Fisher ("EXECUTIVE"). WHEREAS, Executive entered into an Employment Agreement (the "Employment AGREEMENT") with the Company on October 30, 1998; WHEREAS, as part of the Company's reorganization, which was completed on June 29, 1999, Executive and the Company entered into an Amendment to Employment Agreement on June 29, 1999 ("AMENDMENT NO. 1"); WHEREAS, Executive and the Company entered into Amendment No. 2 to Employment Agreement on December 2, 1999 ("AMENDMENT NO. 2", and together with the Employment Agreement and Amendment No. 1, the "AMENDED AGREEMENT"); and WHEREAS, Executive and the Company desire to further amend the Amended Agreement and, for clarity, to amend and restate it in its entirety. NOW, THEREFORE, the parties hereby amend and restate the Employment Agreement as follows: 2 1. Employment. (a) The Company hereby agrees that Executive shall, during the Term (as defined), continue to act as President and Chief Executive Officer of the Company. (b) Executive hereby accepts his continued employment as the President and Chief Executive Officer of the Company and agrees to continue to provide to the Company his full-time services as President and Chief Executive Officer of the Company, performing such duties as shall reasonably be required of a President and Chief Executive Officer and otherwise on the terms and subject to the conditions set forth in this Agreement. In such capacity, Executive will report to, and serve under the direction of, the Board of Directors of the Company (the "BOARD"). Throughout the Term (as hereinafter defined), Executive shall devote his full working time and energy exclusively to performing the services and duties of his employment hereunder to the best of his ability and utilizing all of his skills, experience and knowledge. In addition, Executive shall be a member of the Board. Other than services to be rendered in connection with charitable activities and trade association activities which do not interfere with Executive's day-to-day responsibilities to the Company, without limiting the generality of Paragraph 6, Executive shall not, directly or indirectly, engage in or participate in the operation or management of, or render any services to, any other business, enterprise or individual. 2. Term. Executive's term of employment became effective on November 23, 1998 under the Employment Agreement (the "EFFECTIVE DATE") and will 3 continue under this Agreement until the earlier of (i) January 31, 2002, (ii) the date that Executive or the Company terminates his employment pursuant to Paragraph 7, 8 or 9 or (iii) the occurrence of a Section 12 Change of Control (as hereinafter defined) (the "TERM"). 3. Location of Employment. Executive shall render services primarily at the Company's offices that are located in Syracuse, New York. Notwithstanding the foregoing, Executive acknowledges and agrees that Executive's duties hereunder will include travel outside the Syracuse, New York area, including frequent travel to such geographic locations where the Company owns or operates supermarkets or retail grocery stores, as well as other locations within and outside the United States, to attend meetings and other functions as the performance of Executive's duties hereunder may require. 4. Compensation. (a) Base Salary. The Company shall increase Executive's base salary as of the date of this Agreement to $1,000,000 per annum ("BASE SALARY") for the period commencing on the date hereof and ending on the date this Agreement is terminated in accordance with Paragraph 2. Executive's Base Salary will be reviewed periodically by the Board and may be increased (but not decreased) at such times if the Board, in its sole discretion, determines that an increase is warranted. The Base Salary shall be paid in accordance with the Company's standard payroll practices and will be subject to withholding and other applicable taxes. 4 (b) Discretionary Bonus. The Executive may receive, at the sole discretion of the Board, a cash bonus (the "BONUS") as the Board shall determine. The Board is not obligated to pay any Bonuses at any time to the Executive. Notwithstanding the foregoing, the Company shall pay Executive on the date hereof $250,000 in respect of the Bonus Executive is entitled to receive for the fiscal year ending January 29, 2000. Such payment shall be made by wire transfer to an account designated by Executive on the date hereof. (c) Loan. The Company, on the Effective Date, provided the Executive with a loan in the amount of $1,000,000 (the "LOAN"). The Loan is evidenced by a non-negotiable full recourse 6% promissory note (the "NOTE") in the form attached hereto as Exhibit A. As of the date hereof, the Loan and the Note (and all interest accrued thereunder) are forgiven in their entirety, and the Company shall have no claim whatsoever in relation to, and releases Executive entirely from any payments or other obligations under, the Note and in respect of the Loan (inclusive of accrued interest) and the Note shall be returned to Executive marked "paid in full" promptly after the date hereof. Executive shall be solely responsible for the payment of any taxes in connection with forgiving such Loan. (d) Options. Subject to the terms of the Company's 1999 Equity Incentive Plan (the "EQUITY PLAN"), Executive was granted as of June 29, 1999, fully-vested options to purchase 280,000 shares of the Common Stock, $.01 par value per share (the "COMMON STOCK"), of the Company with an exercise price equal to $18.30 per share. Such options are fully vested and generally must be exercised on or 5 before the tenth anniversary of the Effective Date. In addition, Executive was granted as of September 22, 1999 options to purchase 140,000 shares of the Common Stock with an exercise price equal to $8.75 per share. Such options shall vest 20% as of September 22, 1999, and 20% on each of the four anniversaries thereof. Such options generally must be exercised on or before the tenth anniversary of such date. A copy of the Award Agreement for such options is attached hereto as EXHIBIT B. To the extent permitted by the Internal Revenue Code ("IRC"), such options qualify as incentive stock options under the IRC. 5. Fringe Benefits. (a) Executive shall, from and after the Effective Date, have the right to participate in the Company's medical, dental, disability, life and other insurance plans maintained during the Term by the Company for executives of the stature and rank of Executive, and any other plans and benefits, if any, generally maintained by the Company for executives of the stature and rank of Executive during the Term, in each case in accordance with the terms and conditions of such plan as from time-to-time in effect (collectively referred to herein as "FRINGE BENEFITS"). (b) Subject to the requirements of Executive's office, Executive shall be entitled to four weeks annual vacation to be taken in accordance with the vacation policy of the Company. (c) The Company will, upon being provided with reasonable supporting documentation thereof, promptly reimburse Executive for (i) actual, ordinary and necessary travel and accommodation cost, entertainment and other 6 business expenses incurred as a necessary part of discharging Executive's duties hereunder, including, without limitation, allowance for one-time initiation fees and annual dues for a membership in a country club of Executive's choice and (ii) all legal fees and expenses incurred in connection with the negotiation of this Agreement in the amount of $35,000. 6. No Competition; Confidentiality. (a) Executive agrees that while this Agreement is in effect and for a period of 12 months (with respect to the matters referred to in clause (i) below) and 18 months (with respect to the matters referred to in clauses (ii) and (iii) below) after the termination of this Agreement pursuant to Paragraph 2 (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 whatsoever, 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 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 7 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 Paragraph 6 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). Notwithstanding the foregoing, the provisions of this Section 6(a) shall not apply if this Agreement is terminated by the Executive for Good Reason. (b) 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 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 8 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 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. (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 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 Paragraph 6 are necessary in order to protect and maintain the proprietary interests and other legitimate business 9 interests of the Company and its subsidiaries and affiliates and that the enforcement of such restrictive covenants will not prevent Executive from earning a livelihood. The Executive acknowledges that the remedy at law for any breach or threatened breach of this Paragraph 6 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. 7. Grounds for Termination by Company. The Company may terminate this Agreement and Executive's employment hereunder for "Cause". "Cause" shall mean the termination of Executive because of (i) his willful and continued failure (other than by reason of incapacity due to physical or mental illness) to perform the material duties of his employment after notice from the Company of such failure and his inability or unwillingness to correct such failure (prospectively) within 30 days following such notice, (ii) his conviction of a felony or plea of no contest to a felony or (iii) perpetration by Executive of a material dishonest act of fraud against the Company or any subsidiary thereof; PROVIDED, HOWEVER, that, before the Company may terminate the Executive for Cause, the Board shall deliver to him a written notice of the Company's intent to terminate him for Cause, including the reasons for such termination, and the Company must provide him an opportunity to meet once with the Board prior to such termination. 8. Grounds for Termination by Executive. Executive may terminate this Agreement and his employment hereunder for Good Reason (as 10 hereinafter defined) by written notice to the Company setting forth the grounds for termination with specificity. "Good Reason" shall mean (a) the failure to elect or appoint the Executive as President and Chief Executive Officer and to continue to elect or appoint Executive to the Board of Directors of the Company or (b) the failure by the Company to pay any compensation or other amount due to the Executive under this Agreement, which failure is not remedied within ten (10) business days after written notice thereof is delivered to the Company by Executive. Any termination for Good Reason shall be effective as of the business day immediately following the date upon which the Company was required to (but did not) remedy such failure. 9. Termination For Death or Disability. (a) If during the Term, Executive should die, Executive's employment shall be deemed to have terminated as of the date of death. (b) If during the Term, Executive should suffer a disability which, in fact, prevents Executive from substantially performing his duties hereunder for a period of 180 consecutive days or 230 or more days in the aggregate, in any period of 12 consecutive months, then and in any such event the Company may terminate Executive's services hereunder by a written notice to Executive setting forth the grounds for such termination with specificity, which termination will take effect 30 days after such notice is given. Executive may only be terminated for disability if the Company's termination notice is given within 60 days following the end of the aforementioned 180- or 230-day period, whichever the Company relies upon. The existence of Executive's disability for the purposes of this Agreement shall be 11 determined by a physician mutually selected by the Company and Executive, and Executive agrees to submit to an examination by such physician for purposes of such determination. 10. Designation of Beneficiary or Beneficiaries. As to any payment to be made under this Agreement to a beneficiary designated by Executive, it is agreed that Executive shall designate such beneficiary (or beneficiaries) or change his designation of such beneficiary (or beneficiaries) from time-to-time by written notice to the Company. In the event Executive fails to designate a beneficiary (or beneficiaries) as herein provided, any payments which are to be made to Executive's designated beneficiary (or beneficiaries) under this Agreement shall be made to Executive's widow, if any, during her lifetime, thereafter to his issue, if any, including legally adopted children, and then to Executive's personal representative. 11. Effect of Company's Termination Other Than Under Paragraph 7 or 9 OR EFFECT OF EXECUTIVE'S TERMINATION UNDER PARAGRAPH 8. If (i) the Company terminates Executive's employment under this Agreement for any reason other than Cause, or other than due to his death or disability or (ii) Executive terminates Executive's employment under this Agreement for Good Reason, then: (a) The Company shall continue to pay to Executive his Base Salary then in effect (in the manner in which Base Salary payments have theretofore been paid) for a period equal to the number of months remaining from the effective date of termination until January 31, 2002; PROVIDED, that if such termination occurs between January 31, 2001 and January 31, 2002, such Base Salary payments shall 12 continue for 12 months from the date of termination. In addition, if a Section 12 Change of Control (as defined below) occurs prior to the Determination Date (as defined below) but following such termination, then in the case of and notwithstanding (i) the termination of this Agreement by the Company for any reason other than Cause or (ii) the termination of this Agreement by the Executive for Good Reason, the Company shall make the Change of Control Payment as provided in Section 12 on the dates provided in such Section, LESS the amount of Base Salary to be paid by the Company to Executive pursuant to this Section 11(a) with respect to any period following the date the Change of Control Payment is made until the end of the Term. (b) The Company shall continue to provide to the Executive the benefits described in Paragraph 5(a) hereof for a period of 12 months from the date of termination. If during Executive's employment hereunder a Change of Control (as defined) (other than a Section 12 Change of Control) occurs, and following such Change of Control, Executive resigns from his position with the Company or, is terminated from employment with the Company within six months from the date of such Change of Control, Executive shall be entitled to enter into a consulting agreement with the Company providing for the Executive to receive a lump sum payment in an amount equal to 24 months of Base Salary. For purposes of this Agreement, "Change of Control" shall mean the occurrence of any event where (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person shall be deemed to have "beneficial ownership" of all 13 shares that any 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 stock, (ii) the Company consolidates with or merges into another person or conveys, transfers, sells or leases all or substantially all of its assets to any person, or any person consolidates with or merges into the Company, in either event pursuant to a transaction in which the outstanding voting stock of the Company is changed into or exchanged for cash, securities or other property, other than any such transaction between the Company and its wholly owned subsidiaries (which wholly owned subsidiaries are United States corporations), with the effect that any "person" becomes the "beneficial owner," 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 stock or (iii) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board (together with any new directors whose election by the Board, or whose nomination for election by the Company's stockholders, 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. 12. Effect of Specified Change of Control Events. (a) If at any time prior to the "Determination Date" (as defined below) the Company shall have entered 14 into a definitive agreement in respect of a "Section 12 Change of Control" (as defined below) or a Section 12 Change of Control shall have occurred, then Executive shall (assuming Executive has not voluntarily terminated this Agreement for other than Good Reason or the Company has terminated this Agreement for Cause, in either case prior to consummation) be entitled to receive the "Change of Control Payment" (as defined below) on the date of the occurrence or consummation of a Section 12 Change of Control irrespective of whether the Term has expired or would have expired but for his termination without Cause or for Good Reason in accordance with Section 2(i) hereof prior to such date. If a Change of Control Payment is made to Executive, Executive shall not be entitled to the payments described in Section 11(b) above. Upon Executive's receipt of the Change of Control Payment in full (subject to offset as set forth in Section 11(a)), this Agreement shall be terminated automatically and Executive shall no longer be entitled to any further payments described herein except for reimbursement of expenses contemplated by Section 5(c). For purposes of this Agreement, the following terms shall have the following meanings: (i) "Determination Date" shall mean the later of (x) March 31, 2001 or (y) the date set forth in any engagement or similar agreement entered into between the Company and an investment bank retained for purposes of advising the Company in connection with any transaction that would constitute a Change of Control for payment by the Company of a success or so-called "tail" fee for any such transaction. 15 (ii) "Section 12 Change of Control" shall have the same meaning as clauses (i) and (ii) of the definition of "Change of Control" in Section 11(b) above and shall also include an event that results in Byron Allumbaugh, Kevin Collins, Thomas Harberts, Gabriel Nechamkin, Lief Rosenblatt, Mark Sonnino and Peter Zurkow who, as of June 29, 1999, constituted the independent directors of the Board, ceasing to constitute a majority of the independent directors then in office. (iii) "Change of Control Payment" shall mean an amount equal to the greater of (I) Base Salary for the remainder of the Term (but not less than one-year's Base Salary) and (II) $4,900,000, MINUS the SUM of (A) the "in-the-money" value on the date of the occurrence of a Section 12 Change of Control of the options granted to Executive on June 29, 1999 under Section 4(d) hereof (I.E., 280,000 options MULTIPLIED by the DIFFERENCE between the (1) closing price of the Common Stock on the Nasdaq National Market on the last trading date immediately prior to the date of the occurrence of a Section 12 Change of Control (or if the transaction which triggers the Section 12 Change of Control is a cash tender offer, the cash tender offer per share price) AND (2) $18.30) PLUS (B) the "in-the-money" value on the date of the occurrence of a Section 12 Change of Control of Executive's options granted on September 22, 1999 under Section 4(d) hereof that are vested and exercisable (I.E., up to 140,000 options MULTIPLIED by the DIFFERENCE between (1) the closing price of the Common Stock on the Nasdaq National Market on the last trading date immediately prior to the date of the occurrence of a Section 12 Change of Control (or if the transaction which triggers 16 the Section 11(c) Change of Control is a cash tender offer, the cash tender offer per share price) AND (2) $8.75). (b) GROSS-UP PAYMENT. In the event it shall be determined that any payment or distribution of any type to or for the benefit of the Executive, by the Company, any of its affiliates, any Person who acquires ownership or effective control of the Company or ownership of a substantial portion of the Company's assets (within the meaning of IRC ss. 280G and the regulations thereunder) or any affiliate of such Person, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the "TOTAL PAYMENTS"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "CODE"), or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "EXCISE TAX"), then the Executive shall be entitled to receive an additional payment (a "GROSS-UP PAYMENT") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. 13. EFFECT OF COMPANY'S TERMINATION FOR CAUSE, EXECUTIVE'S Termination WITHOUT GOOD REASON, TERMINATION UPON DEATH OR DISABILITY. If the Company terminates Executive's employment under this Agreement for Cause or Executive terminates his employment under this Agreement other than for 17 Good Reason, or if Executive's employment is terminated due to his death or disability, then the Company shall continue to pay Executive (or his designated beneficiary) his Base Salary through the effective date of termination. 14. EXECUTIVE'S REPRESENTATIONS AND WARRANTIES. Executive represents and warrants to the Company as follows: (a) Executive has the unfettered right to enter into this Agreement on the terms and subject to the conditions hereof, and Executive has not done or permitted to be done anything which may curtail or impair any of the rights granted to the Company herein. (b) Neither the execution and delivery of this Agreement by Executive nor the performance by Executive of any of Executive's obligations hereunder constitute or will constitute a violation or breach of, or a default under, any agreement, arrangement or understanding, or any other restriction of any kind, to which Executive is a party or by which Executive is bound. 15. INDEMNIFICATION, ETC. The Company agrees to hold harmless and promptly indemnify Executive to the fullest extent permitted by law against all damages and/or losses which Executive may suffer as a result of Executive's services as, and/or for activities engaged in by Executive while Executive is, an officer and/or employee and/or member of the Board of Directors of the Company or any affiliate thereof, including either paying or reimbursing Executive, promptly after request, for any reasonable and documented expenses and all attorneys' fees and costs actually incurred by Executive in connection with defending, or himself instituting and/or 18 maintaining, any claim, action, suit or proceeding arising from circumstances to which the Company's above indemnification relates; PROVIDED, HOWEVER, that no such indemnification shall be paid for damages or losses incurred by Executive that result from actions by Executive that Delaware law explicitly prohibits an employer from indemnifying its directors or employees against, including, without limitation, to the extent any such damages or losses arise through the gross negligence, bad faith or misconduct of Executive or the breach by Executive of any of Executive's obligations under or representations and warranties made pursuant to this Agreement. This indemnity shall survive the termination of this Agreement. The Company represents and warrants that it has $30 million of director's and officer's insurance available on the date hereof and that it will use its reasonable commercial efforts to maintain such policy throughout the Term. The Company has obtained "tail" coverage under its existing director's and officer's policy covering its current directors and officers for any claims brought against them, which coverage extends for a period of not less than six (6) years from June 29, 1999. 16. Notices. Any notice, consent, termination or other communication under this Agreement shall be in writing and shall be considered given on the date when hand delivered or, if sent by registered or certified mail, on the fifth day after such notice is mailed or, if sent by overnight courier guaranteeing overnight delivery, on the day after such notice is so sent, in each case to the parties at the following addresses (or at such other address as a party may specify by notice in accordance with the provisions hereof to the other): 19 If to Executive, to Executive at: Mr. Joseph V. Fisher 7654 Linkside Drive Manlius, New York 13104 If to the Company: The Penn Traffic Company 1200 State Fair Boulevard Syracuse, New York 13221 Attn: Francis D. Price, General Counsel 17. Complete Agreement and Modification. This Agreement contains a complete statement of all the arrangements between the parties with respect to Executive's employment by the Company, supersedes all existing agreements or arrangements between them concerning Executive's employment (including the Amended Agreement), and can only be amended or modified by a written instrument signed by the Company and Executive. 18. Severability Provisions. If any provision of this Agreement is declared invalid, illegal or incapable of being enforced by any court of competent jurisdiction, all of the remaining provisions of this Agreement shall nevertheless continue in full force and effect and no provisions shall be deemed dependent upon any other provision unless expressly set forth herein. 19. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements entered into and performed entirely within such State. 20 20. Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. 21. Heading. The headings in this Agreement are solely for the convenience of reference and shall not affect its interpretation. 22. Withholding. Any amount payable under this Agreement shall be reduced by any amount that the Company is obligated by law or regulation to withhold in respect of any such payment. 23. Heirs, Successors and Assigns. This Agreement will inure to the benefit of, and be enforceable by, Executive's heirs and the Company's successors and assigns. The Company shall have the right to assign this Agreement or any part hereof or any rights hereunder to any successor-in-interest to the Company and to any affiliate of the Company; PROVIDED, HOWEVER, that in the event of any such assignment the assignee shall expressly agree in writing to assume all of the Company's obligations under this Agreement, and Company shall remain secondarily liable to Executive for the performance of all such obligations. 21 WHEREFORE, the parties hereto have executed this Agreement as of the day and year first above written. THE PENN TRAFFIC COMPANY By:_________________________ _____________________________ Name: Joseph V. Fisher Title: EX-10.3B 3 EXHIBIT 10.3B Exhibit 10.3b EXECUTION COPY THE PENN TRAFFIC COMPANY 1200 State Fair Boulevard Syracuse, New York 13209 January 31, 2000 Hirsch & Fox, LLC 411 Theodore Fremd Avenue Rye, New York 10580 Attention: Gary D. Hirsch Dear Mr. Hirsch: Reference is hereby made to that certain Amended and Restated Management Agreement dated as of December 2, 1999 (the "MANAGEMENT AGREEMENT") among Hirsch & Fox LLC (the "MANAGER") Gary D. Hirsch ("HIRSCH"), Martin A. Fox ("FOX" and together with Hirsch, the "EXECUTIVES") and The Penn Traffic Company, a Delaware corporation (the "COMPANY"). The Company, the Manager and the Executives each desire to terminate the Management Agreement and the engagement by the Company of the Manager for the provisions of the services of Hirsch and Fox thereunder, subject to the terms and upon the conditions set forth below. The effective date of termination of the Management Agreement and such engagement thereunder shall be as of January 31, 2000 (the "EFFECTIVE DATE"). Simultaneously with the execution of this Letter Agreement, the Company is entering into an Employment Agreement dated as of the date hereof with Fox (the "FOX EMPLOYMENT AGREEMENT"). Capitalized terms used in this Letter Agreement but not otherwise defined shall have the respective meanings given to them in the Management Agreement. 1. TERMINATION OF MANAGEMENT AGREEMENT. Each of the Company, the Manager and the Executives hereby acknowledge and agree that the Management Agreement, shall be deemed terminated, and of no further force and effect, effective as of the Effective Date; PROVIDED, HOWEVER, that it is expressly agreed and understood that with respect to the Manager and Hirsch, Sections 7, 9, 13, 14 and 15 of the Management Agreement shall survive beyond the Effective Date in accordance with the terms of those Sections (except in the case of Section 7 of the Management Agreement, which shall survive in accordance with Section 3 hereof); and with 2 respect to Fox, Section 9 of the Management Agreement shall survive beyond the Effective Date in accordance with the terms thereof. 2. COMPENSATION AND PAYMENT. (a) Subject to the terms and conditions set forth in this Letter Agreement, and in lieu of any amounts that otherwise would be payable to the Manager and the Executives pursuant to (i) the Management Agreement, including all Management Fees, Annual Bonus or Change of Control Payments, or (ii) any other agreement or understanding between the Manager or the Executives, on the one hand and the Company on the other hand, the Manager shall be entitled to receive a cash payment equal to $4,600,000 (the "CASH PAYMENT") and (b) the Executives shall be entitled to reimbursement for all documented expenses incurred by the Executives through the Effective Date pursuant to Section 5 of the Management Agreement (the Cash Payment and any payments received pursuant to clause (b), the "MANAGEMENT AGREEMENT TERMINATION PAYMENT"). The Cash Payment shall be allocated between the Executives as follows: (i) $1,554,166.67 to Fox in full satisfaction of Fox's Management Fees and Annual Bonus due under the Management Agreement, (ii) $1,700,000 to Hirsch in full satisfaction of Hirsch's rights in respect of the Change of Control Payment contemplated by the Management Agreement, and (iii) $1,345,833.33 to Hirsch in full satisfaction of Hirsch's Management Fees due under the Management Agreement. In addition, Hirsch shall be entitled to receive a cash payment equal to $300,000 in exchange for the cancellation of his currently exercisable options to purchase 360,000 shares (the "HIRSCH VESTED OPTIONS") of the Company's common stock, par value $.01 per share ("COMMON STOCK"), issued pursuant to the Award Agreement dated June 29, 1999 between the Company and Hirsch (the "HIRSCH VESTED OPTION PAYMENT"; and together with the Management Agreement Termination Payment, the "TERMINATION AMOUNT"). Subject to Section 5 hereof, the Termination Amount shall be paid to the Manager via wire transfer on the date hereof. (b) Notwithstanding anything to the contrary set forth herein, each of the (i) the Fox Employment Agreement, (ii) the Award Agreement dated June 29, 1999 between the Company and Fox relating to the grant of options to acquire 130,000 shares of Common Stock, (iii) the Award Agreement dated June 29, 1999 between the Company and Fox relating to the grant of options to acquire 87,000 shares of Common Stock and (iv) the Award Agreement dated September 22, 1999 between the Company and Fox relating to the grant of options to acquire 87,000 shares of Common Stock (clauses (ii-iv) referred to as the "FOX OPTION AGREEMENTS") shall remain in full force and effect, shall not be terminated and shall not be deemed amended or modified by this Letter Agreement. Any payments contemplated by the Fox Employment Agreement shall be in addition to any payments Fox receives hereunder in respect of the Termination Amount; and in the event of any conflicts or inconsistencies between this Agreement, on the one hand, and either the Fox Employment Agreement or the Fox Option Agreements, on the other hand, the provisions of the Fox Employment Agreement and the Fox Option Agreements shall govern. 3 3. BENEFITS. From and after the Effective Date until June 30, 2001, the Company shall continue to provide the benefits provided by the Company to Hirsch on the date hereof, in accordance with Section 7 of the Management Agreement or reimburse Hirsch for the cost of such benefits at an annual cost not to exceed $25,000; PROVIDED, THAT, in the case of the Supplemental Retirement Plan referred to in Section 7 of the Management Agreement, any benefits Hirsch has accrued thereunder shall, notwithstanding the termination of the Management Agreement, be paid to Hirsch in lump sum on the date provided for in such plan. In addition, from the Effective Date until the earlier of (i) 60 days following a Change of Control, or (ii) June 30, 2001, Hirsch will be entitled to continue to utilize his current office, free of charge, at the Company's office located in Rye, New York and Hirsch will be provided at the Company's expense with the use of his current secretary (or one that has similar qualifications to be determined in his discretion) at such office, and shall be permitted to avail himself, free of charge, of the offices products, services and technology to the same extent provided to Fox, through such date. 4. RESIGNATIONS; FULL SATISFACTION. 4.1 Hirsch hereby resigns, effective as of the Effective Date, from Hirsch's positions as Chairman of the Executive Committee and as a Director of the Company and from all other positions (including that of officer or director) that the Executive holds with the Company or any of its respective subsidiaries or Affiliates (each, a "PT ENTITY"). Fox hereby resigns, effective as of the Effective Date as Vice Chairman of the Executive Committee of the Company. 4.2 The Manager and the Executives each acknowledge and agree that, except as expressly set forth in this Letter Agreement, the Fox Employment Agreement or the Fox Option Agreements, neither the Manager nor the Executives shall be entitled (other than in their capacities as security holders of the Company) to any other payments, compensation or benefits, including, without limitation, any amounts relating to any Management Fees, Annual Bonus, Change of Control Payments, sick pay, termination pay, severance pay, vacation pay, health and welfare benefits, stock grants, restricted stock or stock options (whether vested or unvested) from any PT Entity, whether by way of the Management Agreement or otherwise; PROVIDED, HOWEVER, that the foregoing in this Section 4.2 shall not apply with respect to payments, compensation or benefits that may be payable pursuant to agreements entered into after the date hereof between the Company and either Executive. In addition, Hirsch hereby expressly acknowledges that all options to acquire shares of Common Stock held by Hirsch on the Effective Date, whether vested or unvested (including the Hirsch Vested Options, the unvested options to acquire 240,000 shares of the Common Stock granted on June 29, 1999 and unvested options to acquire 240,000 shares of Common Stock granted on September 22, 1999), shall be deemed cancelled, terminated and no longer outstanding and exercisable. The Manager and the Executives each acknowledge and agree that the Termination Amount, as and when received, and the benefits provided for herein, represent payment in full of all 4 sums that were heretofore and may be hereafter due and owing to the Manager in respect of the services to the Company under the Management Agreement. Nothing in this Letter Agreement or in the Executive Release executed pursuant hereto shall be deemed to release, discharge, limit or otherwise affect any rights of indemnification to which the Manager or the Executives may be entitled against any PT Entity pursuant to Section 9 of the Management Agreement, any statute, the common law or otherwise. 5. WITHHOLDING AND TAXES. The Manager and the Executives acknowledge and agree that they shall be exclusively liable for the payment of all Federal, state, local and foreign taxes that may be due as a result of the payments to be made to the Manager and the Executives hereunder (including the Termination Amount) and the benefits to be received by the Manager and the Executives hereunder. The Executives shall deliver to the Company reasonable proof demonstrating compliance with the foregoing at the Company's request. Further, the Executives agree to indemnify and hold harmless the Company from and against any claims, liabilities, or expenses in respect of any such taxes, including reasonable attorney's fees and disbursements, relating to such compensation, tax, insurance and/or benefit matters. 6. RELEASE AND PAYMENT. 6.1 As a material inducement for the Company to enter into this Letter Agreement and in consideration of the monies agreed to be paid to the Manager and the Executives and the benefits contemplated to be provided to the Manager and the Executives hereunder, the Manager and each of the Executives hereby acknowledge that they are each executing simultaneously herewith and delivering to the Company on the date hereof a release, dated such date and in the form of EXHIBIT A hereto (the "EXECUTIVE RELEASE"). 6.2 As a material inducement for the Manager and the Executives to enter into this Letter Agreement, the Company acknowledges that it is executing simultaneously herewith and delivering to the Manager and the Executives a release, dated the date hereof and in the form of EXHIBIT B hereto (the "COMPANY RELEASE"). 7. NON-DISPARAGEMENT. 7.1 The Manager and the Executives hereby agree that they shall not at any time make any written or oral statements, representations or other communications that are false or materially misleading AND are intended to be disparaging or damaging to the business or reputation of any PT Entity or any officer, director or employee of any PT Entity other than to the extent reasonably necessary in order (x) to assert a bona fide claim that is not a Released Executives Claim (as defined in the Executive Release attached as EXHIBIT A hereto) or (y) to respond in an appropriate manner to any legal process or give appropriate testimony in a legal or regulatory proceeding. Hirsch further agrees that without the prior consent of the 5 Company's Board of Directors he shall not intentionally or recklessly act in a manner that is reasonably likely to interfere with or influence the management, policies and operations of any PT Entity; provided, that, the sole and exclusive remedy for a violation of the foregoing agreement in this sentence shall be limited solely to his loss of use of the Rye, New York office as contemplated in Section 3 hereof. 7.2 The Company agrees that it shall not at any time make and shall not suffer or permit any employee, officer or director of the Company to make any written or oral statements, representations or other communications that are false or materially misleading and are intended to be disparaging or damaging to the reputation of the Manager or to either of the Executives, other than to the extent reasonably necessary in order (x) to assert a bona fide claim that is not a Released Company Claim (as defined in the Company Release attached as EXHIBIT B hereto) or (y) to respond in an appropriate manner to any legal process or give appropriate testimony in a legal or regulatory proceeding. 7.3 Each of the Manager and the Executives and the Company acknowledges and agrees that the remedies available to the Company on the one hand and the Manager and the Executives on the other hand, at law for a breach or threatened breach of any of the provisions of this Agreement (including Section 7.1 and Section 7.2, respectively), would be inadequate and, in recognition of this fact, the Manager and the Executives on the one hand and the Company on the other hand agree that, in the event of a breach or threatened breach, in addition to any remedies at law, each of the Company on the one hand and the Manager and the Executives on the other hand shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy that may then be available; provided that the foregoing shall not expand the Company's remedies for a violation by Hirsch of his agreement as set forth in the last sentence of Section 7.1, as set forth therein. 8. ADDITIONAL AGREEMENTS. 8.1 The Company, on the one hand, and the Manager and the Executives, on the other hand, represent, covenant and agree to the other that neither they, nor their agents, assignees, successors, heirs or executors (as applicable) have commenced, continued, encouraged, joined in or assisted, and will not hereafter commence, continue, encourage, join in or assist, any lawsuit, arbitration or other action or proceeding asserting any Released Company Claim or Released Executives Claim, respectively, against the other or in any other manner attempt to assert any Released Company Claim or Released Executive Claim, respectively, against the other. 8.2 In consideration of the payments agreed to be paid to the Manager and the Executives and the benefits contemplated to be provided to the Manager and the Executives hereunder, from and after the date hereof, the Manager 6 and the Executives agree to cooperate with the Company and any other PT Entity, as reasonably requested by the Company, in the handling or investigation of any action, suit, proceeding, arbitration, investigation or dispute against or affecting the Company or any other PT Entity or any of their respective properties, assets or operations that relate to matters that arose while the Executives were officers of the Company (or officer or director of any other PT Entity) and to consult with the Company, any other PT Entity and their respective advisors, as reasonably requested, on any inquiry related to any such matters. In making any such requests, the Company shall take all reasonable steps so as to avoid (i) placing unreasonable travel or time burdens on an Executive or (ii) materially interfering with such Executive's obligations to his then-current employer, it being expressly understood that such Executive will not be obligated to comply with any request which would result in the consequences described in either clause (i) or (ii) of this sentence. The Company shall reimburse the Executive for any reasonable out-of-pocket expenses (including, without limita tion, reasonable attorneys' fees) incurred by the Executives by reason of such cooperation and consultation and shall pay each Executive $1000 for each day over two days that such Executive is required to provide oral testimony in a deposition, trial or other legal proceeding. 8.3 Each of the Manager, the Executives and the Company hereby agree to execute such further documents or take such further actions as may be reasonably required or desirable to carry out the provisions hereof, including, without limitation, any documents necessary to effect the resignations contemplated under Section 4.1 hereof. 9. AUTHORIZATION. The Company represents that (i) its execution of this Agreement and the Company Release have been duly authorized by all requisite corporate action on the part of the Company and when executed and delivered, will be binding obligations on the part of the Company and (ii) it has the authority to execute the Company Release on behalf of the other PT Entities. 10. LEGAL FEES. The Company shall reimburse the fees and expenses of McDermott, Will & Emery, counsel to the Manager, in connection with the negotiation and execution of this Letter Agreement in the amount of $35,000. 11. ENTIRE AGREEMENT; AMENDMENT. This Letter Agreement (including the provisions of the Management Agreement referred to in Section 1 hereof, the Executive Release and the Company Release) sets forth the entire understanding of the Company on the one hand and the Manager and the Executives with respect to the subject matter hereof and, except as set forth herein, supersedes all prior agreements and understandings, both written and oral, between the parties with respect thereto. This Letter Agreement cannot be amended or modified except by a writing signed by the Company, the Manager and the Executives. 7 12. GOVERNING LAW; SEVERABILITY. This Letter Agreement shall be governed by and interpreted in accordance with the laws of the State of New York, without giving effect to the choice-of-law provisions thereof. If, under such law, any portion of this Letter Agreement is at any time deemed to be in conflict with any applicable statute, rule, regulation or ordinance, such portion shall be deemed to be modified or altered to conform thereto or, if that is not possible, to be omitted from this Letter Agreement, and the invalidity of such portion shall not affect the force, effect and validity of the remaining portion hereof. 13. JURISDICTION; VENUE; ATTORNEYS FEES. 13.1 The Company on the one hand, and the Manager and the Executives on the other hand, agree that any action, suit or proceeding arising under or relating in any way to this Letter Agreement or the transactions contemplated hereby may only be brought in the Supreme Court of the State of New York, New York County, or in the United States District Court for the Southern District of New York, and each of the parties hereto irrevocably consents to the jurisdiction of each such court in respect of any such action, suit or proceeding. Each of the Company, the Manager and the Executives further irrevocably consent to the service of process in any such action, suit or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, return receipt requested to such party at its address as provided for notices hereunder. 13.2 Each of the Company, the Manager and the Executives hereby irrevocably waive any objection that it or he may have on the basis of venue to any action, suit or proceeding brought in the courts set forth in Section 13.1 hereof, and hereby further irrevocably waives any claim that such courts are not convenient forums for any such action, suit or proceeding. 14. NOTICES. Any and all notices or consents required or permitted to be given under any of the provisions of this Letter Agreement shall be in writing or by written telecommunication and delivered either by hand delivery or by registered or certified mail, return receipt requested, to the relevant addresses set out below (or such other address as shall be specified by like notice), in which event they shall be deemed to have been duly given upon receipt. If to the Manager or to the Executives, to: Hirsch & Fox, LLC 411 Theodore Fremd Avenue Rye, New York 10580 8 with a copy to: C. David Goldman, Esq. McDermott, Will & Emory 50 Rockefeller Plaza New York, NY 10020 If to the Company, to: Peter T. Zurkow 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 Boulevard Syracuse, New York 13221-4737 and a copy to: Douglas A. Cifu, Esq. James M. Dubin, Esq. Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York, 10019-6064 9 15. COUNTERPARTS. This Letter Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. Very truly yours, THE PENN TRAFFIC COMPANY By:___________________________ Name: Peter Zurkow Title: Chairman Agreed to and accepted this 31st day of January, 2000 - -------------------------- Gary D. Hirsch - -------------------------- Martin A. Fox Hirsch & Fox, LLC By: ________________________ Name: Title: EXHIBIT A FORM OF RELEASE TO ALL WHOM THESE PRESENTS SHALL COME OR MAY CONCERN, KNOW that the undersigned, on their own behalf and on behalf of their affiliates, members, managers, directors, officers, employees, agents, representatives, attorneys, insurers, heirs, executors and administrators, agree to and do hereby fully and completely forever release, absolve and discharge, The Penn Traffic Company, a Delaware corporation (the "COMPANY"), and its subsidiaries, affiliates, predecessors and successors and all of their respective past and/or present directors, officers, shareholders, employees, agents, representatives, administrators, attorneys, insurers and fiduciaries in their representative capacities (hereinafter collectively referred to as the "PT RELEASEES"), with respect to and from any and all causes of actions, claims, demands, agreements, promises, damages, disputes, controversies, contracts, covenants, actions, suits, accounts, wages, obligations, debts, expenses, attorneys' fees, judgments, orders and liabilities of any kind whatsoever (other than pursuant to Section 9 of the Management Agreement) (hereinafter collectively referred to as "CLAIMS"), which the undersigned or their affiliates, members, managers, directors, officers, employees, agents, representatives, attorneys, insurers, heirs, executors and administrators, as applicable, ever had, now have or may have against the PT RELEASEES or any of them, in law, equity or otherwise (other than in their capacity as security holders of the Company and solely with respect to Claims related thereto), whether known or unknown to the undersigned, for, upon, or by reason of, any matter, course or thing whatsoever from the beginning of time to the effective date of this Release, including specifically, but not exclusively and without limiting the generality of the foregoing, based upon, arising out of or related in any way to (i) the Company's obligations under the Management Agreement (as defined in the Letter Agreement hereinafter referred to), (ii) any transaction, occurrence, act or omission related to the undersigned's employment by or provision of management services to the Company or the termination of that employment or provision of management services, including, but not limited to, any claims of management fees, bonuses, severance pay, bonus, sick leave, disability pay, vacation pay, life insurance, health and medical insurance, or any other fringe benefits, workers' compensation or disability benefits and (iii) all matters referred to in the Management Agreement and any applicable employment, compensatory or equity arrangement with the Company or any other PT Entity (as defined in the Letter Agreement); PROVIDED, HOWEVER, that nothing herein shall release the Company from (i) any obligations arising under or referred to or described in the Letter Agreement dated as of January 31, 2000 (as amended, modified or otherwise supplemented from time to time, the "LETTER AGREEMENT") between the Company and the undersigned (or any claims or rights expressly reserved therein), or impair the right or ability of the undersigned to enforce the Letter Agreement, (ii) any obligations arising under the Fox Employment Agreement (as defined in the Letter Agreement) or the Fox Option Agreements (as defined in the Letter Agreement) or (iii) any Claims that the Executives may have in respect of rights to indemnification pursuant to Section 9 of the Management Agreement or under any statute, the common law or otherwise for actions taken in connection with the Management Agreement or in their capacities as employees, officers or directors of the Company or any PT Entity, including Section 145 of the Delaware General Corporation Law. All Claims released by the undersigned pursuant to this Release shall collectively be referred to herein as the "RELEASED EXECUTIVES CLAIMS". Notwithstanding the generality of the foregoing, the Released Executives Claims shall include, without limitation, (i) any and all claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, the Civil Rights Act of 1971, the Civil Rights Act of 1991, the Fair Labor Standards Act, the Employee Retirement Income Security Act of 1974, the Americans with Disabilities Act, the Family and Medical Leave Act of 1993, and any and all other federal, state or local laws, statutes, rules and regulations pertaining to employment or otherwise, and (ii) except as expressly excluded in the proviso of the immediately preceding paragraph, any claims for wrongful discharge, breach of contract, or any compensation claims, or any other claims under any statute, rule or regulation or under the common law (other than relating to fraud or misrepresentation), including compensatory damages, punitive damages, attorney's fees, costs, expenses and all claims for any other type of damage or relief. The undersigned hereby represent and warrant that (i) they are the sole owners of the Released Executives Claims and have not sold, assigned or otherwise transferred or disposed of (or agreed to do any of the same) the Released Executives Claims to any other party and (ii) they own the Released Executives Claims free and clear of any rights, claims, interests, liens or encumbrances of or in favor of any other party and have the unconditional right, power and authority, without the consent of any third party to fully and finally release the Released Executives Claims as provided herein. This Release shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed solely within such State. This Release shall not be amended, altered, modified, changed or rescinded except by an instrument in writing signed by the undersigned. This Release shall be binding upon the undersigned and their legal representatives, executors and administrators. This Release shall become effective on the date hereof on the moment Manager receives the Termination Amount (as defined in the Letter Agreement) and the Fox Employment Agreement is executed by both Martin Fox and the Company. IN WITNESS WHEREOF, the undersigned have executed this RELEASE on this 31st day of January, 2000. ----------------------------- Gary D. Hirsch ----------------------------- Martin A. Fox HIRSCH & FOX LLC By:__________________________ Name: Title: EXHIBIT B FORM OF RELEASE TO ALL WHOM THESE PRESENTS SHALL COME OR MAY CONCERN, KNOW that The Penn Traffic Company, a Delaware corporation (the "COMPANY"), on its own behalf and on behalf of the other PT Entities (as defined in the Letter Agreement hereinafter referred to), agrees to and does hereby fully and completely forever release, absolve and discharge, Hirsch & Fox LLC, Gary D. Hirsch ("HIRSCH") and Martin A. Fox ("FOX"), and their heirs, executors, attorneys and administrators (hereinafter collectively referred to as the "EXECUTIVE RELEASEES"), with respect to and from any and all causes of actions, claims, demands, agreements, promises, disputes, controversies, contracts, covenants, actions, suits, accounts, wages, obligations, debts, expenses, attorneys' fees, damages, judgments, orders and liabilities of any kind whatsoever (hereinafter collectively referred to as "CLAIMS"), which the Company or the other PT Entities ever had, now have or may have against the EXECUTIVE RELEASEES or any of them, in law, equity or otherwise, whether known or unknown to the Company, for, upon, or by reason of, any matter, course or thing whatsoever from the beginning of time to the effective date of this Release, including specifically, but not exclusively and without limiting the generality of the foregoing, based upon, arising out of or related in any way to (i) the Manager's, Hirsch's and Fox's obligations under the Management Agreement (as defined in the Letter Agreement), (ii) any transaction, occurrence, act or omission related to the provision of management services by the Manager or either Executive to the Company or any other PT Entity or the termination of the provision of those services and (iii) all matters referred to in the Management Agreement and any applicable employment, compensatory or equity arrangement with the Company or any other PT Entity; PROVIDED, HOWEVER, that nothing herein shall release the Manager or either Executive from any obligations arising under or referred to or described in the Letter Agreement dated January __, 2000 (as amended, modified or otherwise supplemented from time to time, the "LETTER AGREEMENT") among the Company, the Manager and the Executives (including, without limitation, (i) the provisions of the Management Agreement that have expressly been made to survive the termination of the Management Agreement pursuant to Section 1 of the Letter Agreement and (ii) any claims or rights expressly reserved in the Letter Agreement), or impair the right or ability of the undersigned to enforce the Letter Agreement (or such provisions or rights that so survive or are so reserved; PROVIDED, FURTHER, that nothing herein shall release Fox from any obligations under the Fox Employment Agreement (as defined in the Letter Agreement) or the Fox Option Agreements (as defined in the Letter Agreements). All claims released by the undersigned pursuant to this Release shall collectively be referred to herein as the "RELEASED COMPANY CLAIMS". The Released Company Claims shall include, without limitation, any Claims for breach of contract or any other claims under any statute, rule or regulation or under the common law, including compensatory damages, punitive damages, attorneys fees, costs, expenses, and all claims for any other type of damage or relief. The undersigned hereby represents and warrants that (i) it and the other PT Entities are the sole owners of the Released Company Claims and have not sold, assigned or otherwise transferred or disposed of (or agreed to do any of the same) the Released Company Claims to any other party and (ii) it and the other PT Entities own the Released Company Claims free and clear of any rights, claims, interests, liens or encumbrances of or in favor of any other party (other than the rights of Fleet Bank pursuant to that certain Loan and Security Agreement, dated June 29, 1999, as amended) and have the unconditional right, power and authority, without the consent of any third party (including, without limitation, Fleet Bank) to fully and finally release the Released Company Claims as provided herein. The Release shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed solely within such State. This Release shall not be amended, altered, modified, changed or rescinded except by an instrument in writing signed by the undersigned. This Release shall be binding upon the undersigned and its successors and assigns. This Release shall become effective on the date that the Executive Release (as defined in the Letter Agreement) becomes effective pursuant to its terms. IN WITNESS WHEREOF, the undersigned has caused this RELEASE to be executed on this __ day of January, 2000. THE PENN TRAFFIC COMPANY ----------------------------- Name: Peter Zurkow Title: Chairman EX-10.4 4 EXHIBIT 10.4 Exhibit 10.4 EXECUTION COPY EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of this 31st day of January, 2000, by and between The Penn Traffic Company (the "COMPANY") and Martin A. Fox ("EXECUTIVE"). WHEREAS, Executive, as a member of Hirsch & Fox LLC ("Hirsch & Fox") entered into a Management Agreement with the Company on June 29, 1999, which was amended on December 2, 1999 (the Management Agreement, as so amended, is referred to herein as the "MANAGEMENT AGREEMENT"); and WHEREAS, on the date hereof, the Company, Hirsch & Fox, Gary D. Hirsch and Executive have agreed to terminate the Management Agreement; and Executive and the Company desire to enter into this Agreement to provide for the employment of the Executive on the terms specified below; NOW, THEREFORE, the parties hereby agree as follows: 1. Employment. (a) The Company hereby agrees to engage, hire and employ Executive from and after the date of this Agreement throughout the Term (as defined below) as Executive Vice President and Chief Financial Officer of the Company. (b) Executive hereby accepts employment as an Executive Vice President and the Chief Financial Officer of the Company and agrees to devote predominantly all of his working time as such, performing such duties as shall reasonably be required of an Executive Vice President and Chief Financial Officer and otherwise on the terms and subject to 2 the conditions set forth in this Agreement. In such capacity, Executive will report to, and serve under the direction of, the Company's President and Chief Executive Officer and the Board of Directors of the Company (the "BOARD"). Throughout the Term, Executive shall utilize his best efforts and all of his skills, experience and knowledge to promote the interests of the Company. During the Term, Executive shall continue to serve as a member of the Board. Other than services to be rendered in connection with charitable activities and trade association activities and passive investment activities which do not interfere with Executive's day-to-day responsibilities to the Company, without limiting the generality of Paragraph 6, Executive shall not, directly or indirectly, engage in or participate in the operation or management of, or render any services to, any other business, enterprise or individual. 2. Term. The term of employment of Executive under this Agreement shall commence as of the date hereof (the "EFFECTIVE DATE") and will continue under this Agreement until the earlier of (i) March 31, 2001, (ii) the date that Executive or the Company terminates his employment pursuant to Paragraph 7, 8 or 9 or (iii) the occurrence of a Change of Control (as hereinafter defined) (the "TERM"). 3. Location of Employment. Executive shall render services at the Company's offices that are located in Syracuse, New York in a manner consistent with past practices of Executive in his capacity as Chief Financial Officer after consultation with the Company's Chief Executive Officer. Executive may spend the remaining days of the work week at the Company's office located in Rye, New York and during the Term, the Company shall be responsible for providing Executive with up-keep of office systems and secretarial assistance at such location. Notwithstanding the foregoing, Executive acknowledges and agrees that Executive's duties hereunder will include travel outside the Syracuse, New York and Rye, New 3 York areas, including frequent travel to such geographic locations where the Company owns or operates supermarkets or retail grocery stores, as well as other locations within and outside the United States, to attend meetings and other functions as the performance of Executive's duties hereunder may require. 4. Compensation. (a) Salary. Executive's salary shall be $1,000,000 per annum ("SALARY") for the period commencing on the date hereof and ending on the date this Agreement is terminated in accordance with Paragraph 2. The Salary shall be paid in accordance with the Company's standard payroll practices and will be subject to withholding and other applicable taxes. (b) Discretionary Bonus. The Executive may receive, at the sole discretion of the Board, a cash bonus (the "BONUS") as the Board shall determine. The Board is not obligated to pay any Bonuses at any time to the Executive. (c) Options. Pursuant to the Management Agreement, Executive was granted as of June 29, 1999, subject to the terms of the Company's 1999 Equity Incentive Plan (the "EQUITY PLAN"), (i) fully-vested options, to purchase 130,000 shares of the Common Stock, $.01 par value per share (the "COMMON STOCK"), of the Company with an exercise price equal to $18.30 per share and (ii) options to purchase 87,000 shares of Common Stock with an exercise price equal to $18.30 per share, such options to vest 50% on the third anniversary of the date of grant and 50% on the fourth anniversary of such date. In addition, Executive was granted as of September 22, 1999, options to purchase 87,000 shares of the Common Stock with an exercise price equal to $8.75 per share. Such options shall vest as set forth therein. Copies 4 of the Award Agreements for such options are attached hereto as EXHIBITS A, B AND C and such Award Agreements shall remain in full force and effect. 5. Fringe Benefits. (a) Executive shall, from and after the Effective Date, have the right to participate in the Company's medical, dental, disability, life and other insurance plans maintained during the Term by the Company for executives of the stature and rank of Executive, and any other plans and benefits, if any, generally maintained by the Company for executives of the stature and rank of Executive during the Term, in each case in accordance with the terms and conditions of such plan as from time-to-time in effect (collectively referred to herein as "FRINGE BENEFITS"). If any of the Fringe Benefits have minimum service requirements, Executive shall be provided with credit for past service with the Company (including through the Management Agreement) so as to provide Executive with Fringe Benefits on a level with executives of the stature and rank of Executive. In addition, the Company shall, during the Term, provide Executive (through the adoption of a separate Supplemental Retirement Plan or otherwise) with a means to (i) retain all of his accrued retirement benefits under the Company's Supplemental Retirement Plan for Non-Employee Executives (the "SERP") notwithstanding the termination of the Management Agreement and (ii) continue to accrue retirement benefits in the amount and in comparable fashion to the manner in which Executive's retirement benefits would have accrued, had the Management Agreement not been terminated, under the SERP. (b) Subject to the requirements of Executive's office, Executive shall be entitled to four weeks annual vacation to be taken in accordance with the vacation policy of the Company. 5 (c) The Company will, upon being provided with reasonable supporting documentation thereof, promptly reimburse Executive for (i) actual, ordinary and necessary travel and accommodation cost, entertainment and other business expenses incurred as a necessary part of discharging Executive's duties hereunder and (ii) all legal fees and expenses incurred in connection with the negotiation of this Agreement in the amount of $35,000. 6. Confidentiality; No Competition. (a) Executive agrees that while this Agreement is in effect and for a period of 12 months after termination of this Agreement pursuant to paragraph 2, Executive shall not, directly or indirectly, for his own account or as agent, employee, officer, director, trustee, consultant or shareholder of any corporation, or any member of any firm or otherwise, divulge, furnish or make accessible to any person, or himself make use other than for the sole benefit of the Company, any material confidential or proprietary information of the Company obtained by him while in the employ of the Company other than disclosures made by Executive based on Executive's reasonable belief that such disclosures were in furtherance of his duties as set forth herein, 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 by 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 6 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), (y) the Executive may disclose such information known generally to the public (without any action on the part of the Executive prohibited by the restrictions of this paragraph), and (z) 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. (b) Notwithstanding the foregoing, in the event that Executive receives a subpoena or other process or order which may require it or him to disclose any confidential information, 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 reasonable 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 that is required to be disclosed. (c) The obligations of the Executive under this Section 6 shall survive any termination of this Agreement. (d) Executive agrees that while this Agreement is in effect and, solely in the event a Change of Control occurs prior to termination of this Agreement and the Change of Control Payment described below is made, for a period of 12 months after termination of this Agreement pursuant to paragraph 2, Executive agrees that he will not, directly or indirectly, for his own account or as agent, employee, officer, director, trustee consultant or shareholder of any corporation or a member of any firm or otherwise: (i) engage in any way in any wholesale 7 and/or retail food business which operates within 30 miles of any retail store operated by the Company at any time during the restricted period; (ii) induce or attempt to induce any person with an annual salary in excess of $75,000 who is in the employ of the Company or any subsidiary or affiliate thereof to leave the employ of the Company or such subsidiary or affiliate; 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 6 shall not prohibit (A) Executive from owning less than 5% of the equity of any entity that engages in the actions described in (i), (ii) or (iii) above and (B) the Executives from providing references for employees of the Company or its subsidiaries or affiliates who have been solicited by a prospective employer without violation of (ii) above); PROVIDED, HOWEVER, that in the event the Company terminates the Agreement prior to the end of the Term for reasons other than Cause and fails to provide the Executives with the payments required by Section 11 and in the manner provided therein, the provisions of this Section shall not survive such termination. (e) 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 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 Paragraph 6 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 8 covenants will not prevent Executive from earning a livelihood. The Executive acknowledges that the remedy at law for any breach or threatened breach of this Paragraph 6 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. 7. Grounds for Termination by Company. The Company may terminate this Agreement and Executive's employment hereunder for "Cause" by written notice to Executive setting forth the grounds for termination with specificity. "Cause" shall mean the termination of Executive because of (i) his willful and continued failure (other than by reason of incapacity due to physical or mental illness) to perform the material duties of his employment after notice from the Company of such failure and his inability or unwillingness to correct such failure (prospectively) within 30 days following such notice, (ii) his conviction of a felony or plea of no contest to a felony or (iii) perpetration by Executive of a material dishonest act of fraud against the Company or any subsidiary thereof; PROVIDED, HOWEVER, that, before the Company may terminate the Executive for Cause, the Board shall deliver to him a written notice of the Company's intent to terminate him for Cause, including the reasons for such termination, and the Company must provide him an opportunity to meet once with the Board prior to such termination. 8. Grounds for Termination by Executive. Executive may terminate this Agreement and his employment hereunder for Good Reason (as hereinafter defined) by written notice to the Company setting forth the grounds for termination with specificity. "Good Reason" 9 shall mean (a) the failure to elect or appoint the Executive as an Executive Vice President and Chief Financial Officer and to continue to elect or appoint Executive to the Board of Directors of the Company or (b) the failure by the Company to pay any compensation or other amount due to the Executive under this Agreement, which failure is not remedied within ten (10) business days after written notice thereof is delivered to the Company by Executive. Any termination for Good Reason shall be effective as of the business day immediately following the date upon which the Company was required to (but did not) remedy such failure. 9. Termination For Death or Disability. (a) If during the Term, Executive should die, Executive's employment shall be deemed to have terminated as of the date of death. (b) If during the Term, Executive should suffer a disability which, in fact, prevents Executive from substantially performing his duties hereunder for a period of 180 consecutive days or 230 or more days in the aggregate, in any period of 12 consecutive months, then and in any such event the Company may terminate Executive's services hereunder by a written notice to Executive setting forth the grounds for such termination with specificity, which termination will take effect 30 days after such notice is given. Executive may only be terminated for disability if the Company's termination notice is given within 60 days following the end of the aforementioned 180- or 230-day period, whichever the Company relies upon. The existence of Executive's disability for the purposes of this Agreement shall be determined by a physician mutually selected by the Company and Executive, and Executive agrees to submit to an examination by such physician for purposes of such determination. 10. Designation of Beneficiary or Beneficiaries. As to any payment to be made under this Agreement to a beneficiary designated by Executive, it is agreed that Executive 10 shall designate such beneficiary (or beneficiaries) or change his designation of such beneficiary (or beneficiaries) from time-to-time by written notice to the Company. In the event Executive fails to designate a beneficiary (or beneficiaries) as herein provided, any payments which are to be made to Executive's designated beneficiary (or beneficiaries) under this Agreement shall be made to Executive's widow, if any, during her lifetime, thereafter to his issue, if any, including legally adopted children, and then to Executive's personal representative. 11. Effect of Company's Termination Other Than Under Paragraph 7 or 9 OR EFFECT OF EXECUTIVE'S TERMINATION UNDER PARAGRAPH 8. (a) If the Company terminates Executive's employment under this Agreement for any reason other than Cause, or other than due to his death or disability, or Executive terminates this Agreement for Good Reason, Executive shall be entitled to receive a lump sum payment of his Salary then in effect in an amount that Executive would have been entitled to receive from the date of such termination until March 31, 2001 had a termination not occurred prior to such date. (b) In addition, if a Change of Control (as defined below) occurs prior to the Determination Date (as defined below), but following a termination contemplated by Section 11(a), then in the case of and notwithstanding (i) the termination of this Agreement by the Company for any reason other than Cause, or (ii) the termination of this Agreement by the executive for Good Reason, the Company shall make the Change of Control Payment as provided in Section 12 on the dates provided in such Section, LESS that portion of the lump sum payment Executive received pursuant to Section 11(a) that is attributable to the period following the Change of Control. (c) The Company shall continue to provide to the Executive the benefits described in Paragraph 5(a) hereof for a period of 12 months from the date of termination. 11 12. Effect of a Change of Control. (a) If at any time prior to the "Determination Date" (as defined below) the Company shall have entered into a definitive agreement in respect of a "Change of Control" or a Change of Control shall have occurred; then Executive shall (assuming Executive has not voluntarily terminated this Agreement for other than Good Reason or the Company has not terminated this Agreement for Cause, in either case prior to the end of the Term) be entitled to receive the "Change of Control Payment" (as defined below) (subject to offset as set forth in Section 11(b) above) on the date of the occurrence or consummation of a Change of Control irrespective of whether the Term has expired or would have expired but for his termination without Cause or for Good Reason. Upon Executive's receipt of the Change of Control Payment in full (subject to offset as set forth in Section 11(b) above), this Agreement shall be terminated automatically and Executive shall no longer be entitled to any further payments described herein except for reimbursement of expenses contemplated by Section 5(c). For purposes of this Agreement, the following terms shall have the following meanings: (i) "Determination Date" shall mean the later of (x) March 31, 2001 or (y) the date set forth in any engagement or similar agreement entered into between the Company and any investment banking firm retained at any time during the Term (or, in the event Executive's employment is terminated prior to March 31, 2001 for reasons other than Cause or for Good Reason, retained prior to March 31, 2001) for purposes of advising the Company in connection with any transaction that would constitute a Change of Control for payment by the Company of a success or so-called "tail" fee for any such transaction. 12 (ii) "Change of Control" shall mean the occurrence of any event where (i) Byron Allumbaugh, Kevin Collins, Thomas Harberts, Gabriel Nechamkin, Lief Rosenblatt, Mark Sonnino and Peter Zurkow who, as of June 29, 1999, constituted the independent directors of the Board, cease to constitute a majority of the independent directors then in office, (ii) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person shall be deemed to have "beneficial ownership" of all shares that any 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 stock, (iii) the Company consolidates with or merges into another person or conveys, transfers, sells or leases all or substantially all of its assets to any person, or any person consolidates with or merges into the Company, in either event pursuant to a transaction in which the outstanding voting stock of the Company is changed into or exchanged for cash, securities or other property, other than any such transaction between the Company and its wholly owned subsidiaries (which wholly owned subsidiaries are United States corporations), with the effect that any "person" becomes the "beneficial owner," 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 stock or (iv) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board (together with any new directors whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then still in office who were either 13 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. (iii) "Change of Control Payment" shall mean an amount equal to the greater of (I) Salary for the remainder of the Term (but not less than one-year's Salary) and (II) $2,900,000, MINUS the SUM of (A) the "in-the-money" value on the date of the occurrence of a Change of Control of the options granted to Executive on June 29, 1999 under Section 4(c) hereof (I.E., 130,000 options MULTIPLIED by the DIFFERENCE between the (1) closing price of the Common Stock on the Nasdaq National Market on the last trading date immediately prior to the date of the occurrence of a Change of Control (or if the transaction which triggers the Change of Control is a cash tender offer, the cash tender offer per share price) AND (2) $18.30) PLUS (B) the "in-the-money" value on the date of the occurrence of a Change of Control of Executive's options granted on September 22, 1999 under Section 4(c) hereof that are vested and exercisable (I.E., up to 87,000 options MULTIPLIED by the DIFFERENCE between (1) the closing price of the Common Stock on the Nasdaq National Market on the last trading date immediately prior to the date of the occurrence of a Change of Control (or if the transaction which triggers the Change of Control is a cash tender offer, the cash tender offer per share price) AND (2) $8.75). (b) Gross-Up Payment. In the event it shall be determined that any payment or distribution of any type to or for the benefit of the Executive, by the Company, any of its affiliates, any Person who acquires ownership or effective control of the Company or ownership of a substantial portion of the Company's assets (within the meaning of IRC ss. 280G and the regulations thereunder) or any affiliate of such Person, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the "TOTAL 14 PAYMENTS"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "CODE"), or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "EXCISE TAX"), then the Executive shall be entitled to receive an additional payment (a "GROSS-UP PAYMENT") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. 13. Effect of Company's Termination For Cause, Executive's Termination WITHOUT GOOD REASON, TERMINATION UPON DEATH OR DISABILITY. (a) If the Company terminates Executive's employment under this Agreement for Cause or Executive terminates his employment under this Agreement other than for Good Reason, or if Executive's employment is terminated due to his death or disability, then the Company shall continue to pay Executive (or his designated beneficiary) his Salary through the effective date of termination. 14. Executive's Representations and Warranties. Executive represents and warrants to the Company as follows: (a) Executive has the unfettered right to enter into this Agreement on the terms and subject to the conditions hereof, and Executive has not done or permitted to be done anything which may curtail or impair any of the rights granted to the Company herein. (b) Neither the execution and delivery of this Agreement by Executive nor the performance by Executive of any of Executive's obligations hereunder constitute or will constitute a violation or breach of, or a default under, any agreement, arrangement or 15 understanding, or any other restriction of any kind, to which Executive is a party or by which Executive is bound. 15. Indemnification, Etc. The Company hereby agrees to indemnify Executive to the fullest extent permitted by law from and against all losses, liabilities, damages, deficiencies, demands, claims, actions, judgments or causes of action, assessments, costs or expenses (including, without limitation, interest, penalties and reasonable fees, expenses and disbursements of attorneys, experts, personnel and consultants reasonably incurred by the Executive in any action or proceeding) based upon, arising out of or otherwise in respect of Executive's services as, and/or for activities engaged in by Executive while Executive is, an officer and/or employee and/or director of the Company or any affiliate thereof, including either paying or reimbursing Executive, promptly after request, for any reasonable and documented expenses and attorney's fees and costs actually incurred by Executive in connection with defending, or himself instituting and/or maintaining, any claim, action, suit or proceeding arising from circumstances to which the Company's above indemnification relates (other than any claim, action, suit or proceeding brought by the former principals of Miller Tabak & Hirsch + Company against the Executive); PROVIDED, however, that no such indemnification shall be paid for damages or losses incurred by each Executive that result from actions by him that Delaware law explicitly prohibits a corporation from indemnifying its directors or officers against, including, without limitation, to the extent any such damages or losses arise through gross negligence, bad faith or misconduct. This indemnity shall survive the termination of this Agreement. The Company represents and warrants that it has $30 million dollars of director's and officer's insurance available on the date hereof and that it will use its reasonable commercial efforts to maintain such policy throughout the Term and that the Company has obtained "tail" 16 coverage under its existing director's and officer's policy covering its current directors and officers for any claims brought against them, which coverage shall extend for a period at least through June 29, 2005. 16. Notices. Any notice, consent, termination or other communication under this Agreement shall be in writing and shall be considered given on the date when hand delivered or, if sent by registered or certified mail, on the fifth day after such notice is mailed or, if sent by overnight courier guaranteeing overnight delivery, on the day after such notice is so sent, in each case to the parties at the following addresses (or at such other address as a party may specify by notice in accordance with the provisions hereof to the other): If to Executive, to Executive at: Mr. Martin A. Fox c/o The Penn Traffic Company 411 Theodore Fremd Ave. Rye, New York 10580 If to the Company: The Penn Traffic Company 1200 State Fair Boulevard Syracuse, New York 13221 Attn: Francis D. Price, General Counsel 17. Complete Agreement and Modification. This Agreement contains a complete statement of all the arrangements between the parties with respect to Executive's employment by the Company, supersedes all existing agreements or arrangements between them concerning Executive's employment (including the Management Agreement), and can only be amended or modified by a written instrument signed by the Company and Executive. 18. Severability Provisions. If any provision of this Agreement is declared invalid, illegal or incapable of being enforced by any court of competent jurisdiction, all of the 17 remaining provisions of this Agreement shall nevertheless continue in full force and effect and no provisions shall be deemed dependent upon any other provision unless expressly set forth herein. 19. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements entered into and performed entirely within such State. 20. Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. 21. Heading. The headings in this Agreement are solely for the convenience of reference and shall not affect its interpretation. 22. Withholding. Any amount payable under this Agreement shall be reduced by any amount that the Company is obligated by law or regulation to withhold in respect of any such payment. 23. Heirs, Successors and Assigns. This Agreement will inure to the benefit of, and be enforceable by, Executive's heirs and the Company's successors and assigns. The Company shall have the right to assign this Agreement or any part hereof or any rights hereunder to any successor-in-interest to the Company and to any affiliate of the Company; PROVIDED, HOWEVER, that in the event of any such assignment the assignee shall expressly agree 18 in writing to assume all of the Company's obligations under this Agreement, and Company shall remain secondarily liable to Executive for the performance of all such obligations. 19 WHEREFORE, the parties hereto have executed this Agreement as of the day and year first above written. THE PENN TRAFFIC COMPANY By:_________________________ _____________________________ Name: Martin A. Fox Title: EXHIBIT A This document is incorporated by reference to Exhibit A-2 of the Amended and Restated Management Agreement. That document constitutes Exhibit 10.3A to the Form 10-K filed on April 28, 2000. EXHIBIT B This document is incorporated by reference to Exhibit B-2 of the Amended and Restated Management Agreement. That document constitutes Exhibit 10.3A to the Form 10-K filed on April 28, 2000. EXHIBIT C This document is incorporated by reference to Exhibit C-2 of the Amended and Restated Management Agreement. That document constitutes Exhibit 10.3A to the Form 10-K filed on April 28, 2000. EX-23.1 5 EXHIBIT 23.1 a Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-88275) of The Penn Traffic Company of our report dated March 10, 2000 relating to the financial statements and financial statement schedules, which appears in this Form 10-K. PricewaterhouseCoopers LLP Syracuse, New York April 27, 2000 EX-27 6 EXHIBIT 27
5 1,000 7-MOS JAN-29-2000 JUN-27-1999 JAN-29-2000 51,759 0 60,283 (10,561) 268,550 387,359 243,490 17,459 1,020,457 240,931 308,215 0 0 201 363,363 1,020,457 1,448,629 1,477,219 1,124,755 1,124,755 0 0 22,923 (55,153) (4,940) (60,093) 0 0 0 (60,093) (2.99) 0
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