-----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, PulczFH58UEiXU3XwIEexi7IxIMmI09Pm3sikr0/UH47vytY6z4584e6bOtR2jWN CjEqLk7ufWQDwrLtI7wF/w== 0000912057-02-018258.txt : 20020503 0000912057-02-018258.hdr.sgml : 20020503 ACCESSION NUMBER: 0000912057-02-018258 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020202 FILED AS OF DATE: 20020503 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: 1934 Act SEC FILE NUMBER: 001-09930 FILM NUMBER: 02632505 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 a2078392z10-k.txt FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 2, 2002 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 of incorporation) (IRS Employer Identification No.) 1200 STATE FAIR BLVD., 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 $112,353,908 as of April 26, 2002. COMMON STOCK, PAR VALUE $.01 PER SHARE: 20,058,264 SHARES OUTSTANDING AS OF APRIL 26, 2002 FORM 10-K INDEX
PAGE - -------------------------------------------------------------------------------------------- PART I. - -------------------------------------------------------------------------------------------- Item 1. Business 4 Item 2. Properties 17 Item 3. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 17 - -------------------------------------------------------------------------------------------- PART II. - -------------------------------------------------------------------------------------------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 18 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 44 Item 8. Financial Statements and Supplementary Data 45 Item 9. Changes in and Disagreements with Accountants on Accounting 82 and Financial Disclosure - -------------------------------------------------------------------------------------------- PART III. - -------------------------------------------------------------------------------------------- Item 10. Directors and Executive Officers of Registrant 83 Item 11. Executive Compensation 83 Item 12. Security Ownership of Certain Beneficial Owners and Management 83 Item 13. Certain Relationships and Related Transactions 83 - -------------------------------------------------------------------------------------------- PART IV. - -------------------------------------------------------------------------------------------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 84
CAUTION CONCERNING FORWARD LOOKING STATEMENTS Certain statements included in this Form 10-K, including without limitation, statements included in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations," 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, as amended. Without limiting the foregoing, the words "anticipate," "believe," "estimate," "expect," "intend," "plan," "project" 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 and investments in the Company's technology infrastructure including point-of-sale systems); labor relations; labor and employee benefit costs including increases in health care and pension costs; the impact of the Company's loyalty card program on its results of operations; the impact of Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" on the Company's financial statements and financial results (as discussed in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Impact of New Accounting Standards"); availability and terms of and access to capital; the Company's liquidity and other financial considerations; the ability of the Company to repurchase its common stock in open market purchases and the prices at which it repurchases its common stock; restrictions on the Company's ability to repurchase its shares under its debt instruments; and the outcome of pending or yet-to-be instituted legal proceedings. Penn Traffic cautions that the foregoing list of important factors is not exhaustive. -3- PART I ITEM 1. BUSINESS GENERAL Penn Traffic is one of the leading food retailers in the eastern United States. The Company operates 216 supermarkets in Ohio, West Virginia, Pennsylvania, upstate New York, Vermont and New Hampshire under the "Big Bear" and "Big Bear Plus" (68 stores), "Bi-Lo" (42 stores), "P&C" (72 stores) and "Quality" (34 stores) trade names. Penn Traffic also operates a wholesale food distribution business serving 85 licensed franchises and 67 independent operators. Revenues for the 52-week period ended February 2, 2002 were approximately $2.4 billion. The Company operates supermarkets in larger metropolitan areas such as Columbus, Ohio, and Syracuse and Buffalo, New York as well as a number of smaller communities throughout the Company's six-state trade area. Penn Traffic's stores are clustered geographically within these markets providing economies of scale in advertising, distribution and operations management. Penn Traffic's stores generally have long-standing brand equity and leading market positions. More than 75% of Penn Traffic's retail revenues are derived in markets where the Company believes that it has the number one or two market position. The Company's supermarkets, which average approximately 41,000 square feet, are conveniently located and generally modern. Penn Traffic tailors the size and product assortment of each store to local demographics. Since the completion of the Company's financial restructuring in June 1999, the Company has made significant investments in its store base and infrastructure. In the 2 1/2 year period between August 1999 and February 2002 the Company invested approximately $135 million in its store base and infrastructure. This program has resulted in the upgrading or replacement of 80 stores representing approximately 43% of the Company's total retail square footage. -4- 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 in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The Bankruptcy Cases were commenced 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." -5- BUSINESS STRATEGY Since the second half of 1998, Penn Traffic has been implementing a business 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 quality perishables and customer service. The major components of the Company's strategy are to: - Pursue a strong capital investment program - Enhance the Company's merchandising - Improve store operations - Reduce and contain costs. The following is a description of each major component of the Company's business strategy: 1. PURSUE A STRONG CAPITAL INVESTMENT PROGRAM The Company believes that its stores are conveniently located and generally modern. 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 new competition. Additionally, the Company believes that it has opportunities to build new stores in communities contiguous to existing markets. As noted above, over the 2 1/2-year period since the completion of Penn Traffic's financial restructuring, the Company has invested approximately $135 million to upgrade its store base and make improvements to its distribution, manufacturing and technology infrastructure. This program has resulted in the upgrading or replacement of 80 of its 218 stores, representing approximately 43% of the Company's total retail square footage. Now that these significant enhancements have been made to the Company's store base, the Company's emphasis will shift toward growing its business through the construction of new or replacement stores. During the fiscal year ending February 1, 2003, Penn Traffic expects to invest approximately $65 million in its store base, distribution system, bakery and technology infrastructure. As part of this program, the Company plans to open two new stores in "fill-in" locations within its core markets, replace four stores, expand one store and complete approximately 13 store remodels. -6- In addition to these investments in Penn Traffic's store base, the Company is investing in technology to run its business more efficiently and effectively. During the next two to three years, Penn Traffic expects to invest $25-30 million to replace the vast majority of its point-of-sale (POS) systems with a new system. The Company expects the new POS system will enhance customer service, increase labor productivity, improve shrink control, generate important data on consumer behavior and enable Penn Traffic to implement a greater variety of merchandising programs. 2. ENHANCE THE COMPANY'S MERCHANDISING Penn Traffic has implemented or plans to implement programs designed to (1) refine the assortment and enhance the quality and presentation of products offered in each of its stores, (2) improve the return from promotional expenditures and (3) introduce products and services to address the evolving lifestyles of the Company's customers. Key components of these programs include: a. Loyalty card marketing In September 2000, Penn Traffic launched the "Wild Card" loyalty card program in its Big Bear stores. During September 2001, the Company introduced the loyalty card program in its other markets. The Company has issued more than two million Wild Cards to its customers. The Company believes that the Wild Card increases customer loyalty and sales. In addition, by targeting more of the Company's promotions on its best customers, Penn Traffic believes that the loyalty card program enables the Company to more efficiently promote its offerings, thereby improving its gross profit. b. Enhanced perishable departments Between 1999 and 2001, Penn Traffic introduced enhanced perishable departments under the following names: "Gold Label" meat, "Garden Fresh" produce, "Bakery Fresh" bakery and "Fresh N' Ready" deli. The Company plans to continue to enhance presentation, quality and variety in its perishable departments. c. Category management During 2001, Penn Traffic continued the rollout of a category management program designed to establish more efficient product assortment, analyze individual product movement and evaluate the impact of promotional decisions. With this process, category managers develop category business plans that improve assortment and pricing decisions. By the end of 2001, Penn Traffic had developed category plans for products constituting the majority of the Company's total retail sales of grocery, dairy and frozen food products. -7- d. Private label offerings Since 1999, Penn Traffic has been implementing a comprehensive marketing plan to increase sales of the Company's private label products. These products offer consumers a level of quality generally comparable to the national brand at a lower price to consumers and higher gross margins for the Company. As a result of this marketing program, the Company has achieved a significant increase in the percentage of the Company's sales from private label products over each of the last two years. The Company believes that there is an opportunity to further increase sales of private label products. e. 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 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 88 in-store pharmacies and plans to open seven additional pharmacies in its supermarkets during 2002. 3. IMPROVE STORE OPERATIONS 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. The Company is continuing to focus on the consistent delivery of high quality products and excellent customer service to the consumer in a pleasant shopping environment. 4. REDUCE AND CONTAIN COSTS Penn Traffic has been working to reduce costs throughout the Company's operations, while maintaining the Company's quality and service goals. For example, over the past three years, the Company has made significant progress in reducing nonperishable shrink expense. One of the Company's major initiatives for 2002 is the reduction of inventory shrink in its perishable departments. In addition, the Company has been implementing a number of initiatives to reduce distribution costs, including the completion of a warehouse consolidation project in 2000 and the recent implementation of a new logistics system to improve truck routing and trailer capacity utilization. The Company has begun to develop plans for a number of other cost reduction and cost containment programs. These include work simplification initiatives, the rollout of a labor scheduling system in all of the Company's stores and the use of electronic commerce to reduce the cost of certain products. -8- FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company's businesses are classified by management into two primary industry segments: Retail Food Business and Wholesale Food Distribution Business (both described below). Financial information about the Company's industry segments for the three years ended February 2, 2002 is found in Note 17 to the Consolidated Financial Statements. RETAIL FOOD BUSINESS Penn Traffic is one of the leading supermarket retailers in its operating areas, which include Ohio, West Virginia, Pennsylvania, upstate New York, Vermont and New Hampshire. The Company operates in communities with diverse economies and demographics. Penn Traffic's stores are conveniently located in close proximity to the Company's customers. Most of the Company's stores 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. 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 than its other stores. Penn Traffic's store sizes and formats vary widely, depending upon the demographic conditions in each location. For example, "conventional" store formats are generally more appropriate in areas of low population density; larger populations are better served by full-service supermarkets of up to 75,000 square feet, which offer an increased variety of merchandise and numerous expanded service departments such as bakeries, delicatessens, floral departments and fresh seafood departments. Penn Traffic's 13 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 developed a new format for these stores 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 was completed in 2001. -9- 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 total, Penn Traffic sold 21 stores and closed 29 stores. The sale of the 21 stores generated net cash proceeds of approximately $40 million. 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 to Penn Traffic's stores and third parties, including customers of Penn Traffic's wholesale food distribution business. -10- Selected statistics on Penn Traffic's retail food stores are presented below (1):
Fiscal Year Ended - -------------------------------------------------------------------------------------------------------------------- February 2, February 3, January 29, January 30, January 31, 2002 2001 2000 1999 1998 (53 weeks)(2) (3) (3) (3) - -------------------------------------------------------------------------------------------------------------------- Average annual revenues per store $ 9,554,000 $ 9,563,000 $ 9,574,000 $ 9,138,000 $ 9,340,000 Total store area in square feet 9,020,822 9,134,778 8,910,898 9,796,604 10,787,686 Total store selling area in square feet 6,538,587 6,621,450 6,455,352 7,086,099 7,812,114 Average total square feet per store 41,380 41,522 42,433 42,046 40,862 Average square feet of selling area per store 29,994 30,097 30,740 30,412 29,591 Annual revenues per square foot of selling area $ 318 $ 315 $ 315 $ 306 $ 317 Number of stores: Remodels/expansions (over $100,000) 29 39 16 5 4 New stores opened 0 0 1 1 1 Stores acquired 1 11 2 0 1 Stores closed/sold 3 1 26 32 3 Size of stores (total store area): Up to 19,999 square feet 33 34 28 29 36 20,000 - 29,999 square feet 36 36 36 42 50 30,000 - 44,999 square feet 75 75 72 81 92 45,000 - 60,000 square feet 46 46 45 50 55 Greater than 60,000 square feet 28 29 29 31 31 Total stores open at fiscal year-end 218 220 210 233 264
(1) Statistics for all years reflect the Company's implementation of EITF Issue Number 00-14 "Accounting for Certain Sales Incentives," as codified by EITF Issue Number 01-9, "Accounting for Consideration Given by a Vendor to a Customer" ("EITF 00-14"). (2) Average annual revenues per store and annual revenues per square foot of selling area are calculated on a 52-week basis. Data for stores acquired during the fiscal year ended February 3, 2001, includes 10 stores in Vermont and New Hampshire formerly leased to another supermarket company which the Company commenced operating in August 2000 (see "New England Stores"). (3) Includes revenues and square footage amounts from stores disposed of as part of the Store Rationalization Program. -11- WHOLESALE FOOD DISTRIBUTION BUSINESS Penn Traffic supplies 152 independently operated supermarkets with a wide variety of food and non-food products from its distribution centers in New York and Pennsylvania. These customers of the Company's wholesale food distribution business are primarily located in upstate New York and western Pennsylvania. As part of Penn Traffic's wholesale food distribution business, the Company licenses, royalty-free, the use of its "Riverside," "Bi-Lo" and "Big M" names to 85 of these 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 and retail counseling services from Penn Traffic. In addition, Penn Traffic receives rent from 44 of the licensed independent operators which lease or sublease their supermarkets from Penn Traffic. The Company also acts as a food distributor to 67 other independent supermarkets. In addition to contributing to the Company's operating income, the Company's wholesale food distribution business enables the Company to spread fixed and semi-fixed procurement and distribution costs over additional revenues. 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 food products from TOPCO Associates, Inc., a national products purchasing cooperative comprising 54 regional supermarket chains and other food distributors. For the fiscal year ended February 2, 2002, purchases from TOPCO Associates accounted for approximately 21% of Penn Traffic product purchases. Penn Traffic's primary New York distribution facility is a company-owned 514,000 square foot dry grocery facility in Syracuse, New York. The Company also owns a 241,000 square foot distribution center for perishable products in Syracuse and a 274,000 square foot distribution center for general merchandise and health and beauty care items in Jamestown, New York. The Company's primary Ohio distribution center is a leased 492,000 square foot dry grocery facility in Columbus, Ohio. Penn Traffic also owns a 208,000 square foot distribution facility for perishable products in Columbus and leases a 233,000 square foot warehouse in Columbus for distribution of certain general merchandise. -12- Penn Traffic's primary Pennsylvania distribution facility is a company-owned 390,000 square foot dry grocery facility in DuBois, Pennsylvania. Penn Traffic also owns a 195,000 square foot distribution center for perishable products in DuBois. Approximately two-thirds 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 multi-regional, regional and local supermarket chains, convenience stores, stores owned and operated and otherwise affiliated with large food wholesalers, unaffiliated independent food stores, warehouse clubs, discount drug store chains, discount general merchandise chains, "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, in some cases can obtain more favorable terms from landlords, 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. As of February 2, 2002, Penn Traffic had approximately 15,900 hourly employees and 1,400 salaried employees. Approximately 53% of Penn Traffic's hourly employees belong to the United Food and Commercial Workers Union. An additional 6% of Penn Traffic's hourly employees (principally employed in the distribution function and in the Company's bakery plant) belong to a total of four other unions. 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; 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, retaining or renewing its licenses and registrations. -13- 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%, 19% and 21% of product purchases in the fiscal years ended February 2, 2002, February 3, 2001 and January 29, 2000, respectively. 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 food distribution business in a contiguous market to the east of Penn Traffic's historical marketplace. 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 to implement a prenegotiated financial restructuring of the Company. On June 29, 1999, the Plan became effective in accordance with its terms. -14- 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. Grand Union had the right to extend the term of the New England Operating Agreement for an additional five years after the 10-year term, at set operating fees. Penn Traffic had also granted Grand Union the option to purchase such stores based on a formula set forth in the New England Operating Agreement. As Grand Union did not exercise either of these options, by August 1, 2000, the Company regained operating control of the 10 stores that had been subject to the New England Operating Agreement that were still operating. Nine of these stores were opened for business on various dates during August 2000. The Revenues account of the Company's Consolidated Statement of Operations for the 53-week period ended February 3, 2001 and the 52-week period ended January 29, 2000 includes income from the New England Operating Agreement of approximately $5.7 million and $12.5 million, respectively. 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 June 29, 1999 the Plan became effective in accordance with its terms. Consummation of the Plan has resulted in (1) the former $732.2 million principal amount of the Company's senior notes being exchanged for $100 million of senior notes and 19,000,000 shares of newly issued common stock (the "Common Stock"), (2) the former $400 million principal amount of senior subordinated notes being exchanged for 1,000,000 shares of Common Stock and six-year warrants to purchase 1,000,000 shares of Common Stock having an exercise price of $18.30 per share, (3) holders of Penn Traffic's formerly issued common stock receiving one share of 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 (4) 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 of options to purchase up to 2,297,000 shares of Common Stock. The Company's Common Stock and warrants to purchase common stock are currently trading on the Nasdaq National Market under the symbols "PNFT" and "PNFTW," respectively. -15- 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 "Credit Facility"). The Credit Facility includes (1) a $205 million revolving credit facility and (2) a $115 million term loan. The lenders under the Credit Facility have a first priority perfected security interest in substantially all of the Company's assets. Proceeds from the Credit Facility were used to satisfy the Company's obligations under its debtor-in-possession financing and 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." -16- 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 191 of the supermarkets that it operates. The leased supermarkets are held under leases expiring from 2002 to 2024, excluding option periods. Penn Traffic owns or leases 44 supermarkets which are leased or subleased to independent operators. Penn Traffic owns five shopping centers that contain company-owned or licensed supermarkets. Penn Traffic also owns distribution centers in Syracuse and Jamestown, New York; Columbus, Ohio; and DuBois, Pennsylvania; and a bakery plant in Syracuse, New York. Penn Traffic owns a fleet of trucks and trailers, fixtures and equipment utilized in its business and certain miscellaneous real estate. Also see Item 1 - "Business - Retail Food Business" and "Business - Purchasing and Distribution" for additional information concerning the Company's properties. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are involved in several lawsuits, claims and inquiries, most of which are routine to the nature of the business. Estimates of future liability are based on an evaluation of currently available facts regarding each matter. Liabilities are recorded when it is probable that costs will be incurred and can be reasonably estimated. Based on management's evaluation, the resolution of these matters 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 February 2, 2002. -17- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since September 15, 1999, Penn Traffic's Common Stock and warrants have been listed on the Nasdaq National Market under the symbols "PNFT" and "PNFTW," respectively. Shares of Common Stock were held by approximately 2,196 stockholders and 98 warrant holders, respectively, of record on February 2, 2002. Common stock information is provided on Pages 89 and 90 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 February 2, 2002. 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 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 financial statements of the Company for periods after June 26, 1999 are not comparable to the Company's financial statements for periods ended on or prior to such date. The selected historical consolidated financial data for the 52-week period ended February 2, 2002, the 53-week period ended February 3, 2001, the 31-week period ended January 29, 2000, the 21-week period ended June 26, 1999, and the 52-week periods ended January 30, 1999 and January 31, 1998 are derived from the consolidated financial statements of Penn Traffic which have been audited by PricewaterhouseCoopers LLP, independent accountants. The consolidated financial statements of Penn Traffic have been reclassified to reflect the implementation of EITF Issue Number 00-14 "Accounting for Certain Sales Incentives," as codified by EITF Issue Number 01-9, "Accounting for Consideration Given by a Vendor to a Customer" ("EITF 00-14") and certain other income statement reclassifications the Company made during the third quarter of the fiscal year ended February 2, 2002 (see footnote 1 on page 20). The selected historical consolidated financial data should be read in conjunction with the Penn Traffic consolidated financial statements and related notes included elsewhere herein. -18- CONSOLIDATED STATEMENT OF OPERATIONS
SUCCESSOR COMPANY ---------------------------------- 52 WEEKS 53 WEEKS ENDED ENDED (IN THOUSANDS OF DOLLARS, FEBRUARY 2, FEBRUARY 3, EXCEPT PER SHARE DATA) 2002 2001 -------------- -------------- REVENUES(1) $ 2,404,302 $ 2,413,295 COSTS AND OPERATING EXPENSES: Cost of sales(1) 1,748,710 1,761,043 Selling and administrative expenses(1) 594,517 593,757 Amortization of excess reorganization value 109,273 111,381 Unusual items(2) (1,741) -------------- -------------- OPERATING LOSS (48,198) (51,145) Interest expense 36,100 39,164 -------------- -------------- LOSS BEFORE INCOME TAXES (84,298) (90,309) Provision for income taxes(3) 11,418 9,593 -------------- -------------- NET LOSS $ (95,716) $ (99,902) ============== ============== NET LOSS PER SHARE (BASIC AND DILUTED) $ (4.77) $ (4.97) ============== ==============
No dividends on common stock have been paid during the past five fiscal years. BALANCE SHEET DATA: Total assets $ 815,729 $ 909,570 Total debt (including capital leases) 328,116 324,448 Stockholders' equity 145,217 263,287 OTHER DATA: EBITDA(4) $ 103,649 $ 101,884 Depreciation and amortization 41,926 41,870 LIFO provision 648 1,519 Capital expenditures, including capital leases and acquisitions 48,008 57,982 Cash interest expense 35,223 38,275
-19- FOOTNOTES: (1) The Company's Consolidated Statement of Operations for the 52-week period ended February 2, 2002 ("Fiscal 2002") and the 53-week period ended February 3, 2001 ("Fiscal 2001") reflect the Company's implementation of EITF 00-14 in the 13-week period ended November 3, 2001. EITF 00-14 addresses the recognition, measurement and income statement classification of certain sales incentives offered by companies in the form of discounts, coupons or rebates. In connection with the implementation of this new accounting pronouncement, Penn Traffic has made certain reclassifications between "Revenues" and "Costs and Operating Expenses" in the Company's Consolidated Statement of Operations for all periods in the Consolidated Five-Year Financial Summary. These reclassifications result in an equal decrease to the Company's reported Revenues and Costs and Operating Expenses for these periods. In addition, in Fiscal 2002, the Company made certain other reclassifications of expenses in the Company's Consolidated Statement of Operations between "Cost of sales" and "Selling and administrative expenses" for all periods in the Consolidated Five-Year Financial Summary. The implementation of EITF 00-14 and these other reclassifications did not have any effect on Penn Traffic's reported Operating Income (Loss), EBITDA or Net Income (Loss). (2) During Fiscal 2001, the Company recorded an unusual item (income) of $3.0 million associated with a reduction in the estimate of the remaining liability associated with the Store Rationalization Program and an unusual item (expense) of $1.3 million related to the implementation of a warehouse consolidation project. (3) The tax provisions for Fiscal 2002 and Fiscal 2001 are not recorded at statutory rates due to differences between income calculations for financial reporting and tax reporting purposes that result primarily from nondeductible amortization of excess reorganization value. (4) "EBITDA" is earnings before interest, taxes, depreciation, amortization, amortization of excess reorganization value, LIFO provision and unusual items. EBITDA should not be interpreted as a measure of operating results, cash flow provided by operating activities or liquidity, or as an alternative to any generally accepted accounting principle measure of performance. The Company reports 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- CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
SUCCESSOR COMPANY PREDECESSOR COMPANY ------------ ---------------------------------------------- 31 WEEKS 21 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ENDED (IN THOUSANDS OF DOLLARS, JANUARY 29, JUNE 26, JANUARY 30, JANUARY 31, EXCEPT PER SHARE DATA) 2000 1999 1999 1998 ------------ ---------- ----------- -------------- REVENUES(1) $ 1,421,936 $ 969,250 $ 2,701,470 $ 2,875,118 COSTS AND OPERATING EXPENSES: Cost of sales(1)(2) 1,034,049 717,843 2,020,305 2,116,834 Selling and administrative expenses(1)(3) 347,577 252,375 669,239 691,797 Restructuring charges(3) 10,704 Gain on sale of Sani-Dairy(4) (24,218) Amortization of excess reorganization value 65,132 Unusual items(2)(5) 7,408 (4,631) 61,355 Write-down of long-lived assets(6) 143,842 26,982 ------------ ---------- ----------- ----------- OPERATING (LOSS) INCOME (32,230) 3,663 (193,271) 53,019 Interest expense(7) 22,923 21,794 147,737 149,981 Reorganization items(8) 167,031 ------------ ---------- ----------- ----------- LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS (55,153) (185,162) (341,008) (96,962) Provision (benefit) for income taxes(9) 4,940 60 (23,914) (35,836) ------------ ---------- ----------- ----------- LOSS BEFORE EXTRAORDINARY ITEMS (60,093) (185,222) (317,094) (61,126) Extraordinary items(10) (654,928) ------------ ---------- ----------- ----------- NET (LOSS) INCOME $ (60,093) $ 469,706 $ (317,094) $ (61,126) ============ ========== =========== =========== 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 the period ended on or 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 $ 1,563,586 Total debt (including capital leases) 320,174 1,377,358 1,373,607 Stockholders' equity (deficit) 363,564 (469,706) (159,809) OTHER DATA: EBITDA(11) $ 67,378 $ 29,773 $ 99,450 $ 165,283 Depreciation and amortization 26,176 25,832 77,179 88,966 LIFO provision 892 1,009 2,376 2,343 Capital expenditures, including capital leases and acquisitions 31,468 6,279 14,368 22,272 Cash interest expense 22,405 20,393 143,411 145,177
-21- FOOTNOTES: (1) The Company's Consolidated Statement of Operations for the 31-week period ended January 29, 2000, the 21-week period ended June 26, 1999 and the 52-week periods ended January 30, 1999 and January 31, 1998 reflect the Company's implementation of EITF 00-14 in the 13-week period ended November 3, 2001 and certain other reclassifications of expenses between "Cost of sales" and "Selling and administrative expenses." (2) 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. 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) For the 52-week period ended January 31, 1998 ("Fiscal 1998"), the Company recorded special charges totaling $18.2 million ($10.7 million, net of tax). These special charges consist of (1) $12.6 million associated with a management reorganization and related corporate actions ($10.7 million of this charge is included in restructuring charges and $1.9 million is included in selling and administrative expenses) and (2) $5.6 million associated with the retention of certain corporate executives, which is included in selling and administrative expenses. (4) 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. (5) During the 31-week period ended January 29, 2000, the Company recorded unusual items (expense) of $5.5 million associated with the restructuring of certain executive compensation agreements and $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. -22- (6) 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. 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 value. During Fiscal 1998, the Company recorded a noncash charge of $27.0 million primarily related to the write-down 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. (7) 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. (8) 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. (9) 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, is not recorded at statutory rates due to the recording of a valuation allowance for all income tax benefits generated. 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. (10) The extraordinary items for the 21-week period ended June 26, 1999 include (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. -23- (11) "EBITDA" is earnings before interest, taxes, depreciation, amortization, amortization of excess reorganization value, LIFO provision, special charges, unusual items, write-down of long-lived assets, reorganization items and extraordinary items. EBITDA should not be interpreted as a measure of operating results, cash flow provided by operating activities or liquidity, or as an alternative to any generally accepted accounting principle measure of performance. The Company reports 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. -24- 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, as amended. Without limiting the foregoing, the words "anticipate," "believe," "estimate," "expect," "intend," "plan," "project" 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 and investments in the Company's technology infrastructure including point-of-sale systems); labor relations; labor and employee benefit costs including increases in health care and pension costs; the impact of the Company's loyalty card program on its results of operations; the impact of Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" on the Company's financial statements and financial results (as discussed in "Impact of New Accounting Standards" below); availability and terms of and access to capital; the Company's liquidity and other financial considerations; the ability of the Company to repurchase its common stock in open market purchases and the prices at which it repurchases its common stock; restrictions on the Company's ability to repurchase its shares under its debt instruments; and the outcome of pending or yet-to-be instituted legal proceedings. Penn Traffic cautions that the foregoing list of important factors is not exhaustive. The following discussion utilizes the Company's Consolidated Statement of Operations for the periods noted after taking into account the reclassifications described under "Impact of New Accounting Standards." -25- 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 to be created for financial reporting purposes. The 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." For purposes of the discussion of Results of Operations for the 52-week period ended January 29, 2000 ("Fiscal 2000"), the results of the 21-week period ended June 26, 1999 (Predecessor Company) and the 31-week period ended January 29, 2000 (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. -26- RESULTS OF OPERATIONS FISCAL YEAR ENDED FEBRUARY 2, 2002 ("FISCAL 2002") COMPARED TO FISCAL YEAR ENDED FEBRUARY 3, 2001 ("FISCAL 2001") FISCAL 2002 WAS A 52-WEEK YEAR AND FISCAL 2001 WAS A 53-WEEK YEAR. The following table sets forth certain Statement of Operations components expressed as percentages of revenues for Fiscal 2002 and Fiscal 2001:
FISCAL YEAR 2002 2001 ---------- ---------- Revenues 100.0% 100.0% Gross profit(1) 27.3 27.0 Adjusted gross profit(2) 27.3 26.9 Selling and administrative expenses 24.7 24.6 Adjusted selling and administrative expenses(3) 24.6 24.7 Amortization of excess reorganization value 4.5 4.6 Unusual items (0.1) Operating loss (2.0) (2.1) Adjusted operating income(4) 2.6 2.2 Interest expense 1.5 1.6 Adjusted interest expense 1.5 1.6 Net loss (4.0) (4.1) Adjusted net income(5) 0.6 0.3
- --------------- See notes below -27- (1) Revenues less cost of sales. (2) "Adjusted gross profit as a percentage of revenues" for Fiscal 2002 is (a) gross profit excluding loyalty card startup costs of $0.4 million divided by (b) revenues. "Adjusted gross profit as a percentage of revenues" for Fiscal 2001 is (a) gross profit excluding the estimated effect of the additional week in Fiscal 2001 of $12.7 million, income associated with the Company's prior lease of 10 stores in New England to another supermarket chain which expired in August 2000 (the "New England Lease") of $5.7 million, loyalty card startup costs of $0.4 million and startup costs and operating losses associated with the commencement of the Company's New England stores of $0.6 million divided by (b) revenues excluding the estimated effect of the additional week of $46.6 million and revenues of $5.7 million associated with the New England Lease ("Adjusted Fiscal 2001 Revenues"). (3) "Adjusted selling and administrative expenses as a percentage of revenues" for Fiscal 2002 is (a) selling and administrative expenses excluding loyalty card startup costs of $2.0 million divided by (b) revenues. "Adjusted selling and administrative expenses as a percentage of revenues" for Fiscal 2001 is (a) selling and administrative expenses excluding the estimated impact of the additional week of $9.7 million, loyalty card startup costs of $1.1 million and startup costs and operating losses associated with the commencement of operation of the Company's New England stores of $0.5 million divided by (b) Adjusted Fiscal 2001 Revenues. (4) "Adjusted operating income as a percentage of revenues" for Fiscal 2002 is (a) operating loss excluding loyalty card startup costs of $2.4 million and amortization of excess reorganization value of $109.3 million ("Adjusted operating income" for Fiscal 2002) divided by (b) revenues. "Adjusted operating income as a percentage of revenues" for Fiscal 2001 is (a) operating loss excluding the estimated effect of the additional week of $3.0 million, income associated with the New England Lease of $5.7 million, loyalty card startup costs of $1.5 million, startup costs and operating losses associated with the commencement of operation of the Company's New England stores of $1.1 million, an unusual item (income) of $1.7 million and amortization of excess reorganization value of $111.4 million ("Adjusted operating income" for Fiscal 2001) divided by (b) Adjusted Fiscal 2001 Revenues. (5) "Adjusted net income as a percentage of revenues" for Fiscal 2002 is net loss excluding loyalty card startup costs of $1.4 million (after tax) and amortization of excess reorganization value of $109.3 million ("Adjusted net income" for Fiscal 2002) divided by (b) revenues. "Adjusted net income as a percentage of revenues" for Fiscal 2001 is (a) net loss excluding the estimated effect of the additional week of $1.3 million (after tax), New England Lease income of $3.4 million (after tax), loyalty card startup costs of $0.9 million (after tax), startup costs and operating losses associated with the commencement of operation of the Company's New England stores of $0.6 million (after tax), an unusual item (income) of $1.0 million (after tax) and amortization of excess reorganization value of $111.4 million ("Adjusted net income" for Fiscal 2001) divided by (b) Adjusted Fiscal 2001 Revenues. -28- REVENUES Revenues for Fiscal 2002 decreased 0.4% to $2.404 billion from $2.413 billion in Fiscal 2001. The decrease in revenues for Fiscal 2002 is attributable to the fact that Fiscal 2002 was a 52-week fiscal year and Fiscal 2001 was a 53-week fiscal year. Revenues of $2.404 billion in Fiscal 2002 increased 1.8% over Adjusted Fiscal 2001 Revenues of $2.361 billion (which exclude the estimated effect of the additional week and revenues associated with the New England Lease). This increase in revenues was primarily due to an increase in same store sales and the Company's operation of 10 New England stores for a full year in Fiscal 2002 compared to a partial year in Fiscal 2001 (see "Liquidity and Capital Resources" below). Same store sales for Fiscal 2002 increased 0.8% from the comparable prior year period. Wholesale food distribution revenues were $274.8 million in Fiscal 2002 compared to $272.5 million, excluding the estimated effect of the additional week, in Fiscal 2001. GROSS PROFIT; ADJUSTED GROSS PROFIT Gross profit for Fiscal 2002 was 27.3% of revenues compared to 27.0% of revenues in Fiscal 2001. Adjusted gross profit for Fiscal 2002 was 27.3% of revenues compared to 26.9% of revenues in Fiscal 2001. The increase in adjusted gross profit as a percentage of revenues in Fiscal 2002 was primarily due to an increase in private label sales, the Company's ability to more efficiently promote its offerings with the Company's new loyalty card, a reduction in inventory shrink expense and a reduction in the LIFO provision from the prior year. These improvements in adjusted gross profit were partially offset by an increase in promotional spending during Fiscal 2002 to drive sales. SELLING AND ADMINISTRATIVE EXPENSES; ADJUSTED SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses for Fiscal 2002 were 24.7% of revenues compared to 24.6% of revenues in Fiscal 2001. Adjusted selling and administrative expenses for Fiscal 2002 were 24.6% of revenues compared to 24.7% of revenues for Fiscal 2001. The decrease in adjusted selling and administrative expenses as a percentage of revenues in Fiscal 2002 was primarily due to the benefits of the Company's cost reduction programs partially offset by cost increases in labor and utilities. -29- DEPRECIATION AND AMORTIZATION Depreciation and amortization expense was $41.9 million or 1.7% of revenues in Fiscal 2002 and $41.9 million or 1.8% of revenues (excluding the effect of the extra week) in Fiscal 2001. Amortization of excess reorganization value for Fiscal 2002 was $109.3 million and $111.4 million in Fiscal 2001. The excess reorganization value asset of $327.8 million, which was established in June 1999 in connection with the implementation of fresh-start reporting, is being amortized on a straight-line basis over a three-year period. The Company will not amortize the excess reorganization value asset after Fiscal 2002 in accordance with a new accounting standard (see "Impact of New Accounting Standards" below). UNUSUAL ITEMS During Fiscal 2001, the Company recorded unusual items of (1) $3.0 million (income) associated with a reduction in the estimate of the remaining liability associated with the Company's store rationalization program (the "Store Rationalization Program") and (2) $1.3 million (expense), related to the implementation of a warehouse consolidation project (see Note 5 to the Consolidated Financial Statements). OPERATING LOSS; ADJUSTED OPERATING INCOME Operating loss for Fiscal 2002 was $48.2 million or 2.0% of revenues compared to an operating loss of $51.1 million or 2.1% of revenues for Fiscal 2001. The Company had an operating loss for Fiscal 2002 and Fiscal 2001 due to noncash charges for amortization of excess reorganization value of $109.3 million and $111.4 million, respectively. As described above, the Company will not amortize excess reorganization value after Fiscal 2002 (see "Impact of New Accounting Standards" below). Adjusted operating income for Fiscal 2002 was $63.4 million or 2.6% of revenues compared to $52.3 million or 2.2% of revenues for Fiscal 2001. The increase in adjusted operating income as a percentage of revenues in Fiscal 2002 was due to an increase in adjusted gross profit as a percentage of revenues. INTEREST EXPENSE; ADJUSTED INTEREST EXPENSE Interest expense for Fiscal 2002 was $36.1 million compared to $39.2 million in Fiscal 2001. Adjusted interest expense for Fiscal 2002 of $36.1 million compared to $38.4 million, excluding the effect of the extra week, in Fiscal 2001. The decrease in interest expense in Fiscal 2002 is due to a decrease in the interest rates on the Company's variable rate debt from the prior year. -30- INCOME TAXES Income tax provision was $11.4 million for Fiscal 2002 compared to $9.6 million in Fiscal 2001. The effective tax rates for Fiscal 2002 and Fiscal 2001 vary from statutory rates due to differences between income for financial reporting and tax reporting purposes that result primarily from the nondeductible amortization of excess reorganization value. NET LOSS; ADJUSTED NET INCOME Net loss for Fiscal 2002 was $95.7 million compared to a net loss $99.9 million for Fiscal 2001. Adjusted net income was $15.0 million for Fiscal 2002 compared to $7.2 million for Fiscal 2001. -31- FISCAL YEAR ENDED FEBRUARY 3, 2001 ("FISCAL 2001") COMPARED TO FISCAL YEAR ENDED JANUARY 29, 2000 ("FISCAL 2000") FISCAL 2001 WAS A 53-WEEK YEAR AND FISCAL 2000 WAS A 52-WEEK YEAR. The following table sets forth certain Statement of Operations components expressed as percentages of revenues for Fiscal 2001 and Fiscal 2000:
FISCAL YEAR 2001 2000 ------------------- ------------------ Revenues 100.0% 100.0% Gross profit(1) 27.0 26.7 Adjusted gross profit(2) 26.9 26.5 Selling and administrative expenses 24.6 25.1 Adjusted selling and administrative expenses(3) 24.7 25.2 Amortization of excess reorganization value 4.6 2.7 Unusual items (0.1) 0.1 Operating loss (2.1) (1.2) Adjusted operating income(4) 2.2 1.3 Interest expense 1.6 1.9 Adjusted interest expense 1.6 1.9 Reorganization items 7.0 Net (loss) income (4.1) 17.1 Adjusted net income (loss)(5) 0.3 (0.8)
- ---------- See notes below -32- (1) Revenues less cost of sales. (2) "Adjusted gross profit as a percentage of revenues" for Fiscal 2001 is (a) gross profit excluding the estimated effect of the additional week of $12.7 million, income associated with the Company's New England Lease of $5.7 million, loyalty card startup costs of $0.4 million and startup costs and operating losses associated with the commencement of the Company's New England stores of $0.6 million divided by (b) Adjusted Fiscal 2001 Revenues. "Adjusted gross profit as a percentage of revenues" for Fiscal 2000 is (a) gross profit excluding New England Lease income of $12.5 million and a special charge of $3.9 million divided by (b) revenues excluding New England Lease income of $12.5 million ("Adjusted Fiscal 2000 Revenues"). (3) "Adjusted selling and administrative expenses as a percentage of revenues" for Fiscal 2001 is (a) selling and administrative expenses excluding the estimated impact of the additional week of $9.7 million, loyalty card startup costs of $1.1 million and startup costs and operating losses associated with the commencement of operation of the Company's New England stores of $0.5 million divided by (b) Adjusted Fiscal 2001 Revenues. "Adjusted selling and administrative expenses as a percentage of revenues" for Fiscal 2000 is (a) selling and administrative expenses divided by (b) Adjusted Fiscal 2000 Revenues. (4) "Adjusted operating income as a percentage of revenues" for Fiscal 2001 is (a) operating loss excluding the estimated impact of the additional week of $3.0 million, income associated with the New England Lease of $5.7 million, loyalty card startup costs of $1.5 million, startup costs and operating losses associated with the commencement of operation of the Company's New England stores of $1.1 million, an unusual item (income) of $1.7 million, and amortization of excess reorganization value of $111.4 million ("Adjusted operating income" for Fiscal 2001) divided by (b) Adjusted Fiscal 2001 Revenues. "Adjusted operating income as a percentage of revenues" for Fiscal 2000 is (a) operating loss excluding income associated with the New England Lease of $12.5 million, a special charge of $3.9 million, an unusual item (expense) of $2.8 million and amortization of excess reorganization value of $65.1 million ("Adjusted operating income" for Fiscal 2000) divided by (b) Adjusted Fiscal 2000 Revenues. (5) "Adjusted net income as a percentage of revenues" for Fiscal 2001 is (a) net loss excluding the estimated impact of the additional week of $1.3 million (after tax), New England Lease income of $3.4 million (after tax), loyalty card startup costs of $0.9 million (after tax), startup costs and operating losses associated with the commencement of operation of the Company's New England stores of $0.6 million (after tax), an unusual item (income) of $1.0 million (after tax) and amortization of excess reorganization value of $111.4 million ("Adjusted net income" for Fiscal 2001) divided by (b) Adjusted Fiscal 2001 Revenues. "Adjusted net loss as a percentage of revenues" for Fiscal 2000 is (a) net income excluding income associated with the New England Lease of $9.4 million (after tax), unusual items (expense) of $0.1 million (after tax), special charge of $3.9 million (after tax), amortization of excess reorganization value of $65.1 million, reorganization items (expense) of $167.0 million and extraordinary items (income) of $654.9 million ("Adjusted net income for Fiscal 2000") divided by (b) Adjusted Fiscal 2000 Revenues. -33- REVENUES Revenues for Fiscal 2001 increased 0.9% to $2.413 billion from $2.391 billion in Fiscal 2000. The increase in revenues for Fiscal 2001 was primarily attributable to (1) an increase in same store sales, (2) the commencement of the Company's operation of 10 New England stores formerly leased to another supermarket chain (see "Liquidity and Capital Resources" below) and (3) the fact that Fiscal 2001 was a 53-week fiscal year and Fiscal 2000 was a 52-week fiscal year. These increases in revenues were partially offset by (1) a reduction in the number of stores the Company operated during Fiscal 2001 as compared to Fiscal 2000, resulting from the Company's decision to close or sell certain stores as part of the Company's Store Rationalization Program (during the fiscal year ended January 29, 2000, Penn Traffic sold or closed 21 stores in connection with this program; 19 of these stores were sold or closed in the 13-week period ended May 1, 1999) and (2) a decline in wholesale food distribution revenues. On a 52-week basis, revenues for Fiscal 2001 were approximately $2.361 billion. Same store sales for Fiscal 2001 increased 0.2% from the comparable prior year period. Wholesale food distribution revenues, excluding the effect of the additional week in Fiscal 2001, were $272.5 million in Fiscal 2001 compared to $286.1 million in Fiscal 2000. The decrease in wholesale food distribution revenues in Fiscal 2001 is a result of a reduction in the average number of customers and the average shipments per customer. GROSS PROFIT; ADJUSTED GROSS PROFIT Gross profit for Fiscal 2001 was 27.0% of revenues compared to 26.7% of revenues in Fiscal 2000. Adjusted gross profit for Fiscal 2001 was 26.9% of revenues compared to 26.5% of revenues in Fiscal 2000. The increase in adjusted gross profit as a percentage of revenues in Fiscal 2001 was primarily a result of (1) an increase in allowance income from the Company's vendors, (2) a reduction in inventory shrink expense and (3) a reduction in depreciation and amortization expense (as described below). These increases in adjusted gross profit were partially offset by an increase in promotional spending, as a percentage of revenues, to drive sales and launch a number of remodeled stores. SELLING AND ADMINISTRATIVE EXPENSES; ADJUSTED SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses for Fiscal 2001 were 24.6% of revenues compared to 25.1% of revenues in Fiscal 2000. Adjusted selling and administrative expenses for Fiscal 2001 were 24.7% of revenues compared to 25.2% of revenues for Fiscal 2000. The decrease in adjusted selling and administrative expense as a percentage of revenues in Fiscal 2001 was primarily a result of (1) the Company's cost reduction initiatives, (2) a reduction in bad debt expense and (3) reductions in depreciation expense and goodwill amortization (as described below). -34- DEPRECIATION AND AMORTIZATION Depreciation and amortization expense was $41.9 million or 1.8% of revenues in Fiscal 2001 and $52.0 million or 2.2% of revenues in Fiscal 2000. Depreciation and amortization expense decreased in Fiscal 2001 primarily due to (1) a reduction in the carrying value of property, plant and equipment associated with the implementation of fresh-start reporting (see Note 3 to the Consolidated Financial Statements) and (2) the elimination of goodwill associated with the implementation of fresh-start reporting. Amortization of excess reorganization value for Fiscal 2001 was $111.4 million and $65.1 million in Fiscal 2000. The excess reorganization value asset of $327.8 million, which was established in June 1999 in connection with the implementation of fresh-start reporting, is being amortized on a straight-line basis over a three-year period. The Company will not amortize the excess reorganization value asset after Fiscal 2002 in accordance with a new accounting standard (see "Impact of New Accounting Standards" below). UNUSUAL ITEMS During Fiscal 2001, the Company recorded unusual items of (1) $3.0 million (income) associated with a reduction in the estimate of the remaining liability associated with the Store Rationalization Program and (2) $1.3 million (expense) related to the implementation of a warehouse consolidation project. During Fiscal 2000, the Company recorded unusual items of (1) $5.5 million (expense) associated with the restructuring of certain executive compensation agreements, (2) $1.9 million (expense) associated with an early retirement program for certain eligible employees and (3) $4.6 million (income) related to the Store Rationalization Program (see Note 5 to the Consolidated Financial Statements). OPERATING LOSS; ADJUSTED OPERATING INCOME Operating loss for Fiscal 2001 was $51.1 million or 2.1% of revenues compared to an operating loss of $28.6 million or 1.2% of revenues for Fiscal 2000. The Company had an operating loss for Fiscal 2001 and Fiscal 2000 due to noncash charges for amortization of excess reorganization value of $111.4 million and $65.1 million, respectively. As described above, the Company will not amortize excess reorganization value after Fiscal 2002. Adjusted operating income for Fiscal 2001 was $52.3 million or 2.2% of revenues compared to $30.7 million or 1.3% of revenues for Fiscal 2000. The increase in adjusted operating income as a percentage of revenues in Fiscal 2001 was due to an increase in adjusted gross profit as a percentage of revenues and a decrease in adjusted selling and administrative expenses as a percentage of revenues. -35- INTEREST EXPENSE; ADJUSTED INTEREST EXPENSE Interest expense for Fiscal 2001 was $39.2 million compared to $44.7 million in Fiscal 2000. Adjusted interest expense for Fiscal 2001 (excluding the effect of the additional week) was $38.4 million compared to $44.7 million in Fiscal 2000. As discussed in Note 6 to the Consolidated Financial Statements, the Company discontinued the accrual of interest on the Company's former senior and senior subordinated notes on March 1, 1999. REORGANIZATION ITEMS During Fiscal 2000, the Company recorded reorganization items (expense) of $167.0 million (see Note 7 to the Consolidated Financial Statements). INCOME TAXES Income tax provision was $9.6 million for Fiscal 2001 compared to $5.0 million in Fiscal 2000. The effective tax rates for Fiscal 2001 and the 31-week period ended January 29, 2000 vary from statutory rates due to differences between income for financial reporting and tax reporting purposes that result primarily from the nondeductible amortization of excess reorganization value. The effective tax rate for the 21-week period ended June 26, 1999, varies from statutory rates due to the recording of a valuation allowance for all income tax benefits generated. 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 (see Note 8 to the Consolidated Financial Statements). 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 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 Fiscal 2001. EXTRAORDINARY ITEM During Fiscal 2000, the Company recorded an extraordinary gain of $654.9 million associated with the Company's financial restructuring (see Note 9 to the Consolidated Financial Statements). -36- NET (LOSS) INCOME; ADJUSTED NET INCOME (LOSS) Net loss for Fiscal 2001 was $99.9 million compared to a net income of $409.6 million for Fiscal 2000. Adjusted net income was $7.2 million for Fiscal 2001 compared to a net loss of $18.7 million for Fiscal 2000. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those accounting policies that are very important to the portrayal of the Company's financial condition and results which require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company believes the following to be critical and could result in materially different amounts being reported under different conditions or using different assumptions: RESERVE FOR STORE CLOSURES For closed stores and stores which the Company has decided to close, the Company records a liability for the estimated future cash flows (including future lease commitments, net of estimated cost recoveries) and miscellaneous closing costs. Future cash flows are estimated based on the Company's knowledge of the market in which the stores closed or to be closed are located. These estimates of future cash flows could be affected by changes in real estate markets and other economic conditions. IMPAIRMENT OF LONG-LIVED ASSETS At each fiscal year end, the Company reviews its long-lived assets for impairment based on projected future undiscounted cash flows attributable to such assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, such assets are written down to their fair value. In projecting future cash flows, management considers historical performance and assessments of the effect, among other things, of projected changes in competition, maturation of new stores and store remodels, merchandising and marketing strategies and general market conditions. The determination of fair values is based upon management's knowledge of local real estate markets and the value of equipment utilized in the supermarket industry. No assurance can be given that the actual future cash flows will be sufficient to recover the carrying value of long-lived assets. LIABILITY FOR SELF-INSURANCE The Company is primarily self-insured for workers compensation, general liability and certain group health and welfare costs. Self-insurance liabilities are actuarially calculated based on claims filed and an estimate of claims incurred but not yet reported. Projection of losses concerning these liabilities is subject to a high degree of variability due to factors such as claim settlement patterns, litigation trends, legal interpretations and future levels of health care costs. -37- EMPLOYEE BENEFIT PLANS The actuarial determination of Penn Traffic's obligations and expense for company sponsored pension benefits is dependent on the Company's selection of assumptions including the discount rate, expected long-term rate of return on plan assets and rates of compensation increase. Significant differences between Penn Traffic's actual experience or significant changes in our assumptions may materially affect our pension obligations and future expense. -38- LIQUIDITY AND CAPITAL RESOURCES In connection with the completion of the Company's financial restructuring in June 1999, the Company issued $100 million of 11% Senior Notes due on June 29, 2009 (the "Senior Notes") and entered into a new $320 million secured credit facility (the "Credit Facility"). Certain terms of the Senior Notes and the Credit Facility are summarized below. The indenture for the Senior Notes 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. The Credit Facility includes (1) a $205 million revolving credit facility (the "Revolving Credit Facility") and (2) a $115 million term loan (the "Term Loan"). The lenders under the Credit Facility have a first priority perfected security interest in substantially all of the Company's assets. The Credit Facility contains a variety of operational and financial covenants intended to restrict the Company's operations. These include, among other things, restrictions on the Company's ability to incur debt and make capital expenditures and restricted payments, as well as requirements that the Company achieve required levels for Consolidated EBITDA, interest coverage, fixed charge coverage and funded debt ratio (all as defined in the Credit Facility). 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:
Fiscal Year Ending Amount Maturing ------------------ --------------- (In thousands of dollars) 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 ------------- $ 108,250 =============
Availability under the Revolving Credit Facility is calculated based on a specified percentage of eligible inventory and accounts receivable of the Company. The Revolving Credit Facility will mature on June 30, 2005. As of February 2, 2002, there were approximately $32.1 million of borrowings and $27.7 million of letters of credit outstanding under the Revolving Credit Facility. Availability under the Revolving Credit Facility was approximately $137 million as of February 2, 2002 (see Note 12 to the Consolidated Financial Statements). -39- 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 weighted average fixed interest rate of 7.08% per annum and receives payments at variable interest rates based on the London InterBank Offered Rate. During Fiscal 2002, the Company's internally generated funds from operations, available cash resources and amounts available under the Revolving Credit Facility provided sufficient liquidity to meet the Company's operating, capital expenditure and debt service needs. During the 52-week period ending February 1, 2003 ("Fiscal 2003"), the Company expects to utilize internally generated funds from operations, amounts available under the Revolving Credit Facility and new capital leases to satisfy its operating, capital expenditure and debt service needs and fund any repurchase of shares of its common stock under its announced stock repurchase program as described below. Cash flows used to meet the Company's operating requirements during Fiscal 2002 are reported in the Consolidated Statement of Cash Flows. During Fiscal 2002, the Company's net cash used in investing activities was $45.3 million. This amount was financed by net cash provided by operating activities, net cash provided by financing activities and a reduction in cash and cash equivalents of $39.1 million, $3.2 million and $3.0 million, respectively. As described above in Item 1 - "Business - New England Stores," in July 1990, the Company entered into an agreement with another supermarket company pursuant to which such company acquired the right to operate 13 stores in Vermont and New Hampshire under its trade name until July 31, 2000 (the "New England Operating Agreement"). Prior to July 1990, these stores had been operated by Penn Traffic under the Company's "P&C" trade name. By August 1, 2000, the Company had regained operating control of the 10 stores that remained in operation under the New England Operating Agreement. Nine of these stores were opened for business in August 2000. The Revenues account of the Company's Consolidated Statement of Operations includes income of approximately $5.7 million from the New England Operating Agreement in Fiscal 2001 (which was recorded in the first half of the fiscal year). In contrast, the Company incurred approximately $1 million of operating losses in connection with the commencement of operation of these 10 stores in the second half of Fiscal 2001. While these stores contributed to the Company's operating income in Fiscal 2002, Penn Traffic expects that the operating income allocable to such stores in future periods will be significantly less than the income received pursuant to the New England Operating Agreement. The Company competes with several supermarket chains, independent grocery stores, supercenters (combination supermarket and general merchandise stores) and other retailers, many of which have greater resources than Penn Traffic. The number of competitors and the degree of competition encountered by the Company's supermarkets vary by location. Any significant change in the number of the Company's competitors, the number or size of competitors' stores, or in the pricing and promotion practices of the Company's competitors could have an impact on the Company's results of operations. -40- Penn Traffic expects that it will incur significant increases in employee benefit costs in Fiscal 2003. These are comprised of (1) increases in health care costs which the Company believes are, on a percentage basis, generally consistent with overall increasing costs in the health care industry and (2) an increase in pension expense that the Company will record in Fiscal 2003 as a result of the declining returns in the equity markets over the past two years. Penn Traffic competes against some companies which do not provide the same levels of employee benefits as the Company. It is not certain what portion of these cost increases Penn Traffic will be able to offset through its cost reduction programs, merchandising enhancements or market pricing adjustments. During Fiscal 2001, the Company commenced implementation of a loyalty card program in its Big Bear stores in Ohio and West Virginia. Fiscal 2001 operating income was reduced by an estimated $1.5 million in connection with the launch of this loyalty card program. Penn Traffic completed the chain-wide implementation of this program by introducing the loyalty card in the Company's remaining 150 stores in New York, Pennsylvania and New England in September 2001. The Company incurred approximately $2.4 million of startup costs to complete the rollout of the loyalty card program. During Fiscal 2002, the Company invested approximately $48 million in capital expenditures (including capital leases). The Company financed such capital expenditures through cash generated from operations, new capital leases and amounts available under the Revolving Credit Facility. During Fiscal 2003, Penn Traffic expects to invest approximately $65 million (including capital leases). Capital expenditures will be principally for new stores, store remodels and investments in the Company's distribution system and technology infrastructure (including new point-of-sale systems in several of the Company's stores). The Company expects to finance such expenditures through cash generated from operations, amounts available under the Revolving Credit Facility and new capital leases. On June 29, 2000, the Company announced that its Board of Directors has authorized the Company to repurchase up to an aggregate value of $10 million of Penn Traffic's common stock from time to time in the open market or privately negotiated transactions. The timing and amounts of purchases will be governed by prevailing market conditions and other considerations. To date, the Company has repurchased 53,000 shares of common stock at an average price of $7.08 per share. During Fiscal 2002 and Fiscal 2001, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, the Company does not engage in trading activities involving non-exchange traded contracts. As such, the Company is not materially exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships. Penn Traffic does not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with the Company or its related parties other than what is disclosed in Note 15 to the Consolidated Financial Statements. -41- The table below presents significant contractual cash obligations of the Company at February 2, 2002:
TOTAL COMMITMENT EXPIRES CONTRACTUAL DURING THE CAPITAL LEASE OPERATING CASH FISCAL YEAR ENDING DEBT(1) OBLIGATIONS(2)(3) LEASES(3) OBLIGATIONS ------------------ ------------- ------------------ ------------ -------------- (IN THOUSANDS OF DOLLARS) February 1, 2003 $ 7,066 $ 16,715 $ 32,864 $ 56,645 January 31, 2004 10,005 14,480 31,019 55,504 January 29, 2005 12,972 13,629 27,941 54,542 January 28, 2006 40,086 12,881 25,979 78,946 February 3, 2007 71,492 12,854 23,537 107,883 Thereafter 111,091 50,994 149,623 311,708
- ---------- (1) Balance for fiscal year ending January 28, 2006 includes repayment of $32.1 million outstanding under the Revolving Credit Facility at February 2, 2002. (2) Includes amounts classified as imputed interest. (3) See Note 11 to the Consolidated Financial Statements. The Company has also made certain contractual commitments that extend beyond February 2, 2002 as shown below:
COMMITMENT EXPIRES STAND-BY DURING THE LETTERS OF SURETY FISCAL YEAR ENDING CREDIT (1) BONDS (2) ------------------ ------------ ----------- (IN THOUSANDS OF DOLLARS) February 1, 2003 $ 27,668 $ 6,877
- ---------- (1) Letters of credit are primarily associated with supporting workers compensation obligations and are renewable annually. (2) The Company is required to maintain surety bonds for varying periods of up to three years from the date of issuance. -42- IMPACT OF NEW ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. SFAS 142 provides that intangible assets with finite useful lives be amortized, and that goodwill and intangible assets with indefinite useful lives not be amortized but tested at least annually for impairment. Penn Traffic will adopt SFAS 142 in the first quarter of Fiscal 2003 (the 52-week period ending February 1, 2003). The Company will not record any amortization of excess reorganization value or goodwill in its Consolidated Statement of Operations for periods after Fiscal 2002. Penn Traffic will test the carrying value of the excess reorganization value and goodwill assets for impairment in conjunction with the adoption of SFAS 142 and at least annually thereafter. Excess reorganization value and goodwill were amortized at a rate of approximately $110 million annually in Fiscal 2002, Fiscal 2001 and the 31-week period ended January 29, 2000 and will have a carrying value of approximately $51 million at the date of adoption of this standard. Other than the elimination of the amortization of excess reorganization value and goodwill, the Company has not yet determined the effect that adoption of SFAS 142 will have on its financial statements. In October 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supercedes Statement of Financial Accounting Standards No. 121, "Impairment of Long-Lived Assets to be Disposed Of," ("SFAS 121"). SFAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principle Board Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The Company will adopt SFAS 144 in the first quarter of Fiscal 2003. The Company is currently evaluating the impact this pronouncement will have on its financial statements. -43- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See information set forth above in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Note 12 to the Consolidated Financial Statements. -44- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements Page - ------------------------------------------ ---- Reports of Independent Accountants 46 Consolidated Financial Statements: Statement of Operations 48 Balance Sheet 49 Statement of Stockholders' Equity (Deficit) 51 Statement of Cash Flows 52 Notes to Consolidated Financial Statements 54 Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts 88 Supplementary Data - Quarterly Financial Data (Unaudited) 89
-45- REPORT OF INDEPENDENT ACCOUNTANTS (POST-EMERGENCE) To the Stockholders and the Board of Directors of The Penn Traffic Company: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The Penn Traffic Company and its subsidiaries at February 2, 2002 and February 3, 2001 and the results of their operations and their cash flows for the years ended February 2, 2002, February 3, 2001 and the 31-weeks ended January 29, 2000 in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion. 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 15, 2002 -46- REPORT OF INDEPENDENT ACCOUNTANTS (PRE-EMERGENCE) To the Stockholders and the Board of Directors of The Penn Traffic Company: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the consolidated statements of operations, stockholders equity (deficit) and cash flows of the Penn Traffic Company and its subsidiaries for the 21-weeks ended June 26, 1999, in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion. 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 -47- THE PENN TRAFFIC COMPANY CONSOLIDATED STATEMENT OF OPERATIONS
PREDECESSOR SUCCESSOR COMPANY COMPANY ------------------------------------------------------ --------------- 52 WEEKS 53 WEEKS 31 WEEKS 21 WEEKS ENDED ENDED ENDED ENDED FEBRUARY 2, FEBRUARY 3, JANUARY 29, JUNE 26, 2002 2001 2000 1999 --------------- --------------- -------------- --------------- (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) REVENUES $ 2,404,302 $ 2,413,295 $ 1,421,936 $ 969,250 COST AND OPERATING EXPENSES: Cost of sales (Note 4) 1,748,710 1,761,043 1,034,049 717,843 Selling and administrative expenses 594,517 593,757 347,577 252,375 Amortization of excess reorganization value (Note 3) 109,273 111,381 65,132 Unusual items (Note 5) (1,741) 7,408 (4,631) --------------- --------------- -------------- --------------- OPERATING (LOSS) INCOME (48,198) (51,145) (32,230) 3,663 Interest expense (Note 6) 36,100 39,164 22,923 21,794 Reorganization items (Note 7) 167,031 --------------- --------------- -------------- --------------- LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS (84,298) (90,309) (55,153) (185,162) Provision for income taxes (Note 8) 11,418 9,593 4,940 60 --------------- --------------- -------------- --------------- LOSS BEFORE EXTRAORDINARY ITEMS (95,716) (99,902) (60,093) (185,222) Extraordinary items (Note 9) (654,928) --------------- --------------- -------------- --------------- NET (LOSS) INCOME $ (95,716) $ (99,902) $ (60,093) $ 469,706 =============== =============== ============== =============== PER SHARE (BASIC AND DILUTED): Net loss (Note 10) $ (4.77) $ (4.97) $ (2.99) =============== =============== ==============
The accompanying notes are an integral part of these statements. Per share data is not presented for the period ended on June 26, 1999, because of the general lack of comparability as a result of the revised capital structure of the Company. -48- THE PENN TRAFFIC COMPANY CONSOLIDATED BALANCE SHEET
FEBRUARY 2, FEBRUARY 3, 2002 2001 -------------- ------------- (IN THOUSANDS OF DOLLARS) ASSETS CURRENT ASSETS: Cash and short-term investments (Note 1) $ 39,562 $ 42,529 Accounts and notes receivable (less allowance for doubtful accounts of $2,107 and $4,634, respectively) 49,710 46,113 Inventories (Note 1) 284,221 271,704 Prepaid expenses and other current assets 9,697 9,338 -------------- ------------- 383,190 369,684 -------------- ------------- CAPITAL LEASES (NOTES 1 AND 11): Capital leases 59,920 60,405 Less: Accumulated amortization (15,173) (9,593) -------------- ------------- 44,747 50,812 -------------- ------------- FIXED ASSETS (NOTE 1): Land 40,113 39,733 Buildings 87,756 84,425 Furniture and fixtures 161,862 138,572 Vehicles 4,943 4,764 Leasehold improvements 52,736 32,662 -------------- ------------- 347,410 300,156 Less: Accumulated depreciation (73,974) (44,649) -------------- ------------- 273,436 255,507 ------------- ------------- OTHER ASSETS (NOTES 1 AND 3): Goodwill - net 8,990 9,197 Beneficial leases - net 46,920 50,549 Excess reorganization value - net 42,032 151,304 Other assets - net 16,414 22,517 -------------- ------------- $ 815,729 $ 909,570 ============== =============
The accompanying notes are an integral part of these statements. -49- THE PENN TRAFFIC COMPANY CONSOLIDATED BALANCE SHEET
FEBRUARY 2, FEBRUARY 3, 2002 2001 -------------- ------------- (IN THOUSANDS OF DOLLARS) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of obligations under capital leases (Note 11) $ 8,329 $ 7,878 Current maturities of long-term debt (Note 12) 7,066 5,062 Trade accounts and drafts payable (Note 1) 128,872 119,905 Other accrued liabilities 77,590 76,857 Accrued interest expense 2,514 3,478 Taxes payable 18,179 16,971 -------------- ------------- 242,550 230,151 -------------- ------------- NONCURRENT LIABILITIES: Obligations under capital leases (Note 11) 67,075 73,396 Long-term debt (Note 12) 245,646 238,112 Deferred income taxes 63,770 76,141 Other noncurrent liabilities 51,471 28,483 STOCKHOLDERS' EQUITY (NOTE 14): Preferred stock - authorized 1,000,000 shares, $.01 par value; none issued Common stock - authorized 30,000,000 shares, $.01 par value; 20,056,264 shares and 20,054,022 shares issued and outstanding, respectively 201 201 Capital in excess of par value 416,597 416,207 Stock warrants 7,249 7,249 Retained deficit (255,711) (159,995) Accumulated other comprehensive loss (22,744) Treasury stock, at cost (375) (375) -------------- ------------- TOTAL STOCKHOLDERS' EQUITY 145,217 263,287 -------------- ------------- $ 815,729 $ 909,570 ============== =============
The accompanying notes are an integral part of these statements. -50- THE PENN TRAFFIC COMPANY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Accumulated Total Capital in Other Stockholders' Common Excess of Stock Retained Comprehensive Unearned Treasury Equity Stock Par Value Warrants Deficit (Loss) Income Compensation Stock (Deficit) ----------------------------------------------------------------------------------- ------------ (In thousands of dollars) PREDECESSOR COMPANY: - ------------------- 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 Comprehensive loss: Net loss (99,902) Total comprehensive loss (99,902) Purchase of treasury shares (375) (375) - ----------------------------------------------------------------------------------------------------------------- ------------ FEBRUARY 3, 2001 201 416,207 7,249 (159,995) 0 0 (375) 263,287 Comprehensive loss: Net loss (95,716) Minimum pension liability net of tax benefit of $13,935 (20,042) Cumulative effect of accounting change net of tax benefit of $1,244 (1,790) Change in fair value of cash flow hedges net of tax benefit of $635 (912) Total comprehensive loss (118,460) Other 390 390 - ----------------------------------------------------------------------------------------------------------------- ------------ FEBRUARY 2, 2002 $ 201 $ 416,597 $ 7,249 $(255,711) $ (22,744) $ 0 $ (375) $ 145,217 ================================================================================================================= ============
The accompanying notes are an integral part of these statements. -51- THE PENN TRAFFIC COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS
PREDECESSOR SUCCESSOR COMPANY COMPANY ---------------------------------------------------------- ------------------- 52 WEEKS 53 WEEKS 31 WEEKS 21 WEEKS ENDED ENDED ENDED ENDED FEBRUARY 2, FEBRUARY 3, JANUARY 29, JUNE 26, 2002 2001 2000 1999 ----------------- ---------------- ---------------- ---------------- (IN THOUSANDS OF DOLLARS) OPERATING ACTIVITIES: Net (loss) income $ (95,716) $ (99,902) $ (60,093) $ 469,706 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 41,926 41,870 26,176 25,832 Amortization of excess reorganization value 109,273 111,381 65,132 Gain on sold/closed stores (2,921) 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 of excess reorganization value 14,811 Other - net 216 (238) (941) 120 NET CHANGE IN ASSETS AND LIABILITIES: Accounts receivable and prepaid expenses (3,956) 2,606 2,445 15,437 Inventories (12,517) (3,154) (11,423) 22,321 Payables and accrued expenses 6,291 (16,980) (9,754) 16,477 Deferred income taxes 2,795 4,553 (9,979) Other assets (7,423) (4,302) 2,403 1,464 Other noncurrent liabilities (1,770) 1,317 (3,067) (4,797) ------------ ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 39,119 37,151 15,710 43,633 ------------ ------------ ------------ ------------
-52- THE PENN TRAFFIC COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
PREDECESSOR SUCCESSOR COMPANY COMPANY ------------------------------------------------------- ------------------- 52 WEEKS 53 WEEKS 31 WEEKS 21 WEEKS ENDED ENDED ENDED ENDED FEBRUARY 2, FEBRUARY 3, JANUARY 29, JUNE 26, 2002 2001 2000 1999 ---------------- ---------------- ---------------- ---------------- (IN THOUSANDS OF DOLLARS) INVESTING ACTIVITIES: Capital expenditures (45,672) (57,982) (31,468) (6,279) Proceeds from sale of assets 383 1,551 5,251 17,273 ------------ ------------ ------------ ------------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (45,289) (56,431) (26,217) 10,994 ------------ ------------ ------------ ------------ FINANCING ACTIVITIES: Net increase (decrease) in drafts payable 1,877 5,321 (3,332) (2,677) Borrowing of term loan 115,000 Borrowing of revolving debt 194,800 95,900 33,100 Repayment of revolving debt (180,200) (78,400) (33,100) Borrowing of former revolver debt 31,100 Repayment of former revolver debt (144,000) Borrowing of DIP revolver debt 166,751 Repayment of DIP revolver debt (166,751) Payments to settle long-term debt (5,062) (2,296) (162) (9,598) Reduction of capital lease obligations (8,220) (10,100) (5,773) (8,487) Payment of debt issuance costs (7,906) Purchase of treasury shares (375) Exercise of stock options 8 ------------ ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,203 10,050 (9,267) (26,568) ------------ ------------ ------------ ------------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,967) (9,230) (19,774) 28,059 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,529 51,759 71,533 43,474 ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 39,562 $ 42,529 $ 51,759 $ 71,533 ============ ============ ============ ============
The accompanying notes are an integral part of these statements. -53- 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 the retail food business and the wholesale food distribution business. As of February 2, 2002 the Company operated 218 supermarkets in Ohio, West Virginia, Pennsylvania, upstate New York, Vermont and New Hampshire, and supplied 88 franchise supermarkets and 68 independent wholesale accounts. The Company also operated eight 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 for prior years have been reclassified to conform to the presentation for the 52-week period ended February 2, 2002 (see "Recently Issued Accounting Standards"). 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 maturity of three months or less at the date of purchase 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 $3.1 million and $2.4 million higher than reported at February 2, 2002 and February 3, 2001, respectively. -54- FIXED ASSETS AND CAPITAL LEASES Major renewals and betterments are capitalized, whereas maintenance and repairs are charged to operations as incurred. Interest costs on major capital projects constructed for the Company's own use are capitalized as part of the costs of the newly constructed facilities. 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 10 to 40 years Furniture and fixtures 3 to 10 years Vehicles 3 to 8 years Leasehold improvements 10 to 40 years Capital leases lease term
For the 52-week period ended February 2, 2002 ("Fiscal 2002"), the 52-week period ended February 3, 2001 ("Fiscal 2001"), the 31-week period ended January 29, 2000 and the 21-week period ended June 26, 1999, depreciation expense was $29.0 million, $28.0 million, $18.0 million and $17.4 million, respectively. For Fiscal 2002, Fiscal 2001, the 31-week period ended January 29, 2000 and the 21-week period ended June 26, 1999, capital lease amortization expense was $6.6 million, $7.6 million, $5.1 million and $3.9 million, respectively. INTANGIBLES The excess of the costs over the amounts attributed to the fair value of net assets acquired ("Goodwill") is being amortized over 40 years using the straight-line method. In accordance with the implementation of the Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"), the Company will no longer amortize goodwill or intangible assets with indefinite lives after Fiscal 2002. Beneficial leases (which were established upon the adoption of fresh-start reporting) represent the present value of the difference between market value rent and contract rent over the remaining term of a lease (see Note 3). Such amounts are being amortized over the remaining lease term (ranging from four to 19 years from June 26, 1999) using the straight-line method. Excess reorganization value (which was established upon the adoption of fresh-start reporting) represents the total reorganization value in excess of the aggregate fair value of the Company's tangible and identifiable intangible assets less non-interest-bearing liabilities (see Note 3). This amount is being amortized on a straight-line basis over a three-year period from June 26, 1999. In accordance with SFAS 142, the Company will no longer amortize excess reorganization value after Fiscal 2002. For Fiscal 2002, Fiscal 2001, the 31-week period ended January 29, 2000 and the 21-week period ended June 26, 1999, amortization of intangibles was $115.6 million, $117.6 million, $68.8 million and $3.9 million, respectively. -55- OTHER ASSETS Other assets primarily consist of investments, notes receivable, 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. IMPAIRMENT OF LONG-LIVED ASSETS Assets are generally evaluated on a market-by-market basis in making a determination as to whether such assets are impaired. At each fiscal year-end, the Company reviews its long-lived assets (including goodwill) for impairment based on estimated future undiscounted 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, such assets are written down to their fair values. The Company performed a comprehensive review of its long-lived assets during Fiscal 2002, Fiscal 2001 and the 31-week period ended January 29, 2000. Based on this review, no assets were deemed to be impaired. STORE PRE-OPENING COSTS Store pre-opening costs are charged to expense as incurred. ADVERTISING COSTS The Company's advertising costs are expensed as incurred and included in Selling and administrative expenses in the Consolidated Statement of Operations. Advertising expenses were $35.3 million in Fiscal 2002, $37.3 million in Fiscal 2001, $19.7 million for the 31-week period ended January 29, 2000 and $15.3 million for the 21-week period ended June 26, 1999. INCOME TAXES Income taxes are provided based on the liability method of accounting. 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. TRADE ACCOUNTS AND DRAFTS PAYABLE Trade accounts and drafts payable include drafts payable of $39.7 million and $37.8 million at February 2, 2002 and February 3, 2001, respectively. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. -56- RECENTLY ISSUED ACCOUNTING STANDARDS Penn Traffic adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133"), in the first quarter of Fiscal 2002. This statement requires all derivative financial instruments to be carried on the balance sheet at fair value, with changes in fair value recorded in comprehensive income and/or net income, depending on the nature of the instrument. The Company currently holds interest rate swap contracts for the purpose of hedging interest rate risk associated with variable-rate debt (see Note 12). Upon the adoption of SFAS 133, the Company recognized in accumulated other comprehensive income a loss of $1.8 million (after tax) representing the cumulative effect of the adoption of this new accounting standard. The Company's interest rate swap contracts have been designated as cash flow hedges at the origination date and at February 2, 2002. Accordingly, the change in the fair value of these contracts during Fiscal 2002 (a loss of $0.9 million, after tax) has been recorded in accumulated other comprehensive income. The Company's Consolidated Statement of Operations for Fiscal 2002 reflects the Company's implementation of EITF Issue Number 00-14, "Accounting for Certain Sales Incentives" as codified by EITF Issue Number 01-9, "Accounting for Consideration Given by Vendors to a Customer" ("EITF 00-14") in Fiscal 2002. EITF 00-14 addresses the recognition, measurement and income statement classification of certain sales incentives offered by companies in the form of discounts, coupons or rebates. In connection with the implementation of this new accounting pronouncement, Penn Traffic has made certain reclassifications between "Revenues" and "Costs and Operating Expenses" in the Company's Consolidated Statement of Operations for Fiscal 2002. These reclassifications result in an equal decrease to the Company's reported Revenues and Costs and Operating Expenses. Penn Traffic has also reclassified the Company's prior year financial statements for comparability purposes. In addition, the Company made certain other reclassifications of expenses in the Consolidated Statement of Operations between "Cost of sales" and "Selling and administrative expenses" for Fiscal 2002, Fiscal 2001, the 31-week period ended January 29, 2000 and the 21-week period ended June 26, 1999. After such reclassifications, the "Cost of sales" caption includes cost of goods sold including the cost of distributing such products to the Company's retail stores and wholesale/franchise accounts. In contrast, in the Company's historic income statement classifications, the Cost of sales caption also included buying and occupancy costs. These costs are now included under the caption, "Selling and administrative expenses." The Company believes that after these reclassifications, Penn Traffic's income statement presentation is more consistent with the majority of public companies in the supermarket industry than its historic presentation. The implementation of EITF 00-14 and these other reclassifications do not have any effect on Penn Traffic's reported Operating (Loss) Income, EBITDA or Net (Loss) Income. -57- In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. SFAS 142 provides that intangible assets with finite useful lives be amortized, and that goodwill and intangible assets with indefinite useful lives not be amortized but tested at least annually for impairment. Penn Traffic will adopt SFAS 142 in the first quarter of the 52-week period ending February 1, 2003 ("Fiscal 2003"). The Company will not record any amortization of excess reorganization value or goodwill in its Consolidated Statement of Operations for periods after Fiscal 2002. Penn Traffic will test the carrying value of the excess reorganization value and goodwill assets for impairment in conjunction with the adoption of SFAS 142 and at least annually thereafter. Excess reorganization value and goodwill were amortized at a rate of approximately $110 million annually in Fiscal 2002, Fiscal 2001 and the 31-week period ended January 29, 2000 and will have a carrying value of approximately $51 million at the date of adoption of this standard. Other than the elimination of the amortization of excess reorganization value and goodwill, the Company has not yet determined the effect that adoption of SFAS 142 will have on its financial statements. In October 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supercedes Statement of Financial Accounting Standards No. 121, "Impairment of Long-Lived Assets to be Disposed Of," ("SFAS 121"). SFAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principle Board Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The Company will adopt SFAS 144 in the first quarter of Fiscal 2003. The Company is currently evaluating the impact this pronouncement will have on its financial statements. -58- 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 June 29, 1999 (the "Effective Date"), the Company's Chapter 11 plan of reorganization (the "Plan") became effective in accordance with its terms. Consummation of the Plan has resulted in (1) the former $732.2 million principal amount of the Company's senior notes being exchanged for $100 million of new senior notes (the "Senior Notes") and 19,000,000 shares of newly issued common stock (the "Common Stock"), (2) the former $400 million principal amount of senior subordinated notes being exchanged for 1,000,000 shares of Common Stock and six-year warrants to purchase 1,000,000 shares of Common Stock having an exercise price of $18.30 per share, (3) holders of Penn Traffic's formerly issued common stock receiving one share of 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 (4) 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 Common Stock. The Company's 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 "Credit Facility"). The Credit Facility includes (1) a $205 million revolving credit facility (the "Revolving Credit Facility") and (2) a $115 million term loan (the "Term Loan"). The lenders under the Credit Facility have a first priority perfected security interest in substantially all of the Company's assets. Proceeds from the Credit Facility were used to satisfy the Company's obligations under its debtor-in-possession financing (the "DIP Facility") and pay certain costs of the reorganization process and are available to satisfy the Company's ongoing working capital and capital expenditure requirements. -59- 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 period ended on June 26, 1999 has 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 were 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 the assistance of a financial advisor using various valuation methods, including (1) a comparison of the Company and its projected performance to how the market values comparable companies, (2) a calculation of the present value of the free cash flows under the projections, including an assumption for a terminal value and (3) 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 $327.8 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. This amount is being amortized on a straight-line basis over a three-year period from June 26, 1999. In connection with the implementation of SFAS 142, the Company will no longer amortize excess reorganization value after Fiscal 2002. 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 Common Stock distributed in conjunction with the consummation of the Plan. -60- NOTE 4 - SPECIAL CHARGE: 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 stores. This charge, which consists of estimated inventory markdowns for discontinued product lines, is included in cost of sales. NOTE 5 - UNUSUAL ITEMS: During Fiscal 2001, the Company recorded (1) an unusual item (income) of $3.0 million associated with a reduction in the estimate of a pension withdrawal liability which had been included in a $68.2 million special charge associated with the Store Rationalization Program, as described below, which the Company had recorded in the fiscal year ended January 29, 1999 ("Fiscal 1999") and (2) an unusual item (expense) of $1.3 million related to the implementation of a warehouse consolidation project. During the 31-week period ended January 29, 2000, the Company recorded unusual items of (1) $5.5 million (expense) associated with the restructuring of certain executive compensation agreements and (2) $1.9 million (expense) 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 accrued in Fiscal 1999 in connection with the 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 ("Store Rationalization Program") to divest itself of certain marketing areas and to close other underperforming stores. In connection with the Store Rationalization Program, Penn Traffic sold 21 stores and closed 29 stores. During Fiscal 1999, the Company recorded a special charge of $68.2 million related to the Store Rationalization Program. NOTE 6 - 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. -61- NOTE 7 - REORGANIZATION ITEMS: Reorganization items (expense) consist of the following items:
PREDECESSOR COMPANY ----------------------- 21 WEEKS ENDED JUNE 26, 1999 ----------------------- (IN THOUSANDS OF DOLLARS) 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. -62- NOTE 8 - INCOME TAXES: The provision for income taxes was as follows:
PREDECESSOR SUCCESSOR COMPANY COMPANY ------------------------------------- ----------- 52 WEEKS 53 WEEKS 31 WEEKS 21 WEEKS ENDED ENDED ENDED ENDED FEBRUARY 2, FEBRUARY 3, JANUARY 29, JUNE 26, 2002 2001 2000 1999 ------------- ---------- ---------- ----------- (IN THOUSANDS OF DOLLARS) Current Tax Provision: Federal income $ 5,987 $ 307 $ (44) $ State income 2,636 829 90 60 ------------- ---------- ---------- ----------- 8,623 1,136 46 60 ------------- ---------- ---------- ----------- Deferred Tax Provision: Federal income 2,165 6,877 3,787 State income 630 1,580 1,107 ------------- ---------- ---------- ----------- 2,795 8,457 4,894 ------------- ---------- ---------- ----------- Provision for income taxes $ 11,418 $ 9,593 $ 4,940 $ 60 ============= ========== ========== ===========
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:
PREDECESSOR SUCCESSOR COMPANY COMPANY ------------------------------------- ----------- 52 WEEKS 53 WEEKS 31 WEEKS 21 WEEKS ENDED ENDED ENDED ENDED FEBRUARY 2, FEBRUARY 3, JANUARY 29, JUNE 26, 2002 2001 2000 1999 ------------- ---------- ---------- ----------- (IN THOUSANDS OF DOLLARS) Federal (benefit) at statutory rates $ (29,504) $ (31,608) $ (19,304) $ (64,807) State income taxes net of federal income tax effect 2,123 1,566 778 (10,870) Nondeductible amortization of excess reorganization value and goodwill 38,245 38,983 22,796 1,303 Miscellaneous items 629 727 714 Tax credits (75) (75) (44) Valuation allowance 74,434 ------------- ---------- ---------- ----------- Provision for income taxes $ 11,418 $ 9,593 $ 4,940 $ 60 ============= ========== ========== ===========
-63- Components of deferred income taxes at February 2, 2002, and February 3, 2001, were as follows:
FEBRUARY 2, FEBRUARY 3, 2002 2001 ------------ ------------- (IN THOUSANDS OF DOLLARS) Deferred Tax Liabilities: Fixed assets $ 68,261 $ 68,797 Inventory 28,057 28,038 Beneficial leases and goodwill 21,420 21,776 Pensions 4,474 6,512 ------------ ------------ $ 122,212 $ 125,123 ============ ============ Deferred Tax Assets: Nondeductible accruals $ 42,363 $ 32,336 Capital leases 12,573 12,493 Tax credit carryforwards 249 249 ------------ ------------ $ 55,185 $ 45,078 ============ ============ Net Deferred Tax Liability $ 67,027 $ 80,045 ============ ============
In Fiscal 2002, the Company recorded a provision for income taxes of approximately $11.4 million. In addition, in Fiscal 2002 the Company recorded a benefit for income taxes (1) approximately $13.9 million associated with the recording of a minimum pension liability and the write-off of certain prepaid pension assets and (2) approximately $1.9 million associated with the recording of a liability equal to the fair value of the Company's interest rate swap contracts. The Company recorded provisions for income taxes for Fiscal 2001 and the 31-week period ended January 29, 2000 of approximately $9.6 million and $4.9 million, respectively. 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. Due to the operating loss carryforward described below, the Company did not pay any income taxes for the 52-week period ended January 29, 2000 (other than $0.2 million of franchise taxes). -64- 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 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 Fiscal 2001. The Company made cash payments of approximately $6.2 million and $0.5 million for income taxes in Fiscal 2002 and Fiscal 2001, respectively. NOTE 9 - EXTRAORDINARY ITEMS: The extraordinary items recorded for the 21-week period ended June 26, 1999 includes 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 and the extraordinary gain on debt discharge recognized as a result of the consummation of the Plan. No corresponding tax provision has been recorded. -65- NOTE 10 - 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 potentially dilutive shares outstanding (i.e., options and warrants) during the period. Income used in the EPS calculation is net loss for Fiscal 2002, Fiscal 2001 and the 31-week period ended January 29, 2000. Shares used in the calculation of basic and diluted EPS were:
52 WEEKS 53 WEEKS 31 WEEKS ENDED ENDED ENDED FEBRUARY 2, FEBRUARY 3, JANUARY 29, 2002 2001 2000 ------------ ------------- ------------ (IN THOUSANDS) Shares used in the calculation of Basic EPS (weighted average shares outstanding) 20,056 20,084 20,107 Effect of potentially dilutive securities 0 0 0 ----------- ----------- ----------- Share used in the calculation of Diluted EPS 20,056 20,084 20,107 =========== =========== ===========
The Fiscal 2002 calculation of diluted EPS excludes the effect of incremental common stock equivalents aggregating 54,608 shares, since they would have been antidilutive given the net loss for the year. In addition, the number of shares used in the calculation of diluted EPS for Fiscal 2002 excludes options and warrants for the purchase of 1,239,170 shares and 1,000,000 shares, respectively, for which the exercise price was greater than the average market price of common shares for the year. The Fiscal 2001 calculation of diluted EPS excludes the effect of incremental common stock equivalents aggregating 1,677 shares, since they would have been antidilutive given the net loss for the year. The number of shares used in the calculation of diluted EPS for Fiscal 2001 also excludes additional options for the purchase of 1,436,274 shares and warrants for the purchase of 1,000,000 shares, respectively, for which the exercise price was greater than the average market price of common shares for the year. There were no incremental potentially dilutive securities for the 31-week period ended January 29, 2000, as the exercise price for options 1,459,500 shares and outstanding warrants 1,000,000 shares was greater than the average market price of common shares for such period. Net loss per share data is not presented for the period ended June 26, 1999, because of the general lack of comparability as a result of the revised capital structure of the Company. -66- NOTE 11 - 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 Fiscal 2002, Fiscal 2001, the 31-week period ended January 29, 2000 and the 21-week period ended June 26, 1999, capital lease amortization expense was $6.6 million, $7.6 million, $5.1 million and $3.9 million, respectively. The following is an analysis of the leased property under capital leases by major classes:
ASSET BALANCES AT: FEBRUARY 2, FEBRUARY 3, 2002 2001 ------------ ------------ (IN THOUSANDS OF DOLLARS) Store facilities $ 49,692 $ 51,943 Warehousing and distribution 7,666 8,033 Other 2,562 429 ----------- ----------- Total $ 59,920 $ 60,405 Less: Accumulated amortization (15,173) (9,593) ----------- ----------- Capital lease assets, net $ 44,747 $ 50,812 =========== ===========
-67- 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 February 2, 2002:
Fiscal Years Ending: TOTAL OPERATING CAPITAL ----------- ----------- ----------- (IN THOUSANDS OF DOLLARS) February 1, 2003 $ 49,579 $ 32,864 $ 16,715 January 31, 2004 45,499 31,019 14,480 January 29, 2005 41,570 27,941 13,629 January 28, 2006 38,860 25,979 12,881 February 3, 2007 36,391 23,537 12,854 Later years 200,617 149,623 50,994 ----------- ----------- ----------- Total minimum lease payments $ 412,516 $ 290,963 121,553 =========== =========== Less: Estimated amount representing interest (46,149) ----------- Present value of net minimum capital lease payments 75,404 Less: Current portion (8,329) ----------- Long-term obligations under capital leases $ 67,075 ===========
Future minimum rentals have not been reduced by minimum sublease rental income of $12.3 million due in the future under noncancelable subleases. During Fiscal 2002, the Company incurred new capital lease obligations of $2.3 million associated with leased equipment. The Company incurred no new capital lease obligations during Fiscal 2001, the 31-week period ended January 29, 2000 and the 21-week period ended June 26, 1999. Minimum rental payments for operating leases were as follows:
PREDECESSOR SUCCESSOR COMPANY COMPANY --------------------------------------- ---------- 52 WEEKS 53 WEEKS 31 WEEKS 21 WEEKS ENDED ENDED ENDED ENDED FEBRUARY 2, FEBRUARY 3, JANUARY 29, JUNE 26, 2002 2001 2000 1999 ------------- ----------- ---------- ----------- (IN THOUSANDS OF DOLLARS) Minimum rentals $ 36,734 $ 37,761 $ 22,245 $ 16,693 Contingent rentals 543 564 305 334 Less: Sublease payments (6,541) (6,508) (4,466) (3,325) ------------- ---------- ---------- ---------- Net rental payments $ 30,736 $ 31,817 $ 18,084 $ 13,702 ============= ========== ========== ==========
-68- NOTE 12 - LONG-TERM DEBT: The long-term debt of Penn Traffic consisted of the obligations described below as of the dates set forth:
FEBRUARY 2, FEBRUARY 3, 2002 2001 -------------- -------------- (IN THOUSANDS OF DOLLARS) Secured Term Loan $ 108,250 $ 113,000 Secured Revolving Credit Facility 32,100 17,500 Other Secured Debt 12,362 12,674 11% Senior Notes due June 29, 2009 100,000 100,000 ------------- ------------- Total Debt $ 252,712 $ 243,174 Less: Current maturities of long-term debt (7,066) (5,062) ------------- ------------- Total Long-Term Debt $ 245,646 $ 238,112 ============= =============
Amounts maturing during each of the next five fiscal years are: $7.1 million (Fiscal 2003); $10.0 million (Fiscal 2004); $13.0 million (Fiscal 2005); $40.1 million (Fiscal 2006, including amounts outstanding under the Revolving Credit Facility at February 2, 2002), $71.5 million (Fiscal 2007) and $111.1 million thereafter. The Company incurred interest expense of $36.1 million, $39.2 million, $22.9 million and $21.8 million, including noncash amortization of deferred financing costs of $0.9 million, $0.9 million, $0.5 million and $1.4 million for Fiscal 2002, Fiscal 2001, the 31-week period ended January 29, 2000, and the 21-week period ended June 26, 1999, respectively. Interest paid was $36.2 million, $37.7 million, $21.0 million and $11.7 million for Fiscal 2002, Fiscal 2001, the 31-week period ended January 29, 2000, and the 21-week period ended June 26, 1999, respectively. The estimated fair value of the Company's debt, including current maturities, was approximately $245 million at February 2, 2002, $221 million at February 3, 2001, and $215 million at January 29, 2000. 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 fair value of such debt amounts. The estimated fair value of the Company's long-term debt does not necessarily reflect the amount at which the debt could be settled. -69- The 11% Senior Notes due June 29, 2009, 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 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. The indenture for the Senior Notes 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. In June 1999 the Company entered into the Credit Facility. The Credit Facility includes (1) the $205 million Revolving Credit Facility and (2) the $115 million Term Loan. The lenders under the Credit Facility have a first priority perfected security interest in substantially all of the Company's assets. The Credit Facility contains a variety of operational and financial covenants intended to restrict the Company's operations. These include, among other things, restrictions on the Company's ability to incur debt, make capital expenditures and make restricted payments as well as requirements that the Company achieve required levels for Consolidated EBITDA, interest coverage, fixed charge coverage and funded debt ratio (all as defined in the Credit Facility). The remaining outstanding balance of the Term Loan will mature on June 30, 2006. The Term Loan consists of a $40 million Tranche A Term Loan ($34 million outstanding at February 2, 2002) and a $75 million Tranche B Term Loan ($74.25 million outstanding at February 2, 2002). Amounts of the Term Loan maturing in future fiscal years are outlined in the following table :
Fiscal Year Ending Amount Maturing ------------------ --------------- (In thousands of dollars) 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 ------------- $ 108,250 =============
Availability under the Revolving Credit Facility is calculated based on a specified percentage of eligible inventory and accounts receivable of the Company. The Revolving Credit Facility will mature on June 30, 2005. As of February 2, 2002, there were approximately $32.1 million of borrowings and $27.7 million of letters of credit outstanding under the Revolving Credit Facility. Availability under the Revolving Credit Facility was approximately $137 million as of February 2, 2002. -70- The interest rate on borrowings under the Credit Facility is determined, at the Company's option, as a spread over the London InterBank Offered Rate ("LIBOR") or the prime rate (as defined). The spreads used in such calculations are adjusted on a quarterly basis depending upon the ratio of the Company's total debt (including capital leases) plus outstanding letters of credit to Consolidated EBITDA. The spread over LIBOR or prime utilized in such calculation for each component of the Credit Facility is between the amounts shown below:
LIBOR-BASED PRIME-BASED BORROWINGS BORROWINGS ------------------- -------------------- Revolving Credit 1.875% - 2.750% 0.875% - 1.750% Term Loan A 1.875% - 2.750% 0.875% - 1.750% Term Loan B 2.750% - 3.000% 1.750% - 2.000%
The Company currently holds interest rate swap contracts with a notional value of $50 million, which expire in April 2005, for the purpose of hedging interest rate risk associated with variable rate debt. Under the terms of these agreements, the Company makes payments at a weighted average fixed interest rate of 7.08% per annum and receives payments at variable interest rates based on LIBOR. The weighted average interest rate on borrowings under the Credit Facility (including the effect of the interest rate swap contracts described above) was 6.0% and 9.2% at February 2, 2002 and February 3, 2001, respectively. -71- NOTE 13 - EMPLOYEE BENEFIT PLANS: The majority of the Company's employees are covered by either defined benefit plans or defined contribution plans. The following sets forth the net pension expense (income) recognized for the defined benefit pension plans, as well as the benefit obligations, assets and the funded status of the Company's defined benefit pension plans:
PREDECESSOR SUCCESSOR COMPANY COMPANY ------------------------------------------ ------------ 52 WEEKS 53 WEEKS 31 WEEKS 21 WEEKS ENDED ENDED ENDED ENDED FEBRUARY 2, FEBRUARY 3, JANUARY 29, JUNE 26, 2002 2001 2000 1999 -------------- ------------ ------------ ------------ (IN THOUSANDS OF DOLLARS) Service cost $ 3,951 $ 4,142 $ 3,171 $ 2,230 Interest cost 13,781 13,578 7,608 5,385 Expected return on plan assets (20,097) (20,113) (12,139) (8,714) Net amortization (62) (232) (46) 484 ------------- ---------- ---------- ----------- Net pension income $ (2,427) $ (2,625) $ (1,406) $ (615) ============= ========== ========== ===========
PENSION BENEFITS FEBRUARY 2, FEBRUARY 3, 2002 2001 ------------ ----------- (IN THOUSANDS OF DOLLARS) Change in benefit obligation: Benefit obligation at beginning of year $ 192,794 $ 175,843 Service cost 3,951 4,142 Interest cost 13,781 13,578 Settlement of obligations (7,959) Amendment 438 Actuarial loss 11,596 11,131 Benefits paid (12,808) (11,900) ------------ ----------- Benefit obligation at end of year $ 201,793 $ 192,794 ============ =========== Change in plan assets: Fair value of plan assets at beginning of year $ 195,387 $ 201,553 Actual (loss) return on plan assets (5,442) 3,279 Settlement of obligations (7,122) Company contributions 5,829 2,455 Benefits paid (12,808) (11,900) ------------ ----------- Fair value of plan assets at end of year $ 175,844 $ 195,387 ============ =========== Funded status of the plans $ (25,949) $ 2,593 Unrecognized actuarial loss 50,158 13,289 Unrecognized prior service cost 438 ------------ ----------- Net amount recognized $ 24,647 $ 15,882 ============ ===========
-72- Components of the amounts recognized in the Company's Consolidated Balance Sheet consist of:
PENSION BENEFITS FEBRUARY 2, FEBRUARY 3, 2002 2001 ----------- ----------- (IN THOUSANDS OF DOLLARS) Prepaid benefit cost $ 10,409 $ 20,375 Accrued benefit liability (20,177) (4,493) Intangible asset 438 Accumulated other comprehensive income 33,977 ---------- ----------- Net amount recognized $ 24,647 $ 15,882 ========== ===========
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 $157.2 million, $153.0 million and $132.9 million, respectively, as of February 2, 2002. 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 $26.6 million, $26.6 million and $23.5 million, respectively, as of February 3, 2001. In calculating benefit obligations and plan assets for Fiscal 2002, the Company assumed a weighted average discount rate of 7.25%, 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 2001, the Company assumed a weighted average discount rate of 7.5%, 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 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 8.0%, compensation increase rate of 3.5% and an expected long-term rate of return on plan assets of 10.5%. Pursuant to Statement of Accounting Standards No. 87, "Employers' Accounting for Pensions," during Fiscal 2002, the Company recognized a pretax loss of $34.0 million ($20.0 million, net of an income tax benefit) in accumulated other comprehensive income. This was comprised of (1) the recording of an additional minimum pension liability of $20.2 million in other noncurrent liabilities (representing the amount by which the accumulated benefit obligation exceeded the fair value of plan assets) and (2) a $13.8 million reduction of the prepaid pension assets included in other assets. There was no additional minimum pension liability adjustment as of February 3, 2001, or January 29, 2000. The Company's defined benefit plans, other than the Penn Traffic Cash Balance Plan, generally provides a retirement benefit to employees based on (1) specified percentages applied to final average compensation, as defined, coupled with years of service earned to the date of retirement or (2) specific dollar amounts coupled with years of service earned to the date of retirement. The assets of Penn Traffic's defined benefit plans 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. -73- The Penn Traffic Cash Balance Plan is a defined benefit Plan which assigns account balances to the independent 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 for the Plan. Contributions by the Company to its 401(k) Plan totaled approximately $1.1 million, $1.1 million, $0.4 million and $0.7 million in Fiscal 2002, Fiscal 2001, the 31-week period ended January 29, 2000 and the 21-week period ended June 26, 1999, respectively. The Company also contributes to multi-employer pension funds, which cover certain union employees under collective bargaining agreements. Such contributions aggregated $4.6 million, $3.8 million, $1.6 million and $2.1 million in Fiscal 2002, Fiscal 2001, the 31-week period ended January 29, 2000 and the 21-week period ended June 26, 1999, 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 multi-employer plan covering substantially all of its employees in eastern Pennsylvania. Due to the Company's decision to exit certain markets (see Note 5), the Company has accrued a withdrawal liability to cover its pro rata portion of the unfunded vested benefit obligations in this plan. During Fiscal 2002, one of the Company's defined benefit plans was terminated. The assets and liabilities associated with the vested participants in such plan (other than retirees) were transferred to a multi-employer pension fund. The remaining assets and the liabilities associated with retired participants in such plan were transferred into the Penn Traffic Cash Balance Plan. -74- NOTE 14 - STOCKHOLDERS' EQUITY: 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 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. As of February 2, 2002, options to acquire an additional 1,058,000 shares may be granted by the Compensation Committee of the Company's Board of Directors. 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 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 Common Stock (subject to antidilution adjustments) at a price equal to the fair 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. As of February 2, 2002, options to acquire an additional 76,000 shares may be granted under the Directors Plan. A summary of the status of the Company's Equity Plan and Directors Plan as of February 2, 2002, February 3, 2001, and January 29, 2000, and the changes during Fiscal 2002, Fiscal 2001 and the 31-week period ended January 29, 2000, are presented below:
Equity Plan Directors Plan -------------------------- ------------------------- Weighted Weighted Average Average Number Exercise Number Exercise Plan Options of Shares Price of Shares Price - ------------ ------------ --------- ------------ --------- Outstanding at June 26, 1999 Granted 2,164,500 $ 14.53 140,000 $ 12.13 Forfeited (845,000) 15.55 ------------ --------- ------------ --------- Outstanding at January 29, 2000 1,319,500 13.87 140,000 12.13 Granted 129,000 3.94 27,000 5.96 Forfeited (73,500) 12.13 ------------ --------- ------------ --------- Outstanding at February 1, 2001 1,375,000 13.03 167,000 11.13 Granted 510,000 4.35 7,000 4.48 Exercised (2,000) 3.94 Forfeited (644,000) 16.18 ------------ --------- ------------ --------- Outstanding at February 2, 2002 1,239,000 $ 7.84 174,000 $ 10.86 ============ ========= ============ =========
-75- As of February 2, 2002, the 1,239,000 options outstanding under the Equity Plan have exercise prices between $3.94 and $12.13 and a weighted average remaining contractual life of 8.5 years. As of February 2, 2002, the 174,000 options outstanding under the Directors Plan have exercise prices between $4.48 and $12.13 and a weighted average remaining contractual life of 7.6 years. The following table summarizes information about stock options outstanding at February 2, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------ -------------------- Exercise Remaining Price Shares Life Shares ---------------- -------------- -------------- ---------------- $ 3.94 107,000 8.8 42,800 4.35 510,000 9.7 102,000 4.48 7,000 9.4 7,000 5.89 20,000 8.2 20,000 6.16 7,000 8.4 7,000 8.75 140,000 7.6 84,000 12.13 622,000 7.4 429,200
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 for options granted under the Equity Plan or Directors Plan except as described below. During Fiscal 2002, options previously granted to certain executives to purchase 497,000 shares at $18.30 per share and 87,000 shares at $8.75 per share were canceled. At the same time, new options to purchase 510,000 shares at $4.35 were granted to the same executives. In accordance with APB 25, such new options are deemed to be variable options and under FASB Interpretation No. 44, variable accounting will apply to the new options to purchase 477,000 shares. This requires recognition of compensation expense for changes in intrinsic option value over the vesting period. Compensation expense recognized in Fiscal 2002 for these options was approximately $0.4 million. -76- 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. 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 values of options granted during Fiscal 2002, Fiscal 2001 and the 31-week period ended January 29, 2000 are as follows:
52 WEEKS 53 WEEKS 31 WEEKS ENDED ENDED ENDED FEBRUARY 2, FEBRUARY 1, JANUARY 29, 2002 2001 2000 ---------------- ---------------- ------------------- Equal to Market Price $ 2.14 $ 1.98 $ 4.89 Less than Market Price 1.90 3.18 In excess of Market Price 2.21 0.30
The average 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:
52 WEEKS 53 WEEKS 31 WEEKS ENDED ENDED ENDED FEBRUARY 2, FEBRUARY 1, JANUARY 29, 2002 2001 2000 ----------------- ----------------- ----------------- Risk free interest rate 3.95% 5.81% 5.77% Weighted average expected life (in years) 4.97 4.65 3.95 Volatility 50% 50% 40% Dividends 0 0 0
-77- For purpose of the pro forma disclosures, the estimated fair value of the options is amortized over the options' vesting periods. This pro forma information is as follows:
52 WEEKS 53 WEEKS 31 WEEKS ENDED ENDED ENDED FEBRUARY 2, FEBRUARY 3, JANUARY 29, 2002 2001 2000 ----------------- ----------------- ------------------ (In thousands of dollars, except per share data) Net loss - as reported $ (95,716) $ (99,902) $ (60,093) Net loss - pro forma (96,427) (100,823) (61,246) Net loss per share - as reported: Basic and diluted (4.77) (4.97) (2.99) Net loss per share - pro forma: Basic and diluted (4.81) (5.02) (3.05)
On June 29, 2000, the Company announced that its Board of Directors has authorized the Company to repurchase up to an aggregate value of $10 million of Penn Traffic's common stock from time to time in the open market or privately negotiated transactions. The timing and amounts of purchases will be governed by prevailing market conditions and other considerations. To date, the Company has repurchased 53,000 shares of common stock at an average price of $7.08 per share. -78- NOTE 15 - RELATED PARTIES: During 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 1999 and the first month of Fiscal 2000, MTH provided financial consulting and business management services to the Company. During Fiscal 1999, the Company paid MTH fees of $1.44 million for such services. 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 2001 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 $4.9 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. On December 19, 2001, the Company entered into an amended and restated employment agreement with Mr. Fox. NOTE 16 - 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 the 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. -79- NOTE 17 - SEGMENT INFORMATION The Company sells and distributes products that are typically found in supermarkets. In the fourth quarter of Fiscal 2002, management reevaluated its reportable operating segments to more closely reflect how the business is currently analyzed and evaluated. The Company has two reportable segments: the Retail Food Business and the Wholesale Food Distribution Business. The Retail Food Business consists of more than 200 stores which the Company operates. The Wholesale Food Distribution Business supplies independently owned supermarkets located primarily in New York and Pennsylvania with food and non-food products. The Company's senior management utilizes more than one measurement to evaluate segment performance and allocate resources. However, the dominant measures utilized are (1) Revenues and (2) EBITDA before unallocated expenses/income. The accounting policies of the reportable segments are the same as those described in Note 1 except that the Company accounts for inventory on a FIFO basis at the segment level compared to a LIFO basis at the consolidated level. The table below presents Revenues and EBITDA by reportable segment:
WHOLESALE RETAIL FOOD FOOD DISTRIBUTION TOTAL ------------------- ------------------- ------------------- (IN THOUSANDS OF DOLLARS) 52 WEEKS ENDED FEBRUARY 2, 2002 Revenues $ 2,113,012 $ 274,781 $ 2,387,793 EBITDA (1) 144,541(2) 17,890 162,431 53 WEEKS ENDED FEBRUARY 1, 2001 Revenues $ 2,114,731 $ 278,152 $ 2,392,883 EBITDA (1) 140,308(3) 19,080 159,388 31 WEEKS ENDED JANUARY 29, 2000 Revenues $ 1,238,148 $ 167,047 $ 1,405,195 EBITDA (1) 89,579 10,710 100,289 21 WEEKS ENDED JUNE 26, 1999 Revenues $ 838,433 $ 119,063 $ 957,496 EBITDA (1) 49,379 6,475 55,854
-80- Reconciliation of Total segment revenues to Consolidated revenues and Total EBITDA for reportable segments to Loss before income taxes and extraordinary items:
PREDECESSOR SUCCESSOR COMPANY COMPANY -------------------------------------------------------- ---------------- 52 WEEKS 53 WEEKS 31 WEEKS 21 WEEKS ENDED ENDED ENDED ENDED FEBRUARY 2, FEBRUARY 1, JANUARY 29, JUNE 26, 2002 2001 2000 1999 ---------------- ---------------- ---------------- ---------------- REVENUES: Total segment revenues $ 2,387,793 $ 2,392,883 $ 1,405,195 $ 957,496 Other revenues (4) 16,509 20,412 16,741 11,754 ------------ ------------ ------------ ------------ Consolidated revenues $ 2,404,302 $ 2,413,295 $ 1,421,936 $ 969,250 ============ ============ ============ ============ EBITDA (1): Total EBITDA for reportable segments $ 162,431 $ 159,388 $ 100,289 $ 55,854 New England Lease income 5,726 7,443 5,086 Unallocated expenses/income (58,782) (63,230) (40,354) (31,167) Special charge (5) (3,900) Unusual items (6) 1,741 (7,408) 4,631 Depreciation and amortization (41,926) (41,870) (26,176) (25,832) Amortization of excess reorganization value (109,273) (111,381) (65,132) LIFO provision (648) (1,519) (892) (1,009) Interest expense (36,100) (39,164) (22,923) (21,794) Reorganization items (167,031) ------------ ------------ ------------ ------------ Loss before income taxes and extraordinary items $ (84,298) $ (90,309) $ (55,153) $ (185,162) ============ ============ ============ ============
(1) EBITDA is earnings before interest, taxes, depreciation, amortization, amortization of excess reorganization value, LIFO provision, special charges, unusual items, reorganization items and extraordinary items. (2) Retail Food EBITDA for the 52-week period ended February 2, 2002 includes loyalty card startup costs of $2.4 million. (3) Retail Food EBITDA for the 53-week period ended February 3, 2001 includes loyalty card startup costs of $1.5 million and startup costs and operating losses associated with the commencement of operation of the Company's New England stores of $1.1 million. (4) Other Revenues include income associated with the Company's prior lease of 10 stores in New England to another supermarket chain which expired in August 2000 of $5.7 million, $7.4 million and $5.1 million for the 53-week period ended February 3, 2001, the 31-week period ended January 29, 2000 and the 21-week period ended June 26, 1999. (5) See Note 4 to the Consolidated Financial Statements. (6) See Note 5 to the Consolidated Financial Statements. -81- 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, with respect to financial reporting, obtain 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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None -82- 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 17, 2002. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the caption "Executive Compensation" in the Company's Proxy Statement to be filed in connection with the Company's Annual Meeting of Stockholders to be held on or about July 17, 2002. The information set forth in "Compensation and Stock Option Committee" 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 17, 2002, 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 17, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the caption "Compensation of Directors" 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 17, 2002. -83- 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 45 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 January 28, 1995). 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). -84- EXHIBITS (CONTINUED): EXHIBITS NO. DESCRIPTION - ----------- ----------- *10.1 Amended and Restated Employment Agreement of Joseph V. Fisher, dated December 19, 2001. 10.2 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). 10.2A 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). 10.2B Termination of Management Agreement dated January 31, 2000 among Hirsch & Fox LLC, Gary D. Hirsch, Martin A. Fox and Penn Traffic (incorporated by reference to Exhibit 10.3B to Form 10-K filed on April 28, 2000). *10.3 Amended and Restated Employment Agreement of Martin A. Fox, dated December 19, 2001. 10.4 1999 Equity Incentive Plan (incorporated by reference to Exhibit 10.24 to Form 10-Q filed on September 14, 1999). 10.5 1999 Directors' Stock Option Plan (incorporated by reference to Exhibit 10.25 to Form 10-Q filed on September 14, 1999). 10.6 Supplemental Retirement Plan for Non-Employee Executives (incorporated by reference to Exhibit 10.26 to Form 10-Q filed on September 14, 1999). 10.7 Registration Rights Agreement (incorporated by reference to Exhibit 10.27 to Form 10-Q filed on September 14, 1999). 10.8 Revolving Credit and Term 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). 10.8A Amendment No. 1 to the Revolving Credit and Term Loan Agreement by and among Penn Traffic, certain of its subsidiaries, Fleet Capital Corporation and the Lenders party thereto (incorporated by reference to Exhibit 10.10A to Form 10-Q filed on September 12, 2000). -85- EXHIBITS (CONTINUED): EXHIBITS NO. DESCRIPTION - ----------- ----------- 10.8B Amendment No. 2 to the Revolving Credit and Term Loan Agreement by and among Penn Traffic, certain of its subsidiaries, Fleet Capital Corporation and the lenders party thereto (incorporated by reference to Exhibit 10.10B to Form 10-Q filed on November 3, 2001). *10.8C Amendment No. 3 to the Revolving Credit and Term Loan Agreement by and among Penn Traffic, certain of its subsidiaries, Fleet Capital Corporation and the lenders party thereto. 10.9 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. - ---------- * Filed herewith. Copies of the above exhibits will be furnished without charge to any shareholder by writing to Vice President - Finance and Chief Accounting Officer, The Penn Traffic Company, 1200 State Fair Boulevard, Syracuse, New York 13221-4737. REPORTS ON FORM 8-K No reports on Form 8-K were filed during fiscal quarter ended February 2, 2002. -86- 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 MAY 3, 2002 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 Chief Financial Officer and Director Accounting Officer MAY 3, 2002 MAY 3, 2002 -------------- --------------- DATE DATE /s/ Byron E. Allumbaugh /s/ Kevin P. Collins - ------------------------------------ ---------------------------------- Byron E. Allumbaugh, Director Kevin P. Collins, Director MAY 3, 2002 MAY 3, 2002 -------------- --------------- DATE DATE /s/ David B. Jenkins /s/ Gabriel S. Nechamkin - ------------------------------------ ---------------------------------- David B. Jenkins, Director Gabriel S. Nechamkin, Director MAY 3, 2002 MAY 3, 2002 -------------- --------------- DATE DATE /s/ Lief D. Rosenblatt /s/ Mark D. Sonnino - ------------------------------------ ---------------------------------- Lief D. Rosenblatt, Director Mark D. Sonnino, Director MAY 3, 2002 MAY 3, 2002 -------------- --------------- DATE DATE /s/ Peter L. Zurkow - ------------------------------------ Peter L. Zurkow, Chairman of the Board of Directors MAY 3, 2002 -------------- DATE -87- 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 52 WEEKS ENDED FEBRUARY 2, 2002 Provision for doubtful accounts $ 4,634 $ 399 $ 2,926(1) $ 2,107 =========== ============ =========== =========== FOR THE 53 WEEKS ENDED FEBRUARY 3, 2001 Provision for doubtful accounts $ 10,561 $ 2,048 $ 7,975(1) $ 4,634 =========== ============ =========== =========== FOR THE 31 WEEKS ENDED JANUARY 29, 2000 Provision for doubtful accounts $ 8,650 $ 1,965 $ 54(1) $ 10,561 =========== ============ =========== =========== Tax valuation allowance $ 104,321 $ 0 $ 104,321(2) $ 0 =========== ============ =========== =========== PREDECESSOR COMPANY: - ------------------- FOR THE 21 WEEKS ENDED JUNE 26, 1999 Provision for doubtful accounts $ 5,731 $ 3,598 $ 679(1) $ 8,650 =========== ============ =========== =========== Tax valuation allowance $ 104,321 $ 0 $ 0 $ 104,321 =========== ============ =========== ===========
(1) Uncollectible receivables written off, net of recoveries. (2) Valuation allowance eliminated due to the implementation of fresh-start reporting. -88- THE PENN TRAFFIC COMPANY SUPPLEMENTARY DATA QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized below is quarterly financial data for the fiscal years ended February 2, 2002 ("Fiscal 2002"), and February 3, 2001 ("Fiscal 2001"):
Fiscal 2002 -------------------------------------------------------------------------- 1st 2nd 3rd 4th -------------- --------------- ----------------- --------------- 13 Weeks 13 Weeks 13 Weeks 13 Weeks Ended Ended Ended Ended May 5, August 4, November 3, February 2, Description 2001 2001 2001 2002 (1) - ----------- -------------- --------------- ----------------- --------------- (In thousands of dollars, except per share data) Revenues $ 579,055 $ 611,504 $ 598,766 $ 614,977 Gross Margin 156,643 166,446 162,094 170,409 Net loss (3) (27,135) (22,002) (26,402) (20,177) Per common share data (Basic and Diluted): Net loss (3) $ (1.35) $ (1.10) $ (1.32) $ (1.00) No dividends were paid on common stock during Fiscal 2002. EBITDA (4) $ 21,351 $ 29,537 $ 22,156 $ 30,605 Depreciation and amortization 10,454 10,532 10,443 10,497 LIFO provision (benefit) 625 625 625 (1,227) Capital expenditures, including capital leases and acquisitions 11,149 11,311 10,606 14,942 MARKET VALUE PER COMMON SHARE: High $ 7.440 $ 6.470 $ 5.350 $ 7.390 Low 4.000 4.060 4.330 4.400
-89- THE PENN TRAFFIC COMPANY SUPPLEMENTARY DATA QUARTERLY FINANCIAL DATA (UNAUDITED) CONTINUED:
Fiscal 2001 ------------------------------------------------------------------------ 1st 2nd 3rd 4th -------------- --------------- --------------- --------------- 13 Weeks 13 Weeks 13 Weeks 14 Weeks Ended Ended Ended Ended April 29, July 29, October 28, February 3, Description 2000 2000 2000 2001 (1) - ----------- -------------- --------------- --------------- --------------- (In thousands of dollars, except per share data) Revenues $ 566,087 $ 602,123 $ 585,366 $ 659,719 Gross Margin 153,929 162,188 155,771 180,364 Net loss (2) (3) (26,727) (23,564) (28,344) (21,267) Per common share data (Basic and Diluted): Net loss (2) (3) $ (1.33) $ (1.17) $ (1.41) $ (1.06) No dividends were paid on common stock during Fiscal 2001. EBITDA (4) $ 22,048 $ 28,203 $ 19,538 $ 32,095 Depreciation and amortization 10,224 10,310 10,893 10,443 LIFO provision 500 500 500 19 Capital expenditures, including capital leases and acquisitions 21,789 13,145 13,030 10,018 MARKET VALUE PER COMMON SHARE: High $ 8.750 $ 8.800 $ 8.000 $ 4.875 Low 6.125 4.688 4.625 3.250
-90- FOOTNOTES: (1) Comparisons of financial data for the fourth quarters of Fiscal 2002 and Fiscal 2001 are affected by the additional week in the fourth quarter of Fiscal 2001. (2) During Fiscal 2001, the Company recorded an unusual item (expense) of $1.3 million related to the implementation of a warehouse consolidation project. The Company recorded $0.4 million of this unusual item during first quarter Fiscal 2001 and $0.9 million of this unusual item during the second quarter of Fiscal 2001. During the 14-week period ended February 3, 2001, the Company recorded an unusual item (income) of $3.0 million associated with a reduction in the estimate of the remaining liability associated with the Store Rationalization Program. (3) The tax provisions for each quarter of Fiscal 2002 and Fiscal 2001 are 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. (4) "EBITDA" is earnings before interest, taxes, depreciation, amortization, amortization of excess reorganization value, LIFO provision and unusual items. 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 reports 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. -91- EX-10.1 3 a2078392zex-10_1.txt EXHIBIT 10-1 EXHIBIT 10.1 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Employment Agreement (the "AGREEMENT") is entered into as of this 19th day of December, 2001, by and between The Penn Traffic Company (the "COMPANY") and Joseph V. Fisher (the "EXECUTIVE"). WHEREAS, the Executive entered into an employment agreement with the Company on October 30, 1998, which was amended on June 29, 1999 and December 2, 1999 and amended and restated in its entirety on January 31, 2000 (such employment agreement, as amended and restated, is referred to herein as the "ORIGINAL EMPLOYMENT AGREEMENT") to provide for the employment of the Executive; and WHEREAS, the Original Employment Agreement shall expire on January 31, 2002 and the Executive wishes to continue in the employ of the Company, and the Company wishes to provide for the continued employment of the Executive. NOW, THEREFORE, the parties hereby amend and restate the Original Employment Agreement in its entirety as follows: 1. EMPLOYMENT. (a) The Company hereby agrees that the Executive shall, during the Term (as defined herein), continue to act as the President and Chief Executive Officer of the Company. (b) The Executive hereby accepts his continued employment as the President and Chief Executive Officer of the Company and agrees to continue to provide the Company his full-time service 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 the Agreement. In such capacity, the Executive will report to, and serve under the direction 2 of, the Board of Directors of the Company (the "BOARD"). Throughout the Term, the Executive shall utilize his best efforts and all of his skills, experience and knowledge to promote the interests of the Company. During the Term, the Executive shall continue to serve as a member of the Board. Other than services to be rendered in connection with charitable activities, trade association activities and passive investment activities which do not interfere with the Executive's day-to-day responsibilities to the Company, without limiting the generality of Section 6, the 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 the Executive under the Original Employment Agreement commenced on November 23, 1998 (the "ORIGINAL EFFECTIVE DATE") and the term of employment of the Executive under this Agreement shall commence on the date hereof (the "EFFECTIVE DATE") and will continue under this Agreement until the earlier of (i) January 31, 2005, (ii) the date that the Executive or the Company terminates his employment pursuant to Section 7, 8 or 9 or (iii) the occurrence of a Change of Control (as defined herein) (the "TERM"). 3. LOCATION OF EMPLOYMENT. The Executive shall render services primarily at the Company's offices that are located in Syracuse, New York. Notwithstanding the foregoing, the Executive acknowledges and agrees that the 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 the Executive's duties hereunder may require. 3 4. COMPENSATION. (a) BASE SALARY. The Company shall pay the Executive a base salary at a rate of $1,000,000 per annum ("BASE SALARY"). The Executive's Base Salary will be reviewed periodically by the Board and may be increased (but not decreased) at such times as 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. (b) BONUS. (i) With respect to each fiscal year beginning with the fiscal year ending February 1, 2003, the Executive shall be eligible to earn an annual bonus (the "BONUS"). The Bonus, if any, awarded to the Executive each year shall be based on the extent to which the Company achieves annual performance criteria which shall be determined by the Compensation and Stock Option Committee of the Board of Directors of the Company (the "COMMITTEE") prior to the beginning of each such year; PROVIDED, HOWEVER, that such Bonus shall not in any year exceed 75% of the Executive's Base Salary. Such Bonus as to any fiscal year, if any, shall be paid to the Executive at the same time that bonuses or incentive compensation with respect to that fiscal year are paid to other executive employees of the Company. The Executive understands and agrees that the Company may provide this bonus opportunity under a shareholder approved arrangement that is intended to qualify under Section 162(m) of the Internal Revenue Code ("IRC"); provided, however, that the Company's agreements hereunder shall apply irrespective of whether such bonus so qualifies. 4 (ii) In addition, the Executive may receive such other discretionary bonuses or other incentive compensation as the Committee may determine in its discretion. (c) OPTIONS. The Company and the Executive acknowledge that the Executive was granted options to purchase shares of the common stock, $.01 par value per share, of the Company (the "COMMON STOCK") generally as follows: (i) Effective as of October 24, 2001, pursuant to the Company's 1999 Equity Incentive Plan (the "EQUITY PLAN"), the Executive was granted options to purchase 260,000 shares of the Common Stock with an exercise price equal to $4.35 per share (the "2001 OPTION AWARD") subject to a vesting schedule and other terms as set forth in the 2001 Option Award. (ii) Effective as of September 22, 1999, pursuant to the Equity Plan, the Executive was granted options to purchase 140,000 shares of the Common Stock with an exercise price equal to $8.75 per share (the "1999 OPTION AWARD") subject to a vesting schedule and other terms as set forth in the 1999 Option Award. (iii) The 2001 Option Award and the 1999 Option Award are subject to the terms of their respective awards and the Equity Plan. Copies of the 1999 Option Award and the 2001 Option Award (the "AWARDS") are attached hereto as EXHIBIT A and EXHIBIT B and such Awards shall remain in full force and effect. (iv) As a condition of the 2001 Option Award, all other stock options, other than the 1999 Option Award, granted by the Company to or on behalf of the Executive were cancelled on October 24, 2001. 5 (v) To the extent permitted by the IRC, such options qualify as incentive stock options under the IRC. 5. FRINGE BENEFITS. (a) The 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 the Executive, and any other plans and benefits, if any, generally maintained by the Company for executives of the stature and rank of the 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) To the extent permitted by law and the terms of The Penn Traffic Company Cash Balance Pension Plan (the "CORPORATE PLAN"), the Executive shall have the right to participate in the Corporate Plan. In addition, the Executive shall participate in The Penn Traffic Company Supplemental Retirement Plan for Joseph V. Fisher (the "SERP"). The SERP is attached hereto as EXHIBIT C and such SERP shall remain in full force and effect. The SERP is intended to provide benefits that are supplemental to those contained in the Corporate Plan. It is the Company's present intent to amend the Corporate Plan to provide as much of the service credit benefits contemplated under the SERP under the Corporate Plan without causing (i) the Corporate Plan to fail to satisfy the requirements of Section 401(a) of the Code or (ii) the Company to incur additional costs or to change the timing of Corporate Plan payouts; PROVIDED, that the Company will not be obligated to make or continue in effect any such amendment. 6 (c) Further, upon the termination of the Agreement (and following such time that the Fringe Benefits are no longer being provided to the Executive by the Company at its cost), the Executive shall be entitled, at his own cost and expense (at the same rate as the Company may charge for coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985), to continued coverage under the medical and dental plans maintained by the Company until the earlier to occur of (i) the date that both the Executive and his spouse reach the age of 65, or (ii) the date the Executive is provided medical and dental coverage by a different employer; PROVIDED, that such benefits shall be provided only to the extent permitted under the Company's medical and dental plans and insurance policies and in accordance with any applicable laws. (d) Subject to the requirements of the Executive's office, the Executive shall be entitled to four weeks annual vacation to be taken in accordance with the vacation policy of the Company. (e) The Company will, upon being provided with reasonable supporting documentation thereof, promptly reimburse the Executive for (i) actual, ordinary and necessary travel and accommodation cost, entertainment and other business expenses incurred as a necessary part of discharging the Executive's duties hereunder, including, without limitation, allowance for one-time initiation fees and annual dues for a membership in a country club of the Executive's choice and (ii) all legal fees and expenses incurred in connection with the negotiation of the Agreement in the amount of $35,000. 7 6. NO COMPETITION; CONFIDENTIALITY. (a) The Executive agrees that while the Agreement is in effect and for a period of 12 months after termination of the Agreement pursuant to Section 2, the 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 of 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 the Executive based on the 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 restrictions of this Section 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 Section), (y) the Executive may disclose such information known 8 generally to the public (without any action on the part of the Executive prohibited by the restrictions of this Section), 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 the Executive receives a subpoena or other process or order which may require him to disclose any confidential information, the Executive agrees (i) to notify the Company promptly of the existence, terms and circumstances surrounding such process or order, and (ii) to cooperate with the Company, at the Company's 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 as is required to be disclosed. (c) The obligations of the Executive under this Section 6 shall survive any termination of the Agreement. (d) The Executive agrees that while the Agreement is in effect and for a period of 12 months after termination of the Agreement pursuant to Section 2, the 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 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, provided, that this clause (i) shall only apply in the event a Change of Control occurs prior to termination of the Agreement and 9 the Change of Control Payment or the Carryover Change of Control Payment described below is made; (ii) induce or attempt to induce any person that is a salaried employee (including, without limitation, any person who is a store manager or a district manager) 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) the 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 Executive 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). Notwithstanding the foregoing, the provisions of this subsection (d) shall terminate, and the Executive shall have no obligations hereunder, if, and following such time that the Company fails to make timely payment of any material amounts owing to the Executive pursuant to Section 11 or Section 12 hereof. (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 Section 6 are necessary in order to protect and maintain the 10 proprietary interests and other legitimate business interests of the Company and its subsidiaries and affiliates. The Executive understands that the enforcement of this Section 6 may limit the Executive's ability to earn a livelihood in a business similar to the business of the Company but nevertheless agrees and hereby acknowledges that (i) such provisions do not impose a greater restraint than is necessary to protect the goodwill or other business interests of the Company, (ii) such provisions contain reasonable limitations as to time and scope of activity to be restrained, (iii) such provisions are not harmful to the general public, and (iv) such provisions are not unduly burdensome to the Executive and the consideration provided hereunder is sufficient to compensate the Executive for the restrictions contained in such provisions. In consideration thereof and in light of the Executive's education, skills and abilities, the Executive agrees that the Executive will not assert in any forum that such provisions prevent the Executive from earning a living or otherwise are void or unenforceable or should be held void or unenforceable. The Executive acknowledges that the remedy at law for any breach or threatened breach of this Section 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 the Agreement and the Executive's employment hereunder for "Cause" by written notice to the Executive setting forth the grounds for termination with specificity. "Cause" shall mean the termination of the Executive because of (i) his willful and continued failure 11 (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 the Executive of a material dishonest act of fraud against the Company or any subsidiary thereof; PROVIDED, 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 THE EXECUTIVE. The Executive may terminate the Agreement and his employment hereunder for Good Reason (as defined herein) 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 the 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 the Agreement, which failure is not remedied within ten (10) business days after written notice thereof is delivered to the Company by the 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. 12 9. TERMINATION FOR DEATH OR DISABILITY. (a) If during the Term, the Executive should die, the Executive's employment shall be deemed to have terminated as of the date of death. (b) If during the Term, the Executive should suffer a disability which, in fact, prevents the 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 the Executive's services hereunder by a written notice to the Executive setting forth the grounds for such termination with specificity, which termination will take effect 30 days after such notice is given. The 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 the Executive's disability for the purposes of the Agreement shall be determined by a physician mutually selected by the Company and the Executive, and the 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 the Agreement to a beneficiary designated by the Executive, it is agreed that the 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 the Executive fails to designate a beneficiary (or beneficiaries) as herein provided, any payments which are to be made to the Executive's designated beneficiary (or beneficiaries) under the Agreement shall be made to the 13 Executive's widow, if any, during her lifetime, thereafter to his issue, if any, including legally adopted children, and then to the Executive's personal representative. 11. EFFECT OF COMPANY'S TERMINATION OTHER THAN UNDER SECTIONS 7 OR 9 OR EFFECT OF THE EXECUTIVE'S TERMINATION UNDER SECTION 8. (a) If the Company terminates the Executive's employment under the Agreement for any reason other than Cause, or other than due to his death or disability, or the Executive terminates the Agreement for Good Reason, the Executive shall be entitled to receive a lump sum payment equal to the aggregate amount of his Base Salary, as then in effect, for the period from the date of such termination through January 31, 2005; PROVIDED, that if such termination occurs between January 31, 2004 and January 31, 2005, the Executive shall be entitled to receive a lump sum payment equal to the aggregate of twelve (12) months Base Salary. Such payment shall be made within thirty (30) days following the date of such termination. (b) In addition, if at any time prior to January 31, 2005 or the Carryover Determination Date (as defined herein) but following a termination described in Section 11(a), the Company shall have entered into a definitive agreement in respect of a Change of Control (as defined herein) or a Change of Control shall have occurred, then in the case of, and notwithstanding (i) the termination of the Agreement by the Company for any reason other than Cause or (ii) the termination of the Agreement by the Executive for Good Reason, the Company shall make the payment as provided in Section 12(a) or Section 12(b), as the case may be, on the dates provided in such Section, LESS that portion of the lump sum payment the Executive received pursuant to Section 11(a) that is attributable to the period following the Change of Control. 14 (c) The Company shall continue to provide to the Executive the benefits described in Section 5(a) hereof for a period of 12 months from the date of termination to the extent not prohibited by law or the terms of such benefit arrangements; the Executive shall continue his participation in the Corporate Plan and the Awards in accordance with the provisions thereof; the Company shall continue to make the payments required to be made pursuant to the SERP and reimbursements contemplated by Section 5(e) hereof; and without limiting the Executive's rights under Section 5(a) as set forth in the first clause of this paragraph (c), the Executive shall be entitled to continue coverage under the medical and dental plans maintained by the Company on the terms set forth in Section 5(c) hereof. 12. EFFECT OF CHANGE OF CONTROL. (a) If at any time prior to January 31, 2005 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 (assuming the Executive has not voluntarily terminated the Agreement for other than Good Reason and the Company has not terminated the Agreement for Cause, in either case prior to the Change of Control) the Executive shall be entitled to receive the "Change of Control Payment" (as defined herein) (subject to offset as set forth in the last clause of Section 11(b) herein, if applicable) on the date of the occurrence or consummation of a Change of Control irrespective of whether the Term has expired or has terminated by reason of the Company's termination of the Agreement without Cause or the Executive's termination of the Agreement for Good Reason. Upon the Executive's receipt of the Change of Control Payment in full (subject to offset as set forth in the last clause of Section 11(b) herein, if applicable), the Agreement shall be 15 terminated automatically and the Executive shall no longer be entitled to any further payments described herein except for payments required to be made pursuant to the SERP and reimbursements contemplated by Section 5(e) of the Agreement; the Executive shall continue his participation in the Corporate Plan and the Awards in accordance with the provisions thereof; and the Executive shall be entitled to continue coverage under the medical and dental plans maintained by the Company on the terms set forth in Section 5(c) hereof. The payment contemplated by this Section 12(a) shall not be duplicative to the payment contemplated by Section 11(b) herein. (b) If at any time prior to the Carryover Determination Date 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 the Executive shall (assuming the Executive has not voluntarily terminated the Agreement for other than Good Reason or the Company has not terminated the Agreement for Cause, in either case prior to the Change of Control) be entitled to elect, at his option, to receive either the Change of Control Payment or the Carryover Change of Control Payment (as defined herein) (subject to offset as set forth in the last clause of Section 11(b) herein, if applicable) on the date of the occurrence or consummation of a Change of Control irrespective of whether the Term has previously expired or terminated by reason of the Company's termination of the Agreement without Cause or the Executive's termination for Good Reason. Upon the Executive's receipt of either the Change of Control Payment or the Carryover Change of Control Payment in full (subject to offset as set forth in the last clause of Section 11(b) herein, if applicable), the Agreement shall be terminated automatically and the Executive shall no longer be entitled to any further payments 16 described herein except for payments as required to be made pursuant to the SERP and reimbursements of expenses contemplated by Section 5(e) of the Agreement; and the Executive shall continue his participation in the Corporate Plan and the Awards in accordance with the provisions thereof; and the Executive shall be entitled to continue coverage under the medical and dental plans maintained by the Company on the terms set forth in Section 5(c) hereof. The payment contemplated by this Section 12(b) shall not be duplicative to the payment contemplated by Section 11(b) herein. (c) Notwithstanding any other provision herein, the Executive shall not receive both the Change of Control Payment provided in Section 12(a) and the Carryover Change of Control Payment provided in Section 12(b). (d) For purposes of the Agreement, the following terms shall have the following meanings: (i) "Carryover Change of Control Payment" shall mean an amount equal to the greater of (x) a lump sum payment equal to the aggregate amount of the Base Salary as then in effect for the period from the date of the Change of Control through January 31, 2005 (but not less than one-year's Base Salary) and (y) $4,900,000 MINUS the "in-the-money" value on the date of the occurrence of a Change of Control of all of the options granted to the Executive under the Awards that are vested and exercisable (i.e., the number of such vested and exercisable 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 17 tender offer, the cash tender offer per share price) AND (2) $4.35, as to the 2001 Option Award, and $8.75, as to the 1999 Option Award). (ii) "Carryover Determination Date" shall mean the later of (x) January 31, 2002, or (y) one (1) year following termination of any engagement or similar agreement entered into between the Company and any investment banking firm retained prior to January 31, 2002 for purposes of advising the Company in connection with any transaction that would constitute a Change of Control. (iii) "Change of Control" shall mean the occurrence of any event where (a) 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, or (b) 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 18 of the Company or securities representing 50% or more of the combined voting power of the Company's voting stock or (c) 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. (iv) "Change of Control Payment" shall mean an amount equal to the greater of (x) a lump sum payment equal to the aggregate amount of the Base Salary as then in effect for the period from the date of the Change of Control through January 31, 2005 and (y) three (3) times the Executive's Base Salary. (e) 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 Section 280G and the regulations thereunder) or any affiliate of such Person, whether paid or payable or distributed or distributable pursuant to the terms of the 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 19 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 THE COMPANY'S TERMINATION FOR CAUSE, THE EXECUTIVE'S TERMINATION WITHOUT GOOD REASON, TERMINATION UPON DEATH OR DISABILITY. If the Company terminates the Executive's employment under the Agreement for Cause or the Executive terminates his employment under the Agreement other than for Good Reason, or if the Executive's employment is terminated due to his death or disability, then the Company shall continue to pay the Executive (or his designated beneficiary) his Base Salary through the effective date of termination, and the Executive shall continue to be entitled to payments required to be made pursuant to the SERP and the reimbursements contemplated by Section 5(c) of the Agreement; the Executive shall continue his participation in the Corporate Plan and the Awards in accordance with the provisions thereof; and the Executive shall be entitled to continue coverage under the medical and dental plans maintained by the Company on the terms set forth in Section 5(c) hereof. 14. THE EXECUTIVE'S REPRESENTATIONS AND WARRANTIES. The Executive represents and warrants to the Company as follows: (a) The Executive has the unfettered right to enter into the Agreement on the terms and subject to the conditions hereof, and the Executive has not done or permitted to be done anything which may curtail or impair any of the rights granted to the Company herein. 20 (b) Neither the execution and delivery of the Agreement by the Executive nor the performance by the Executive of any of the 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 the Executive is a party or by which the Executive is bound. 15. INDEMNIFICATION, ETC. The Company agrees to indemnify the 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 the Executive's services as, and/or for activities engaged in by the Executive while the Executive is, an officer and/or employee and/or director of the Company or any affiliate thereof, including either paying or reimbursing the Executive, promptly after request, for any reasonable and documented expenses and attorney's fees and costs actually incurred by the 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; PROVIDED, HOWEVER, that no such indemnification shall be paid for damages or losses incurred by the 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 the gross negligence, bad faith or misconduct of the Executive or the breach by the Executive of any of the 21 Executive's obligations under or representations and warranties made pursuant to the Agreement. This indemnity shall survive the termination of the Agreement. The Company represents and warrants that it (i) has $30 million of director's and officer's insurance available on the date hereof, (ii) will use its reasonable commercial efforts to maintain such policy throughout the Term, and (iii) 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 shall extend until June 29, 2005. 16. NOTICES. Any notice, consent, termination or other communication under the 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 THE EXECUTIVE, TO THE 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. The Agreement contains a complete statement of all the arrangements between the parties with respect to the Executive's employment by the Company, supersedes all existing agreements or 22 arrangements between them concerning the Executive's employment and can only be amended or modified by a written instrument signed by the Company and the Executive. 18. SEVERABILITY PROVISIONS. If any provision of the Agreement is declared invalid, illegal or incapable of being enforced by any court of competent jurisdiction, all of the remaining provisions of the 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. The 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, without regard to principles of conflicts of laws. 20. WAIVER. The failure of a party to insist upon strict adherence to any term of the 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 the Agreement. 21. HEADING. The headings in the Agreement are solely for the convenience of reference and shall not affect its interpretation. 22. WITHHOLDING. Any amount payable under the 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. The Agreement will inure to the benefit of, and be enforceable by, the Executive's heirs and the Company's successors and assigns. The Company shall have the right to assign the Agreement or any part hereof or any rights hereunder to any successor-in-interest to the Company and to any affiliate of 23 the Company; PROVIDED, that in the event of any such assignment the assignee shall expressly agree in writing to assume all of the Company's obligations under the Agreement, and Company shall remain secondarily liable to the Executive for the performance of all such obligations. 24 WHEREFORE, the parties hereto have executed the Agreement as of the day and year first above written. THE PENN TRAFFIC COMPANY By: /s/ Peter Zurkow By: /s/ Joseph V. Fisher --------------------------------- ------------------------------------ Name: Peter Zurkow Joseph V. Fisher Title: Chairman of the Board Exhibit A AWARD AGREEMENT THIS AGREEMENT (the "Agreement"), is made effective as of the 22nd day of September, 1999, (hereinafter called the "Date of Grant"), between Penn Traffic Company, a Delaware corporation (hereinafter called the "Company"), and Joseph V. Fisher (hereinafter called the "Participant"): R E C I T A L S: WHEREAS, the Company has adopted the Penn Traffic Company 1999 Equity Incentive Plan (the "Plan"), which Plan is incorporated herein by reference and made a part of this Agreement. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan; and WHEREAS, the Committee has determined that it would be in the best interests of the Company and its stockholders to grant the option provided for herein (the "Option") to the Participant pursuant to the Plan and the terms set forth herein. NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties hereto agree as follows: 1. GRANT OF THE OPTION. The Company hereby grants to the Participant the right and option (the "Option") to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate of 140,000 Common Shares, subject to adjustment as set forth in the Plan. The purchase price of the Shares subject to the Option shall be $8.75 per Share (the "Exercise Price"). The Option is intended to be treated as an Incentive Stock Option that complies with section 422 of the Internal Revenue Code of 1986, as amended. The Option is intended to be treated as an Incentive Stock Option that complies with section 422 of the Internal Revenue Code of 1986, as amended, as to 57,143 Shares and as Non-Qualified Stock Option as to 82,857 Shares. The Company cannot guarantee that the special tax treatment described in section 422 of the Internal Revenue Code will apply. For example, if the Participant sells the Common Stock acquired pursuant to the exercise of this Option either within two years after the date of this Agreement or within one year after the date this Option (or part thereof) is exercised, this special tax treatment will not apply. If the Option (or any part thereof) does not qualify for Incentive Stock Option treatment for any reason, then, to the extent of such nonqualification, the Option (or portion) shall be treated as a Non-Qualified Stock Option granted under the Plan. 2. VESTING. 2 The Option shall be vested and exercisable with respect to 20% of the Shares initially covered by the Option upon grant. Subject to the Participant's continued employment with the Company, the Option shall vest with respect to an additional 20% of the Shares initially subject to the Option on each of the first, second, third and fourth anniversaries of the date of grant. Any portion of the Option which is not vested as of the Participant's termination of employment shall immediately terminate and expire. (a) At any given time, the portion of the Option which has become vested and exercisable as described above is hereinafter referred to as the "Vested Portion." (b) In the event of a Change of Control (as defined in the Plan) or a Section 11(c) Change of Control (as defined in the Employment Agreement dated as of October 30, 1998, as amended to the date hereof and from time to time hereafter, between the Company and Participant), the Option shall, to the extent not then vested or previously canceled, vest and become immediately exercisable in full. 3. EXERCISE OF OPTION. (a) PERIOD OF EXERCISE. Subject to the provisions of the Plan and this Agreement, the Participant may exercise all or any part of the Vested Portion of the Option at any time prior to the earliest to occur of: (i) the tenth anniversary of the Date of Grant; (ii) sixty days following the date of the Participant's termination of employment by the Company for "Cause;" or (iii) (a) in the case of the Participant's termination of employment for death or disability (within the meaning of Section 422(e)(3) of the Code), one year following such termination or (b) in the case of the Participant's termination of employment for any reason other than death, disability or "Cause," 90 days following such termination. For purposes of this agreement: "Cause" shall mean (i) a felony conviction or guilty plea or (ii) a conviction or guilty plea of any crime involving fraud or embezzlement. (b) Method of Exercise. (i) Subject to Section 3(a), the Option may be exercised by delivering to the Company at its principal office written notice of intent to so exercise; PROVIDED that, the Option may be exercised with respect to whole Shares only. Such notice shall specify the number of Shares for which the Option is being exercised and shall be accompanied by payment in full of the Exercise Price. The payment of the Exercise Price may be made in cash, or its equivalent, or (x) by exchanging Shares owned by the Participant (which are not the subject of any pledge or other security 3 interest and which have been owned by the Participant for at least 6 months), (y) subject to such rules as may be reasonably established by the Committee, through delivery of irrevocable instructions to a broker to sell a portion of the Shares otherwise deliverable upon the exercise of the Option and to deliver promptly to the Company an amount equal to the aggregate exercise price of the portion of the Option so exercised or (z) by the promissory note and agreement of the Participant providing for the payment with interest of the unpaid balance accruing at a rate not less than needed to avoid the imputation of income under Code section 7872 and upon such terms and conditions (including the furnishing of security, if any therefor) as the Committee may determine, or by a combination of the foregoing. (ii) Notwithstanding any other provision of the Plan or this Agreement to the contrary, the Option may not be exercised prior to the completion of any registration or qualification of the Option or the Shares under applicable state and federal securities or other laws, or under any ruling or regulation of any governmental body or national securities exchange that the Committee shall in its sole discretion determine to be necessary or advisable. (iii) Upon the Company's determination that the Option has been validly exercised as to any of the Shares, the Company shall issue certificates in the Participant's name for such Shares. However, the Company shall not be liable to the Participant for damages relating to any delays in issuing the certificates to him, any loss of the certificates, or any mistakes or errors in the issuance of the certificates or in the certificates themselves. (iv) In the event of the Participant's death, the Option shall remain exercisable by the Participant's executor or administrator, or the person or persons to whom the Participant's rights under this Agreement shall pass by will or by the laws of descent and distribution as the case may be, to the extent set forth in Section 3(a). Any heir or legatee of the Participant shall take rights herein granted subject to the terms and conditions hereof. 4. NO RIGHT TO CONTINUED EMPLOYMENT. Neither the Plan nor this Agreement shall be construed as giving the Participant the right to be retained in the employ of, or in any consulting relationship to, the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss the Participant or discontinue any consulting relationship, free from any liability or any claim under the Plan or this Agreement, except as otherwise expressly provided herein. 5. LEGEND ON CERTIFICATES. The certificates representing the Shares purchased by exercise of the Option shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares are listed, and any applicable Federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 4 6. TRANSFERABILITY. The Option may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant otherwise than by will or by the laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate; provided that the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance. No such permitted transfer of the Option to heirs or legatees of the Participant shall be effective to bind the Company unless the Committee shall have been furnished with written notice thereof and a copy of such evidence as the Committee may deem necessary to establish the validity of the transfer and the acceptance by the transferee or transferees of the terms and conditions hereof. During the Participant's lifetime, the Option is exercisable only by the Participant. Notwithstanding the foregoing, the vested portion of this Option, insofar as such vested portion is not intended to be treated as an Incentive Stock Option that complies with section 422 of the Internal Revenue Code of 1986, as amended, may be transferred by the Participant (the "Grantee") without consideration, subject to such rules as the Committee may adopt to preserve the purposes of the Plan, to: (A) any or all of the Grantee's spouse, children or grandchildren (including adopted and stepchildren and grandchildren) (collectively, the "Immediate Family"); (B) a trust solely for the benefit of the Grantee and/or his or her Immediate Family (a "Family Trust"); or (C) a partnership or limited liability company whose only partners or shareholders are the Grantee and/or his or her Immediate Family and/or a Family Trust; (each transferee described in clauses (A), (B) and (C) above is hereinafter referred to as a "Permitted Transferee"); PROVIDED that the Grantee gives the Committee advance written notice describing the terms and conditions of the proposed transfer and the Committee notifies the Grantee in writing that such a transfer would comply with the requirements of the Plan and this Agreement. If any portion of this Option is transferred in accordance with the immediately preceding sentence, the terms of this Option shall apply to the Permitted Transferee and any reference in this Agreement to an optionee, Grantee or Participant shall be deemed to refer to the Permitted Transferee, except that (a) Permitted Transferees shall not be entitled to transfer this Option, other than by will or the laws of descent and distribution; (b) Permitted Transferees shall not be entitled to exercise the transferred Option unless there shall be in effect a registration statement on an appropriate form covering the shares to be acquired pursuant to the exercise of such Option if the Committee determines that such registration statement is necessary or appropriate, (c) the Committee or the Company shall not be required to provide any notice to a Permitted Transferee, 5 whether or not such notice is or would otherwise have been required to be given to the Grantee under the Plan or otherwise and (d) the consequences of termination of the Grantee's employment by, or services to, the Company under the terms of the Plan and this Agreement shall continue to be applied with respect to the Grantee, following which the Option shall be exercisable by the Permitted Transferee only to the extent, and for the periods, specified in the Plan and this Agreement. 7. WITHHOLDING. (a) The Participant may be required to pay to the Company or any Affiliate and the Company or any Affiliate shall have the right and is hereby authorized to withhold from any Shares or other property deliverable under the Option or from any compensation or other amount owing to a Participant the amount (in cash, Shares, or other property) of any applicable withholding taxes in respect of the Option, its exercise, or any payment or transfer under the Option or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. (b) Without limiting the generality of Section 7(a) above, the Participant may satisfy, in whole or in part, the foregoing withholding liability by delivery of Shares owned by the Participant (which are not subject to any pledge or other security interest and which have been owned by the Participant for at least 6 months) with a Fair Market Value equal to such withholding liability or by having the Company withhold from the number of Shares otherwise issuable pursuant to the exercise of the option a number of Shares with a Fair Market Value equal to such withholding liability. (c) The Company may, as a condition of Option exercise, require that satisfactory arrangements have been made in advance to satisfy all tax withholding obligations. 8. SECURITIES LAWS. Upon the acquisition of any Shares pursuant to the exercise of the Option, the Participant will make or enter into such written representations, warranties and agreements as the Committee may reasonably request in order to comply with applicable securities laws or with this Agreement. 9. NOTICES. Any notice necessary under this Agreement shall be addressed to the Company in care of its Secretary at the principal executive office of the Company and to the Participant at the address appearing in the personnel records of the Company for the Participant or to either party at such other address as either party hereto may hereafter designate in writing to the other. Any such notice shall be deemed effective upon receipt thereof by the addressee. 10. CHOICE OF LAW. THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. 6 11. ANTI-DILUTION. The provisions of Section 4(b) and Section 7(c) of the Plan, shall be applied in a manner that is no less favorable than if the Option granted hereunder were subject to the anti-dilution and adjustment provisions of warrants granted pursuant to the Warrant Agreement, dated as of June 29, 1999, among the Company and Harris Bank and Trust, as Warrant Agent. In addition, if there occurs any consolidation or merger of the Company with or into any other person or entity (other than a merger consolidation of the Company in which the Company is the continuing corporation and which does not result in any reclassification or change of the outstanding Common Shares) or sale, transfer or other disposition of all or substantially all of the assets of the Company to another person or entity, then each Option shall thereafter be exercisable into the same kind and amount of securities (including shares of stock) or other assets, or both, which were issuable or distributable to holders of outstanding Common Shares upon such consolidation, merger, sale or conveyance in respect of that number of Common Shares into which the Options might have been converted immediately prior to such consolidation, merger, sale or conveyance and in any such case appropriate adjustments shall be made to insure that the provisions set forth herein shall be thereafter applicable as reasonably may be practicable in relation to any securities or other assets thereafter deliverable upon exercise of the Options. In addition, in the event the Change of Control or Section 11(c) Change of Control which resulted (or would result upon consummation) in the Options vesting pursuant to Section 2 is a tender offer or exchange offer, the Company, at the Participant's option, shall (i) in the case of a cash tender offer, pay the Participant the difference between the cash consideration in the tender offer and the exercise price of the Options and (ii) in the case of any other tender offer or exchange offer, provide, notwithstanding the provisions of Section 2 hereof, that the Participant shall be permitted to exercise the Options immediately prior to the consummation of such tender offer or exchange offer so that the Participant may tender any or all of the Shares received upon exercise of the Options in such tender offer or exchange offer. 12. OPTION SUBJECT TO PLAN. By entering into this Agreement the Participant agrees and acknowledges that the Participant has received and read a copy of the Plan. The Option is subject to the Plan. The terms and provisions of the Plan as it may be amended from time to time are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail. 13. SIGNATURE IN COUNTERPARTS. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement. PENN TRAFFIC COMPANY ------------------------------------------- By: Title: 7 OPTIONEE ------------------------------------------- Exhibit B PENN TRAFFIC COMPANY 1999 EQUITY INCENTIVE PLAN AWARD AGREEMENT THIS AGREEMENT (the "Agreement"), is made effective as of the 24th day of October, 2001, (hereinafter called the "Date of Grant"), between Penn Traffic Company, a Delaware corporation (hereinafter called the "Company"), and Joseph V. Fisher (hereinafter called the "Participant"): R E C I T A L S: WHEREAS, the Company has adopted the Penn Traffic Company 1999 Equity Incentive Plan (the "Plan"), which Plan is incorporated herein by reference and made a part of this Agreement. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan; and WHEREAS, the corporation and stock option Committee of the Board of Directors of the Company (the "Committee") has determined that it would be in the best interests of the Company and its stockholders to grant the option to purchase shares of the Company Common Stock ("Shares") provided for herein (the "Option") to the Participant pursuant to the Plan and the terms set forth herein. NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties hereto agree as follows: 1. GRANT OF THE OPTION. The Company hereby grants to the Participant the right and option to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate of 260,000 Shares, subject to adjustment as set forth in the Plan (the "Option"). The purchase price of the Shares subject to the Option shall be $4.35 per Share (the "Exercise Price"). The Option is intended to be qualified as an Incentive Stock Option, within the meaning of section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), with respect to 22,988 Shares and as Non-Qualified Stock Option with respect to 237,012 Shares. The Company cannot guarantee that the special tax treatment described in section 422 of the Code will apply. For example, if the Participant sells the Shares acquired pursuant to the exercise of this Option either within two years after the date of this Agreement or within one year after the date this Option (or part thereof) is exercised, this special tax treatment will not apply. If the Option (or any part thereof) does not qualify for Incentive Stock Option treatment for any reason, then, to the extent of such nonqualification, the Option (or such portion thereof) shall be treated as a Non-Qualified Stock Option granted under the Plan. 2 2. VESTING. Subject to the Participant's continued employment with the Company, the Option shall vest with respect to 20% of the Shares initially subject to the Option on the Grant Date hereof, 20% of the Shares initially subject to the Option on each of the first and second anniversaries of the Grant Date and 40% of the Shares initially subject to the Option on the third anniversary of the Grant Date. Any portion of the Option which is not vested as of the Participant's termination of employment shall immediately terminate and expire. (a) At any given time, the portion of the Option which has become vested and exercisable as described above is hereinafter referred to as the "Vested Portion." (b) In the event of (i) a "Change of Control" (as defined in the Plan); (ii) a "Change of Control" (as defined in the Employment Agreement dated as of December 19, 2001, as amended to the date hereof and from time to time hereafter, between the Company and Participant (as amended, the "Employment Agreement")); (iii) the termination by the Company of the Participant's employment with the Company other than for "Cause" (as defined in the Employment Agreement); or (iv) termination by the Participant of the Participants employment with the Company for "Good Reason" (as defined in the Employment Agreement), the Option shall, to the extent not then vested or previously canceled, vest and become immediately exercisable in full. 3. EXERCISE OF OPTION. (a) PERIOD OF EXERCISE. Subject to the provisions of the Plan and this Agreement, the Participant may exercise all or any part of the Vested Portion of the Option at any time prior to the earliest to occur of: (i) 11:59pm Eastern Standard Time on the tenth anniversary of the Date of Grant; (ii) sixty (60) days following either (a) the date of the Participant's termination of employment by the Company for "Cause" (as defined in the Employment Agreement) or (b) the date of the Participant's voluntary termination of employment without "Good Reason" (as defined in the Employment Agreement); or (iii) (a) in the case of the Participant's termination of employment for death or disability (within the meaning of section 22(e)(3) of the Code), one year following such termination. (b) Method of Exercise. (i) Subject to Section 3(a) of this Agreement, the Option may be exercised by delivering to the Company at its principal office written notice of intent to so exercise; PROVIDED that, the Option may be exercised with respect to whole Shares 3 only. Such notice shall specify the number of Shares for which the Option is being exercised and shall be accompanied by payment in full of the Exercise Price. The payment of the Exercise Price may be made in cash, or its equivalent, or (x) by exchanging Shares owned by the Participant (which are not the subject of any pledge or other security interest and which have been owned by the Participant for at least 6 months), (y) subject to such rules as may be reasonably established by the Committee, through delivery of irrevocable instructions to a broker to sell a portion of the Shares otherwise deliverable upon the exercise of the Option and to deliver promptly to the Company an amount equal to the aggregate exercise price of the portion of the Option so exercised or (z) by a recourse promissory note and agreement of the Participant providing for the payment with interest of the unpaid balance accruing at a rate not less than needed to avoid the imputation of income under section 7872 of the Code and upon such terms and conditions (including the furnishing of security, if any therefor) as the Committee may determine, or by a combination of the foregoing. (ii) Notwithstanding any other provision of the Plan or this Agreement to the contrary, the Option may not be exercised prior to the completion of any registration or qualification of the Option or the Shares under applicable state and federal securities or other laws, or under any ruling or regulation of any governmental body or national securities exchange that the Committee shall in its sole discretion determine to be necessary or advisable. (iii) Upon the Company's determination that the Option has been validly exercised as to any of the Shares, the Company shall issue certificates in the Participant's name for such Shares. However, the Company shall not be liable to the Participant for damages relating to any delays in issuing the certificates to him, any loss of the certificates, or any mistakes or errors in the issuance of the certificates or in the certificates themselves. (iv) In the event of the Participant's death, the Option shall remain exercisable by the Participant's executor or administrator, or the person or persons to whom the Participant's rights under this Agreement shall pass by will or by the laws of descent and distribution as the case may be, to the extent set forth in Section 3(a) of this Agreement. Any heir or legatee of the Participant shall take rights herein granted subject to the terms and conditions hereof. 4. NO RIGHT TO CONTINUED EMPLOYMENT. Neither the Plan nor this Agreement shall be construed as giving the Participant the right to be retained in the employ of, or in any consulting relationship to, the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss the Participant or discontinue any consulting relationship, free from any liability or any claim under the Plan or this Agreement, except as otherwise expressly provided herein. 5. LEGEND ON CERTIFICATES. The certificates representing the Shares purchased by exercise of the Option shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon 4 which such Shares are listed, and any applicable Federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 6. TRANSFERABILITY. The Option may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant otherwise than by will or by the laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate; provided that the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance. No such permitted transfer of the Option to heirs or legatees of the Participant shall be effective to bind the Company unless the Committee shall have been furnished with written notice thereof and a copy of such evidence as the Committee may deem necessary to establish the validity of the transfer and the acceptance by the transferee or transferees of the terms and conditions hereof. During the Participant's lifetime, the Option is exercisable only by the Participant. Notwithstanding the foregoing, the vested portion of this Option, insofar as such vested portion is not intended to be treated as an Incentive Stock Option that complies with section 422 of the Internal Revenue Code of 1986, as amended, may be transferred by the Participant (the "Grantee") without consideration, subject to such rules as the Committee may adopt to preserve the purposes of the Plan, to: (A) any or all of the Grantee's spouse, children or grandchildren (including adopted and stepchildren and grandchildren) (collectively, the "Immediate Family"); (B) a trust solely for the benefit of the Grantee and/or his or her Immediate Family (a "Family Trust"); or (C) a partnership or limited liability company whose only partners or shareholders are the Grantee and/or his or her Immediate Family and/or a Family Trust; (each transferee described in clauses (A), (B) and (C) above is hereinafter referred to as a "Permitted Transferee"); PROVIDED that the Grantee gives the Committee advance written notice describing the terms and conditions of the proposed transfer and the Committee notifies the Grantee in writing that such a transfer would comply with the requirements of the Plan and this Agreement. If any portion of this Option is transferred in accordance with the immediately preceding sentence, the terms of this Option shall apply to the Permitted Transferee and any reference in this Agreement to an optionee, Grantee or Participant shall be deemed to refer to the Permitted Transferee, except that (a) Permitted Transferees shall not be entitled to transfer this Option, other than by will or the laws of descent and distribution; (b) Permitted Transferees shall not be entitled to exercise the transferred Option unless there shall be in effect a 5 registration statement on an appropriate form covering the shares to be acquired pursuant to the exercise of such Option if the Committee determines that such registration statement is necessary or appropriate, (c) the Committee or the Company shall not be required to provide any notice to a Permitted Transferee, whether or not such notice is or would otherwise have been required to be given to the Grantee under the Plan or otherwise and (d) the consequences of termination of the Grantee's employment by, or services to, the Company under the terms of the Plan and this Agreement shall continue to be applied with respect to the Grantee, following which the Option shall be exercisable by the Permitted Transferee only to the extent, and for the periods, specified in the Plan and this Agreement. 7. WITHHOLDING. (a) The Participant may be required to pay to the Company or any Affiliate and the Company or any Affiliate shall have the right and is hereby authorized to withhold from any Shares or other property deliverable under the Option or from any compensation or other amount owing to a Participant the amount (in cash, Shares, or other property) of any applicable withholding taxes in respect of the Option, its exercise, or any payment or transfer under the Option or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. (b) Without limiting the generality of Section 7(a) above, the Participant may satisfy, in whole or in part, the foregoing withholding liability by delivery of Shares owned by the Participant (which are not subject to any pledge or other security interest and which have been owned by the Participant for at least 6 months) with a Fair Market Value equal to such withholding liability or by having the Company withhold from the number of Shares otherwise issuable pursuant to the exercise of the option a number of Shares with a Fair Market Value equal to such withholding liability. (c) The Company may, as a condition of Option exercise, require that satisfactory arrangements have been made in advance to satisfy all tax withholding obligations. 8. SECURITIES LAWS. Upon the acquisition of any Shares pursuant to the exercise of the Option, the Participant will make or enter into such written representations, warranties and agreements as the Committee may reasonably request in order to comply with applicable securities laws or with this Agreement. 9. NOTICES. Any notice necessary under this Agreement shall be addressed to the Company in care of its Secretary at the principal executive office of the Company and to the Participant at the address appearing in the personnel records of the Company for the Participant or to either party at such other address as either party hereto may hereafter designate in writing to the other. Any such notice shall be deemed effective upon receipt thereof by the addressee. 6 10. CHOICE OF LAW. THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. 11. ANTI-DILUTION. If there occurs any consolidation or merger of the Company with or into any other person or entity (other than a merger consolidation of the Company in which the Company is the continuing corporation and which does not result in any reclassification or change of the outstanding Shares) or sale, transfer or other disposition of all or substantially all of the assets of the Company to another person or entity, then each Option shall thereafter be exercisable into the same kind and amount of securities (including shares of stock) or other assets, or both, which were issuable or distributable to holders of outstanding Shares upon such consolidation, merger, sale or conveyance in respect of that number of Shares into which the Options might have been converted immediately prior to such consolidation, merger, sale or conveyance and in any such case appropriate adjustments shall be made to insure that the provisions set forth herein shall be thereafter applicable as reasonably may be practicable in relation to any securities or other assets thereafter deliverable upon exercise of the Options. In addition, in the event the Change of Control (as defined in the Plan) or a Change of Control (as defined in the Employment Agreement) which resulted (or would result upon consummation) in the Options vesting pursuant to Section 2 of this Agreement is a tender offer or exchange offer, the Company, at the Participant's option, shall (i) in the case of a cash tender offer, pay the Participant the difference between the cash consideration in the tender offer and the exercise price of the Options and (ii) in the case of any other tender offer or exchange offer, provide, notwithstanding the provisions of Section 2 hereof, that the Participant shall be permitted to exercise the Options immediately prior to the consummation of such tender offer or exchange offer so that the Participant may tender any or all of the Shares received upon exercise of the Options in such tender offer or exchange offer. 12. OPTION SUBJECT TO PLAN. By entering into this Agreement the Participant agrees and acknowledges that the Participant has received and read a copy of the Plan. The Option is subject to the Plan including without limitation the anti-dilution provisions set out in Section 4(b) thereof. The terms and provisions of the Plan as it may be amended from time to time are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail. 13. DISQUALIFYING DISPOSITION. The Participant agrees and covenants that if he disposes of any of the Shares acquired pursuant to the exercise of this Option in a "disqualifying disposition," as described in section 422 of the Code, he will immediately contact the Company to inform it of such event. 14. RIGHTS AS STOCKHOLDER. The Participant shall not be deemed to be the owner of any Shares subject to this Option unless, until and to the extent that (i) this Option shall have been exercised pursuant to its terms, (ii) the Company shall have issued and delivered to the Participant the Shares, and (iii) the Participant's name shall have been 7 entered as a stockholder of record with respect to such Shares on the books of the Company. 15. SIGNATURE IN COUNTERPARTS. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 16. SUCCESSORS. The terms of the Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, and of the Participant and the beneficiaries, executors, administrators, heirs and successors of the Participant. 17. INVALID PROVISION. The invalidity or unenforceability of any particular provision hereof shall not affect the other provisions hereof, and the Agreement shall be construed in all respects as if such invalid or unenforceable provision had been omitted. 18. MODIFICATIONS. No change, modification or waiver of any provision of the Agreement shall be valid unless the same be in writing and signed by the parties hereto. 19. ENTIRE AGREEMENT. The Agreement and the Plan contain the entire agreement and understanding of the parties hereto with respect to the subject matter contained herein and therein and supersede all prior communications, representations and negotiations in respect thereto. 8 20. HEADINGS. The headings of the Sections hereof are provided for convenience only and are not to serve as a basis for interpretation or construction, and shall not constitute a part, of the Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement. PENN TRAFFIC COMPANY ------------------------------ By: Title: PARTICIPANT ------------------------------ Exhibit C THE PENN TRAFFIC COMPANY SUPPLEMENTAL RETIREMENT PLAN FOR JOSEPH V. FISHER ARTICLE I ESTABLISHMENT, PURPOSE AND EFFECTIVE DATE OF PLAN 1.1 ESTABLISHMENT. The Penn Traffic Company, a Delaware corporation, hereby establishes a supplemental retirement program for Joseph V. Fisher, which shall be known as The Penn Traffic Company Supplemental Retirement Plan For Joseph V. Fisher (the "Plan"). 1.2 PURPOSE. The purpose of the Plan is to provide Joseph V. Fisher with retirement income. Payment of the retirement benefit under the Plan shall be made from the general assets of the Company, or by such other method as is consistent with Section 7.2 of the Plan and which is agreed to by Joseph V. Fisher and the Company. 1.3 BENEFITS UNDER THE CORPORATE PLAN. As indicated below, the Plan is intended to provide benefits that are supplemental to those contained in the Corporate Plan. It is the Company's present intent to amend the Corporate Plan to provide as much of the Retirement Benefit contemplated hereunder as possible under the Corporate Plan without causing (i) the Corporate Plan to fail to satisfy the requirements of Section 401(a) of the Code or (ii) the Company to incur additional costs; PROVIDED, that the Company will not be obligated to make or continue in effect any such amendment. ARTICLE II DEFINITIONS 2.1 DEFINITIONS. Whenever used herein, the following terms shall have their respective meanings set forth below: 2 (A) "Account" means the bookkeeping account established and maintained with respect to the Executive pursuant to Section 4.1. (B) "Account Value" means, on any given date the value of the Account as determined under Article IV. (C) "Applicable Termination Event" means a Termination (i) by the Executive for Good Reason, (ii) by reason of a Change of Control pursuant to Section 12(a) of the Employment Agreement, or (iii) by the Company without Cause. (D) "Beneficiary" means the person(s) properly designated to receive, under provisions of the Plan, benefits payable in the event of the Executive's death. (E) "Board" means the Board of Directors of the Company. (F) "Cause" means Cause under the terms of the Employment Agreement. (G) "Change of Control" means Change of Control under the terms of the Employment Agreement. (H) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any regulations relating thereto. (I) "Committee" means the Compensation and Stock Option Committee of the Board. (J) "Company" means The Penn Traffic Company, a Delaware corporation. (K) "Corporate Plan" means The Penn Traffic Company Cash Balance Pension Plan. (L) "Disability" means being Disabled under the terms of the Employment Agreement. (M) "Effective Date" means January 31, 2001. 3 (N) "Employment Agreement" means the employment agreement between the Company and the Executive dated December 19, 2001, and any extension or renewal thereof, or successor agreement thereto. (O) "Executive" means Joseph V. Fisher. (P) "Good Reason" means Good Reason under the terms of the Employment Agreement. (Q) "Interest Credits" means additions to the Account determined pursuant to Section 4.3. (R) "Opening Account Balance" means the initial amount credited to the Account in accordance with Section 4.4. (S) "Plan Year" means the twelve month period ending on January 31 of each year. (T) "Retirement Benefit" means the benefit payable to the Executive on or after his Termination Date, but prior to his death, pursuant to Article V of the Plan. (U) "Service Credits" means additions to the Account determined pursuant to Section 4.2. (V) "Termination" means a termination of the Executive's services to the Company under the Employment Agreement irrespective of the reason therefor. (W) "Termination Date" means the date on which the Executive ceases to provide services to the Company under the Employment Agreement for any reason. 2.2 OTHER DEFINED TERMS. Any capitalized terms that are used in the Plan, which are not defined in this Article, shall have the meaning stated in the Corporate Plan. 4 2.3 GENDER AND NUMBER. Except when otherwise indicated by the context, words in the masculine gender when used in the Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. ARTICLE III VESTING 3.1 VESTING. All benefits under the Plan shall be fully vested and nonforfeitable at all times. ARTICLE IV ACCOUNTS AND CREDITS TO ACCOUNTS 4.1 ACCOUNT. As of the Effective Date, the Account shall be credited with an Opening Account Balance in accordance with Section 4.4. 4.2 SERVICE CREDITS. (a) On the January 31 of each of 2002, 2003, 2004 and 2005, the Account shall be increased by a Service Credit of $100,028 if the Executive is employed by the Company on such date. (b) If prior to January 31, 2005, there is a Termination that is not by reason of an Applicable Termination Event but is rather by reason of: (i) a Termination by the Executive other than for Good Reason, (ii) Termination by the Company for Cause, or (iii) the Executive's death or Disability, then the Account shall be increased by a Service Credit for the fiscal year of the Termination equal to a pro-rated portion of $100,028, based on the Executive's employment through the end of the month prior to the month in which the Termination Date occurs; the Account shall be increased by this pro-rata Service Credit on the January 31 coincident or following the Termination; provided, that if the Executive submits a 5 claim for benefits in accordance with the provisions of Section 5.2 prior to such January 31 then the Account shall be increased by the pro-rata Service Credit on the date of the distribution of the Account. If the Account is increased by a Service Credit pursuant to this paragraph (b), no further Service Credits will be added to the Account. (c) If prior to January 31, 2005, there is a Termination by reason of an Applicable Termination Event, the Account shall be increased by the Service Credits as otherwise provided for under paragraph (a) of this Section 4.2 notwithstanding that the Executive is not employed on the applicable January 31. The Service Credits so provided for may be credited to the Account earlier than as set forth in paragraph (a) of this Section 4.2, in accordance with the requirements of the proviso to the first sentence of Section 5.2. 4.3 INTEREST CREDITS. Each Plan Year the Account shall be automatically increased as of the last day of such Plan Year by crediting the balance in such Account as of the last day of the previous Plan Year (or, in the case of the first Plan Year, as of the Effective Date), with an Interest Credit equal to said Account balance multiplied by 6%. Such Interest Credits shall continue after the Executive's Termination Date, PROVIDED, however, that no Interest Credits shall be made to the Account for any Plan Year beginning on or after the date on which his benefit is paid. For the Plan Year in which the Executive's benefit is paid, an Interest Credit shall be made on a pro rata basis through the end of the month prior to the month in which the date of benefit is paid. 6 4.4 OPENING ACCOUNT BALANCE. The Executive shall have an Opening Account Balance as of the Effective Date of $318,449. ARTICLE V RETIREMENT BENEFITS 5.1 RETIREMENT BENEFIT. The Executive's Retirement Benefit on any given date shall be the Account Value as of such date less the Executive's vested accrued benefit under the Corporate Plan (or any successor or replacement plan); PROVIDED, that (i) for this purpose the Executive's vested accrued benefit under the Corporate Plan (or any successor or replacement plan) shall not include any benefits (or related interest thereon) accrued after the last day of the Plan Year ending on January 31, 2005, and (ii) the determination of the amount of the Executive's vested accrued benefit under the Corporate Plan (or any successor or replacement plan) shall be made in the reasonable judgment of the Committee. 5.2 PAYMENT OF RETIREMENT BENEFIT. The Executive shall receive the payment of his Retirement Benefit as of the first day of the month following the later to occur of (a) the Termination Date, and (b) the date on which the Executive submits a claim for benefits pursuant to Section 6.1; PROVIDED, that (i) in the case of the Executive's Termination by reason of an Applicable Termination Event, the Executive may elect for payment of his Retirement Benefit to be made either (x) on the Termination Date in which case the Retirement Benefit shall include the sum of the then Account Value less the Executive's vested accrued benefit under the Corporate Plan, increased by Service Credits that would otherwise be made hereunder through January 31, 2005, but excluding any Interest Credits following such Termination, or (y) on or after January 31, 2005, in which case he 7 shall be paid the sum of the then Account Value less the Executive's vested accrued benefit under the Corporate Plan, i.e. including Service Credits through January 31, 2005 and Interest Credits through the date of payment, and (ii) the Executive shall receive the payment no later than the first business day of February 2008. The Executive shall elect to receive the payment of his Retirement Benefit in the form of either a (a) lump sum payment, or (b) an annuity purchasable from his Account Balance. 5.3 DEATH OR DISABILITY PRIOR TO RETIREMENT. If the Executive dies or suffers a Disability prior to the commencement of any benefit payments under the Plan whether before or after his Termination Date, the Executive's Beneficiary shall be entitled to payment of a benefit as of the first day of any month after the Executive's death or Disability. The death or Disability benefit shall be payable in a single lump sum in an amount which is equal to the Executive's Retirement Benefit at the date of his death or Disability increased by any Interest Credits made under the Plan prior to the date on which distribution of the benefit is made or commences. ARTICLE VI CLAIMS PROCEDURE 6.1 WRITTEN REQUEST. Any claim for benefits by the Executive or his Beneficiaries shall be made in writing to the Committee. ARTICLE VII GENERAL PROVISIONS 7.1 ADMINISTRATION. The Committee shall be responsible for the general operation and administration of the Plan and for carrying out the provisions hereof. The Committee shall be entitled to rely conclusively upon all certificates, opinions and reports furnished 8 by any accountant, controller, counsel or other person employed or engaged by the Company with respect to the Plan. 7.2 FUNDING. The Board, in its sole discretion, may elect to fund the benefits payable under the Plan, through various investments. However, any such investment shall remain the property of the Company and be subject to the claims of general creditors of the Company. The Executive shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Plan. The Executive may not pledge as collateral any investments purchased to fund benefits under the Plan. Nothing contained in the Plan shall constitute a guaranty by the Company or any other entity or person that assets of the Company will be sufficient to pay any benefit hereunder. It is the intention of the parties that the Plan will be an unfunded deferred compensation plan solely for the benefit of the Executive and thus would not be subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). However, if the plan is interpreted to be subject to ERISA, it is the intention of the parties that the Plan be an unfunded deferred compensation plan solely for the benefit of management and highly compensated employees for tax purposes and for purposes of Title I of ERISA. 7.3 NO EMPLOYMENT CONTRACT. Nothing contained in the Plan shall be construed as a contract of employment between the Company and the Executive or as a limitation on the right of the Company to terminate, or fail to renew or extend the Employment Agreement, subject to the terms and conditions thereof, and without regard to the effect that such discontinuity may have upon the Executive's rights or potential rights, if any, under the Plan. 9 7.4 SPENDTHRIFT PROVISION. No interest of any person or entity in, or right to receive a benefit under, the Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment or other alienation or encumbrance of any kind; nor may such interest or right to receive a benefit be taken, either voluntarily or involuntarily, for the satisfaction of the debts of or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. 7.5 BINDING EFFECT. The Plan shall be binding upon and inure to the benefit of the Executive, his Surviving Spouse and Beneficiaries, the Company and any successor to the Company, whether by merger, consolidation, purchase, or otherwise. 7.6 APPLICABLE LAW. The Plan shall be governed by and construed in accordance with the laws of the State of New York, except to the extent preempted by ERISA, if it is determined that the Plan is subject to ERISA, without regard to principles of conflict of laws. 7.7 WITHHOLDING. Any payment made pursuant to the Plan shall be reduced by federal and state income, FICA or other employee payroll, withholding or other similar taxes that the Executive's employer may be required to withhold by law. In addition, as the Retirement Benefit accrues during the period of time that the Executive provides services to the Company under the Employment Agreement, the regular payments that the Company makes to Executive with respect to the Executive's services to the Company shall be subject to FICA or other employee payroll, withholding or other similar taxes which the Company may be required by law to withhold on the accrual of benefits. 10 7.8 SEVERABILITY. If one or more provisions of the Plan, or any part thereof, shall be determined by a court of competent jurisdiction to be invalid or unenforceable, then the Plan shall be administered as if such invalid or unenforceable provision had not been contained in the Plan. The invalidity or unenforceability of any Plan provision, or any part thereof, shall not affect the validity and enforceability of any other Plan provision or any part thereof. 7.9 TERMINATION OF THE PLAN. The Company intends to maintain the Plan until all benefit payments are made pursuant to the Plan. The Company may not amend or terminate the Plan without the written consent of the Executive. 11 7.10 TITLES AND HEADINGS NOT TO CONTROL. The titles to the Articles and the headings of Sections in the Plan are placed herein for convenience of reference only, and in case of any conflict, the text of this instrument, rather than such titles or headings, shall control. THE PENN TRAFFIC COMPANY By: ------------------------ EX-10.3 4 a2078392zex-10_3.txt EXHIBIT 10-3 EXHIBIT 10.3 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Employment Agreement (the "AGREEMENT") is entered into as of this 19th day of December, 2001, by and between The Penn Traffic Company (the "COMPANY") and Martin A. Fox (the "EXECUTIVE"). WHEREAS, on January 31, 2000, the Executive and the Company entered into an employment agreement, which was amended on November 15, 2000 (such employment agreement, as so amended, is referred to herein as the "ORIGINAL EMPLOYMENT AGREEMENT") to provide for the employment of the Executive; and WHEREAS, the Original Employment Agreement shall expire on December 31, 2001 and the Executive wishes to continue in the employ of the Company, and the Company wishes to provide for the continued employment of the Executive. NOW, THEREFORE, the parties hereby amend and restate the Employment Agreement in its entirety as follows: 1. EMPLOYMENT. (a) The Company hereby agrees that the Executive shall, during the Term (as defined herein), continue to act as the Executive Vice President and Chief Financial Officer of the Company. (b) The Executive hereby accepts his continued 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 the conditions set forth in the Agreement. In such capacity, the 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 2 "BOARD"). Throughout the Term, the Executive shall utilize his best efforts and all of his skills, experience and knowledge to promote the interests of the Company. During the Term, the 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 the Executive's day-to-day responsibilities to the Company, without limiting the generality of Section 6, the 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 the Executive under the Original Employment Agreement commenced on January 31, 2000 (the "ORIGINAL EFFECTIVE DATE") and the term of employment of the Executive under this Agreement shall commence on the date hereof (the "EFFECTIVE DATE") and will continue under this Agreement until the earlier of (i) December 31, 2004, (ii) the date that the Executive or the Company terminates his employment pursuant to Section 7, 8 or 9 or (iii) the occurrence of a Change of Control (as defined herein) (the "TERM"). 3. LOCATION OF EMPLOYMENT. The Executive shall render services at the Company's offices that are located in Syracuse, New York in a manner consistent with past practices of the Executive in his capacity as Chief Financial Officer after consultation with the Company's Chief the Executive Officer. The 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 the Executive with up-keep of office systems and secretarial assistance at such location. Notwithstanding the foregoing, the Executive acknowledges and agrees that the Executive's duties 3 hereunder will include travel outside the Syracuse, New York and Rye, New 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 the Executive's duties hereunder may require. 4. COMPENSATION. (a) BASE SALARY. The Company shall pay the Executive a base salary at a rate of $1,000,000 per annum ("BASE SALARY"). 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. (b) BONUS. (i) With respect to each fiscal year beginning with the fiscal year ending February 1, 2003, the Executive shall be eligible to earn an annual bonus (the "BONUS"). The Bonus, if any, awarded to the Executive each year shall be based on the extent to which the Company achieves annual performance criteria which shall be determined by the Compensation and Stock Option Committee of the Board of Directors of the Company (the "COMMITTEE") prior to the beginning of such year; provided, however, that such Bonus shall not in any year exceed 37.5% of the Executive's Base Salary. Such Bonus as to any fiscal year, if any, shall be paid to the Executive at the same time that bonuses or incentive compensation with respect to that fiscal year are paid to other executive employees of the Company. The Executive understands and agrees that the Company may provide this bonus opportunity under a shareholder approved arrangement that is intended to qualify under Section 162(m) of the Internal Revenue 4 Code ("IRC"); provided, however, that the Company's agreements hereunder shall apply irrespective of whether such bonus so qualifies. (ii) In addition, the Executive may receive such other discretionary bonuses or other incentive compensation as the Committee may determine, in its sole discretion. (c) OPTIONS. The Company and the Executive acknowledge that the Executive was granted options to purchase shares of the common stock, $.01 par value per share, of the Company (the "COMMON STOCK") generally as follows: (i) Effective as of October 24, 2001, pursuant to the Equity Plan (as defined herein), the Executive was granted options to purchase 250,000 shares of the Common Stock with an exercise price equal to $4.35 per share (the "OPTION AWARD") subject to a vesting schedule and other terms as set forth in the Option Award. (ii) The Options are subject to the terms of the Award and the Company's 1999 Equity Incentive Plan (the "EQUITY PLAN"). A copy of the Award is attached hereto as EXHIBIT A and such Award shall remain in full force and effect. (iii) As a condition of the Award, all other stock options granted by the Company to or on the behalf of the Executive were cancelled on October 24, 2001. (iv) To the extent permitted by the IRC, the options to purchase Common Stock granted pursuant to the Option Award qualify as incentive stock options under the IRC. 5. FRINGE BENEFITS. (a) The Executive shall, from and after the Effective Date, have the right to participate in the Company's medical, dental, disability, life and other insurance 5 plans maintained during the Term by the Company for executives of the stature and rank of the Executive, and any other plans and benefits, if any, generally maintained by the Company for executives of the stature and rank of the 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 Fringe Benefits have minimum service requirements, the Executive shall be provided with credit for past service with the Company (including through the management agreement between the Company and Hirsch & Fox LLC, as of June 29, 1999, which was amended on December 2, 1999 (the "MANAGEMENT AGREEMENT") to which the Executive was an indirect party) so as to provide the Executive with Fringe Benefits on a level with executives of the stature and rank of the Executive. To the extent permitted by law and the terms of The Penn Traffic Company Cash Balance Pension Plan (the "CORPORATE PLAN"), the Executive shall have the right to participate in the Corporate Plan. In addition, the Executive shall continue to participate in The Penn Traffic Company Supplemental Retirement Plan for Martin Fox (the "SERP"). The SERP is attached hereto as EXHIBIT B and such SERP shall remain in full force and effect. (b) Subject to the requirements of the Executive's office, the 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 the Executive for (i) actual, ordinary and necessary travel and accommodation cost, entertainment and other business expenses incurred as a necessary part of discharging the Executive's duties hereunder and 6 (ii) all legal fees and expenses incurred in connection with the negotiation of the Agreement in the amount of $35,000. 6. CONFIDENTIALITY; NO COMPETITION. (a) The Executive agrees that while the Agreement is in effect and for a period of 12 months after termination of the Agreement pursuant to Section 2, the 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 of, 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 the Executive based on the 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 restrictions of this Section shall not apply to publicly available information or information known 7 generally to the public (without any action on the part of the Executive prohibited by the restrictions of this Section), (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 Section), 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 the Executive receives a subpoena or other process or order which may require him to disclose any confidential information, the Executive agrees (i) to notify the Company promptly of the existence, terms and circumstances surrounding such process or order, and (ii) to cooperate with the Company, at the Company's 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 as is required to be disclosed. (c) The obligations of the Executive under this Section 6 shall survive any termination of the Agreement. (d) The Executive agrees that while the Agreement is in effect and, solely in the event a Change of Control occurs prior to termination of the Agreement and the Change of Control Payment or the Carryover Change of Control Payment described below is made, for a period of 12 months after termination of the Agreement pursuant to Section 2, the 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 8 corporation or a member of any firm or otherwise: (i) engage in any way in any wholesale 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) the 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 Executive 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, 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 Executive 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 9 covenants set forth in this Section 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. The Executive understands that the enforcement of this Section 6 may limit the Executive's ability to earn a livelihood in a business similar to the business of the Company but nevertheless agrees and hereby acknowledges that (i) such provisions do not impose a greater restraint than is necessary to protect the goodwill or other business interests of the Company, (ii) such provisions contain reasonable limitations as to time and scope of activity to be restrained, (iii) such provisions are not harmful to the general public, and (iv) such provisions are not unduly burdensome to the Executive, and the consideration provided hereunder is sufficient to compensate the Executive for the restrictions contained in such provisions. In consideration thereof and in light of the Executive's education, skills and abilities, the Executive agrees that the Executive will not assert in any forum that such provisions prevent the Executive from earning a living or otherwise are void or unenforceable or should be held void or unenforceable. The Executive acknowledges that the remedy at law for any breach or threatened breach of this Section 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 the Agreement and the Executive's employment hereunder for "Cause" by written notice to the Executive setting forth the grounds for termination with specificity. "Cause" shall 10 mean the termination of the 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 the Executive of a material dishonest act of fraud against the Company or any subsidiary thereof; PROVIDED, 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 THE EXECUTIVE. The Executive may terminate the Agreement and his employment hereunder for Good Reason (as defined herein) 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 an Executive Vice President and Chief Financial Officer and to continue to elect or appoint the 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 the Agreement, which failure is not remedied within ten (10) business days after written notice thereof is delivered to the Company by the 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. 11 9. TERMINATION FOR DEATH OR DISABILITY. (a) If during the Term, the Executive should die, the Executive's employment shall be deemed to have terminated as of the date of death. (b) If during the Term, the Executive should suffer a disability which, in fact, prevents the 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 the Executive's services hereunder by a written notice to the Executive setting forth the grounds for such termination with specificity, which termination will take effect 30 days after such notice is given. The 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 the Executive's disability for the purposes of the Agreement shall be determined by a physician mutually selected by the Company and the Executive, and the 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 the Agreement to a beneficiary designated by the Executive, it is agreed that the 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 the Executive fails to designate a beneficiary (or beneficiaries) as herein provided, any payments which are to be made to the Executive's designated beneficiary (or beneficiaries) under the Agreement shall be made to the 12 Executive's widow, if any, during her lifetime, thereafter to his issue, if any, including legally adopted children, and then to the Executive's personal representative. 11. EFFECT OF COMPANY'S TERMINATION OTHER THAN UNDER SECTIONS 7 OR 9 OR EFFECT OF THE EXECUTIVE'S TERMINATION UNDER SECTION 8. (a) If the Company terminates the Executive's employment under the Agreement for any reason other than Cause, or other than due to his death or disability, or the Executive terminates the Agreement for Good Reason, the Executive shall be entitled to receive a lump sum payment equal to the aggregate amount of his Base Salary for the period from the date of such termination through December 31, 2004. Such payment shall be made within thirty (30) days following the date of such termination. (b) In addition, if at any time prior to December 31, 2004 or the Carryover Determination Date (as defined herein), but following a termination described in Section 11(a), the Company shall have entered into a definitive agreement in respect of a Change of Control (as defined herein) or a Change of Control shall have occurred, then in the case of, and notwithstanding (i) the termination of the Agreement by the Company for any reason other than Cause, or (ii) the termination of the Agreement by the Executive for Good Reason, the Company shall make the payment as provided in Section 12(a) or Section 12(b), as the case may be, on the dates provided in such Section, LESS that portion of the lump sum payment the 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 Section 5(a) hereof for a period of 12 months from the date of termination to the extent not prohibited by law or the terms of such benefit arrangement; 13 the Executive shall continue his participation in the Corporate Plan and the Award in accordance with the provisions thereof; and the Company shall continue to make the payments required to be made pursuant to the SERP and reimbursements contemplated by Section 5(c) hereof. 12. EFFECT OF A CHANGE OF CONTROL. (a) If at any time prior to December 31, 2004 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 (assuming the Executive has not voluntarily terminated the Agreement for other than Good Reason and the Company has not terminated the Agreement for Cause, in either case prior the Change of Control) the Executive shall be entitled to receive the Change of Control Payment (as defined herein) (subject to offset as set forth in the last clause of Section 11(b) herein, if applicable) on the date of the occurrence or consummation of a Change of Control irrespective of whether the Term has expired or terminated by reason of the Company's termination of the Agreement without Cause or the Executive's termination for Good Reason. Upon the Executive's receipt of the Change of Control Payment in full (subject to offset as set forth in the last clause of Section 11(b) herein, if applicable), the Agreement shall be terminated automatically and the Executive shall no longer be entitled to any further payments described herein except for payments required to be made pursuant to the SERP and reimbursements contemplated by Section 5(c) of the Agreement; and the Executive shall continue his participation in the Corporate Plan and the Award in accordance with the provisions thereof. The payment contemplated by this Section 12(a) shall not be duplicative to the payment contemplated by Section 11(b) herein. 14 (b) If at any time prior to the Carryover Determination Date 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 the Executive shall (assuming the Executive has not voluntarily terminated the Agreement for other than Good Reason and the Company has not terminated the Agreement for Cause, in either case prior to the Change of Control) be entitled to elect, at his option, to receive either the Change of Control Payment or the Carryover Change of Control Payment (as defined herein) (subject to offset as set forth in the last clause of Section 11(b) herein, if applicable) on the date of the occurrence or consummation of a Change of Control irrespective of whether the Term has previously expired or terminated by reason of the Company's termination of the Agreement without Cause or the Executive's termination for Good Reason. Upon the Executive's receipt of either the Change of Control Payment or the Carryover Change of Control Payment in full (subject to offset as set forth in the last clause of Section 11(b) herein, if applicable), the Agreement shall be terminated automatically and the Executive shall no longer be entitled to any further payments described herein except for payments as required to be made pursuant to the SERP and reimbursements of expenses contemplated by Section 5(c) of the Agreement; and the Executive shall continue his participation in the Corporate Plan and the Award in accordance with the provisions thereof. The payment contemplated by this Section 12(b) shall not be duplicative to the payment contemplated by Section 11(b) herein. (c) Notwithstanding any other provision herein, the Executive shall not receive both the Change of Control Payment provided in Section 12(a) and the Carryover Change of Control Payment provided in Section 12(b). 15 (d) For purposes of the Agreement, the following terms shall have the following meanings: (i) "Carryover Change of Control Payment" shall mean an amount equal to the greater of (x) a lump sum payment equal to the aggregate amount of the Base Salary for the period from the date of the Change of Control through December 31, 2004 and (y) $2,900,000 MINUS the "in-the-money" value on the date of the occurrence of a Change of Control of all of the options granted to the Executive under the Award that are vested and exercisable (i.e., the number of such vested and exercisable 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) $4.35). (ii) "Carryover Determination Date" shall mean the later of (x) December 31, 2001, or (y) one (1) year following the termination of any engagement or similar agreement entered into between the Company and any investment banking firm retained prior to December 31, 2001 for purposes of advising the Company in connection with any transaction that would constitute a Change of Control. (iii) "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 shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly 16 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. (iv) "Change of Control Payment" shall mean an amount equal to the greater of (x) a lump sum payment equal to the aggregate amount of the Base Salary for the period from the date of the Change of Control through December 31, 2004 and (y) two (2) times the Executive's Base Salary. 17 (e) 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 Section 280G and the regulations thereunder) or any affiliate of such Person, whether paid or payable or distributed or distributable pursuant to the terms of the 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 THE COMPANY'S TERMINATION FOR CAUSE, THE EXECUTIVE'S TERMINATION WITHOUT GOOD REASON, TERMINATION UPON DEATH OR DISABILITY. If the Company terminates the Executive's employment under the Agreement for Cause or the Executive terminates his employment under the Agreement other than for Good Reason, or if the Executive's employment is terminated due to his death or disability, then the Company shall continue to pay the Executive (or his designated beneficiary) his Base Salary through the effective date of termination, and the Executive shall continue to be entitled to payments required to be made pursuant to the SERP and 18 the reimbursements contemplated by Section 5(c) of the Agreement; the Executive shall continue his participation in the Corporate Plan and the Award in accordance with the provisions thereof. 14. THE EXECUTIVE'S REPRESENTATIONS AND WARRANTIES. The Executive represents and warrants to the Company as follows: (a) The Executive has the unfettered right to enter into the Agreement on the terms and subject to the conditions hereof, and the 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 the Agreement by the Executive nor the performance by the Executive of any of the 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 the Executive is a party or by which the Executive is bound. 15. INDEMNIFICATION, ETC. The Company agrees to indemnify the 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 the Executive's services as, and/or for activities engaged in by the Executive while the Executive is, an officer and/or employee and/or director of the Company or any affiliate thereof, including either paying or reimbursing the Executive, 19 promptly after request, for any reasonable and documented expenses and attorney's fees and costs actually incurred by the 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 the 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 the 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" 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 the 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 20 other address as a party may specify by notice in accordance with the provisions hereof to the other): IF TO THE EXECUTIVE, TO THE EXECUTIVE AT: Mr. Martin A. Fox 3 Fieldcrest Road Westport, Connecticut 06880 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. The Agreement contains a complete statement of all the arrangements between the parties with respect to the Executive's employment by the Company, supersedes all existing agreements or arrangements between them concerning the Executive's employment (including the Management Agreement), and can only be amended or modified by a written instrument signed by the Company and the Executive. 18. SEVERABILITY PROVISIONS. If any provision of the Agreement is declared invalid, illegal or incapable of being enforced by any court of competent jurisdiction, all of the remaining provisions of the 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. The 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, without regard to principles of conflicts of laws. 21 20. WAIVER. The failure of a party to insist upon strict adherence to any term of the 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 the Agreement. 21. HEADING. The headings in the Agreement are solely for the convenience of reference and shall not affect its interpretation. 22. WITHHOLDING. Any amount payable under the 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. The Agreement will inure to the benefit of, and be enforceable by, the Executive's heirs and the Company's successors and assigns. The Company shall have the right to assign the 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, that in the event of any such assignment the assignee shall expressly agree in writing to assume all of the Company's obligations under the Agreement, and Company shall remain secondarily liable to the Executive for the performance of all such obligations. 22 WHEREFORE, the parties hereto have executed the Agreement as of the day and year first above written. THE PENN TRAFFIC COMPANY By: /s/ Peter Zurkow /s/ Martin A. Fox ------------------------- ------------------------- Name: Peter Zurkow Martin A. Fox Title: Chairman of the Board Exhibit A PENN TRAFFIC COMPANY 1999 EQUITY INCENTIVE PLAN AWARD AGREEMENT THIS AGREEMENT (the "Agreement"), is made effective as of the 24th day of October, 2001, (hereinafter called the "Date of Grant"), between Penn Traffic Company, a Delaware corporation (hereinafter called the "Company"), and Martin A. Fox (hereinafter called the "Participant"): R E C I T A L S: WHEREAS, the Company has adopted the Penn Traffic Company 1999 Equity Incentive Plan (the "Plan"), which Plan is incorporated herein by reference and made a part of this Agreement. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan; and WHEREAS, the corporation and stock option Committee of the Board of Directors of the Company (the "Committee") has determined that it would be in the best interests of the Company and its stockholders to grant the option to purchase shares of the Company Common Stock ("Shares") provided for herein (the "Option") to the Participant pursuant to the Plan and the terms set forth herein. NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties hereto agree as follows: 1. GRANT OF THE OPTION. The Company hereby grants to the Participant the right and option to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate of 250,000 Shares, subject to adjustment as set forth in the Plan (the "Option"). The purchase price of the Shares subject to the Option shall be $4.35 per Share (the "Exercise Price"). The Option is intended to be qualified as an Incentive Stock Option, within the meaning of section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), with respect to 91,952 Shares and as Non-Qualified Stock Option with respect to 158,048 Shares. The Company cannot guarantee that the special tax treatment described in section 422 of the Code will apply. For example, if the Participant sells the Shares acquired pursuant to the exercise of this Option either within two years after the date of this Agreement or within one year after the date this Option (or part thereof) is exercised, this special tax treatment will not apply. If the Option (or any part thereof) does not qualify for Incentive Stock Option treatment for any reason, then, to the extent of such nonqualification, the Option (or such portion thereof) shall be treated as a Non-Qualified Stock Option granted under the Plan. 2 2. VESTING. Subject to the Participant's continued employment with the Company, the Option shall vest with respect to 20% of the Shares initially subject to the Option on the Grant Date hereof, 20% of the Shares initially subject to the Option on each of the first and second anniversaries of the Grant Date and 40% of the Shares initially subject to the Option on the third anniversary of the Grant Date. Any portion of the Option which is not vested as of the Participant's termination of employment shall immediately terminate and expire. (a) At any given time, the portion of the Option which has become vested and exercisable as described above is hereinafter referred to as the "Vested Portion." (b) In the event of (i) a "Change of Control" (as defined in the Plan); (ii) a "Change of Control" (as defined in the Employment Agreement dated as of December 19, 2001, as amended to the date hereof and from time to time hereafter, between the Company and Participant (as amended, the "Employment Agreement")); (iii) the termination by the Company of the Participant's employment with the Company other than for "Cause"(as defined in the Employment Agreement); or (iv) termination by the Participant of the Participants employment with the Company for "Good Reason" (as defined in the Employment Agreement), the Option shall, to the extent not then vested or previously canceled, vest and become immediately exercisable in full. 3. EXERCISE OF OPTION. (a) PERIOD OF EXERCISE. Subject to the provisions of the Plan and this Agreement, the Participant may exercise all or any part of the Vested Portion of the Option at any time prior to the earliest to occur of: (i) 11:59pm Eastern Standard Time on the tenth anniversary of the Date of Grant; (ii) sixty (60) days following either (a) the date of the Participant's termination of employment by the Company for "Cause" (as defined in the Employment Agreement) or (b) the date of the Participant's voluntary termination of employment without "Good Reason" (as defined in the Employment Agreement); or (iii) in the case of the Participant's termination of employment for death or disability (within the meaning of section 22(e)(3) of the Code), one year following such termination. (b) Method of Exercise. (i) Subject to Section 3(a) of this Agreement, the Option may be exercised by delivering to the Company at its principal office written notice of intent to so exercise; PROVIDED that, the Option may be exercised with respect to whole Shares 3 only. Such notice shall specify the number of Shares for which the Option is being exercised and shall be accompanied by payment in full of the Exercise Price. The payment of the Exercise Price may be made in cash, or its equivalent, or (x) by exchanging Shares owned by the Participant (which are not the subject of any pledge or other security interest and which have been owned by the Participant for at least 6 months), (y) subject to such rules as may be reasonably established by the Committee, through delivery of irrevocable instructions to a broker to sell a portion of the Shares otherwise deliverable upon the exercise of the Option and to deliver promptly to the Company an amount equal to the aggregate exercise price of the portion of the Option so exercised or (z) by a recourse promissory note and agreement of the Participant providing for the payment with interest of the unpaid balance accruing at a rate not less than needed to avoid the imputation of income under section 7872 of the Code and upon such terms and conditions (including the furnishing of security, if any therefor) as the Committee may determine, or by a combination of the foregoing. (ii) Notwithstanding any other provision of the Plan or this Agreement to the contrary, the Option may not be exercised prior to the completion of any registration or qualification of the Option or the Shares under applicable state and federal securities or other laws, or under any ruling or regulation of any governmental body or national securities exchange that the Committee shall in its sole discretion determine to be necessary or advisable. (iii) Upon the Company's determination that the Option has been validly exercised as to any of the Shares, the Company shall issue certificates in the Participant's name for such Shares. However, the Company shall not be liable to the Participant for damages relating to any delays in issuing the certificates to him, any loss of the certificates, or any mistakes or errors in the issuance of the certificates or in the certificates themselves. (iv) In the event of the Participant's death, the Option shall remain exercisable by the Participant's executor or administrator, or the person or persons to whom the Participant's rights under this Agreement shall pass by will or by the laws of descent and distribution as the case may be, to the extent set forth in Section 3(a) of this Agreement. Any heir or legatee of the Participant shall take rights herein granted subject to the terms and conditions hereof. 4. NO RIGHT TO CONTINUED EMPLOYMENT. Neither the Plan nor this Agreement shall be construed as giving the Participant the right to be retained in the employ of, or in any consulting relationship to, the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss the Participant or discontinue any consulting relationship, free from any liability or any claim under the Plan or this Agreement, except as otherwise expressly provided herein. 5. LEGEND ON CERTIFICATES. The certificates representing the Shares purchased by exercise of the Option shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon 4 which such Shares are listed, and any applicable Federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 6. TRANSFERABILITY. The Option may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant otherwise than by will or by the laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate; provided that the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance. No such permitted transfer of the Option to heirs or legatees of the Participant shall be effective to bind the Company unless the Committee shall have been furnished with written notice thereof and a copy of such evidence as the Committee may deem necessary to establish the validity of the transfer and the acceptance by the transferee or transferees of the terms and conditions hereof. During the Participant's lifetime, the Option is exercisable only by the Participant. Notwithstanding the foregoing, the vested portion of this Option, insofar as such vested portion is not intended to be treated as an Incentive Stock Option that complies with section 422 of the Internal Revenue Code of 1986, as amended, may be transferred by the Participant (the "Grantee") without consideration, subject to such rules as the Committee may adopt to preserve the purposes of the Plan, to: (A) any or all of the Grantee's spouse, children or grandchildren (including adopted and stepchildren and grandchildren) (collectively, the "Immediate Family"); (B) a trust solely for the benefit of the Grantee and/or his or her Immediate Family (a "Family Trust"); or (C) a partnership or limited liability company whose only partners or shareholders are the Grantee and/or his or her Immediate Family and/or a Family Trust; (each transferee described in clauses (A), (B) and (C) above is hereinafter referred to as a "Permitted Transferee"); PROVIDED that the Grantee gives the Committee advance written notice describing the terms and conditions of the proposed transfer and the Committee notifies the Grantee in writing that such a transfer would comply with the requirements of the Plan and this Agreement. If any portion of this Option is transferred in accordance with the immediately preceding sentence, the terms of this Option shall apply to the Permitted Transferee and any reference in this Agreement to an optionee, Grantee or Participant shall be deemed to refer to the Permitted Transferee, except that (a) Permitted Transferees shall not be entitled to transfer this Option, other than by will or the laws of descent and distribution; (b) Permitted Transferees shall not be entitled to exercise the transferred Option unless there shall be in effect a 5 registration statement on an appropriate form covering the shares to be acquired pursuant to the exercise of such Option if the Committee determines that such registration statement is necessary or appropriate, (c) the Committee or the Company shall not be required to provide any notice to a Permitted Transferee, whether or not such notice is or would otherwise have been required to be given to the Grantee under the Plan or otherwise and (d) the consequences of termination of the Grantee's employment by, or services to, the Company under the terms of the Plan and this Agreement shall continue to be applied with respect to the Grantee, following which the Option shall be exercisable by the Permitted Transferee only to the extent, and for the periods, specified in the Plan and this Agreement. 7. WITHHOLDING. (a) The Participant may be required to pay to the Company or any Affiliate and the Company or any Affiliate shall have the right and is hereby authorized to withhold from any Shares or other property deliverable under the Option or from any compensation or other amount owing to a Participant the amount (in cash, Shares, or other property) of any applicable withholding taxes in respect of the Option, its exercise, or any payment or transfer under the Option or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. (b) Without limiting the generality of Section 7(a) above, the Participant may satisfy, in whole or in part, the foregoing withholding liability by delivery of Shares owned by the Participant (which are not subject to any pledge or other security interest and which have been owned by the Participant for at least 6 months) with a Fair Market Value equal to such withholding liability or by having the Company withhold from the number of Shares otherwise issuable pursuant to the exercise of the option a number of Shares with a Fair Market Value equal to such withholding liability. (c) The Company may, as a condition of Option exercise, require that satisfactory arrangements have been made in advance to satisfy all tax withholding obligations. 8. SECURITIES LAWS. Upon the acquisition of any Shares pursuant to the exercise of the Option, the Participant will make or enter into such written representations, warranties and agreements as the Committee may reasonably request in order to comply with applicable securities laws or with this Agreement. 9. NOTICES. Any notice necessary under this Agreement shall be addressed to the Company in care of its Secretary at the principal executive office of the Company and to the Participant at the address appearing in the personnel records of the Company for the Participant or to either party at such other address as either party hereto may hereafter designate in writing to the other. Any such notice shall be deemed effective upon receipt thereof by the addressee. 6 10. CHOICE OF LAW. THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. 11. ANTI-DILUTION. If there occurs any consolidation or merger of the Company with or into any other person or entity (other than a merger consolidation of the Company in which the Company is the continuing corporation and which does not result in any reclassification or change of the outstanding Shares) or sale, transfer or other disposition of all or substantially all of the assets of the Company to another person or entity, then each Option shall thereafter be exercisable into the same kind and amount of securities (including shares of stock) or other assets, or both, which were issuable or distributable to holders of outstanding Shares upon such consolidation, merger, sale or conveyance in respect of that number of Shares into which the Options might have been converted immediately prior to such consolidation, merger, sale or conveyance and in any such case appropriate adjustments shall be made to insure that the provisions set forth herein shall be thereafter applicable as reasonably may be practicable in relation to any securities or other assets thereafter deliverable upon exercise of the Options. In addition, in the event the Change of Control (as defined in the Plan) or a Change of Control (as defined in the Employment Agreement) which resulted (or would result upon consummation) in the Options vesting pursuant to Section 2 of this Agreement is a tender offer or exchange offer, the Company, at the Participant's option, shall (i) in the case of a cash tender offer, pay the Participant the difference between the cash consideration in the tender offer and the exercise price of the Options and (ii) in the case of any other tender offer or exchange offer, provide, notwithstanding the provisions of Section 2 hereof, that the Participant shall be permitted to exercise the Options immediately prior to the consummation of such tender offer or exchange offer so that the Participant may tender any or all of the Shares received upon exercise of the Options in such tender offer or exchange offer. 12. OPTION SUBJECT TO PLAN. By entering into this Agreement the Participant agrees and acknowledges that the Participant has received and read a copy of the Plan. The Option is subject to the Plan including without limitation the anti-dilution provisions set out in Section 4(b) thereof. The terms and provisions of the Plan as it may be amended from time to time are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail. 13. DISQUALIFYING DISPOSITION. The Participant agrees and covenants that if he disposes of any of the Shares acquired pursuant to the exercise of this Option in a "disqualifying disposition," as described in section 422 of the Code, he will immediately contact the Company to inform it of such event. 14. RIGHTS AS STOCKHOLDER. The Participant shall not be deemed to be the owner of any Shares subject to this Option unless, until and to the extent that (i) this Option shall have been exercised pursuant to its terms, (ii) the Company shall have issued and delivered to the Participant the Shares, and (iii) the Participant's name shall have been 7 entered as a stockholder of record with respect to such Shares on the books of the Company. 15. SIGNATURE IN COUNTERPARTS. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 16. SUCCESSORS. The terms of the Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, and of the Participant and the beneficiaries, executors, administrators, heirs and successors of the Participant. 17. INVALID PROVISION. The invalidity or unenforceability of any particular provision hereof shall not affect the other provisions hereof, and the Agreement shall be construed in all respects as if such invalid or unenforceable provision had been omitted. 18. MODIFICATIONS. No change, modification or waiver of any provision of the Agreement shall be valid unless the same be in writing and signed by the parties hereto. 19. ENTIRE AGREEMENT. The Agreement and the Plan contain the entire agreement and understanding of the parties hereto with respect to the subject matter contained herein and therein and supersede all prior communications, representations and negotiations in respect thereto. 8 20. HEADINGS. The headings of the Sections hereof are provided for convenience only and are not to serve as a basis for interpretation or construction, and shall not constitute a part, of the Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement. PENN TRAFFIC COMPANY ---------------------------- By: Title: PARTICIPANT ---------------------------- Exhibit B THE PENN TRAFFIC COMPANY SUPPLEMENTAL RETIREMENT PLAN FOR MARTIN A. FOX TABLE OF CONTENTS ARTICLE I ESTABLISHMENT, PURPOSE AND EFFECTIVE DATE OF PLAN 1 1.1 Establishment........................................................1 1.2 Purpose..............................................................1 1.3 Effective Date.......................................................1 ARTICLE II DEFINITIONS 1 2.1 Definitions..........................................................1 2.2 Other Defined Terms..................................................3 2.3 Gender and Number....................................................3 ARTICLE III VESTING 4 3.1 Vesting..............................................................4 ARTICLE IV ACCOUNTS AND CREDITS TO ACCOUNTS 4 4.1 Accounts.............................................................4 4.2 Basic Pay-Based Credits..............................................4 4.3 Interest Credits.....................................................4 4.4 Opening Account Balance..............................................5 ARTICLE V RETIREMENT BENEFITS 5 5.1 Retirement Benefit...................................................5 5.2 Payment of Retirement Benefit........................................5 5.3 Death Prior to Retirement............................................5 ARTICLE VI CLAIMS PROCEDURE 6 6.1 Written Request......................................................6 ARTICLE VII GENERAL PROVISIONS 6 7.1 Administration.......................................................6 7.2 Funding..............................................................6 7.3 No Employment Contract...............................................7 7.4 Spendthrift Provision................................................7 7.5 Binding Effect.......................................................7 7.6 Applicable Law.......................................................7 7.7 Withholding..........................................................7 7.8 Severability.........................................................8 7.9 Termination of the Plan..............................................8 7.10 Titles and Headings Not to Control...................................8
THE PENN TRAFFIC COMPANY SUPPLEMENTAL RETIREMENT PLAN FOR MARTIN A. FOX ARTICLE I ESTABLISHMENT, PURPOSE AND EFFECTIVE DATE OF PLAN 1.1 ESTABLISHMENT. The Penn Traffic Company ("Company"), a Delaware corporation, hereby establishes a supplemental retirement program for Martin A. Fox, which shall be known as The Penn Traffic Company Supplemental Retirement Plan For Martin A. Fox ("Plan"). 1.2 PURPOSE. The purpose of the Plan is to provide Martin A. Fox with retirement income. Payment of the retirement benefit under this Plan shall be made from the general assets of the Company, or by such other method as is consistent with Section 7.2 of this Plan and which is agreed to by the Executive and the Company. The Plan supersedes, and replaces all benefits due to Martin A. Fox under The Penn Traffic Company Supplemental Retirement Plan For Non-Employee Executives. 1.3 EFFECTIVE DATE. The Plan shall be effective as of June 29, 1999. ARTICLE II DEFINITIONS 2.1 DEFINITIONS. Whenever used herein, the following terms shall have their respective meanings set forth below: (A) "Account" means the bookkeeping account established and maintained with respect to an Executive pursuant to Section 4.1. (B) "Account Value" means, on any given date the value of Executive's Account as determined under Article IV. 2 (C) "Beneficiary" means the person(s) properly designated to receive, under provisions of the Plan, benefits payable in the event of the Executive's death. (D) "Board" means the Board of Directors of the Company. (E) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any regulations relating thereto. (F) "Committee" means the Compensation and Stock Option Committee of the Board. (G) "Company" means The Penn Traffic Company, a Delaware corporation. (H) "Compensation" means $500,000 per annum, prorated by days for the short year in which his Termination Date occurs. (I) "Corporate Plan" means The Penn Traffic Company Cash Balance Pension Plan. (J) "Disability" means being Disabled under the terms of the Employment Agreement. (K) "Effective Date" means June 29, 1999. (L) "Executive" means Martin A. Fox. (M) "Interest Credits" means additions to an Executive's Account determined pursuant to Section 4.3. (N) "Employment Agreement" means the employment agreement between the Company and Executive dated January 31, 2000, and any extension or renewal thereof, or successor agreement thereto. (O) "Opening Account Balance" means the initial bookkeeping account established pursuant to Section 4.4 of the Plan. 3 (P) "Pay-Based Credit" means additions to an Executive's Account determined pursuant to Section 4.2. (Q) "Plan" means The Penn Traffic Company Supplemental Retirement Plan for Martin A. Fox, as amended from time to time. (R) "Plan Year" means the period June 29, 1999 through December 31, 1999 and each subsequent twelve-month period from January 1 through December 31 for which this Plan is in effect. (S) "Retirement Benefit" means the benefit payable to the Executive on or after his Termination Date, but prior to his death, pursuant to Article V of the Plan. (T) "Termination Date" means the date on which the Executive ceases to provide services to the Company under the Employment Agreement for any reason. 2.2 OTHER DEFINED TERMS. Any capitalized terms that are used in the Plan, which are not defined in this Article, shall have the meaning stated in the Corporate Plan. 2.3 GENDER AND NUMBER. Except when otherwise indicated by the context, words in the masculine gender when used in the Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. ARTICLE III VESTING 3.1 VESTING. All benefits under this Plan shall be fully vested and nonforfeitable at all times. ARTICLE IV ACCOUNTS AND CREDITS TO ACCOUNTS 4 4.1 ACCOUNTS. On the Effective Date, the Account shall be credited with an Opening Account Balance in accordance with Section 4.4. 4.2 BASIC PAY-BASED CREDITS. An Executive shall accrue a Pay-Based Credit under this Section 4.2 for each Plan Year. The amount of the Pay-Based Credit for an Executive shall be three percent (3%) of the Executive's Compensation for such Plan Year. The determination of the amount creditable hereunder for a Plan Year shall be made as of the last day of the Plan Year. 4.3 INTEREST CREDITS. Each Plan Year each Executive's Account shall be automatically increased as of the last day of such Plan Year by crediting the balance in such Account as of the last day of the previous Plan Year (or, in the case of the first Plan Year, as of the Effective Date), with an Interest Credit equal to said Account balance multiplied by 5%. Such Interest Credits shall continue after the Executive's Termination Date, provided, however, that no Interest Credits shall be made to an Executive's Account for any Plan Year beginning on or after the date on which his benefit is paid. For the Plan Year in which the Executive's benefit is paid, an Interest Credit shall be made on a pro rata basis through the end of the month prior to the month in which the date of benefit is paid. 4.4 OPENING ACCOUNT BALANCE. Executive shall have an Opening Account Balance as of the Effective Date of $175,000, which shall be reflected in an initial bookkeeping account established on his behalf. ARTICLE V RETIREMENT BENEFITS 5.1 RETIREMENT BENEFIT. Executive's Retirement Benefit on any given date shall be the Executive's Account Value as of such date. 5 5.2 PAYMENT OF RETIREMENT BENEFIT. On the first day of the month following the month in which the Termination Date occurs, Executive shall receive payment of his Account Balance in a lump sum payment; provided that if the Termination Date occurs prior to January 1, 2003, the payment of Executive's Account Balance shall be made on the first business day of January, 2003. 5.3 DEATH PRIOR TO RETIREMENT. If the Executive dies prior to the commencement of any benefit payments under this Plan whether before or after his Termination Date, the Executive's Beneficiary shall be entitled to payment of a death benefit as of the first day of any month after the Executive's death. The death benefit shall be payable in a single lump sum in an amount which is the Executive's Account Value at the date of his death increased by any Interest Credits made under the Plan prior to the date on which distribution of the benefit is made or commences. ARTICLE VI CLAIMS PROCEDURE 6.1 WRITTEN REQUEST. Any claim for benefits by the Executive or his Beneficiaries shall be made in writing to the Committee. In this Article VI, the Executive and his Beneficiaries are referred to collectively as claimants. ARTICLE VII GENERAL PROVISIONS 7.1 ADMINISTRATION. The Committee shall be responsible for the general operation and administration of the Plan and for carrying out the provisions hereof. The Committee shall be entitled to rely conclusively upon all certificates, opinions and reports furnished by any accountant, controller, counsel or other person employed or engaged by the Company with respect to the Plan. 6 7.2 FUNDING. The Board, in its sole discretion, may elect to fund the benefits payable under the Plan, through various investments. However, any such investment shall remain the property of the Company and be subject to the claims of general creditors of the Company. The Executive shall have only the rights of a general unsecured creditor of the Company with respect to any rights under this Plan. The Executive may not pledge as collateral any investments purchased to fund benefits under the Plan. Nothing contained in the Plan shall constitute a guaranty by the Company or any other entity or person that assets of the Company will be sufficient to pay any benefit hereunder. It is the intention of the parties that this Plan will be an unfunded deferred compensation plan solely for the benefit of Martin A. Fox and thus would not be subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). However, if the plan is interpreted to be subject to ERISA, it is the intention of the parties that this Plan be an unfunded deferred compensation plan solely for the benefit of management and highly compensated employees for tax purposes and for purposes of Title I of ERISA. 7.3 NO EMPLOYMENT CONTRACT. Nothing contained in this Plan shall be construed as a contract of employment between the Company and the Executive or as a limitation on the right of the Company to terminate, discontinue, or fail to renew or extend the Employment Agreement, subject to the terms and conditions thereof, and without regard to the effect that such discontinuity may have upon the Executive's rights or potential rights, if any, under this Plan. 7.4 SPENDTHRIFT PROVISION. No interest of any person or entity in, or right to receive a benefit under, the Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment garnishment, or other alienation or encumbrance 7 of any kind; nor may such interest or right to receive a benefit be taken, either voluntarily or involuntarily, for the satisfaction of the debts of or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. 7.5 BINDING EFFECT. This Plan shall be binding upon and inure to the benefit of the Executives, his Surviving Spouse and Beneficiaries, the Company and any successor to the Company, whether by merger, consolidation, purchase, or otherwise. 7.6 APPLICABLE LAW. The Plan shall be governed by and construed in accordance with the laws of the State of New York, except to the extent preempted by ERISA, if it is determined that the Plan is subject to ERISA. 7.7 WITHHOLDING. Any payment made pursuant to this Plan shall be reduced by federal and state income, FICA or other employee payroll, withholding or other similar taxes that the Executive's employer may be required to withhold by law. In addition, as the Retirement Benefit accrues during the period of time that the Executive provides services to the Company under the Employment Agreement, the regular payments that the Company makes to Executive with respect to the Executive's services to the Company shall be subject to FICA or other employee payroll, withholding or other similar taxes which the Company may be required by law to withhold on the accrual of benefits. 7.8 SEVERABILITY. If one or more provisions of this Plan, or any part thereof, shall be determined by a court of competent jurisdiction to be invalid or unenforceable, then the Plan shall be administered as if such invalid or unenforceable provision had not been contained in the Plan. The invalidity or unenforceability of any Plan 8 provision, or any part thereof, shall not affect the validity and enforceability of any other Plan provision or any part thereof. 7.9 TERMINATION OF THE PLAN. The Company intends to maintain this Plan until all benefit payments are made pursuant to the Plan. The Company may not amend or terminate the Plan without the written consent of Executive. 7.10 TITLES AND HEADINGS NOT TO CONTROL. The titles to the Articles and the headings of Sections in the Plan are placed herein for convenience of reference only, and in case of any conflict, the text of this instrument, rather than such titles or headings, shall control. THE PENN TRAFFIC COMPANY By: ------------------------------------- 9 THE PENN TRAFFIC COMPANY EXECUTIVES' RETIREMENT PLAN BENEFICIARY DESIGNATION ----------------------- Executive: --------------------------------------------------------------------- Social Security Number: ---- Primary Beneficiary: ------------------------------------------------------------ Social Security Number: ---- Relationship: ------------------------------------------------------------------- Address: ------------------------------------------------------------------------ INSTRUCTION: USE THE FOLLOWING SPACE TO PROVIDE THIS SAME INFORMATION ABOUT ADDITIONAL PRIMARY BENEFICIARIES, IF YOU WISH TO NAME MORE THAN ONE PRIMARY BENEFICIARY. FOLLOWING THIS SAME INSTRUCTION BELOW, IF YOU WISH TO NAME MORE THAN ONE CONTINGENT BENEFICIARY. Contingent Beneficiary: ---- Social Security Number: ---- Relationship: ------------------------------------------------------------------- Address: ----------------------------------------------------------------------- Date: --------------------------------------------------------------------------- EX-10.8 5 a2078392zex-10_8.txt EXHIBIT 10-8C EXHIBIT 10.8C AMENDMENT NO. 3 TO REVOLVING CREDIT AND TERM LOAN AGREEMENT AMENDMENT NO. 3, dated as of April 19, 2002 (this "AMENDMENT") to that certain Revolving Credit and Term Loan Agreement dated as of June 29, 1999, as amended as of June 26, 2000 and as of September 14, 2001 and as may be further amended, modified, restated or supplemented from time to time (the "LOAN AGREEMENT") among THE PENN TRAFFIC COMPANY ("Penn Traffic"), DAIRY DELL, INC., BIG M SUPERMARKETS, INC. and PENNY CURTISS BAKING COMPANY, INC. (individually, each a "BORROWER" and collectively, the "BORROWERS"), the Lenders listed therein (collectively, the "LENDERS"), FLEET CAPITAL CORPORATION, as Administrative Agent for the Lenders (in such capacity, the "AGENT"), GMAC BUSINESS CREDIT, LLC, as documentation agent, and AMSOUTH BANK and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as co-agents is made by, between and among the Borrowers, the Lenders and the Agent. Capitalized terms used herein, except as otherwise defined herein, shall have the meanings given to such terms in the Loan Agreement. WHEREAS, the Borrowers have requested that the Lenders amend certain financial covenants contained in the Loan Agreement and the Lenders, subject to the terms and conditions set forth herein, are willing to grant such request. WHEREAS, the Agent and the Lenders wish to confirm the Commitments of the Lenders as of the date hereof. NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is hereby amended as of April 19, 2002 (the "Effective Date"), subject to the fulfillment of the conditions under Section 6 hereof, as follows: (i) Section 8.13(a) (Cash Capital Expenditures) of the Credit Agreement is hereby amended by deleting the information set forth under the headings "FISCAL YEAR" and "AMOUNTS" and replacing it with the following:
"Fiscal Year Amounts ----------- ------- 2002 $50,000,000 2003 $45,000,000 2004 $47,000,000 2005 $47,000,000 2006 $50,000,000 2007 $50,000,000"
(ii) Section 8.14 (Consolidated EBITDA) of the Credit Agreement is hereby amended by(x) deleting the information set forth under the headings "FISCAL QUARTER" and "AMOUNTS" and replacing it with the following:
"Fiscal Quarter Amounts --------------- ------- Fiscal Year 2002 Q4 $ 95,000,000 Fiscal Year 2003 Q1 $ 95,000,000 Fiscal Year 2003 Q2 $ 95,000,000 Fiscal Year 2003 Q3 $ 95,000,000 Fiscal Year 2003 Q4 $ 95,000,000 Fiscal Year 2004 Q1 $ 95,000,000 Fiscal Year 2004 Q2 $ 96,000,000 Fiscal Year 2004 Q3 $ 97,000,000 Fiscal Year 2004 Q4 $ 98,000,000 Fiscal Year 2005 Q1 $101,000,000 Fiscal Year 2005 Q2 $104,000,000 Fiscal Year 2005 Q3 $108,000,000 Fiscal Year 2005 Q4 $112,000,000 Fiscal Year 2006 Q1 $115,000,000 Fiscal Year 2006 Q2 $118,000,000 Fiscal Year 2006 Q3 $121,000,000 Fiscal Year 2006 Q4 $125,000,000 Fiscal Year 2007 Q1 $130,000,000 Fiscal Year 2007 Q2 $135,000,000"
and (y) deleting the following proviso at the end of Section 8.14 of the Loan Agreement: "provided, that solely for the purpose of the requirements of this Section 8.14 and without any effect upon any other provision of this Agreement or the definition of Consolidated EBITDA, $10,000,000 shall be added to Consolidated EBITDA calculated for the four consecutive Fiscal Quarter periods ending on each of the third and fourth Fiscal Quarters of Fiscal Year 2002 and on each of the first, second, third and fourth Fiscal Quarters of Fiscal Year 2003." (iii) Section 8.16 (Consolidated Interest Coverage Ratio) of the Credit Agreement is hereby amended by deleting the information set forth under the headings "FISCAL YEAR", "QUARTER" and "REQUIREMENT" and replacing it with the following:
"Fiscal Year Quarter Requirement ------------ ------- ----------- 2002 4 2.10
2
"Fiscal Year Quarter Requirement ------------ ------- ----------- 2003 1 2.15 2 2.20 3 2.25 4 2.30 2004 1 2.35 2 2.40 3 2.40 4 2.40 2005 1 2.45 2 2.50 3 2.60 4 2.70 2006 1 2.75 2 2.80 3 2.85 4 2.90 2007 1 2.95 2 3.00"
(iv) Section 8.17 (Consolidated Fixed Charge Coverage Ratio) of the Credit Agreement is hereby amended by deleting the information set forth under the headings "FISCAL YEAR" and "REQUIREMENT" and replacing it with the following:
"Fiscal Year Requirement ----------- ----------- 2002 1.00 2003 1.00 2004 1.00 2005 1.00 2006 1.00"
(v) For the periods on and after the Effective Date, Annex B (Pricing Grid) to the Credit Agreement is hereby deleted in its entirety and replaced with Annex B annexed hereto. 2. REPRESENTATIONS AND WARRANTIES. As an inducement to the Lenders to enter into this Amendment, each of the Borrowers hereby represents and warrants to the Lenders and agrees with the Lenders as follows: 3 (a) It has the power and authority to enter into this Amendment and has taken all corporate action required to authorize its execution, delivery, and performance of this Amendment. This Amendment has been duly executed and delivered by it and constitutes its valid and binding obligation, enforceable against it in accordance with its terms. The execution, delivery, and performance of this Amendment will not violate its certificate of incorporation or by-laws or any agreement or legal requirements binding upon it. (b) As of the date hereof and after giving effect to the terms of this Amendment: (i) the Loan Agreement is in full force and effect and constitutes a binding obligation of the Borrowers, enforceable against the Borrowers and owing in accordance with its terms; (ii) the Obligations are due and owing by the Borrowers in accordance with their terms; and (iii) Borrowers have no defense to or setoff, counterclaim, or claim against payment of the Obligations and enforcement of the Loan Documents based upon a fact or circumstance existing or occurring on or prior to the date hereof. 3. COMMITMENTS OF LENDERS. Each Lender party hereto, and the Agent, confirms that Annex A annexed hereto sets forth the Commitment of such Lender as of the date hereof. The Swing Line Lender confirms that the Commitment of the Swing Line Lender is as set forth in Section 2.12 of the Loan Agreement. 4. NO IMPLIED AMENDMENTS. Except as expressly provided herein, the Loan Agreement and the other Loan Documents are not amended or otherwise affected in any way by this Amendment. 5. ENTIRE AGREEMENT; MODIFICATIONS; BINDING EFFECT. This Amendment constitutes the entire agreement of the parties with respect to its subject matter and supersedes all prior oral or written understandings about such matter. Each of the Borrowers confirms that, in entering into this Amendment, it did not rely upon any agreement, representation, or warranty by the Agent or any Lender except those expressly set forth herein. No modification, rescission, waiver, release, or amendment of any provision of this Amendment may be made except by a written agreement signed by the parties hereto. The provisions of this Amendment are binding upon and inure to the benefit of the representatives, successors, and assigns of the parties hereto; provided, however, that no interest herein or obligation hereunder may be assigned by any Borrower without the prior written consent of the Required Lenders. 6. EFFECTIVE DATE. This Agreement shall become effective on the Effective Date subject to the fulfillment of the following conditions: (i) No Event or Event of Default shall have occurred and there shall have been no material adverse change in the business or financial condition of any of the Borrowers. 4 (ii) The Borrowers shall deliver to the Agent a certificate of the Borrowers' Chief Executive or Chief Financial Officer with respect to Section (i) above and such other instruments and documents as the Agent shall reasonably request. (iii) The Agent shall have received an original counterpart of this Amendment, duly executed and delivered by the Borrowers and the Required Lenders. 7. COUNTERPARTS. This Amendment may be executed in any number of counterparts, and by each party in separate counterparts, each of which is an original, but all of which shall together constitute one and the same agreement. 8. GOVERNING LAW. This Amendment is deemed to have been made in the State of New York and is governed by and interpreted in accordance with the laws of such state, provided that no doctrine of choice of law shall be used to apply the laws of any other state or jurisdiction. 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their duly authorized officers as of the date first above written. BORROWERS: THE PENN TRAFFIC COMPANY By: ------------------------------------ Title: DAIRY DELL, INC. By: ------------------------------------ Title: BIG M SUPERMARKETS, INC. By: ------------------------------------ Title: PENNY CURTISS BAKING COMPANY INC. By: ------------------------------------ Title: ADMINISTRATIVE AGENT: FLEET CAPITAL CORPORATION By: ------------------------------------ Title: SWING LINE LENDER: FLEET CAPITAL CORPORATION By: ------------------------------------ Title: 6 LENDERS: FLEET CAPITAL CORPORATION By: ------------------------------------ Title: GMAC BUSINESS CREDIT, LLC By: ------------------------------------ Title: AMSOUTH BANK By: ------------------------------------ Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: ------------------------------------ Title: HELLER FINANCIAL, INC. By: ------------------------------------ Title: LASALLE BUSINESS CREDIT, INC. By: ------------------------------------ Title: 7 CITIZENS BUSINESS CREDIT COMPANY By: ------------------------------------ Title: THE CIT GROUP/BUSINESS CREDIT, INC. By: ------------------------------------ Title: IBJ WHITEHALL BUSINESS CREDIT CORPORATION By: ------------------------------------ Title: FOOTHILL CAPITAL CORPORATION By: ------------------------------------ Title: TRANSAMERICA BUSINESS CREDIT CORPORATION By: ------------------------------------ Title: 8 SOVEREIGN BANK By: ------------------------------------ Title: THE PROVIDENT BANK By: ------------------------------------ Title: 9 Annex A COMMITMENTS
REVOLVING A TERM B TERM TOTAL LENDER COMMITMENT COMMITMENT COMMITMENT COMMITMENT ------ ---------- ---------- ---------- ---------- Fleet Capital Corporation $ 26,640,775 $ 6,703,125 $ 15,082,031 $ 48,425,931 GMAC Business Credit, LLC $ 19,218,750 $ 3,093,750 $ 6,960,938 $ 29,273,438 AmSouth Bank $ 14,053,980 $ 2,262,876 $ 8,121,094 $ 24,437,950 Bank of America National Trust and Savings Association $ 22,421,875 $ 3,609,375 $ 8,121,094 $ 34,152,344 Foothill Capital Corporation $ 27,586,645 $ 4,440,249 $ 6,960,938 $ 38,987,832 Heller Financial, Inc. $ 16,015,625 $ 2,578,125 $ 5,800,781 $ 24,394,531 LaSalle Business Credit, Inc. $ 16,015,625 $ 2,578,125 $ 5,800,781 $ 24,394,531 CIT Group/Business Credit, Inc. $ 16,015,625 $ 2,578,125 $ 5,800,781 $ 24,394,531 Citizens Business Credit Company $ 9,609,375 $ 1,546,875 $ 3,480,469 $ 14,636,719 IBJ Whitehall Business Credit Corporation $ 9,609,375 $ 1,546,875 $ 3,480,469 $ 14,636,719 Transamerica Business Credit Corporation $ 14,999,850 -0- -0- $ 14,999,850 Sovereign Bank $ 6,406,250 $ 1,031,250 $ 2,320,311 $ 9,757,811 The Provident Bank $ 6,406,250 $ 1,031,250 $ 2,320,313 $ 9,757,813 Total $205,000,000 $33,000,000 $ 74,250,000 $312,250,000
10 ANNEX B PRICING GRID (Rates and fees in basis points)
Revolving/ Swing Line Consolidated Loans Term Loans A Term Loans B Funded Debt Prime Rate Prime Rate Prime Rate Unused Line Ratio Libor + + Libor + + Libor + + Fee ----------- ------- ---------- ------- ---------- ------- ---------- ------------ Tier I: 4.75+ 275 175 275 175 300 200 50 Tier II: 4.26 - 4.75 250 150 250 150 300 200 50 Tier III: 3.76 - 4.25 225 125 225 125 275 175 37.5 Tier IV: 3.26 - 3.75 200 100 200 100 275 175 25 Tier V: < 3.25 187.5 87.5 187.5 87.5 275 175 25
There will be no pricing adjustment prior to May 1, 2000 (the "Adjustment Date"). The initial review for pricing adjustment will occur following receipt of the Borrowers' financial statements delivered pursuant to Section 7.2(a) for Fiscal Year 2000. Thereafter, rate adjustments based on the Pricing Grid will be made following receipt from the Borrowers of the financial statements delivered pursuant to Section 7.2(a) or 7.2(b), and of a request for a rate adjustment accompanied by a schedule reflecting the appropriate calculation. Quarterly adjustments based on the Pricing Grid shall occur 45 and 90 days after the end of the quarter or year-end, as appropriate, based on the financial statements for the corresponding periods respectively. Solely for the purposes of calculating Consolidated Funded Debt Ratio under this Pricing Grid for the first Fiscal Quarter of Fiscal Year 2001 and any subsequent Fiscal Quarter or Fiscal Year, Consolidated Funded Debt shall include the Undrawn Amount of all Letters of Credit outstanding on the date of determination. 11 EX-23.1 6 a2078392zex-23_1.txt EXHIBIT 23-1 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 15, 2002 relating to the financial statements and financial statement schedules, which appears in this Form 10-K. PricewaterhouseCoopers LLP Syracuse, New York May 1, 2002 -----END PRIVACY-ENHANCED MESSAGE-----