-----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, KmIqaNtBX0dOeU+5eqvJBn9eO7d7NNqWPHW6qf9ZmJyHvalp/OxSPhdkP4k1NDfL DiKY7s9V03dmfHZCmNjk6A== 0001104659-08-039076.txt : 20080610 0001104659-08-039076.hdr.sgml : 20080610 20080610171137 ACCESSION NUMBER: 0001104659-08-039076 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20080503 FILED AS OF DATE: 20080610 DATE AS OF CHANGE: 20080610 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-08858 FILM NUMBER: 08891399 BUSINESS ADDRESS: STREET 1: 1200 STATE FAIR BLVD CITY: SYRACUSE STATE: NY ZIP: 13221-4737 BUSINESS PHONE: (315) 453-7284 MAIL ADDRESS: STREET 1: 1200 STATE FAIR BLVD CITY: SYRACUSE STATE: NY ZIP: 13221-4737 10-Q 1 a08-16331_110q.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended May 3, 2008

o 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)

(315) 453-7284

(Registrant’s telephone number, including area code)

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

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

Large accelerated filer o		Accelerated filer x

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

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x

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 o

Common Stock, par value $.01 per share: 8,336,192 shares outstanding as of June 2, 2008

FORM 10-Q INDEX

			PAGE
PART I. FINANCIAL INFORMATION

Item	1.	Financial Statements	4

Item	2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item	3.	Quantitative and Qualitative Disclosures About Market Risk	20

Item	4.	Controls and Procedures	20

PART II. OTHER INFORMATION

Item	6.	Exhibits	21

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements included in this Form 10-Q, including without limitation, statements included in Item 2 - “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, reflecting management’s current analysis and expectations, based on what management believes to be reasonable assumptions. These forward-looking statements include statements relating to our anticipated financial performance and business prospects. Statements preceded by, followed by or that include words such as “believe,” “anticipate,” “estimate,” “expect,” “could,” and other similar expressions are to be considered such forward-looking statements. Forward-looking statements may involve known and unknown risks, uncertainties and other factors, which may cause the actual results to differ materially from those projected, stated or implied, depending on such factors as the risks set forth in Item 1A – “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 2, 2008; our ability to improve operating performance and effectuate business plans; our ability to operate pursuant to the terms of our credit facilities and to comply with the terms of our lending agreements or to amend or modify the terms of such agreements as may be needed from time to time; our ability to generate cash; our ability to attract and maintain adequate capital; our ability to refinance our indebtedness; increases in prevailing interest rates; our ability to obtain trade credit, and shipments and terms with vendors and service providers for current orders; our ability to maintain contracts that are critical to our operations; potential adverse developments with respect to our liquidity or results of operations; general economic and business conditions; competition, including increased capital investment and promotional activity by our competitors; availability, location and terms of sites for store development; the successful implementation of our capital expenditure program; labor relations; labor and employee benefit costs including increases in health care and pension costs and the level of contributions to our sponsored pension plans; the result of our pursuit of strategic alternatives; economic and competitive uncertainties; our ability to pursue strategic alternatives; economic and competitive uncertainties; changes in strategies; changes in generally accepted accounting principles; adverse changes in economic and political climates around the world, including terrorist activities and international hostilities; and the outcome of pending, or the commencement of any new, legal proceedings against, or governmental investigations of us, including the previously announced SEC and U.S. Attorney’s Office investigations. We caution that the foregoing list of important factors is not exhaustive. Accordingly, there can be no assurance that we will meet future results, performance or achievements expressed or implied by such forward-looking statements, which are generally required to be publicly revised as circumstances change, and which we do not intend to update.

PART I

ITEM 1. Financial Statements

The Penn Traffic Company

Condensed Consolidated Balance Sheets

(In thousands)

	May 3,		February 2,
	2008		2008
	(unaudited)
ASSETS

Current Assets:
Cash and cash equivalents	$	11,793	$	20,916
Accounts and notes receivable (less allowance for doubtful accounts of $6,139 and $5,690, respectively)	32,811		37,513
Inventories	87,517		89,208
Prepaid expenses and other current assets	6,281		7,307
Total current assets	138,402		154,944

Capital Leases, net	8,000		8,268

Fixed Assets, net	71,526		78,402

Other Assets:
Intangible assets	14,412		15,397
Deferred tax asset	3,604		2,440
Other assets	3,753		2,998
Total other assets	21,769		20,835

Total Assets	$	239,697	$	262,449

The accompanying notes are an integral part of these statements.

	May 3,			February 2,
	2008			2008
	(unaudited)

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Current portion of obligations under capital leases	$	1,420		$	1,368
Current maturities of long-term debt (Note 6)	46,853			278
Accounts payable	27,803			34,178
Other current liabilities	45,436			47,060
Accrued interest expense	108			176
Deferred income taxes (Note 7)	12,649			11,485
Liabilities subject to compromise (Note 5)	1,413			2,516
Total current liabilities	135,682			97,061

Non-current Liabilities:
Obligations under capital leases	8,594			8,962
Long-term debt (Note 6)	3,562			50,209
Defined benefit pension plan liability (Note 9)	5,715			6,326
Other non-current liabilities	29,544			30,716
Total non-current liabilities	47,415			96,213

Total Liabilities	183,097			193,274

Commitments and Contingencies (Notes 5, 6, 9 and 10)

Stockholders’ Equity:
Preferred stock - authorized 1,000,000 shares, $.01 par value	100			100
Common stock - authorized 15,000,000 shares, $.01 par value; issued and to be issued 8,650,110 in first quarter and 8,519,095 in fiscal 2008	86			85
Capital in excess of par value	128,148			128,149
Deficit	(86,787		)	(74,356		)
Accumulated other comprehensive income	15,053			15,197
Total stockholders’ equity	56,600			69,175

Total Liabilities and Stockholders’ Equity	$	239,697		$	262,449

The accompanying notes are an integral part of these statements.

The Penn Traffic Company

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(unaudited)

	Quarter			Quarter
	Ended			Ended
	May 3, 2008			May 5, 2007

Revenues	$	287,058		$	297,973

Cost and Operating Expenses:
Cost of sales	212,020			218,637
Selling and administrative expenses	81,314			81,746
Loss on store and distribution center closings	921			1,883
Asset impairment	2,604			—

Operating Loss	(9,801		)	(4,293		)

Interest expense	2,353			2,341
Reorganization and other expenses	110			164

Loss from continuing operations before income taxes	(12,264		)	(6,798		)

Income tax expense (Note 7)	157			59

Loss from continuing operations	$	(12,421	)	(6,857		)

Discontinued operations (Note 8)
Loss from discontinued operations	(10		)	(553		)
Net loss	$	(12,431	)	$	(7,410	)

Loss per share – basic and diluted (Note 4):

Loss from continuing operations	$	(1.47	)	$	(0.81	)
Loss from discontinued operations	0.00			(0.06		)
Loss per share – basic and diluted	$	(1.47	)	$	(0.87	)

Basic and diluted shares outstanding and to be issued	8,650,110			8,498,752

The accompanying notes are an integral part of these statements.

The Penn Traffic Company

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

	Quarter Ended			Quarter Ended
	May 3, 2008			May 5, 2007

Operating activities:
Net loss	$	(12,431	)	$	(7,410	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	5,664			6,868
Allowance for doubtful accounts	619			918
Gain on sale of fixed assets	(1,874		)	(491		)
Asset impairment charge	2,604			—
Amortization of deferred financing cost	333			5
Deferred income taxes	92			—
Phantom stock compensation	131			406

Net change in operating assets and liabilities:
Accounts and notes receivable, net	4,083			(691		)
Prepaid expenses and other current assets	1,026			277
Inventories	1,691			2,940
Liabilities subject to compromise	(1,103		)	(181		)
Accounts payable and other current liabilities	(8,067		)	(3,331		)
Other assets	(4		)	10
Defined benefit pension plan	(847		)	(1,668		)
Other non-current liabilities	(1,302		)	912

Net cash used in operating activities	(9,385		)	(1,436		)

Investing activities:
Capital expenditures	(1,764		)	(657		)
Proceeds from sale of fixed assets	3,498			490

Net cash provided by (used in) investing activities	1,734			(167		)

Financing activities:
Payments of mortgages	(72		)	(76		)
Reduction in capital lease obligations	(316		)	(445		)
Deferred financing costs	(1,084		)	—

Net cash used in financing activities	(1,472		)	(521		)

Decrease in cash and cash equivalents	(9,123		)	(2,124		)

Cash and cash equivalents at the beginning of period	20,916			24,661

Cash and cash equivalents at end of period	$	11,793		$	22,537

The accompanying notes are an integral part of these statements.

The Penn Traffic Company

Condensed Consolidated Statements of Stockholders’ Equity

For the unaudited period February 2, 2008 to May 3, 2008

(In thousands, except share data)

	Common Stock		Preferred Stock		Capital in Excess of Par Value			Deficit			Accumulated Other Comprehensive Income			Total Stockholders’ Equity

Balance at February 2, 2008	$	85	$	100	$	128,149		$	(74,356	)	$	15,197		$	69,175

Net loss for the quarter ended May 3, 2008	—		—		—			(12,431		)	—			(12,431		)

Increase of 125,754 shares estimated to be issued in connection with settlement	1		—		(1		)	—			—			—

Amortization of net actuarial gain included in net periodic pension benefit, net of deferred taxes of ($92) for the quarter ended May 3, 2008	—		—		—			—			(144		)	(144		)

Comprehensive loss	—		—		—			—			—			(12,575		)

Balance at May 3, 2008	$	86	$	100	$	128,148		$	(86,787	)	$	15,053		$	56,600

The accompanying notes are an integral part of these statements.

The Penn Traffic Company

Notes to Condensed Consolidated Financial Statements

Note 1 – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of The Penn Traffic Company and subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the Unites States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring deferrals and accruals) considered necessary for a fair presentation have been included. The operating results for the periods presented are not necessarily indicative of the results to be expected for the full year. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s latest Annual Report on Form 10-K.

The balance sheet as of February 2, 2008 has been derived from the audited consolidated financial statements as of such date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The Company’s fiscal year ends each year on the Saturday closest to January 31. Fiscal year 2009 is the 52-week period ended January 31, 2009. Fiscal year 2008 is the 52-week period ended February 2, 2008. The information presented in this Quarterly Report on Form 10-Q is for the quarter beginning February 3, 2008 and ending May 3, 2008.

All significant intercompany transactions and accounts have been eliminated in consolidation.

Note 2 – Voluntary Bankruptcy Filing and Reorganization

On May 30, 2003, the Company and all of its subsidiaries filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. The filing was made in response to pending defaults under the Company’s then-existing loan agreements and a lack of liquidity to continue operations. Under Chapter 11, the Company continued to operate its businesses as debtor-in-possession under court protection from its creditors and claimants, while using the Chapter 11 process to substantially reduce its debt obligations and implement a plan of reorganization.

On February 2, 2005, the Company filed the First Amended Joint Plan of Reorganization (the “Plan”) with the bankruptcy court. The Plan was confirmed on March 17, 2005 and became effective on April 13, 2005 (the “Effective Date”).

Pursuant to the terms of the Plan, the following transactions occurred on or around the Effective Date:

1. The Company entered into new credit agreements providing for borrowings of up to $164 million. Proceeds from these new credit agreements provided funds sufficient to repay a debtor-in-possession credit facility and all administrative and priority claims to the extent provided for in the Plan.

2. The Company sold and leased back its five owned distribution facilities for a sales price of approximately $37 million.

3. All shares of common stock and all stock options and warrants outstanding prior to the confirmation of the Plan were cancelled and the holders of such equity securities received no distributions under the Plan.

4. The reorganized Company was authorized to issue new shares of common stock to unsecured creditors, which included holders of $100 million of senior notes, a claim by the Pension Benefit Guaranty Corporation or the (“PBGC”) of $60 million and trade claims, all of whom were eligible to receive pro rata distributions of new shares of common stock and the right to share in potential proceeds from certain causes of action.

Pursuant to the provisions of Statement of Position 90-7 “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”) issued by the American Institute of Certified Public Accountants upon emergence from Chapter 11 proceedings, the Company adopted fresh-start reporting which resulted in a new reporting entity and a new basis of accounting.

Although April 13, 2005 was the effective date of the Plan, the Company chose April 16, 2005 as the effective date for accounting purposes to adopt fresh-start reporting because of the proximity of that date to the end of an accounting period. Applying fresh-start reporting as of April 16, 2005 rather than the actual effective date of April 13, 2005 did not have a material effect on the financial condition or results of operations of the Company.

Note 3 – New Accounting Standards

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurement,” or SFAS 157, effective for fiscal years beginning November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements. Effective February 3, 2008, the Company adopted the provision of SFAS 157. The adoption did not have any effect on our consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” – Including an amendment of FASB Statement No. 115, or SFAS 159, effective for fiscal years ending after November 15, 2007. SFAS 159 permits an entity to elect fair value as the initial and subsequent measurement attribute for many financial assets and liabilities. Entities electing the fair value option would be required to recognize changes in fair value in earnings. The Company has not elected to apply the provision of SFAS 159 which became effective for the Company in February 2, 2008.

Note 4 - Per Share Data

Basic and diluted net loss per share is based on the number of common shares issued and estimated to be issued pursuant to the Plan. At May 3, 2008 and February 2, 2008, 313,918 and 188,164 common shares, respectively, are estimated to be issued in connection with the settlement of remaining claims. Diluted loss per share for the quarter ended May 3, 2008 does not include the 639,923 common shares issuable on the conversion of the preferred stock as the effect is antidilutive.

Note 5 – Liabilities Subject to Compromise

In connection with the Chapter 11 proceeding, there are two pending matters involving claims for the payment of money or the transfer of property. In one matter, the Ohio Bureau of Workers’ Compensation (“OBWC”) has filed priority and administrative claims aggregating $13.4 million for pre-petition unpaid workers’ compensation premiums and for reserves to pay future claims arising from existing injuries. The OBWC has also filed claims aggregating $1.8 million for alleged non-payment of post-petition premiums and for reserves to pay future claims arising from existing injuries. The Company disputes the amounts of the claims, and is attempting to negotiate a settlement.

In the other matter, COR Route 5 Company LLC (“COR”) had filed a priority claim allegedly arising out of a sale-leaseback transaction seeking either damages of $2.2 million or specific performance of the agreement. On May 30, 2008, the Bankruptcy Court approved the entry of the Stipulation and Order with Respect to Settlement of COR Route five Company Claims (the “Stipulation”), pursuant to which COR agreed to release all potential claims against the Company in exchange for a payment by the Company to COR of $1.1 million, to be made from an existing escrow account maintained during the pendency of the disputed claims. As of May 30, 2008, the escrow account held approximately $1.4 million (included in accounts receivable). Escrowed funds remaining after the payment to COR will be retained by the Company, and the Company’s obligations to make monthly payments into the escrow account have terminated. As a result, the Company recorded a liability (included in other current liability) and corresponding change (included in selling and administrative expense) for $1.1 million during the quarter ended May 3, 2008. The Company made the required $1.1 million payment to COR from the escrow account June 9, 2008.

As part of the settlement with COR, the Company has granted COR a right of first refusal with respect to the sale, lease, transfer or other conveyance of the Company’s supermarket located in Fayetteville, New York that was the subject of the dispute between the Company and COR (the “Property”). Under the terms of this right, the Company must notify COR of any arm’s length written offer from an unaffiliated third party received for sale, lease, transfer or other conveyance of the Property and provide COR with the opportunity to consummate the proposed transaction on economic terms and conditions substantially similar to the terms contained in such third party offer.

During the quarter ended May 3, 2008, the Company paid out $0.01 million in settlement of disputed claims as compared to $0.2 million during the quarter ended May 5, 2007.

The Company has established liabilities for the estimated cash payments required to settle the remaining claims outstanding in the Chapter 11 proceedings. Estimated shares of common stock to be issued in settlement of claims have been accounted for as stockholders’ equity.

Note 6 – Long Term Debt

On August 1, 2007, both of the Company’s credit facilities were amended to permit the disposal of assets in connection with the closing of two stores. Further, the availability amount, which the Company is required to maintain under certain financial covenants contained in such facilities was reduced to less than $27.5 million for four consecutive days or less than $25 million for any one day.

In March 2008, the maturity date of both facilities were extended from April 13, 2008 to April 13, 2009. Based on the maturity date of April 13, 2009, amounts due under the revolving credit and term loan facility and the supplemental real estate credit facility have been classified as current maturities in the accompanying balance sheet as of May 3, 2008. See Note 7 to the financial statements included in the Annual Report on Form 10-K for year ended February 2, 2008 for additional information.

Note 7 – Income Taxes

The Company maintains a full valuation allowance against substantially all of its deferred tax assets including amounts resulting from net operating loss carryforwards. The valuation allowance will be maintained until there is sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets will be realized.

The Company has recently filed its federal and state income tax returns for its fiscal years ended in 2004, 2005, 2006, and 2007 and is currently under examination by the Internal Revenue Service for these years.

Note 8 – Dispositions and Discontinued Operations

In January 2007, the Company announced the closing of a leased distribution center used for the distribution of general merchandise and health and beauty products. At the same time, the Company entered into a five-year supply agreement with a third party to provide the merchandise previously distributed from the distribution center. In connection with the announced closing, in January 2007, the Company recorded a liability of $1.4 million for termination benefits which were provided to the distribution center’s employees at such time. The Company ceased use of the facility in March 2007, at which time the Company recorded a liability of $1.9 million representing the present value of the remaining lease rentals reduced by estimated sublease rentals that could be reasonably obtained for the distribution center. In addition, in March 2007, the Company sold its remaining inventory located in the distribution center to the third party at current cost. The carrying value of such inventory at February 3, 2007 was approximately $4.8 million.

On January 2, 2008, as a result of the loss of a significant customer, the Company announced the closing of its commercial bakery operation. In accordance with the provisions of FASB No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS 144”), the results of operations of the commercial bakery operation for the period ended May 5, 2007 have been reported as discontinued operations.

Fixed assets at February 2, 2008 include $1.0 million of commercial bakery equipment held for sale. The bakery equipment held for sale was sold during the quarter ended May 3, 2008 for $1.0 million.

During the quarter ended May 3, 2008, the Company closed five stores and sold one. It is anticipated that revenues will continue to be generated from customers of four of the five closed stores and the sold store from the Company stores located in the same vicinity. Accordingly, the result of operations of these stores are included in continuing operations. The Company will no longer have a presence in the vicinity of the other closed store but the amount of lost revenues was determined to be immaterial and not treated as discontinued operations. The store that was sold resulted in cash proceeds of $1.8 million and an associated leasehold gain of $1.3 million for the quarter ended May 3, 2008.

During the quarter ended May 3, 2008, an impairment loss of $2.6 million was recognized with respect to the assets related to the 5 closed stores. In addition, the Company recorded a liability of $0.9 million representing the present value of the remaining lease rentals reduced by estimated sublease rentals that could reasonably be obtained for the five closed stores. In addition, certain ongoing maintenance expense related to the bakery operations have been classified as discontinued operations in the quarter ended May 3, 2008.

No stores were closed during the quarter ended May 5, 2007.

Note 9 – Pension Plans

The Company has four noncontributory defined benefit pension plans covering certain union personnel. The Company’s policy is to fund pension benefits to the extent contributions are deductible for tax purposes and in compliance with federal laws and regulations.

The components of net periodic pension (benefit) cost for the periods ended May 3, 2008 and May 5, 2007 is as follows (in thousands):

	Quarter Ended			Quarter Ended
	May 3,			May 5,
	2008			2007
	(unaudited)
Service cost	$	313		$	495
Interest cost	1,474			1,560
Expected return on plan assets	(1,593		)	(1,597		)
Amount of recognized gain	(236		)	(30		)

Net periodic pension (benefit) cost	$	(42	)	$	428

For the quarters ended May 3, 2008 and May 5, 2007, the Company contributed $0.8 million and $2.1 million, respectively, to the four defined benefit pension plans.

Note 10 – Commitments and Contingencies

The United States Attorney for the Northern District of New York and the Securities and Exchange Commission (“SEC”) have been conducting investigations relating to the Company’s promotional allowance practices and policies. Such investigations began prior to the Company’s emergence from bankruptcy in April 2005. The Company has been cooperating with these investigations and has produced documents and made Company employees available for interviews as requested.

On June 1, 2006, the Company announced that the Audit Committee of the Board of Directors had completed its internal investigation of the Company’s promotional allowance practices. The Audit Committee hired independent counsel to perform the investigation. The Audit Committee found that the Company had engaged in certain improper practices principally relating to the premature recognition of promotional allowances and that these practices had largely ceased by the time of the Company’s Chapter 11 filing in May 2003. On February 3, 2006, the Company announced that the employment of the Company’s Chief Marketing Officer and the Company’s Vice President, Non-Perishables Marketing had been terminated following an interim report to the Audit Committee on the findings of the investigation.

On September 17, 2007, the SEC filed civil fraud charges against the Company’s former Chief Marketing Officer and former Vice President, Non-Perishables Marketing alleging that such individuals orchestrated a scheme to inflate the Company’s income and other financial results by prematurely recognizing promotional allowances received from vendors from approximately the second quarter of fiscal year 2001 through at least the fourth quarter of fiscal year 2003. These officers had been terminated by the Company in February 2006 following an interim report to the Audit Committee on the findings of an internal investigation. The SEC’s complaint further alleges that the individuals deceived the Company’s accounting personnel to carry out their fraudulent scheme and aided and abetted the Company’s violations of the Securities Exchange Act of 1934 and rules thereunder. In addition, on the same date, the United States Attorney for the Northern District of New York announced that a federal grand jury has returned an indictment against the above-mentioned individuals on related criminal charges. Both the SEC and the United States Attorney have indicated that their investigations are continuing.

In connection with these matters, the Company could be subject to damage claims, fines or penalties. At present, the Company is unable to estimate the likelihood of an unfavorable outcome or the amount of any damage claims, fines or penalties in the event of an unfavorable outcome and, accordingly, no liability has been recorded for this contingency. In addition, the Company has incurred significant legal costs associated with these matters to date and expects to continue to do so. These costs are recorded in selling and administrative expenses as incurred and are expected to increase in the next several periods unless and until the matters are resolved.

On March 12, 2008, the Company commenced an action in the Supreme Court for the State of New York for the County of Onondaga seeking declaratory judgment to resolve a dispute over the lease term for commercial property pertaining to a store that was closed in 2007. The Company is seeking an order declaring the proper and effective lease termination date to be November 30, 2009, rather than June 30, 2017 the date asserted by the landlord. The Company estimates that the increased rent expense for the additional lease term asserted by the landlord to be approximately $2.8 million. At present, the Company is unable to estimate the likelihood of an unfavorable outcome and accordingly, no liability has been recorded for this contingency.

Note 11 – Stock Award Plan

On December 15, 2006, the Company established the 2006 Omnibus Award Plan (the “Award Plan”). Pursuant to the provisions of the Award Plan, the Company can grant stock options, restricted stock, phantom stock and stock appreciation rights. The amount of shares of common stock that can be granted are limited to 902,268 in the aggregate.

At May 3, 2008, there were 188,260 shares of phantom stock granted, 100,000 shares forfeited, and 88,260 shares outstanding to officers and non-officer directors. Approximately 20,910 shares of phantom stock are unvested as of the quarter ended May 3, 2008. In accordance with SFAS 123(R) the awards are being accounted for as compensation expense and a corresponding liability over the period to settlement date based on changes in the value of the Company’s common stock. Compensation expense totaled $0.1 million and $0.4 million for the quarters ended May 3, 2008 and May 5, 2007, respectively. Refer to Note 15 to the financial statements included in the Annual Report on Form 10-K for additional information.

Note 12 – Segment Information

The Company operates in two segments – the retail food business and the wholesale food distribution business. The retail food business consists of supermarkets which the Company operates. The wholesale food distribution business supplies independent supermarkets and other independent wholesale accounts with food, related products and other services.

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

	Quarter Ended May 3, 2008
				Wholesale Food			Reconciling
	Retail Food			Distribution			Items			Total

Revenues	$	231,423		$	53,527		$	2,108	(1)	$	287,058

Cost of sales	(160,663		)	(50,484		)	(331		)(2)	(211,478		)(4)
Selling and administrative expense	(60,859		)	(1,232		)	(14,101		)(3)	(76,192		)(4)
Loss on store closings	—			—			(921		)	(921		)
Asset impairment	—			—			(2,604		)(5)	(2,604		)

Operating income (loss) before depreciation and amortization	9,901			1,811			(15,849		)	(4,137		)

Depreciation and amortization	(5,232		)	(183		)	(249		)(6)	(5,664		)

Operating income (loss)	$	4,669		$	1,628		$	(16,098	)	(9,801		)
Interest expense										(2,353		)
Reorganization costs										(110		)

Loss from continuing operations before income taxes										$	(12,264	)

Total assets as of May 3, 2008	$	182,091	(6)	$	19,883	(6)	$	37,723	(7)	$	239,697

Capital expenditures for the year ended May 3, 2008	$	1,454		$	8		$	302		$	1,764

(1)		Consists principally of approximately $1.6 million for trucking revenues, $0.3 million of rental income, and $0.1 million from sales of electronic data.

(2)		Consists principally of approximately $0.3 million increase in cost of sales to reconcile segment inventories on FIFO to consolidated inventories on LIFO.

(3)		Consists principally of approximately $7.6 million of payroll, benefits, and payroll taxes associated with the administrative staff, approximately $5.3 million of Professional fees (of which approximately $0.4 million pertained to legal costs associated with the internal and SEC investigation relating to the Company’s practices regarding promotional discounts and allowances), approximately $1.4 million of contract hauling costs associated with trucking revenue, approximately $0.8 million for an increase in reserves for doubtful accounts, $0.2 million in data processing maintenance costs, and $0.1 million for general insurance.

(4)		Excludes depreciation and amortization of $0.5 million for cost of sales and $5.1 million related to selling and administrative expenses.

(5)		Asset impairment charges are recorded at the corporate level and are not carried on a store by store basis.

(6)		The warehouse and transportation assets have been allocated using the same methodology as that which was used for the warehouse and transportation costs.

(7)		Consists principally of general corporate assets (including cash and cash equivalents) that cannot be separated by business segment.

	Quarter Ended May 5, 2007
				Wholesale Food			Reconciling
	Retail Food			Distribution			Items			Total

Revenues	$	245,159		$	50,534		$	2,280	(1)	$	297,973

Cost of sales	(170,207		)	(47,218		)	(340		)(2)	(217,765		)(4)
Selling and administrative expense	(60,839		)	(1,425		)	(13,674		)(3)	(75,938		)(4)
Loss on distribution center closing	—			—			(1,883		)	(1,883		)

Operating income (loss) before depreciation and amortization	14,113			1,891			(13,617		)	2,387

Depreciation and amortization	(6,218		)	(245		)	(217		)	(6,680		)

Operating income (loss)	$	7,895		$	1,646		$	(13,834	)	(4,293		)
Interest expense										(2,341		)
Reorganization costs										(164		)

Loss from continuing operations before income taxes										$	(6,798	)

Total assets as of May 5, 2007	$	214,690	(5)	$	23,126	(5)	$	57,647	(6)	$	295,463

Capital expenditures for the year ended May 5, 2007	$	494		$	101		$	62		$	657

(1)		Consists principally of approximately $1.7 million for trucking revenues, $0.3 million of rental income and $0.1 million from sales of electronic data.

(2)		Consists principally of approximately $0.3 million in cost of sales to reconcile segment inventories on FIFO to consolidated inventories on LIFO.

(3)		Consists principally of approximately $7.6 million of payroll, benefits, and payroll taxes associated with the administrative staff, approximately $4.3 million of professional fees (of which approximately $0.3 million pertaining to legal costs associated with the internal and SEC investigation relating to the Company’s practices regarding promotional discounts and allowances), approximately $1.4 million of contract hauling costs associated with trucking revenue, approximately $0.5 million for an increase in reserves for doubtful accounts, $0.3 million in data processing maintenance offset by $0.5 million gain on disposal of assets.

(4)		Excludes depreciation and amortization of $0.9 million for cost of sales and $5.8 million related to selling and administrative expenses.

(5)		The warehouse and transportation assets have been allocated using the same methodology as that which was used for the warehouse and transportation costs.

(6)		Consists principally of general corporate assets (including cash and cash equivalents) that cannot be separated by business segment.

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

Introduction

We operate or supply more than 220 supermarkets in upstate New York, Pennsylvania, Vermont and New Hampshire. We operate in two segments. Our retail food business includes corporate-owned stores with the “BiLo”, “P&C” and “Quality” trade names, and our wholesale food distribution business supplies independently operated supermarkets and other wholesale accounts.

Our primary objective is to enhance the in-store experience of our customers and improve our long-term financial performance. Under the direction of our new senior team (formed in fiscal year 2007), we are focusing on rebuilding our core business. This means re-establishing basic disciplines and reemphasizing and instilling a much stronger profitable growth culture around sales and margin.

Results of Operations

The following table sets forth certain Consolidated Statement of Operations components expressed as percentages of revenues for the quarters ended May 3, 2008 and May 5, 2007.

	Unaudited
	Quarter		Quarter
	Ended		Ended
	May 3, 2008		May 5, 2007

Revenues	100.0	%	100.0	%

Gross profit (1)	26.1		26.6

Selling and administrative expenses	28.3		27.4

Loss on store and distribution center closing	0.3		0.6

Asset impairment	0.9		0.0

Operating loss	(3.4	)	(1.4	)

Interest expense	0.8		0.8

Reorganization and other expenses	0.0		0.1

Loss from continuing operations, before income taxes	(4.2	)	(2.3	)

Income tax expense	0.1		0.0

Loss from continuing operations	(4.3	)	(2.3	)

Loss from discontinued operations	0.0		(0.2	)

Net loss	(4.3	)	(2.5	)

(1) Revenues less cost of sales.

Fiscal Year 2009 (the Quarter Ended May 3, 2008) and Fiscal Year 2008 (the Quarter Ended May 5, 2007)

Revenues

Revenues for the quarter ended May 3, 2008 decreased to $287.1 million from $298.0 million for the quarter ended May 5, 2007. The $10.9 million decrease in revenues was mainly attributable to a decline in same store sales, partially offset by an increase in wholesale food distribution revenues.

Same store sales for the quarter ended May 3, 2008 decreased 1.4% compared to the quarter ended May 5, 2007.

Wholesale food distribution revenues for the quarter ended May 3, 2008 increased $3.0 million, or 5.9% to $53.5 million or 18.6% of total revenues, from $50.5 million or 17.0% of total revenues for the quarter ended May 5, 2007. The increase in the wholesale food distribution revenues was primarily attributable to the addition of three new wholesale accounts.

Gross Profit

Gross profit was $75.0 million, or 26.1% of revenues, for the quarter ended May 3, 2008 compared to $79.3 million, or 26.6% of revenues, for the quarter ended May 5, 2007. The decrease is the result of decreased sales due to store closings and declining customer counts.

Selling and Administrative Expenses

Selling and administrative expenses for the quarter ended May 3, 2008 were $81.3 million, or 28.3% of revenues, compared to $81.7 million, or 27.4% of revenues, for the quarter ended May 5, 2007. The increase in selling and administrative expenses as a percentage of revenues was due to the decrease in sales.

Depreciation and Amortization

Depreciation and amortization expense was $5.7 million, or 2.0% of revenues, for the quarter ended May 3, 2008 compared to $6.9 million, or 2.3% of revenues, for the quarter ended May 5, 2007. The decrease in depreciation and amortization during the quarter ended May 3, 2008 was primarily due to an $11.0 million write-down of intangible assets in conjunction with the recognition of net operating loss carryforwards for prior years.

Loss on Store and Distribution Center Closings

For the quarter ended May 3, 2008 the Company recorded a loss on store closings of $0.9 million, or 0.3% of revenues, representing the net present value of the remaining lease rentals associated with its closed stores. A loss of $1.9 million, or 0.6% of revenues, representing the net present value of the remaining lease payments associated with our closed distribution centers, was incurred for the quarter ended May 5, 2007

Asset Impairment Charges

Asset impairment charges were $2.6 million, or 0.9% of revenues, for the quarter ended May 3, 2008. The asset impairment charges were mainly attributed to the write-down of closed store assets.

Operating Loss

Operating loss for the quarter ended May 3, 2008 was $9.8 million, or 3.4% of revenues, compared to the operating loss of $4.3 million, or 1.4% of revenues, for the quarter ended May 5, 2007.

Interest Expense

Interest expense for the quarter ended May 3, 2008 was $2.4 million, or 0.8% of revenues, compared to $2.3 million, or 0.8% of revenues, for the quarter ended May 5, 2007. The $0.1 million increase in interest expense for the quarter, under our credit facilities ended May 3, 2008 was due to the increase in our average borrowings, and a higher weighted-average borrowing rate under our credit facility.

Reorganization and Other Expenses

Reorganization expense for the quarter ended May 3, 2008 was $0.1 million, or less than 0.1% of revenues, compared to $0.2 million, or 0.1% of revenues, for the quarter ended May 5, 2007. They consist primarily of professional fees.

Loss from Continuing Operations

Loss from continuing operations for the quarter ended May 3, 2008 was $12.4 million, or 4.3% of revenues, compared to a loss from continuing operations of $6.9 million, or 2.3% of revenues, during the quarter ended May 5, 2007. The $5.5 million increase in loss from continuing operations is primarily due to a decrease in gross profit of $4.3 million related to decreased sales due to store closings, declining customer counts and an asset impairment charge of $2.6 million related to the write-down of closed store assets for the quarter ended May 3, 2008.

Loss from Discontinued Operations

Loss from discontinued operations for the quarter ended May 3, 2008 was $0.01 million, or less than 0.1% of revenues, compared to a loss from discontinued operations of $0.6 million, or 0.2% of revenues, during the quarter ended May 5, 2007. The decrease in the loss from discontinued operations in the quarter ended May 3, 2008 is primarily due to $0.6 million incurred from bakery operations.

Net Loss

Net loss for the quarter ended May 3, 2008 was $12.4 million, or 4.3% of revenues, compared to a net loss of $7.4 million, or 2.5% of revenues, during the quarter ended May 5, 2007.

Liquidity and Capital Resources

Overview

As of the quarter ended May 3, 2008, we had cash and cash equivalents of $11.8 million and total debt outstanding of $60.4 million. We also have the ability to draw down on our revolving credit facilities. We believe that our existing cash on hand, cash generated from operating activities and available borrowings under our credit facility will be sufficient to satisfy our currently anticipated cash requirements for at least the next 12 months.

Financial Results

Operating Activities

Cash used in operating activities for the quarter ended May 3, 2008 was $9.4 million as compared to cash used in operating activities of $1.4 million for the quarter ended May 5, 2007. For the quarter ended May 3, 2008, we incurred a net loss of $12.4 million, adjustments for non cash items of $7.5 million, and a net decrease in operating net assets of $4.5 million. For the quarter ended May 5, 2007, we incurred a net loss of $7.4 million, adjustments for non-cash items of $7.7 million and a net decrease in operating net assets of $1.7 million.

Investing Activities

Cash provided by investing activities for the quarter ended May 3, 2008 was $1.7 million and cash used in investing activities for the quarter ended May 5, 2007 was $0.2 million. The $1.9 million increase was due to increased proceeds from the sale of fixed assets ($3.5 million as compared to $0.5 million) partially offset by increased capital expenditures ($1.8 million as compared to $0.7 million).

Financing Activities

Cash used in financing activities for the quarter ended May 3, 2008 and the quarter ended May 5, 2007 were $1.5 million and $0.5 million, respectively. The $1.0 million increase was due to fees incurred with the amendment to the revolving credit and term loan facility.

Borrowings

On April 13, 2005, upon emergence from Chapter 11 proceedings, we entered into a revolving credit and term loan facility with a group of financial institutions providing for a $130.0 million revolving credit facility and a $6.0 million term loan. Also on April 13, 2005, we entered into a supplemental real estate credit facility with another group of lenders, providing for term loan borrowings of up to $28.0 million. Availability under both credit facilities is dependent on levels of accounts receivable, inventory and certain other assets. Interest rates on borrowings under the revolving credit facility vary depending upon the amount of availability. At May 3, 2008, outstanding borrowings under both facilities aggregated $46.6 million. At such date, availability in excess of outstanding borrowings and letters of credit was approximately $31.5 million. Borrowings under the revolving credit and term loan facility are secured by substantially all of our assets, subject to first liens on certain properties by other lenders. Borrowings under the real estate facility are secured by a first lien on substantially all of our leasehold interests and a second lien on substantially all of our remaining assets. At May 3, 2008, we had stand-by letters of credit of approximately $40.6 million. Many of these stand-by letters of credit were required upon emergence from bankruptcy and as a result of our inability to file financial statements.

Provisions of both credit facilities, among other things, require the maintenance of certain financial covenants (when availability under the credit facilities is less than $27.5 million for four consecutive days or less than $25 million for any one day), and limit the amount of capital expenditures, our assumption of additional debt and our payment of dividends. At no time through May 3, 2008 had we been subject to compliance with these financial covenants because the annual available for borrowing had not dropped to these levels. However, had such an event occurred, we would not have been in compliance with the financial covenants and would have been in default under the terms of the loan agreement at May 3, 2008.

Pursuant to our plan of reorganization, we entered into a collateral trust agreement with the collateral trustee in connection with the secured trade lien program. The secured trade lien program is with certain of our vendors and allows us to maintain trade terms.

On December 26, 2006, August 1, 2007 and January 30, 2008, both the revolving credit and term loan facility and the supplemental real estate credit facility were amended to permit the disposal of assets in connection with the closing of certain stores. In March 2008, the maturity date of both facilities was extended to at least April 13, 2009. See Note 7 to the financial statements included in the Annual Report on Form 10-K for year ended February 2, 2008 for additional information.

We also have $3.8 million of borrowings under mortgages secured by three related properties as of May 3, 2008.

Certain Contingencies

For additional information regarding contingencies that may effect our financial condition, see Note 10 to our unaudited financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our financial results are subject to risk from interest rate changes on debt that has variable interest rates. Total variable rate debt outstanding under our loan agreements at May 3, 2008 was $46.6 million with a weighted average interest rate of 10.1%. A 1.0% change in interest rates would impact pre-tax income by $0.5 million based on the debt outstanding at May 3, 2008. In addition to the variable rate debt we had $3.8 million of fixed rate debt outstanding at May 3, 2008 with a weighted average interest rate of 6.6%. We view the fixed rate debt as a partial hedge against interest rate fluctuations.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures under Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Securities Act”) are those controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rule and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Pursuant to Rule 13a-15(e) under the Exchange Act, our management evaluated the effectiveness of the design and operation of our disclosure controls and procedures with the participation of our principal executive and principal financial officers. Based on their current observations combined with observations by the disclosure committee, which is comprised of members of management, members of the audit committee and external counsel, management concluded that our disclosure controls and procedures were effective as of May 3, 2008 in providing reasonable assurance that material information requiring disclosure was brought to management’s attention on a timely basis and that our financial reporting was reliable.

Change in our Internal Control Over Financial Reporting

In May 2007, we hired an outside consulting firm to assist management in its evaluation of the effectiveness of our internal controls over financial reporting, including disclosure controls and procedures. They have since determined they will use the framework established in “Internal Control-Integrated Framework”, issued by the Committee of Sponsoring Organizations of the Treadway Commission.

PART II – OTHER INFORMATION

ITEM 6. EXHIBITS

The following are filed as Exhibits to this Report:

Exhibit No.		Description

10.1		Fourth Amendment to the Credit Agreement, dated as of April 13, 2005, by and among The Penn Traffic Company, various of its subsidiaries, General Electric Capital Corporation as agent and lender, and the other lenders party thereto (incorporated by reference to exhibit 99.1 to the Form 8-K filed by the Company on March 31, 2008).

10.2		Fourth Amendment to the Credit Agreement, dated as of April 13, 2005, by and among The Penn Traffic Company, various of its subsidiaries and Kimco Capital Corp. (incorporated by reference to Exhibit 99.2 to the Form 8-K filed by the Company on March 31, 2008).

10.3		Form of Change of Control Agreement.

10.4		Form of Bonus Agreement.

31.1		Certification of CEO pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

31.2		Certification of CFO pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

32.1		Certification of CEO pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

32.2		Certification of CFO pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

Signatures

Pursuant to the requirements 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

	By:	/s/ Gregory J. Young
	Name:	Gregory J. Young
	Title:	Chief Executive Officer and President

	By:	/s/ Tod A. Nestor
	Name:	Tod A. Nestor
	Title:	Senior Vice President and Chief Financial Officer

EX-10.3 2 a08-16331_1ex10d3.htm EX-10.3

Exhibit 10.3

CHANGE IN CONTROL PROTECTION AGREEMENT

This Change in Control Protection Agreement, dated as of (this “Agreement”), between The Penn Traffic Company (the “Company”) and (the “Key Employee”).

R E C I T A L S

The Company has employed the Key Employee in an officer position and has determined that the Key Employee holds a critical position with the Company.

The Company believes that, in the event it is confronted with a situation that could result in a change in ownership or control of the Company, continuity of management will be essential to its ability to evaluate and respond to such situation in the best interests of its shareholders, and the Company desires to assure itself of the Key Employee’s services during the period in which it is confronting such a situation, and to provide certain financial assurances to the Key Employee.

The Key Employee has had access to important confidential information and important employee and customer relationships, all of which the Key Employee agrees are valuable assets of the Company that the Company and the Key Employee desire to reasonably protect.

To achieve these objectives, the Company and the Key Employee desire to enter into an agreement providing the Company and the Key Employee with certain rights and obligations upon the occurrence of a Change in Control (as defined in Section 2 hereof);

The Company and the Key Employee hereby agree as follows:

1. Operation of Agreement.

(a) Term. This Agreement shall become effective as of the date first set forth above (the “Commencement Date”) and shall remain in effect until the third anniversary of the Commencement Date (the “Expiration Date”).

(b) Effective Date. Notwithstanding the provisions of Section 1(a) hereof, this Agreement shall govern the terms and conditions of the Key Employee’s employment and the benefits and compensation to be provided to the Key Employee only if a Change in Control is consummated prior to the Expiration Date. For purposes of this Agreement, the “Effective Date” shall mean the date, prior to the Expiration Date, on which a Change in Control is consummated; provided that if the Key Employee is not employed by the Company on the Effective Date or at any time during the ninety (90) days immediately prior to the Effective Date, then the Key Employee shall not have any rights under this Agreement. For the avoidance of doubt, the parties acknowledge that the Key Employee shall not have any rights under, and the terms, conditions and benefits of such Key Employee’s employment shall not be governed by,

this Agreement prior to the Effective Date, or if a Change in Control does not occur prior to the Expiration Date.

2. Definition of Change in Control.

“Change in Control” shall be deemed to occur upon:

(i) the acquisition by any individual, entity or group (a “Person”) (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the “Exchange Act”)) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more (on a fully diluted basis) of either (A) the then outstanding shares of common stock of the Company (“Common Stock”), taking into account as outstanding for this purpose such Common Stock issuable upon the exercise of options or warrants, the conversion of convertible stock or debt, and the exercise of any similar right to acquire such Common Stock (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this Agreement, the following acquisitions shall not constitute a Change in Control: (I) any acquisition by the Company or any entity that directly or indirectly is controlled by controls or is under common control with the Company (an “Affiliate”), (II) any acquisition by any employee benefit plan sponsored or maintained by the Company or any Affiliate, or (III) any acquisition by the Key Employee or any group of persons including the Key Employee (or any entity controlled by the Key Employee or any group of persons including the Key Employee);

(ii) individuals who, on the date hereof, constitute the Board of Directors of the Company (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board of Directors (the “Board”), provided that any person becoming a director subsequent to the date hereof, whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of a registration statement of the Company describing such person’s inclusion on the Board, or a proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation A promulgated under the Exchange Act, with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;

(iii) the dissolution or liquidation of the Company;

(iv) the sale, transfer or other disposition of all or substantially all of the business or assets of the Company; or

(v) the consummation of a reorganization, recapitalization, merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company that requires the approval of the Company’s stockholders, whether for such transaction or the issuance of securities in the transaction (a “Business Combination”), unless immediately following such Business Combination: (A) more than 50% of the total voting power of (x) the entity resulting from such Business Combination (the “Surviving Company”), or (y) if applicable, the ultimate parent entity that directly or indirectly has beneficial ownership of sufficient voting securities eligible to elect a majority of the members of the board of directors (or the analogous governing body) of the Surviving Company (the “Parent Company”), is represented by the Outstanding Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which the Outstanding Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of the Outstanding Company Voting Securities among the holders thereof immediately prior to the Business Combination, and (B) at least a majority of the members of the board of directors (or the analogous governing body) of the Parent Company (or, if there is no Parent Company, the Surviving Company) following the consummation of the Business Combination were Board members at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination.

3. Protected Period. If the Key Employee is an employee of the Company on the Effective Date, the Company agrees to continue the Key Employee in its employ, and the Key Employee agrees to remain in the employ of the Company, on the terms and subject to conditions of this Agreement, for a period commencing on the Effective Date and ending on the earlier of (i) the termination of the Key Employee’s employment with the Company in accordance with the terms hereof and (ii) two years immediately following the Effective Date (the “Protected Period”). For purposes of clarity and not by way of limitation, in the event of a Change in Control after the Commencement Date but prior to the Expiration Date set forth in Section l(a), the Expiration Date shall be adjusted to coincide with the last day of the Protected Period.

4. Position and Duties.

(a) No Reduction in Position. During the Protected Period, the Key Employee’s position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that (i) an entity or group of related entities shall have acquired all or substantially all of the business, capital stock and/or assets of (an “Acquirer”) or (ii) the Company or the

Acquirer imposes upon the Key Employee additional or changed reporting obligations or other similar and customary responsibilities within the group structure of the Acquirer.

(b) Business Time. During the Protected Period, the Key Employee agrees to devote his full attention during normal business hours to the business and affairs of the Company and to use his best efforts to perform faithfully and efficiently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in managing his personal, financial and legal affairs and serving on corporate, civic or charitable boards or committees, in each case only if and to the extent not interfering in any material respect with the performance of such responsibilities and to the extent permitted by the policies of the Company and the Acquirer, and (ii) periods of vacation and sick leave to which he is entitled.

5. Compensation.

(a) Base Salary. During the Protected Period, the Key Employee shall receive a base salary at a monthly rate at least equal to the monthly salary paid to the Key Employee by the Company immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof or any individual having authority to take such action in accordance with the Company’s regular practices. The Key Employee’s base salary, as it may be increased from time to time, shall hereafter be referred to as the “Base Salary.” Neither the Base Salary nor any increase in the Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder.

(b) Annual Bonus. During the Protected Period, in addition to the Base Salary, the Key Employee shall be eligible to receive discretionary annual bonuses or incentive compensation as may be authorized from time to time by action of the Board or the Acquirer or any committee thereof or any individual having authority to take such action in accordance with the Company’s or the Acquirer’s regular practices in their sole discretion (the “Annual Bonus Opportunity”). The Annual Bonus Opportunity shall be an amount that provides the Key Employee with the same bonus opportunity as other employees of the Company or the Acquirer of comparable rank (“Similarly Situated Key Employees”). If any fiscal year commences but does not end during the Protected Period, the Key Employee shall receive a pro-rated amount in respect of the Annual Bonus Opportunity for the portion of the fiscal year occurring during the Protected Period. Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or any prorated portion) is earned or awarded, unless electively deferred by the Key Employee pursuant to any deferral programs or arrangements that the Company or the Acquirer may make available to the Key Employee.

(c) Long-term Incentive Compensation Programs. During the Protected Period, the Key Employee shall be eligible to participate in all long-term incentive compensation programs that are made available from time to time to Similarly

Situated Key Employees, subject to and on a basis consistent with the terms, conditions, and overall administration of such programs.

(d) Benefit Plans. During the Protected Period, the Key Employee (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life, accidental death and travel accident insurance plans and programs of the Company and any Affiliate that are made available from time to time to other Similarly Situated Key Employees, subject to and on a basis consistent with the terms, conditions, and overall administration of such plans and arrangements.

(e) Expenses. During the Protected Period, the Key Employee shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Key Employee (the “Expenses”) in accordance with the policies and procedures of the Company as in effect from time to time with respect to expenses incurred by other Similarly Situated Key Employees.

(f) Vacation and Fringe Benefits. During the Protected Period, the Key Employee shall be entitled to paid vacation and fringe benefits that are made available from time to time to other Similarly Situated Key Employees.

(g) Indemnification. During and after the Protected Period, the Company shall indemnify the Key Employee and hold the Key Employee harmless from and against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys’ fees, on the same terms and conditions applicable from time to time with respect to the indemnification of other Similarly Situated Key Employees.

(h) Office and Support Staff. The Key Employee shall be entitled to an office with furnishings and other appointments, and to secretarial and other assistance, that are made available to other Similarly Situated Key Employees.

6. Termination.

(a) Death, Disability or Retirement. The Key Employee’s employment with the Company shall terminate automatically upon the Key Employee’s death, termination due to “Disability” (as defined below) or voluntary retirement under any of the Company’s retirement plans as in effect from time to time. For purposes of this Agreement, “Disability” shall have the meaning set forth in the long-term disability plan then made available to the Key Employee by the Company or the Acquirer.

(b) Voluntary Termination; Termination without Cause. Notwithstanding anything in this Agreement to the contrary, the Key Employee may voluntarily terminate employment with the Company, and the Company may terminate the employment of the Key Employee, at any time for any reason (including early retirement under the terms of any of the Company’s retirement plans as in effect from time to time), upon not less than 30 days’ written notice, provided any termination by the

Key Employee pursuant to Section 6(d) hereof on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b).

(c) Cause. The Company may terminate the Key Employee’s employment for Cause. For purposes of this Agreement, “Cause” means (i) the commission by the Key Employee of an act of fraud, dishonesty, embezzlement (including the unauthorized disclosure or use of confidential or proprietary information of the Company, the Acquirer or their respective Affiliates or clients) or other act or omission intended or with consequences that bring, or could reasonably be expected to bring, the Company, the Acquirer or any of their respective Affiliates into disrepute or otherwise materially harm, or could reasonably be expected to materially harm, their respective commercial or governmental relationships or licenses, (ii) the Key Employee pleads guilty or no contest to or is convicted of any criminal offense for which a penalty of imprisonment may be imposed (other than an offense under road traffic legislation), (iii) material misconduct as an employee of the Company or any of its subsidiaries or other conduct tending to bring the Company, the Acquirer or any of their respective Affiliates or shareholders into disrepute or failure to comply with any written guidelines adopted or promulgated by the Company or the Acquirer, (iv) abandonment or material neglect by the Key Employee of any of the duties for which he has been employed by the Company, (v) persistent failure of the Key Employee to comply with or carry out the instructions of the Company’s or the Acquirer’s Board of Directors or management if the ability to comply with or carry out such instructions is reasonably within the control of the Employee, or (vi) material breach by the Key Employee of his duties under this Agreement, or material failure to carry out any such duties; provided that any such breach or failure shall not have been remedied by the Key Employee within thirty days of receipt by the Key Employee of written notice from the Company of the occurrence of such breach or failure.

(d) Good Reason. The Key Employee may terminate his employment at any time for Good Reason, effective thirty days after receipt by the Company of Notice of Termination (as defined below); provided that the Good Reason shall not have been remedied by the Company prior to the expiration of such 30-day period. For purposes of this Agreement, “Good Reason” means the occurrence of any of the following, without the express written consent of the Key Employee, after the Effective Date or at any time during the ninety (90) day period immediately preceding the Effective Date: (1) a material reduction in the Key Employee’s title, authority or responsibilities, provided that such a reduction shall not be deemed to have occurred because the Company or an Acquirer imposes upon the Key Employee additional or changed reporting obligations or additional responsibilities, (2) a reduction in the salary paid to the Key Employee by the Company, or (3) a more than 50 mile change in the location of the Key Employee’s office (excluding travel required for the performance of the Key Employee’s responsibilities) (in each case compared to the state of affairs in effect immediately prior to the commencement of the Protected Period or such 90-day period, as the case may be). In no event shall the mere occurrence of a Change in Control, absent any further impact on the Key Employee, be deemed to constitute Good Reason.

(e) Notice of Termination. Any termination by the Company for Cause or by the Key Employee for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 9(e) hereof. For purposes of this Agreement, a “Notice of Termination” means a written notice given, (i) in the case of a termination for Cause, by the Company at any time after discovery of the events giving rise to such termination, or (ii) in the case of a termination for Good Reason, within 30 days of the Key Employee’s having actual knowledge of the events giving rise to such termination. Any such Notice of Termination shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) set forth a general description of the facts and circumstances claimed to provide a basis for termination of the Key Employee’s employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specify the termination date of this Agreement (which date shall be not more than 30 days after the giving of such notice). The failure by the Company or the Key Employee to set forth in a Notice of Termination any fact or circumstance which contributes to a showing of Cause or Good Reason shall not waive any right of the Company or the Key Employee hereunder or preclude the Company or the Key Employee from asserting such fact or circumstances in enforcing its or his rights hereunder.

(f) Date of Termination. For the purpose of this Agreement, the term “Date of Termination” means (i) in the case of a termination for Cause, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, (ii) in the case of termination for Good Reason, thirty days after the date of receipt by the Company of the Notice of Termination, subject to the proviso to the first sentence of Section 6(d) and (iii) in all other cases, the actual date on which the Key Employee’s employment terminates during the Protected Period.

(g) Other.

(i) Upon the termination of the Key Employee’s employment with the Company for any reason, the Key Employee (or, if applicable, his estate) shall immediately deliver to the Company all documents, correspondence, memoranda, notes, records, reports, plans, designs, studies and any other papers or items made or received by the Key Employee in connection with his employment with the Company and including all copies of the foregoing), and all computer equipment, disks and software, keys, credit cards, books and other property of or relating to the Company or any of its Affiliates (including without limitation all documents prepared by the Key Employee or which may have come into the Key Employee’s possession in the course of his employment hereunder, and including copies thereof) then in the Key Employee’s (or, if applicable, his estate’s) possession.

(ii) After the termination of the Key Employee’s employment with the Company for any reason, the Key Employee shall not at any time thereafter represent himself as being in any way connected with or interested in the business of or employed by the Company or its Affiliates, or use for trade or other purposes the name of the Company or its Affiliates, or any name capable of confusion therewith.

(iii) Upon the termination of the Key Employee’s employment with the Company for any reason, the Key Employee shall immediately be deemed to have resigned from all offices the Key Employee holds in the Company or any of its Affiliates, and any directorships held at the request of or on the behalf of the Company or its Affiliates.

7. Obligations of the Company upon Termination.

(a) Death or Disability. If, during the Protected Period or at any time during the ninety (90) day period immediately preceding the Effective Date, the Key Employee’s employment is terminated by reason of the Key Employee’s death or Disability, this Agreement shall terminate without further obligations to the Key Employee or the Key Employee’s legal representatives under this Agreement, except that the Company shall be obligated to pay to the Key Employee (or his beneficiary or estate), at the times determined below (i) the Key Employee’s full Base Salary through the Date of Termination (the “Earned Salary”), (ii) any vested amounts or benefits owing to the Key Employee under or in accordance with the terms and conditions of the Company’s otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Key Employee (together with any accrued earnings thereon) and not yet paid by the Company, any accrued vacation pay not yet paid by the Company, and any unreimbursed Expenses (the “Accrued Obligations”), and (iii) any other benefits payable due to the Key Employee’s death or Disability under the Company’s applicable plans, policies or programs (the “Additional Benefits”).

Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 30 days (or at such earlier date required by law), following the Date of Termination. Any Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement.

(b) Cause and Voluntary Termination. If, during the Protected Period or at any time during the ninety (90) day period immediately preceding the Effective Date, the Key Employee’s employment shall be terminated by the Company for Cause or voluntarily terminated by the Key Employee (other than on account of Good Reason), the Company shall pay the Key Employee (i) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 30 days, following the Date of Termination, and (ii) any Accrued Obligations in accordance with the terms of the applicable plan, program or arrangement.

(c) Termination by the Company without Cause and Termination by the Key Employee for Good Reason. If, during the Protected Period or at any time during the ninety (90) day period immediately preceding the Effective Date, (x) the Company terminates the Key Employee’s employment without Cause or (y) the Key Employee terminates his employment for Good Reason, then:

(i) Lump Sum Payments. The Company shall pay to the Key Employee, at the times determined below, the following amounts:

(A) the Key Employee’s Earned Salary;

(B) a cash amount (the “Severance Amount”) equal to the sum of

(1) two times the higher of (x) the Key Employee’s annual rate of Base Salary as then in effect or (y) the average annualized Base Salary of the Key Employee for each of the 24 months of employment ended immediately prior to the Effective Date (or, if less, the number of months during which the Key Employee was an employee of the Company); and

(2) two times the average of the annual cash bonuses payable to the Key Employee under the Company’s annual incentive plan for each of the three fiscal years of the Company (or, if less, the number of prior fiscal years during which the Key Employee was an employee of the Company) ended immediately prior to the Effective Date for which an annual bonus amount had been determined prior to the Effective Date. If the Key Employee was employed by the Company for only a portion of any fiscal year included in the period for which the average referred to in the immediately preceding sentence is determined and the bonus payable for such fiscal year took into account such partial period of employment, such bonus for such fiscal year shall be annualized for purposes of calculating such average; and

(C) any Accrued Obligations.

The Earned Salary and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 30 days (or at such earlier date required by law), following the Date of Termination. Any Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement.

(ii) Continuation of Benefits. The Key Employee (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination (or, in the event of termination during the 90 days immediately preceding to the Effective Date, the Effective Date) until the first anniversary of the Date of Termination (or, in the event of termination during the 90 days immediately preceding to the Effective Date, the Effective Date) (the “End Date”), to continue participation in all of the Company’s plans providing medical, dental and longterm disability benefits for which the Key Employee was eligible as of the Date of Termination (collectively, the “Continuing Benefit Plans”); provided, however, that the participation by the Key Employee and, to the extent

applicable, his dependents) in any Continuing Benefit Plan shall cease on the date, if any, prior to the End Date on which the Key Employee becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer (the “Prior Date”). The Key Employee’s participation in the Continuing Benefit Plans will be on the same terms and conditions that are made available to employees of the Company who have a rank similar to the Key Employee’s rank prior to termination. To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a cash payment to the Key Employee in an amount equal to the employer contribution that would have been made in accordance with the terms of such plan, policy or program.

(d) Discharge of the Company’s Obligations. The Key Employee’s sole remedy for the Company’s breach of this Agreement during the Protected Period, to the extent constituting Good Reason, shall be to terminate this Agreement and to receive payments under this Section 7. Except as expressly provided in this Section 7(d), the amounts payable to the Key Employee pursuant to this Section 7 (whether or not reduced pursuant to Section 7(e) hereof) shall be in full and complete satisfaction of the Key Employee’s rights under this Agreement following termination of his employment and any claims he may have in respect of employment by the Company or any of its Affiliates (or termination thereof), for breach by the Company of this Agreement or for severance payments. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, subject to the Key Employee’s receipt of such amounts, the Company and its directors, officers, shareholders, affiliates and agents shall be released and discharged from any and all liability to the Key Employee in connection with this Agreement, the breach thereof or otherwise in connection with the Key Employee’s employment with the Company and its Affiliates or the termination thereof. Notwithstanding the foregoing, the obligations of the Company under this Agreement are meant to supplement and not replace any rights of the Key Employee under any equity incentive or stock option plan, as such rights may be determined in accordance with the terms of such plans, if any. As a condition to any payment under this Section 7, (1) the Key Employee shall be required to sign and deliver to the Company a waiver and release (to be provided by the Company following the termination of the employment of the Key Employee) waiving and releasing any claims he or she may have against the Company and its parents, subsidiaries, affiliates, predecessors, assigns and representatives, and their respective present and former benefit and severance plans, plan administrators, insurers, agents, shareholders, officers, directors, attorneys and employees, except as expressly provided in this Section 7(d) and payments and benefits due under this Section 7, and (2) seven days shall have elapsed following delivery of such release to the Company without such release being revoked by the Key Employee by written notice to the Company to the addresses set forth for notices in Section 9(e). The waiver and release will include, but not be limited to, any claims arising under any Federal, state or local law or ordinance, tort, employment contract (express or implied), public policy, whisteblower law, wrongful discharge or any other obligation including any claims arising under the Civil Rights Act of 1866, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967 (“ADEA”), as amended by the Older Workers Benefit

Protection Act, the Americans With Disabilities Act of 1990, the Employee Retirement Income Security Act of 1974, the Worker Adjustment Retraining and Notification Act, or State law, and all claims for wages, severance, bonuses, monetary or equitable relief or other damages of any kind, vacation pay, other employee fringe benefits or attorneys’ fees.

(e) Excise Tax Cutback.

(i) If the aggregate of all amounts and benefits due to the Key Employee, under this Agreement or any other plan, program, agreement or arrangement of the Company or any of its Affiliates, which, if received by the Key Employee in full, would constitute “parachute payments” as such term is defined in and under Section 280G of the Code (collectively, “Change in Control Benefits”), reduced by all Federal, state and local taxes applicable thereto, including the excise tax imposed pursuant to Section 4999 of the Code, is less than the amount the Key Employee would receive, after all such applicable taxes, if the Key Employee received aggregate Change in Control Benefits equal to an amount which is $1.00 less than three times the Key Employee’s “base amount”, as defined in and determined under Section 280G of the Code then such cash Change in Control Benefits shall be reduced or eliminated to the extent necessary so that the Change in Control Benefits received by the Key Employee will not constitute parachute payments. If a reduction in the Change in Control Benefits is necessary, reduction shall occur in the following order unless the Key Employee elects in writing a different order, subject to the Company’s consent (which consent shall not be unreasonably withheld): first, a reduction of cash payments not attributable to stock awards which vest on an accelerated basis; second, the cancellation of accelerated vesting of stock awards; third, the reduction of employee benefits and fourth a reduction in any other “parachute payments”. If acceleration of vesting of stock award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grant of the Key Employee’s stock awards unless the Key Employee elects in writing a different order for cancellation.

(ii) It is possible that after the determinations and selections made pursuant to Section 7(e)(i) the Key Employee will receive Change in Control Benefits that are, in the aggregate, either more or less than the amounts contemplated by Section 7(e)(i) above (hereafter referred to as an “Excess Payment” or “Underpayment”, respectively). If there is an Excess Payment, the Key Employee shall promptly repay the Company an amount consistent with this Section 7(e)(ii). If there is an Underpayment, the Company shall pay the Key Employee an amount consistent with this Section 7(e)(ii).

(iii) The determinations with respect to this Section 7(e)(iii) shall be made by an independent auditor (the “Auditor”) compensated by the Company. The Auditor shall be the Company’s regular independent auditor, unless the Key Employee objects to the use of that firm, in which event the Auditor shall be a nationally-recognized United States public accounting firm chosen by the Company and approved by the Key Employee (which approval shall not be unreasonably withheld or

delayed). For purposes of this Agreement, the term “Code” shall mean the Internal Revenue Code of 1986, as amended, including all final regulations promulgated thereunder and any reference to a particular section of the Code shall include any provision that modifies, replaces or supersedes such section.

(f) Notwithstanding anything else in this Section 7 to the contrary, nothing in this Section 7 shall be construed to release the Company from (or to otherwise waive or modify) the Company’s obligation to indemnify the Key Employee pursuant to Section 5(g) hereof.

8. Successors.

(a) This Agreement is personal to the Key Employee and, without the prior written consent of the Company, shall not be assignable by the Key Employee otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Key Employee’s legal representatives.

(b) This Agreement shall inure to the benefit of and be binding upon the Company and their successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place.

9. Miscellaneous.

(a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applied without reference to principles of conflict of laws.

(b) Arbitration. Any dispute, alleged breach, interpretation, or disagreement whatsoever arising out of this Agreement that the parties are unable to resolve shall be resolved by final and binding arbitration before a panel of three arbitrators pursuant to the Commercial Arbitration Rules of the American Arbitration Association in the County of Onondaga, State of New York. The party demanding arbitration shall have thirty days in which to select an arbitrator. Thereafter, the other party shall have thirty days in which to select an arbitrator, failing which the American Arbitration Association shall select such arbitrator. Such arbitrators shall, thereafter, within thirty days, jointly select a third arbitrator, failing which the American Arbitration Association shall select such arbitrator. Such arbitration shall be the exclusive means for settling any disputes hereunder. The majority decision of the panel of arbitrators may, but need not, be entered as judgment in accordance with the provisions of applicable law. The parties shall share equally the costs and expenses in connection with any arbitration or other proceeding hereunder, provided that a panel of arbitrators acting in accordance with the provisions of this Section 9 shall have the power to award attorneys’ fees in

connection with the issuance of any final decision by such panel. If this arbitration provision is for any reason held to be invalid or otherwise inapplicable to any dispute, the parties hereto agree that any action or proceeding brought with respect to any dispute arising under this Agreement, or to interpret or clarify any rights or obligations arising hereunder, shall be maintained solely and exclusively in courts located in the County of Onondaga, State of New York.

(c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.

(d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein and, except as expressly provided herein, supersedes any and all prior agreements or understandings. No other agreement relating to the terms of the Key Employee’s employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties respecting the subject matter hereof other than those that are expressly contained herein. The Key Employee acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and has had at least 21 days to review this Agreement with his attorney and that he understands it and its legal consequences.

(e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Key Employee:		at the home address of the Key Employee
		noted on the records of the Company

If to the Company		The Penn Traffic Company
		PO Box 4737
		Syracuse NY 13221-4737
		Attn: General Counsel

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.

(f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation.

(g) Severability: Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby.

(h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions.

(i) Captions; Pronouns. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. Any masculine personal pronoun shall be considered to mean the corresponding feminine personal pronoun, as the context requires.

(j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the Key Employee has executed this Agreement and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the date first above written.



		Print name:
		Title:

ATTESTED:



Print name


Company Seal



		KEY EMPLOYEE:



		Print name:


WITNESSED:



Print name:

EX-10.4 3 a08-16331_1ex10d4.htm EX-10.4

Exhibit 10.4

The Penn Traffic Company

[Date]

[Address]

Dear Mr. :

The Penn Traffic Company offers a special bonus arrangement (a “Transaction Bonus”) to provide you an incentive to stay in the Company’s employ.

1. Definitions.

The following definitions shall be applicable throughout this Agreement:

(a) “Agreement” means this Agreement.

(b) “Board” means the Board of Directors of the Company.

(c) “Committee” shall have the meaning set forth in section 2(g) of The Penn Traffic Company 2006 Omnibus Award Plan (the “Omnibus Award Plan”).

(d) “Company” means The Penn Traffic Company.

(e) “Fair Market Value” means the per share amount of cash or other consideration paid to the stockholders of the Company for their Common Stock. The Fair Market Value of any such non-cash consideration shall be determined by the Committee in its sole discretion.

(f) “Sale” shall mean a “Change in Control”, as that term is defined in Section 2(e) of the Omnibus Award Plan, as amended from time to time.

(g) “Transaction Bonus” means an amount equal to the value indicated on the chart attached hereto as Exhibit A.

2. Transaction Bonus.

(a) Timing and Form of Payment. If you are actively employed by the Company when a Sale is consummated, you will receive a Transaction Bonus in an amount determined under Exhibit A attached hereto. The Transaction Bonus will be payable in a single lump sum no later than ten days following the consummation of the Sale.

(b) Medium of Payment. The Committee, in its sole discretion, will determine whether the Transaction Bonus will be paid (i) in cash or (ii) in that number of shares of Common Stock with a Fair Market Value equal to the value of the Transaction Bonus, or (iii) in a combination of cash and such shares of Common Stock. In determining whether to pay all or part of the Transaction Bonus in shares of Common Stock, the Committee shall consider the form of consideration to be received by the stockholders of the Company in the Sale and not issue to you a greater percentage of Common Stock to cash than is being issued to such stockholders pursuant to the definitive agreement governing the Sale. The Committee shall also consider the withholding and other tax implications to you of receiving the Transaction Bonus in the form of shares of Common Stock instead of cash.

(c) Compliance With Section 409A. Notwithstanding any provision of this Agreement to the contrary, it is intended that the provisions of this Agreement comply with Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”), and all provisions of this Agreement will be construed and interpreted in a manner consistent with the requirements for avoiding taxes or penalties under Section 409A. You are solely responsible and liable for the satisfaction of all taxes and penalties that may be imposed on you in connection with this Agreement or any other Agreement maintained by the Company (including any taxes and penalties under Section 409A), and neither the Company nor any affiliate of the Company shall have any obligation to indemnify or otherwise hold you (or any beneficiary) harmless from any or all of such taxes or penalties.

(d) Transaction Bonus Limit. You will only be eligible to receive a Transaction Bonus, if any, with respect to the first Sale to occur after the date of this Agreement. Additional Sales will not entitle you to additional Transaction Bonuses.

3. Miscellaneous.

(a) Your eligibility for payment of a Transaction Bonus is in addition to, and not in lieu of, your right to participate in any other bonus or incentive compensation programs currently made available to you and shall not be deemed in any way to limit or restrict the Company from making any bonus or other payments to you under any other plan or agreement, whether now existing or hereinafter in effect.

(b) Unless otherwise determined by the Board (and to the extent allowable under applicable law), any payment of a Transaction Bonus shall not be taken into account in computing your salary or compensation for the purposes of determining any benefits or compensation under (i) any pension, retirement, life insurance, severance or other benefit plan of the Company or its affiliates or (ii) any agreement between you and the Company or its affiliates.

4. Administration. The Committee shall administer this Agreement.

(a) Subject to the provisions of this Agreement and applicable law, the Committee shall have the power, in addition to other express powers and

authorizations conferred on the Committee by this Agreement, to: (i) designate individuals eligible to receive a Transaction Bonus; (ii) determine the type of Transaction Bonus to be granted to you; (iii) determine the amount of the Transaction Bonus; (iv) determine the terms and conditions of any Transaction Bonus; (v) determine whether, to what extent, and under what circumstances the Transaction Bonuses may be canceled, forfeited, or suspended and the method or methods by which the Transaction Bonus may be paid, canceled, forfeited, or suspended; (vi) determine whether, once the Company is fully compliant with the reporting requirements of the Securities Exchange Act of 1934, as amended (the “1934 Act”), and has filed and had declared effective a Registration Statement on Form 10 under the 1934 Act, to replace the entire Transaction Bonus with an equity-based award having substantially equivalent value to you (and concurrently to unilaterally terminate this Agreement), all as determined by the Committee in its sole, good faith discretion; (vii) determine whether, to what extent, and under what circumstances the Transaction Bonus, and other amounts payable with respect to the Transaction Bonus shall be deferred either automatically or at the election of the holder thereof or of the Committee; (viii) interpret, administer reconcile any inconsistency, correct any default and/or supply any omission in this Agreement and any instrument or agreement relating to, or the Transaction Bonus granted under this Agreement; (ix) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of this Agreement; and (x) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of this Agreement.

(b) Unless otherwise expressly provided in this Agreement, all designations, determinations, interpretations, and other decisions under or with respect to this Agreement or any Transaction Bonus or any documents evidencing any and all Transaction Bonuses shall be within the sole discretion of the Committee, may be made at any time granted pursuant to this Agreement and shall be final, conclusive, and binding upon all parties, including, without limitation, the Company, an affiliate, you, your beneficiary, and any shareholder.

(c) No member of the Committee shall be liable for any action or determination made in good faith with respect to this Agreement or any Transaction Bonus hereunder.

5. Restrictive Covenants.

(a) Non-Competition; Non-Solicitation. At all times during your employment by the Company and during the period of one year commencing on and following the date as of which your employment with the Company terminates for any reason, you agree that you will not, directly or indirectly, without the prior written consent of the Committee, be employed by, or act as a consultant or lender to or in association with, or as a director, officer, employee, partner, owner, joint venturer, member or otherwise, of any person, firm, corporation, partnership, limited liability company, association or other entity that engages in the retail supermarket business or the business of wholesale food distribution in New York, New Hampshire, Pennsylvania, or Vermont (other than by beneficial ownership of up to 5% of the outstanding voting stock

of a publicly-traded company that is or owns such a competitor). You further agree that at all times during your employment and for one year following the date as of which your employment with the Company terminates for any reason, you will not directly or indirectly (i) solicit or hire or encourage the solicitation or hiring of any person who was an employee of the Company at any time on or after the date of such termination (unless more than 12 months shall have elapsed between the last day of such person’s employment by the Company and the first date of such solicitation or hiring) or (ii) induce or attempt to induce any employee of the Company to leave the employ of the Company or in any way interfere with the relationship between the Company and any employee thereof.

(b) Non-Disclosure of Confidential Information. You recognize that the services you perform for the Company are special, unique and extraordinary in that you may acquire confidential information, trade secrets or other competitive information concerning the operations of the Company, the use or disclosure of which could cause the Company substantial loss and damages which could not be readily calculated, and for which no remedy at law would be adequate. Accordingly, you agree that you will not at any time during your employment with the Company or thereafter, except in performance of your obligations to the Company hereunder, disclose, either directly or indirectly, any Confidential Information (as hereinafter defined) that you may learn by reason of his association with the Company. The term “Confidential Information” shall mean any past, present or future confidential or secret plans, programs, documents, agreements, internal management reports, financial information or other material relating to the business, strategies, services or activities of the Company, including, without limitation, information with respect to the Company’s operations, processes, products, inventions, business practices, finances, principals, vendors, suppliers, customers, potential customers, marketing methods, costs, prices, contractual relationships, including leases, regulatory status, compensation paid to employees or other terms of employment, and trade secrets, market reports, customer investigations, customer lists and other similar information that is proprietary information of the Company. Notwithstanding the foregoing, you may disclose such Confidential Information when required to do so by a court of competent jurisdiction, by any governmental agency having supervisory authority over the business of the Company and/or its affiliates, as the case may be, or by any administrative body or legislative body (including a committee thereof) with jurisdiction to order you to divulge, disclose or make accessible such information; provided, further, that in the event that you are ordered by any such court or other government agency, administrative body or legislative body to disclose any Confidential Information, you shall (i) promptly notify the Company of such order, (ii) at the written request of the Company, diligently contest such order at the sole expense of the Company as expenses occur, and (iii) at the written request of the Company, seek to obtain, at the sole expense of the Company, such confidential treatment as may be available under applicable laws for any information disclosed under such order. As used in this Section 5(b), “Company” shall mean the Company and its affiliates.

6. Enforcement; Forfeiture of Bonus.

(a) You acknowledge and agree that any violation by you of any of the undertakings contained in Section 5 of this Agreement would cause the Company immediate, substantial and irreparable injury for which the Company has no adequate remedy at law. Accordingly, you agree that, in the event of a breach or threatened breach by you of any of the undertakings in Section 5 of this Agreement, the Company will be entitled to temporary and permanent injunctive relief in any court of competent jurisdiction (without the need to post bond and without proving that damages would be inadequate).

(b) You further agree that, if the Company determines in good faith that you have breached Section 5 of this Agreement, then:

(i) the Transaction Bonus shall be automatically forfeited as of the date of breach, and

(ii) you shall promptly repay to the Company an amount equal to any payment in respect of the Transaction Bonus which you have received prior to the date of breach.

Payments required to be made pursuant to Section 6(b)(ii) above must be (i) made within 90 days after receiving notice from the Company that such amounts are due and (ii) paid in cash or by such other method determined by Company in its sole discretion.

7. No Right to Continued Employment. Nothing in this Agreement shall confer upon you any right to continue in the employ of the Company interfere with or restrict in any way the right of the Company or, which are hereby expressly reserved, to remove, terminate or discharge you at any time for any reason whatsoever.

8. Withholding Taxes. The Company may withhold from any amounts payable under the Agreement such federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation.

9. Governing Law. The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without regard to the principle of conflicts of laws.

10. Entire Agreement; Amendments. The Agreement states the entire agreement and understanding of the parties on the subject matter of the Agreement and supersedes all previous agreements, arrangements, communications, and understandings relating to that subject matter. The Agreement may be amended, modified, superseded, or canceled, and any of the terms thereof may be waived, only by a written document signed by each party to the Agreement or, in the case of waiver, by the party or parties waiving compliance.

11. Counterparts. The 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.

	The Penn Traffic Company


	By:
		Name:
		Title:


AGREED TO AND ACCEPTED BY:




Dated: , 2008

Exhibit A

Share Value		Transaction Bonus Payment
$10.00		$
$14.99		$
$15.00		$
$19.99		$
$20.00		$

Transaction Bonus amounts for Share Values between $10.00 and $14.99 and $15.00 and $19.99 shall be determined by straight line interpolation. No Transaction Bonus will be paid for Share Values below $10.00.

For the purposes of this Agreement, “Share Value” means the per share consideration paid in a Sale for each share of Common Stock.

EX-31.1 4 a08-16331_1ex31d1.htm EX-31.1

Exhibit 31.1

CERTIFICATION

I, Gregory J. Young, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of The Penn Traffic Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation: and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 10, 2008	By:	/s/ Gregory J. Young
		Gregory J. Young
		President and Chief Executive Officer

EX-31.2 5 a08-16331_1ex31d2.htm EX-31.2

Exhibit 31.2

CERTIFICATION

I, Tod A. Nestor, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of The Penn Traffic Company;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 10, 2008	By:	/s/ Tod A. Nestor
		Tod A. Nestor
		Senior Vice President and Chief Financial Officer

EX-32.1 6 a08-16331_1ex32d1.htm EX-32.1

EXHIBIT 32.1

THE PENN TRAFFIC COMPANY

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of The Penn Traffic Company (the “Company”) on Form 10-Q for the fiscal period ending May 3, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory J. Young, President & Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

	(1)		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Gregory J. Young
Gregory J. Young
President and Chief Executive Officer

June 10, 2008

EX-32.2 7 a08-16331_1ex32d2.htm EX-32.2

EXHIBIT 32.2

THE PENN TRAFFIC COMPANY

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of The Penn Traffic Company (the “Company”) on Form 10-Q for the fiscal period ending May 3, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Tod A. Nestor, Senior Vice President Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

	(1)		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Tod A. Nestor
Tod A. Nestor
Senior Vice President and Chief Financial Officer

June 10, 2008

-----END PRIVACY-ENHANCED MESSAGE-----

(iii) the dissolution or liquidation of the Company;

(iv) the sale, transfer or other disposition of all or substantially all of the business or assets of the Company; or

(i) Lump Sum Payments. The Company shall pay to the Key Employee, at the times determined below, the following amounts:

(A) the Key Employee’s Earned Salary;

(B) a cash amount (the “Severance Amount”) equal to the sum of

(C) any Accrued Obligations.

(f) Notwithstanding anything else in this Section 7 to the contrary, nothing in this Section 7 shall be construed to release the Company from (or to otherwise waive or modify) the Company’s obligation to indemnify the Key Employee pursuant to Section 5(g) hereof.

1. Definitions.

(a) “Agreement” means this Agreement.

(b) “Board” means the Board of Directors of the Company.

(c) “Committee” shall have the meaning set forth in section 2(g) of The Penn Traffic Company 2006 Omnibus Award Plan (the “Omnibus Award Plan”).

(d) “Company” means The Penn Traffic Company.

(e) “Fair Market Value” means the per share amount of cash or other consideration paid to the stockholders of the Company for their Common Stock. The Fair Market Value of any such non-cash consideration shall be determined by the Committee in its sole discretion.

(f) “Sale” shall mean a “Change in Control”, as that term is defined in Section 2(e) of the Omnibus Award Plan, as amended from time to time.

(g) “Transaction Bonus” means an amount equal to the value indicated on the chart attached hereto as Exhibit A.

2. Transaction Bonus.

(d) Transaction Bonus Limit. You will only be eligible to receive a Transaction Bonus, if any, with respect to the first Sale to occur after the date of this Agreement. Additional Sales will not entitle you to additional Transaction Bonuses.

3. Miscellaneous.

4. Administration. The Committee shall administer this Agreement.

(a) Subject to the provisions of this Agreement and applicable law, the Committee shall have the power, in addition to other express powers and

(c) No member of the Committee shall be liable for any action or determination made in good faith with respect to this Agreement or any Transaction Bonus hereunder.

5. Restrictive Covenants.

6. Enforcement; Forfeiture of Bonus.

(b) You further agree that, if the Company determines in good faith that you have breached Section 5 of this Agreement, then:

(i) the Transaction Bonus shall be automatically forfeited as of the date of breach, and

(ii) you shall promptly repay to the Company an amount equal to any payment in respect of the Transaction Bonus which you have received prior to the date of breach.

8. Withholding Taxes. The Company may withhold from any amounts payable under the Agreement such federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation.

9. Governing Law. The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without regard to the principle of conflicts of laws.

11. Counterparts. The 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.

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.