<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________ to __________
Commission file number 1-9930
THE PENN TRAFFIC COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 25-0716800
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1200 State Fair Boulevard, Syracuse, New York 13221-4737
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (315) 453-7284
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $1.25 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past ninety (90) days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates of
the Registrant was $42,710,374 as of April 24, 1998.
Common Stock $1.25 par value Shares outstanding - 10,824,591 as of April 24,
1998
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement dated May 1, 1998 provided to
Registrant's stockholders in connection with the annual meeting of stockholders
scheduled for June 4, 1998 are incorporated by reference in Part III of this
Form 10-K.
<PAGE>
FORM 10-K INDEX
<TABLE>
<CAPTION>
PAGE
PART I
<S> <C>
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Supplemental Item. Executive Officers of Registrant 12
PART II
Item 5. Market for Registrant's Common Equity and Related 14
Stockholder Matters
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
PART III
Item 10. Directors and Executive Officers of Registrant 51
Item 11. Executive Compensation 51
Item 12. Security Ownership of Certain Beneficial Owners
and Management 51
Item 13. Certain Relationships and Related Transactions 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 52
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS (as of January 31, 1998 unless otherwise noted)
General
The Penn Traffic Company ("Penn Traffic" or the "Company") is one of the leading
food retailers in the eastern United States operating 264 supermarkets in
upstate New York, Pennsylvania, Ohio and northern West Virginia under the "Big
Bear" and "Big Bear Plus" (79 stores), "Bi-Lo Foods" (79 stores), "P&C Foods"
(64 stores) and "Quality Markets" (42 stores) trade names. Penn Traffic also
operates wholesale food distribution businesses serving 106 licensed franchises
and 90 independent operators. Total revenues for the fiscal year ended January
31, 1998 ("Fiscal 1998") aggregated approximately $3 billion.
Approximately 65% of Penn Traffic's retail supermarket revenues are in smaller
communities where Penn Traffic believes it virtually always holds the number one
or number two market position. The balance of Penn Traffic's retail supermarket
revenues are in Columbus, Ohio, Buffalo and Syracuse, New York and
Scranton/Wilkes-Barre, Pennsylvania.
Penn Traffic's retail and wholesale operations stretch from Ohio to upstate New
York. The Company operates in communities with diverse economies based primarily
on manufacturing, natural resources, retailing, health care services, education
and government services. No supermarket company competes against Penn Traffic
supermarkets representing 25% or more of the Company's retail supermarket
revenues, with the exception of The Kroger Co. and Wegmans Food Markets, Inc.,
which compete against supermarkets representing approximately 35% and 25% of
Penn Traffic's retail supermarket revenues, respectively.
Penn Traffic pursues a capital program that seeks to match store size and format
to local demographics and competitive conditions. During the six fiscal years
ended January 31, 1998, Penn Traffic opened or remodeled approximately 60% of
its retail supermarket square footage. These larger, more modern facilities
strengthen Penn Traffic's competitive position and enable it to offer its
customers a broader variety of specialty departments, including pharmacies,
bakeries, delicatessens, floral products, greeting cards and other general
merchandise.
The principal executive offices of Penn Traffic are located at 1200 State Fair
Boulevard, Syracuse, New York 13221-4737. The Company's telephone number is
(315) 453-7284.
3
<PAGE>
Certain statements included in this Part I, Item 1, "Business," and elsewhere in
this Annual Report on Form 10-K which are not statements of historical fact are
intended to be, and are hereby identified as, "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Without limiting the foregoing, the words "believe," "anticipate," "plan,"
"expect," "estimate," "intend" and other similar expressions are intended to
identify forward-looking statements. The Company cautions readers that
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievement expressed or implied by such forward-looking statements. Such
factors include, among others, the following: General economic and business
conditions; competition; the success or failure of the Company in implementing
its current business strategy to improving sales and profitability; changes in
the Company's business strategy; availability, location and terms of sites for
store development; availability and terms of necessary or desirable financing or
refinancing; unexpected costs of year 2000 compliance or failure by the Company
or other entities with whom it does business to achieve compliance; labor
relations; and labor and employee benefit costs.
Retail Food Distribution Business
Penn Traffic is one of the leading supermarket retailers in its primary
operating areas which include New York, Pennsylvania and Ohio.
Penn Traffic's store sizes and formats vary widely, depending upon the
demographic and competitive conditions in each location. For example,
"conventional" store formats are generally more appropriate in areas of low
population density, while larger areas are better served by full-service
supermarkets of up to 65,000 square feet, which contain numerous specialty
service departments such as bakeries, delicatessens, floral departments and
fresh seafood departments. Penn Traffic's "Plus" format stores range in size
from 65,000 to 140,000 square feet. These full service supermarkets carry an
expanded variety of nonfood merchandise.
Penn Traffic's supermarkets offer a broad selection of grocery, meat, poultry,
seafood, dairy, fresh produce, delicatessen, bakery and frozen food products.
The stores also offer nonfood products and services such as health and beauty
products, housewares, general merchandise, floral items, video rental
departments and banking services. In general, Penn Traffic's larger stores carry
broader selections of merchandise and feature a larger variety of service
departments. Most of the Company's supermarkets are located in shopping centers.
4
<PAGE>
Selected statistics on Penn Traffic's retail food stores are presented below.
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------------
January 31, February 1, February 3, January 28, January 29,
1998 1997 1996 1995 1994
(53 weeks) (1)
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Average annual
revenues per
store $ 9,811,000 $10,598,000 $10,900,000 $11,648,000 $11,428,000
Total store area
in square feet 10,787,686 10,737,891 10,424,538 9,927,633 8,803,297
Total store
selling area in
square feet 7,812,114 7,780,811 7,527,665 7,140,390 6,333,023
Average total
square feet per
store 40,862 40,520 39,338 37,182 37,945
Average square
feet of selling
area per store 29,591 29,362 28,406 26,743 27,298
Annual revenues per
square foot of
selling area $ 332.74 $ 367.52 $ 397.13 $ 423.43 $ 427.72
Number of stores:
Remodels/expansions
(over $100,000) 3 7 15 9 39
New stores opened 1 5 11 12 12
Stores acquired 1 2 2 31(2) 19(3)
Stores closed 3 7 15 8 16
Size of stores (total store area):
Up to 19,999
square feet 36 37 37 39 29
20,000 - 29,999
square feet 50 52 56 67 60
30,000 - 44,999
square feet 92 93 95 96 86
45,000 - 60,000
square feet 55 55 53 48 43
Greater than
60,000 square
feet 31 28 24 17 14
Total stores open
at fiscal year-end 264 265 265 267 232
</TABLE>
(1) Average annual revenues per store and annual revenues per square foot
of selling area are calculated on a 52-week basis.
(2) Includes the addition of 30 of the 45 former Acme stores acquired by
the Company in January 1995 which the Company initially expected to
operate.
(3) Includes the addition of 12 Insalaco's stores acquired by the Company
in September 1993 which the Company initially operated.
5
<PAGE>
Wholesale Food Distribution Business
Penn Traffic licenses the use of its "Riverside," "Bi-Lo Foods" and "Big M"
names to 106 independently-owned supermarkets that are required to maintain
certain quality and other standards. The majority of these independent stores
use Penn Traffic as their primary wholesaler and also receive advertising,
accounting, merchandising, consulting and retail counseling services from Penn
Traffic. Penn Traffic receives rent from 59 of the licensed independent
operators which lease or sublease their supermarkets from Penn Traffic. In
addition, the Company acts as a food distributor to 90 other independent
operators.
In Fiscal 1998, Penn Traffic's wholesale operations accounted for $357.5 million
or 11.9% of total revenues. The incremental volume provided by wholesale
operations enhances Penn Traffic's purchasing power and the efficiency of its
distribution system.
At January 31, 1998, Penn Traffic had guaranteed obligations of $0.1 million of
indebtedness of certain of such licensed independent operators.
Food Processing Operations
Penn Traffic owns and operates Penny Curtiss Bakery ("Penny Curtiss"), a bakery
processing plant in Syracuse, New York. This operation primarily supplies
certain of the Company's stores and its affiliated accounts with private label
fresh and frozen bakery products. In addition, Penny Curtiss supplies several
other companies unrelated to Penn Traffic with bakery products.
6
<PAGE>
Purchasing and Distribution
Penn Traffic is a large volume purchaser of products. Penn Traffic's purchases
are of sufficient volume to qualify for minimum price brackets for most items.
Penn Traffic purchases brand name grocery merchandise directly from national
manufacturers. The Company purchases private label products and certain other
grocery items from TOPCO Associates, Inc., a national products purchasing
cooperative comprising 30 regional supermarket chains. In Fiscal 1998, purchases
from TOPCO Associates accounted for approximately 21% of product purchases.
Penn Traffic's principal Pennsylvania distribution facility is a Company-owned
390,000 square foot distribution center in DuBois, Pennsylvania. Penn Traffic
also operates a 196,000 square foot distribution center for perishable products
in DuBois, Pennsylvania. In addition, Penn Traffic leases a 70,000 square foot
warehouse in DuBois, Pennsylvania, in which Penn Traffic houses grocery
products, certain store supplies and aerosol products.
The principal New York distribution facilities are a Company-owned 498,000
square foot distribution center in Syracuse, New York and a Company-owned
267,000 square foot distribution center in Jamestown, New York. The Company also
owns a 217,000 square foot distribution center for perishable products in
Syracuse, New York.
The Company's primary Ohio distribution center is a leased 484,000 square foot
dry grocery facility in Columbus, Ohio. Penn Traffic also owns a 208,000 square
foot distribution facility for perishable goods in Columbus, Ohio and leases
three additional warehouses totaling 603,000 square feet, in Columbus, Ohio for
distribution of general merchandise and health and beauty care items to all Penn
Traffic stores.
Approximately 75% of the merchandise offered in Penn Traffic's retail stores is
distributed from its warehouses by its fleet of 275 tractors, 338 refrigerated
trailers and 558 dry trailers. Merchandise not delivered from Penn Traffic's
warehouses is delivered directly to the stores by manufacturers, distributors,
vendor drivers and sales representatives for such products as beverages, snack
foods and bakery items.
Competition
The food retailing business is highly competitive and may be affected by general
economic conditions. The number of competitors and the degree of competition
experienced by Penn Traffic's supermarkets vary by location. Penn Traffic
competes with several multi-regional, regional and local supermarket chains,
convenience stores, stores owned and operated and otherwise affiliated with
large food wholesalers, unaffiliated independent food stores, warehouse clubs,
discount drug store chains, discount general merchandise chains, "supercenters"
(combination supermarket and general merchandise stores) and other retailers. No
supermarket company competes against Penn Traffic supermarkets representing 25%
or more of the Company's retail supermarket revenues, with the exception of The
Kroger Co. and Wegmans Food Markets, Inc., which compete against supermarkets
representing approximately 35% and 25% of Penn Traffic's retail supermarket
revenues, respectively.
7
<PAGE>
Employees
Labor costs and their impact on product prices are important competitive factors
in the supermarket industry. At January 31, 1998, Penn Traffic had approximately
18,900 hourly employees and 1,600 salaried employees.
Approximately 57% of Penn Traffic's hourly employees belong to the United Food
and Commercial Workers Union. An additional 7% of Penn Traffic's hourly
employees (principally employed in the distribution function and in the
Company's bakery plant) belong to four other unions. The Company competes with
certain independently-owned and chain-owned supermarkets, discount drug stores,
warehouse clubs, general merchandise stores, convenience stores, supercenters,
and other retailers whose employees are not union affiliated.
While management believes that the Company's relations with its employees are
good, a prolonged labor dispute could have an adverse effect on the Company.
Government Regulation
Penn Traffic's food and drug business requires it to hold various licenses and
to register certain of its facilities with state and federal health, drug and
alcoholic beverage regulatory agencies. By virtue of these licenses and
registration requirements, Penn Traffic is obligated to observe certain rules
and regulations, and a violation of such rules and regulations could result in a
suspension or revocation of licenses or registrations. In addition, most of Penn
Traffic's licenses require periodic renewals. Penn Traffic has experienced no
material difficulties with respect to obtaining, effecting or retaining its
licenses and registrations.
Seasonality, Customers and Suppliers
The supermarket business of Penn Traffic is generally not seasonal in nature.
During the past three fiscal years, no single customer or group of customers
under common control accounted for 10% or more of Penn Traffic's consolidated
revenues. Groceries, general merchandise and raw materials are available from
many different sources. During the past three fiscal years, no single supplier
accounted for 10% or more of Penn Traffic's cost of sales except TOPCO
Associates, Inc. which accounted for approximately 21% of product purchases in
Fiscal 1998.
8
<PAGE>
History
Penn Traffic is the successor to a retail business which dates back to 1854.
Penn Traffic, then a publicly held corporation, was acquired in March 1987 by
Riverside Acquisition Company, Limited Partnership ("RAC"), a Delaware limited
partnership and an affiliate of Miller Tabak Hirsch + Co. ("MTH"). At the time
of the acquisition, Penn Traffic was the largest retail and wholesale food
distribution company in its principal operating area, comprising 19 counties in
central and northwestern Pennsylvania and southwestern New York. In 1988, Penn
Traffic again became a publicly held corporation.
In August 1988, Penn Traffic acquired P&C Food Markets, Inc. ("P&C"), which
operated a retail and wholesale grocery business in a contiguous market to the
east of Penn Traffic's historical marketplace. In October 1991, P&C became a
wholly-owned subsidiary of the Company, and in April 1993, P&C was merged into
the Company. The Company operates 64 "P&C" stores in New York and Pennsylvania,
franchises 61 "Big M" stores and provides wholesaling services to 63 independent
supermarkets.
In April 1989, Penn Traffic acquired Big Bear Stores Company ("Big Bear"), a
leading food retailer in Ohio and a portion of West Virginia. In April 1993, Big
Bear was merged into the Company. The Company operates 79 retail supermarkets
under the names "Big Bear" and "Big Bear Plus" in Ohio and West Virginia.
In January 1993, Penn Traffic acquired 28 supermarkets located in western New
York and northwestern Pennsylvania from Peter J. Schmitt Co., Inc. Sixteen of
the stores are currently being operated by the Company under the Quality trade
name.
In September 1993, Penn Traffic acquired the operating assets of Insalaco
Supermarkets, Inc. which consisted of 12 supermarkets in northeastern
Pennsylvania. Since September 1993, certain of these stores have been divested,
replaced or expanded. The remaining stores operate under the Bi-Lo Foods trade
name.
In January 1995, Penn Traffic acquired 45 supermarkets owned by American Stores
Company which had operated under the Acme trade name. Eighteen of these acquired
stores have been closed or sold. The Company is operating the remaining 27
stores under the Bi-Lo and P&C trade names.
During 1995, Penn Traffic decided to close 11 of its 15 remaining stand-alone
general merchandise stores (Harts) in Ohio. During 1996, one of the four
remaining Harts stores was converted to a Big Bear Plus store. The other three
remaining former Harts stores were closed in 1997.
In January 1998, Penn Traffic sold Sani-Dairy, its dairy manufacturing
operation. Concurrent with the completion of the transaction, the Company
entered into a 10-year supply agreement with the acquirer for the purchase of
products that were supplied by Sani-Dairy and two other dairies.
9
<PAGE>
Relationship with Grand Union
In April 1989, Penn Traffic acquired an indirect ownership interest in the
common stock of the parent company of The Grand Union Company ("Grand Union"),
which is engaged in the food retailing business. As of February 2, 1991, Penn
Traffic had recorded losses which reduced the carrying value of its investment
to zero. Penn Traffic's equity interest in Grand Union's parent company became
worthless as the result of Grand Union's filing of a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code in January
1995.
In July 1990, P&C (then a subsidiary of Penn Traffic and now a division of Penn
Traffic) and Grand Union entered into an operating agreement (the "New England
Operating Agreement") whereby Grand Union acquired the right to operate 13 P&C
stores located in New England under the Grand Union name until July 2000.
Pursuant to the New England Operating Agreement, Grand Union agreed to pay Penn
Traffic (as the successor to P&C, which was merged into the Company in April
1993) a minimum annual fee averaging $10.7 million per year during the 10-year
term and, beginning with the year commencing July 31, 1992, to pay Penn Traffic
additional contingent fees of up to a specified amount per year (currently $1.2
million) based on sales performance of the stores operated by Grand Union. In
July 1992, Penn Traffic received a $15 million prepayment of an operating fee
from Grand Union pursuant to the terms of the New England Operating Agreement.
This prepayment reduced the future payments that Grand Union will make to Penn
Traffic pursuant to the terms of the New England Operating Agreement by
approximately $3.2 million per year. The Total Revenues line of the Consolidated
Statement of Operations includes pre-tax operating fees of $11.2 million for the
fiscal year ended January 31, 1998, $11.2 million for fiscal year ended February
1, 1997, and $11.4 million for the fiscal year ended February 3, 1996.
At the expiration of the 10-year term of the New England Operating Agreement,
Grand Union has the right to extend the term of the New England Operating
Agreement for an additional five years. In the event of such extension of the
lease term, Grand Union would pay Penn Traffic an annual fee of $13.6 million in
the first year of the extended term, $14.0 million in the second year, $14.4
million in the third year, $14.9 million in the fourth year and $15.3 million in
the fifth year.
Penn Traffic also granted Grand Union an option (the "Purchase Option") to
purchase the stores operated by Grand Union under the New England Operating
Agreement. Grand Union paid Penn Traffic $7.5 million for the Purchase Option,
which provides that (i) prior to July 30, 1998, Grand Union may purchase the
stores operated under the New England Operating Agreement from Penn Traffic for
a purchase price equal to $95 million and (ii) from July 30, 1998 until the
expiration of the term (or the extended term) of the New England Operating
Agreement, Grand Union may purchase the stores operated under the New England
Operating Agreement from Penn Traffic for a purchase price equal to the greater
of $55 million or the amount produced under a formula based upon the stores'
cash flow, provided that the purchase price shall not exceed $95 million.
If Grand Union does not extend the initial term of the New England Operating
Agreement at its expiration in July 2000, or does not exercise the Purchase
Option prior to the expiration of the term (or the extended term), or in the
event of a default by Grand Union in the performance of its obligations pursuant
to the New England Operating Agreement, the stores operated by Grand Union
pursuant to the New England Operating Agreement will be returned to Penn
Traffic.
10
<PAGE>
ITEM 2. PROPERTIES
Penn Traffic follows the general industry practice of leasing the majority of
its retail supermarket locations. Penn Traffic presently owns 43 and leases
221 of the supermarkets that it operates. The owned supermarkets range in
size from 4,300 to 123,000 square feet. The leased supermarkets range in size
from 8,100 to 140,000 square feet and are held under leases expiring from
1998 to 2018, excluding option periods. Penn Traffic owns or leases 59
supermarkets which are leased or subleased to independent operators.
Penn Traffic also owns six shopping centers, five of which contain one of the
Company-owned or licensed supermarkets. Penn Traffic also operates distribution
centers in DuBois, Pennsylvania; Syracuse and Jamestown, New York; and Columbus,
Ohio; and a bakery plant in Syracuse, New York. Penn Traffic also owns a fleet
of trucks and trailers, fixtures and equipment utilized in its business and
other miscellaneous real estate.
Penn Traffic believes that all of its properties, fixtures and equipment are
well maintained and in good condition.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in several lawsuits, claims and
inquiries, most of which are routine to the nature of the business. Estimates of
future liability are based on an evaluation of currently available facts
regarding each matter. Liabilities are recorded when it is probable that costs
will be incurred and can be reasonably estimated.
In September 1997, a jury verdict was returned in favor of a former employee
who was injured in one of the Company's stores. The total award, including
attorney's fees and interest is approximately $5 million. The Company has filed
an appeal and believes it will ultimately prevail. The Company further believes
that its insurance would cover some portion of any loss.
Based on management's evaluation, the resolution of these matters will not
materially affect the financial position, results of operations or liquidity of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year ended January 31, 1998.
11
<PAGE>
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF REGISTRANT
Certain information regarding the executive officers of Penn Traffic is set
forth as follows:
<TABLE>
<CAPTION>
Name Age Position with Penn Traffic
---- --- --------------------------
<S> <C> <C>
Gary D. Hirsch 48 Chairman and Director
Martin A. Fox 44 Director, Vice Chairman - Finance
and Assistant Secretary
Phillip E. Hawkins 46 Director, President and Chief
Executive Officer
Nick Campbell 39 Senior Vice President - Marketing
Robert J. Davis 44 Senior Vice President - Chief
Financial Officer and
Assistant Secretary
Bradley W. Melvin 48 Senior Vice President - Operations
Francis D. Price, Jr. 48 Vice President, General Counsel
and Secretary
W. David Walters 49 Vice President - Finance and Chief
Accounting Officer
</TABLE>
Each of the executive officers is a citizen of the United States.
Mr. Hirsch has been a Director and Chairman of Penn Traffic since 1987; from
September 1996 until April 1, 1997, Mr. Hirsch served as Chief Executive Officer
of the Company. Mr. Hirsch has been a general partner and the managing partner
of MTH (broker-dealer) since March 1982 and a Managing Director of MTH Holdings,
Inc. ("MTH Holdings") since November 1983. He is Chairman, President and a
Director of RAC Partners, Inc. ("RAC Partners"), the sole general partner of
Riverside Acquisition Company, Limited Partnership ("RAC"). Mr. Hirsch was
Chairman and a Director of Grand Union Holdings Corporation ("Grand Union
Holdings") (food distribution holding company) between 1989 and March 1996 and
of certain of Grand Union Holdings' subsidiaries for certain periods between
1992 and March 1996.
Mr. Fox has been Director and Vice Chairman - Finance since February
1993. Mr. Fox was a Vice President of the Company from 1989 until
February 1993. Mr. Fox has been Assistant Secretary of Penn Traffic
since 1989. Mr. Fox has been Executive Vice President of MTH since 1988.
Mr. Fox was a Vice President of Grand Union Holdings between 1989 and
March 1996, a Director of Grand Union Holdings between 1992 and March
1996 and a Director and Vice President of certain of Grand Union
Holdings' subsidiaries for certain periods between 1989 and March 1996.
Mr. Hawkins has been a Director and the President and Chief Executive Officer of
the Company since April 1997. Prior to joining Penn Traffic, Mr. Hawkins spent
twenty-nine years at Vons Companies (food distribution), where he held various
management positions including Senior Vice President, Stores (from 1994 until
March 1997), Group Vice President, Perishables (from 1992 until 1994), Vice
President and General Manager, Pavilions Operations (from 1991 until 1992), and
Vice President, Sales and Marketing (from 1989 until 1991).
12
<PAGE>
Mr. Campbell has been Senior Vice President of Marketing of Penn Traffic
since April 1997. Mr. Campbell was Vice President of Sales and
Merchandising of the Company's P&C, Quality and Insalaco divisions from
1995 until April 1997. Mr. Campbell served in various positions at Big
Bear between 1976 and 1995.
Mr. Davis has been Senior Vice President and Chief Financial Officer of
Penn Traffic since May 1997. From 1995 until May 1997 he served as the
Company's Treasurer. Prior to 1995, Mr. Davis served in various finance
and management positions at Sandoz Corporation, B.F. Goodrich Company and
Marathon Oil Company.
Mr. Melvin has been Senior Vice President - Operations of Penn Traffic
since May 1997. From April 1997 until May 1997, Mr. Melvin was Vice
President - Operations Support of the Company. Mr. Melvin was Director
of Operations Support of Vons Companies from 1992 until April 1997. Mr.
Melvin served in various other positions at the Vons Companies between
1970 and 1992.
Mr. Price has been Vice President and General Counsel and Assistant
Secretary of Penn Traffic since February 1993 and became Secretary in
1997. Mr. Price was Vice President and General Counsel of the P&C
division from 1985 until April 1993 and Secretary of P&C from 1991 until
April 1993. Mr. Price served in various other positions at P&C between
1978 and 1985.
Mr. Walters has been Vice President - Finance of Penn Traffic since
August 1997. Prior to August 1997, Mr. Walters was the Vice President
and Controller of Bruno's Inc., from April 1996 until December 1996. From
April 1992 until April 1996, Mr. Walters was Senior Vice President and
Chief Financial Officer of ABCO Markets, Inc. in Phoenix, Arizona. Prior to
1992, Mr. Walters served in various positions at American Stores Company,
Inc.
In January 1995, The Grand Union Company ("Grand Union") filed a voluntary
petition for reorganization under Chapter 11 of the United States Bankruptcy
Code with the United States Bankruptcy Court, District of Delaware (the
"Bankruptcy Court"). Grand Union emerged from Chapter 11 reorganization in June
1995. In February 1995, an involuntary Chapter 11 petition was filed in the
Bankruptcy Court against Grand Union Capital Corporation ("Grand Union
Capital"), of which Grand Union was a wholly-owned subsidiary. Grand Union
Capital consented to the entry of an order for relief on the involuntary Chapter
11 petition and, in February 1995, Grand Union Holdings filed a voluntary
Chapter 11 petition in the Bankruptcy Court. Grand Union Capital's and Grand
Union Holdings' Bankruptcy Court proceedings were completed in March 1996.
Following completion of these proceedings, Grand Union Capital and Grand Union
Holdings were dissolved. At the time the Chapter 11 petitions were filed,
Messrs. Hirsch and Fox were directors and executive officers of Grand Union,
Grand Union Capital and Grand Union Holdings. Messrs. Hirsch and Fox resigned as
directors and officers of Grand Union in June 1995, and ceased to be directors
and executive officers of Grand Union Capital and Grand Union Holdings upon the
dissolutions of these companies in March 1996.
There are no family relationships between the executive officers of Penn
Traffic. The term of office for executive officers is a one-year period
beginning on the date of the annual meeting of stockholders, which is normally
held in June of each year, except for Mr. Hawkins whose employment contract
extends to January 31, 2001.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Penn Traffic's common stock is listed on the New York Stock Exchange and was
held by approximately 645 stockholders of record on January 31, 1998.
Common stock information is provided on Page 15 of this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
The comparative summary of selected financial data of Penn Traffic for the five
years ended January 31, 1998 appears on Pages 16 through 18 of this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations appears on Pages 19 through 25 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants 26
Consolidated Financial Statements:
Statement of Operations for each of the three fiscal
years ended January 31, 1998 27
Balance Sheet as of January 31, 1998 and February 1, 1997 28
Statement of Stockholders' Equity for each of the three
fiscal years ended January 31, 1998 30
Statement of Cash Flows for each of the three fiscal
years ended January 31, 1998 31
Notes to Consolidated Financial Statements 32
Financial Statement Schedule for the three years ended
January 31, 1998:
Schedule VIII -- Valuation and Qualifying Accounts 59
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
14
<PAGE>
Quarterly Financial Data (Unaudited)
Summarized below is quarterly financial data for the fiscal years ended January
31, 1998 ("Fiscal 1998"), and February 1, 1997 ("Fiscal 1997"):
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
------------------------------------------------ ------------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
--------- --------- --------- --------- --------- --------- --------- ---------
(In thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 759,388 $ 773,890 $ 726,180 $ 750,607 $ 827,658 $ 842,764 $ 811,125 $ 814,915
Gross margin $ 177,771 $ 178,247 $ 164,381 $ 171,819 $ 191,662 $ 194,181 $ 180,682 $ 198,556
Net (loss)
applicable to common
stock (1) (2) (3) $ (22,824) $ (11,924) $ (13,527) $ (12,850) $ (9,029) $ (10,149) $ (15,924) $ (6,328)
Per common share data (Basic and Diluted):
Net (loss) (4) $ (2.16) $ (1.13) $ (1.28) $ (1.21) $ (0.85) $ (0.96) $ (1.51) $ (0.60)
No dividends on common stock were paid during Fiscal 1998 and Fiscal 1997.
Other data:
Depreciation and
amortization (3) $ 22,882 $ 22,544 $ 22,145 $ 21,395 $ 22,822 $ 22,980 $ 23,397 $ 23,506
LIFO provision (benefit) $ 500 $ 750 $ 750 $ 343 $ 1,000 $ 825 $ 825 $ (275)
Market value per common share:
High $ 7.625 $ 9.000 $ 10.500 $ 9.813 $ 16.875 $ 13.750 $ 12.625 $ 5.375
Low $ 2.375 $ 5.750 $ 6.813 $ 5.875 $ 13.000 $ 7.500 $ 4.875 $ 2.375
</TABLE>
(1) During Fiscal 1998, the Company recorded pre-tax charges totaling $18.2
million ($10.7 million, net of tax) in connection with a management
reorganization and related corporate actions and the retention of recently
hired corporate executives. The Company recorded $15.1 million of these
charges ($8.9 million, net of tax) during the first quarter and $3.1
million ($1.8 million, net of tax) during the second quarter of Fiscal
1998.
(2) During the fourth quarter of Fiscal 1998, the Company recorded a gain
totaling $24.2 million ($14.3 million, net of tax) related to the sale of
Sani-Dairy, the Company's dairy manufacturing operation, for cash
consideration of approximately $37 million.
(3) As of the beginning of the fourth quarter of Fiscal 1996, the Company
adopted Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("SFAS 121"). The Company periodically reviews the recorded
value of its long-lived assets to determine if the future cash flows to be
derived from these properties will be sufficient to recover the remaining
recorded asset values. In accordance with SFAS 121, the Company recorded a
noncash charge of $27.0 million ($15.9 million, net of tax) during the
fourth quarter of Fiscal 1998 primarily related to the write-down of a
portion of the recorded asset values of 12 of the Company's supermarkets,
as well as certain other real estate. As a result of these reduced carrying
values of the Company's long-lived assets, depreciation and amortization
expense was reduced in the fourth quarter by approximately $0.4 million.
(4) As of the beginning of the fourth quarter of Fiscal 1998, the Company
adopted Statement of Financial Accounting Standards No. 128, "Earnings per
Share". Earnings per share for all prior periods presented have been
restated to give retroactive effect to the implementation of this new
accounting standard.
15
<PAGE>
Consolidated Five-year Financial Summary
Set forth below is selected historical consolidated financial data of Penn
Traffic for the five fiscal years ended January 31, 1998. Due to the adoption of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
during the fiscal year ended February 3, 1996 ("Fiscal 1996"), and the adoption
of Statement of Financial Accounting Standards No. 112, "Employers' Accounting
for Postemployment Benefits" at the beginning of the fiscal year ended January
28, 1995 ("Fiscal 1995"), comparisons of the consolidated financial results
among years are not necessarily meaningful.
The selected historical consolidated financial data for the five fiscal years
ended January 31, 1998, are derived from the consolidated financial statements
of Penn Traffic which have been audited by Price Waterhouse LLP, independent
accountants. The selected historical consolidated financial data should be read
in conjunction with the Penn Traffic consolidated financial statements and
related notes included elsewhere herein.
Statement of Operations
<TABLE>
<CAPTION>
As of and for the Fiscal Year Ended
-----------------------------------------------------------------
(In thousands of dollars, January 31, February 1, February 3, January 28, January 29,
except per share data) 1998 1997 1996 1995 1994
(53 Weeks)
----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Total revenues $3,010,065 $3,296,462 $3,536,642 $3,333,225 $3,171,600
Cost of sales 2,317,847 2,531,381 2,724,639 2,570,708 2,464,853
Selling and administrative
expenses (1) 625,731 684,558 670,387 606,782 559,729
Restructuring charges (1) 10,704
Gain on sale of
Sani-Dairy (2) (24,218)
Unusual item (3) 65,237 6,400
Write-down of long-lived
assets (4) 26,982 46,847
---------- ---------- ---------- ---------- ----------
Operating income 53,019 80,523 29,532 155,735 140,618
Interest expense 149,981 144,854 136,359 117,859 117,423
---------- ---------- ---------- ---------- ----------
(Loss) income before income
taxes, extraordinary item
and cumulative effect of
change in accounting
principle (96,962) (64,331) (106,827) 37,876 23,195
(Benefit) provision for
income taxes (35,836) (22,901) (27,202) 15,851 15,019
---------- ---------- ---------- ---------- ----------
(Loss) income before extra-
ordinary item and
cumulative effect of
change in accounting
principle (61,126) (41,430) (79,625) 22,025 8,176
Extraordinary item (net of
tax benefit)(5) (3,025) (25,843)
---------- ---------- ---------- ---------- ----------
(Loss) income
before cumulative effect
of change in accounting
principle (61,126) (41,430) (79,625) 19,000 (17,667)
Cumulative effect of
change in accounting
principle (net of tax
benefit) (6) (5,790)
---------- ---------- ---------- ---------- ----------
Net (loss) income (61,126) (41,430) (79,625) 13,210 (17,667)
Preferred dividends (159)
---------- ---------- ---------- ---------- ----------
Net (loss) income
applicable to
common stock $ (61,126) $ (41,430) $ (79,625) $ 13,210 $ (17,826)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
16
<PAGE>
Statement of Operations (continued)
<TABLE>
<CAPTION>
As of and for the Fiscal Year Ended
(In thousands of dollars, January 31, February 1, February 3, January 28, January 29,
except per share data) 1998 1997 1996 1995 1994
(53 Weeks)
----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Per Share Data (Basic):
(Loss) income before extra-
ordinary item and cumulative
effect of change in
accounting principle
(after preferred
dividends) $ (5.78) $ (3.92) $ (7.52) $ 2.02 $ 0.78
Extraordinary item (0.28) (2.51)
Cumulative effect of change
in accounting principle (0.53)
---------- ---------- ---------- ---------- ----------
Net (loss) income (7) $ (5.78) $ (3.92) $ (7.52) $ 1.21 $ (1.73)
========== ========== ========== ========== ==========
Per Share Data (Diluted):
(Loss) income before extra-
ordinary item and cumulative
effect of change in
accounting principle
(after preferred
dividends) $ (5.78) $ (3.92) $ (7.52) $ 1.92 $ 0.78
Extraordinary item (0.26) (2.51)
Cumulative effect of change
in accounting principle (0.51)
---------- ---------- ---------- ---------- ----------
Net (loss) income (7) $ (5.78) $ (3.92) $ (7.52) $ 1.15 $ (1.73)
========== ========== ========== ========== ==========
No dividends on common stock have been paid during the past five fiscal years.
Balance Sheet Data:
Total assets $1,563,586 $1,704,119 $1,760,146 $1,793,966 $1,632,901
Total funded
indebtedness 1,373,607 1,398,991 1,341,657 1,277,276 1,166,025
Stockholders' equity
(deficit) (159,809) (96,755) (53,271) 32,927 14,982
Other Data:
Depreciation and
amortization 88,966 92,705 92,479 87,811 82,869
LIFO provision (benefit) 2,343 2,375 (672) 2,792 103
Capital expenditures,
including capital
leases and acquisitions 22,272 69,785 136,139 202,357 182,730
Cash interest expense 145,177 140,289 132,062 113,664 113,270
</TABLE>
17
<PAGE>
Footnotes:
(1) For the 52-week period ended January 31, 1998 ("Fiscal 1998"), the
Company recorded pre-tax charges totaling $18.2 million ($10.7 million,
net of tax). These special charges consist of (1) $12.6 million
associated with a management reorganization and related corporate
actions ($10.7 million of this charge is included in a restructuring
charge and $1.9 million is included in selling and administrative
expenses); and (2) $5.6 million associated with the retention of
recently hired corporate executives, which is included in selling and
administrative expenses.
(2) During Fiscal 1998, the Company recorded a gain totaling $24.2 million
($14.3 million, net of tax) related to the sale of Sani-Dairy, the
Company's dairy manufacturing operation, for cash consideration of
approximately $37 million.
(3) During Fiscal 1996, the Company recorded an unusual item of $65.2
million, which was related primarily to the closure of its stand-alone
general merchandise business (Harts), a write-down of assets that the
Company would no longer utilize in its business and the Company's
expense reduction program. During the fiscal year ended January 29,
1994 ("Fiscal 1994"), the Company recorded certain expenses totaling
$6.4 million classified as an unusual item. This unusual item comprised
$4.0 million related to a voluntary employee separation program at the
Company's P&C division and $2.4 million related to the realignment of
certain operations.
(4) As of the beginning of the fourth quarter of Fiscal 1996, the Company
adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). In accordance with SFAS 121,
the Company recorded a noncash charge of $27.0 million ($15.9 million,
net of tax) during the fourth quarter of Fiscal 1998 primarily related
to the write-down of a portion of the recorded asset values (including
allocable goodwill) of 12 of the Company's supermarkets, as well as
certain other real estate. During Fiscal 1996, the Company recorded a
noncash charge of $46.8 million ($27.7 million, net of tax) primarily
related to the write-down of a portion of the recorded asset values
(including allocable goodwill) of 18 of the Company's supermarkets.
(5) The extraordinary item (net of income tax benefit) resulted from the
early retirement of debt.
(6) Effective January 30, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" ("SFAS 112"). SFAS 112 requires employers to recognize the
obligation to provide postemployment benefits on an accrual basis if
certain conditions are met. The cumulative effect of the change in
accounting principle determined as of January 30, 1994, reduced net
income by $5.8 million (net of a $4.1 million income tax benefit) for
Fiscal 1995.
(7) As of the beginning of the fourth quarter of Fiscal 1998, the Company
adopted Statement of Financial Accounting Standards No. 128, "Earnings
Per Share." Earnings per share for all periods presented have been
restated to give retroactive effect to the implementation of this
standard.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements included in this Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Form 10-K which are not statements of historical fact are
intended to be, and are hereby identified as, "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Without limiting the foregoing, the words "believe," "anticipate," "plan,"
"expect," "estimate," "intend" and other similar expressions are intended to
identify forward-looking statements. The Company cautions readers that
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievement expressed or implied by such forward-looking statements. Such
factors include, among others, the following: General economic and business
conditions; competition; the success or failure of the Company in implementing
its current business strategy to improve sales and profitability; changes in the
Company's business strategy; availability, location and terms of sites for store
development; availability and terms of necessary or desirable financing or
refinancing; unexpected costs of year 2000 compliance or failure by the Company
or other entities with which it does business to achieve compliance; labor
relations; and labor and employee benefit costs.
Results of Operations
Fiscal Year Ended January 31, 1998("Fiscal 1998") Compared to
Fiscal Year Ended February 1, 1997 ("Fiscal 1997")
The following table sets forth Statement of Operations components expressed
as percentages of total revenues for Fiscal 1998 and Fiscal 1997:
<TABLE>
<CAPTION>
Percentage of Total Revenues
Fiscal Year
----------------------------
1998 1997
---- -----
<S> <C> <C>
Total revenues 100.0% 100.0%
Gross profit (1) 23.0 23.2
Selling and administrative
expenses excluding
special charges (2) 20.5 20.8
Selling and administrative
expenses 20.8 20.8
Restructuring charges 0.3
Gain on sale of Sani-Dairy (0.8)
Write-down of long-lived assets 0.9
Operating income excluding
unusual items (3) 2.5 2.4
Operating income 1.8 2.4
Interest expense 5.0 4.4
(Loss) before income taxes (3.2) (2.0)
</TABLE>
(1) Total revenues less cost of sales.
(2) Selling and administrative expenses, excluding pre-tax special charges
for Fiscal 1998 of (1) $5.6 million associated with the retention of
recently hired corporate executives, and (2) $1.9 million of other costs
associated with a management reorganization and related corporate
actions (see Note 6).
(3) Operating income excluding (1) special charges of $18.2 million, (2) the
gain on sale of Sani-Dairy of $24.2 million and (3) the write-down of
certain impaired long-lived assets of $27.0 million (see Notes 6,7 and 9).
19
<PAGE>
Total revenues for Fiscal 1998 decreased 8.7% to $3.01 billion from $3.30
billion in Fiscal 1997. Same store sales for Fiscal 1998 decreased by 8.2% from
Fiscal 1997. Wholesale supermarket revenues decreased in Fiscal 1998 to $357.5
million from $401.9 million in Fiscal 1997.
In Fiscal 1998, gross profit as a percentage of total revenues was 23.0%
compared to 23.2% in Fiscal 1997. The decrease in gross profit as a percentage
of total revenues was due to (1) investments in gross margin related to the
Company's new marketing program; and (2) an increase in certain buying and
occupancy costs as a percentage of revenues during a period of low price
inflation and a decline in same store sales. Gross profit for Fiscal 1997 was
negatively impacted by approximately $2 million due to a work stoppage at the
Company's former Sani-Dairy division("Dairy").
Selling and administrative expenses for Fiscal 1998 were $625.7 million or
20.8% of revenues compared to $684.6 million or 20.8% of revenues in Fiscal
1997. For Fiscal 1998, selling and administrative expenses, excluding special
charges of $7.5 million (see Note 6), were $618.2 million or 20.5% of revenues.
Selling and administrative expenses, excluding special charges, decreased as a
percentage of revenues due to the Company's cost reduction programs.
During Fiscal 1998, the Company recorded special charges of $18.2 million
($10.7 million, net of tax) in connection with the management reorganization and
related corporate actions and the retention of recently hired corporate
executives. Of this charge, $7.5 million is included in selling and
administrative expenses and $10.7 million is included in restructuring charges
(see Note 6).
During Fiscal 1998, the Company recorded a gain totaling $24.2 million
($14.3 million, net of tax) related to the sale of the Dairy for cash
consideration of approximately $37 million (Note 7).
As of the beginning of the fourth quarter of Fiscal 1996, the Company
adopted Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"). The Company periodically reviews the recorded value of its
long-lived assets to determine if the future cash flows to be derived from these
properties will be sufficient to recover the remaining recorded asset values. In
accordance with SFAS 121, the Company recorded a noncash charge of $27.0 million
($15.9 million, net of tax) during the fourth quarter of Fiscal 1998 primarily
related to the write-down of a portion of the recorded asset values of 12 of the
Company's supermarkets, as well as certain other real estate. As a result of
these reduced carrying values of the Company's long-lived assets, depreciation
and amortization expense was reduced in the fourth quarter of Fiscal 1998 by
approximately $0.4 million (See Note 9).
Depreciation and amortization expense was $89.0 million in Fiscal 1998 and
$92.7 million in Fiscal 1997, representing 3.0% and 2.8% of total revenues,
respectively.
Operating income for Fiscal 1998 was $53.0 million or 1.8% of total
revenues compared to $80.5 million or 2.4% of total revenues in Fiscal 1997.
Operating income excluding unusual items (special charges of $18.2 million, the
gain on the sale of the Dairy of $24.2 million and the write-down of certain
impaired long-lived assets of $27.0 million) for Fiscal 1998 was $74.0 million
or 2.5% of total revenues. The increase in operating income as a percentage of
total revenues, excluding unusual items, was the result of a decrease in selling
and administrative expenses as a percentage of total revenues, excluding special
charges, partially offset by a decrease in gross profit as a percentage of total
revenues.
20
<PAGE>
Interest expense for Fiscal 1998 and Fiscal 1997 was $150.0 million and
$144.9 million, respectively. The increase in interest expense resulted
primarily from the higher debt levels outstanding during Fiscal 1998.
Loss before income taxes was $97.0 million for Fiscal 1998 compared to a
loss of $64.3 million for Fiscal 1997. Excluding unusual items (special charges,
the gain on the sale of the Dairy and the write-down of certain impaired
long-lived assets), loss before income taxes was $76.0 million in Fiscal 1998.
The reason for the increase in loss before income taxes, excluding unusual
items, was the decrease in operating income combined with an increase in
interest expense.
The income tax benefit for Fiscal 1998 was $35.8 million compared to a
benefit of $22.9 million in Fiscal 1997. The income tax benefit for Fiscal 1998
includes an $8.6 million benefit associated with unusual items (special charges,
the gain on the sale of the Dairy and the write-down of certain impaired
long-lived assets). The effective tax rates vary from the statutory rates due to
differences between income for financial reporting and tax reporting purposes
that result primarily from the amortization of nondeductible goodwill (Note 4).
Net loss was $61.1 million in Fiscal 1998 compared to a net loss of $41.4
million in Fiscal 1997. The net loss, excluding the after-tax impact of unusual
items (special charges, gain on the sale of the Dairy and the write-down of
certain impaired long-lived assets) was $48.8 million in Fiscal 1998.
21
<PAGE>
Fiscal Year Ended February 1, 1997 ("Fiscal 1997") Compared to
Fiscal Year Ended February 3, 1996 ("Fiscal 1996")
Fiscal 1997 was a 52-week year and Fiscal 1996 was a 53-week
year.
The following table sets forth Statement of Operations components expressed
as percentages of total revenues for Fiscal 1997 and Fiscal 1996:
<TABLE>
<CAPTION>
Percentage of Total Revenues
Fiscal Year
-----------------------------
1997 1996
---- -----
<S> <C> <C>
Total revenues 100.0% 100.0%
Gross profit (1) 23.2 23.0
Selling and administrative
expenses 20.8 19.0
Unusual item 1.9
Write-down of long-lived assets 1.3
Operating income 2.4 0.8
Interest expense 4.4 3.8
(Loss) before income taxes (2.0) (3.0)
</TABLE>
(1) Total revenues less cost of goods sold.
Total revenues for Fiscal 1997 decreased 6.8% to $3.30 billion (52 weeks)
from $3.54 billion in Fiscal 1996 (53 weeks). Same store sales for Fiscal 1997
decreased by 3.4% from Fiscal 1996 (calculated on a comparable week basis).
The decrease in total revenues was primarily the result of the closure of
the stand-alone general merchandise business (Harts), a decline in same store
sales, a decline in wholesale revenues and the fact that fiscal 1997 was a
52-week year while Fiscal 1996 was a 53- week year.
Fiscal 1996 revenues included $44.4 million generated by 11 of the
Company's former general merchandise stores (Harts) and two former Acme stores,
which were closed during Fiscal 1996. Excluding these closed stores, revenues
for Fiscal 1997 decreased 5.6% from Fiscal 1996. Wholesale supermarket revenues
decreased in Fiscal 1997 to $401.9 million from $429.4 million in Fiscal 1996.
In Fiscal 1997, gross profit as a percentage of total revenues was 23.2%
compared to 23.0% in Fiscal 1996. The increase in gross profit as a percentage
of total revenues primarily resulted from the positive impact of the Company's
merchandising initiatives implemented during Fiscal 1997 and the classification
of certain expenses (approximately $9.7 million) as selling and administrative
expenses in Fiscal 1997 which had been recorded in cost of goods sold in Fiscal
1996. These factors were partially offset by an increase in certain buying and
occupancy costs as a percentage of revenues during a period of low price
inflation and a decline in same store sales.
Selling and administrative expenses as a percentage of total revenues
increased to 20.8% for Fiscal 1997 from 19.0% in Fiscal 1996. The increase in
selling and administrative expenses as a percentage of total revenues in Fiscal
1997 primarily resulted from (1) increased payroll related to the Company's
repositioning program which emphasizes increased levels of customer service and
enhanced perishable departments in stores; (2) an increase in fixed and semi-
fixed expenses as a percentage of total revenues during a period of low price
inflation and a decrease in same store sales; and (3) the classification of
certain expenses (approximately $9.7 million) as selling and administrative
expenses in Fiscal 1997 which had been recorded in cost of goods sold in Fiscal
1996.
22
<PAGE>
During the second quarter of Fiscal 1996, the Company recorded certain
expenses totaling $65.2 million ($51.9 million, net of tax benefit) classified
as an unusual item. The unusual item was related to the closure of the
stand-alone general merchandise business (Harts), the write-off of equipment
which the Company determined it would no longer utilize in its business, costs
incurred in connection with the Company's expense reduction program and an
increase in the Company's closed store reserve (Note 8).
As of the beginning of the fourth quarter of Fiscal 1996, the Company
adopted Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"). As a result of this adoption, the Company recorded a noncash
charge of $46.8 million. This charge primarily related to the write-down of a
portion of the recorded asset values (including allocable goodwill) of 18 of the
Company's 265 supermarkets. No assets were written down in Fiscal 1997 (Note 9).
Depreciation and amortization expense of $92.7 million in Fiscal 1997 and
$92.5 million in Fiscal 1996 represented 2.8% and 2.6% of total revenues,
respectively.
The Company experienced a work stoppage at the Dairy from August 1, 1996,
through September 22, 1996. Operating income was reduced by approximately $2.5
million for Fiscal 1997 as a result of this work stoppage.
Operating income for Fiscal 1997 was $80.5 million or 2.4% of total
revenues compared to $29.5 million or 0.8% of total revenues in Fiscal 1996.
Excluding the effect of the unusual item and the write-down of certain impaired
long-lived assets, operating income for Fiscal 1996 was $141.6 million or 4.0%
of total revenues. The decrease in operating income (excluding the effect of the
unusual item and the write-down of certain impaired long-lived assets in Fiscal
1996) as a percentage of total revenues in Fiscal 1997 was the result of an
increase in selling and administrative expenses as a percentage of total
revenues partially offset by an increase in gross profit as a percentage of
total revenues.
Interest expense for Fiscal 1997 and Fiscal 1996 was $144.9 million and
$136.4 million, respectively. The increase in interest expense primarily
resulted from the higher debt levels outstanding during Fiscal 1997.
Loss before income taxes was $64.3 million for Fiscal 1997 compared to a
loss of $106.8 million for Fiscal 1996. Excluding the effect of the unusual item
and the write-down of certain impaired long-lived assets, income before income
taxes was $5.3 million in Fiscal 1996. The reason for the increase in loss
before income taxes in Fiscal 1997 (excluding the effect of the unusual item and
the write-down of certain impaired long-lived assets in Fiscal 1996) was the
decrease in operating income in Fiscal 1997 combined with an increase in
interest expense.
The income tax benefit for Fiscal 1997 was $22.9 million compared to a
benefit of $27.2 million in Fiscal 1996. The income tax benefit for Fiscal 1996
included a $32.4 million benefit associated with the unusual item and the
write-down of certain impaired long-lived assets. The effective tax rates vary
from the statutory rates due to differences between income for financial
reporting and tax reporting purposes that result primarily from the amortization
of nondeductible goodwill (Note 4).
23
<PAGE>
Liquidity and Capital Resources
Payments of interest and principal on the Company's approximately $1.24
billion of debt (excluding capital leases) will restrict funds available to the
Company to finance capital expenditures and working capital. Amounts maturing in
the next five years are $4.4 million (Fiscal 1999); $2.7 million (Fiscal 2000);
$85.1 million, including $77.6 million outstanding as of January 31, 1998, under
the Company's secured revolving credit facility which matures in April 2000
(Fiscal 2001); $107.7 million (Fiscal 2002); and $125.4 million (Fiscal 2003).
The Company has a revolving credit facility (the "Revolving Credit
Facility") which provides for borrowings of up to $250 million, subject to a
borrowing base limitation measured by eligible inventory and accounts receivable
of the Company. The Revolving Credit Facility matures in April 2000 and is
secured by a pledge of the Company's inventory, accounts receivable and related
assets. As of January 31, 1998, additional availability under the Revolving
Credit Facility was $110.4 million.
During Fiscal 1998, the Company's internally generated funds from
operations, amounts available under the Revolving Credit Facility and the
proceeds of asset sales provided sufficient liquidity to meet the Company's
operating, capital expenditure and debt service needs.
Cash flows to meet the Company's requirements for operating, investing and
financing activities during Fiscal 1998 are reported in the Consolidated
Statement of Cash Flows. During the fiscal year ended January 31, 1998, the
Company's net cash used in operating activities was $4.5 million and net cash
used in financing activities was $24.7 million. These amounts were offset by net
cash provided by investing activities of $25.1 million and a decrease in cash of
$4.1 million. During the fiscal year ended February 1, 1997, the Company's net
cash used in operating activities was $1.3 million and net cash used in
investing activities was $33.3 million. These amounts were financed by net cash
provided by financing activities of $29.2 million and a decrease in cash of $5.3
million. During the fiscal year ended February 3, 1996, the Company's net cash
used in investing activities was $121.5 million and the Company had a $12.1
million increase in cash. These amounts were financed by net cash provided by
operating activities of $80.7 million and net cash provided by financing
activities of $52.9 million.
Working capital at February 1, 1997 and January 31, 1998 were approximately
the same.
The Company is in compliance with all terms and restrictive covenants of
its long-term debt agreements as of and for the fiscal year ended January 31,
1998.
The Company's debt agreements provide restrictive covenants on the payment
of dividends to its stockholders. As of January 31, 1998, no dividend payments
to the Company's stockholders could have been made under the most restrictive of
these limitations.
During Fiscal 1998, the Company opened one new store, acquired one store
and completed three store remodels/expansions. Capital expenditures (including
capitalized leases) were approximately $22.3 million for Fiscal 1998.
During the fiscal year ending January 30, 1999, the Company expects to
invest approximately $30 million in capital expenditures (including capital
leases). Penn Traffic expects to finance such capital expenditures through cash
generated from operations, proceeds of asset sales and amounts available under
the Revolving Credit Facility. Capital expenditures will be principally for new
stores, store remodels and investments in technology.
24
<PAGE>
Year 2000
Many of the Company's computer systems will require modification or
replacement over the next two years in order to render these systems compliant
with the year 2000. The Company has established processes for evaluating and
managing the risks and costs associated with this issue. The Company expects to
have all critical systems compliant. Based on current information, the Company
estimates that the cost of Year 2000 compliance during the fiscal years ended
January 30, 1999, and January 29, 2000, will be approximately $10 million
(including the purchase of certain new hardware and software). The business of
the Company could be adversely affected should the Company or other entities
with which the Company does business be unsuccessful in completing critical
modifications in a timely manner.
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
The Penn Traffic Company
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of The
Penn Traffic Company and its subsidiaries (the "Company") at January 31, 1998
and February 1, 1997, and the results of their operations and their cash flows
for each of the three years in the period ended January 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the Consolidated Financial statements, the Company
changed its method for measuring the impairment of long-lived assets to adopt
the provisions of Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, effective October 29, 1995.
PRICE WATERHOUSE LLP
Syracuse, New York
March 20, 1998
26
<PAGE>
THE PENN TRAFFIC COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
52 Weeks Ended 52 Weeks Ended 53 Weeks Ended
January 31, 1998 February 1, 1997 February 3, 1996
---------------- ---------------- ----------------
(All dollar amounts in thousands, except per share data)
<S> <C> <C> <C>
Total Revenues $3,010,065 $3,296,462 $3,536,642
Costs and Operating Expenses:
Cost of sales (including
buying and occupancy cost) 2,317,847 2,531,381 2,724,639
Selling and administrative
expenses 625,731 684,558 670,387
Restructuring charges (Note 6) 10,704
Gain on sale of Sani-Dairy
(Note 7) (24,218)
Unusual item (Note 8) 65,237
Write-down of long-lived assets
(Note 9) 26,982 46,847
---------- ---------- ----------
Operating Income 53,019 80,523 29,532
Interest expense 149,981 144,854 136,359
---------- ---------- ----------
(Loss) Before Income Taxes (96,962) (64,331) (106,827)
(Benefit) for income
taxes (Note 4) (35,836) (22,901) (27,202)
---------- ---------- ----------
Net (Loss) $ (61,126) $ (41,430) $ (79,625)
---------- ---------- ----------
---------- ---------- ----------
Per Share Data (Basic and Diluted):
Net (loss) (Note 1) $ (5.78) $ (3.92) $ (7.52)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE>
THE PENN TRAFFIC COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
---------- ----------
(In thousands of dollars)
ASSETS
<S> <C> <C>
Current Assets:
Cash and short-term investments (Note 1) $ 49,095 $ 53,240
Accounts and notes receivable (less allowance
for doubtful accounts of $3,597 and $2,867,
respectively) 68,454 71,874
Inventories (Note 1) 327,389 340,009
Prepaid expenses and other current assets 16,032 17,266
---------- ----------
460,970 482,389
---------- ----------
Facilities Under Capital Leases (Note 5):
Capital leases 190,638 201,154
Less: Accumulated amortization (75,057) (69,083)
---------- ----------
115,581 132,071
---------- ----------
Fixed Assets (Note 1):
Land 17,595 24,602
Buildings 189,369 204,755
Furniture and fixtures 471,684 483,799
Vehicles 15,891 17,775
Leaseholds and improvements 214,562 210,171
---------- ----------
909,101 941,102
Less: Accumulated depreciation (412,600) (369,796)
---------- ----------
496,501 571,306
---------- ----------
Other Assets:
Goodwill, net (Note 1) 401,829 422,816
Other assets and deferred charges, net 88,705 95,537
---------- ----------
490,534 518,353
---------- ----------
Total Assets $1,563,586 $1,704,119
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE>
THE PENN TRAFFIC COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
---------- ----------
(In thousands of dollars)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of obligations under capital
leases (Note 5) $ 13,518 $ 13,541
Current maturities of long-term debt (Note 2) 4,429 3,736
Trade accounts and drafts payable 149,389 159,579
Payroll and other accrued liabilities 79,763 82,654
Accrued interest expense 35,335 35,664
Payroll taxes and other taxes payable 19,208 13,476
Deferred income taxes (Note 4) 16,671 31,029
---------- ----------
318,313 339,679
---------- ----------
Noncurrent Liabilities:
Obligations under capital leases (Note 5) 121,436 134,976
Long-term debt (Note 2) 1,234,224 1,246,738
Deferred income taxes (Note 4) 23,876
Other noncurrent liabilities 49,422 55,605
---------- ----------
1,405,082 1,461,195
---------- ----------
Total Liabilities 1,723,395 1,800,874
---------- ----------
Stockholders' Equity (Note 10):
Preferred stock--authorized 10,000,000 shares, $1.00 par
value; none issued
Common stock--authorized 30,000,000 shares, $1.25 par value;
10,824,591 shares and 10,869,441 shares issued and
outstanding, respectively 13,586 13,641
Capital in excess of par value 180,060 180,412
Retained deficit (340,470) (280,668)
Minimum pension liability adjustment (Note 3) (10,667) (8,730)
Unearned compensation (1,693) (785)
Treasury stock, at cost (625) (625)
---------- ----------
Total Stockholders' Equity (159,809) (96,755)
---------- ----------
Total Liabilities and Stockholders' Equity $1,563,586 $1,704,119
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
29
<PAGE>
THE PENN TRAFFIC COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Minimum
Capital in Pension Total
Common Excess of Retained Liability Unearned Treasury Stockholders'
Stock Par Value Deficit Adjustment Compensation Stock Equity
------- ---------- -------- ---------- ------------ --------- ------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
January 28, 1995 $13,558 $179,165 $(149,681) $ (356) $ (9,759) $ 32,927
Net (loss) (79,625) (79,625)
Exercise of 24,348 common stock
option shares (Note 10) 31 271 302
Issuance of 23,500 restricted stock
shares (Note 10) 29 849 (878)
Cancellation of 9,500 restricted stock
shares (Note 10) (12) (256) 268
Minimum pension liability adjustment
(Note 3) (6,250) (6,250)
Unearned compensation adjustment
(Note 10) (6,185) 6,185
Treasury stock, at cost (Note 10) $ (625) (625)
------- -------- --------- -------- ---------- ------- ---------
February 3, 1996 13,606 180,029 (235,223) (6,606) (4,452) (625) (53,271)
Net (loss) (41,430) (41,430)
Exercise of 5,592 common stock
option shares (Note 10) 7 63 70
Issuance of 23,500 restricted stock
shares (Note 10) 29 323 (352)
Cancellation of 500 restricted stock
shares (Note 10) (1) (3) 4
Minimum pension liability adjustment
(Note 3) (2,124) (2,124)
Unearned compensation adjustment
(Note 10) (4,019) 4,019
------- -------- --------- -------- ---------- ------- ---------
February 1, 1997 13,641 180,412 (280,668) (8,730) (785) (625) (96,755)
Net (loss) (61,126) (61,126)
Exercise of 1,150 common stock
option shares (Note 10) 3 6 9
Cancellation of 46,000 restricted stock
shares (Note 10) (58) (358) 416
Minimum pension liability adjustment
(Note 3) (1,937) (1,937)
Unearned compensation adjustment
(Note 10) 908 (908)
------- -------- --------- -------- ---------- ------- ---------
January 31, 1998 $13,586 $180,060 $(340,470) $(10,667) $ (1,693) $ (625) $(159,809)
------- -------- --------- -------- ---------- ------- ---------
------- -------- --------- -------- ---------- ------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE>
THE PENN TRAFFIC COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
52 Weeks Ended 52 Weeks Ended 53 Weeks Ended
January 31, 1998 February 1, 1997 February 3, 1996
---------------- ---------------- ----------------
(In thousands of dollars)
<S> <C> <C> <C>
Operating Activities:
Net (loss) $ (61,126) $ (41,430) $ (79,625)
Adjustments to reconcile net (loss)
to net cash (used in) provided by
operating activities:
Depreciation and amortization 73,422 76,328 75,375
Amortization of intangibles 15,544 16,377 17,104
Write-off of fixed assets 16,416
Write-off of intangible assets 32,809
Write-down of long-lived assets 26,982 46,847
Gain on sale of Sani-Dairy (24,218)
Other--net (5,759) (10,852) (13,997)
Net change in assets and
liabilities:
Accounts receivable and prepaid
expenses 2,758 9,256 (3,785)
Inventories 9,136 16,568 29,659
Accounts payable and accrued
expenses (5,213) (50,388) (6,653)
Deferred taxes (38,234) (12,792) (31,808)
Deferred charges and other
assets 2,178 (4,361) (1,649)
---------- ---------- ----------
Net Cash (Used in) Provided by
Operating Activities (4,530) (1,294) 80,693
---------- ---------- ----------
Investing Activities:
Capital expenditures (21,833) (67,828) (124,963)
Proceeds from sale-and-leaseback
transactions 22,151
Proceeds from sale of assets 9,880 12,297 3,423
Proceeds from sale of Sani-Dairy 37,067
Other--net 96
---------- ---------- ----------
Net Cash (Used in) Provided by
Investing Activities 25,114 (33,284) (121,540)
---------- ---------- ----------
---------- ---------- ----------
Financing Activities:
Increase in long-term debt 106,840
Payments to settle long-term
debt (2,231) (3,258) (4,095)
Borrowing of revolver debt 369,483 430,200 588,300
Repayment of revolver debt (378,700) (487,500) (520,900)
Reduction of capital lease
obligations (13,290) (13,523) (9,889)
Payment of debt issuance costs (3,596) (225)
Purchase of treasury stock (625)
Other--net 9 70 347
---------- ---------- ----------
Net Cash (Used in) Provided by
Financing Activities (24,729) 29,233 52,913
---------- ---------- ----------
(Decrease) Increase in Cash and
Cash Equivalents (4,145) (5,345) 12,066
Cash and Cash Equivalents at
Beginning of Year 53,240 58,585 46,519
---------- ---------- ----------
Cash and Cash Equivalents at
End of Year $ 49,095 $ 53,240 $ 58,585
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE>
THE PENN TRAFFIC COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Business Description and Summary of Significant
Accounting Policies:
The Penn Traffic Company ("Penn Traffic" or the "Company") is primarily
engaged in retail and wholesale food distribution. As of January 31, 1998, the
Company operated 264 supermarkets in Pennsylvania, New York, Ohio and West
Virginia, and supplied 106 franchise supermarkets and 90 independent wholesale
accounts. The Company also operated 11 distribution centers with approximately
2.9 million square feet of combined space and a bakery.
BASIS OF PRESENTATION All significant intercompany transactions and
accounts have been eliminated in consolidation.
The Company is principally involved in the distribution and retail sale of
food and related products, which constitutes a single significant business
segment.
Certain prior year amounts have been reclassified on the Consolidated
Statement of Cash Flows for comparative purposes.
FISCAL YEAR The fiscal year of the Company ends on the Saturday nearest to
January 31.
CASH AND SHORT-TERM INVESTMENTS Short-term investments are classified as
cash and are stated at cost, which approximates market value. For the purpose of
the Consolidated Statement of Cash Flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
INVENTORIES Inventories are valued at the lower of cost or market. The
Company's inventories, representing grocery and certain general merchandise and
manufactured inventories, are stated at cost using the last-in, first-out (LIFO)
method of valuation. Inventories stated on the LIFO basis were $22,566,000 and
$20,223,000 below replacement cost at January 31, 1998, and February 1, 1997,
respectively.
During Fiscal 1998 and Fiscal 1997, inventory quantities were reduced,
which resulted in a liquidation of certain LIFO inventory layers carried at
lower costs which prevailed in prior years. The effect for Fiscal 1998 was to
decrease cost of goods sold by $552,000 and to decrease net loss by $325,000, or
$0.03 per share. The effect for Fiscal 1997 was to decrease cost of goods sold
by $745,000 and to decrease net loss by $440,000, or $0.04 per share.
FIXED ASSETS AND CAPITAL LEASES Major renewals and betterments are
capitalized, whereas maintenance and repairs are charged to operations as
incurred. Depreciation and amortization for financial accounting purposes are
provided on the straight-line method. For income tax purposes, the Company
principally uses accelerated methods. For financial accounting purposes,
depreciation and amortization are provided over the following useful lives or
lease term:
<TABLE>
<S> <C>
Buildings 16 to 40 years
Furniture and fixtures 4 to 15 years
Vehicles 3 to 8 years
Leaseholds and improvements 5 to 30 years
Capital leases lease term
</TABLE>
32
<PAGE>
INTANGIBLES The excess of the costs over the amounts attributed to the fair
value of net assets acquired (goodwill) is being amortized primarily over 40
years using the straight-line method. In addition, certain other nonfinancing
costs resulting from acquisitions have been capitalized as other assets and
deferred charges. For Fiscal 1998, 1997 and 1996, amortization of intangibles
was $15,545,000, $16,377,000 and $17,104,000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS As of the beginning of the fourth quarter
of Fiscal 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Accordingly, commencing with the fourth quarter of
Fiscal 1996, assets are generally evaluated on a market-by-market basis in
making a determination as to whether such assets are impaired. At each year-end,
the Company reviews its long-lived assets (including goodwill) for impairment
based on estimated future nondiscounted cash flows attributable to the assets.
In the event such cash flows are not expected to be sufficient to recover the
recorded value of the assets, the assets are written down to their estimated
fair values. Prior to the fourth quarter of Fiscal 1996, this evaluation was
based on cash flows and assets aggregated principally by the operating divisions
of the Company (Note 9).
DEFERRED CHARGES Deferred charges consist of debt issuance costs, prepaid
pension expense and the value of leasehold interests that were recorded in
conjunction with acquisitions. These deferred charges are being amortized
primarily on a straight-line basis over the life of the related debt, the
remaining service lives of employees and the lives of the related leases,
respectively.
STORE PRE-OPENING COSTS Store pre-opening costs are charged to expense as
incurred.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
INCOME TAXES Income taxes are provided based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109").
Deferred income taxes are recorded to reflect the tax consequences on
future years of temporary differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end.
33
<PAGE>
NET (LOSS) Per Share In the fourth quarter of Fiscal 1998, the Company
adopted Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"). This standard requires presentation of basic earnings per
share ("EPS"), computed based on the weighted average number of common shares
outstanding for the period, and diluted EPS, which gives effect to all dilutive
potential shares outstanding (i.e., options, restricted stock and warrants)
during the period. Previously presented EPS amounts have been restated to
reflect the method of computation required by SFAS 128. Income used in the EPS
calculation is net (loss) for each year. Shares used in the calculation of basic
and diluted EPS were (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Shares used in the calculation of
Basic EPS (weighted average
shares outstanding) 10,572 10,570 10,594
Effect of dilutive potential securities 0 0 0
------ ------ ------
Shares used in the calculation of
Diluted EPS 10,572 10,570 10,594
------ ------ ------
------ ------ ------
</TABLE>
The Fiscal 1998, 1997 and 1996 calculations of diluted EPS exclude the
effect of dilutive potential securities aggregating 678,000, 299,000 and 373,000
shares, respectively, because to give effect thereto would have been
antidilutive given the net loss for the year. The shares used in the calculation
of diluted EPS exclude options and warrants to purchase shares whenever the
exercise price was greater than the average market price of common shares for
the year. Such shares aggregated 1,156,000, 548,000 and 460,000 in Fiscal 1998,
1997 and 1996, respectively.
34
<PAGE>
Note 2 -- Long-term Debt:
The long-term debt of Penn Traffic consists of the obligations described
below:
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
---------- -----------
(In thousands of dollars)
<S> <C> <C>
Secured Revolving Credit Facility $ 77,583 $ 86,800
Other Secured Debt 28,830 31,434
11 1/2% Senior Notes due October 15, 2001 107,240 107,240
10 1/4% Senior Notes due February 15, 2002 125,000 125,000
8 5/8% Senior Notes due December 15, 2003 200,000 200,000
10 3/8% Senior Notes due October 1, 2004 100,000 100,000
10.65% Senior Notes due November 1, 2004 100,000 100,000
11 1/2% Senior Notes due April 15, 2006 100,000 100,000
9 5/8% Senior Subordinated Notes due April 15, 2005 400,000 400,000
---------- ----------
TOTAL DEBT 1,238,653 1,250,474
Less: Amounts due within one year (4,429) (3,736)
---------- ---------
TOTAL LONG-TERM DEBT $1,234,224 $1,246,738
---------- ---------
---------- ---------
</TABLE>
Amounts maturing during each of the next five fiscal years are: $4,433,000
(Fiscal 1999); $2,682,000 (Fiscal 2000); $85,060,000, including $77,583,000
outstanding as of January 31, 1998, under the Company's secured revolving credit
facility which matures in April 2000 (Fiscal 2001); $107,716,000 (Fiscal 2002);
and $125,449,000 (Fiscal 2003). The Company incurred interest expense of
$149,981,000, $144,854,000 and $136,359,000, including noncash amortization of
deferred financing costs of $4,804,000, $4,565,000 and $4,297,000, for Fiscal
1998, Fiscal 1997 and Fiscal 1996, respectively. Interest paid amounted to
$145,506,000, $138,437,000 and $128,936,000 for Fiscal 1998, Fiscal 1997 and
Fiscal 1996, respectively.
The estimated fair value of the Company's long-term debt, including current
maturities, was $976 million at January 31, 1998, and $820 million at February
1, 1997. The estimated fair value of the Company's long-term debt has been
determined by the Company using market information provided by an investment
banking firm as to the market value of such debt amounts. The estimated fair
market value of the Company's long-term debt does not necessarily reflect the
amount at which the debt would be settled.
The Company's secured revolving credit facility (the "Revolving Credit
Facility") provides for borrowings of up to $250 million, subject to a borrowing
base limitation measured by eligible inventory and accounts receivable of the
Company. The Revolving Credit Facility matures in April 2000 and is secured by a
pledge of the Company's inventory, accounts receivable and related assets. At
January 31, 1998 there were $77.6 million of borrowings and $36.1 million of
letters of credit outstanding under the Revolving Credit Facility. Additional
availability under the Revolving Credit Facility was $110.4 million at January
31, 1998. The interest rate on borrowings for which the Company elects a
LIBOR-based rate option is LIBOR plus 2.75%, and the interest rate on borrowings
for which the Company elects a prime-based rate option is prime plus 1.5%. At
January 31, 1998, the weighted average rate of interest on the Revolving Credit
Facility was 8.5%.
35
<PAGE>
The 11 1/2% Senior Notes due 2001, the 10 1/4% Senior Notes due 2002, the 8
5/8% Senior Notes due 2003, the 10 3/8% Senior Notes due 2004, the 10.65% Senior
Notes due 2004 and the 11 1/2% Senior Notes due 2006 (collectively, the "Senior
Notes ") are unsecured obligations of Penn Traffic which rank pari passu with
each other and with indebtedness under the Revolving Credit Facility. However,
indebtedness under the Revolving Credit Facility is secured by certain assets of
the Company. The 9 5/8% Senior Subordinated Notes due 2005 (the "Senior
Subordinated Notes") are subordinated to all existing and future senior
indebtedness.
The Senior Notes, the Senior Subordinated Notes and the Revolving Credit
Facility each contain certain covenants, including restrictions on incurrence of
indebtedness by Penn Traffic and limitations on the payment of dividends to Penn
Traffic's common stockholders. The Company is in compliance with all terms and
covenants of its long-term debt agreements as of and for the fiscal year ended
January 31, 1998.
The Company has an interest rate swap agreement outstanding which expires
within the next year, that effectively converts $50 million of its fixed rate
borrowings into variable rate obligations. Under the terms of this agreement,
the Company makes payments at variable rates based on LIBOR and receives
payments at fixed interest rates. The net amount paid or received is included in
interest expense. The estimated fair value of the Company's interest rate swap
agreement at January 31, 1998, was a $0.1 million liability and at February 1,
1997, when two agreements were outstanding, was a $0.4 million liability,
neither of which has been recorded on the books of the Company. The estimated
fair value of these interest rate agreements has been determined by the Company
using market information available to the Company, based on information provided
by the counterparty to each interest rate agreement.
36
<PAGE>
Note 3 -- Employee Benefit Plans:
Substantially all of the Company's employees are covered by either defined
benefit plans or defined contribution plans.
The following sets forth the net pension expense recognized for the defined
benefit pension plans and the status of the Company's defined benefit plans:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
January 31, February 1, February 3,
1998 1997 1996
----------- ----------- ------------
(In thousands of dollars)
<S> <C> <C> <C>
Service cost -- benefits earned
during the period $ 6,474 $ 5,841 $ 4,572
Interest cost on projected benefit
obligation 12,371 10,639 9,671
Actual return on plan assets (29,533) (15,777) (22,634)
Net amortization and deferral 13,634 42 9,990
----------- ----------- -----------
Net pension expense $ 2,946 $ 745 $ 1,599
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
January 31, 1998 February 1, 1997
Plans in Which Plans in Which
------------------------ ------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
------------ ----------- ----------- -----------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Actuarial present value of
vested benefit obligation $ (58,250) $ (95,778) $ (56,417) $ (77,826)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Accumulated benefit obligation $ (63,836) $ (101,056) $ (63,729) $ (83,781)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Projected benefit obligation $ (75,515) $ (104,914) $ (73,099) $ (88,153)
Plan assets at fair value 100,108 85,451 98,507 70,633
----------- ----------- ----------- -----------
Plan assets in excess of (less
than) projected benefit
obligation 24,593 (19,463) 25,408 (17,520)
Unrecognized net transition
(asset) liability (1,396) (1,535) 97
Unrecognized net (gain) loss (5,403) 21,288 (9,661) 18,910
Unrecognized prior service cost 793 10,291 1,584 11,330
Minimum liability (27,721) (25,965)
----------- ----------- ----------- -----------
Net pension asset (liability) $ 18,587 $ (15,605) $ 15,796 $ (13,148)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
In calculating benefit obligations and plan assets for Fiscal 1998, the
Company assumed a weighted average discount rate of 7.25%, compensation increase
rates ranging from 3.0% to 3.5% and an expected long-term rate of return on plan
assets of 10.5%. For Fiscal 1997, the Company assumed a weighted average
discount rate of 7.75%, compensation increase rates ranging from 3.0% to 3.5%
and expected long-term rates of return on plan assets of 10.5%.
37
<PAGE>
The Company's defined benefit plans generally provide a retirement benefit
to employees based on specified percentages applied to final average
compensation, as defined, coupled with years of service earned to the date of
retirement. All pension plans comply with the provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA"). Penn Traffic's defined benefit
plans' assets are maintained in separate trusts and are managed by independent
investment managers. The assets are invested primarily in equity, debt and
short-term cash securities.
The Company also contributes to multi-employer pension funds, which cover
certain union employees under collective bargaining agreements. Such
contributions aggregated $4,807,000, $3,933,000 and $4,521,000 in Fiscal 1998,
1997 and 1996, respectively. The applicable portion of the total plan benefits
and net assets of these plans is not separately identifiable.
The Company sponsors a deferred profit-sharing plan for certain salaried
employees. Contributions and costs totaled $134,119, $750,000 and $998,000 in
Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively.
Pursuant to the provisions of Statement of Financial Accounting Standards
No. 87, "Employers' Accounting for Pensions" ("SFAS 87"), the Company recorded
in other noncurrent liabilities an additional minimum pension liability
adjustment of $27,721,000 as of January 31, 1998, $25,965,000 as of February 1,
1997, and $21,093,000 as of February 3, 1996, representing the amount by which
the accumulated benefit obligation exceeded the fair value of plan assets plus
accrued amounts previously recorded. The additional liability has been offset by
an intangible asset to the extent of previously unrecognized prior service cost.
The amount in excess of previously unrecognized prior service cost (after tax)
is recorded as a reduction of stockholders' equity in the amount of $10,667,000
as of January 31, 1998, $8,730,000 as of February 1, 1997, and $6,606,000 as of
February 3, 1996.
38
<PAGE>
Note 4 -- Income Taxes:
The benefit for income taxes charged to continuing operations was as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------
January 31, February 1, February 3,
1998 1997 1996
---------- ---------- --------
(In thousands of dollars)
Current Tax (Benefit) Expense:
<S> <C> <C> <C>
Federal income $ (8,177) $ (2,126)
State income $ 250 233
-------- -------- ---------
250 (7,944) (2,126)
-------- -------- ---------
Deferred Tax (Benefit) Expense:
Federal income (27,894) (9,697) (18,922)
State income (8,192) (5,260) (6,154)
-------- -------- --------
(36,086) (14,957) (25,076)
-------- -------- --------
(Benefit) for income taxes $(35,836) $(22,901) $(27,202)
======== ======== ========
</TABLE>
The differences between income taxes computed using the statutory federal
income tax rate and those shown in the Consolidated Statement of Operations are
summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------
January 31, February 1, February 3,
1998 1997 1996
---------- ---------- --------
(In thousands of dollars)
<S> <C> <C> <C>
Federal (benefit) tax at statutory rates $(33,937) $(22,516) $(37,389)
State income taxes net of federal
income tax effect (5,162) (3,268) (3,850)
Nondeductible goodwill
amortization and write-off 3,312 2,926 14,724
Miscellaneous items 35 27 331
Decrease in deferred income taxes due
to changes in state income tax rates (232)
Tax credits (84) (70) (786)
-------- -------- --------
(Benefit) for income taxes $(35,836) $(22,901) $(27,202)
======== ======== ========
</TABLE>
39
<PAGE>
Components of deferred income taxes at January 31, 1998, and February 1,
1997, were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------
January 31, February 1,
1998 1997
---------- -------
(In thousands of dollars)
Deferred Tax Liabilities:
<S> <C> <C>
Fixed assets $ 77,438 $ 87,502
Inventory 29,043 30,394
Prepaid expenses and other
current assets 984 960
Goodwill amortization 3,225 4,382
Pensions 4,594 4,952
Deferred charges and other assets 11,725 10,139
------- -------
$127,009 $138,329
======== ========
Deferred Tax Assets:
Nondeductible accruals $ 19,531 $ 14,837
Prepaid operating fee 4,160
Capital leases 6,005 5,531
Net operating loss carryforwards 67,339 39,804
Capital loss carryforward 5,375
Tax credit carryforwards 17,463 16,015
Valuation allowance - capital loss
carryforward (2,298)
-------- --------
$110,338 $ 83,424
======== ========
Net Deferred Tax Liability $ 16,671 $ 54,905
======== ========
</TABLE>
At January 31, 1998, Penn Traffic had deferred tax assets of approximately
$56,339,000 due to federal net operating loss carryforwards of approximately
$161 million which begin to expire in 2011 and various state net operating loss
carryforwards, tax-effected for federal income tax purposes, of approximately
$11,000,000, which begin to expire in 2004. In addition, the Company has
alternative minimum tax credit carryforwards of $12,018,000, general business
tax credit carryforwards of $3,754,000 and various state tax credits, tax-
effected for federal income tax purposes, of $1,691,000 available to offset the
Company's regular income tax liability in future years. The general business tax
credit carryforwards begin to expire in 2004 and the alternative minimum tax
credit carryforwards have no expiration date.
A valuation allowance is required when it is more likely than not that
the recorded value of a deferred tax asset will not be realized. In the
judgement of management, no such allowance is required at January 31, 1998.
However, it is possible that valuation allowances may be required in the future.
Management presently believes that a valuation allowance will be required for
some portion or all of any deferred tax assets related to net operating loss and
tax credit carryforwards arising in the future.
40
<PAGE>
Note 5 -- Leases:
The following is a schedule by year of future gross minimum rental payments
for all leases with terms greater than one year reconciled to the present value
of net minimum capital lease payments as of January 31, 1998:
<TABLE>
<CAPTION>
Fiscal Years Ending: Total Operating Capital
-------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C>
1999 $ 71,124 $ 43,539 $ 27,585
2000 66,883 41,153 25,730
2001 62,765 39,307 23,458
2002 57,107 36,116 20,991
2003 51,947 33,834 18,113
Later years 397,051 277,240 119,811
-------- -------- --------
Total minimum lease payments $706,877 $471,189 235,688
======== ========
Less: Executory costs (654)
--------
Net minimum capital lease payments 235,034
Less: Estimated amount
representing interest (100,080)
---------
Present value of net minimum capital
lease payments 134,954
Less: Current portion (13,518)
---------
Long-term obligations under capital lease at
January 31, 1998 $121,436
========
</TABLE>
The Company principally operates in leased store facilities with terms of
up to 20 years with renewable options for additional periods. The Company
follows the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases" ("SFAS 13"), in determining the criteria for capital
leases. Leases that do not meet such criteria are classified as operating leases
and related rentals are charged to expense in the year incurred. During Fiscal
1998, 1997 and 1996, the Company incurred capital lease obligations of $439,308,
$24,109,000 and $11,176,000, respectively, in connection with lease agreements
for buildings and equipment. For Fiscal 1998, 1997 and 1996, capital lease
amortization expense was $13,839,000, $14,463,000 and $12,485,000, respectively.
Future minimum rentals have not been reduced by minimum sublease rentals of
$44,608,000 due in the future under noncancelable subleases. In addition to
minimum rentals, some leases provide for the Company to pay real estate taxes
and other expenses and, in many cases, contingent rentals based on sales.
Minimum rental payments and related executory costs for operating leases
were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
January 31, February 1, February 3,
1998 1997 1996
---------- ---------- --------
(In thousands of dollars)
<S> <C> <C> <C>
Minimum rentals and executory costs $ 44,560 $ 45,067 $ 40,806
Contingent rentals 2,691 2,760 2,264
Less: Sublease payments (9,577) (10,086) (9,946)
-------- -------- --------
Net rental payments $ 37,674 $ 37,741 $ 33,124
======== ======== ========
</TABLE>
41
<PAGE>
Note 6 -- Special Charges:
During Fiscal 1998 the Company recorded pre-tax charges of $18.2 million
($10.7 million, net of tax). The special charges consist of (1) $12.6 million
associated with a management reorganization and related corporate actions; and
(2) $5.6 million associated with the retention of recently hired corporate
executives. These charges are included in the restructuring charges and selling
and administrative expenses lines of the Consolidated Statement of Operations as
described below.
The management reorganization included the centralization of management in
the Company's Syracuse, New York, headquarters and other actions to streamline
the Company's organizational structure. The management reorganization was
implemented during the second and third quarters of Fiscal 1998. It resulted in
the layoff of approximately 375 employees, with most of the layoffs coming in
the Company's Columbus, Ohio, and DuBois, Pennsylvania, divisional headquarters.
The restructuring charges of $10.7 million for Fiscal 1998 included $9.7
million of severance costs and $1.0 million of miscellaneous other costs
recorded in connection with the management reorganization.
Selling and administrative expenses for Fiscal 1998 included pre-tax
special charges of (1) $5.6 million incurred in connection with the retention of
recently hired corporate executives (consisting of $3.4 million paid to the
newly hired executives primarily to reimburse them for loss of benefits under
arrangements with their prior employers and $2.2 million of relocation and other
miscellaneous expenses associated with their retention); and (2) $1.9 million of
other costs recorded in connection with management reorganization and related
corporate actions.
The accrued liability related to the special charges was $2.1 million at
January 31, 1998.
Note 7 -- Gain on Sale of Sani-Dairy:
During Fiscal 1998, the Company recorded a gain of approximately $24.2
million ($14.3 million, net of tax) related to the sale of Sani- Dairy, the
Company's dairy manufacturing operation, for cash consideration of approximately
$37 million. Concurrent with the completion of the transaction, the Company
entered into a 10-year supply agreement with the acquirer for the purchase of
products that were supplied by Sani-Dairy and two other dairies.
42
<PAGE>
Note 8 -- Unusual Item:
During Fiscal 1996, the Company recorded an unusual item (charge) of $65.2
million ($51.9 million, net of tax) as described below.
During the second quarter of Fiscal 1996, the Company decided to close 11
of its 15 remaining stand-alone general merchandise stores (Harts) in Ohio and
convert the other four stores to the Company's "Plus" format. During Fiscal
1996, these 11 stores generated 1.1% of the total revenues of the Company. The
impact of these stores on the operating income of the Company was immaterial in
Fiscal 1996. As a result of the decision to close the 11 Harts stores and
convert the remaining four stores during the second quarter of Fiscal 1996, the
Company recorded an unusual item (charge) of $50.6 million. This charge
specifically relates to the write-off of goodwill ($32.8 million), the write-off
of fixed assets ($8.4 million) and store closing costs consisting principally of
inventory markdowns ($9.4 million).
The unusual item also included $14.6 million in connection with the noncash
write-off of certain fixed assets which the Company determined during the second
quarter of Fiscal 1996 it would no longer utilize in its business ($8.0
million), costs incurred in connection with the implementation of the Company's
expense reduction programs ($4.0 million) and an increase in the Company's
closed store reserve ($2.6 million).
The noncash portion of the unusual item was approximately $57.5 million and
the cash portion was approximately $7.7 million. The accrued liability related
to the unusual item was $3.7 million at January 31, 1998.
Note 9 -- Accounting for Certain Long-lived Assets:
As of the beginning of the fourth quarter of Fiscal 1996, the Company
adopted Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"). Accordingly, the Company periodically reviews the recorded value
of its stores and other assets to determine if the future nondiscounted cash
flows from these properties are expected to be sufficient to recover the
remaining recorded asset values.
Based upon a comprehensive review of the Company's long-lived assets, the
Company recorded a noncash charge of $27.0 million in Fiscal 1998. This charge
primarily related to the write-down of a portion of the recorded asset values
(including allocable goodwill) of 12 of the Company's 264 retail supermarkets
that were in operation as of January 31, 1998, as well as certain other real
estate. These 12 supermarkets were located throughout the Company's trading
area.
The Company performed a comprehensive review of its long-lived assets as of
the end of Fiscal 1997. Based on this review, no additional assets were deemed
to be impaired.
During Fiscal 1996, the Company performed a comprehensive review of its
long-lived assets and recorded a noncash charge of $46.8 million. This charge
primarily related to the write-down of a portion of the recorded asset values
(including allocable goodwill) of 18 of the Company's 265 retail supermarkets
that were in operation as of February 3, 1996. These 18 supermarkets were
located throughout the Company's trading area.
43
<PAGE>
Note 10 -- Stockholders' Equity:
The Company has a Long-term Incentive Plan (the "1993 Plan") and a
Performance Incentive Plan (the "1997 Plan"), each of which provides for
long-term incentives based upon objective, quantifiable measures of the
Company's performance over time through the payment of incentive compensation of
the types commonly known as stock options, restricted stock, performance shares
and other forms of stock-based incentives such as phantom stock and cash awards.
The 1997 Plan was adopted in Fiscal 1998 as the successor to the 1993 Plan. The
1993 Plan was adopted in Fiscal 1994 as the successor to the Company's 1988
Stock Option Plan (the "1988 Plan"). A maximum of 350,000 shares of common stock
were authorized for grants under the 1993 Plan and 1,500,000 shares for grants
under the 1997 Plan.
As of January 31, 1998, a total of 1,030,940 options to purchase shares of
the Company's common stock (with exercise prices ranging from $4.06 to $9.31 per
option share) were outstanding under the Company's 1997 Plan. As of January 31,
1998, 206,188 of those shares were currently exercisable. At January 31, 1998,
467,910 shares of common stock remained available for future grants under the
1997 Plan.
As of January 31, 1998, 291,000 shares authorized under the 1993 Plan had
been either used in grants of restricted stock or made subject to options at
exercise prices ranging from $4.06 to $18.19; forfeitures of previously-made
grants resulted in 59,000 shares being available at that date for future grants.
Vesting of 129,100 shares of restricted stock is contingent upon attainment by
the Company, subsequent to the date of grant and prior to the end of the quarter
ended May 2, 1998, of stated EBITDA levels. Since the required EBITDA levels
will not be achieved, those shares of the restricted stock granted will be
forfeited during 1998 and will thereupon also be available for future grants.
The vesting requirements for 125,000 shares of restricted stock relate to
improvement in the market value of the Company's common stock. Those shares will
become vested if, for a period of ten consecutive trading days, the closing
price of shares of the Company's common stock is at least $12.00 per share
during the period from August 15, 1997, through August 14, 1998; $14.00 per
share during the period from August 15, 1998, through August 14, 1999; $16.00
per share during the period from August 15, 1999, through August 14, 2000;
$18.00 per share during the period from August 15, 2000, through August 14,
2001; $20.00 per share during the period from August 15, 2001, through August
14, 2002. Those shares will be forfeited to the Company if not vested by August
14, 2002.
As of January 31, 1998, unearned compensation was debited in the amount of
$908,000 to reflect the impact of the outstanding restricted shares. Unearned
compensation, which is shown as a separate component of stockholders' equity,
will be expensed as the compensation is earned.
The Company also has a stock option plan for directors (the "Directors'
Plan") pursuant to which each director of the Company who is not an employee of
the Company receives as of the date of appointment to the Board of Directors,
and thereafter annually, as of the first business day after the conclusion of
each Annual Meeting of Stockholders of the Company, an option to purchase 1,500
shares of common stock (subject to antidilution adjustments) at a price equal to
the fair market value (as defined in the Directors' Plan) of such shares on the
date of grant. At January 31, 1998, an additional 38,000 shares of common stock
are reserved for issuance under the Directors' Plan.
44
<PAGE>
Under each of the plans, option prices are 100% of the "fair market value"
of the shares on the date granted and the options expire 10 years after the date
of grant. Under terms of the Directors' Plan, the options are exercisable six
months after the date of grant. The 1988, 1993 and 1997 Plan options generally
vest 20% on the date of grant and 20% on each of the next four anniversary
dates.
A summary of the status of the Company's 1988 Plan, 1993 Plan and 1997
Plan, as of February 3, 1996, February 1, 1997, and January 31, 1998, and
changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1997 Fiscal 1998
------------------ ------------------ -----------------
Weighted- Weighted- Weighted-
Average Average Average
1988/1993/1997 Exercise Exercise Exercise
Plan Options Shares Price Shares Price Shares Price
- -------------- --------- ------- --------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 244,442 $19.06 226,094 $19.57 210,983 $19.86
Granted 3,000 18.19 1,100,100 6.42
Exercised (21,348) 13.56 (5,592) 12.50 ( 1,150) 7.69
Forfeited (9,519) 17.14 (72,520) 15.83
------- ------- ---------
Outstanding at
end of year 226,094 $19.57 210,983 $19.86 1,237,413 $ 8.16
======= ======= =========
Options exercisable
at year-end 224,094 $19.37 209,783 $19.72 383,141 $12.12
======= ======= =========
</TABLE>
As of January 31, 1998, the 1,237,413 options outstanding under the 1988
Plan, the 1993 Plan, and the 1997 Plan have exercise prices between $4.06 and
$28.13 and a weighted-average remaining contractual life of 8.4 years.
A summary of the status of the Company's Directors' Plan as of February 3,
1996, February 1, 1997, and January 31, 1998, and changes during the years ended
on those dates is presented below:
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1997 Fiscal 1998
------------------ ------------------ -----------------
Weighted- Weighted- Weighted-
Average Average Average
Directors' Plan Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
- --------------- --------- ------- --------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 39,000 $29.65 42,000 $30.97 48,000 $28.43
Granted 6,000 33.81 6,000 10.63 6,000 6.94
Exercised (3,000) 19.47
Forfeited --------- --------- ---------
Outstanding at
end of year 42,000 $30.97 48,000 $28.43 54,000 $26.04
====== ====== ======
Options exercisable
at year-end 42,000 $30.97 48,000 $28.43 54,000 $26.04
====== ====== ======
</TABLE>
45
<PAGE>
The following table summarizes information about stock options outstanding
at January 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------- -------------------
Average Remaining Average
Exercise Price Shares Price Life Shares Price
- -------------- ------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Less than $5 400,000 $ 4.06 9.1 80,000 $ 4.06
$5 to $10 673,840 7.75 9.5 139,568 7.77
Greater than $10 217,573 22.00 2.8 217,573 22.00
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair
value based method of accounting for an employee stock option by which
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period. A company may elect to adopt
SFAS No. 123 or elect to continue accounting for its stock option or similar
equity awards using the method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," by
which compensation cost is measured at the date of grant based on the excess of
the market value of the underlying stock over the exercise price. The Company
has elected to continue to account for its stock-based compensation plans under
the provisions of APB 25 and, accordingly, no compensation expense has been
recognized in the accompanying financial statements relative to the Company's
stock option plans.
Pro forma information regarding net (loss) and (loss) per share is required
by SFAS No. 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The
weighted average fair value of options granted in Fiscal 1998 was $4.51. The
fair value of these options was estimated at the date of grant using the
Black-Scholes options pricing model with the following weighted-average
assumptions: Risk-free interest rate of 6.37%; volatility factor of the expected
market price of the Company's common stock of 75.0%; a weighted-average expected
life of the option of six years; and that no dividends would be paid on common
stock.
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for Fiscal 1998 follows (in thousands, except for earnings
per share information):
<TABLE>
<CAPTION>
Fiscal 1998
-----------
<S> <C>
Net (loss) - as reported $ (61,126)
Net (loss) - pro forma (62,331)
Net (loss) per share - as reported:
Basic and diluted (5.78)
Net (loss) per share - pro forma:
Basic and diluted (5.89)
</TABLE>
The pro forma disclosures include only options granted during Fiscal 1998.
Options granted in Fiscal 1997 and Fiscal 1996 were immaterial and therefore the
pro forma effect is not presented.
46
<PAGE>
At January 31, 1998, certain persons affiliated or previously affiliated
with Miller Tabak Hirsch + Co. ("MTH") held warrants to purchase 289,000 shares
at $14.00 per share, ("Warrants"). The Warrants were issued in June 1988 and are
exercisable until June 23, 2001. None of the Warrants has been exercised or
forfeited since the date of grant.
In October 1995, the Company's Board of Directors authorized the repurchase
by the Company of up to 500,000 shares of its outstanding common stock, either
in the open market or in private transactions. Shares which are repurchased will
be available for issuance upon exercise of outstanding options which have been
granted under the Company's equity incentive programs and for other corporate
purposes. The Company did not purchase any shares during Fiscal 1998 or Fiscal
1997. During Fiscal 1996, the Company purchased 45,200 shares at a cost of
$625,000, which shares are being held in treasury. Penn Traffic's debt
agreements contain limitations which currently prohibit it from repurchasing any
additional shares of its common stock.
Note 11 -- Equity Investment:
In July 1989, Penn Traffic acquired an indirect ownership interest in the
common stock of Grand Union Holdings Corporation ("Grand Union Holdings"), which
was the corporate parent of The Grand Union Company ("Grand Union"). The Company
accounted for its investment in Grand Union under the equity method. The
investment was recorded originally at a cost of $18,250,000. The carrying value
of the investment was reduced to zero as of February 2, 1991.
On January 25, 1995, Grand Union filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code with the
United States Bankruptcy Court, District of Delaware (the "Bankruptcy Court").
On February 16, 1995, Grand Union Holdings filed a voluntary Chapter 11 petition
with the Bankruptcy Court. As a result of these bankruptcy proceedings, Penn
Traffic's equity ownership interest in Grand Union Holdings, which as of the
dates of filing of the Chapter 11 petitions was approximately 17.8% on a fully
diluted basis, became worthless.
See Note 12 - Related Parties for a description of certain relationships
between Penn Traffic and Grand Union.
47
<PAGE>
Note 12 -- Related Parties:
During Fiscal 1998, the Company paid MTH fees of $1,437,000 for financial
consulting and business management services provided by MTH to the Company.
Subject to such adjustments as may be made by the Company and MTH, the fee
payable to MTH for Fiscal 1999 will be approximately the same. During Fiscal
1998, in consideration for services rendered in connection with the sale of the
Company's Sani- Dairy operation, the Company agreed to extend the expiration
date of the Warrants from June 23, 1998, to June 23, 2001. See Note 10
concerning issuance of options, warrants and restricted stock to officers and
directors of the Company.
During Fiscal 1997 and Fiscal 1996, the amounts of the annual fees paid to
MTH under the financial consulting and business management services agreement
were $1,405,600 and $1,395,100, respectively.
On July 30, 1990, P&C (then a subsidiary and now a division of Penn
Traffic) and Grand Union entered into an agreement (the "New England Operating
Agreement") whereby Grand Union acquired the right to operate 13 P&C stores
located in New England under the Grand Union name until July 2000. Pursuant to
the New England Operating Agreement, Grand Union agreed to pay Penn Traffic (as
the successor of P&C, which was merged into the Company in April 1993) a minimum
annual fee averaging $10.7 million per year during the 10-year term and,
beginning with the year commencing July 31, 1992, to pay Penn Traffic additional
contingent fees of up to a specific amount per year (currently $1.2 million)
based on sales performance of the stores operated by Grand Union. In July 1992,
Penn Traffic received a $15 million prepayment of an operating fee from Grand
Union pursuant to the terms of the New England Operating Agreement. This
prepayment reduced the future payments that Grand Union will make to Penn
Traffic pursuant to the terms of the New England Operating Agreement by
approximately $3.2 million per year. The Total Revenues line of the Consolidated
Statement of Operations includes pretax operating fees of $11.2 million for the
fiscal year ended January 31, 1998, $11.2 million for the fiscal year ended
February 1, 1997, and $11.4 million for the fiscal year ended February 3, 1996.
At the expiration of the 10-year term of the New England Operating
Agreement, Grand Union has the right to extend the term of the New England
Operating Agreement for an additional five years. In the event of such extension
of the lease term, Grand Union would pay Penn Traffic an annual fee of $13.6
million in the first year of the extended term, $14.0 million in the second
year, $14.4 million in the third year, $14.9 million in the fourth year and
$15.3 million in the fifth year.
Penn Traffic also granted Grand Union an option (the "Purchase Option") to
purchase the stores operated by Grand Union under the New England Operating
Agreement. Grand Union paid Penn Traffic $7.5 million for the Purchase Option.
If Grand Union does not extend the initial term of the New England
Operating Agreement at its expiration in July 2000 or does not exercise the
Purchase Option prior to the expiration of the term (or the extended term), or
in the event of a default by Grand Union in the performance of its obligations
pursuant to the New England Operating Agreement, the stores operated by Grand
Union pursuant to the New England Operating Agreement will be returned to Penn
Traffic.
48
<PAGE>
Note 13 -- Commitments and Contingencies:
The Company enters into various purchase commitments in the normal course
of business. No losses are expected to result from these purchase commitments.
The Company and its subsidiaries are involved in several lawsuits, claims
and inquiries, most of which are routine to the nature of the business.
Estimates of future liability are based on an evaluation of currently available
facts regarding each matter. Liabilities are recorded when it is probable that
costs will be incurred and can be reasonably estimated.
In September 1997, a jury verdict was returned in favor of a former
employee who was injured in one of the Company's stores. The total award,
including attorney's fees and interest, is approximately $5 million. The Company
has filed an appeal and believes it will ultimately prevail. The Company further
believes that its insurance would cover some portion of any loss.
Based on management's evaluation, the resolution of these matters will not
materially affect the financial position, results of operations or liquidity of
the Company.
49
<PAGE>
REPORT OF MANAGEMENT
Penn Traffic's management has prepared the financial statements presented in
this Annual Report on Form 10-K and is responsible for the integrity of all
information contained herein. The financial statements presented in this report
have been audited by the independent accountants appointed by the Board of
Directors on the recommendation of its Audit Committee and management. The
Company maintains an effective system of internal accounting controls. The
independent accountants obtain and maintain an understanding of the Company's
internal accounting controls and conduct such tests and related procedures as
they deem necessary to express an opinion on the fairness of the presentation of
the financial statements. The Audit Committee, composed solely of outside
directors, meets periodically with management and independent accountants to
review auditing and financial reporting matters and to ensure that each group is
properly discharging its responsibilities. We rely on our internal and external
auditors to assist us in fulfilling our responsibility for the fairness of the
Company's financial reporting and monitoring the effectiveness of our system of
internal accounting controls.
50
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
As permitted by General Instruction G(3), information concerning the executive
officers of Penn Traffic is set forth as a supplemental item included in Part I
of the Form 10-K Report under the caption "Executive Officers of Registrant."
The information required by this item is incorporated herein by reference to the
captions "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement dated May 1, 1998 filed
or to be filed in connection with the Company's Annual Meeting of Stockholders
to be held on June 4, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
caption "Executive Compensation" in the Company's Proxy Statement dated May 1,
1998, filed or to be filed in connection with the Company's Annual Meeting of
Stockholders to be held on June 4, 1998. The information set forth in
"Compensation Committee Report" and "Performance Graph" of the Company's Proxy
Statement dated May 1, 1998, filed or to be filed in connection with the
Company's Annual Meeting of Stockholders to be held on June 4, 1998, is not
"filed" as a part hereof.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated herein by reference to the
caption "Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement dated May 1, 1998, filed or to be filed in connection
with the Company's Annual Meeting of Stockholders to be held on June 4, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
captions "Certain Transactions" and "Compensation of Directors" in the Company's
Proxy Statement dated May 1, 1998, filed or to be filed in connection with the
Company's Annual Meeting of Stockholders to be held on June 4, 1998.
51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
The index for Financial Statements and Supplementary Data is on page 14 under
Item 8 of this Form 10-K.
Exhibits:
The following are filed as Exhibits to this Report:
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
2.1 Certificate of Merger for merger of Penn Traffic
Acquisition Corporation into Penn Traffic dated April 14,
1993 (incorporated by reference to Exhibit No. 2.5 to Penn
Traffic's Registration Statement on Form S-3 (Reg. No. 33-
51213) filed on December 8, 1993 with the Securities and
Exchange Commission (the "SEC") and referred to herein as
the "December 1993 Registration Statement").
2.2 Plan of Merger dated as of February 25, 1993 for the merger
of P&C Food Markets, Inc. ("P&C") into Penn Traffic
(incorporated by reference to Exhibit No. 2.6 to Penn
Traffic's Registration Statement on Form S-3 (Reg. No. 33-
58918) filed on April 7, 1993 with the SEC and referred to
herein as the "April 1993 Registration Statement").
2.3 Certificates of Merger for merger of P&C into Penn Traffic
dated April 14, 1993 (incorporated by reference to Exhibit
No. 2.7 to the December 1993 Registration Statement).
2.4 Agreement and Plan of Merger dated as of February 25, 1993
by and among Penn Traffic, Penn Traffic Acquisition
Corporation and Big Bear Stores Company ("Big Bear")
(incorporated by reference to Exhibit No. 2.8 to the April
1993 Registration Statement).
2.5 Certificate of Merger for merger of Big Bear into Penn
Traffic Acquisition Corporation dated April 14, 1993
(incorporated by reference to Exhibit No. 2.9 to the
December 1993 Registration Statement).
2.6 Asset Purchase Agreement dated as of December 9, 1992
between Penn Traffic and Peter J. Schmitt Co., Inc. (the
"December 9, 1992 Asset Purchase Agreement") (incorporated
by reference to Exhibit No. 2.1 to Penn Traffic's Current
Report on Form 8-K filed on January 18, 1993 with the SEC
and referred to herein as the "Penn Traffic 1993 8-K").
2.6A Letter Agreement dated December 31, 1992 with respect to the
December 9, 1992 Asset Purchase Agreement (incorporated by
reference to Exhibit No. 2.1A to the Penn Traffic 1993 8-K).
2.7 Asset Purchase Agreement dated as of December 29, 1992
between Penn Traffic and Peter J. Schmitt Co., Inc. (the
"December 29, 1992 Asset Purchase Agreement") (incorporated
by reference to Exhibit No. 2.2 to the Penn Traffic 1993
8-K).
2.7A Letter Agreement dated December 30, 1992 with respect to the
December 29, 1992 Asset Purchase Agreement (incorporated by
reference to Exhibit No. 2.2A to the Penn Traffic 1993 8-K).
</TABLE>
52
<PAGE>
Exhibits (continued):
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
2.8 Agreement of Purchase and Sale, dated as of August 27,
1993, by and between Insalaco Markets, Inc., Insalaco's Old
Forge, Inc., Insalaco's Clarks Green, Inc., Insalaco's
Supermarkets Warehouse, Insalaco Enterprises, Insalaco's
Real Estate, Insalaco's Foodliner, Eagle Valley Realty,
Tannersville Realty Company and Penn Traffic (incorporated
by reference to Exhibit No. 10.23 to Penn Traffic's
Quarterly Report on Form 10-Q for the fiscal quarter ended
July 31, 1993 and referred to herein as the "Penn Traffic
July 1993 10-Q").
2.9 Asset Purchase Agreement by and among Acme Markets, Inc.,
American Stores Properties, Inc., American Stores Realty
Corp. and The Penn Traffic Company, dated as of September
30, 1994 (incorporated by reference to Exhibit 2.13 to Penn
Traffic's Report on Form 8-K dated October 12, 1994 and
referred to herein as the "1994 8-K").
3.1 Certificate of Incorporation of Penn Traffic (incorporated
by reference to Exhibit No. 3.1 to Penn Traffic's
Registration Statement on Form S-3 (Reg. No. 33-51824)
filed on October 2, 1992 with the SEC and referred to
herein as the "October 1992 Registration Statement").
3.2 By-Laws of Penn Traffic as amended through April 2, 1996
(incorporated by reference to Exhibit No. 3.2 to Penn
Traffic's Annual Report on Form 10-K for the fiscal year
ended February 3, 1996 and referred to herein as the "1996
10-K").
4.1 Certificate of Incorporation of Penn Traffic (filed as
Exhibit No. 3.1).
4.2 By-Laws of Penn Traffic (filed as Exhibit No. 3.2).
4.3 Form of Common Stock Certificate (incorporated by reference
to Exhibit No. 4.2 to Penn Traffic's Annual Report on Form
10-K for the fiscal year ended January 28, 1995 and
referred to herein as the "1995 10-K").
4.4 Indenture, including form of 11 1/2% Senior Note Due 2001,
dated as of October 16, 1991 between P&C and Bankers Trust
Company ("Bankers Trust"), as Trustee (incorporated by
reference to Exhibit No. 10.25 to P&C's quarterly report on
Form 10-Q for the fiscal quarter ended November 2, 1991 and
referred to herein as the "P&C November 1991 10-Q").
4.4A First Supplemental Indenture dated as of April 15, 1993
between the Company and Bankers Trust, as Trustee, relating
to the 11 1/2% Senior Notes Due 2001 (incorporated by
reference to Exhibit No. 4.10A to Penn Traffic's Quarterly
Report on Form 10-Q for the fiscal quarter ended May 1,
1993 and referred to herein as the "Penn Traffic May 1993
10-Q").
4.5 Indenture, including form of 10 1/4% Senior Note Due
February 15, 2002, dated as of February 18, 1992 between
Penn Traffic and Marine Midland Bank, N.A., Trustee
(incorporated by reference to Exhibit No. 4.13 to Penn
Traffic's Annual Report on Form 10-K for the fiscal year
ended February 1, 1992 and referred to herein as the "Penn
Traffic 1992 10-K").
</TABLE>
53
<PAGE>
Exhibits (continued):
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
4.5A First Supplemental Indenture dated as of June 10, 1992 to the
Indenture dated as of February 18, 1992, relating to the 10
1/4% Senior Notes Due 2002, between Penn Traffic and Marine
Midland Bank, N.A., as Trustee (incorporated by reference to
Exhibit 4.15A to the October 1992 Registration
Statement).
4.5B Second Supplemental Indenture dated as of September 18, 1992
to the Indenture dated as of February 18, 1992, relating to
the 10 1/4% Senior Notes Due 2002, between Penn Traffic and
Marine Midland Bank, N.A., as Trustee (incorporated by
reference to Exhibit 4.15B to the October 1992 Registration
Statement).
4.6 Indenture, including form of 10 3/8% Senior Note Due
October 1, 2004, dated as of October 1, 1992, between Penn
Traffic and United States Trust Company of New York, as
Trustee (incorporated by reference to Exhibit No. 4.16 to
Penn Traffic's Quarterly Report on Form 10-Q for the fiscal
quarter ended October 31, 1992).
4.7 Indenture, including form of 9 5/8% Senior Subordinated
Note Due April 15, 2005, dated as of April 15, 1993,
between Penn Traffic and First Trust of California,
National Association, as Trustee (incorporated by reference
to Exhibit No. 4.14 to the Penn Traffic May 1993 10-Q).
4.8 Indenture dated as of December 15, 1993, between Penn
Traffic and United States Trust Company of New York, as
Trustee (incorporated by reference to Exhibit No. 4.9 to
Penn Traffic's Form 10-K for the fiscal year ended January
29, 1994, and referred to herein as the "1994 10-K").
4.8A Officer's Certificate pursuant to the Indenture filed as
Exhibit 4.8, dated December 21, 1993, establishing the terms
of the 8 5/8% Senior Notes due December 15, 2003
(incorporated by reference to Exhibit 4.8A to the 1995 10-K).
4.8B Officer's Certificate pursuant to the Indenture filed as
Exhibit 4.8, dated October 20, 1994, establishing the terms
of the 10.65% Senior Notes due November 1, 2004 (incorporated
by reference to Exhibit 4.8B to the 1995 10- K).
4.8C Officer's Certificate pursuant to the Indenture filed as
Exhibit 4.8, dated April 23, 1996, establishing the terms of
the 11.50% Senior Notes due April 15, 2006 (incorporated by
reference to Exhibit 4.8C to Penn Traffic's Quarterly Report
on Form 10-Q for the fiscal quarter ended May 4, 1996 (the
"May 1996 10-Q")).
10.1 Membership and Licensing Agreement dated April 18, 1982
among TOPCO Associates, Inc. (Cooperative), Kingston
Marketing Co. and Penn Traffic (incorporated by reference
to Exhibit No. 10.2 to Penn Traffic's Registration
Statement on Form S-1 (Reg. No. 33-12926) filed on March
27, 1987 with the SEC and referred to herein as the "1987
Registration Statement").
*10.2 The Penn Traffic Company Incentive Compensation Plan
(incorporated by reference to Exhibit No. 10.3 to the 1987
Registration Statement).
</TABLE>
54
<PAGE>
Exhibits (continued):
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
*10.3 The Penn Traffic Company Severance Pay Plan (incorporated
by reference to Exhibit No. 10.5 to the 1987 Registration
Statement).
*10.4 Quality Markets, Inc. ("Quality") Profit Sharing Plan
(incorporated by reference to Exhibit No. 10.11 to the 1987
Registration Statement).
10.5 Loan and Security Agreement (the "Loan and Security
Agreement") among Penn Traffic, Quality, Dairy Dell, Big M
Supermarkets, Inc. ("Big M"), Penny Curtiss Baking Company
Inc. ("Penny Curtiss"), and Hart Stores, Inc. ("Hart"), the
lenders party thereto and NatWest USA Credit Corp., as
Agent, dated March 5, 1993 (incorporated by reference to
Exhibit No. 10.2 to the April 1993 Registration Statement).
10.5A Amendment No. 1, dated March 12, 1993, to the Loan and
Security Agreement (incorporated by reference to Exhibit
No. 10.2A to the April 1993 Registration Statement).
10.5B Amendment No. 2, dated as of March 24, 1993, to the Loan
and Security Agreement (incorporated by reference to
Exhibit No. 10.2B to the April 1993 Registration
Statement).
10.5C Waiver Letter dated as of April 14, 1993, among the lenders
under the Loan and Security Agreement, Penn Traffic, Quality,
Dairy Dell, Big M, Penny Curtiss and Hart (incorporated by
reference to Exhibit No. 10.22C to the Penn Traffic May 1993
10-Q).
10.5D Amendment No. 3, dated as of April 15, 1993, to the Loan
and Security Agreement (incorporated by reference to
Exhibit No. 10.22D to the Penn Traffic May 1993 10-Q).
10.5E Amendment No.4, dated as of August 20, 1993, to the Loan and
Security Agreement (incorporated by reference to Exhibit No.
10.22E to the Penn Traffic July 1993 10-Q).
10.5F Amendment No. 5, dated as of August 24, 1994, to the Loan and
Security Agreement (incorporated by reference to Exhibit
10.9F to Penn Traffic's Report on Form 10-Q for the fiscal
quarter ended July 30, 1994 and referred to herein as the
"July 1994 10-Q").
10.5G Amendment No. 6, dated as of August 24, 1994, to the Loan
and Security Agreement (incorporated by reference to
Exhibit 10.9G to the July 1994 10-Q).
10.5H Consent and Amendment to the Loan and Security Agreement,
dated as of September 29, 1994 (incorporated by reference to
Exhibit 10.9H to the 1994 Form 8-K).
10.5I Amendment No. 8, dated as of November 4, 1994, to the Loan
and Security Agreement (incorporated by reference to Exhibit
No. 10.9I to Penn Traffic's Quarterly Report on Form 10-Q for
the fiscal quarter ended April 29, 1995 and referred to
herein as the "April 1995 10-Q").
10.5J Amendment No. 9, dated as of May 10, 1995, to the Loan and
Security Agreement (incorporated by reference to Exhibit
No. 10.9J to the April 1995 10-Q).
</TABLE>
55
<PAGE>
Exhibits (continued):
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
10.5K Amendment No. 10, dated as of August 31, 1995, to the Loan
and Security Agreement (incorporated by reference to Exhibit
No. 10.9K to Penn Traffic's Quarterly Report on Form 10-Q for
the fiscal quarter ended July 29, 1995).
10.5L Amendment No. 11, dated as of October 16, 1995, to the Loan
and Security Agreement (incorporated by reference to Exhibit
No. 10.9L to Penn Traffic's Quarterly Report on Form 10-Q for
the fiscal quarter ended October 28, 1995).
10.5M Amendment No. 12, dated as of March 7, 1996, to the Loan
and Security Agreement (incorporated by reference to
Exhibit No. 10.5M to the 1996 10-K).
10.5N Amendment No. 13, dated as of May 31, 1996, to the Loan and
Security Agreement (incorporated by reference to Exhibit
No. 10.5N to the May 1996 10-Q).
10.5O Amendment No. 14, dated as of October 16, 1996, to the Loan
and Security Agreement (incorporated by reference to
Exhibit No. 10.5O to Penn Traffic's Current Report on Form
8-K dated October 16, 1996).
10.5P Amendment No. 15, dated as of May 27, 1997, to the Loan and
Security Agreement (incorporated by reference to Exhibit
10.5P to Penn Traffic's report of Form 8-K as filed with the
SEC on June 2, 1997).
10.5Q Amendment No. 16, dated as of January 20, 1998, to the Loan
and Security Agreement.
10.5R Amendment No. 17, dated as of March 13, 1998, to the Loan and
Security Agreement (incorporated by reference to Exhibit
10.5R to Penn Traffic's report of Form 8-K as filed with the
SEC on March 24, 1998).
10.6 Engagement Letter dated as of January 30, 1994 by and among
Penn Traffic and Miller Tabak Hirsch + Co. (incorporated by
reference to Exhibit 10.10 to the 1994 10-K).
*10.7 The Penn Traffic Company Amended and Restated Directors'
Stock Option Plan (filed as Exhibit "A" to Penn Traffic's
Proxy Statement filed with the SEC on May 1, 1996 and
incorporated herein by reference).
10.8 Agreement and Master Sublease dated as of July 30, 1990, by
and between The Grand Union Company and P&C (incorporated
by reference to Exhibit No. 10.24 to Penn Traffic's
Quarterly Report on Form 10-Q for the Fiscal Quarter ended
August 4, 1990 (Securities and Exchange Commission File No.
1-9930) and referred to herein as the "Penn Traffic August
1990 10-Q").
10.9 Interest Rate and Currency Exchange Agreement dated as of
October 16, 1991 between Salomon Brothers Holding Company,
Inc. ("SBHC") and P&C (incorporated by reference to Exhibit
No. 10.27 to the P&C November 1991 10-Q).
*10.10 Employment Agreement, dated as of February 2, 1992, among
Penn Traffic, P & C and Claude J. Incaudo (incorporated by
reference to Exhibit No. 10.37 to the Penn Traffic 1992
10-K).
</TABLE>
56
<PAGE>
Exhibits (continued):
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
*10.11 The Penn Traffic Company's 1993 Long Term Incentive Plan
(filed as Exhibit "A" to Penn Traffic's Proxy Statement filed
with the SEC on May 1, 1993 and incorporated herein by
reference).
10.12 First Mortgage, Security Agreement, Financing Statement and
Assignment of Leases and Rents dated as of October 25, 1993
by and among Penn Traffic and Onondaga County Industrial
Development Agency, as mortgagor and NatWest USA Credit
Corp., as mortgagee (incorporated by reference to Exhibit
No. 10.24 to Penn Traffic's Quarterly Report on Form 10-Q
for the fiscal quarter ended October 31, 1993).
10.13 Agreement Containing Consent Order dated January 9, 1995 by
and between Penn Traffic and the Federal Trade Commission
entered into in the matter of The Penn Traffic Company
(incorporated by reference to Exhibit 10.25 to Penn
Traffic's Report on Form 8-K dated January 19, 1995).
10.14 Agreement, dated November 18, 1994, between Penn Traffic
and Grand Union relating to the Grand Union warehouse in
Montgomery, New York (incorporated by reference to Exhibit
No. 10.21 to the 1995 10-K).
*10.15 Employment Agreement, dated as of January 29, 1995, between
John T. Dixon and Penn Traffic (incorporated by reference
to Exhibit No. 10.22 to the 1995 10-K).
*10.16 Agreement dated October 5, 1996, between John T. Dixon and
Penn Traffic.
*10.17 Employment Agreement, dated as of March 11, 1997, between
Phillip E. Hawkins and Penn Traffic.
*10.18 Penn Traffic's 1997 Performance Incentive Plan.
*10.19 Penn Traffic's Supplemental Retirement Income Plan.
21.1 Subsidiaries of Penn Traffic (incorporated by reference to
Exhibit 21.1 to Penn Traffic's 1994 10-K).
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule.
</TABLE>
- ----------------------
* Management contract, compensatory plan or arrangement.
Copies of the above exhibits will be furnished without charge to any shareholder
by writing to The Vice President of Strategic Planning, The Penn Traffic
Company, 1200 State Fair Boulevard, Syracuse, New York 13209.
Reports on Form 8-K
No reports on Form 8-K were filed during the fiscal quarter ended January 31,
1998.
57
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE PENN TRAFFIC COMPANY
April 30, 1998 By: /s/ Phillip E. Hawkins
-------------- -------------------------------------
DATE Phillip E. Hawkins,
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Gary D. Hirsch /s/ Robert J. Davis
- -------------------------------- ------------------------------------
Gary D. Hirsch, Chairman of the Robert J. Davis,
Board and Director Senior Vice President and
Chief Financial Officer
April 30, 1998 April 30, 1998
-------------- --------------
DATE DATE
/s/ Eugene A. DePalma /s/ W. Davis Walters
- -------------------------------- ------------------------------------
Eugene A. DePalma, Director W. David Walters,
Vice President Finance and
Chief Accounting Officer
April 30, 1998 April 30, 1998
-------------- --------------
DATE DATE
/s/ Martin A. Fox /s/ Susan E. Engel
- -------------------------------- ------------------------------------
Martin A. Fox, Director Susan E. Engel, Director
April 30, 1998 April 30, 1998
-------------- --------------
DATE DATE
/s/ James A. Lash /s/ Claude J. Incaudo
- -------------------------------- ------------------------------------
James A. Lash, Director Claude J. Incaudo, Director
April 30, 1998 April 30, 1998
-------------- --------------
DATE DATE
/s/ Richard D. Segal /s/ Harold S. Poster
- -------------------------------- ------------------------------------
Richard D. Segal, Director Harold S. Poster, Director
April 30, 1998 April 30, 1998
-------------- --------------
DATE DATE
58
<PAGE>
THE PENN TRAFFIC COMPANY
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance charged Deductions Balance
at beginning to costs from at end
Description of period and expenses accounts of period
---------------------- ------------ ------------ ---------- ---------
<S> <C> <C> <C> <C>
Reserve deducted from asset
to which it applies:
For the 52 Weeks Ended
January 31, 1998
Provision for doubtful
accounts $ 2,867 $ 2,585 $ 1,855(a) $ 3,597
======= ======= ======= =======
For the 52 Weeks Ended
February 1, 1997
Provision for doubtful
accounts $ 1,483 $ 8,414 $ 7,030(a) $ 2,867
======= ======= ======= =======
For the 53 Weeks Ended
February 3, 1996
Provision for doubtful
accounts $ 1,374 $ 3,926 $ 3,817(a) $ 1,483
======= ======= ======= =======
</TABLE>
(a) Uncollectible receivables written off net of recoveries.
59
<PAGE>
Exhibit 10.5Q
AMENDMENT NO. 16 TO
LOAN AND SECURITY AGREEMENT
AMENDMENT NO. 16, dated as of January 20, 1998 (this "Amendment") to that
certain Loan and Security Agreement dated as of March 5, 1993, as amended by
Amendment Nos. 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15
(collectively, the "Loan Agreement") among THE PENN TRAFFIC COMPANY ("Penn
Traffic"), DAIRY DELL, BIG M SUPERMARKETS, INC. and PENNY CURTISS BAKING
COMPANY, INC. (individually, each a "Borrower" and collectively, the
"Borrowers"), the Lenders listed therein (collectively, the "Lenders") and
FLEET BANK, N.A. (as successor to NatWest USA Credit Corp.), as Agent for the
Lenders (in such capacity, the "Agent"), is made by, between and among the
Borrowers, the Agent, and the Lenders. Capitalized terms used herein, except
as otherwise defined herein, shall have the meanings given to such terms in
the Loan Agreement.
WHEREAS, the Borrowers have advised the Agent and the Lenders that Penn
Traffic and Dairy Dell propose to sell to Dean Foods Company certain assets
comprising its dairy manufacturing operations based in Johnstown,
Pennsylvania, for net cash proceeds of not less than $30,000,000; and
WHEREAS, in connection with such proposed sale the Borrowers have requested
the Agent and the Lender to amend the Loan Agreement to modify the existing
covenant regarding sales of assets set forth in Section 10.5 of the Loan
Agreement so as to permit such sale; and
WHEREAS, the Borrowers, the Agent and the Lenders have agreed to amend the
Loan Agreement pursuant to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements hereinafter set forth, the parties hereto agree as follows:
1. Amendment to Loan Agreement. The Loan Agreement is hereby amended
as of the effective date hereof as follows:
Section 10.5 of the Loan Agreement is hereby amended by (i)deleting the word
"and" immediately prior to clause (h), (ii) replacing the period at the end
of clause (h) with a semicolon and (iii) adding the following language
immediately after such semicolon "and (i) the sale by Penn Traffic of its
dairy manufacturing operations based in Johnstown, Pennsylvania (including
without limitation the accounts receivable, inventory, equipment, vehicles,
real estate and intellectual property associated therewith) resulting in net
cash proceeds, after payment of transaction costs and repayment of debt
relating to the dairy manufacturing operation, of not less than $30,000,000,
which net proceeds shall be applied to the Revolving Loans."
<PAGE>
2. Representations and Warranties. As an inducement to the Agent and the
Lenders to enter into this Amendment, each of the Borrowers hereby represents
and warrants to the Agent and the Lenders and agrees with the Agent and the
Lenders as follows:
(a) It has the power and authority to enter into this Amendment and has
taken all corporate action required to authorize its execution,
delivery, and performance of this Amendment. This Amendment has been
duly executed and delivered by it and constitutes its valid and binding
obligation, enforceable against it in accordance with its terms. The
execution, delivery, and performance of this Amendment will not violate
its certificate of incorporation or by-laws or any agreement or legal
requirements binding upon it.
(b) As of the date hereof and after giving effect to the terms of this
Amendment: (i) the Loan Agreement is in full force and effect and
constitutes a binding obligation of the Borrowers, enforceable against
the Borrowers and owing in accordance with its terms; (ii) the
Obligations are due and owing by the Borrowers in accordance with their
terms; and (iii) Borrowers have no defense to or setoff, counterclaim,
or claim against payment of the Obligations and enforcement of the Loan
Documents based upon a fact or circumstance existing or occurring on or
prior to the date hereof.
(c) The Obligations under the Loan Agreement as amended by this
Amendment constitute "Senior Indebtedness" and "Designated Senior
Indebtedness" as defined under the indentures relating to the Senior
Notes and to the Subordinated Notes.
3. No Implied Amendments. Except as expressly provided herein, the
Loan Agreement and the other Loan Documents are not amended or otherwise
affected in any way by this Amendment.
4. Entire Agreement; Modifications; Binding Effect. This Amendment
constitutes the entire agreement of the parties with respect to its subject
matter and supersedes all prior oral or written understandings about such
matter. Each of the Borrowers confirms that, in entering into this Amendment,
it did not rely upon any agreement, representation, or warranty by the Agent
or any Lender except those expressly set forth herein. No modification,
rescission, waiver, release, or amendment of any provision of this Amendment
may be made except by a written agreement signed by the parties hereto. The
provisions of this Amendment are binding upon and inure to the benefit of the
representatives, successors, and assigns of the parties hereto; provided,
however, that no interest herein or obligation hereunder may be assigned by
any Borrower without the prior written consent of the Required Lenders.
5. Effective Date. This Agreement shall become effective upon compliance with
the conditions set forth immediately below:
(i) No Event or Event of Default shall have occurred and there shall
have been no material adverse change in the business or financial
condition of any of the Borrowers.
<PAGE>
(ii) The Borrowers shall deliver to the Agent for the benefit of the
Lenders an opinion of Borrowers' counsel in form and substance
satisfactory to the Agent and its counsel (which opinion shall cover
such matters as the Agent may reasonably request, including a statement
that the Obligations under the Loan Agreement as amended by this
Amendment constitute "Senior Indebtedness" and "Designated Senior
Indebtedness" as defined under the indentures relating to the Senior
Notes and to the Subordinated Notes).
(iii) The Borrowers shall deliver to the Agent a certificate of the
Borrowers' Chief Executive, Chief Financial Officer or Vice Chairman-
Finance with respect to Section (i) above and such other instruments
and documents as the Agent shall reasonably request.
(iv) The Agent shall have received an original counterpart of this
Amendment, duly executed and delivered by the Borrowers and the
Required Lenders.
6. Counterparts. This Amendment may be executed in any number of
counterparts, and by each party in separate counterparts, each of which is an
original, but all of which shall together constitute one and the same
agreement.
7. Governing Law. This Amendment is deemed to have been made in the State of
New York and is governed by and interpreted in accordance with the laws of
such state, provided that no doctrine of choice of law (except as may be
applicable under the UCC with respect to the Security Interest) shall be used
to apply the laws of any other state or jurisdiction.
<PAGE>
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-32307) of The Penn Traffic Company of our
report dated March 20, 1998 relating to the consolidated financial statements
of The Penn Traffic Company which appears on page 26 of the Annual Report on
Form 10-K.
Price Waterhouse LLP
Syracuse, NY
April 29, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-2-1997
<PERIOD-END> JAN-31-1998
<CASH> 49,095
<SECURITIES> 0
<RECEIVABLES> 72,051
<ALLOWANCES> 3,597
<INVENTORY> 327,389
<CURRENT-ASSETS> 460,970
<PP&E> 909,101
<DEPRECIATION> 412,600
<TOTAL-ASSETS> 1,563,586
<CURRENT-LIABILITIES> 318,313
<BONDS> 1,355,660
0
0
<COMMON> 13,586
<OTHER-SE> (173,395)
<TOTAL-LIABILITY-AND-EQUITY> 1,563,586
<SALES> 2,959,376
<TOTAL-REVENUES> 3,010,065
<CGS> 2,317,847
<TOTAL-COSTS> 2,317,847
<OTHER-EXPENSES> 639,199
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 149,981
<INCOME-PRETAX> (96,962)
<INCOME-TAX> 35,836
<INCOME-CONTINUING> (61,126)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61,126)
<EPS-PRIMARY> (5.78)
<EPS-DILUTED> (5.78)
</TABLE>
