<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 1, 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 of incorporation) (IRS Employer Identification No.)
1200 State Fair Blvd., Syracuse, NY 13221-4737
(Address of principal executive offices) (Zip Code)
(315) 453-7284
(Telephone number)
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 .
--- ---
Common stock, par value $1.25 per share: 10,695,491 shares
outstanding as of September 11, 1998
1 0f 18
<PAGE>
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
THE PENN TRAFFIC COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
(All dollar amounts in thousands,
except per share data)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
AUGUST 1, AUGUST 2, AUGUST 1, AUGUST 2,
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 730,223 $ 773,890 $1,447,022 $1,533,278
COSTS AND OPERATING EXPENSES:
Cost of sales (including
buying and occupancy costs) 568,629 595,643 1,128,019 1,177,260
Selling and administrative
expenses (Note 2) 154,080 158,258 302,035 326,490
Restructuring charges (Note 2) 1,400 10,704
--------- --------- ---------- ----------
OPERATING INCOME 7,514 18,589 16,968 18,824
Interest expense 37,258 37,289 74,120 74,660
--------- --------- ---------- ----------
(LOSS) BEFORE INCOME TAXES (29,744) (18,700) (57,152) (55,836)
(Benefit) for income
taxes (Note 3) (6,246) (6,776) (16,596) (21,088)
--------- --------- ---------- ----------
NET (LOSS) $ (23,498) $ (11,924) $ (40,556) $ (34,748)
========= ========= ========== ==========
PER SHARE DATA (BASIC
AND DILUTED):
Net (loss) (Note 4) $ (2.22) $ (1.13) $ (3.84) $ (3.29)
========= ========= ========== ==========
</TABLE>
See Notes to Interim Consolidated Financial Statements.
- 2 -
<PAGE>
THE PENN TRAFFIC COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(All dollar amounts in thousands)
UNAUDITED
AUGUST 1, 1998 JANUARY 31, 1998
-------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and short-term investments $ 45,419 $ 49,095
Accounts and notes receivable
(less allowance for doubtful accounts
of $5,028 and $3,597 respectively) 64,358 68,454
Inventories (Note 6) 310,473 327,389
Prepaid expenses and other current assets 15,399 16,032
---------- ----------
Total Current Assets 435,649 460,970
NONCURRENT ASSETS:
Capital leases - net 109,350 115,581
Property, plant and equipment - net 469,726 496,501
Goodwill - net 395,668 401,829
Other assets and deferred charges - net 88,823 88,705
---------- ----------
$1,499,216 $1,563,586
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of obligations
under capital leases $ 13,091 $ 13,518
Current maturities of long-term
debt (Note 8) 102,644 4,429
Trade accounts and drafts payable 148,340 149,389
Payroll and other accrued liabilities 69,071 79,763
Accrued interest expense 34,519 35,335
Payroll taxes and other taxes payable 18,756 19,208
Deferred income taxes 16,671
---------- ----------
Total Current Liabilities 386,421 318,313
NONCURRENT LIABILITIES:
Obligations under capital leases 115,457 121,436
Long-term debt (Note 8) 1,155,241 1,234,224
Other noncurrent liabilities 42,462 49,422
---------- ----------
Total Liabilities 1,699,581 1,723,395
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stock - authorized 10,000,000
shares at $1.00 par value; none issued
Common Stock - authorized 30,000,000
shares at $1.25 par value; 10,695,491
shares and 10,824,591 shares
issued and outstanding, respectively 13,426 13,586
Capital in excess of par value 179,881 180,060
Retained deficit (381,997) (340,470)
Minimum pension liability adjustment (10,667) (10,667)
Unearned compensation (383) (1,693)
Treasury stock, at cost (625) (625)
---------- ----------
Total Shareholders' Equity (200,365) (159,809)
---------- ----------
$1,499,216 $1,563,586
========== ==========
</TABLE>
See Notes to Interim Consolidated Financial Statements.
- 3 -
<PAGE>
THE PENN TRAFFIC COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
(All dollar amounts in thousands)
TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED
AUGUST 1, 1998 AUGUST 2, 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) $(40,556) $ (34,748)
Adjustments to reconcile
net (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 32,484 37,289
Amortization of intangibles 7,458 8,136
Other - net (1,746) (4,031)
NET CHANGE IN ASSETS AND LIABILITIES:
Accounts receivable and prepaid expenses 4,729 5,967
Inventories 16,916 8,402
Payables and accrued expenses (13,009) 23,023
Deferred taxes (16,671) (21,162)
Deferred charges and other assets (1,447) (41)
-------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES (11,842) 22,835
-------- ---------
INVESTING ACTIVITIES:
Capital expenditures (8,028) (9,190)
Proceeds from sale of assets 3,368 1,980
Other - net 1,652
-------- ---------
NET CASH (USED IN) INVESTING ACTIVITIES (4,660) (5,558)
-------- ---------
FINANCING ACTIVITIES:
Payments to settle long-term debt (3,085) (1,165)
Borrowing of revolver debt 70,800 183,700
Repayment of revolver debt (48,483) (194,000)
Reduction of capital lease obligations (6,406) (6,566)
-------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 12,826 (18,031)
-------- ---------
(DECREASE) IN CASH AND
CASH EQUIVALENTS (3,676) (754)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 49,095 53,240
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 45,419 $ 52,486
======== =========
</TABLE>
See Notes to Interim Consolidated Financial Statements.
- 4 -
<PAGE>
THE PENN TRAFFIC COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
The results of operations for the interim periods are not necessarily an
indication of results to be expected for the year. In the opinion of
management, all adjustments necessary for a fair presentation of the results are
included for the interim periods, and all such adjustments are normal and
recurring. These unaudited interim financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Annual Report on Form 10-K for the fiscal year ended January
31, 1998.
All significant intercompany transactions and accounts have been eliminated
in consolidation.
Certain prior year amounts have been reclassified on the Consolidated
Statement of Cash Flows for comparative purposes.
NOTE 2 - SPECIAL CHARGES
For the 13-week and 26-week periods ended August 2, 1997 the Company
recorded pre-tax charges totaling $1.6 and $12.6 million, respectively,
associated with management reorganization and related corporate actions ($1.4
and $10.7 million, respectively, of these charges are included in a
restructuring charge and $0.2 and $1.9 million, respectively, are included in
selling and administrative expenses). In addition, during the 13-week and
26-week periods ended August 2, 1997 the Company recorded pre-tax charges of
$1.6 and $5.6 million, respectively, associated with the retention of certain
corporate executives, which are included in selling and administrative expenses.
NOTE 3 - TAX BENEFITS
The tax benefits for the 13-week and 26-week periods ended August 1,
1998 are not recorded at statutory rates due to (a) differences between the
income calculations for financial reporting and tax reporting purposes and
(b) the recording of a valuation allowance. A valuation allowance is
required when it is more likely than not that the recorded value of a
deferred tax asset will not be realized.
- 5 -
<PAGE>
NOTE 4 - NET (Loss) PER SHARE
Net (Loss) per share is computed based the requirements of Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). This
standard requires presentation of basic Earnings per Share ("EPS"), computed
based on the weighted average number of common shares outstanding for the
period, and diluted EPS, which gives effect to all dilutive potential shares
outstanding (i.e., options, restricted stock and warrants) during the period.
The previously presented EPS amounts for the 13-week and the 26-week periods
ended August 2, 1997 have been restated to reflect the method of computation
required by SFAS 128. Shares used in the calculation of basic and diluted EPS
(weighted average shares outstanding) were 10,570,491 for the 13-week and
26-week periods ended August 1, 1998 and 10,569,341 for the 13-week and 26-week
periods ended August 2, 1997. The calculations of diluted EPS exclude the
effect of incremental dilutive potential securities aggregating 2,819 and
180,656 shares for the 13-week and 26-week periods ended August 1, 1998 and
August 2, 1997, respectively, since they would have been antidulutive given the
net loss.
NOTE 5 - SUPPLEMENTAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
(In thousands of dollars)
Second Quarter Twenty-six Weeks
-------------- ----------------
<S> <C> <C>
FISCAL 1999
Operating Income $ 7,514 $ 16,968
Depreciation and Amortization 19,894 39,942
LIFO Provision 625 1,250
Cash Interest Expense 36,012 71,679
FISCAL 1998
Operating Income $ 18,589 $ 18,824
Operating Income before
special charges 21,739 37,016
Depreciation and Amortization 22,544 45,425
LIFO Provision 750 1,250
Cash Interest Expense 36,076 72,263
</TABLE>
- 6 -
<PAGE>
NOTE 6 - INVENTORIES
If the first-in, first-out (FIFO) method had been used by the Company,
inventories would have been $23,816,000 and $22,566,000 higher than reported at
August 1, 1998 and January 31, 1998, respectively.
NOTE 7 - ASSET DISPOSITION PROCESS
On June 4, 1998, the Company announced that it has engaged Goldman Sachs &
Company to undertake a process for realizing value from certain of the Company's
Bi-Lo stores and related wholesale/franchise operations (the "Pennsylvania
Assets"). The Pennsylvania Assets being considered for disposition produced
revenues of approximately $675 million over the past twelve months.
Approximately 80% of these revenues were generated in Company supermarkets, with
the remainder being revenues from the Company's Pennsylvania wholesale/franchise
customer relationships. No assurance can be given that any transaction will be
completed nor is it possible to predict the net proceeds to the Company of any
such transaction or the timing of such a transaction.
NOTE 8 - LONG-TERM DEBT AND CURRENT MATURITIES
The Company and the lenders ("Bank Lenders") that are parties to the
Company's revolving credit facility ("Revolving Credit Facility") entered into
an amendment dated as of August 31, 1998 to the Revolving Credit Facility (the
"Amendment") that provides that the financial covenants contained in the
Revolving Credit Facility would not be applicable to the Company for the period
from August 1, 1998 until April 1, 1999. Without the Amendment, the Company
would not have been in compliance with certain financial covenants set forth in
the Revolving Credit Facility for the 13-week period ended August 1, 1998 and an
Event of Default (as defined in the Revolving Credit Facility) would have
occurred. The Company does not currently believe, based upon its current
operating performance, that it will be in compliance with some or all of the
financial covenants set forth in the Revolving Credit Facility after April 1,
1999 and as a result the Company will seek an additional waiver of such
covenants or renegotiation of the terms of the Revolving Credit Facility prior
to that date. Accordingly, the amount outstanding under the Revolving Credit
Facility as of August 1, 1998 ($99.9 million) has been classified as Current
Maturities of Long-Term Debt.
The Bank Lenders also consented in the Amendment to the sales of certain of
the Company's retail and wholesale assets in Pennsylvania. Upon the completion
of a substantial portion of the contemplated Pennsylvania asset sale
transactions, the Company will seek to renegotiate the terms of the Revolving
Credit Facility. This is expected to occur prior to April 1, 1999. Failure to
obtain an additional waiver of financial covenant noncompliance or complete a
satisfactory renegotiation of the terms of the Revolving Credit Facility may
cause an acceleration of the obligations under the Revolving Credit Facility.
There can be no assurance that the Bank Lenders will agree to any further waiver
of financial covenant noncompliance or renegotiation of the terms of the
Revolving Credit Facility on satisfactory terms or at all.
- 7 -
<PAGE>
NOTE 9 - SUBSEQUENT EVENT
During the 13-week period ending October 31, 1998 the Company completed the
sale of two stores. In addition, the Company closed eight under-performing
Bi-Lo stores in Pennsylvania. The Company will record an as-yet undetermined
charge related to these actions during the 13-week period ending October 31,
1998. These 10 stores represented less than two percent of consolidated
revenues.
- 8 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements included in this Part I, Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Quarterly Report on Form 10-Q which are not statements of
historical fact are intended to be, and are hereby identified as,
"forward-looking statements" as defined in the Securities Exchange Act of 1934,
as amended, and involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: general economic and business conditions;
competition; the success or failure of the Company in implementing its current
business and operational strategies; changes in the Company's business or
operational strategies; availability, location and terms of sites for store
development; the availability and amount of proceeds generated from sale of
assets; the ability of the Company to successfully renegotiate the terms of the
Revolving Credit Facility; availability, terms and access to capital; labor
relations and labor costs.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ("SECOND QUARTER FISCAL 1999") AND TWENTY-SIX WEEKS ENDED
AUGUST 1, 1998 COMPARED TO THIRTEEN WEEKS ("SECOND QUARTER FISCAL 1998") AND
TWENTY-SIX WEEKS ENDED AUGUST 2, 1997
The following table sets forth Statement of Operations components expressed
as a percentage of total revenues for Second Quarter Fiscal 1999 and Second
Quarter Fiscal 1998, and for the 26-weeks ended August 1, 1998 and August 2,
1997, respectively:
<TABLE>
<CAPTION>
Second Quarter Ended Twenty-six Weeks Ended
AUGUST 1, August 2, AUGUST 1, August 2,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0% 100.0%
Gross profit (1) 22.1 23.0 22.0 23.2
Selling and administrative
expenses excluding
special charges (2) 21.1 20.2 20.9 20.8
Selling and administrative
expenses 21.1 20.4 20.9 21.3
Restructuring charges 0.2 0.7
Operating income excluding
unusual items (3) 1.0 2.8 1.2 2.4
Operating income 1.0 2.4 1.2 1.2
Interest expense 5.1 4.8 5.1 4.9
(Loss) before income taxes (4.1) (2.4) (3.9) (3.6)
Net (loss) (3.2) (1.5) (2.8) (2.3)
</TABLE>
(See notes on next page)
- 9 -
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
(1) Total revenues less cost of sales.
(2) Selling and administrative expenses include pre-tax special charges for
Second Quarter Fiscal 1998 and the 26-week period ended August 2, 1997 of
(1) $1.6 and $5.6 million, respectively, associated with the retention of
certain corporate executives and (2) $0.2 and $1.9 million, respectively,
of other costs associated with a management reorganization and related
corporate actions (see Note 2).
(3) Operating income for the Second Quarter Fiscal 1998 and the 26-week period
ended August 2, 1997 excluding pre-tax special charges of $3.2 and $18.2
million, respectively (see Note 2).
Total revenues for Second Quarter Fiscal 1999 decreased to $730.2
million from $773.9 million in Second Quarter Fiscal 1998. Total revenues
for the 26-week period ended August 1, 1998 decreased to $1.447 billion from
$1.533 billion for the 26-week period ended August 2, 1997. The decrease in
revenues for the Second Quarter and the 26-week period ended August 1, 1998
is primarily attributable to a decline in same store sales and a decline in
wholesale revenues. Same store sales for Second Quarter Fiscal 1999 and the
26-week period ended August 1, 1998 declined 4.4% and 4.3%, respectively.
Wholesale supermarket revenues were $84.2 million in Second Quarter Fiscal
1999 compared to $93.3 million in Second Quarter Fiscal 1998. Wholesale
supermarket revenues were $164.9 million for the 26-weeks ended August 1,
1998 compared to $183.7 million for the 26-weeks ended August 2, 1997.
Gross profit in Second Quarter Fiscal 1999 was $161.6 million or 22.1%
of revenues compared to $178.2 million or 23.0% of revenues in Second Quarter
Fiscal 1998. Gross profit as a percentage of total revenues decreased to
22.0% for the 26-week period ended August 1, 1998 from 23.2% for the 26-week
period ended August 2, 1997. The decrease in gross profit as a percentage of
total revenues primarily resulted from investments in gross margins
associated with the Company's marketing program (initiated in September 1997)
and an increase in inventory shrink expense.
Selling and administrative expenses in Second Quarter Fiscal 1999 were
$154.1 million or 21.1% of revenues compared to $158.3 million or 20.4% of
revenues in Second Quarter Fiscal 1998. In Second Quarter Fiscal 1998,
selling and administrative expenses, excluding pre-tax special charges of
$1.8 million (see Note 2), were $156.5 million or 20.2% of revenues. Selling
and administrative expenses for the 26-week period ended August 1, 1998 were
$302.0 million or 20.9% of revenues compared to $326.5 million or 21.3% of
revenues for the 26-week period ended August 2, 1997. For the 26-week period
ended August 2, 1997, selling and administrative expenses, excluding pre-tax
special charges of $7.5 million (see Note 2), were $319.0 million or 20.8% of
revenues.
- 10 -
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
Selling and administrative expenses, excluding special charges,
increased as a percentage of revenues due to increased promotional expenses
associated with the Company's marketing program (Penn Traffic accounts for
certain promotional expenses in the selling and administrative expenses line
of the Consolidated Statement of Operations) and a non-recurring charge of
$1.0 million incurred in connection with the settlement of personal injury
litigation. These additional costs were partially offset by a decrease in
costs associated with the implementation of the Company's cost reduction
programs.
During Second Quarter Fiscal 1998 and the 26-week period ended August 2,
1997, the Company recorded special charges of $3.2 and $18.2 million in
connection with the management reorganization and related corporate actions,
and the retention of certain corporate executives(see Note 2).
Depreciation and amortization expense was $19.9 million in Second
Quarter Fiscal 1999 and $22.5 million in Second Quarter Fiscal 1998,
representing 2.7% and 2.9% of total revenues, respectively. Depreciation and
amortization expense was $40.0 million for the 26-week period ended August
1, 1998 and $45.4 million for the 26-week period ended August 2, 1997,
representing 2.8% and 3.0% of total revenues, respectively.
Operating income for the Second Quarter Fiscal 1999 was $7.5 million or
1.0% of total revenues compared to $18.6 million or 2.4% of total revenues in
Second Quarter Fiscal 1998. In the Second Quarter Fiscal 1998, operating
income, excluding pre-tax special charges of $3.2 million, was $21.8 million
or 2.8% of total revenues. Operating income, for the 26-week period ended
August 1, 1998 was $17.0 million or 1.2% of total revenues compared to $18.8
million or 1.2% of total revenues for the 26-week period ended August 2,
1997. Operating income for the 26-week period ended August 2, 1997, excluding
pre-tax special charges of $18.2 million, was $37.0 million or 2.4% of total
revenues.
Interest expense for both the Second Quarter Fiscal 1999 and Second
Quarter Fiscal 1998 was $37.3 million. Interest expense for the 26-week
period ended August 1, 1998 and August 2, 1997 was $74.1 million and $74.7
million, respectively.
Loss before income taxes was $29.7 million for Second Quarter Fiscal
1999 compared to a loss of $18.7 million for Second Quarter Fiscal 1998. The
loss before income taxes, excluding the effect of pre-tax special charges of
$3.2 million, was $15.5 million for Second Quarter Fiscal 1998. Loss before
income taxes was $57.2 million for the 26-week period ended August 1, 1998
compared to a loss of $55.8 million for the 26-week period ended August 2,
1997. The loss before income taxes, excluding the effect of pre-tax special
charges of $18.2 million, was $37.6 million for the 26-week period ended
August 2, 1997. The reason for the increase in the loss before income taxes
is the decrease in operating income for Second Quarter Fiscal 1999 and
26-week period ended August 1, 1998.
- 11 -
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
The income tax benefit for Second Quarter Fiscal 1999 was $6.2 million
compared to a benefit of $6.8 million for Second Quarter Fiscal 1998. The
income tax benefit, excluding the effect of pre-tax special charges of $3.2
million, was $5.5 million for Second Quarter Fiscal 1998. The income tax
benefit for the 26-week period ended August 1, 1998 was $16.6 million
compared to a benefit of $21.1 million for the 26-week period ended August 2,
1997. The income tax benefit, excluding the effect of pre-tax special
charges of $18.2 million, was $13.6 million for the 26-week period ended
August 2, 1997. The effective tax rates for the Second Quarter and 26-week
period ended August 1, 1998 vary from the statutory rates due to differences
between income for financial reporting and tax reporting purposes, primarily
related to goodwill amortization resulting from acquisitions and the
recording of a valuation allowance. A valuation allowance is required when
it is more likely than not that the recorded value of a deferred tax asset
will not be realized. Management presently believes that a valuation
allowance will be required for the deferred tax assets related to net
operating losses and tax credit carryforwards arising in the future. As a
result, management expects the Company will be unable to accrue a benefit for
income taxes for the remainder of Fiscal 1999 and for indefinite future
periods.
Net loss for Second Quarter Fiscal 1999 was $23.5 million compared to a
net loss of $11.9 million for Second Quarter Fiscal 1998. Net loss,
excluding the after-tax impact of special charges, was $10.1 million for
Second Quarter Fiscal 1998. The net loss for the 26-week period ended August
1, 1998 was $40.6 million compared to a net loss of $34.7 million for the
26-week period ended August 2, 1997. The net loss, excluding the after-tax
impact of special charges, was $24.0 million for the 26-week period ended
August 2, 1997.
- 12 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Payments of interest and principal on the Company's approximately $1.26
billion of debt (excluding capital leases) will restrict funds available to
the Company to finance capital expenditures and working capital. Amounts of
the Company's debt (excluding capital leases) maturing in the next five years
are outlined on the following table:
<TABLE>
<CAPTION>
AMOUNT MATURING
FISCAL YEAR ($ in millions)
----------- ---------------
<S> <C>
1999 1.3 *
2000 102.6 **
2001 7.5
2002 107.7
2003 125.4
</TABLE>
* Amount due for the remainder of Fiscal 1999.
** Amount includes $99.9 million outstanding as of August 1, 1998, under
the Company's revolving credit facility.
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 August 1, 1998, additional availability
under the Revolving Credit Facility was $69.2 million.
The Company and the lenders ("Bank Lenders") that are parties to the
Revolving Credit Facility entered into an amendment dated as of August 31,
1998 to the Revolving Credit Facility (the "Amendment") that provides that
the financial covenants contained in the Revolving Credit Facility would not
be applicable to the Company for the period from August 1, 1998 until April
1, 1999. Without the Amendment, the Company would not have been in
compliance with certain financial covenants set forth in the Revolving Credit
Facility for the 13-week period ended August 1, 1998 and an Event of Default
(as defined in the Revolving Credit Facility) would have occurred. The
Company does not currently believe, based upon its current operating
performance, that it will be in compliance with some or all of the financial
covenants set forth in the Revolving Credit Facility after April 1, 1999 and
as a result the Company will seek an additional waiver of such covenants or
renegotiation of the terms of the Revolving Credit Facility prior to that
date.
- 13 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Bank Lenders also consented in the Amendment to the sales of certain
of the Company's retail and wholesale assets in Pennsylvania. Upon the
completion of a substantial portion of the contemplated Pennsylvania asset
sale transactions, the Company will seek to renegotiate the terms of the
Revolving Credit Facility. This is expected to occur prior to April 1, 1999.
Failure to obtain an additional waiver of financial covenant noncompliance or
complete a satisfactory renegotiation of the terms of the Revolving Credit
Facility may cause an acceleration of the obligations under the Revolving
Credit Facility. There can be no assurance that the Bank Lenders will agree
to any further waiver of financial covenant noncompliance or renegotiation of
the terms of the Revolving Credit Facility on satisfactory terms or at all.
During Second Quarter Fiscal 1999, the Company's internally generated
funds from operations, proceeds of asset sales and amounts available under
the Revolving Credit Facility 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 in the 26-week period ended August 1, 1998 are
reported in the Consolidated Statement of Cash Flows. For the 26-week period
ended August 1, 1998, the Company experienced a negative cash flow from
operating activities of $11.8 million.
Working capital decreased by $93.4 million from January 31, 1998 to
August 1, 1998, primarily due to the reclassification of the Revolving Credit
Facility to Current Maturities of Long-Term Debt as discussed in Note 8 -
Long Term Debt and Current Maturities.
The Company expects to spend approximately $20 million on capital
expenditures (including capital leases) during Fiscal 1999. Capital
expenditures will be principally for new stores, remodeled store facilities
and investments in technology. The Company expects to utilize internally
generated funds from operations, amounts available under the Revolving Credit
Facility and proceeds of asset sales, if any, to satisfy its operating,
capital expenditure and debt service needs for the remainder of Fiscal 1999.
On June 4, 1998, the Company announced that it has engaged Goldman Sachs
& Company to undertake a process for realizing value from certain of the
Company's Bi-Lo stores and related wholesale/franchise operations (the
"Pennsylvania Assets"). The Pennsylvania Assets being considered for
disposition produced revenues of approximately $675 million over the past
twelve months. Approximately 80% of these revenues were generated in Company
supermarkets, with the remainder being revenues from the Company's
Pennsylvania wholesale/franchise customer relationships. No assurance can be
given that any transaction will be completed nor is it possible to predict
the net proceeds to the Company of any such transaction or the timing of such
a transaction.
- 14 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company intends to satisfy its long-term capital requirements by (1)
improving its results from operations thereby increasing its operating cash
flow, (2) applying the proceeds from contemplated sales of certain
Pennsylvania assets to repay a portion of its debt and working capital
obligations and (3) renegotiating and extending the Revolving Credit
Facility, as described above. If the Company does not accomplish some or all
of these objectives, Penn Traffic may seek or be required to sell additional
assets or sell additional debt or equity securities in public or private
transactions to satisfy its debt and other capital requirements or otherwise
seek to restructure its debt obligations. There can be no assurance that the
Company will accomplish any of the foregoing on satisfactory terms or at all.
- 15 -
<PAGE>
YEAR 2000
Many of the Company's computer systems and certain other equipment 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 including the assessment of third parties who may
be critical to us. 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. The Company believes that the contingency plans for
non-critical systems which are not year 2000 compliant are adequate at this
time.
- 16 -
<PAGE>
PART II. OTHER INFORMATION
All items which are not applicable or to which the answer is negative have
been omitted from this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
10.5S Amendment No. 18 to the Revolving Credit Facility
dated as of August 31, 1998.
10.20 Termination Agreement dated as of August 6, 1998
between the Company and Phillip E. Hawkins.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fiscal quarter ended
August 1, 1998.
- 17 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PENN TRAFFIC COMPANY
September 14, 1998 /s/- Claude J. Incaudo
---------------------------------
By: Claude J. Incaudo
President and Chief Executive
Officer
September 14, 1998 /s/- Robert J. Davis
---------------------------------
By: Robert J. Davis
Senior Vice President and
Chief Financial Officer
- 18 -
<PAGE>
Exhibit 10.5S
AMENDMENT NO. 18 AND WAIVER TO
LOAN AND SECURITY AGREEMENT
AMENDMENT No. 18, dated as of August 31, 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, 15, 16 and 17
(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 requested that the Agent and the Lenders
amend the Loan Agreement to, among other things, (i) waive the existing Interest
Coverage ratio set forth in Section 10.18 of the Loan Agreement through
March 31, 1999; (ii) waive the Consolidated Adjusted Net Worth covenant set
forth in Section 10.19 of the Loan Agreement through March 31, 1999; (iii) waive
the Consolidated EBDAIT covenant set forth in Section 10.20 of the Loan
Agreement through March 31, 1999 and (iv) modify the restrictions on sales of
assets set forth in Section 10.5 of the Loan Agreement and certain reporting
requirements.
WHEREAS, the Borrowers, the Agent and the Lenders have agreed to amend
the Loan Agreement pursuant to the terms and conditions set forth herein.
WHEREAS, the Borrowers have agreed to pay an amendment fee in the
aggregate amount of $500,000 to the Agent on behalf of, and for the benefit of,
those Lenders only which have executed this Agreement (the "AMENDMENT FEE").
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements hereinafter set forth, the parties hereto agree as follows:
1. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is hereby
amended as of the effective date hereof as follows:
(i) Section 10.5 of the Loan Agreement shall be amended by
deleting the word "and" immediately prior to clause (i) and adding a new clause
<PAGE>
immediately prior to the period at the end of the penultimate sentence of such
Section, which new clause shall read in its entirety as follows:
"and (j) sales of (i) certain retail stores located in
Pennsylvania, and (ii) the wholesale and franchise operations located
in Pennsylvania and all related assets in Pennsylvania including the
Dubois warehouse, in each case which have previously been identified
to the Agent, provided that such sales are for fair market value to
Persons who are not Affiliates of the Borrowers and provided that the
net proceeds of each such sale is remitted to the Agent for
application to the Obligations; PROVIDED, HOWEVER, that applying the
net proceeds of each such sale to the Obligations shall not reduce the
Commitments or prevent the Borrowers from borrowing Revolving Loans
hereunder to the extent they are otherwise permitted to do so."
(ii) Section 7.8 of the Loan Agreement shall be amended by adding
a new sentence at the end reading in its entirety as follows:
"At such time, if any, that the Borrowers' availability to borrow
Revolving Loans is $25,000,000 or less on an aggregate basis, each
Borrower will provide the Agent no later than Friday of each week
during which the Borrowers' availability to borrow Revolving Loans is
$25,000,000 or less, a Borrowing Base Certificate calculated as of a
date no earlier than the Friday of the immediately preceding week.
2. WAIVERS TO LOAN AGREEMENT. The Lenders hereby agree that from
August 1, 1998 through March 31, 1999 the Borrowers shall not be required to
comply with Sections 10.18, 10.19 and 10.20 of the Loan Agreement.
3. 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
2
<PAGE>
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.
4. NO IMPLIED AMENDMENTS OR WAIVERS. 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. Except for the specific
waivers set forth in Section 2, nothing herein shall be or be deemed to be a
waiver of any covenant or agreement contained in the Loan Agreement and each
Borrower hereby agrees that all of the covenants and agreements contained in the
Loan Agreement are hereby ratified and confirmed in all respects.
5. ENTIRE AGREEMENT; MODIFICATIONS; BINDING EFFECT. This Amendment
constitutes the entire agreement of the parties with respect to its subject
matter and supersedes all prior oral or written understandings about such
matter. Each of the Borrowers confirms that, in entering into this Amendment,
it did not rely upon any agreement, representation, or warranty by the Agent or
any Lender except those expressly set forth herein. No modification,
rescission, waiver, release, or amendment of any provision of this Amendment may
be made except by a written agreement signed by the parties hereto. The
provisions of this Amendment are binding upon and inure to the benefit of the
representatives, successors, and assigns of the parties hereto; provided,
however, that no interest herein or obligation hereunder may be assigned by any
Borrower without the prior written consent of the Required Lenders.
6. EFFECTIVE DATE. This Amendment 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.
(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
3
<PAGE>
statement that the Obligations under the Loan Agreement as amended by
this Agreement 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, Vice Chairman-Finance or Chief
Financial Officer 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.
(v) The Agent shall have received payment of the Amendment
Fee, which shall be paid pro-rata to those Lenders which have executed
this Agreement.
7. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, and by each party in separate counterparts, each of which is an
original, but all of which shall together constitute one and the same agreement.
8. GOVERNING LAW. This Amendment is deemed to have been made in the
State of New York and is governed by and interpreted in accordance with the laws
of such state, provided that no doctrine of choice of law (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.
4
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Amendment as of
the date first above written.
BORROWERS:
THE PENN TRAFFIC COMPANY
By:
-------------------------------------
Title:
DAIRY DELL
By:
-------------------------------------
Title:
BIG M SUPERMARKETS, INC.
By:
-------------------------------------
Title:
PENNY CURTISS BAKING COMPANY, INC.
By:
-------------------------------------
Title:
LENDERS:
Commitment: $35,000,000 FLEET BANK, N.A. (as successor to
Pro-Rata Share: 14% NatWest USA Credit Corp.)
Lending Office:
60 East 42nd Street
New York, New York 10017 By:
-------------------------------------
Title: Senior Vice President
Commitment: $20,000,000 NATIONAL BANK OF CANADA
Pro-Rata Share: 8%
Lending Office:
Main Place Tower By:
Suite 2540 -------------------------------------
350 Main Street Title: Vice President
Buffalo, New York 14202
By:
-------------------------------------
Title: Marketing Officer
5
<PAGE>
Commitment: $10,000,000 TRANSAMERICA BUSINESS
Pro-Rata Share: 4% CREDIT CORP.
Lending Office:
555 Theodore Fremd Avenue
Suite C301 By:
Rye, New York 10580 -------------------------------------
Title: Senior Vice President
Commitment: $30,000,000 SANWA BUSINESS CREDIT
Pro-Rata Share: 12% CORPORATION
Lending Office:
One South Wacker Drive
Suite 2800 By:
Chicago, IL 60606 -------------------------------------
Title:
Commitment: $45,000,000 BANKAMERICA BUSINESS
Pro-Rata Share: 18% CREDIT, INC.
Lending Office:
40 East 52nd Street
Second Fl By:
New York, New York 10022 -------------------------------------
Title: Vice President
Commitment: $50,000,000 HELLER FINANCIAL, INC.
Pro-Rata Share: 20%
Lending Office:
101 Park Avenue, 12th Fl. By:
New York, New York 10178 -------------------------------------
Title: Senior Vice President
Commitment: $10,000,000 LEHMAN COMMERCIAL
Pro-Rata Share: 4% PAPER, INC.
Lending Office:
3 World Financial Center
10th Fl. By:
New York, New York 10285 -------------------------------------
Title: Authorized Signatory
Commitment: $10,000,000 AMSOUTH BANK
Pro-Rata Share: 4%
Lending Office:
350 Park Avenue By:
New York, New York 10022 -------------------------------------
Title: Attorney-in-Fact
6
<PAGE>
Commitment: $15,000,000 THE CIT GROUP/BUSINESS
Pro-Rata Share: 6% CREDIT, INC.
Lending Office:
300 South Grand Avenue
3rd Fl. By:
Los Angeles, CA 90071 -------------------------------------
Title: Assistant Secretary
Commitment: $25,000,000 COMPAGNIE FINANCIERE DE CIC
Pro-Rata Share: 10% ET DE L'UNION EUROPEENNE
Lending Office:
520 Madison
37th Floor By:
New York, New York 10022 -------------------------------------
Title: First
Vice President Vice President
AGENT:
FLEET BANK, N.A. (as successor to
NatWest USA Credit Corp.),
As Agent
By:
-------------------------------------
Title: Senior Vice President
7
<PAGE>
Exhibit 10.20
THE PENN TRAFFIC COMPANY
1200 State Fair Boulevard
Syracuse, New York 13209
August 6, 1998
Mr. Phillip E. Hawkins
26140 Birchfield Drive
Rancho Palos Verdes, CA 90275
Dear Mr. Hawkins:
Reference is hereby made to that certain Employment Agreement entered
into as of March 11, 1997 (the "EMPLOYMENT AGREEMENT") between Phillip E.
Hawkins (the "EXECUTIVE") and The Penn Traffic Company, a Delaware corporation
(the "COMPANY").
The Company and the Executive desire to terminate the Employment
Agreement and the employment by the Company of the Executive thereunder, subject
to the terms and upon the conditions set forth below. The effective date of
termination of the Employment Agreement and such employment thereunder shall be
as of July 31, 1998 (the "EFFECTIVE DATE").
Capitalized terms used in this Letter Agreement but not otherwise
defined shall have the respective meanings given to them in the Employment
Agreement.
1. TERMINATION OF EMPLOYMENT AGREEMENT. Each of the Company and the Executive
hereby acknowledges the termination of the Employment Agreement, effective as of
the Effective Date; PROVIDED, HOWEVER, that it is expressly agreed and
understood that Sections 5(a), 5(b) and 5(c) of the Employment Agreement shall
survive beyond the Effective Date in accordance with the terms of those
sections. Notwithstanding anything stated in the proviso of the immediately
preceding sentence, nothing in Section 5(a) of the Employment Agreement shall
apply to any of the entities listed on SCHEDULE 1 hereto or their respective
affiliates.
2. COMPENSATION AND PAYMENT. Subject to the terms and conditions set forth in
this Letter Agreement, and in lieu of any amounts that otherwise would be
payable to Executive pursuant to (i) the Employment Agreement or (ii) any other
agreement or understanding between the Executive and the Company, the Executive
shall be entitled
<PAGE>
2
to receive (a) his Base Salary through the Effective Date in accordance with the
ordinary payroll practices of the Company, (b) reimbursement for all documented
expenses incurred by Executive through the Effective Date pursuant to Section
4.3 of the Employment Agreement, (c) $450,000 (the "BASE AMOUNT") and (d)
$100,000 representing compensation to Executive in respect of relocating his
primary residence from the Syracuse, New York area (the "RELOCATION AMOUNT").
Subject to Section 5 hereof, the Base Amount shall be paid to the Executive as
follows: (i) Executive shall receive by check or via wire transfer a lump sum
payment of $225,000 (the "INITIAL PAYMENT") within three business days of the
date hereof and (ii) Executive shall receive by check or via wire transfer 24
consecutive weekly payments of $9,375 commencing on September 1, 1998 and ending
February 9, 1999. Subject to Section 5 hereof, the Relocation Amount shall be
paid to the Executive in its entirety within three business days of the date
hereof by check or via wire transfer.
3. BENEFITS. From and after the Effective Date until the earlier of the 18
month anniversary of the Effective Date or the date upon which Executive obtains
employment with another employer, the Executive shall be entitled to
continuation of coverage under the medical insurance plan maintained by the
Company for the most senior management of the Company as in effect from time to
time; PROVIDED, THAT, the Company shall only bear the costs and expenses of such
coverage until the earlier of the first anniversary of the Effective Date or the
date upon which Executive obtains employment with another employer (and after
such date, Executive shall bear all costs and expenses related to such coverage
if Executive elects to so continue such coverage).
4. RESIGNATIONS; FULL SATISFACTION.
4.1 The Executive hereby resigns, effective as of the Effective Date,
from the Executive's positions as President and Chief Executive Officer of the
Company and from all other positions (including that of officer or director)
that the Executive holds with the Company or any of its respective subsidiaries
or Affiliates (each, a "PT ENTITY").
4.2 The Executive acknowledges and agrees that, except as expressly
set forth in this Letter Agreement, the Executive shall not be entitled to any
other compensation or benefits, including, without limitation, any amounts
relating to Executive's Bonus or Target Bonus, sick pay, vacation pay, health
and welfare benefits or stock options, from any PT Entity, whether by way of the
Employment Agreement or otherwise. The Executive hereby acknowledges that (i)
all stock options held by Executive on the Effective Date, whether vested or
unvested, shall terminate on August 1, 1998 and (ii) the Base Amount and the
Relocation Amount, as and when received, and the medical benefits provided for
herein, represent payment in full of all sums that were heretofore and may be
hereafter due and owing to the Executive in respect of the Executive's
employment services to the Company under the Employment Agreement. Nothing in
this Letter Agreement or in the Executive
<PAGE>
3
Release executed pursuant hereto shall be deemed to release, discharge, limit or
otherwise affect any rights of indemnification to which Executive may be
entitled against any PT Entity pursuant to any statute, the common law or
otherwise. Without limiting the generality of the foregoing, the Company hereby
agrees to indemnify, defend and hold harmless the Executive from any and all
liabilities, losses, damages, claims, actions, obligations, amounts paid in
settlement, fines, penalties, deficiencies, costs and expenses (including
reasonable attorney's fees and expenses) arising in connection with the proposed
lawsuit set forth on SCHEDULE 2 hereto or any of the claims underlying such
proposed lawsuit (the "Lawsuit"); PROVIDED, THAT, the Company shall no longer be
obligated to indemnify Executive with respect to the Lawsuit pursuant to this
Section 4.2 or otherwise (i) in the event Executive fails to comply with the
provisions of Section 10 hereof or (ii) if Executive's actions or omissions in
connection with the Lawsuit constitute acts or omissions for which
indemnification would be prohibited under Delaware law.
5. WITHHOLDING AND TAXES. The Executive acknowledges and agrees that he shall
be exclusively liable for the payment of all Federal, state, local and foreign
taxes that may be due as a result of the payments to be made to the Executive
hereunder and the benefits to be received by the Executive hereunder. The
Company shall be entitled to and shall withhold from the Base Amount and/or the
Relocation Amount such amounts that it is required by law or regulation to
withhold in connection with such payments and the medical benefits received by
the Executive from (or procured by) the Company pursuant to the terms hereof.
The Company shall deliver to the Executive documentation evidencing the
calculation of the amount of taxes withheld or to be withheld by the Company in
respect of the Base Amount, the Relocation Amount and such medical benefits.
6. RELEASE AND PAYMENT.
6.1 As a material inducement for the Company to enter into this
Letter Agreement and in consideration of the monies agreed to be paid to the
Executive and the benefits contemplated to be provided to the Executive
hereunder, the Executive hereby acknowledges that he is executing simultaneously
herewith and delivering to the Company on the date hereof a release, dated such
date and in the form of EXHIBIT A hereto (the "EXECUTIVE RELEASE").
6.2 As a material inducement for the Executive to enter into this
Letter Agreement, the Company acknowledges that it is executing simultaneously
herewith and delivering to the Executive a release, dated the date hereof and in
the form of EXHIBIT B hereto (the "COMPANY RELEASE").
<PAGE>
4
7. NON-DISPARAGEMENT.
7.1 The Executive hereby agrees that he shall not at any time make
any written or oral statements, representations or other communications that
disparage or are damaging to the business or reputation of any PT Entity or any
officer, director or employee of any PT Entity other than to the extent
reasonably necessary in order (x) to assert a bona fide claim that is not a
Released Executive Claim (as defined in EXHIBIT A hereto) or (y) respond in an
appropriate manner to any legal process or give appropriate testimony in a legal
or regulatory proceeding.
7.2 The Company agrees that it shall not at any time make and shall
not suffer or permit any employee, officer or director of the Company to make
any written or oral statements, representations or other communications that
disparage or are damaging to the reputation of the Executive, other than to the
extent reasonably necessary in order (x) to assert a bona fide claim that is not
a Released Company Claim (as defined in EXHIBIT B hereto) or (y) respond in an
appropriate manner to any legal process or give appropriate testimony in a legal
or regulatory proceeding.
7.3 Each of the Executive and the Company acknowledges and agrees
that the remedies available to the Company and the Executive, respectively, at
law for a breach or threatened breach of any of the provisions of Section 7.1
and Section 7.2, respectively, would be inadequate and, in recognition of this
fact, each of the Executive and the Company agrees that, in the event of a
breach or threatened breach, in addition to any remedies at law, each of the
Company and the Executive shall be entitled to obtain equitable relief in the
form of specific performance, temporary restraining order, temporary or
permanent injunction or any other equitable remedy that may then be available.
8. ADDITIONAL AGREEMENTS.
8.1 The Company, on the one hand, and the Executive, on the other
hand, represent, covenant and agree to the other that neither they, nor their
agents, assignees, successors, heirs or executors (as applicable) have
commenced, continued or joined in, and will not hereafter commence, continue, or
join in, any lawsuit, arbitration or other action or proceeding asserting any
Released Company Claim or Released Executive Claim, respectively, against the
other or in any other manner attempt to assert any Released Company Claim or
Released Executive Claim, respectively, against the other.
8.2 The Executive agrees that he shall maintain in confidence and
shall not at any time disclose or reveal to any Person any of the terms of this
Letter Agreement, the Executive Release, the Company Release or the Employment
Agreement. Notwithstanding the foregoing, the Executive may disclose such
information (i) to his family members and advisors who will be informed of, and
bound by, this Section 8.2 and (ii) to the extent it is required to be disclosed
by
<PAGE>
5
applicable law or judicial order; PROVIDED, that, in the case of clause (ii),
the Executive shall notify the Company as promptly as practicable (and, if
possible, prior to making such disclosure) of the information to be disclosed.
The Company also agrees to maintain in confidence and not at any time disclose
or reveal to any Person any of the terms of this Letter Agreement, the Executive
Release, the Company Release or the Employment Agreement. Notwithstanding the
foregoing, the Company may disclose such information (i) to advisors to the
Company and its Affiliates, who will be informed of, and bound by, this
Section 8.2, (ii) to employees, consultants and agents of the Company and its
Affiliates who have a reasonable need to know such information, who will be
informed of, and bound by, this Section 8.2, and (iii) to the extent it is
required to be disclosed by applicable law, judicial order or pursuant to any
listing agreement with, or the rules or regulations of, any securities exchange
on which securities of the Company or any of its Affiliates are or may be listed
or traded.
8.3 In consideration of the payments agreed to be paid to the
Executive and the benefits contemplated to be provided to the Executive
hereunder, during the period from the date hereof through and including
August 6, 2002, the Executive agrees to cooperate with the Company and any other
PT Entity, as reasonably requested by the Company, in the handling or
investigation of any action, suit, proceeding, arbitration, investigation or
dispute against or affecting the Company or any other PT Entity or any of their
respective properties, assets or operations that relate to matters that arose
while the Executive was an employee of the Company (or officer or director of
the Company or any other PT Entity) and to consult with the Company, any other
PT Entity and their respective advisors, as reasonably requested, on any inquiry
related to any such matters. In making any such requests, the Company shall
take all reasonable steps so as to avoid (i) placing unreasonable travel or time
burdens on Executive and (ii) materially interfering with Executive's
obligations to his then-current employer, it being expressly understood that
Executive will not be obligated to comply with any request which would result in
the consequences described in either clause (i) or (ii) of this sentence. The
Company shall reimburse the Executive for any reasonable out-of-pocket expenses
(including, without limitation, reasonable attorneys' fees) incurred by the
Executive by reason of such cooperation and consultation.
8.4 Each of the Executive and the Company hereby agrees to execute
such further documents or take such further actions as may be reasonably
required or desirable to carry out the provisions hereof, including, without
limitation, any documents necessary to effect the resignations contemplated
under Section 4.1 hereof.
9. AUTHORIZATION. The Company represents that (i) its execution of this
Agreement and the Company Release have been duly authorized by all requisite
corporate action on the part of the Company and when executed and delivered,
will
<PAGE>
6
be binding obligations on the part of the Company and (ii) it has the authority
to execute the Company Release on behalf of the other PT Entities.
10. INFORMATION. As a material inducement for the Company to enter into this
Letter Agreement and in consideration of the monies agreed to be paid to the
Executive and the benefits contemplated to be provided to the Executive
hereunder, Executive hereby covenants and agrees that he shall not in any way
utilize or disclose (unless he is required to do so by applicable law or
judicial order), whether for profit or otherwise, any of the intellectual
property, information, trade secrets or know-how (collectively, the
"INFORMATION") owned by the company (or any parent, subsidiary or affiliate
thereof) named in the caption of the Lawsuit, including the Information upon
which the Lawsuit is, has been or may be based in any of Executive's future
endeavors, including, without limitation, in connection with any position
Executive may hold as officer or otherwise with any employer. If Executive
shall at any time breach the covenant set forth in this Section 10, any and all
claims that the Company may have against the Executive in connection with such
breach shall be specifically excluded from the Released Company Claims (as
defined in EXHIBIT B hereto) and Executive shall no longer be entitled to
indemnification from the Company for such matter pursuant to Section 4.2 hereof.
11. ENTIRE AGREEMENT; AMENDMENT. This Letter Agreement (including the
provisions of the Employment Agreement referred to in Section 1 hereof, the
Executive Release and the Company Release) sets forth the entire understanding
of the Company and the Executive with respect to the subject matter hereof and,
except as set forth herein, supersedes all prior agreements and understandings,
both written and oral, between the parties with respect thereto. This Letter
Agreement cannot be amended or modified except by a writing signed by the
Company and the Executive.
12. GOVERNING LAW; SEVERABILITY. This Letter Agreement shall be governed by
and interpreted in accordance with the laws of the State of New York, without
giving effect to the choice-of-law provisions thereof. If, under such law, any
portion of this Letter Agreement is at any time deemed to be in conflict with
any applicable statute, rule, regulation or ordinance, such portion shall be
deemed to be modified or altered to conform thereto or, if that is not possible,
to be omitted from this Letter Agreement, and the invalidity of such portion
shall not affect the force, effect and validity of the remaining portion hereof.
13. JURISDICTION; VENUE; ATTORNEYS FEES.
13.1 Each of the Company and the Executive agrees that any action,
suit or proceeding arising under or relating in any way to this Letter Agreement
or the transactions contemplated hereby may only be brought in the Supreme Court
of the State of New York, New York County, or in the United States District
Court for the Southern District of New York, and each of the parties hereto
irrevocably consents to the jurisdiction of each such court in respect of any
such action, suit or
<PAGE>
7
proceeding. Each of the Company and the Executive further irrevocably consents
to the service of process in any such action, suit or proceeding by the mailing
of copies thereof by registered or certified mail, postage prepaid, return
receipt requested to such party at its address as provided for notices
hereunder.
13.2 Each of the Company and the Executive hereby irrevocably waives
any objection that it or he may have on the basis of venue to any action, suit
or proceeding brought in the courts set forth in Section 13.1 hereof, and hereby
further irrevocably waives any claim that such courts are not convenient forums
for any such action, suit or proceeding.
13.3 Each of the Company and the Executive hereby agrees that the
non-prevailing party in any action, suit or proceeding brought pursuant to the
terms of or relating to the matters covered in this Letter Agreement, the
Executive Release or the Company Release shall be responsible for paying in full
all reasonable and documented attorneys' fees incurred by the prevailing party
in connection with such action, suit or proceeding.
14. NOTICES. Any and all notices or consents required or permitted to be given
under any of the provisions of this Letter Agreement shall be in writing or by
written telecommunication and delivered either by hand delivery or by registered
or certified mail, return receipt requested, to the relevant addresses set out
below (or such other address as shall be specified by like notice), in which
event they shall be deemed to have been duly given upon receipt.
If to the Executive, to:
Phillip E. Hawkins
26140 Birchfield Drive
Rancho Palos Verdes, CA 90275
with a copy to:
Richard Pachulski, Esq.
Pachulski, Stang, Ziehl & Young
Suite 1100
10100 Santa Monica Boulevard
Los Angeles, California 90067
If to the Company, to:
Gary D. Hirsch
Chairman
The Penn Traffic Company
411 Theodore Fremd Avenue
<PAGE>
8
Rye, New York 10580
with a copy to:
Francis D. Price, Esq.
Vice President, General Counsel and Secretary
The Penn Traffic Company
P.O. Box 4737
1200 State Fair Boulevard
Syracuse, New York 13221-4737
and a copy to:
James M. Dubin, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York, 10019-6064
<PAGE>
9
15. COUNTERPARTS. This Letter Agreement may be executed in counterparts, each
of which shall be deemed an original but all of which together shall constitute
one and the same instrument.
Very truly yours,
THE PENN TRAFFIC COMPANY
By:
--------------------------------
Name: Gary D. Hirsch
Title: Chairman
Agreed to and accepted this
6th day of August, 1998
- -----------------------------------
Phillip E. Hawkins
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