ITEM 1. BUSINESS (as of February 3, 1996 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. Penn Traffic operates 265 supermarkets in Pennsylvania, upstate New York, Ohio and northern West Virginia under the names "Big Bear" and "Big Bear Plus" (76 stores), "Bi-Lo Foods" (42 stores), "Insalaco's" (29 stores), "P&C" (67 stores), "Quality Markets" (42 stores) and "Riverside" (9 stores). Penn Traffic also operates a wholesale food distribution business which serves 124 licensed franchisees and 116 independent operators. Total revenues for the fiscal year (53 weeks) ended February 3, 1996 ("Fiscal 1996") aggregated approximately $3.5 billion.
Approximately 65% of Penn Traffic's supermarket sales 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 sales 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 Wegman's Food Markets, Inc., which compete against supermarkets representing approximately 35% and 25% of Penn Traffic's retail supermarket revenues, respectively.
In addition, Penn Traffic operates a full-service dairy business in Johnstown, Pennsylvania under the name "Sani-Dairy" and a bakery business in Syracuse, New York under the name "Penny Curtiss".
Penn Traffic pursues an aggressive capital program that seeks to match store size and format to local demographics and competitive conditions. During the five fiscal years ended February 3, 1996, Penn Traffic opened or remodeled approximately 65% 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.
RETAIL FOOD DISTRIBUTION BUSINESS
Penn Traffic is one of the leading supermarket retailers in its primary operating areas in New York, Pennsylvania and Ohio. Penn Traffic's supermarkets are primarily located in towns and small cities. In many of these communities, Penn Traffic operates or licenses one or more of a small number of total supermarkets or the only supermarket in town.
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 or more affluent 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 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.
During Fiscal 1996, the Company commenced the implementation of several expense reduction programs. Certain of these expense reduction initiatives are designed to take advantage of the combined purchasing power of the Company's business units and the Company's ability to consolidate certain previously decentralized functions. The Company currently expects that the implementation of these initiatives will result in cost savings of at least $10 million per year.
(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 and the addition of 23 stores acquired from the Peter J. Schmitt Co., Inc. in January 1993 which the Company initially operated.
WHOLESALE FOOD DISTRIBUTION BUSINESS
Penn Traffic licenses the use of its "Riverside", "Bi-Lo Foods" and "Big M" names to 124 independently-owned supermarkets that are required to maintain certain quality and other standards and 116 independent operators. 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 70 of the licensed independent operators which lease or sublease the supermarket buildings.
In Fiscal 1996, Penn Traffic's wholesale operations accounted for $429.4 million or 12.1% of total revenues. The incremental volume provided by wholesale operations enhances Penn Traffic's purchasing power and the efficiency of its distribution system.
At February 3, 1996, Penn Traffic had guaranteed obligations of $2.0 million of indebtedness of certain of such licensed independent operators. Riverside receives an initial fee but no annual fee for the license of its Riverside and Bi-Lo Foods names. P&C receives neither an initial fee nor an annual fee for the use of the Big M name.
FOOD PROCESSING OPERATIONS
The Company owns and operates Johnstown Sanitary Dairy ("Sani-Dairy"), a dairy processing plant in Johnstown, Pennsylvania, which is one of the largest dairies in Pennsylvania. Sani-Dairy sells its products to certain Penn Traffic-owned and licensed supermarkets and to other retail outlets located in Pennsylvania and adjoining states.
Penn Traffic owns and operates Penny Curtiss Bakery, a bakery processing plant in Syracuse, New York. This operation primarily supplies P&C's stores and its affiliated accounts with private label fresh and frozen bakery products. In addition, Riverside and Quality Markets procure certain fresh and frozen bakery products from Penny Curtiss.
MASS MERCHANDISING BUSINESS
During the second quarter of Fiscal 1996, Penn Traffic decided to close 11 of its 15 remaining stand-alone general merchandise stores (Harts) in Ohio. The remaining four stores are now operated under the Company's "Plus" trade name.
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 and generic products and certain other grocery items from TOPCO Associates, Inc., a national products purchasing cooperative comprising 46 regional supermarket chains. In Fiscal 1996, purchases from TOPCO Associates accounted for approximately 16% of product purchases.
Penn Traffic's principal Pennsylvania distribution facilities are a Company-owned 390,000-square foot distribution center in DuBois, Pennsylvania and a Company-owned 248,000-square foot distribution center in Scranton, Pennsylvania. Penn Traffic also operates 196,000-square foot and 86,000-square foot distribution centers for perishable products in DuBois and Scranton, Pennsylvania, respectively. In addition, Penn Traffic leases a 70,000-square foot warehouse in New Bethlehem, Pennsylvania, which Penn Traffic uses to supplement its forward buy program, under which the Company purchases and stores for later sale certain products which, from time to time, are available for purchase at reduced prices. Penn Traffic also leases a 37,000-square foot warehouse in Punxsutawney, Pennsylvania, which houses certain store supplies and aerosol products and a 44,000-square foot warehouse in DuBois, Pennsylvania, which houses high-bulk grocery 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 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. The Company also leases three additional warehouses totalling 603,000 square feet, in Columbus, Ohio for distribution of general merchandise and health and beauty care items to all Penn Traffic stores (including a 204,000-square foot leased warehouse which the Company began utilizing in August 1995).
From September 1993 through September 1995, Penn Traffic's health and beauty care products and general merchandise were distributed to Insalaco's, P&C, Quality Markets and Riverside stores from a general merchandise warehouse operated by The Grand Union Company ("Grand Union") and located in Montgomery, New York. This arrangement was part of a joint health and beauty care and general merchandise purchasing and distribution program with Grand Union. All of Penn Traffic's retail stores are currently supplied with health and beauty care products and general merchandise from the Columbus, Ohio warehouses.
Approximately 75% of the merchandise offered in Penn Traffic's retail stores is distributed from its warehouses by its fleet of 346 tractors, 442 refrigerated trailers and 582 dry trailers. Merchandise not delivered from Penn Traffic's warehouses is delivered directly to the stores by distributors, vendor drivers and salesmen 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 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, and "supercenters" (combination supermarket and general merchandise stores). 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.
EMPLOYEES
Labor costs and their impact on product prices are important competitive factors in the supermarket industry. At February 3, 1996, Penn Traffic had approximately 25,700 hourly employees and 1,800 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 dairy and bakery plants) belong to five other unions. The Company competes with certain independently-owned and chain-owned supermarkets, discount drug stores, warehouse clubs, general merchandise stores, convenience stores and supercenters, whose employees are not union affiliated.
During Penn Traffic's fiscal year ending February 1, 1997, labor contracts covering approximately 11,000 of the Company's employees will expire. While the Company believes that relations with its employees are good, and has not encountered any significant work stoppages in recent years, a prolonged labor dispute could have an adverse effect on the Company.
GOVERNMENT REGULATION
The United States Department of Agriculture and the Pennsylvania Milk Marketing Board each regulate and inspect all aspects of fluid milk and dairy product production, enforcing strict standards of sanitation, product composition, packaging and labelling, as well as regulating milk and dairy product pricing. All dairy goods producers and distributors must comply with substantially similar standards, and compliance by Penn Traffic with these standards has not had and is not expected to have a significant effect on its earnings or competitive position.
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 16% of product purchases in Fiscal 1996.
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 and stated that it intended to acquire retail and wholesale food distribution companies contiguous to its operating area.
In August 1988, Penn Traffic acquired P&C Food Markets, Inc. ("P&C"), which operates 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. P&C currently operates as a division of the Company. P&C is headquartered in Syracuse, New York and operates 67 "P&C" retail supermarkets, franchises 68 "Big M" stores and provides wholesaling services to 76 independent supermarkets.
In April 1989, Penn Traffic acquired Big Bear Stores Company ("Big Bear"), a leading food retailer in Columbus and eastern Ohio, which is to the west of Penn Traffic's traditional market area. In April 1993, Big Bear was merged into the Company. Big Bear currently operates as a division of the Company. Big Bear is headquartered in Columbus, Ohio and operates 76 retail supermarkets under the names "Big Bear" and "Big Bear Plus".
In January 1993, Penn Traffic acquired 28 supermarkets located in western New York and northwestern Pennsylvania from Peter J. Schmitt Co., Inc. Seventeen of the stores are currently being operated by Penn Traffic.
In September 1993, Penn Traffic acquired the operating assets of Insalaco Supermarkets, Inc. ("Insalaco's"), which consisted of 12 supermarkets with approximately 400,000 total square feet.
In January 1995, Penn Traffic acquired 45 supermarkets owned by American Stores Company which had operated under the Acme trade name. Fourteen of these acquired stores have been closed and two are being held for sale. The Company is operating the remaining 29 stores under the Bi-Lo Foods, Insalaco's and P&C trade names.
RELATIONSHIP WITH GRAND UNION
Until March 1995, Penn Traffic held an indirect ownership interest in the common stock of Grand Union Holdings Corporation ("Grand Union Holdings"), which was the indirect corporate parent of Grand Union. Grand Union 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.
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 the filings of the Chapter 11 petitions was approximately 17.8% on a fully diluted basis, became worthless.
In July 1990, P&C (then a subsidiary 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 ten-year term and, beginning with the year commencing July 31, 1992, to pay Penn Traffic additional contingent fees of up to $700,000 per year based upon sales performance of the stores operated by Grand Union. Under the terms of the New England Operating Agreement, the recapitalization of Grand Union in July 1992 triggered a $15 million prepayment of the operating fee. 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.
At the expiration of the ten-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 will pay to 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, plus contingent fees based upon the sales performance of the stores of up to $700,000 in each 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 and 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 operation by Penn Traffic. Based on current conditions, management does not believe that the return of operation of the stores to Penn Traffic would have a significant impact on the financial condition of the Company.
From September 1993 until September 1995, Penn Traffic and Grand Union participated in a consolidated health and beauty care and general merchandise purchasing and distribution program.
ITEM 2.

ITEM 2. PROPERTIES
Penn Traffic follows the general industry practice of leasing the majority of its retail supermarket locations. Penn Traffic presently owns 37 and leases 228 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 8,000 to 140,000 square feet and are held under leases expiring from 1996 to 2015, excluding option periods. Penn Traffic also owns two supermarkets and leases 70 supermarkets which are leased or subleased to independent operators.
Penn Traffic also owns 10 shopping centers, eight of which contain one of the Company-owned or licensed supermarkets. Penn Traffic also operates major distribution centers in DuBois and Scranton, Pennsylvania; Syracuse and Jamestown, New York; and Columbus, Ohio; a dairy plant in Johnstown, Pennsylvania; 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.

ITEM 3. LEGAL PROCEEDINGS
Penn Traffic and its subsidiaries are involved in various legal actions, some of which involve claims for substantial sums. However, any ultimate liability with respect to these contingencies is not considered by management to be material in relation to the consolidated financial position or results of operations of the Company.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended February 3, 1996.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF REGISTRANT
Certain information regarding the executive officers of Penn Traffic is set forth as follows:
Name Age Position with Penn Traffic - --------------------- --- --------------------------------------
Gary D. Hirsch 46 Chairman and Director
Martin A. Fox 42 Director, Vice Chairman - Finance and Assistant Secretary
John T. Dixon 56 Director, President and Chief Executive Officer
Stephen V. Breech 54 Senior Vice President and President of Big Bear Division
Roy M. Flood 55 Senior Vice President and President of P&C Foods Division
Raymond J. Heath 57 Senior Vice President and President of Riverside Markets Division
Eugene R. Sunderhaft 48 Senior Vice President - Finance and Secretary (Chief Financial Officer)
David A. Adamsen 44 Vice President - Manufacturing
William G. Berryman 52 Vice President and Chief Information Officer
Michael T. Del Viscio 47 Vice President - Nonfood Merchandising
Glenn L. Goldberg 44 Vice President and Assistant Secretary
Francis D. Price, Jr. 46 Vice President, General Counsel and Assistant Secretary
Randall J. Sweeney 44 Vice President and General Manager of Quality Markets Division
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. 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 (food distribution holding company) between 1989 and March 1996 and of certain of its 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 its subsidiaries for certain periods between 1989 and March 1996.
Mr. Dixon has been a Director since December 1994 and President and Chief Executive Officer of Penn Traffic since January 1995. Mr. Dixon was a Vice President of Penn Traffic and the President of the P&C division from 1993 until January 1995. He served as President of the Quality Markets division from January 1992 until August 1993 and served in various other positions at Big Bear between 1957 and 1992.
Mr. Breech has been Vice President of Penn Traffic and President of the Big Bear division since September 1995. Mr. Breech was Senior Vice President of Store Operations at Big Bear until September 1995. He was Vice President of Construction and Real Estate at Big Bear from 1989 until 1995. Mr. Breech served in various other positions at Big Bear between 1958 and 1989.
Mr. Flood has been Senior Vice President of Penn Traffic and President of the P&C division since January 1995. Mr. Flood was Executive Vice President of Merchandising of the Big Bear division from 1990 until January 1995. He was Vice President of Sales and Merchandising at P&C from 1986 until 1990 and served in various other positions at P&C between 1977 and 1986.
Mr. Heath has been Senior Vice President of Penn Traffic since January 1995 and has been President of the Riverside division since 1979. Mr. Heath had been a Vice President of Penn Traffic since 1979. Mr. Heath served in various other positions at Riverside between 1967 and 1979.
Mr. Sunderhaft has been Senior Vice President - Finance of Penn Traffic since January 1995 and has been Chief Financial Officer and Secretary of Penn Traffic since May 1993. Mr. Sunderhaft had been a Vice President of Penn Traffic since May 1993 and was Treasurer of Penn Traffic from May 1993 until April 1995. He became Vice President - Finance and Chief Financial Officer of the P&C division in 1989 and served in various other positions at P&C between 1972 and 1989.
Mr. Adamsen has been Vice President of Manufacturing of Penn Traffic since September 1994 and President of Penny Curtiss Baking Company ("Penny Curtiss") since 1986. Mr. Adamsen served in various other positions at Penny Curtiss between 1974 and 1986.
Mr. Berryman has been Vice President and Chief Information Officer of Penn Traffic since April 1995. Mr. Berryman was a consultant for Technology Solutions Company from 1994 until April 1995. From 1989 until 1994, Mr. Berryman was Vice President of Management Information Services for Dominick's Finer Foods, Inc.
Mr. Del Viscio has been Vice President of Nonfood Merchandising since July 1995. Mr. Del Viscio was Senior Vice President of General Merchandise for Montgomery Ward from September 1994 until July 1995. From June 1991 until September 1994, Mr. Del Viscio was Senior Vice President and General Merchandise Manager for Hess Department Stores.
Mr. Goldberg has been a Vice President and Assistant Secretary of Penn Traffic since 1989. Mr. Goldberg has been Executive Vice President of MTH since 1988. From 1982 until 1988, Mr. Goldberg was Senior Vice President of MTH. Mr. Goldberg was a Vice President of Grand Union Holdings and of certain of its subsidiaries for certain periods between 1989 and March 1996.
Mr. Price has been Vice President and General Counsel and Assistant Secretary of Penn Traffic since February 1993. He 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. Sweeney has been Vice President of Penn Traffic since January 1995 and General Manager of the Quality Markets division since 1993. Mr. Sweeney served in various other positions at Quality between 1974 and 1993.
On January 25, 1995, Grand Union filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code with the Bankruptcy Court. Grand Union emerged from Chapter 11 reorganization on June 15, 1995. On February 6, 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. On February 16, 1995, Grand Union Capital consented to the entry of an order for relief on the involuntary Chapter 11 petition and Grand Union Holdings filed a voluntary Chapter 11 petition in the Bankruptcy Court. Grand Union Capital and Grand Union Holdings' Bankruptcy Court proceedings were completed on March 27, 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, and Mr. Goldberg was an executive officer of Grand Union Capital and Grand Union Holdings. Messrs. Hirsch and Fox resigned as directors and officers of Grand Union on June 15, 1995, and Messrs. Hirsch, Fox and Goldberg ceased to be directors and executive officers of Grand Union Capital and Grand Union Holdings upon the dissolutions of these companies on March 27, 1996 and March 28, 1996, respectively.
There are no family relationships between the executive officers of Penn Traffic. The term of office of executive officers is for a one-year period beginning on the date of the annual meeting of stockholders, which is normally held in June of each year.
PART II
ITEM 5.

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 370 shareholders of record on February 3, 1996.
Common stock information is provided on Page 18 of this Form 10-K.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The comparative summary of selected financial data of Penn Traffic for the five years ended February 3, 1996 appears on Pages 19 through 21 of this Form 10-K.
ITEM 7.

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 22 through 28 of this Form 10-K.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements Page
Report of Independent Accountants 29 Consolidated Financial Statements: Statement of Operations for each of the three fiscal years ended February 3, 1996 30 Balance Sheet as of February 3, 1996 and January 28, 1995 31 Statement of Shareholders' Equity for each of the three fiscal years ended February 3, 1996 33 Statement of Cash Flows for each of the three fiscal years ended February 3, 1996 34 Notes to Consolidated Financial Statements 36 Financial Statement Schedule for the three years ended February 3, 1996: Schedule VIII - Valuation and Qualifying Accounts 66
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized below are quarterly financial data for the fiscal years ended February 3, 1996 and January 28, 1995.
(1) During the second quarter of Fiscal 1996, the Company recorded certain expenses totalling $65.2 million ($51.9 million net of tax benefit) associated with the closure of the stand-alone general merchandise business (Harts), a write-down of assets that the Company will no longer utilize in its business and the Company's expense reduction program.
(2) 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", which resulted in a noncash charge of $46.8 million ($27.7 million net of tax benefit) primarily related to the write-down of a portion of the recorded asset values (including allocable goodwill) of 18 of the Company's supermarkets.
CONSOLIDATED FIVE-YEAR FINANCIAL SUMMARY
Set forth below is selected historical consolidated financial data of Penn Traffic for the five fiscal years ended February 3, 1996. 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, comparisons of the consolidated financial results among years are not necessarily meaningful. Furthermore, the historical consolidated financial data for the fiscal years ended January 30, 1993 and February 1, 1992 have been restated for the retroactive adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
The selected historical consolidated financial data for the five fiscal years ended February 3, 1996 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.
(1) 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 will 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 totalling $6.4 million classified as an unusual item. This unusual item was comprised of $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.
(2) 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, the Company recorded a noncash charge of $46.8 million related primarily to the write-down of a portion of the recorded asset values (including allocable goodwill) of 18 of the Company's supermarkets.
(3) The extraordinary items (net of income tax benefit) resulted from the early retirement of debt.
(4) 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 the 52-week period ended January 28, 1995.
During the first quarter of Fiscal 1994, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The cumulative effect of adopting SFAS 109 was reported as a change in accounting principle applied retroactively to the beginning of Fiscal 1992. Retained earnings were reduced at the beginning of Fiscal 1992 by approximately $58.3 million for the cumulative effect of the adoption.
(5) Net (loss) income per share of common stock is based on the average number of shares and equivalents, as applicable, of common stock outstanding during each period. Fully diluted (loss) income per share is not presented for each of the periods since conversion of the Company's shares under option would be anti-dilutive or the reduction from primary (loss) income per share is less than three percent.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR ENDED FEBRUARY 3, 1996 ("FISCAL 1996") COMPARED TO FISCAL YEAR ENDED JANUARY 28, 1995 ("FISCAL 1995")
Fiscal 1996 was a 53-week year and Fiscal 1995 was a 52-week year.
The following table sets forth Statement of Operations components expressed as percentages of total revenues for Fiscal 1996 and Fiscal 1995:
PERCENTAGE OF TOTAL REVENUES FISCAL YEAR ---------------------------- 1996 1995 ---- ----
Total revenues 100.0% 100.0% Gross profit (1) 23.0 22.9 Selling and administrative expenses 19.0 18.2 Unusual item 1.9 Write-down of long-lived assets 1.3 Operating income 0.8 4.7 Interest expense 3.8 3.6 (Loss) income before income taxes, extraordinary item and cumulative effect of change in accounting principle (3.0) 1.1
(1) Total revenues less cost of goods sold.
Total revenues for Fiscal 1996 increased 6.1% to $3.54 billion (53 weeks) from $3.33 billion in Fiscal 1995 (52 weeks). The change in total revenues is the result of the increase in retail supermarket sales resulting from the acquisition of 45 former Acme stores (29 of which the Company is currently operating) in January 1995 and the fact that Fiscal 1996 was a 53-week year. Wholesale revenues decreased in Fiscal 1996 to $429.4 million from Fiscal 1995 revenues of $442.6 million. Same store sales for Fiscal 1996 decreased by 1.8% from Fiscal 1995 (calculated on a comparable week basis). The Company's total revenues and same store sales results for Fiscal 1996 were adversely affected by weak consumer spending and competitive promotional activity.
In Fiscal 1996, gross profit as a percentage of total revenues was 23.0% compared to 22.9% in Fiscal 1995. The increase in gross profit as a percentage of total revenues resulted from a reduced LIFO provision and the relative increase in retail revenues compared to wholesale revenues, which were partially offset by the cost of the Company's response to increased competitor promotional and price initiatives.
Selling and administrative expenses as a percentage of total revenues increased to 19.0% for Fiscal 1996 from 18.2% in Fiscal 1995. The increase in selling and administrative expenses as a percentage of total revenues resulted primarily from the relative increase in retail revenues compared to wholesale revenues, increased promotional expenses and increases in fixed and semi-variable expenses as a percentage of total revenues during a period with low food price inflation and a decline in same store sales.
During the second quarter of Fiscal 1996, the Company recorded an unusual item (charge) of $65.2 million. This unusual item was comprised of $50.6 million related to the closure of the stand-alone general merchandise business (Harts) and $14.6 million related to the noncash write-off of certain fixed assets which the Company determined during the second quarter that it will no longer utilize in its business, costs incurred in connection with the Company's expense reduction programs and an increase in the Company's closed store reserve (Note 6).
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. The adoption of SFAS 121 will result in reduced depreciation and amortization expense in future years. The resulting reduction in depreciation and amortization expense for Fiscal 1997 will be approximately $3.0 million (Note 7).
Depreciation and amortization of $92.5 million in Fiscal 1996 and $87.8 million in Fiscal 1995 represented 2.6% of total revenues in both years. The increase in depreciation and amortization expense is the result of the Company's capital investment program and the acquisition of 45 former Acme stores.
Operating income for Fiscal 1996 was $29.5 million or 0.8% of total revenues compared to $155.7 million or 4.7% of total revenues in Fiscal 1995. Excluding the effect of the unusual item and write-down of long-lived assets, operating income for Fiscal 1996 was $141.6 million or 4.0% of total revenues, compared to $155.7 million or 4.7% of total revenues in Fiscal 1995. The decrease in operating income (excluding the effect of the unusual item and the write-down of certain impaired long-lived assets) as a percentage of total revenues in Fiscal 1996 was the result of increased selling and administrative expenses as a percentage of total revenues, partially offset by increased gross profit as a percentage of total revenues.
Interest expense for Fiscal 1996 and Fiscal 1995 was $136.4 million and $117.9 million, respectively. The increase in interest expense was due to the higher debt levels outstanding during Fiscal 1996, which were the result of funding the acquisition of 45 stores from American Stores Company in January 1995 and the Company's capital investment program.
Loss before income taxes, extraordinary item and the cumulative effect of change in accounting principle was $106.8 million for Fiscal 1996 compared to income of $37.9 million for Fiscal 1995. The reason for the decline is the decrease in operating income (excluding the unusual item and the write-down of certain long-lived assets), the unusual item, the write-down of certain long-lived assets and the increase in interest expense.
The income tax benefit for Fiscal 1996 was $27.2 million compared to a provision of $15.9 million in Fiscal 1995. The income tax benefit for Fiscal 1996 included a $32.4 million benefit associated with the unusual item and the write-down of certain 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 non-deductible goodwill (Note 4).
The extraordinary item for Fiscal 1995 was a $3.0 million charge (net of $2.0 million income tax benefit) related to the early retirement of debt.
During the first quarter of Fiscal 1995, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits". The cumulative effect of this change in accounting principle was a charge of $5.8 million (net of $4.1 million income tax benefit) (Note 3).
FISCAL YEAR ENDED JANUARY 28, 1995 ("FISCAL 1995") COMPARED TO FISCAL YEAR ENDED JANUARY 29, 1994 ("FISCAL 1994")
The following table sets forth Statement of Operations components expressed as percentages of total revenues for Fiscal 1995 and Fiscal 1994:
PERCENTAGE OF TOTAL REVENUES FISCAL YEAR ---------------------------- 1995 1994 ---- ----
Total revenues 100.0% 100.0% Gross profit (1) 22.9 22.3 Selling and administrative expenses 18.2 17.7 Unusual item 0.2 Operating income 4.7 4.4 Interest expense 3.6 3.7 Income before income taxes and extraordinary item and cumulative effect of change in accounting principle 1.1 0.7
(1) Total revenues less cost of goods sold.
Total revenues for Fiscal 1995 increased 5.1% to $3.33 billion from $3.17 billion in Fiscal 1994. Same store sales increased 0.9% in Fiscal 1995. The increase in total revenues is primarily the result of the increase in retail supermarket sales from the acquisition of the Insalaco's stores in September 1993, the increase in same store sales, and revenues from incremental stores that the Company has recently opened. Wholesale revenues decreased in Fiscal 1995 to $442.6 million from Fiscal 1994 revenues of $462.4 million.
In Fiscal 1995, gross profit as a percentage of total revenues increased to 22.9% from 22.3% in Fiscal 1994. The increase in gross profit as a percentage of total revenues resulted primarily from a combination of reduced product procurement costs and the relative increase in retail revenues compared to wholesale revenues.
Selling and administrative expenses as a percentage of total revenues increased to 18.2% for Fiscal 1995 from 17.7% in Fiscal 1994. The increase in selling and administrative expenses as a percentage of total revenues resulted primarily from the relative increase in retail revenues compared to wholesale revenues and increases in fixed and semi-variable expenses as a percentage of total revenues during a period with low food price inflation and continued consumer preferences for lower-priced products.
During the second quarter of Fiscal 1994, the Company recorded certain expenses totalling $6.4 million classified as an unusual item. This unusual item was comprised of $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.
Depreciation and amortization of $87.8 million in Fiscal 1995 and $82.9 million in Fiscal 1994 represented 2.6% of total revenues in both years.
Operating income for Fiscal 1995 was $155.7 million or 4.7% of total revenues compared to $140.6 million or 4.4% of total revenues in Fiscal 1994. Excluding the effect of the unusual item, operating income for Fiscal 1994 was $147.0 million or 4.6% of total revenues.
Interest expense for Fiscal 1995 and Fiscal 1994 was $117.9 million and $117.4 million, respectively.
Income before income taxes, extraordinary item and the cumulative effect of change in accounting principle was $37.9 million for Fiscal 1995 compared to $23.2 million for Fiscal 1994.
The income tax provision for Fiscal 1995 was $15.9 million compared to $15.0 million in Fiscal 1994. The Fiscal 1995 income tax provision includes a $1.0 million decrease in income tax expense and the Fiscal 1994 income tax provision includes a $2.4 million charge. These adjustments are the result of changes in the statutory tax rates applicable to deferred taxes in accordance with the requirements of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). 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).
The extraordinary item for Fiscal 1995 was a $3.0 million charge (net of $2.0 million income tax benefit) compared to a $25.8 million charge (net of $17.8 million income tax benefit) in Fiscal 1994. These extraordinary items relate to the early retirement of debt.
During the first quarter of Fiscal 1995, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits". The cumulative effect of this change in accounting principle was a charge of $5.8 million (net of $4.1 million income tax benefit) (Note 3). This accounting change did not have a material impact on Fiscal 1995 results.
LIQUIDITY AND CAPITAL RESOURCES
Payments of interest and principal on the Company's $1.2 billion of long-term debt (excluding capital leases) will restrict funds available to the Company to finance capital expenditures and working capital. Principal payments of long-term debt due during Fiscal 1997, 1998 and 1999 total $2.7 million, $2.2 million and $3.3 million, respectively.
During Fiscal 1996, the Company's internally generated funds from operations and amounts available under the revolving credit facility described below, provided sufficient liquidity to meet the Company's operating, capital expenditure and debt service needs.
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. The interest rate on borrowings as to which the Company elects a LIBOR-based rate option is LIBOR plus 2.25%, and the interest rate on borrowings as to which the Company elects a prime-based rate option is prime plus 1.0%. As of February 3, 1996, additional availability under the Penn Traffic Revolving Credit Facility was $75.7 million.
The Company has three interest rate swap agreements outstanding, each of which expires within the next three years, that effectively convert $125 million of its fixed rate borrowings into variable rate obligations. Under the terms of these agreements, the Company makes payments at variable rates which are based on LIBOR and receives payments at fixed interest rates. The net amount paid or received is included in interest expense. For Fiscal 1996, the Company recorded a $0.1 million increase of interest expense related to these agreements.
Cash flows to meet the Company's requirements for operating, investing and financing activities during Fiscal 1996 are reported in the Consolidated Statement of Cash Flows. 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. During the fiscal year ended January 28, 1995, the Company's net cash used in investing activities was $194.8 million. These amounts were financed by net cash provided by operating activities of $56.2 million, net cash provided by financing activities of $102.6 million and the Company had a decrease in cash of $35.9 million. During the fiscal year ended January 29, 1994, the Company's net cash used in investing activities was $173.8 million and the Company had an increase in cash of $27.6 million. These amounts were financed by net cash provided by operating activities of $7.7 million and net cash provided by financing activities of $193.7 million.
Working capital decreased by $16.8 million from January 28, 1995 to February 3, 1996.
The Company is in compliance with all terms and restrictive covenants of its long-term debt agreements for the fiscal year ended and as of February 3, 1996.
The Company's debt agreements provide restrictive covenants on the payment of dividends to its shareholders. As of February 3, 1996, no dividend payments to the Company's shareholders could have been made under the most restrictive of these limitations.
During Fiscal 1996, the Company acquired two new stores, opened 11 replacement stores and completed 15 remodels/expansions. Capital expenditures (including capitalized leases) were approximately $136.1 million for Fiscal 1996.
During the fiscal year ending February 1, 1997, the Company expects to invest approximately $80 million on capital expenditures (including capital leases). Penn Traffic expects to finance such capital expenditures (including capital leases) through cash generated from operations, as well as amounts available under the Revolving Credit Facility, additional capital lease obligations and mortgages. Capital expenditures will be principally for new stores, replacement stores and remodels.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders 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 February 3, 1996 and January 28, 1995, and the results of their operations and their cash flows for each of the three years in the period ended February 3, 1996, 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 statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 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 and as discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for postemployment benefits to adopt the provisions of Statement of Financial Accounting Standards No. 112, EMPLOYERS' ACCOUNTING FOR POSTEMPLOYMENT BENEFITS, effective January 30, 1994.
PRICE WATERHOUSE LLP Syracuse, New York March 16, 1996
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
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 February 3, 1996, the Company operated 265 supermarkets in Pennsylvania, New York, Ohio and West Virginia and supplied 124 franchise supermarkets and 116 independent wholesale accounts. The Company operated 15 modern distribution centers with approximately 3.3 million square feet of combined space, a bakery and a dairy.
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 $17,848,000 and $17,145,000 below replacement cost at February 3, 1996 and January 28, 1995, respectively.
During Fiscal 1996, 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 1996 was to decrease cost of goods sold by $1,474,000 and to decrease net loss by $869,000 or $.08 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:
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
INTANGIBLE ASSETS RESULTING FROM ACQUISITIONS The excess of the costs over the amounts attributed to tangible net assets is primarily being amortized over 40 years using the straight-line method. In addition, certain nonfinancing costs resulting from acquisitions have been capitalized as other assets and deferred charges. For Fiscal 1996, 1995 and 1994, amortization of intangibles was $17,104,000, $14,958,000 and $14,313,000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS 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. Previously, this evaluation was based on cash flows and assets aggregated principally by the operating divisions of the Company. 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 at the retail store level in making a determination as to whether such assets are impaired. As a result of this change, a pretax $46.8 million write-down of long-lived assets was recorded in Fiscal 1996, which is further described in Note 7.
INVESTMENT IN AFFILIATED COMPANY Until March 1995, the Company had a minority interest investment in The Grand Union Company which was carried on the equity basis (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 generally 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.
NET INCOME (LOSS) PER SHARE Net income (loss) per share of common stock is based on the average number of shares and equivalents, as applicable, of common stock outstanding during each period, after giving effect to preferred stock dividends. Fully diluted income (loss) per share is not presented for each of the periods since conversion of the Company's shares under option would be anti- dilutive or the reduction from primary income (loss) per share is less than three percent.
NOTE 2 -- LONG-TERM DEBT
The long-term debt of Penn Traffic consists of the obligations described below:
Amounts maturing within the next five years are: $2,728,000, $2,168,000, $3,271,000, $2,646,000 and $152,864,000 (includes $144,100,000 outstanding as of February 3, 1996 under the Company's secured revolving credit facility which matures in April 2000). The Company incurred interest expense of $136,359,000, $117,859,000 and $117,423,000, including noncash amortization of deferred financing costs of $4,297,000, $4,195,000 and $4,153,000 for Fiscal 1996, 1995 and 1994, respectively. Interest paid amounted to $128,936,000, $111,669,000 and $110,070,000 for Fiscal 1996, 1995 and 1994, respectively.
The estimated fair value of the Company's long-term debt, including current maturities, was $1.11 billion at February 3, 1996 and $1.07 billion at January 28, 1995. 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 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. Additional availability under the Revolving Credit Facility was $75.7 million at February 3, 1996. The interest rate on borrowings as to which the Company elects a LIBOR-based rate option is LIBOR plus 2.25%, and the interest rate on borrowings as to which the Company elects a prime-based rate option is prime plus 1.0%. At February 3, 1996, the weighted average rate of interest on the Revolving Credit Facility was 8.0%.
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 and the 10.65% Senior Notes due 2004 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 are subordinated to all existing and future senior indebtedness.
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, the 9 5/8% Senior Subordinated Notes due 2005 and the Revolving Credit Facility contain certain covenants, including restrictions on incurrence of indebtedness by Penn Traffic and limitations on the payment of dividends to Penn Traffic's common shareholders. The Company is in compliance with all terms and covenants of its long-term debt agreements as of and for the fiscal year ended February 3, 1996.
The Company has three interest rate swap agreements outstanding, each of which expires within the next three years, that effectively convert $125 million of its fixed rate borrowings into variable rate obligations. Under the terms of these agreements, the Company makes payments at variable rates which are 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 agreements at February 3, 1996 was a $1.2 million asset and a $4.3 million liability at January 28, 1995, 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.
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:
In calculating benefit obligations and plan assets for Fiscal 1996, the Company assumed a weighted average discount rate of 7.5%, compensation increase rates ranging from 2.0% to 3.5% and expected long-term rates of return on plan assets ranging from 10.5% to 10.75%. For Fiscal 1995, the Company assumed a weighted average discount rate of 9.0%, compensation increase rates ranging from 3.0% to 3.5% and expected long-term rates of return on plan assets ranging from 8.5% to 9.5%.
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"). Generally, the Company funds accrued pension costs as incurred. Penn Traffic's defined benefit plans' assets are maintained in separate trusts and are managed by independent investment managers. The assets were 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 $4,521,000, $4,297,000 and $4,759,000 in Fiscal 1996, 1995 and 1994, respectively. The applicable portion of the total plan benefits and net assets of these plans is not separately identifiable.
The Company contributed to a separate profit-sharing retirement plan for certain eligible employees not covered by a union pension fund for Fiscal 1994 and also contributes to a profit-sharing arrangement for certain union employees. There was no expense for these profit-sharing plans for Fiscal 1996 and Fiscal 1995 and $279,000 for Fiscal 1994. In addition, the Company sponsors a deferred profit-sharing plan for certain salaried employees. Contributions and costs totalled $998,000, $845,000 and $1,053,000 with respect to Fiscal 1996, 1995 and 1994, 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 $21,093,000 as of February 3, 1996 and $7,023,000 as of January 28, 1995, 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 shareholders' equity in the amount of $6,606,000 as of February 3, 1996 and $356,000 as of January 28, 1995 and $4,963,000 as of January 29, 1994.
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 $5.8 million, net of a $4.1 million income tax benefit, for the fiscal year ended January 28, 1995.
NOTE 4 -- INCOME TAXES:
The provision for income taxes charged to continuing operations was provided as follows:
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:
Components of deferred income taxes at February 3, 1996 and January 28, 1995 were as follows:
At February 3, 1996, Penn Traffic had alternative minimum tax credit carryforwards of $25,560,000, general business tax credit carryforwards of $3,104,000, targeted jobs credits of $685,000 and various state tax credits, tax-effected for federal income tax purposes, of $1,400,000 available to offset the Company's regular income tax liability in future years. The general business tax credit carryforwards begin to expire in 2005 and the alternative minimum tax credit carryforwards have no expiration date. In addition, the Company has various state net operating loss carryforwards, tax-effected for federal income tax purposes, of approximately $5,553,000. The Company has recorded a deferred tax asset of approximately $7,074,000 subject to a valuation allowance of $5,574,000 for the capital loss realized on the investment in the capital stock of Grand Union (Note 9).
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 February 3, 1996:
The Company principally operates in leased store facilities with terms of up to 20 years and 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 1996, 1995 and 1994, the Company incurred capital lease obligations of $11,176,000, $5,533,000 and $7,613,000, respectively, in connection with lease agreements for buildings and equipment. For Fiscal 1996, 1995 and 1994, capital lease amortization expense was $12,485,000, $11,887,000 and $11,758,000, respectively.
Future minimum rentals have not been reduced by minimum sublease rentals of $49,649,000 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:
NOTE 6 -- UNUSUAL ITEM:
During Fiscal 1996, the Company recorded an unusual item (charge) of $65.2 million. The Company also recorded a tax benefit of $13.3 million in connection with this charge.
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. During Fiscal 1996, Fiscal 1995 and Fiscal 1994, these 11 stores generated 1.1%, 1.8% and 2.1%, respectively, of the total revenues of the Company. The impact of these stores on the operating income of the Company was immaterial in each of the past three fiscal years. The Company currently is operating the remaining four general merchandise stores under the Company's "Plus" trade name. As a result of the decision to close the 11 Harts stores and convert the remaining four stores, during the second quarter ended July 29, 1995, the Company recorded an unusual item (charge). For the year ended February 3, 1996, the amount of this charge is $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 includes $14.6 million in connection with the noncash write-off of certain fixed assets which the Company determined during the second quarter that it will 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 is approximately $57.5 million and the cash portion is approximately $7.7 million. All costs related to the unusual item were incurred during Fiscal 1996 with the exception of certain facility carrying costs (primarily lease payments) for stores that have been closed, and inventory markdowns and the write-down of fixed assets for the remaining four stores to be converted to the Company's "Big Bear Plus" supermarkets format. The last scheduled lease payment will occur in 2001. The accrued liability relating to the unusual item was $10.5 million at February 3, 1996.
During Fiscal 1994, the Company recorded certain expenses totalling $6.4 million classified as an unusual item. This unusual item is comprised of $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.
NOTE 7 -- 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 will periodically review 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 has 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. These 18 supermarkets are located throughout the Company's trading area and generate approximately 5% of the Company's total revenues. The Company does not currently expect to close any of these stores. The adoption of SFAS 121 will result in reduced depreciation and amortization expense in future years.
NOTE 8 -- SHAREHOLDERS' EQUITY:
The Company has a Long-term Incentive Plan (the "1993 Plan") 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, other forms of stock-based incentives such as phantom stock and cash awards. A maximum of 350,000 shares of common stock may be paid to participants under the 1993 Plan and/or purchased pursuant to stock options granted under the 1993 Plan, subject to antidilution and other adjustments specified in the 1993 Plan.
As of February 3, 1996, a total of 276,100 shares of restricted stock and 3,000 options to purchase shares of the Company's common stock have been awarded under the Company's 1993 Plan to 68 officers and employees of Penn Traffic (including one independent contractor). At February 3, 1996, an additional 70,900 shares of common stock were reserved for future grants under the 1993 Plan. For all awards of restricted stock made prior to January 29, 1995, vesting of the shares granted pursuant to such awards is contingent upon attainment, subsequent to the date of grant, of EBITDA (as defined) levels of $265 million in any four consecutive fiscal quarter period, or $500 million in any eight consecutive fiscal quarter period. Such shares will be forfeited if such levels are not achieved by the fifth anniversary of the date of grant. Vesting of awards of restricted stock that have been made subsequent to the end of Fiscal 1995 is also conditioned upon the recipient's remaining in the employ of the Company for an additional two years following the last fiscal quarter in which the required EBITDA performance level was attained. To encourage retention of such shares by the participants, upon vesting of the restricted stock, the Company will make a cash payment to each participant equal to the amount of income tax payable by such participant in respect of the award and the cash payment, if such participant agrees not to sell his shares for at least two years beyond vesting and to refund the payment if he resigns within such two-year period. As of February 3, 1996, unearned compensation was recorded at $4,452,000 to reflect the impact of the restricted shares. Unearned compensation, which is shown as a separate component of shareholders' equity, will be expensed as the compensation is earned.
The 1993 Plan was adopted in Fiscal 1994 as the successor to the Company's 1988 Stock Option Plan (the "1988 Plan"). 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 Shareholders 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.
As of February 3, 1996, options for 223,094 shares, 3,000 shares and 42,000 shares are outstanding under the 1988 Plan, the 1993 Plan and the Directors' Plan, respectively. An additional 5,000 shares of common stock are reserved for issuance under the Directors' Plan at February 3, 1996. Under the terms of the Directors' Plan, option prices are 100% of the "fair market value" of the shares on the date granted and the options are immediately exercisable. The 1988 Plan options generally vest 20% on the date of grant and 20% on each of the next four anniversary dates. The exercise price for the options granted under the 1993 Plan is 100% of the "fair market value" of the shares on the date granted. These options are currently exercisable for 20% of the total number of shares and will be exercisable for an additional 20% on each of the next four anniversary dates of the grant. The options granted under each of these plans expire ten years after the date of grant.
Changes during the three years ended February 3, 1996 in options outstanding under the 1988 Plan, the 1993 Plan and the Directors' Plan are as follows:
At February 3, 1996, all of the 1988 Plan options were exercisable.
At February 3, 1996, certain persons affiliated with Miller Tabak Hirsch + Co. ("MTH") held warrants to purchase 289,000 shares at $14.00 per share.
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 as well as for other corporate purposes. 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 on the Company's ability to repurchase its common stock based upon certain financial tests.
NOTE 9 -- 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 10 - Related Parties for a description of certain relationships between Penn Traffic and Grand Union.
NOTE 10 -- RELATED PARTIES:
During Fiscal 1996, the Company had an agreement for financial consulting and business management services to be provided by MTH. Under this agreement, the Company paid MTH an annual fee of $1,395,100. The annual fee payable to MTH for Fiscal 1997 will increase to $1,437,000 on November 1, 1996.
During Fiscal 1995, the amount of the annual fee paid to MTH under the financial consulting and business management services agreement was $1,357,100. During Fiscal 1995, the Company paid MTH an additional fee of $500,000 for its services in connection with assisting the Company with the acquisition of 45 former Acme stores and the public offering of $100 million in principal amount of Penn Traffic 10.65% Senior Notes due 2004. During Fiscal 1994, the amount of the annual fee paid to MTH under the financial consulting and business management services agreement was $1,324,000 and the Company paid MTH additional fees totalling $1,500,000 for its services in connection with public offerings of debt and equity securities and with the mergers of P&C and Big Bear into the Company.
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 $700,000 per year based on sales performance of the stores operated by Grand Union. As a result of the recapitalization of 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 $11.4 million for the fiscal year ended February 3, 1996 and $11.2 million for the fiscal years ended January 28, 1995 and January 29, 1994.
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 will pay to 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, plus contingent fees based on the sales performance of the stores of up to $700,000 each 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 operation by Penn Traffic. Based on current conditions, management does not believe that the return of operation of the stores to Penn Traffic would have a significant impact on the financial condition of the Company.
From September 1993 until September 1995, Penn Traffic and Grand Union participated in a consolidated health and beauty care and general merchandise purchasing and distribution program.
NOTE 11 -- 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.
At February 3, 1996, Penn Traffic had guaranteed obligations of $2.0 million of indebtedness of certain licensed independent operators.
The Company, its subsidiaries and divisions also are involved in various legal actions, some of which involve claims for substantial sums. However, any ultimate liability with respect to these contingencies is not considered to be material in relation to the consolidated financial position or results of operations of the Company.
NOTE 12 -- EXTRAORDINARY ITEM:
During Fiscal 1995 and Fiscal 1994, the Company had extraordinary items of $3,025,000 (net of $2,045,000 income tax benefit) and $25,843,000 (net of $17,848,000 income tax benefit), respectively, relating to the early retirement of debt.
NOTE 13 -- ACQUISITIONS:
On January 19, 1995, the Company acquired 45 food stores from American Stores Company. The stores are located in north central and northeastern Pennsylvania and in south central New York.
The acquisition cost of $91,570,000 was attributed to major categories of assets obtained and obligations assumed as follows: inventories $15,502,000; property, plant and equipment $9,638,000; other assets (goodwill) $81,217,000; cash $566,000 and other noncurrent liabilities $15,353,000.
The unaudited consolidated results of operations on a pro forma basis as though the American Stores Company stores had been acquired on January 31, 1993 are as follows:
The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the purchase been made at the beginning of the period or of the future results of the combined operations.
NOTE 14 -- REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In April 1993, Big Bear was merged into Penn Traffic. At the effective date of the merger, holders of Big Bear redeemable convertible 8% preferred stock and Big Bear common stock received aggregate merger consideration for the merger equal to 307,836 shares of Penn Traffic common stock and approximately $10.8 million in cash. As a result of the merger, the Big Bear redeemable convertible 8% preferred stock was retired.
REPORT OF MANAGEMENT
Penn Traffic's management has prepared the financial statements presented in this annual report 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.
PART III
ITEM 10.

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 caption "Election of Directors" in the Company's Proxy Statement dated May 1, 1996, filed or to be filed in connection with the Company's 1996 Annual Meeting of Stockholders.
ITEM 11.

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, 1996 filed or to be filed in connection with the Company's 1996 Annual Meeting of Stockholders. The information set forth in "Compensation Committee Report" and "Performance Graph" of the Company's Proxy Statement dated May 1, 1996, filed or to be filed in connection with the Company's 1996 Annual Meeting of Stockholders, is not "filed" as a part hereof.
ITEM 12.

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, 1996, filed or to be filed in connection with the Company's 1996 Annual Meeting of Stockholders.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
The information required by this Item is incorporated herein by reference to the caption "Certain Transactions" in the Company's Proxy Statement dated May 1, 1996 filed or to be filed in connection with the Company's 1996 Annual Meeting of Stockholders.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The index for Financial Statements and Supplementary Data is on page 17 under Item 8 of this Form 10-K.
EXHIBITS:
The following are filed as Exhibits to this Report:
Exhibit No. Description - ----------- -----------
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).
EXHIBITS (CONTINUED):
Exhibit No. Description - ----------- -----------
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).
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.
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").
EXHIBITS (CONTINUED):
Exhibit No. Description - ----------- -----------
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").
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).
EXHIBITS (CONTINUED):
Exhibit No. Description - ----------- -----------
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).
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).
*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).
- ---------------------- * Management contract, compensatory plan or arrangement.
EXHIBITS (CONTINUED):
Exhibit No. Description - ----------- -----------
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).
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.
EXHIBITS (CONTINUED):
Exhibit No. Description - ----------- -----------
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 Directors' Stock Option Plan (incorporated by reference to Exhibit No. 10.20 to Penn Traffic's Annual Report on Form 10-K for the fiscal year ended February 3, 1990 (Securities and Exchange Commission File No. 1-9930) and referred to herein as the "Penn Traffic 1990 10-K").
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).
10.9A Letter Agreement dated October 16, 1991 from SBHC to P&C, setting forth the terms and conditions of the swap transaction and interest rate transaction entered into between SBHC and P&C on October 16, 1991 (incorporated by reference to Exhibit No. 10.27A 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).
*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).
- ---------------------- * Management contract, compensatory plan or arrangement.
EXHIBITS (CONTINUED):
Exhibit No. Description - ----------- -----------
10.13 Underwriting Agreement relating to Debt Securities, dated December 14, 1993, between Penn Traffic and Goldman, Sachs & Co. and BT Securities Corporation (incorporated by reference to Exhibit 10.24 to Penn Traffic's 1994 10-K).
10.14 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).
10.15 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).
*10.16 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).
21.1 Subsidiaries of Penn Traffic (incorporated by reference to Exhibit 21.1 to Penn Traffic's 1994 10-K).
23.1 Consent of Price Waterhouse LLP.
27.1 Financial Data Schedule.
- ---------------------- * Management contract, compensatory plan or arrangement.
Copies of the above exhibits will be furnished without charge to any shareholder by writing to Treasurer, The Penn Traffic Company, 1200 State Fair Boulevard, Syracuse, New York 13221.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fiscal quarter ended February 3, 1996.
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 11, 1996 By: /s/ John T. Dixon ------------- ---------------------------- DATE John T. Dixon, 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/ Eugene R. Sunderhaft - ------------------------------------- ----------------------------- Gary D. Hirsch, Chairman of the Board Eugene R. Sunderhaft, and Director Senior Vice President and Secretary April 11, 1996 (Principal Financial Officer and ------------- Principal Accounting Officer) DATE April 11, 1996 ------------- DATE
/s/ Susan E. Engel /s/ Eugene A. DePalma - ------------------------------------- ----------------------------- Susan E. Engel, Director Eugene A. DePalma, Director
April 11, 1996 April 11, 1996 ------------- ------------- DATE DATE
/s/ Martin A. Fox /s/ Harold S. Poster - ------------------------------------- ----------------------------- Martin A. Fox, Director Harold S. Poster, Director
April 11, 1996 April 11, 1996 ------------- ------------- DATE DATE
/s/ Richard D. Segal /s/ Claude J. Incaudo - ------------------------------------- ----------------------------- Richard D. Segal, Director Claude J. Incaudo, Director
April 11, 1996 April 11, 1996 ------------- ------------- DATE DATE
THE PENN TRAFFIC COMPANY
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
(a) Uncollectible receivables written off net of recoveries.