UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended May 5, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission file number 0-8858
THE PENN TRAFFIC COMPANY
(Exact name of registrant as specified in its charter)
Delaware 25-0716800
(State of incorporation) (IRS Employer Identification No.)
1200 State Fair Blvd., Syracuse, New York 13221-4737
(Address of principal executive offices) (Zip Code)
(315) 453-7284
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days.
YES |X| NO |_|
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES |X| NO |_|
Common stock, par value $.01 per share: 20,056,112 shares outstanding as
of June 8, 2001
Page 1 of 19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE PENN TRAFFIC COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
(All dollar amounts in thousands,
except per share data)
13 WEEKS 13 WEEKS
ENDED ENDED
MAY 5, APRIL 29,
2001 2000
--------- ---------
REVENUES $ 608,422 $ 592,617
COST AND OPERATING EXPENSES:
Cost of sales (including buying and occupancy costs) 464,295 450,539
Selling and administrative expenses 133,855 130,754
Amortization of excess reorganization value 27,318 27,325
Unusual item (Note 2) 358
--------- ---------
OPERATING LOSS (17,046) (16,359)
Interest expense 9,530 9,651
--------- ---------
LOSS BEFORE INCOME TAXES (26,576) (26,010)
Provision for income taxes (Note 3) 559 717
--------- ---------
NET LOSS $ (27,135) $ (26,727)
========= =========
PER SHARE (BASIC AND DILUTED):
Net loss (Note 4) $ (1.35) $ (1.33)
========= =========
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
-2-
THE PENN TRAFFIC COMPANY
CONSOLIDATED BALANCE SHEET
(All dollar amounts in thousands)
UNAUDITED AUDITED
MAY 5, FEBRUARY 3,
2001 2001
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and short-term investments $ 41,735 $ 42,529
Accounts and notes receivable (less allowance for
doubtful accounts of $5,022 and $4,634, respectively) 42,261 46,113
Inventories 273,893 271,704
Prepaid expenses and other current assets 9,458 9,338
--------- ---------
367,347 369,684
--------- ---------
NONCURRENT ASSETS:
Capital leases - net 51,127 50,812
Property, plant and equipment - net 257,365 255,507
Goodwill - net 9,167 9,197
Beneficial leases - net 48,952 50,549
Excess reorganization value - net 123,986 151,304
Other assets - net 23,361 22,517
--------- ---------
$ 881,305 $ 909,570
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of obligations under capital leases 8,201 7,878
Current maturities of long-term debt 5,067 5,062
Trade accounts and drafts payable 126,225 119,905
Other accrued liabilities 77,204 76,857
Accrued interest expense 5,555 3,478
Taxes payable 16,654 16,971
--------- ---------
238,906 230,151
--------- ---------
NONCURRENT LIABILITIES:
Obligations under capital leases 72,893 73,396
Long-term debt 228,631 238,112
Deferred income tax 74,826 76,141
Other noncurrent liabilities 31,980 28,483
STOCKHOLDERS' EQUITY:
Preferred stock - authorized 1,000,000
shares $.01 par value; none issued
Common Stock - authorized 30,000,000 shares; $.01 par value;
20,054,112 and 20,106,955 shares outstanding, respectively 201 201
Capital in excess of par value 416,207 416,207
Stock warrants 7,249 7,249
Retained deficit (187,130) (159,995)
Accumulated other comprehensive loss (2,083)
Treasury stock, at cost (375) (375)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 234,069 263,287
--------- ---------
$ 881,305 $ 909,570
========= =========
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
-3-
THE PENN TRAFFIC COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
(All dollar amounts in thousands)
13 WEEKS 13 WEEKS
ENDED ENDED
MAY 5, APRIL 29,
2001 2000
-------- --------
OPERATING ACTIVITIES:
Net loss $(27,135) $(26,727)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 10,454 10,224
Amortization of excess reorganization value 27,318 27,325
Other - net 127 (116)
NET CHANGE IN ASSETS AND LIABILITIES:
Accounts receivable and prepaid expenses 3,732 7,018
Inventories (2,189) 974
Payables and accrued expenses 10,544 3,582
Deferred income taxes 133 3,002
Other assets (844) (95)
Other noncurrent liabilities (34) (324)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 22,106 24,863
-------- --------
INVESTING ACTIVITIES
Capital expenditures (9,116) (21,789)
Proceeds from sale of assets 20 117
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (9,096) (21,672)
-------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in drafts payables (2,115) 393
Payments to settle long-term debt (1,076) (75)
Borrowing of revolver debt 55,300
Repayment of revolver debt (63,700)
Reduction of capital lease obligations (2,213) (2,125)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (13,804) (1,807)
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (794) 1,384
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,529 51,759
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 41,735 $ 53,143
======== ========
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
-4-
THE PENN TRAFFIC COMPANY
Notes To Interim Consolidated Financial Statements
Unaudited
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
The results of operations for the interim periods are not necessarily
an indication of results to be expected for the year. In the opinion of
management, all adjustments necessary for a fair presentation of the results are
included for the interim periods, and all such adjustments are normal and
recurring. These unaudited interim financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
February 3, 2001.
All significant intercompany transactions and accounts have been
eliminated in consolidation.
NEW ACCOUNTING STANDARDS
Penn Traffic adopted Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
as amended by SFAS 138 at the beginning of the 13-week period ended May 5, 2001
("First Quarter Fiscal 2002"). SFAS 133 requires that all derivative financial
instruments be carried on the balance sheet at fair value, with changes in fair
value recorded in net income or comprehensive income depending on the nature of
the instrument. The Company currently holds interest rate swap contracts with a
notional value of $50 million for the purpose of hedging interest rate risk
associated with variable rate debt. These contracts have been designated as cash
flow hedges under SFAS 133 and, accordingly, changes in the fair value of the
contracts (net of income taxes) are recorded in other comprehensive income. Upon
adoption of SFAS 133, the Company recognized, in accumulated other comprehensive
income, a loss of approximately $1.8 million (after tax) representing the
cumulative effect of adoption of this new accounting standard. Excluding this
$1.8 million loss associated with the adoption of SFAS 133, total comprehensive
loss for First Quarter Fiscal 2002 was $27.4 million.
-5-
In May 2000, the FASB Emerging Issues Task Force ("EITF") issued a new
accounting pronouncement, EITF Issue Number 00-14, "Accounting for Certain Sales
Incentives" ("EITF 00-14"), which addresses the recognition, measurement and
income statement classification for certain sales incentives offered by
companies in the form of discounts, coupons or rebates. The implementation of
this new accounting pronouncement will require Penn Traffic to make certain
reclassifications between Revenues and Costs and Operating Expenses in the
Company's Consolidated Statement of Operations. Penn Traffic currently expects
to implement EITF 00-14 in the first quarter of Fiscal 2003 (the 52-week period
ending February 1, 2003). Penn Traffic expects that the implementation of EITF
00-14 will result in an equal decrease to the Company's reported Revenues and
Costs and Operating Expenses. In accordance with such implementation, Penn
Traffic will also reclassify certain prior period financial statements for
comparability purposes.
NOTE 2 - UNUSUAL ITEM
In January 2000, Penn Traffic began a process to (1) reduce the number
of distribution centers the Company utilizes for nonperishable grocery products
from four to three and (2) transfer the distribution of general merchandise and
health and beauty care items from a leased facility in Columbus, Ohio to the
Company's Jamestown, New York facility (an owned 267,000 square foot facility
which had supplied grocery products to certain stores in upstate New York and
northern Pennsylvania until January 2000). This process was completed in June
2000. During the 13-week period ended April 29, 2000 ("First Quarter Fiscal
2001"), the Company recorded an unusual item of $0.4 million related to the
implementation of this warehouse consolidation project.
NOTE 3 - INCOME TAXES
The tax provisions for First Quarter Fiscal 2002 and First Quarter
Fiscal 2001 are not recorded at statutory rates due to differences between
income calculations for financial reporting and tax reporting purposes that
result primarily from the nondeductible amortization of excess reorganization
value.
NOTE 4 - NET LOSS PER SHARE
Net loss per share is computed based on the requirements of Statement
of Financial Accounting Standards No. 128, "Earnings per Share". This standard
requires presentation of basic earnings per share ("EPS"), computed based on the
weighted average number of common shares outstanding for the period, and diluted
EPS, which gives effect to all dilutive potential shares outstanding (i.e.,
options and warrants) during the period. In the calculation of basic EPS,
20,054,112 and 20,106,955 shares were used for First Quarter Fiscal 2002 and
First Quarter Fiscal 2001, respectively. The calculations of diluted EPS exclude
the effect of incremental common stock equivalents aggregating 42,191 shares for
First Quarter Fiscal 2002, since they would have been antidilutive given the net
loss for the quarter.
-6-
NOTE 5 - STOCKHOLDERS' EQUITY
On June 29, 2000, the Company announced that its Board of Directors had
authorized the Company to repurchase up to an aggregate value of $10 million of
Penn Traffic's common stock from time to time in the open market or privately
negotiated transactions. The timing and amounts of purchases will be governed by
prevailing market conditions and other considerations. Penn Traffic's ability to
repurchase its common stock is subject to limitations contained in the Company's
debt instruments. The Company is currently allowed to repurchase approximately
$8 million of common shares under these agreements. This amount will change on a
quarterly basis based on the Company's financial results. To date, the Company
has repurchased 53,000 shares of common stock at an average price of $7.08 per
share.
NOTE 6 - SUPPLEMENTAL FINANCIAL INFORMATION
(In thousands of dollars)
13 WEEKS 13 WEEKS
ENDED ENDED
MAY 5, APRIL 29,
2001 2000
-------- --------
EBITDA $21,351 $22,048
Cash Interest Expense 9,311 9,434
"EBITDA" is earnings before interest, depreciation, amortization,
amortization of excess reorganization value, LIFO provision, unusual items and
taxes. EBITDA should not be interpreted as a measure of operating results, cash
flow provided by operating activities, a measure of liquidity, or as an
alternative to any generally accepted accounting principle measure of
performance. The Company is reporting EBITDA because it is a widely used
financial measure of the potential capacity of a company to incur and service
debt. Penn Traffic's reported EBITDA may not be comparable to similarly titled
measures used by other companies.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements included in this Part I, Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Quarterly Report on Form 10-Q which are not statements of
historical fact are intended to be, and are hereby identified as,
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, as amended. Without limiting the foregoing, the
words "anticipate," "believe," "estimate," "expect," "intend," "plan," "project"
and other similar expressions are intended to identify forward-looking
statements. The Company cautions readers that forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievement expressed or
implied by such forward-looking statements. Such factors include, among other
things, the success or failure of the Company in implementing its current
business and operational strategies; general economic and business conditions;
competition; availability, location and terms of sites for store development;
the successful implementation of the Company's capital expenditure program
(including store remodeling); labor relations; labor and employee benefit costs;
the performance of the stores formerly leased under the New England Operating
Agreement (as defined in "Liquidity and Capital Resources" below); the impact of
EITF 00-14 on the Company's financial statements and financial results (as
discussed in "Impact of New Accounting Standards" below); the impact of the
introduction of loyalty card programs on the Company's operating results;
availability, terms and access to capital; the Company's liquidity and other
financial considerations; the ability of the Company to repurchase its common
stock in open market purchases and the prices at which it repurchases its common
stock; restrictions on the Company's ability to repurchase its shares under its
debt instruments; and the outcome of pending or yet-to-be instituted legal
proceedings.
-8-
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MAY 5, 2001 ("FIRST QUARTER FISCAL 2002") COMPARED TO
THIRTEEN WEEKS ENDED APRIL 29, 2000 ("FIRST QUARTER FISCAL 2001")
The following table sets forth Consolidated Statement of Operations
components expressed as percentages of total revenues for First Quarter
Fiscal 2002 and First Quarter Fiscal 2001:
First Quarter Ended
MAY 5, April 29,
2001 2000
------ ------
Total revenues 100.0% 100.0%
Gross profit (1) 23.7 24.0
Selling and administrative
expenses 22.0 22.1
Amortization of excess
reorganization value 4.5 4.6
Unusual item 0.0 0.1
Operating loss (2.8) (2.8)
Operating income excluding unusual item and
amortization of excess reorganization value (2) 1.7 1.9
Interest expense 1.6 1.6
Net loss (4.5) (4.5)
Net income (loss) excluding New England lease
income, unusual item and amortization of excess
reorganization value (3) 0.0 (0.2)
- ----------
(1) Total revenues less cost of sales.
-9-
(2) Operating loss for First Quarter Fiscal 2002 excluding amortization of
excess reorganization value of $27.3 million. Operating loss for First
Quarter Fiscal 2001 excluding an unusual item (expense) of $0.4 million
(see Note 2) and amortization of excess reorganization value of $27.3
million.
(3) Net loss for First Quarter Fiscal 2002 excluding amortization of excess
reorganization value of $27.3 million. Net loss for First Quarter Fiscal
2001 excluding New England lease income of $1.7 million (after tax), an
unusual item (expense) $0.2 million (after tax) and amortization of excess
reorganization value of $27.3 million.
REVENUES
Total revenues for First Quarter Fiscal 2002 increased to $608.4
million from $592.6 million in First Quarter Fiscal 2001. The increase in
revenues for First Quarter Fiscal 2002 is primarily attributable to an increase
in same store sales and the commencement of the Company's operation of 10 New
England stores (see "Liquidity and Capital Resources" below).
Same store sales for First Quarter Fiscal 2002 increased 0.4% from the
comparable prior year period.
Wholesale supermarket revenues were $68.7 million in First Quarter
Fiscal 2002 compared to $67.7 million in First Quarter Fiscal 2001.
GROSS PROFIT
Gross profit for First Quarter Fiscal 2002 was 23.7% of revenues
compared to 24.0% of revenues in First Quarter Fiscal 2001. The decrease in
gross profit as a percentage of revenues in First Quarter Fiscal 2002 was due to
the expiration of the Company's prior agreement with another supermarket company
for the lease of 10 stores in New England (the "New England Operating
Agreement") on July 31, 2000 (gross profit for First Quarter Fiscal 2001
includes $2.9 million of income attributable to the New England Operating
Agreement). This reduction in gross profit as a percentage of revenues was
partially offset by a reduction in inventory shrink expense.
-10-
RESULTS OF OPERATIONS (CONTINUED)
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses for First Quarter Fiscal 2002 were
22.0% of revenues compared to 22.1% of revenues in First Quarter Fiscal 2001.
The reduction in selling and administrative expenses as a percentage of revenues
in First Quarter Fiscal 2002 was due to the benefits of the Company's cost
reduction programs, including initiatives to reduce store labor costs. These
cost reductions were partially offset by an increase in promotional spending as
a percentage of revenues (the Company accounts for certain promotional expenses
in the "Selling and administrative expenses" line of the Consolidated Statement
of Operations).
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $10.5 million in First
Quarter Fiscal 2002 and $10.2 million in First Quarter Fiscal 2001, representing
1.7% in each quarter. The increase in depreciation and amortization expense is a
result of the Company's capital expenditure program.
During First Quarter Fiscal 2002 and First Quarter Fiscal 2001,
amortization of excess reorganization value was $27.3 million. The excess
reorganization value asset of $327.8 million, which was established in June 1999
in connection with the implementation of fresh-start reporting, is being
amortized on a straight-line basis over a three-year period.
UNUSUAL ITEM
During First Quarter Fiscal 2001, the Company recorded an unusual item
of $0.4 million related to the implementation of a warehouse consolidation
project (see Note 2).
OPERATING LOSS; OPERATING INCOME EXCLUDING UNUSUAL ITEM AND AMORTIZATION OF
EXCESS REORGANIZATION VALUE
Operating loss for First Quarter Fiscal 2002 was $17.0 million or 2.8%
of total revenues compared to an operating loss of $16.4 million or 2.8% of
total revenues in First Quarter Fiscal 2001. For First Quarter Fiscal 2002,
operating income excluding amortization of excess reorganization value was $10.3
million or 1.7% of revenues. For First Quarter Fiscal 2001, operating income
excluding an unusual item and amortization of excess reorganization value was
$11.3 million or 1.9% of revenues. Operating income excluding
-11-
RESULTS OF OPERATIONS (CONTINUED)
unusual item and amortization of excess reorganization value as a percentage of
revenues decreased due to the reduction in gross profit as a percentage of
revenues associated with the expiration of the New England Operating Agreement.
INTEREST EXPENSE
Interest expense for First Quarter Fiscal 2002 was $9.5 million
compared to $9.7 million in First Quarter Fiscal 2001.
INCOME TAXES
Income tax provision was $0.6 million for First Quarter Fiscal 2002
compared to $0.7 million in First Quarter Fiscal 2001. The effective tax rates
for First Quarter Fiscal 2002 and First Quarter Fiscal 2001 vary from statutory
rates due to differences between income for financial reporting and tax
reporting purposes that result primarily from the nondeductible amortization of
excess reorganization value.
NET LOSS; NET INCOME (LOSS) EXCLUDING NEW ENGLAND LEASE INCOME, UNUSUAL ITEM
AND AMORTIZATION OF EXCESS REORGANIZATION VALUE
Net loss for First Quarter Fiscal 2002 was $27.1 million compared to a
net loss of $26.7 million for First Quarter Fiscal 2001. Net income excluding
New England lease income, unusual item and amortization of excess reorganization
value was $0.2 million for First Quarter Fiscal 2002 compared to a loss of $0.9
million for First Quarter Fiscal 2001.
-12-
LIQUIDITY AND CAPITAL RESOURCES
In connection with the completion of the Company's financial
restructuring in June 1999, the Company issued $100 million of senior notes (the
"Senior Notes") and entered into a new $320 million secured credit facility (the
"Credit Facility"). Certain terms of the Senior Notes and the Credit Facility
are summarized below.
The Senior Notes mature on June 29, 2009. Pursuant to the terms of the
indenture for the Senior Notes (the "Indenture"), the Company, at its election,
can choose to pay interest on the Senior Notes at the rate of 11% per annum for
the first two years (i.e., the first four semi-annual interest payments) through
the issuance of additional notes; thereafter, interest on the Senior Notes will
be payable at the rate of 11% per annum, in cash. Any notes issued in lieu of
interest would also mature on June 29, 2009, and bear interest at 11% per annum.
The Company paid the interest on the Senior Notes in cash for the first three
semi-annual interest periods. The Company also currently expects to make the
fourth semi-annual interest payment on June 29, 2001, in cash instead of through
the issuance of any additional notes. The Indenture contains certain negative
covenants that, among other things, restrict the Company's ability to incur
additional indebtedness, permit additional liens and make certain restricted
payments.
The Credit Facility includes (1) a $205 million revolving credit
facility (the "Revolving Credit Facility") and (2) a $115 million term loan (the
"Term Loan"). The lenders under the Credit Facility have a first priority
perfected security interest in substantially all of the Company's assets. The
Credit Facility contains a variety of operational and financial covenants
intended to restrict the Company's operations. These include, among other
things, restrictions on the Company's ability to incur debt, make capital
expenditures and make restricted payments as well as requirements that the
Company achieve required levels for Consolidated EBITDA, interest coverage,
fixed charge coverage and funded debt ratio (all as defined in the Credit
Facility).
The Term Loan will mature on June 30, 2006. Amounts of the Term Loan
maturing in each fiscal year are outlined in the following table (in thousands):
FISCAL YEAR ENDING AMOUNT MATURING
------------------ ---------------
February 2, 2002 $ 4,750
February 1, 2003 6,750
January 31, 2004 9,750
January 29, 2005 12,750
January 28, 2006 7,750
February 3, 2007 71,250
--------
$113,000
========
-13-
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Availability under the Revolving Credit Facility is calculated based on
a specified percentage of eligible inventory and accounts receivable of the
Company. The Revolving Credit Facility will mature on June 30, 2005.
Availability under the Revolving Credit Facility was approximately $148 million
as of May 5, 2001.
During April 2000, the Company entered into interest rate swap
agreements, which expire in April 2005, that effectively convert $50 million of
its variable rate borrowings into fixed rate obligations. Under the terms of
these agreements, the Company makes payments at a weighted average fixed
interest rate of 7.08% and receives payments at variable interest rates based on
the London InterBank Offered Rate ("LIBOR").
During First Quarter Fiscal 2002, the Company's internally generated
funds from operations and amounts available under the Revolving Credit Facility
provided sufficient liquidity to meet the Company's operating, capital
expenditure, and debt service needs and fund expenditures related to the
Company's financial restructuring. For the next year, the Company expects to
utilize internally generated funds from operations, amounts available under the
Revolving Credit Facility and new capital leases to satisfy its operating,
capital expenditure and debt service needs, to fund any repurchase of shares of
its common stock under its stock repurchase program and to pay the remaining
expenditures related to the Company's financial restructuring.
Cash flows used to meet the Company's operating requirements during
First Quarter Fiscal 2002 are reported in the Consolidated Statement of Cash
Flows. During First Quarter Fiscal 2002, the Company's net cash used in
investing activities was $9.1 million and net cash used in financing activities
was $13.8 million. This amount was financed by net cash provided by operating
activities of $22.1 million and a reduction in cash and cash equivalents of $0.8
million.
In July 1990, the Company entered into the New England Operating
Agreement with the Grand Union Company ("Grand Union") pursuant to which Grand
Union acquired the right to operate 13 stores in Vermont and New Hampshire under
the "Grand Union" trade name until July 31, 2000. Prior to July 1990, these
stores had been operated by Penn Traffic under the Company's "P&C" trade name.
By August 1, 2000, the Company had regained operating control of the remaining
10 stores that had been subject to the New England Operating Agreement. Nine of
these stores were opened for business in August 2000.
-14-
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Revenues account of the Company's Consolidated Statement of
Operations includes approximately $2.9 million and $2.8 million income from the
New England Operating Agreement in the 13-week periods ended April 29, 2000, and
July 29, 2000, respectively. In contrast, during the second half of the 53-week
period ended February 3, 2001 ("Fiscal 2001"), the Company incurred
approximately $1 million of operating losses in connection with the commencement
of operation of these 10 stores.
The Company expects to continue to invest in promotional activities to
reacquaint customers with the Company's offerings in the startup period for
these 10 New England stores, which the Company expects will conclude in the
first half of the 52-week period ended February 2, 2002 ("Fiscal 2002").
Accordingly, the Company does not expect such stores to contribute to the
Company's operating income in the first half of Fiscal 2002. While the Company
currently expects these stores to contribute to the Company's operating income
in the second half of Fiscal 2002, Penn Traffic believes that the operating
income allocable to such stores will be significantly less than the income
received pursuant to the New England Operating Agreement.
The Company competes with several supermarket chains, independent
grocery stores, supercenters (combination supermarket and general merchandise
stores) and other retailers, many of which have greater resources than Penn
Traffic. The number of competitors and the degree of competition encountered by
the Company's supermarkets vary by location. Any significant change in the
number of the Company's competitors, the number or size of competitors' stores,
or in the pricing and promotion practices of the Company's competitors could
have an impact on the Company's results of operations.
During Fiscal 2001, the Company commenced implementation of a loyalty
card program in its 70 Big Bear stores in Ohio and West Virginia. Fiscal 2001
operating income was reduced by an estimated $1.5 million in connection with the
launch of this loyalty card program. Penn Traffic currently expects to roll out
the program to other markets in the second half of Fiscal 2002. Such
introduction will result in additional costs of an, as yet, undetermined amount.
During Fiscal 2002, the Company expects to invest approximately $60
million (including capital leases). Capital expenditures will be principally for
new stores, store remodels, and investments in the Company's distribution
infrastructure and technology. The Company expects to finance such expenditures
through cash generated from operations, amounts available under the Revolving
Credit Facility and new capital leases.
-15-
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On June 29, 2000, the Company announced that its Board of Directors had
authorized the Company to repurchase up to an aggregate value of $10 million of
Penn Traffic's common stock from time to time in the open market or privately
negotiated transactions. The timing and amounts of purchases will be governed by
prevailing market conditions and other considerations. Penn Traffic's ability to
repurchase its common stock is subject to limitations contained in the Company's
debt instruments. The Company is currently allowed to repurchase approximately
$8 million of common shares under these agreements. This amount will change on a
quarterly basis based on the Company's financial results. To date, the Company
has repurchased 53,000 shares of common stock at an average price of $7.08 per
share.
-16-
IMPACT OF NEW ACCOUNTING STANDARDS
Penn Traffic adopted Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
as amended by SFAS 138 at the beginning of the First Quarter Fiscal 2002. SFAS
133 requires that all derivative financial instruments be carried on the balance
sheet at fair value, with changes in fair value recorded in net income or
comprehensive income depending on the nature of the instrument. The Company
currently holds interest rate swap contracts with a notional value of $50
million for the purpose of hedging interest rate risk associated with variable
rate debt. These contracts have been designated as cash flow hedges under SFAS
133 and, accordingly, changes in the fair value of the contracts (net of income
taxes) are recorded in other comprehensive income. Upon adoption of SFAS 133,
the Company recognized, in accumulated other comprehensive income, a loss of
approximately $1.8 million (after tax) representing the cumulative effect of
adoption of this new accounting standard.
Existing generally accepted accounting principles do not provide
specific guidance on the accounting for sales incentives that many companies
offer to their customers. The FASB Emerging Issues Task Force ("EITF"), a group
responsible for promulgating changes to accounting policies and procedures, has
issued a new accounting pronouncement, EITF Issue Number 00-14, "Accounting for
Certain Sales Incentives" ("EITF 00-14") which addresses the recognition,
measurement and income statement classification for certain sales incentives
offered by companies in the form of discounts, coupons or rebates. The
implementation of this new accounting pronouncement will require Penn Traffic to
make certain reclassifications between Revenues and Costs and Operating Expenses
in the Company's Consolidated Statement of Operations. Penn Traffic currently
expects to implement EITF 00-14 in the first quarter of the Company's Fiscal
2003 (the 52-week period ending February 1, 2003). In accordance with such
implementation, Penn Traffic will also reclassify certain prior period financial
statements for comparability purposes.
Penn Traffic expects that the implementation of EITF 00-14 will result
in an equal decrease to the Company's reported Revenues and Costs and Operating
Expenses. Accordingly, while Penn Traffic is currently reviewing this
pronouncement with its auditors and therefore cannot quantify the precise effect
on reported Revenues, Costs and Operating Expenses or same store sales results,
the Company believes that the implementation of EITF 00-14 will not have an
effect on Penn Traffic's reported Operating Income (Loss), EBITDA or Net Income
(Loss). The Company currently estimates that had EITF 00-14 been implemented in
First Quarter Fiscal 2002, same store sales in First Quarter Fiscal 2002 would
have been reduced from that reported under the Company's existing income
statement classifications.
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PART II. OTHER INFORMATION
All items which are not applicable or to which the answer is negative
have been omitted from this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fiscal quarter ended May
5, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PENN TRAFFIC COMPANY
June 18, 2001 /s/ Joseph V. Fisher
--------------------------------------
By: Joseph V. Fisher
President, Chief Executive
Officer and Director
June 18, 2001 /s/ Martin A. Fox
--------------------------------------
By: Martin A. Fox
Executive Vice President,
Chief Financial Officer and
Director
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