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 October 30, 1999
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: 20,106,955 shares
outstanding as of December 14, 1999
Page 1 of 31
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)
SUCCESSOR PREDECESSOR
COMPANY COMPANY
----------- -----------
13 WEEKS 13 WEEKS
ENDED ENDED
OCTOBER 30, OCTOBER 31,
1999 1998
----------- -----------
TOTAL REVENUES $ 610,563 $ 690,591
COSTS AND OPERATING EXPENSES:
Cost of sales (including
buying and occupancy
costs) (Note 5) 466,042 548,534
Selling and administrative
expenses 130,753 151,173
Amortization of excess
reorganization value 28,552
Unusual items (Note 5) 1,900 45,160
Write-down of long-lived
assets (Note 6) 91,512
--------- ---------
OPERATING (LOSS) (16,684) (145,788)
Interest expense 9,450 37,132
--------- ---------
(LOSS) BEFORE INCOME TAXES (26,134) (182,920)
Provision for income
taxes (Note 9) 992 38
--------- ---------
NET (LOSS) $ (27,126) $(182,958)
========= =========
NET (LOSS) PER SHARE (BASIC
AND DILUTED) (NOTE 11) $ (1.34)
=========
See Notes to Interim Consolidated Financial Statements. Per share data is not
presented for periods prior to June 26, 1999 due to the general lack of
comparability as a result of the revised capital structure of the Company.
-2-
THE PENN TRAFFIC COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
(All dollar amounts in thousands,
except per share data)
SUCCESSOR
COMPANY PREDECESSOR COMPANY
----------- ---------------------------------
18 WEEKS 21 WEEKS 39 WEEKS
ENDED ENDED ENDED
OCTOBER 30, JUNE 26, OCTOBER 31,
1999 1999 1998
---------- ---------- -----------
TOTAL REVENUES $ 851,529 $1,006,804 $2,137,613
COSTS AND OPERATING EXPENSES:
Cost of sales (including
buying and occupancy
costs) (Notes 4 and 5) 650,803 781,342 1,676,553
Selling and administrative
expenses 181,203 226,430 453,208
Amortization of excess
reorganization value 39,534
Unusual items (Note 5) 1,900 (4,631) 45,160
Write-down of long-lived
assets (Note 6) 91,512
---------- ---------- ----------
OPERATING (LOSS) INCOME (21,911) 3,663 (128,820)
Interest expense (contractual
interest estimated at $58,772
for the twenty-one week period
ended June 26, 1999) (Note 7) 12,970 21,794 111,252
Reorganization items (Note 8) 167,031
---------- ---------- ----------
(LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEMS (34,881) (185,162) (240,072)
Provision (benefit) for
income taxes (Note 9) 1,007 60 (16,558)
---------- ---------- ----------
(LOSS) BEFORE EXTRAORDINARY ITEMS (35,888) (185,222) (223,514)
Extraordinary items (Note 10) (654,928)
---------- ---------- ----------
NET (LOSS) INCOME $ (35,888) $ 469,706 $ (223,514)
========== ========== ==========
NET (LOSS) PER SHARE (BASIC
AND DILUTED) (NOTE 11) $ (1.78)
==========
See Notes to Interim Consolidated Financial Statements. Per share data is not
presented for periods prior to June 26, 1999 due to the general lack of
comparability as a result of the revised capital structure of the Company.
-3-
THE PENN TRAFFIC COMPANY
CONSOLIDATED BALANCE SHEET
(All dollar amounts in thousands) UNAUDITED
SUCCESSOR COMPANY PREDECESSOR COMPANY
OCTOBER 30, 1999 JANUARY 30, 1999
---------------- -------------------
ASSETS
CURRENT ASSETS:
Cash and short-term investments $ 50,430 $ 43,474
Accounts and notes receivable
(less allowance for doubtful accounts
of $10,046 and $5,731, respectively) 42,916 62,420
Inventories (Note 13) 292,910 283,631
Prepaid expenses and other current assets 10,596 14,619
---------- ----------
Total Current Assets 396,852 404,144
NONCURRENT ASSETS:
Capital leases - net 63,115 90,932
Property, plant and equipment - net (Note 14) 223,531 380,143
Beneficial leases - net 59,061 14,785
Goodwill - net 269,894
Excess reorganization value - net 302,140
Other assets and deferred charges - net 18,648 68,163
---------- ----------
Total Assets $1,063,347 $1,228,061
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of obligations
under capital leases $ 9,527 $ 11,516
Current maturities of long-term
debt (Note 15) 1,289 1,267,813
Trade accounts and drafts payable 143,671 134,432
Payroll and other accrued liabilities 85,385 81,867
Accrued interest expense 4,833 42,783
Payroll taxes and other taxes payable 11,649 15,420
---------- ----------
Total Current Liabilities 256,354 1,553,831
NONCURRENT LIABILITIES:
Obligations under capital leases 85,526 98,029
Long-term debt (Note 15) 226,751
Deferred taxes 81,203
Other noncurrent liabilities 25,744 45,907
---------- ----------
Total Liabilities 675,578 1,697,767
---------- ----------
STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 16):
Preferred stock (Successor Company) -
authorized 1,000,000 shares,
$.01 par value; none issued
Common Stock (Successor Company) -
authorized 30,000,000 shares, $.01 par value;
20,106,955 shares issued and outstanding 201
Common Stock (Predecessor Company) -
authorized 30,000,000 shares, $1.25 par value;
10,824,591 shares issued and outstanding 13,425
Capital in excess of par value 416,207 179,882
Stock warrants 7,249
Retained deficit (35,888) (658,820)
Minimum pension liability adjustment (3,470)
Unearned compensation (98)
Treasury stock, at cost (625)
---------- ----------
Total Stockholders' Equity (Deficit) 387,769 (469,706)
---------- ----------
Total Liabilities and
Stockholders' Equity (Deficit) $1,063,347 $1,228,061
========== ==========
See Notes to Interim Consolidated Financial Statements.
-4-
THE PENN TRAFFIC COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
(All dollar amounts
in thousands)
SUCCESSOR
COMPANY PREDECESSOR COMPANY
----------- --------------------------
18 WEEKS 21 WEEKS 39 WEEKS
ENDED ENDED ENDED
OCTOBER 30, JUNE 26, OCTOBER 31,
1999 1999 1998
----------- ---------- -----------
OPERATING ACTIVITIES:
Net (loss) income $ (35,888) $ 469,706 $(223,514)
Adjustments to reconcile
net (loss) income to net cash
(used in) provided by
operating activities:
Depreciation and amortization 15,453 25,832 59,302
Amortization of excess
reorganization value 39,534
Gain on sold / closed stores (2,921)
Reorganization Items:
Gain from rejected leases (12,830)
Write-off of unamortized
deferred financing fees 16,591
Fresh-start adjustments 151,161
Extraordinary items (654,928)
Other - net 328 120 119,177
NET CHANGE IN ASSETS AND LIABILITIES:
Accounts receivable and prepaid
expenses 7,123 15,437 8,934
Inventories (35,783) 22,321 12,044
Payables and accrued expenses 3,565 13,800 (20,120)
Deferred taxes (16,671)
Deferred charges and
other assets 1,970 1,464 (1,013)
Other noncurrent liabilities (3,071) (4,797) 17,009
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (6,769) 40,956 (44,852)
--------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures (14,311) (6,279) (11,331)
Proceeds from sale of assets 3,227 17,273 28,227
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (11,084) 10,994 16,896
--------- --------- ---------
FINANCING ACTIVITIES:
Payments to settle
long-term debt (92) (9,598) (5,503)
Borrowing of pre-petition
revolver debt 31,100 101,600
Repayment of pre-petition
revolver debt (144,000) (53,483)
Borrowing of DIP revolver debt 166,751
Repayment of DIP revolver debt (166,751)
Borrowing of new term loan 115,000
Reduction of capital lease
obligations (3,158) (8,487) (15,866)
Payment of debt issuance costs (7,906)
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (3,250) (23,891) 26,748
--------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (21,103) 28,059 (1,208)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 71,533 43,474 49,095
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 50,430 $ 71,533 $ 47,887
========= ========= =========
See Notes to Interim Consolidated Financial Statements.
-5-
THE PENN TRAFFIC COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 - REORGANIZATION
On March 1, 1999 (the "Petition Date"), the Penn Traffic Company (the
"Company") and certain of its subsidiaries filed petitions for relief (the
"Bankruptcy Cases") under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). On May 27, 1999, the Bankruptcy Court
confirmed the Company's Chapter 11 plan of reorganization (the "Plan") and on
June 29, 1999 (the "Effective Date"), the Plan became effective in accordance
with its terms.
Consummation of the Plan has resulted in (a) the former $732.2 million
principal amount of senior notes being exchanged for $100 million of new senior
notes (the "New Senior Notes") and 19,000,000 shares of new common stock (the
"New Common Stock"), (b) the former $400 million principal amount of senior
subordinated notes being exchanged for 1,000,000 shares of New Common Stock and
six-year warrants to purchase 1,000,000 shares of New Common Stock having an
exercise price of $18.30 per share, (c) holders of Penn Traffic's formerly
issued common stock receiving one share of New Common Stock for each 100 shares
of common stock held immediately prior to the Petition Date, for a total of
106,955 new shares. As part of the Plan, the Company also authorized for
issuance to officers and key employees options to purchase up to 2,297,000
shares of New Common Stock. The Company's New Common Stock and warrants to
purchase common stock are currently trading on the Nasdaq National Market under
the symbols "PNFT" and "PNFTW," respectively.
The Company's Plan also provided for the payment in full of all of the
Company's obligations to its other creditors.
On the Effective Date, in connection with the consummation of the Plan,
the Company entered into a new $320 million secured credit facility (the "New
Credit Facility"). The New Credit Facility includes (a) a $205 million revolving
credit facility (the "New Revolving Credit Facility") and (b) a $115 million
term loan (the "Term Loan"). The lenders under the New Credit Facility have a
first priority perfected security interest in substantially all of the Company's
assets. Proceeds from the New Credit Facility were used to satisfy the Company's
obligations under its debtor-in-possession financing (the "DIP Facility"), pay
certain costs of the reorganization process and are available to satisfy the
Company's ongoing working capital and capital expenditure requirements.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
-6-
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, except for fresh-start adjustments (see Note 3). 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 January 30, 1999 and the Company's
Quarterly Reports on Form 10-Q for the thirteen weeks ended May 1, 1999 and July
31, 1999. However, as a result of the implementation of fresh-start reporting,
the financial statements of the Company after the Effective Date are not
comparable to the Company's financial statements for prior periods.
All significant intercompany transactions and accounts have been
eliminated in consolidation.
Certain amounts in the January 30, 1999 Consolidated Balance Sheet
and the Consolidated Statement of Cash Flows for the 39-week period ended
October 31, 1998 have been reclassified for comparative purposes.
NOTE 3 - FRESH-START REPORTING
As of the Effective Date, the Company adopted fresh-start reporting
pursuant to the guidance provided by the American Institute of Certified Public
Accountant's Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"). In connection with the
adoption of fresh-start reporting, a new entity has been created for financial
reporting purposes. The Effective Date is considered to be the close of business
on June 26, 1999 for financial reporting purposes. The periods presented prior
to June 26, 1999 have been designated "Predecessor Company" and the periods
subsequent to June 26, 1999 have been designated "Successor Company". In
accordance with fresh-start reporting, all assets and liabilities are recorded
at their respective fair market values. The fair value of the Company's
long-lived assets was determined, in part, using information provided by
third-party appraisers.
The reorganization value of the Company is now reflected as the debt
and equity value of the new company. To facilitate the calculation of the
reorganization value, the Company developed a set of financial projections.
Based on these financial projections, the reorganization value was determined by
the Company, with the assistance of a financial advisor, using various valuation
methods, including, (i) a comparison of the Company and its projected
performance to how the market values comparable companies, (ii) a calculation of
the present value of the free cash flows under the projections, including an
assumption for a terminal value, and (iii) negotiations with an informal
committee of the Company's noteholders. The estimated enterprise value is highly
dependent upon achieving the future financial results set forth in the
projections as well as the realization of certain other assumptions which are
not guaranteed.
-7-
The total reorganization value as of the Effective Date was
approximately $750 million, which was approximately $342.6 million in excess of
the aggregate fair value of the Company's tangible and identifiable intangible
assets less non-interest bearing liabilities. Such excess is classified as
"Excess reorganization value" in the accompanying Consolidated Balance Sheet and
is being amortized on a straight-line basis over a three-year period.
The total outstanding indebtedness (including capital leases) as of the
Effective Date was approximately $326.3 million. The Stockholders' Equity on the
Effective Date of approximately $423.7 million was established by deducting such
total outstanding indebtedness of $326.3 million from the reorganization value
of $750 million. Stockholders' Equity includes $7.2 million representing the
fair value of the warrants to purchase shares of New Common Stock distributed in
conjunction with the consummation of the Plan.
-8-
The reorganization and the adoption of fresh-start reporting resulted
in the following adjustments to the Company's Consolidated Balance Sheet as of
the Effective Date (in thousands):
PREDECESSOR REORGANIZED
BALANCE SHEET REORGANIZATION FRESH-START BALANCE SHEET
JUNE 26, 1999 ADJUSTMENTS ADJUSTMENTS JUNE 26, 1999
------------- -------------- ----------- -------------
ASSETS
CURRENT ASSETS:
Cash and short-term
investments $ 40,776 $ 30,757 (a) $ 71,533
Accounts and notes
receivable - net 50,266 50,266
Inventories 261,310 $ (4,183)(i) 257,127
Prepaid expenses and
other current assets 10,369 10,369
---------- ---------- ---------- ----------
Total Current Assets 362,721 30,757 (4,183) 389,295
NONCURRENT ASSETS:
Capital leases - net 82,055 (16,127)(i) 65,928
Property, plant
and equipment - net 359,556 (137,232)(i) 222,324
Beneficial leases - net 14,610 46,588 (i) 61,198
Goodwill - net 266,434 (266,434)(j)
Excess reorganization
value - net 342,628 (k) 342,628
Other assets and
deferred charges - net 52,127 2,201 (b) (33,710)(i) 20,618
---------- ---------- ---------- ----------
Total Assets $1,137,503 $ 32,958 $ (68,470) $1,101,991
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Current portion of
obligations under
capital leases $ 9,598 $ 9,598
Current maturities
of long-term debt 493 $ (214)(c) 279
Trade accounts and
drafts payable 134,033 134,033
Payroll and other
accrued liabilities 78,721 13,878 (d) $ 1,578 (l) 94,177
Accrued interest
expense 1,135 (766)(e) 369
Payroll taxes and
other taxes payable 12,531 863 (m) 13,394
---------- ---------- ---------- ----------
Total Current Liabilities 236,511 12,898 2,441 251,850
NONCURRENT LIABILITIES:
Obligations under
capital leases 88,613 88,613
Long-term debt 93,019 134,834 (f) 227,853
Deferred taxes 81,203 (m) 81,203
Other noncurrent liabilities 29,768 (953)(l) 28,815
---------- ---------- ---------- ----------
Total liabilities not
subject to compromise 447,911 147,732 82,691 678,334
LIABILITIES SUBJECT
TO COMPROMISE 1,194,888 (1,194,888)(g)
---------- ---------- ---------- ----------
Total Liabilities 1,642,799 (1,047,156) 82,691 678,334
---------- ---------- ---------- ----------
TOTAL STOCKHOLDERS'
(DEFICIT) EQUITY (505,296) 1,080,114 (h) (151,161)(n) 423,657
---------- ---------- ---------- ----------
Total Liabilities
and Stockholders'
(Deficit) Equity $1,137,503 $ 32,958 $ (68,470) $1,101,991
========== ========== ========== ==========
-9-
The explanation of the reorganization and fresh-start adjustment columns of the
Consolidated Balance Sheet as of the Effective Date are as follows:
(a) Reflects the proceeds of the New Credit Facility net of (1) the
repayment of the Company's obligations under the DIP Facility, (2)
certain mortgages repaid in connection with the reorganization and (3)
the deferred financing costs of the New Credit Facility.
(b) Reflects (1) the establishment of deferred financing costs for the New
Credit Facility and (2) the elimination of unamortized deferred
financing costs related to the DIP Facility and certain mortgages
repaid in connection with the reorganization.
(c) Reflects the repayment of certain mortgages in connection with the
reorganization.
(d) Reflects (1) the reclassification of a liability for rejected leases
(which was included in Liabilities Subject to Compromise prior to the
effectiveness of the Plan) to Payroll and other accrued liabilities and
(2) the accrual of certain deferred financing costs of the New Credit
Facility not paid as of the Effective Date.
(e) Reflects the payment of the accrued interest on the DIP Facility and
certain mortgages repaid in connection with the reorganization.
(f) Reflects (1) the issuance of the New Senior Notes ($100 million) (2)
borrowings under the New Credit Facility on the Effective Date ($115
million Term Loan) and (3) the repayment of the DIP Facility and
certain mortgages.
(g) Reflects (1) the conversion of all the Company's obligations under its
pre-petition senior and senior subordinated notes into $100 million of
New Senior Notes, approximately 99.5% of the shares of the New Common
Stock of reorganized Penn Traffic and warrants to purchase additional
shares of New Common Stock and (2) the reclassification of a liability
for rejected leases to Payroll and other accrued liabilities.
(h) Reflects the adjustment to Stockholders' (Deficit) Equity in connection
with the consummation of the Plan.
(i) Reflects the adjustment of Inventories, Capital leases, Property, plant
and equipment, Beneficial leases and Other assets and deferred charges
to fair value. The adjustment includes a provision for a change in the
method of accounting for inventories. Inventory values in the Successor
Company have been reduced for certain related periodic vendor
promotional discounts whereas the Predecessor Company recorded
inventories without reducing the value for such promotional discounts.
(j) Reflects the elimination of Goodwill.
(k) Reflects the establishment of excess reorganization value (the
reorganization value ($750 million) in excess of the aggregate fair
value of the Company's tangible and identifiable intangible assets less
non-interest bearing liabilities).
(l) Reflects (1) the elimination of a pension liability in connection with
the adjustment of pension assets and liabilities to fair value and (2)
a revaluation of the Company's workmens compensation liabilities.
(m) Reflects the recording of deferred tax liabilities associated with the
difference between the book and tax base of the Company's assets and
liabilities.
(n) Reflects the net effect on Stockholders' (Deficit) Equity of
fresh-start adjustments to the Company's assets and liabilities.
-10-
NOTE 4 - SPECIAL CHARGES
During the 21-week period ended June 26, 1999, the Company decided to
commence a process to refine the scope of the nonfood merchandise carried in its
15 Big Bear Plus combination stores to a smaller number of categories with a
greater depth of variety in these categories. Accordingly, during the 21-week
period ended June 26, 1999, the Company recorded a special charge of $3.9
million associated with this repositioning of these 15 Big Bear Plus combination
stores. This charge, which consists of estimated inventory markdowns for
discontinued product lines, is included in cost of sales.
As described in Note 5 below, during the 13-week period ended October
31, 1998, the Company recorded a special charge of $50.4 million related to its
store rationalization program. In aggregate, during the third and fourth
quarters of Fiscal 1999, the Company recorded special charges of $68.2 million
related to this store rationalization program (net of a $12.7 million gain on
the sale of assets in connection with the store rationalization program). In
connection with the implementation of this program, the Company has sold or
closed 50 stores. At October 30, 1999 and January 30, 1999, the accrued
liability related to these charges was $14.6 million and $37.4 million,
respectively.
NOTE 5 - UNUSUAL ITEMS
During the 13-week and 18-week periods ended October 30, 1999, the
Company recorded an unusual item of $1.9 million associated with an early
retirement program for certain eligible employees.
During the 21-week period ended June 26, 1999, the Company recorded
unusual items (income) of $4.6 million related to (1) a reduction of closed
store reserves previously accrued in connection with the Company's store
rationalization program and (2) a gain on the disposition of certain assets sold
in connection with the Company's store rationalization program.
During the 13-week and 39-week periods ended October 31, 1998, the
Company recorded a special charge of $50.4 million primarily related to (1) the
decision to close certain underperforming stores in connection with the
Company's store rationalization program and (2) a gain related to the sale of 4
stores and certain other real estate. All of these costs are included in the
unusual item account except for inventory markdowns of $5.3 million, which are
included in cost of sales.
NOTE 6 - 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"). During the 13-week and 39-week periods ended October 31, 1998, the
Company recorded a non-cash charge of $91.5 million to write down the carrying
amounts (including allocable goodwill) of property held for sale in connection
with the Company's store rationalization program to estimated realizable value.
-11-
NOTE 7 - INTEREST EXPENSE
As a result of the Bankruptcy Cases, on and after the Petition Date no
principal or interest payments were made on the $1.132 billion of the Company's
former senior and senior subordinated notes. Accordingly, no interest expense
for these obligations has been accrued on or after the Petition Date. Had such
interest been accrued, interest expense for the 21-week period ended June 26,
1999 would have been approximately $58.8 million.
NOTE 8 - REORGANIZATION ITEMS
Reorganization items (expense) included in the accompanying
Consolidated Statements of Operations consist of the following items (in
thousands):
PREDECESSOR
COMPANY
--------------
21 WEEKS ENDED
JUNE 26, 1999
--------------
Fresh-start adjustments $ 151,161
Gain from rejected leases (12,830)
Write-off of unamortized
deferred financing fees 16,591
Professional fees 12,109
---------
Total Expense $ 167,031
=========
The gain from rejected leases listed above is the difference between
the estimated allowed claims for rejected leases and liabilities previously
recorded for such leases. The professional fees listed above include accounting,
legal, consulting and other miscellaneous services associated with the
implementation of the Plan.
NOTE 9 - TAX PROVISION
The effective tax rate associated with the tax provision for the
13-week and 18-week periods ended October 30, 1999 varies 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. Although the Company recorded income tax
provisions for the 13-week and 18-week periods ended October 30, 1999, the
Company does not expect to pay any income taxes for the fiscal year ending
January 29, 2000 because it has available net operating loss carryforwards,
as described below.
At January 30, 1999, Penn Traffic had approximately $300 million of
federal net operating loss carryforwards and various tax credits. As a result of
the gain on debt discharge, during the fiscal year ending January 29, 2000 the
Company will use the entire amount of such net operating loss carryforwards and
tax credits. In addition, after January 29, 2000, the Company will lose the vast
majority of the tax basis of its long-term assets. This will reduce the amount
of tax depreciation and amortization that the Company will be able to utilize on
its tax returns, starting in the fiscal year ending February 3, 2001.
-12-
In connection with the implementation of fresh-start reporting the
Company recorded approximately $82 million of net deferred tax liabilities on
the Effective Date.
The tax provisions for the 21-week period ended June 26, 1999 and the
13-week period ended October 31, 1998 and the tax benefit for the 39-week period
ended October 31, 1998 are not recorded at statutory rates due to (a)
differences between the income calculations for financial reporting and tax
reporting purposes and (b) the recording of a valuation allowance. A valuation
allowance is required when it is more likely than not the recorded value of a
deferred tax asset will not be realized.
NOTE 10 - EXTRAORDINARY ITEMS
The extraordinary items recorded for the 21-week period ended June 26,
1999 are comprised of the write-off of unamortized deferred
financing fees associated with the early retirement of the Company's revolving
credit facility prior to the Petition Date (the "Pre-petition Revolving Credit
Facility") and the extraordinary gain on debt discharge recognized as a result
of the consummation of the Plan as follows (in millions):
Write-off of the unamortized deferred financing fees
for the Pre-petition Revolving Credit Facility $ (1.5)
Elimination of the former senior and senior
subordinated notes including accrued interest 1,182.2
Write-off of unamortized deferred financing fees
for debt repaid in connection with the Plan (2.1)
Issuance of New Senior Notes (100.0)
Issuance of New Common Stock and warrants (423.7)
--------
Total extraordinary gain $ 654.9
========
No corresponding tax benefit has been recorded.
NOTE 11 - 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" ("SFAS 128").
This standard requires presentation of basic earnings per share ("EPS"),
computed based on the weighted average number of common shares outstanding for
the period, and diluted EPS, which gives effect to all dilutive potential shares
outstanding (i.e., options and warrants) during the period. Shares used in the
calculation of basic and diluted EPS were 20,106,955 for the 13-week and 18-week
periods ended October 30, 1999. There were no incremental dilutive potential
securities for the 13-week and 18-week periods ended October 30, 1999 as the
exercise price for outstanding warrants (1,000,000 shares) and options
(1,972,500 shares) was greater than the average market price of the New Common
Stock. The 1,972,500 options exclude 327,000 outstanding options which could
not become exercisable simultaneously with a portion of the issued and
outstanding options.
Net (loss) per share data is not presented for periods prior to June
26, 1999 due to the general lack of comparability as a result of the revised
capital structure of the Company.
-13-
NOTE 12 - SUPPLEMENTAL FINANCIAL INFORMATION
(In thousands of dollars)
SUCCESSOR
COMPANY PREDECESSOR COMPANY
----------- ----------------------
13 WEEKS 13 WEEKS
ENDED ENDED
OCTOBER 30, OCTOBER 31,
1999 1998
----------- -----------
EBITDA $ 25,231 $ 16,137
Cash Interest Expense 9,238 35,890
18 WEEKS 21 WEEKS 39 WEEKS
ENDED ENDED ENDED
OCTOBER 30, JUNE 26, OCTOBER 31,
1999 1999 1998
----------- -------- -----------
EBITDA $ 35,842 $ 29,772 $ 74,297
Cash Interest Expense 12,677 20,393 107,569
"EBITDA" is earnings before interest, depreciation, amortization,
amortization of excess reorganization value, LIFO provision, special charges,
unusual items, the write-down of impaired long-lived assets, reorganization
items, extraordinary items, the cumulative effect of change in accounting
principle 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.
No interest expense for the Company's $1.132 billion of the Company's
former senior and senior subordinated notes has been accrued on or after the
Petition Date. Had such interest been accrued, cash interest expense for the
21-week period ended June 26, 1999 would have been approximately $57.4 million.
NOTE 13 - INVENTORIES
Inventories are stated at the lower of cost or market using the
last-in, first-out ("LIFO") method of valuation for the vast majority of the
Company's inventories. If the first-in, first-out ("FIFO") method had been used
by the Company, inventories would have been $0.9 million and $23.6 million
higher than reported at October 30, 1999 and January 30, 1999, respectively. In
connection with the implementation of fresh-start reporting the Company adjusted
the value of its LIFO inventories on the Effective Date to be equal to fair
value which approximates the FIFO value of inventories.
-14-
NOTE 14 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment - net consists of the following (in
thousands):
OCTOBER 30, 1999 JANUARY 30, 1999
---------------- ----------------
Land $ 40,152 $ 16,525
Buildings 83,585 183,660
Furniture and fixtures 103,880 455,592
Vehicles 2,385 16,792
Leasehold improvements 3,842 171,007
--------- ---------
233,844 843,576
Less: Accumulated depreciation (10,313) (463,433)
--------- ---------
Property, plant and equipment - net $ 223,531 $ 380,143
========= =========
In connection with the implementation of fresh-start reporting, the
Company determined the fair value of each of its leases and recorded a
beneficial lease asset of approximately $61.2 million on June 26, 1999.
Accordingly, the Company eliminated the book value of its leasehold
improvements.
NOTE 15 - LONG-TERM DEBT
Prior to the Petition Date, the Company had the Pre-petition Revolving
Credit Facility which provided for borrowings of up to $250 million, subject to
a borrowing base limitation measured by eligible inventory and accounts
receivable of the Company. After the Petition Date, the Bankruptcy Court
approved the DIP Facility. A portion of the proceeds of the DIP Facility were
used to repay, in full, the Company's Pre-petition Revolving Credit Facility and
a mortgage on one of the Company's distribution facilities and to finance its
working capital and capital expenditure requirements. The DIP Facility matured
on June 29, 1999, the Effective Date.
The consummation of the Plan has resulted in the holders of Penn
Traffic's former senior and senior subordinated notes exchanging their notes in
the following manner: (a) the holders of the former outstanding $732.2 million
of senior notes received their pro rata share of $100 million of New Senior
Notes and 19,000,000 shares of New Common Stock, and (b) the holders of the
former outstanding $400 million of senior subordinated notes received their pro
rata share of 1,000,000 shares of New Common Stock and six-year warrants to
purchase 1,000,000 shares of New Common Stock having an exercise price of $18.30
per share.
The New Senior Notes mature on June 29, 2009 and do not contain any
mandatory redemption or sinking fund requirement provisions (other than pursuant
to certain customary exceptions including, without limitation, requiring the
Company to make an offer to repurchase the New Senior Notes upon the occurrence
of a change of control), and are optionally redeemable at prices beginning at
106% of par in 2004 and declining annually thereafter to par in 2008, and at
111% of par under other specified circumstances as dictated by the Plan.
Pursuant to the terms of the indenture for the New Senior Notes, the Company, at
its election, can choose to pay interest on the New Senior Notes, at the rate of
11% per annum, for the first two years (i.e., the first four interest payments)
through the issuance of additional notes and thereafter, interest on the New
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.
-15-
In connection with the consummation of the Plan, the Company entered
into the New Credit Facility. The New Credit Facility includes (a) the $205
million New Revolving Credit Facility and (b) the $115 million Term Loan. The
lenders under the New Credit Facility have a first priority perfected security
interest in substantially all of the Company's assets. Proceeds from the New
Credit Facility were used to satisfy the Company's obligations under its DIP
Facility, pay certain costs of the reorganization process and are available to
satisfy the Company's ongoing working capital and capital expenditure
requirements.
The Term Loan will mature on June 30, 2006. Amounts of the Term Loan
maturing in future fiscal years are outlined in the following table (in
thousands):
FISCAL YEAR AMOUNT MATURING
----------- ---------------
2001 $ 2,000
2002 4,750
2003 6,750
2004 9,750
2005 12,750
2006 7,750
2007 71,250
--------
$115,000
========
Availability under the New Revolving Credit Facility is calculated
based on a specified percentage of eligible inventory and accounts receivable of
the Company. The New Revolving Credit Facility will mature on June 30, 2005. As
of October 30, 1999, there were no borrowings under the New Revolving Credit
Facility. Availability under the New Revolving Credit Facility was approximately
$154 million as of October 30, 1999.
Total debt outstanding on October 30, 1999 was (in thousands):
Current Maturities $ 1,289
--------
New Term Loan 114,000
Other Secured Debt 12,751
New Senior Notes 100,000
--------
Total Long-Term Debt 226,751
--------
Total Debt $228,040
========
-16-
NOTE 16 - COMMON STOCK OPTIONS AND WARRANTS OUTSTANDING
Pursuant to the Plan, the Company is authorized to issue 30,000,000
shares of New Common Stock. As of October 30, 1999, 20,106,955 shares of common
stock have been issued.
Pursuant to the Plan, the Company is authorized to issue 1,000,000
shares of preferred stock. No shares have been issued.
Pursuant to the Plan, the 1999 Equity Incentive Plan (the "Equity
Plan") was adopted on the Effective Date. The Equity Plan makes available the
granting of options to acquire an aggregate of 2,297,000 shares of New Common
Stock. All of the Company's officers and employees are eligible to receive
options under the Equity Plan. Options to acquire an aggregate of 1,097,000
shares were issued as of the Effective Date. Options to acquire an additional
1,067,500 shares were granted during the 18-week period ended October 30, 1999
to certain officers and employees of the Company. Options to acquire an
additional 137,500 shares may be granted by the Board of Directors' Compensation
Committee.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), defines a fair value based method of
accounting for an employee stock option by which compensation cost is measured
at the grant date based on the fair value of the award and is recognized over
the service period. A company may elect to adopt SFAS 123 or elect to continue
accounting for its stock option or similar equity awards using the method of
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), by which compensation cost is
measured at the date of grant based on the excess of the market value of the
underlying stock over the exercise price. The Company has elected to continue to
account for its stock-based compensation plan under the provisions of APB 25. No
compensation expense has been recognized in the accompanying interim financial
statements relative to the Company's Equity Plan.
During the 18-week period ended October 30, 1999, the Company adopted
the 1999 Directors' Stock Option Plan (the "Directors' Plan"). The Directors'
Plan makes available to the Company's directors, who are not officers of the
Company, options to acquire up to 250,000 shares of New Common Stock. During the
18-week period ended October 30, 1999, the Company granted options to purchase
an aggregate of 140,000 shares to seven of the Company's directors.
Pursuant to the Plan, the Company has also issued six-year warrants to
purchase 1,000,000 shares of New Common Stock at an exercise price of $18.30 per
share.
-17-
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.
Without limiting the foregoing, the words "believe," "anticipate," "plan,"
"expect," "estimate," "intend" and other similar expressions are intended to
identify forward-looking statements. The Penn Traffic Company (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 achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
the success or failure of the Company in implementing its current business and
operational strategies; availability, terms and access to capital and customary
trade credit; general economic and business conditions; competition; changes in
the Company's business strategy; availability, location and terms of sites for
store development; unexpected costs of year 2000 compliance or failure by the
Company or other entities with which it does business to achieve compliance;
labor relations; the outcome of pending or yet-to-be instituted legal
proceedings; and labor and employee benefit costs.
OVERVIEW
As discussed in Note 1 to the accompanying Consolidated Financial
Statements, the Company emerged from its Chapter 11 proceedings effective June
29, 1999 (the "Effective Date"). For financial reporting purposes, the Company
accounted for the consummation of its plan of reorganization (the "Plan")
effective June 26, 1999. In accordance with the American Institute of Certified
Public Accountant's Statement of Position 90-7 "Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company has
applied fresh-start reporting as of June 26, 1999 which has resulted in
significant changes to the valuation of certain of the Company's assets and
liabilities, and to its stockholders' equity. In connection with the adoption of
fresh-start reporting, a new entity has been deemed created for financial
reporting purposes. The periods presented prior to June 26, 1999 have been
designated "Predecessor Company" and the periods subsequent to June 26, 1999
have been designated "Successor Company". For purposes of the discussion of
Results of Operations for the 39-week period ended October 30, 1999, the results
of the Predecessor Company and Successor Company have been combined since
separate discussions of these periods are not meaningful in terms of their
operating results or comparisons to the prior year.
-18-
RESULTS OF OPERATIONS
THIRTEEN WEEKS ("THIRD QUARTER FISCAL 2000") AND THIRTY-NINE WEEKS ENDED OCTOBER
30, 1999 COMPARED TO THIRTEEN WEEKS ("THIRD QUARTER FISCAL 1999") AND
THIRTY-NINE WEEKS ENDED OCTOBER 31, 1998
The following table sets forth Statement of Operations components
expressed as percentages of total revenues for Third Quarter Fiscal 2000 and
Third Quarter Fiscal 1999, and for the 39-week periods ended October 30, 1999
and October 31, 1998, respectively:
Third Quarter Ended Thirty-nine Weeks Ended
OCTOBER 30, October 31, OCTOBER 30, October 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Total revenues 100.0% 100.0% 100.0% 100.0%
Gross profit (1) 23.7 20.6 22.9 21.6
Gross profit excluding
special charges (2) 23.7 21.3 23.1 21.8
Selling and administrative
expenses 21.4 21.9 21.9 21.2
Unusual items (3) 0.3 6.5 (0.1) 2.1
Write-down of long-lived
assets 13.3 4.3
Amortization of excess
reorganization value 4.7 2.1
Operating (loss) (2.7) (21.1) (1.0) (6.0)
Operating income (loss)
excluding unusual items,
special charges and
amortization of excess
reorganization value (4) 2.3 (0.6) 1.2 0.6
Interest expense 1.5 5.4 1.9 5.2
Reorganization items 9.0
Net (loss) income (4.4) (26.5) 23.3 (10.5)
Net income (loss) excluding unusual items,
special charges, amortization of
excess reorganization value,
reorganization items and
extraordinary items (5) 0.4 (5.9) (0.8) (3.8)
(1) Total revenues less cost of sales.
(2) Gross profit excluding a special charge of $3.9 million for the 39-week
period ended October 30, 1999. Gross profit excluding a special charge
of $5.3 million for Third Quarter Fiscal 1999 and the 39-week period
ended October 31, 1998 (see Note 4 and Note 5).
-19-
RESULTS OF OPERATIONS (CONTINUED)
(3) Unusual items of $1.9 million and $2.7 million (income) for Third
Quarter Fiscal 2000 and the 39-week period ended October 30, 1999,
respectively. Unusual item of $45.1 million for Third Quarter Fiscal
1999 and the 39-week period ended October 31, 1998 (see Note 5).
(4) Operating (loss) for Third Quarter Fiscal 2000 excluding an unusual
item of $1.9 million and amortization of excess reorganization value of
$28.6 million. Operating (loss) for the 39-week period ended October
30, 1999 excluding unusual items (income) of $2.7 million, a special
charge of $3.9 million and amortization of excess reorganization value
of $39.5 million. Operating (loss) for Third Quarter Fiscal 1999 and
the 39-week period ended October 31, 1998 excluding special charges of
$50.4 million and the write-down of long-lived assets of $91.5 million
(see Notes 4, 5 and 6).
(5) Net (loss) for Third Quarter Fiscal 2000 excluding an unusual item of
$1.9 million and amortization of excess reorganization value of $28.6
million. Net income for the 39-week period ended October 30, 1999
excluding unusual items (income) of $2.7 million, a special charge of
$3.9 million, amortization of excess reorganization value of $39.5
million, reorganization items (expense) of $167.0 million and
extraordinary items (income) of $654.9 million. Net (loss) for Third
Quarter Fiscal 1999 and the 39-week period ended October 31, 1998
excluding special charges of $50.4 million and the write-down of
long-lived assets of $91.5 million (see Notes 4, 5, 6, 8 and 10).
Total revenues for Third Quarter Fiscal 2000 decreased to $610.6
million from $690.6 million in Third Quarter Fiscal 1999. Total revenues for
the 39-week period ended October 30, 1999 decreased to $1.86 billion from
$2.14 billion for the 39-week period ended October 31, 1998. The decrease in
revenues for Third Quarter Fiscal 2000 and the 39-week period ended October
30, 1999 is primarily attributable to (1) a reduction in the number of stores
the Company has operated in Fiscal 2000 as compared to Fiscal 1999 resulting
from the Company's decision to close or sell certain stores, most of which
were underperforming, as part of the Company's store rationalization program,
(2) a decline in wholesale revenues and (3) for the 39-week period ended
October 30, 1999, a decline in same store sales.
Same store sales for Third Quarter Fiscal 2000 increased 0.4%. For the
39-week period ended October 30, 1999 same store sales decreased 1.8% compared
to the prior year period. Wholesale supermarket revenues were $73.0 million in
Third Quarter Fiscal 2000 compared to $85.5 million in Third Quarter Fiscal
1999. Wholesale supermarket revenues were $224.4 million for the 39-week period
ended October 30, 1999 compared to $256.9 million for the 39-week period ended
October 31, 1998. The decrease in wholesale revenues resulted primarily from a
reduction in the number of customers of the Company's wholesale/franchise
business.
-20-
RESULTS OF OPERATIONS (CONTINUED)
Gross profit in Third Quarter Fiscal 2000 was 23.7% of revenues
compared to 20.6% of revenues in Third Quarter Fiscal 1999. Gross profit
excluding special charges in Third Quarter Fiscal 2000 was 23.7% of revenues
compared to 21.3% of revenues in Third Quarter Fiscal 1999. Gross profit in the
39-week period ended October 30, 1999 was 22.9% of revenues compared to 21.6% of
revenues for the 39-week period ended October 31, 1998. For the 39-week period
ended October 30, 1999, gross profit excluding special charges was 23.1% of
revenues compared to 21.8% of revenues for the 39-week period ended October 31,
1998.
The increase in gross profit excluding special charges as a
percentage of revenues in Third Quarter Fiscal 2000 compared to Third Quarter
Fiscal 1999 was primarily due to (1) the positive effect of re-establishing
the Company's traditional high/low pricing strategy in the second half of the
fiscal year ended January 30, 1999 ("Fiscal 1999"), (2) reduced inventory
shrink expense as a percentage of revenues, (3) an increase in allowance
income from the Company's vendors, (4) the positive effect of the sale or
closure of 50 stores which generally had lower gross margins than the average
for the Company as part of the Company's store rationalization program and
(5) a reduction in depreciation and amortization expense (as described below).
The increase in gross profit excluding special charges as a
percentage of revenues for the 39-week period ended October 30, 1999 was
primarily due to (1) the positive effect of re-establishing the Company's
traditional high/low pricing strategy in the second half of Fiscal 1999, (2)
reduced inventory shrink expense as a percentage of revenues, (3) the
positive effect of the sale or closure of 50 stores which generally had lower
gross margins than the average for the Company as part of the Company's store
rationalization program and (4) a reduction in depreciation and amortization
expense (as described below). These improvements in gross profit as a
percentage of revenues were partially offset by reduced allowance income from
the Company's vendors in the 39-week period ended October 30, 1999.
Selling and administrative expenses in Third Quarter Fiscal 2000 were
21.4% of revenues compared to 21.9% of revenues in Third Quarter Fiscal 1999.
For the 39-week period ended October 30, 1999, selling and administrative
expenses were 21.9% of revenues compared to 21.2% of revenues for the 39-week
period ended October 31, 1998.
The reduction in selling and administrative expenses as a percentage of
revenues in Third Quarter Fiscal 2000 was primarily due to reductions in bad
debt expense, depreciation expense (as described below) and goodwill
amortization. The Company's Goodwill was eliminated on June 26, 1999 in
connection with the implementation of fresh-start reporting. These reductions of
selling and administrative expenses as a percentage of revenues in Third Quarter
Fiscal 2000 were partially offset by (1) the Company's investment in store labor
as part of an effort to improve operations and focus on customer service and (2)
the spreading of certain fixed and semi-fixed costs over reduced revenues.
-21-
RESULTS OF OPERATIONS (CONTINUED)
The increase in selling and administrative expenses as a percentage
of revenues for the 39-week period ended October 30, 1999 was primarily due
to (1) the Company's investment in store labor as part of an effort to
improve operations and focus on customer service and (2) the spreading of
certain fixed and semi-fixed costs over reduced revenues. These increases in
selling and administrative expenses were partially offset by (1) a reduction
in promotional expenses as a percentage of revenues related to the sale or
closure of 50 stores in connection with the Company's store rationalization
program which generally had higher promotional expenses than the average of
the Company (the Company accounts for certain promotional expenses in the
Selling and administrative expense line of the Consolidated Statement of
Operations), (2) a reduction in depreciation expense (as described below) and
(3) a reduction in goodwill amortization resulting from (a) the Company's
store rationalization program, commenced in the middle of Fiscal 1999, which
involved the sale or closure of certain stores and the write-off of related
goodwill and (b) the elimination of Goodwill on June 26, 1999 in connection
with the implementation of fresh-start reporting (see Note 3).
Depreciation and amortization expense was $10.8 million in Third
Quarter Fiscal 2000 and $19.4 million in Third Quarter Fiscal 1999, representing
1.8% and 2.8% of revenues, respectively. Depreciation and amortization expense
was $41.3 million for the 39-week period ended October 30, 1999 and $59.3
million for the 39-week period ended October 31, 1998, representing 2.2% and
2.8% of total revenues, respectively. Depreciation and amortization expense
decreased in Third Quarter Fiscal 2000 and the 39-week period ended October 30,
1999 primarily due to (1) a reduction in the Company's capital expenditure
program, (2) the Company's store rationalization program, commenced in the
middle of Fiscal 1999, which involved the sale or closure of certain stores, (3)
the write-down of long-lived assets recorded in Fiscal 1999 in accordance with
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"), (4) a reduction in the carrying value of property, plant and
equipment associated with the implementation of fresh-start reporting and (5)
the elimination of Goodwill on June 26, 1999 associated with the implementation
of fresh-start reporting.
During the 13-week and 18-week periods ended October 30, 1999,
amortization of excess reorganization value was $28.6 million and $39.5 million,
respectively. The Excess reorganization value asset of $342.6 million, which was
established on the Effective Date in connection with the implementation of
fresh-start reporting, is being amortized on a straight-line basis over a
three-year period (see Note 3).
During Third Quarter Fiscal 2000 and the 39-week period ended
October 30, 1999, the Company recorded an unusual item of $1.9 million
associated with an early retirement program for certain eligible employees
(see Note 5). In addition, during the 39-week period ended October 30, 1999,
the Company recorded unusual items (income) of $4.6 million, related to the
Company's store rationalization program. During Third Quarter Fiscal 1999 and
the 39-week period ended October 31, 1998, the Company recorded a special
charge of $50.4 million related to the Company's store rationalization program
(see Note 5).
-22-
RESULTS OF OPERATIONS (CONTINUED)
During Third Quarter Fiscal 1999 and the 39-week period ended
October 31, 1998, the Company recorded a noncash charge of $91.5 million to
write down the carrying amounts (including allocable goodwill) of property held
for sale in connection with the Company's store rationalization program to
estimated realizable value (see Note 6).
Operating (loss) for Third Quarter Fiscal 2000 was $16.7 million or
2.7% of total revenues compared to an operating (loss) of $145.8 million or
21.1% of total revenues in Third Quarter Fiscal 1999. For Third Quarter
Fiscal 2000, operating income excluding an unusual item and amortization of
excess reorganization value was $13.8 million or 2.3% of revenues. For Third
Quarter Fiscal 1999, operating (loss) excluding special charges and the
write-down of long-lived assets was $3.8 million or 0.6% of revenues.
Operating income excluding unusual items, special charges and amortization of
excess reorganization value as a percentage of revenues increased due to the
increase in gross profit excluding special charges as a percentage of
revenues and a reduction in selling and administrative expenses as a
percentage of revenues.
Operating (loss) for the 39-week period ended October 30, 1999 was
$18.2 million or 1.0% of total revenues compared to an operating (loss) of
$128.8 million or 6.0% of revenues for the 39-week period ended October 31,
1998. Operating income excluding unusual items, special charges and amortization
of excess reorganization value for the 39-week period ended October 30, 1999 was
$22.5 million or 1.2% of revenues compared to $13.1 or 0.6% of revenues for the
39-week period ended October 31, 1998. Operating income excluding unusual items,
special charges and amortization of excess reorganization value as a percentage
of revenues increased in the 39-week period ended October 30, 1999 due to an
increase in gross profit excluding special charges as a percentage of revenues
partially offset by an increase in selling and administrative expenses as a
percentage of revenues.
Interest expense for Third Quarter Fiscal 2000 and Third Quarter Fiscal
1999 was $9.5 million and $37.1 million, respectively. Interest expense for the
39-week periods ended October 30, 1999 and October 31, 1998 was $34.8 million
and $111.3 million, respectively. Interest expense for Third Quarter Fiscal 2000
declined due to the implementation of the Plan on June 29, 1999, which has
substantially reduced the Company's debt. Interest expense for the 39-week
period ended October 30, 1999 declined primarily due to (1) the fact that on
March 1, 1999 (the "Petition Date"), the Company discontinued the accrual of
interest on the Company's former senior and senior subordinated notes and (2)
the implementation of the Plan on June 29, 1999, which has substantially reduced
the Company's debt.
During the 39-week period ended October 30, 1999, the Company recorded
reorganization items (expense) of $167.0 million (see Note 8).
-23-
RESULTS OF OPERATIONS (CONTINUED)
Income tax provision was $1.0 million for Third Quarter Fiscal 2000
compared to a tax provision of $0.0 million in Third Quarter Fiscal 1999.
Income tax provision for the 39-week period ended October 30, 1999 was $1.1
million compared to a tax benefit of $16.6 million for the 39-week period
ended October 31, 1998. The effective tax rate for Third Quarter Fiscal 2000
varies 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. Although the
Company recorded an income tax provision for Third Quarter Fiscal 2000, the
Company does not expect to pay any income taxes for the fiscal year ending
January 29, 2000 due to the utilization of net operating loss carryforwards.
The effective tax rate for the 39-week period ended October 30, 1999 varies
from statutory rates due to (1) differences in income for financial reporting
and tax reporting purposes for the 18-week period ended October 30, 1999 that
result primarily from the nondeductible amortization of excess reorganization
value and (2) the fact the Company recorded a valuation allowance for all
income tax benefits generated in the 21-week period ended June 26, 1999 (see
Note 9).
During the 39-week period ended October 30, 1999, the Company recorded
an extraordinary gain of $654.9 million (see Note 10).
Net (loss) for Third Quarter Fiscal 2000 was $27.1 million compared
to a net (loss) of $182.9 million for Third Quarter Fiscal 1999. Net income
excluding unusual items, special charges and amortization of excess
reorganization value was $2.5 million for Third Quarter Fiscal 2000 compared
to a net (loss) of $41.0 million for Third Quarter Fiscal 1999. Net income
for the 39-week period ended October 30, 1999 was $433.8 million compared to
a net (loss) of $223.5 million for the 39-week period ended October 31, 1998.
Net (loss) excluding unusual items, special charges, amortization of excess
reorganization value, reorganization items and extraordinary items was $14.2
million for the 39-week period ended October 30, 1999 compared to a net
(loss) of $81.6 million for the 39-week period ended October 31, 1998.
-24-
LIQUIDITY AND CAPITAL RESOURCES
As a result of the consummation of the Plan, the Company
substantially reduced the amount of its overall indebtedness. In connection
with the consummation of the Plan, approximately $1.13 billion of senior
notes and senior subordinated notes were converted into $100 million of newly
issued 11% Senior Notes due 2009 (the "New Senior Notes"), approximately
99.5% of the shares of the new common stock of reorganized Penn Traffic (the
"New Common Stock") outstanding on the Effective Date and warrants to
purchase additional shares of New Common Stock. Upon consummation of the Plan
on June 29, 1999, the Company had approximately $326 million of outstanding
indebtedness (including capital leases).
The New Senior Notes mature on June 29, 2009 and do not contain any
mandatory redemption or sinking fund requirement provisions (other than
pursuant to certain customary exceptions including, without limitation,
requiring the Company to make an offer to repurchase the New Senior Notes
upon the occurrence of a change of control), and are optionally redeemable at
prices at 106% of par beginning in the year 2004 and declining annually
thereafter to par in 2008, and at 111% of par under other specified
circumstances as dictated by the Plan. Pursuant to the terms of the indenture
for the New Senior Notes, the Company, at its election, can choose to pay
interest on the New Senior Notes at the rate of 11% per annum, for the first
two years (i.e., the first four interest payments) through the issuance of
additional notes and thereafter, interest on the New 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 has decided to pay the interest on the New Senior Notes in
cash for the initial interest period ending December 29, 1999. The Company
also currently expects to make all future interest payments on the New Senior
Notes in cash instead of through the issuance of any additional notes.
Prior to the Petition Date, the Company had a revolving credit facility
(the "Pre-petition Revolving Credit Facility") which provided for borrowings of
up to $250 million, subject to a borrowing base limitation measured by eligible
inventory and accounts receivable of the Company. After the Petition Date, the
United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court") approved a $300 million debtor-in-possession financing (the "DIP
Facility"). A portion of the proceeds of the DIP Facility were used to repay, in
full, the Company's Pre-petition Revolving Credit Facility and a mortgage on one
of the Company's distribution facilities and to finance its working capital and
capital expenditure requirements. The DIP Facility matured on June 29, 1999, the
Effective Date.
On June 29, 1999, in connection with the consummation of the Plan, the
Company entered into a new $320 million secured credit facility (the "New Credit
Facility"). The New Credit Facility includes (a) a $205 million revolving credit
facility (the "New Revolving Credit Facility") and (b) a $115 million term loan
(the "Term Loan"). The lenders under the New Credit Facility have a first
priority perfected security interest in substantially all of the Company's
assets and the New Credit Facility contains a variety of operational and
financial covenants intended to restrict the Company's operations. Proceeds from
the New Credit Facility were used to satisfy the Company's obligations under its
DIP Facility, pay certain costs of the reorganization process and are available
to satisfy the Company's ongoing working capital and capital expenditure
requirements.
-25-
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Term Loan will mature on June 30, 2006. Amounts of the Term Loan
maturing in future fiscal years are outlined in the following table (in
thousands):
FISCAL YEAR AMOUNT MATURING
----------- ---------------
2001 $ 2,000
2002 4,750
2003 6,750
2004 9,750
2005 12,750
2006 7,750
2007 71,250
--------
$115,000
========
Availability under the New Revolving Credit Facility is calculated
based on a specified percentage of eligible inventory and accounts receivable of
the Company. The New Revolving Credit Facility will mature on June 30, 2005. As
of October 30, 1999, there were no borrowings under the New Revolving Credit
Facility. Availability under the New Revolving Credit Facility was approximately
$154 million as of October 30, 1999.
During Third Quarter Fiscal 2000, the Company's internally generated
funds from operations and amounts available under the New Credit Facility
provided sufficient liquidity to meet the Company's operating, capital
expenditure and debt service needs, and pay expenditures related to the
Company's debt restructuring. The Company expects to utilize internally
generated funds from operations and amounts available under the New Credit
Facility to satisfy its operating, capital expenditure and debt service
needs, and pay expenditures related to the Company's debt restructuring for
the remainder of Fiscal 2000.
Cash flows to meet the Company's operating requirements during the
39-week period ended October 30, 1999 are reported in the Consolidated Statement
of Cash Flows. During the 18-week period ended October 30, 1999, the Company's
net cash used in operating activities, investing activities, and financing
activities were $6.8 million, $11.1 million, and $3.2 million, respectively.
During the 21-week period ended June 26, 1999, the Company's net cash provided
by operating activities and net cash provided by investing activities were $41.0
million and $11.0 million, respectively. These amounts were partially offset by
net cash used in financing activities of $23.9 million. As of October 30, 1999,
the Company had not paid approximately $10 million of expenditures related to
its debt restructuring.
During the fiscal years ending January 29, 2000 and
February 3, 2001, the Company expects to make capital expenditures (including
capital leases) totaling approximately $40 million and $70 million,
respectively. The Company expects to finance such capital expenditures through
cash generated from operations and amounts available under the New Credit
Facility. Capital expenditures will be principally for new stores, store
remodels and investments in the Company's distribution infrastructure and
technology.
-26-
YEAR 2000
Year 2000 exposures arise from the inability of some computer-based
systems and equipment to correctly interpret and process dates after December
31, 1999. The basis for the exposure is that many systems and equipment carry
only the last two digits of the year field. With the year 2000, these systems
and equipment will not be able to distinguish between the year 1900 and 2000.
For those processes and procedures that use the date in calculations,
significant problems can occur.
The Company is dependent on technology including computer hardware and
software and related electronic equipment. This technology supports key business
processes including product procurement, warehousing, product delivery,
inventory control, labor management, retail sales and financial reporting. All
of this technology and electrical equipment may be susceptible to Year 2000
problems.
The calendar year 1999 coincides with eleven months of the Company's
fiscal year 2000. All financial systems have been and currently are functioning
correctly in support of fiscal year 2000.
In 1997, the Company assembled a project team consisting of
representatives across key departments in the organization to assess the state
of readiness and to initiate a plan and timetable to address issues encountered.
This working committee functioned under the control of the Company's Management
Information Systems Steering Committee and provided monthly updates to the
Company's senior management. The Year 2000 readiness plan addresses three major
segments: (a) Information Technology including infrastructure (i.e., mainframe,
server and personal computers and their associated networks), applications,
including all systems and operating software and in-store systems and equipment;
(b) Non-Information Technology, including telephones, time clocks, scales and
security devices and (c) External Entities, including product and service
providers and others with whom the Company interacts or exchanges information.
Each segment of the readiness plan includes data collection, assessment,
prioritization, resolution, testing, implementation, and ongoing monitoring of
compliance.
The table below sets forth the status and expected completion date of
all phases of the readiness plan at December 10, 1999:
ESTIMATED
INFORMATION TECHNOLOGY PERCENT COMPLETE TARGET COMPLETION DATE
- ---------------------- ---------------- ----------------------
Server Computers 100% Complete
Personal Computers 100% Complete
Applications 95% December 1999
Mainframe Computers 100% Complete
Operating Software 100% Complete
In-Store systems/equipment 95% December 1999
NON-INFORMATION TECHNOLOGY
Phone Switches 100% Complete
Other equipment 100% Complete
EXTERNAL ENTITIES
Verification of critical
business partner readiness 99% On-going
Electronic Data Interchange
business partners 97% On-going
-27-
YEAR 2000 (CONTINUED)
The Year 2000 readiness plan has an overall strategy that combines system
replacement and remediation of existing legacy systems. Virtually all critical
equipment and computer programs have been modified or replaced where necessary,
and are now implemented. This includes computing systems and other equipment in
all retail stores, distribution centers, manufacturing facilities and offices.
The remaining installations are underway and will be completed in December 1999.
The Company plans to continue testing systems under various year 2000 dates to
ensure the programs implemented remain year 2000 ready. This effort utilizes
both in-house staff and outside consultants.
As part of the Company's Year 2000 readiness plan, the Company
contacted critical business partners (product suppliers, service providers
and those with whom the Company exchanges information) in the second quarter
of calendar year 1998, requesting information regarding the status of their
individual Year 2000 compliance plans and progress. From that survey, and
updates obtained since then, the Company began a program to test electronic
communications with its critical business partners and convert each to a year
2000 ready state. All critical business partners have had electronic data
interchange formats tested and verified and 99% of such critical business
partners are communicating with the company in year 2000 ready transaction
formats. The Company is continuing to test electronic communications with a
number of smaller supply chain vendors. The Company will commence electronic
communications in a year 2000 ready state with these smaller vendors as soon
as possible. The volume of business represented by these smaller vendors is
not deemed significant to the Company's business. The Company's strategy is
to convert any vendor which the Company communicates with using electronic
data interchange, which is not year 2000 ready by December 27, 1999, to a
modified process allowing for automatic translation of electronic data
interchange to facsimile, thus ensuring uninterrupted communications with
such vendors without significant additional cost to the Company.
Based on current information, management expects that the Company will
not experience significant disruption to operations due to Year 2000 compliance
issues. Management believes the Company compliance assessment and remediation
effort has been thorough. Notwithstanding the substantial efforts of the Company
and its key business partners, the Company could experience disruptions to parts
of its various activities and operations. Consequently, the Company has
formulated a business contingency plan for critical functions and processes that
may be adversely affected by a Year 2000 related problem. The plan considers the
potential for disruption in utilities such as power and telecommunications,
banking, state and local government, and transportation industries, and
addresses provisioning of inventory and supplying stores and customers in the
weeks leading up to and beyond January 1, 2000, communication with employees and
customers, payment to employees and remittance to suppliers, and other areas.
The contingency plan, while complete, will continually be reviewed throughout
the balance of the calendar year as additional information becomes available.
Based on current information, the Company estimates the cost of Year
2000 compliance will be approximately $9 million including the purchase of
certain new hardware and software. To date such expenditures have totaled
approximately $8.1 million. The Company has and will continue to fund these
expenditures by utilizing the Company's operating cash flow as well as amounts
available under its New Credit Facility.
-28-
YEAR 2000 (CONTINUED)
Because the Company's Year 2000 compliance is partially dependent upon
key business partners also being Year 2000 compliant on a timely basis, there
can be no guarantee that the Company's overall efforts will prevent a material
adverse impact on its results of operations, financial condition and cash flows.
The possible consequences to the Company of not being fully Year 2000 compliant
include temporary supermarket closings, delays in the delivery of merchandise,
errors in purchase orders and other financial transactions, and the inability to
efficiently process customer purchases. In addition, business disruptions could
result from the loss of power or the loss of communication links between
supermarkets, warehouse and headquarters locations.
-29-
PART II. OTHER INFORMATION
All items which are not applicable or to which the answer is negative
have been omitted from this report.
ITEM 1. LEGAL PROCEEDINGS
Reorganization. Reference is made to Note 1 of the Consolidated
Financial Statements in Part I and is incorporated by reference herein.
ITEM 2. CHANGE IN SECURITIES
The information required by this item is furnished by incorporation by
reference to the information regarding the material features of the Plan
contained in Note 1 of the Consolidated Financial Statements in Part I of this
Form 10-Q.
ITEM 5. OTHER INFORMATION
Trading of the New Common Stock and warrants on the Nasdaq National
Market under the symbols "PNFT" and "PNFTW," respectively, commenced on
September 15, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
10.21B Amendment No. 2 to Employment Agreement
of Joseph V. Fisher, dated December 2,
1999
10.23A Amended and Restated Management Agreement
of Hirsch & Fox LLC, dated December 2,
1999
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fiscal quarter ended
October 30, 1999.
-30-
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
December 14, 1999 /s/- JOSEPH V. FISHER
---------------------
By: Joseph V. Fisher
President, Chief Executive
Officer and Director
December 14, 1999 /s/- MARTIN A. FOX
------------------
By: Martin A. Fox
Vice Chairman of the
Executive Committee and
Chief Financial Officer
-31-