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 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission file number 1-9930
THE PENN TRAFFIC COMPANY
(Exact name of registrant as specified in its charter)
Delaware 25-0716800
(State of incorporation) (IRS Employer Identification No.)
1200 State Fair Blvd., Syracuse, NY 13221-4737
(Address of principal executive offices) (Zip Code)
(315) 453-7284
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days.
YES [X] NO [ ]
Common stock, par value $1.25 per share: 10,695,491 shares
outstanding as of December 11, 1998
1 of 21
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
THE PENN TRAFFIC COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
(All dollar amounts in thousands,
except per share data)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
1998 1997 1998 1997
---------- ---------- ---------- ----------
TOTAL REVENUES $ 690,591 $ 726,180 $2,137,613 $2,259,458
COSTS AND OPERATING EXPENSES:
Cost of sales (including
buying and occupancy
costs) (Note 3) 548,534 561,799 1,676,553 1,735,448
Selling and administrative
expenses (Note 3) 151,173 148,161 453,208 478,262
Restructuring charges (Note 3) 10,704
Unusual items (Note 3) 45,160 45,160
Write-down of long lived
assets (Note 4) 91,512 91,512
---------- ---------- ---------- ----------
OPERATING (LOSS) INCOME (145,788) 16,220 (128,820) 35,044
Interest expense 37,132 37,548 111,252 112,208
---------- ---------- ---------- ----------
(LOSS) BEFORE INCOME TAXES (182,920) (21,328) (240,072) (77,164)
Provision (benefit) for
income taxes (Note 5) 38 (7,801) (16,558) (28,888)
---------- ---------- ---------- ----------
NET (LOSS) $ (182,958) $ (13,527) $ (223,514) $ (48,276)
========== ========== ========== ==========
PER SHARE DATA (BASIC
AND DILUTED):
Net (loss) (Note 6) $ (17.31) $ (1.28) $ (21.15) $ (4.57)
========== ========== ========== ==========
See Notes to Interim Consolidated Financial Statements.
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THE PENN TRAFFIC COMPANY
CONSOLIDATED BALANCE SHEET
(All dollar amounts in thousands)
UNAUDITED
OCTOBER 31, 1998 JANUARY 31, 1998
---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and short-term investments $ 47,887 $ 49,095
Accounts and notes receivable
(less allowance for doubtful accounts
of $5,122 and $3,597 respectively) 60,196 68,454
Inventories (Note 8) 315,345 327,389
Prepaid expenses and other current assets 15,356 16,032
---------- ----------
Total Current Assets 438,784 460,970
NONCURRENT ASSETS:
Capital leases - net 97,512 115,581
Property, plant and equipment - net 422,457 496,501
Goodwill - net 300,542 401,829
Other assets and deferred charges - net 87,744 88,705
---------- ----------
$1,347,039 $1,563,586
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of obligations
under capital leases $ 11,546 $ 13,518
Current maturities of long-term
debt (Note 9) 135,838 4,429
Trade accounts and drafts payable 156,573 149,389
Payroll and other accrued liabilities 71,625 79,763
Accrued interest expense 20,051 35,335
Payroll taxes and other taxes payable 15,326 19,208
Deferred income taxes 16,671
---------- ----------
Total Current Liabilities 410,959 318,313
NONCURRENT LIABILITIES:
Obligations under capital leases 107,542 121,436
Long-term debt (Note 9) 1,145,429 1,234,224
Other noncurrent liabilities 66,431 49,422
---------- ----------
Total Liabilities 1,730,361 1,723,395
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stock - authorized 10,000,000
shares at $1.00 par value; none issued
Common Stock - authorized 30,000,000
shares at $1.25 par value; 10,695,491
shares and 10,824,591 shares
issued and outstanding, respectively 13,426 13,586
Capital in excess of par value 179,881 180,060
Retained deficit (565,204) (340,470)
Minimum pension liability adjustment (10,667) (10,667)
Unearned compensation (133) (1,693)
Treasury stock, at cost (625) (625)
---------- ----------
Total Shareholders' Equity (383,322) (159,809)
---------- ----------
$1,347,039 $1,563,586
========== ==========
See Notes to Interim Consolidated Financial Statements.
- 3 -
THE PENN TRAFFIC COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
(All dollar amounts in thousands)
THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
OCTOBER 31, 1998 NOVEMBER 1, 1997
---------------- ----------------
OPERATING ACTIVITIES:
Net (loss) $(223,514) $ (48,276)
Adjustments to reconcile
net (loss) to net cash (used in)
by operating activities:
Depreciation and amortization 48,139 56,078
Amortization of intangibles 11,163 11,987
Other - net 136,186 (5,024)
NET CHANGE IN ASSETS AND LIABILITIES:
Accounts receivable and prepaid expenses 8,934 718
Inventories 12,044 (5,855)
Payables and accrued expenses (20,120) (12,052)
Deferred taxes (16,671) (29,000)
Deferred charges and other assets (1,013) 194
-------- --------
NET CASH (USED IN)
OPERATING ACTIVITIES (44,852) (31,230)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (11,331) (15,723)
Proceeds from sale of assets 28,227 3,770
Other - net 1,652
-------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 16,896 (10,301)
-------- --------
FINANCING ACTIVITIES:
Payments to settle long-term debt (5,503) (1,699)
Borrowing of revolver debt 101,600 332,300
Repayment of revolver debt (53,483) (285,000)
Reduction of capital lease obligations (15,866) (9,929)
Other - net 8
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 26,748 35,680
-------- --------
(DECREASE) IN CASH AND
CASH EQUIVALENTS (1,208) (5,851)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 49,095 53,240
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 47,887 $ 47,389
======== ========
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 generally accepted accounting principles
for complete financial statements.
The results of operations for the interim periods are not necessarily
an indication of results to be expected for the year. In the opinion of
management, all adjustments necessary for a fair presentation of the results are
included for the interim periods, and all such adjustments are normal and
recurring. These unaudited interim financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Annual Report on Form 10-K for the fiscal year ended January
31, 1998.
All significant intercompany transactions and accounts have been
eliminated in consolidation.
Certain prior year amounts have been reclassified on the Consolidated
Statement of Cash Flows for comparative purposes.
NOTE 2 - ASSET DISPOSITION PROCESS
On June 4, 1998, the Company announced that it had engaged Goldman
Sachs & Company to undertake a process for realizing value from certain of the
Company's Bi-Lo stores and related wholesale/franchise operations located in
Pennsylvania. To date, the Company has completed the sale of 3 stores in
Pennsylvania and certain other real estate and is currently engaged in
negotiations with potential buyers for certain other Bi-Lo stores.
The Company has determined to continue with the process of selling 22
Bi-Lo stores which, together with the 3 stores previously sold, generated
revenues of $49.5 million and $155.8 million for the 13-week and 39-week periods
ended October 31, 1998, respectively. The net proceeds from the sale of these
stores will be used by the Company to satisfy its short-term capital needs. In
addition, the Company has decided to close 21 Bi-Lo stores (9 of which were
closed in the third quarter). These 21 Bi-Lo stores generated revenues of $20.4
million and $74.6 million for the 13-week and 39-week periods ended October 31,
1998, respectively (these amounts reflect the fact that the 9 stores closed
during the third quarter did not have revenues for the entire periods
described).
The Company intends to retain and operate its 32 remaining Bi-Lo stores
and its existing wholesale/franchise operations in Pennsylvania. No assurance
can be given that any of the transactions described above will be completed nor
is it possible to predict the net proceeds to the Company of any such
transaction or the timing of such a transaction.
- 5 -
NOTE 3 - SPECIAL CHARGES
During the 13-week period ended October 31, 1998, the Company recorded
a special charge of $50.4 million primarily related to (1) the decision to close
24 stores (including the 21 Bi-Lo stores referred to in Note 2 above) primarily
in connection with the process of realizing value from the Company's Bi-Lo
operations and (2) a gain related to the sale of 4 stores (including the 3 Bi-Lo
stores referred to in Note 2 above) and certain other real estate. The
components of this charge are described below.
During the 13-week period ended October 31, 1998, the Company recorded
a charge of $60.0 million in connection with a decision to close 24 of its
stores (11 of which were closed during the third quarter). This charge is
comprised of a write-down of fixed assets ($15.3 million), a write-off of
goodwill ($16.4 million), net present value of future lease costs ($20.4
million), inventory markdowns ($5.3 million), employee severance costs and other
miscellaneous expenses ($2.6 million). All of these costs are included in the
unusual item account except for inventory markdowns which are included in cost
of sales. In addition, during the 13- week period ended October 31, 1998 the
Company sold 4 of its stores and certain other real estate and recorded a net
gain of $9.6 million. This gain is included in the unusual item account.
For the 39-week period ended November 1, 1997 the Company recorded a
charge totaling $12.7 million associated with a management reorganization and
related corporate actions ($10.7 million of this charge is included in a
restructuring charge and $1.9 million is included in selling and administrative
expenses). In addition, during the 39-week period ended November 1, 1997 the
Company recorded a charge of $5.6 million associated with the retention of
certain corporate executives, which is included in selling and administrative
expenses.
NOTE 4 - 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 June 1998, the Company announced its plans for realizing
value from certain of its Pennsylvania Bi-Lo stores and related wholesale
operations. The Company expects to complete this process during calendar year
1999. For the 13-week period ended October 31, 1998, the Company recorded a
noncash charge of $91.5 million to write down the carrying amounts of 22 stores
held for sale (including allocable goodwill) to estimated realizable value.
NOTE 5 - TAX BENEFITS
The tax provision for the 13-week period 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.
- 6 -
NOTE 6 - NET (LOSS) PER SHARE
In the fourth quarter of Fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). The
previously presented EPS amount for the quarter ended November 1, 1997 has been
restated to reflect the method of computation required by SFAS 128. Shares used
in the calculation of basic EPS (weighted average shares outstanding) were
10,570,491 for the quarter ended October 31, 1998 and 10,569,641 for the quarter
ended November 1, 1997. The calculations of diluted EPS exclude the effect of
incremental dilutive potential securities aggregating 281,202 shares for the
quarter ended November 1, 1997, since they would have been antidilutive given
the net loss for the quarter. There were no incremental dilutive potential
securities for the quarter ended October 31, 1998.
NOTE 7 - SUPPLEMENTAL FINANCIAL INFORMATION
(In thousands of dollars)
Third Quarter Thirty-nine Weeks
------------- -----------------
Fiscal 1999
- -----------
Operating (Loss) $(145,788) $(128,820)
Operating (Loss) Income before
special charges (3,848) 13,120
Depreciation and Amortization 19,360 59,302
LIFO Provision 625 1,875
Cash Interest Expense 35,890 107,569
Fiscal 1998
- -----------
Operating Income $ 16,220 $ 35,044
Operating Income before
special charges 16,220 53,236
Depreciation and Amortization 22,145 67,571
LIFO Provision 750 2,000
Cash Interest Expense 36,338 108,601
- 7 -
NOTE 8 - INVENTORIES
If the first-in, first-out (FIFO) method had been used by the Company,
inventories would have been $24,441,000 and $22,566,000 higher than reported at
October 31, 1998 and January 31, 1998, respectively.
NOTE 9 - LONG-TERM DEBT AND PROPOSED RESTRUCTURING
The Company and the lenders ("Bank Lenders") that are parties to the
Company's revolving credit facility ("Revolving Credit Facility") entered into
an amendment dated as of August 31, 1998 to the Revolving Credit Facility that
provides that the financial covenants contained in the Revolving Credit Facility
would not be applicable to the Company for the period from August 1, 1998 until
April 1, 1999. The Company does not believe, based upon its current operating
performance, that it will be in compliance with the financial covenants set
forth in the Revolving Credit Facility after April 1, 1999. Accordingly, the
amount outstanding under the Revolving Credit Facility as of October 31, 1998
($125.7 million) and the amount outstanding under a secured term loan ($9.5
million) which contains the same financial covenants as the Revolving Credit
Facility have been classified as Current Maturities of Long-Term Debt. In
addition, the Bank Lenders have agreed to (i) amend the Revolving Credit
Facility so that the failure by the Company to make the interest payment on its
85/8% Senior Notes described below will not constitute the failure of a
condition precedent to borrowing by the Company under the Revolving Credit
Facility and (ii) waive the occurrence of an event of default under the
Revolving Credit Facility until April 1, 1999 resulting from the failure by the
Company to make such interest payment past the applicable grace period provided
for in the indenture for the 85/8% Senior Notes.
In order to address its long-term capital and debt service
requirements, on December 10, 1998, the Company announced that it had begun
working with an informal committee comprised of more than 40% of the principal
amount of its outstanding senior notes and more than 50% of the principal amount
of its outstanding subordinated notes for the purpose of negotiating a
consensual restructuring of its outstanding securities, including the
outstanding notes. As of October 31, 1998, the Company had approximately $1.13
billion of senior and subordinated notes outstanding. The Company also announced
that it had engaged The Blackstone Group as its financial advisor in connection
with its restructuring efforts.
- 8 -
The Company intends that any such restructuring plan will convert a
substantial portion of its senior and subordinated notes to equity. In addition,
the Company has advised the informal committee of noteholders that any
restructuring proposal made by the Company will provide for payment in full of
all obligations to the Company's trade creditors that continue to support the
Company with customary trade credit. The informal committee of noteholders has
informed the Company that it will support the full repayment of the Company's
trade creditors in connection with a restructuring proposal which is otherwise
acceptable to such noteholders. In addition, Fleet Bank, the agent bank for the
Company's $250 million Revolving Credit Facility, has advised the Company that
it is supporting the Company's efforts to restructure its outstanding
securities. The Company anticipates that any such consensual restructuring would
be implemented through a voluntary filing for relief under Chapter 11 of the
U.S. Bankruptcy Code.
In light of the proposed restructuring, the Company has elected to take
advantage of the 15-day grace period provided for in the Indenture for its 85/8%
Senior Note due December 15, 2003 (the "85/8% Indenture")for the payment of
interest and not pay $8.6 million of interest on $200 million of its 85/8%
Senior Notes that would otherwise be due on December 15, 1998. The failure to
make this payment constitutes a default under the 85/8% Indenture and following
a lapse of the 15-day grace period, the Trustee, on its own or as directed by at
least 25% of the noteholders, may cause the acceleration of $200 million of the
Company's 85/8% Senior Notes. The acceleration of such indebtedness would result
in the occurrence of an event of default under substantially all of the
Company's other indebtedness. Further, the failure to make the aforementioned
interest payment on the Company's 85/8% Senior Note due December 15, 2003 causes
the failure by the Company to satisfy a condition precedent to borrowing by the
Company under the Revolving Credit Facility and the continued failure to make
the $8.6 million interest payment past the 15-day grace period provided for in
the 85/8% Indenture would constitute event of default under the Company's
Revolving Credit Facility, enabling the Company's bank lenders to accelerate the
entire principal amount of such loans. As noted above, on December 15, 1998, the
Company and the Bank Lenders entered into an amendment to the Revolving Credit
Facility which (i) waived the failure by the Company to satisfy a condition
precedent to borrowing resulting from the failure by the Company to make the
interest payment on the 85/8% Senior Notes on December 15, 1998 and (ii) waived
the occurrence of an event of default under the Revolving Credit Facility
resulting from the failure, past the 15-day grace period, to pay interest on the
85/8% Senior Notes.
If the Company does not accomplish the consensual restructuring plan on
terms satisfactory to it or at all, Penn Traffic may seek or be required to file
for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code without such a
prearranged consensual plan and attempt to restructure its long-term debt and
other obligations through such process. There can be no assurance that the
Company will accomplish a consensual restructuring with its noteholders on
acceptable terms or at all or that the recoveries received by holders of the
Company's securities and other creditors in a non-bankruptcy filing will not be
materially less than those that would be received in a consensual plan.
- 9 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements included in this Part I, Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Quarterly Report on Form 10-Q which are not statements of
historical fact are intended to be, and are hereby identified as,
"forward-looking statements" as defined in the Securities Exchange Act of 1934,
as amended, and involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward- looking statements. Such factors include,
among other things, the following: general economic and business conditions;
competition; the success or failure of the Company in implementing its current
business and operational strategies; the ability of the Company to successfully
negotiate a consensual restructuring with its noteholders, its bank lenders and
other creditors on satisfactory terms or at all and the timing of any such
restructuring; changes in the Company's business or operational strategies;
availability, location and terms of sites for store development; the
availability and amount of proceeds generated from sale of assets; the ability
of the Company to successfully renegotiate the terms of the Revolving Credit
Facility; availability, terms and access to capital and customary trade credit;
labor relations and labor costs.
- 10 -
RESULTS OF OPERATIONS
Thirteen Weeks ("Third Quarter Fiscal 1999") and Thirty-nine Weeks Ended
October 31, 1998 Compared to Thirteen Weeks ("Third Quarter Fiscal 1998")
and Thirty-nine Weeks Ended November 1, 1997
The following table sets forth Statement of Operations components
expressed as a percentage of total revenues for Third Quarter Fiscal 1999 and
Third Quarter Fiscal 1998, and for the thirty-nine weeks ended October 31, 1998
and November 1, 1997, respectively:
Third Quarter Ended Thirty-nine Weeks Ended
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Total revenues 100.0% 100.0% 100.0% 100.0%
Gross profit (1) 20.6 22.6 21.6 23.2
Gross profit excluding
special charges (2) 21.3 22.6 21.8 23.2
Selling and administrative
expenses 21.9 20.4 21.2 21.2
Selling and administrative
expenses excluding
special charges (3) 21.9 20.4 21.2 20.8
Restructuring charges 0.5
Unusual items 6.5 2.1
Write-down of long-lived
assets 13.3 4.3
Operating (loss) income (21.1) 2.2 (6.0) 1.6
Operating (loss) income
excluding special
charges (4) (0.6) 2.2 0.6 2.4
Interest expense 5.4 5.2 5.2 5.0
(Loss) before income
taxes (26.5) (2.9) (11.2) (3.4)
(Loss) before income taxes
excluding special charges (5.9) (2.9) (4.6) (2.6)
Net (Loss) (26.5) (1.9) (10.5) (2.1)
Net (Loss) excluding
special charges (5.9) (1.9) (3.8) (1.7)
(See notes on next page)
- 11 -
RESULTS OF OPERATIONS (continued)
(1) Total revenues less cost of sales.
(2) Gross profit excluding pre-tax special charges for the Third Quarter
Fiscal 1999 and 39-week period ended October 31, 1998 of $5.3 million
for inventory markdowns associated with the asset disposition process
(see Note 2 and Note 3).
(3) Selling and administrative expenses excluding pre-tax special charges
for the 39-week period ended November 1, 1997 of (1)$5.6 million
associated with the retention of certain corporate executives and (2)
$1.9 million of other costs associated with a management reorganization
and related corporate actions (see Note 3).
(4) Operating income for the Third Quarter Fiscal 1999 and 39-week
period ended October 31, 1998, excluding pre-tax special charges
of (1) $50.4 million associated with the asset disposition
process (see Note 2 and Note 3) and (2) $91.5 million associated
with the accounting for certain long-lived assets (see Note 4).
Operating income for the 39-week period ended November 1, 1997
excluding pre-tax special charges of $18.2 million (see Note 3).
Total revenues for Third Quarter Fiscal 1999 decreased to $690.6
million from $726.2 million in Third Quarter Fiscal 1998. Total revenues for the
39-week period ended October 31, 1998 decreased to $2.14 billion from $2.26
billion for the 39-week period ended November 1, 1997. The decrease in revenues
for the Third Quarter and the 39- week period ended October 31, 1998 is
primarily attributable to a decline in same store sales, a reduction in the
number of stores the Company operated in such periods from the prior year (see
Note 3) and a decline in wholesale revenues. Same store sales for Third Quarter
Fiscal 1999 and the 39-week period ended October 31, 1998 declined 3.7% and
4.1%, respectively. Wholesale supermarket revenues were $85.5 million in Third
Quarter Fiscal 1999 compared to $87.9 million in Third Quarter Fiscal 1998.
Wholesale supermarket revenues were $256.9 million for the 39-weeks ended
October 31, 1998 compared to $271.6 million for the 39-weeks ended November 1,
1997.
Gross profit in Third Quarter Fiscal 1999 was $142.1 million or 20.6%
of revenues compared to $164.4 million or 22.6% of revenues in Third Quarter
Fiscal 1998. In Third Quarter Fiscal 1999, gross profit, excluding pre-tax
special charges of $5.3 million (see Note 3), were $147.3 million or 21.3% of
revenues. Gross profit as a percentage of total revenues decreased to 21.6% for
the 39-week period ended October 31, 1998 from 23.2% for the 39-week period
ended November 1, 1997. For the 39-week period ended October 31, 1998 gross
profits as a percent of revenues, excluding pre-tax special charges of $5.3
million (see Note 3), were 21.8%. The decrease in gross profit, excluding
special charges, as a percentage of revenues, in Third Quarter Fiscal 1999
resulted primarily from an increase in inventory shrink expense and a reduction
in allowance income. The decrease in gross profit, excluding special charges, as
a percentage of revenues for the 39-week period ended October 31, 1998 resulted
from investments in gross margins associated with the Company's marketing
program (initiated in September 1997), an increase in inventory shrink expense
and a reduction in allowance income.
- 12 -
RESULTS OF OPERATIONS (continued)
Selling and administrative expenses excluding special charges were
$151.2 million or 21.9% of revenues in Third Quarter Fiscal 1999 compared to
$148.2 million or 20.4% of revenues in Third Quarter Fiscal 1998. Selling and
administrative expenses for the 39-week period ended October 31, 1998 were
$453.2 million or 21.2% of revenues compared to $478.3 million or 21.2% of
revenues for the 39-week period ended November 1, 1997. For the 39-week period
ended November 1, 1997, selling and administrative expenses, excluding pre-tax
special charges of $7.5 million (see Note 3), were $470.8 million or 20.8% of
revenues.
The increase in selling and administrative expenses excluding special
charges as a percentage of revenues in Third Quarter Fiscal 1999 and the 39-week
period ended October 31, 1998 was primarily due to increased promotional
expenses associated with the Company's marketing program (Penn Traffic accounts
for certain promotional expenses in the selling and administrative expenses line
of the Consolidated Statement of Operations) and an increase in bad check
expense. For the 39-week period ended October 31, 1998 these additional costs
were partially offset by a decrease in costs associated with the implementation
of the Company's cost reduction programs.
During the Third Quarter Fiscal 1999 the Company recorded a special
charge of $50.4 million (see Note 3) and a write-down of long-lived assets of
$91.5 million (see Note 4).
During the 39-week period ended November 1, 1997, the Company recorded
special charges of $18.2 million in connection with the management
reorganization and related corporate actions, and the retention of certain
corporate executives(see Note 3).
Depreciation and amortization expense was $19.4 million in Third
Quarter Fiscal 1999 and $22.1 million in Third Quarter Fiscal 1998, representing
2.8% and 3.0% of total revenues, respectively. Depreciation and amortization
expense was $59.3 million for the 39- week period ended October 31, 1998 and
$67.6 million for the 39-week period ended November 1, 1997, representing 2.8%
and 3.0% of total revenues, respectively.
Operating loss for Third Quarter Fiscal 1999 was $145.8 million or
21.1% of total revenues compared to operating income of $16.2 million or 2.2% of
total revenues in Third Quarter Fiscal 1998. In the Third Quarter Fiscal 1999,
operating loss, excluding pre-tax special charges of $141.9 million, was $3.8
million or 0.6% of total revenues. Operating loss for the 39-week period ended
October 31, 1998 was $128.8 million or 6.0% of total revenues compared to
operating income of $35.0 million or 1.6% of total revenues for the 39-week
period ended November 1, 1997. Operating income for the 39- week period ended
October 31, 1998, excluding pre-tax special charges of $141.9 million, was $13.1
million or 0.6% of total revenues compared to operating income of $53.2 million,
excluding pre-tax special charges of $18.2 million, or 2.4% of total revenues
for the 39-week period ended November 1, 1997. Operating (loss) income excluding
special charges declined as a percentage of revenues for Third Quarter Fiscal
1999 and the 39-week period ended October 31, 1998 due to a decrease in gross
profit excluding special charges as a percentage of revenues and an increase in
selling and administrative expenses excluding special charges as a percentage of
revenues.
- 13 -
RESULTS OF OPERATIONS (continued)
Interest expense for Third Quarter Fiscal 1999 and Third Quarter Fiscal
1998 was $37.1 million and $37.5 million, respectively. Interest expense for the
39-week period ended October 31, 1998 and November 1, 1997 was $111.3 million
and $112.2 million, respectively.
Loss before income taxes was $182.9 million for Third Quarter Fiscal
1999 compared to a loss of $21.3 million for Third Quarter Fiscal 1998. The loss
before income taxes, excluding the effect of pre-tax special charges of $141.9
million, was $41.0 million for Third Quarter Fiscal 1999. The loss before income
taxes was $240.1 million for the 39-week period ended October 31, 1998 compared
to a loss of $77.2 million for the 39-week period ended November 1, 1997. The
loss before income taxes, excluding the effect of pre-tax special charges of
$141.9 million, was $98.1 million for the 39-week period ended October 31, 1998
compared to a $59.0 million loss before income taxes, excluding the effect of
pre-tax special charges of $18.2 million, for the 39-week period ended November
1, 1997. The reason for the increase in the loss before income taxes is the
decrease in operating income for Third Quarter Fiscal 1999 and 39-week period
ended October 31, 1998.
The income tax provision for Third Quarter Fiscal 1999 was $0.0 million
compared to a benefit of $7.8 million for Third Quarter Fiscal 1998. The income
tax benefit for the 39-week period ended October 31, 1998 was $16.6 million
compared to a benefit of $28.9 million for the 39-week period ended November 1,
1997. The effective tax rates for the Third Quarter and 39-week period ended
October 31, 1998 vary from the statutory rates due to differences between income
for financial reporting and tax reporting purposes, primarily related to
goodwill amortization resulting from acquisitions and the recording of a
valuation allowance. A valuation allowance is required when it is more likely
than not that the recorded value of a deferred tax asset will not be realized.
Management presently believes that a valuation allowance will be required for
the deferred tax assets related to net operating losses and tax credit
carryforwards arising in the future. As a result, management expects the Company
will be unable to accrue a benefit for income taxes for the remainder of Fiscal
1999 and for indefinite future periods.
Net loss for Third Quarter Fiscal 1999 was $182.9 million compared to a
net loss of $13.5 million for Third Quarter Fiscal 1998. Net loss, excluding the
impact of special charges, was $41.0 million for Third Quarter Fiscal 1998. The
net loss for the 39-week period ended October 31, 1998 was $223.5 million
compared to a net loss of $48.3 million for the 39-week period ended October 31,
1997. The net loss, excluding the impact of special charges, was $81.6 million
for the 39-week period ended October 31, 1998 compared to a $37.5 million net
loss, excluding the impact of special charges, for the 39-week period ended
November 1, 1997.
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LIQUIDITY AND CAPITAL RESOURCES
Amounts of the Company's debt (excluding capital leases) maturing in
the next five fiscal years are outlined on the following table:
AMOUNT MATURING
FISCAL YEAR ($ in millions)
----------- ---------------
1999 0.7 *
2000 135.3 **
2001 0.4
2002 107.6
2003 125.3
* Amount due for the remainder of Fiscal 1999.
** Amount includes $125.7 million outstanding as of October 31, 1998,
under the Company's revolving credit facility and $9.5 million
outstanding under a secured term loan.
The Company has a revolving credit facility (the "Revolving Credit
Facility") which provides for borrowings of up to $250 million, subject to a
borrowing base limitation measured by eligible inventory and accounts receivable
of the Company. The Revolving Credit Facility matures in April 2000 and is
secured by a pledge of the Company's inventory, accounts receivable and related
assets. As of October 31, 1998, additional availability under the Revolving
Credit Facility was $45.2 million.
The Company and the lenders ("Bank Lenders") that are parties to the
Revolving Credit Facility entered into an amendment dated as of August 31, 1998
to the Revolving Credit Facility (the "Amendment") that provides that the
financial covenants contained in the Revolving Credit Facility would not be
applicable to the Company for the period from August 1, 1998 until April 1,
1999. Without the Amendment, the Company would not have been in compliance with
certain financial covenants set forth in the Revolving Credit Facility for the
13-week period ended August 1, 1998 and an Event of Default (as defined in the
Revolving Credit Facility) would have occurred. The Company does not believe,
based upon its current operating performance, that it will be in compliance with
the financial covenants set forth in the Revolving Credit Facility after April
1, 1999. In addition, the Bank Lenders have agreed to (i) amend the Revolving
Credit Facility so that the failure by the Company to make the interest payment
on its 85/8% Senior Notes described below will not constitute the failure of a
condition precedent to borrowing by the Company under the Revolving Credit
Facility and (ii) waive the occurrence of an event of default under the
Revolving Credit Facility until April 1, 1999 resulting from the failure by the
Company to make such interest payment past the applicable grace period provided
for in the indenture for the 85/8% Senior Notes.
During Third Quarter Fiscal 1999, the Company's internally generated
funds from operations, proceeds of asset sales and amounts available under the
Revolving Credit Facility provided sufficient liquidity to meet the Company's
operating, capital expenditure and debt service needs.
- 15 -
LIQUIDITY AND CAPITAL RESOURCES (continued)
Cash flows to meet the Company's requirements for operating, investing
and financing activities in the 39-week period ended October 31, 1998 are
reported in the Consolidated Statement of Cash Flows. For the 39-week period
ended October 31, 1998, the Company experienced a negative cash flow from
operating activities of $44.8 million.
Working capital decreased by $114.8 million from January 31, 1998 to
October 31, 1998, primarily due to the reclassification of the Revolving Credit
Facility and a secured term loan which contains the same financial covenants as
the Revolving Credit Facility to Current Maturities of Long-Term Debt as
discussed in Note 9 - Long Term Debt and Current Maturities.
The Company expects to spend approximately $15-20 million on capital
expenditures (including capital leases) during Fiscal 1999. Capital expenditures
are principally for new stores, remodeled store facilities and investments in
technology. Except as disclosed below with respect to an interest payment in its
85/8% Senior Notes, the Company expects to utilize internally generated funds
from operations, amounts available under the Revolving Credit Facility and
proceeds of asset sales, if any, to satisfy its operating, capital expenditure
and debt service needs for the remainder of Fiscal 1999.
On June 4, 1998, the Company announced that it had engaged Goldman
Sachs & Company to undertake a process for realizing value from certain of the
Company's Bi-Lo stores and related wholesale/franchise operations located in
Pennsylvania. To date, the Company has completed the sale of 3 stores and
certain other real estate and is currently engaged in negotiations with
potential buyers for certain other Bi-Lo stores.
The Company has determined to continue with the process of selling 22
Bi-Lo stores which, together with the 3 stores previously sold, generated
revenues of $49.5 million and $155.8 million for the 13-week and 39-week periods
ended October 31, 1998, respectively. The net proceeds of the sale of these
stores will be used by the Company to satisfy its short-term capital needs. In
addition, the Company has decided to close 21 Bi-Lo stores (9 of which were
closed in the third quarter). These 21 Bi-Lo stores generated revenues of $20.4
million and $74.6 million for the 13-week and 39-week periods ended October 31,
1998, respectively (these amounts reflect the fact that the 9 stores closed
during the third quarter did not have revenues for the entire periods
described).
The Company intends to retain and operate its 32 remaining Bi-Lo stores
and its existing wholesale/franchise operations in Pennsylvania. No assurance
can be given that any of the transactions described above will be completed nor
is it possible to predict the net proceeds to the Company of any such
transaction or the timing of such a transaction.
- 16 -
LIQUIDITY AND CAPITAL RESOURCES (continued)
In order to address its long-term capital and debt service
requirements, on December 10, 1998, the Company announced that it had begun
working with an informal committee comprised of more than 40% of the principal
amount of its outstanding senior notes and more than 50% of the principal amount
of its outstanding subordinated notes for the purposes of negotiating a
consensual restructuring of its outstanding securities, including the
outstanding notes. As of October 31, 1998, the Company had approximately $1.13
billion of senior and subordinated notes outstanding. The Company also announced
that it had engaged The Blackstone Group as its financial advisor in connection
with its restructuring efforts.
The Company intends that any such restructuring plan will convert a
substantial portion of its senior and subordinated notes to equity. In addition,
the Company has advised the informal committee of noteholders that any
restructuring proposal made by the Company will provide for payment in full of
all obligations to the Company's trade creditors that continue to support the
Company with customary trade credit. The informal committee of noteholders has
informed the Company that it will support the full repayment of the Company's
trade creditors in connection with a restructuring proposal which is otherwise
acceptable to such noteholders. In addition, Fleet Bank, the agent bank for the
Company's $250 million Revolving Credit Facility, has advised the Company that
it is supporting the Company's efforts to restructure its outstanding
securities. The Company anticipates that any such consensual restructuring would
be implemented through a prearranged, voluntary filing for relief under Chapter
11 of the U.S. Bankruptcy Code.
In light of the proposed restructuring, the Company has elected to take
advantage of the 15-day grace period provided for in the Indenture for its 85/8%
Senior Note due December 15, 2003 (the "85/8% Indenture")for the payment of
interest and not pay $8.6 million of interest on $200 million of 85/8% Senior
Notes that would otherwise be due on December 15, 1998. The failure to make this
payment constitutes a default under the 85/8% Indenture and following a lapse of
the 15-day grace period, the Trustee, on its own or as directed by at least 25%
of the noteholders, may cause the acceleration of $200 million of the Company's
85/8% Senior Notes. The acceleration of such indebtedness would result in the
occurrence of an event of default under substantially all of the Company's other
indebtedness. Further, the failure to make the aforementioned interest payment
on the Company's 85/8% Senior Note due December 15, 2003 causes the failure by
the Company to satisfy a condition precedent to borrowing by the Company under
the Revolving Credit Facility and the continued failure to make the $8.6 million
interest payment past the 15-day grace period provided for in the 85/8%
Indenture would constitute an event of default under the Company's Revolving
Credit Facility, enabling the Company's bank lenders to accelerate the entire
principal amount of such loans. On December 15, 1998 the Company and the Bank
Lenders entered into an amendment to the Revolving Credit Facility which (i)
waived the failure by the Company to satisfy a condition precedent to borrowing
resulting from the failure by the Company to make the interest payment on the
85/8% Senior Notes on December 15, 1998 and (ii) waived the occurrence of an
event of default under the Revolving Credit Facility resulting from the failure,
past the 15-day grace period, to pay interest on the 85/8% Senior Notes.
- 17 -
LIQUIDITY AND CAPITAL RESOURCES (continued)
If the Company does not accomplish the consensual restructuring plan on
terms satisfactory to it or at all, Penn Traffic may seek or be required to file
for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code without such a
pre-arranged consensual plan and attempt to restructure its long-term debt and
other obligations through such process. There can be no assurance that the
Company will accomplish a consensual restructuring with its noteholders on
acceptable terms or at all or that the recoveries received by holders of the
Company's securities and other creditors in a non-prearranged bankruptcy filing
will not be materially less than those that would be received in a consensual
plan.
- 18 -
YEAR 2000
Many of the Company's computer systems and certain other equipment will
require modification or replacement over the next two years in order to render
these systems compliant with the year 2000. The Company has established
processes for evaluating and managing the risks and costs associated with this
issue including the assessment of third parties who may be critical to us. The
Company expects to have all critical systems compliant. Based on current
information, the Company estimates that the cost of Year 2000 compliance during
the fiscal years ended January 30, 1999, and January 29, 2000, will be
approximately $10 million (including the purchase of certain new hardware and
software). The business of the Company could be adversely affected should the
Company or other entities with which the Company does business be unsuccessful
in completing critical modifications in a timely manner. The Company believes
that the contingency plans for non-critical systems which are not year 2000
compliant are adequate at this time.
- 19 -
PART II. OTHER INFORMATION
- --------------------------
All items which are not applicable or to which the answer is negative
have been omitted from this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
10.5t Amendment Number 19 to the Revolving
Credit Facility, dated as of December 14,
1998
10.21 Employment Agreement dated as of
October 30, 1998 between the Company
and Joseph V. Fisher
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 31, 1998.
- 20 -
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, 1998 /s/ Joseph V. Fisher
--------------------
By: Joseph V. Fisher
President and Chief Executive
Officer
December 14, 1998 /s/ Robert J. Davis
-------------------
By: Robert J. Davis
Senior Vice President and
Chief Financial Officer
- 21 -