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 November 1, 1997
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 13209
(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 90 days.
YES X. NO .
Common stock, par value $1.25 per share: 10,824,491 shares
outstanding as of December 2, 1997
1 of 13
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)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------- --------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
------------ ------------ ------------ ------------
TOTAL REVENUES........................................... $ 726,180 $ 811,125 $ 2,259,458 $ 2,481,547
COST AND OPERATING EXPENSES:
Cost of sales (including buying
and occupancy costs)................................. 561,799 630,443 1,735,448 1,915,022
Selling and administrative expenses.................... 148,161 169,877 478,262 514,050
Restructuring charges.................................. 10,704
------------ ------------ ------------ ------------
OPERATING INCOME......................................... 16,220 10,805 35,044 52,475
Interest expense....................................... 37,548 36,591 112,208 107,309
------------ ------------ ------------ ------------
(LOSS) BEFORE INCOME TAXES............................... (21,328) (25,786) (77,164) (54,834)
Benefit for income taxes............................... 7,801 9,862 28,888 19,732
------------ ------------ ------------ ------------
NET (LOSS)............................................... $ (13,527) $ (15,924) $ (48,276) $ (35,102)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
PER SHARE DATA:
Net (loss)............................................. $ (1.24) $ (1.47) $ (4.44) $ (3.23)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Average number of
common shares outstanding............................ 10,866,774 10,869,441 10,867,616 10,863,407
See Notes to Interim Consolidated Financial Statements.
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THE PENN TRAFFIC COMPANY
Consolidated Balance Sheet
(All dollar amounts in thousands)
UNAUDITED
NOVEMBER 1, 1997 FEBRUARY 1, 1997
---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and short-term investments............................................. $ 47,389 $ 53,240
Accounts and notes receivable (less allowance for doubtful accounts of
$5,026 and $2,867, respectively).......................................... 71,187 71,874
Inventories (Note 3)........................................................ 345,865 340,009
Prepaid expenses and other current assets................................... 17,234 17,266
---------------- ---------------
Total Current Assets...................................................... 481,675 482,389
NONCURRENT ASSETS:
Capital leases--net......................................................... 122,045 132,071
Property, plant and equipment--net.......................................... 534,805 571,306
Intangible assets--net...................................................... 412,934 422,816
Other assets and deferred charges--net...................................... 93,238 95,537
---------------- ---------------
$1,644,697 $ 1,704,119
---------------- ---------------
---------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt........................................ $ 4,308 $ 3,736
Current portion of obligations under capital leases......................... 13,535 13,541
Trade accounts and drafts payable........................................... 156,073 159,579
Payroll and other accrued liabilities....................................... 83,735 82,654
Accrued interest expense.................................................... 21,126 35,664
Payroll taxes and other taxes payable....................................... 18,387 13,476
Deferred income taxes....................................................... 25,905 31,029
---------------- ---------------
Total Current Liabilities................................................. 323,069 339,679
NONCURRENT LIABILITIES:
Long-term debt.............................................................. 1,291,767 1,246,738
Obligations under capital leases............................................ 125,492 134,976
Deferred income taxes....................................................... 23,876
Other noncurrent liabilities................................................ 49,428 55,605
---------------- ---------------
Total Liabilities......................................................... 1,789,756 1,800,874
---------------- ---------------
SHAREHOLDERS' 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;
10,824,491 shares and 10,869,441 shares issued, respectively.............. 13,643 13,641
Capital in excess of par value.............................................. 180,418 180,412
Retained deficit............................................................ (327,273) (280,668)
Minimum pension liability adjustment........................................ (8,767) (8,730)
Unearned compensation....................................................... (2,455) (785)
Treasury stock, at cost..................................................... (625) (625)
---------------- ---------------
Total Shareholders' Equity................................................ (145,059) (96,755)
---------------- ---------------
$1,644,697 $ 1,704,119
---------------- ---------------
---------------- ---------------
See Notes to Interim Consolidated Financial Statements.
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THE PENN TRAFFIC COMPANY
Consolidated Statement of Cash Flows
Unaudited
(All dollar amounts in thousands)
THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
NOVEMBER 1, 1997 NOVEMBER 2, 1996
---------------- ----------------
Operating Activities:
Net (loss)................................................................. $ (48,276) $ (35,102)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization............................................ 56,078 56,914
Amortization of intangibles.............................................. 11,987 12,285
(Decrease) in deferred taxes............................................. (29,000)
Other--net............................................................... (2,865) (16,004)
Net change in assets and liabilities:
Accounts receivable and prepaid expenses................................. (1,441) 4,234
Inventories.............................................................. (5,855) (20,222)
Accounts payable and accrued expenses.................................... (12,052) (45,851)
Deferred charges and other assets........................................ 194 (4,420)
---------------- ----------------
Net Cash (Used In) Operating Activities...................................... (31,230) (48,166)
---------------- ----------------
Investing Activities:
Capital expenditures....................................................... (15,723) (53,477)
Proceeds from sale-and-leaseback transactions.............................. 19,879
Proceeds from sale of assets............................................... 3,770 3,439
Other--net................................................................. 1,652 (115)
---------------- ----------------
Net Cash (Used In) Investing Activities...................................... (10,301) (30,274)
---------------- ----------------
Financing Activities:
Increase in long-term debt................................................. 106,840
Payments to settle long-term debt.......................................... (1,699) (2,756)
Borrowings of revolver debt................................................ 332,300 357,400
Payment of revolver debt................................................... (285,000) (377,600)
Reduction of capital lease obligations..................................... (9,929) (9,560)
Payment of debt issuance costs............................................. (3,517)
Other--net................................................................. 8 70
---------------- ----------------
Net Cash Provided By Financing Activities.................................... 35,680 70,877
---------------- ----------------
(Decrease) in Cash and Cash Equivalents...................................... (5,851) (7,563)
Cash and Cash Equivalents at Beginning of Period............................. 53,240 58,585
---------------- ----------------
Cash and Cash Equivalents at End of Period................................... $ 47,389 $ 51,022
---------------- ----------------
---------------- ----------------
See Notes to Interim Consolidated Financial Statements.
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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 February 1, 1997.
Net (loss) income per share of common stock is based on the average number
of shares and equivalents of common stock outstanding during each period. Fully
diluted (loss) income per share is not presented for each of the periods since
conversion of the Company's shares under option would be anti-dilutive or the
reduction from primary (loss) income per share is less than three percent.
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NOTE 2--SUPPLEMENTAL FINANCIAL INFORMATION
(In thousands of dollars) Third Quarter Thirty-nine Weeks
------------- -----------------
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
Fiscal 1997
- -----------
Operating Income.................................... $ 10,805 $ 52,475
Depreciation and Amortization....................... 23,397 69,199
LIFO Provision...................................... 825 2,650
Cash Interest Expense............................... 35,440 103,943
NOTE 3--INVENTORIES
If the first-in, first-out (FIFO) method had been used by the Company,
inventories would have been $22,223,000 and $20,223,000 higher than reported at
November 1, 1997 and February 1, 1997, respectively.
NOTE 4--SPECIAL CHARGES
During the thirty-nine week period ended November 1, 1997 the Company
recorded pre-tax charges totaling approximately $12.6 million associated with a
management reorganization and related corporate actions. In addition, during the
thirty-nine week period ended November 1, 1997 the Company recorded pre-tax
charges of approximately $5.6 million associated with the retention of recently
hired corporate executives. These charges are included in the restructuring
charges and selling and administrative expenses lines of the Consolidated
Statement of Operations as described below.
The management reorganization included the centralization of management in
the Company's Syracuse, New York headquarters and other actions to streamline
the Company's organizational structure. The management reorganization was
implemented during the second and third quarters of Fiscal 1998. It resulted in
the layoff of approximately 375 employees, with most of the layoffs coming in
the Company's Columbus, Ohio and DuBois, Pennsylvania divisional headquarters.
The restructuring charges of $10.7 million for the thirty-nine week period
ended November 1, 1997 includes $9.7 million of severance costs and $1.0 million
of miscellaneous other costs recorded in connection with the management
reorganization.
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NOTE 4--SPECIAL CHARGES (CONTINUED)
Selling and administrative expenses for the thirty-nine week period ended
November 1, 1997 include pre-tax special charges of (1) $5.6 million incurred in
connection with the retention of recently hired corporate executives (consisting
of $3.4 million paid to the newly hired executives primarily to reimburse them
for loss of benefits under arrangements with their prior employers and $2.2
million of relocation and other miscellaneous expenses associated with their
retention) and (2) $1.9 million of other costs recorded in connection with
management reorganization and related corporate actions.
The accrued liability related to the special charges was $7.1 million at
November 1, 1997.
NOTE 5--SHAREHOLDERS' EQUITY
During the First, Second and Third Quarters of Fiscal 1998 awards were made
to officers, employees, and directors of the Penn Traffic Company pursuant to
the 1993 Long Term Incentive Plan and the 1997 Performance Incentive Plan.
These awards, consisting of options and the amending of certain restrictions on
previously awarded restricted stock, covered an aggregate of approximately
1.2 million shares of Common Stock of the Penn Traffic Company.
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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 Company cautions readers that
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievement expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; competition; the success or failure of the Company in implementing
its current business strategy; changes in the Company's business strategy;
availability, location and terms of sites for store development; availability,
terms and development of capital; labor relations; and labor and employee
benefit costs.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ("THIRD QUARTER FISCAL 1998") AND THIRTY-NINE WEEKS ENDED
NOVEMBER 1, 1997 COMPARED TO THIRTEEN WEEKS ("THIRD QUARTER FISCAL 1997") AND
THIRTY-NINE WEEKS ENDED NOVEMBER 2, 1996
The following table sets forth statement of operations components expressed
as a percentage of total revenues for Third Quarter Fiscal 1998 and Third
Quarter Fiscal 1997, and for the thirty-nine weeks ended November 1, 1997 and
November 2, 1996, respectively:
THIRD QUARTER ENDED THIRTY-NINE WEEKS ENDED
---------------------------- ----------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Total revenues............................................. 100.0% 100.0% 100.0% 100.0%
Gross profit(1)............................................ 22.6 22.3 23.2 22.8
Selling and administrative expenses excluding special
changes(2)............................................... 20.4 20.9 20.8 20.7
Selling and administrative expenses........................ 20.4 20.9 21.2 20.7
Restructuring charges...................................... 0.5
Operating income excluding special charges(3).............. 2.2 1.3 2.4 2.1
Operating income........................................... 2.2 1.3 1.6 2.1
Interest expense........................................... 5.2 4.5 5.0 4.3
(Loss) before income taxes................................. (2.9) (3.2) (3.4) (2.2)
Net (loss)................................................. (1.9) (2.0) (2.1) (1.4)
(See notes on next page)
- 8 -
RESULTS OF OPERATIONS (CONTINUED)
(1) Total revenues less cost of sales.
(2) Selling and administrative expenses include pre-tax special charges for the
thirty-nine week period ended November 1, 1997 of (1) $5.6 million
associated with the retention of recently hired corporate executives and (2)
$1.9 million of other costs associated with a management reorganization and
related corporate actions (see Note 4).
(3) Operating income excluding pre-tax special charges for the thirty-nine week
period ended November 1, 1997 of $18.2 million (see Note 4).
Total revenues for Third Quarter Fiscal 1998 decreased to $726.2 million
from $811.1 million in Third Quarter Fiscal 1997. Total revenues for the
thirty-nine week period ended November 1, 1997 decreased to $2.26 billion from
$2.48 billion for the thirty-nine week period ended November 2, 1996. Same store
sales for Third Quarter Fiscal 1998 and the thirty-nine week period ended
November 1, 1997 declined 9.7% and 8.5%, respectively. Wholesale supermarket
revenues were $87.9 million in Third Quarter Fiscal 1998 compared to $100.4
million in Third Quarter Fiscal 1997. Wholesale supermarket revenues were $271.6
million for the thirty-nine weeks ended November 1, 1997 compared to $306.3
million for the thirty-nine weeks ended November 2, 1996.
Gross profit in Third Quarter Fiscal 1998 was $164.4 million or 22.6% of
revenues compared to $180.7 million or 22.3% of revenues in Third Quarter Fiscal
1997. Gross profit as a percentage of total revenues increased to 23.2% for the
thirty-nine week period ended November 1, 1997 from 22.8% for the thirty-nine
week period ended November 2, 1996. During Third Quarter Fiscal 1998 and for the
thirty-nine week period ended November 1, 1997 gross profit as a percentage of
revenues was positively impacted by the Company's merchandising initiatives.
These improvements were partially offset by an increase in buying and occupancy
costs as a percentage of revenues during a period of low price inflation and
declining same store sales. Gross profit for the Third Quarter Fiscal 1997 and
the thirty nine weeks ended November 2, 1996 was negatively impacted by
approximately $2 million due to a work stoppage at the Company's dairy
division.
Selling and administrative expenses for Third Quarter Fiscal 1998 were
$148.2 million or 20.4% of revenues compared to $169.9 million or 20.9% of
revenues in Third Quarter Fiscal 1997. Selling and administrative expenses for
the thirty-nine week period ended November 1, 1997 were $478.3 million or 21.2%
of revenues compared to $514.1 million or 20.7% of revenues for the thirty-nine
week period ended November 2, 1996. For the thirty-nine week period ended
November 1, 1997, selling and administrative expenses, excluding pre-tax special
charges of $7.5 million (see Note 4), were $470.8 million or 20.8% of revenues.
The decrease in selling and administrative expenses as a percentage of total
revenues in Third Quarter Fiscal 1998 is the result of the Company's cost
reduction programs. Selling and administrative expenses, excluding special
charges, for the thirty-nine week period ended November 1, 1997 increased as a
percentage of revenues due to an increase in fixed and semi-fixed expenses as a
percentage of revenues during a period of low price inflation and decrease in
same store sales.
During the thirty-nine 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 recently
hired corporate executives (see Note 4).
- 9 -
RESULTS OF OPERATIONS (CONTINUED)
Depreciation and amortization expense was $22.1 million in Third Quarter
Fiscal 1998 and $23.4 million in Third Quarter Fiscal 1997, representing 3.0%
and 2.9% of total revenues, respectively. Depreciation and amortization expense
was $67.6 million for the thirty-nine weeks ended November 1, 1997 and $69.2
million for the thirty-nine weeks ended November 2, 1996 representing 3.0% and
2.8% of total revenues, respectively.
Operating income for Third Quarter Fiscal 1998 was $16.2 million or 2.2%
of total revenues compared to $10.8 million or 1.3% of total revenues in
Third Quarter Fiscal 1997. Operating income for the thirty-nine week period
ended November 1, 1997 was $35.0 million or 1.6% of total revenues compared
to $52.5 million or 2.1% of total revenues for the thirty-nine week period
ended November 2, 1996. Operating income for the thirty-nine week period
ended November 1, 1997, excluding pre-tax special charges of $18.2 million,
was $53.2 million or 2.4% of total revenues. Operating income for Third
Quarter Fiscal 1997 and the thirty-nine week period ended November 2, 1996
was reduced by approximately $2.5 million as a result of a work stoppage at
the Company's dairy division.
Interest expense for Third Quarter Fiscal 1998 and Third Quarter Fiscal 1997
was $37.5 million and $36.6 million, respectively. Interest expense for the
thirty-nine week periods ended November 1, 1997 and November 2, 1996 was $112.2
million and $107.3 million, respectively. The increase in interest expense is a
result of higher debt levels outstanding and a higher average interest rate on
outstanding debt in Third Quarter Fiscal 1998 and the thirty-nine week period
ended November 1, 1997.
Loss before income taxes for Third Quarter Fiscal 1998 and Third Quarter
Fiscal 1997 was $21.3 million and $25.8 million, respectively. Loss before
income taxes was $77.2 million for the thirty-nine week period ended November 1,
1997 compared to a loss of $54.8 million for the thirty-nine week period ended
November 2, 1996. The loss before income taxes, excluding the effect of pre-tax
special charges of $18.2 million, was $59.0 million for the thirty-nine week
period ended November 1, 1997. The increase in the loss before income taxes for
the thirty-nine week period ended November 1, 1997 is the result of the decrease
in operating income and an increase in interest expense.
The income tax benefit for Third Quarter Fiscal 1998 was $7.8 million
compared to a benefit of $9.9 million for Third Quarter Fiscal 1997. The income
tax benefit for the thirty-nine week period ended November 1, 1997 was $28.9
million compared to a benefit of $19.7 million for the thirty-nine week period
ended November 2, 1996. The income tax benefit, excluding the effect of pre-tax
special charges of $18.2 million, was $21.4 million for the thirty-nine week
period ended November 1, 1997. The effective tax rates vary from the statutory
rates due to differences between income for financial reporting and tax
reporting purposes, primarily related to goodwill amortization resulting from
prior acquisitions.
Net loss was $13.5 million in Third Quarter Fiscal 1998 compared to net loss
of $15.9 million in Third Quarter Fiscal 1997. The net loss for the thirty-nine
week period ended November 1, 1997 was $48.3 million compared to net loss of
$35.1 million for the thirty-nine week period ended November 2, 1996. The net
loss, excluding the after-tax impact of special charges, was $37.6 million for
the thirty-nine week period ended November 1, 1997.
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LIQUIDITY AND CAPITAL RESOURCES
Payments of principal and interest on the Company's $1.30 billion of
long-term debt (excluding capital leases) will materially restrict Company funds
available to finance capital expenditures and working capital. Principal
payments of long-term debt (excluding capital leases) of $2.0 million, $3.0
million and $2.5 million are due during the remainder of Fiscal 1998, Fiscal
1999 and Fiscal 2000, respectively.
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. At November 1, 1997, additional availability under the Revolving Credit
Facility was $70.5 million.
During Third Quarter Fiscal 1998, the Company's internally generated funds
from operations and amounts available under the Revolving Credit Facility
provided sufficient liquidity to meet the Company's operating, capital
expenditure and debt service needs.
The Company has entered into an interest rate swap agreement which
expires within the next year, that effectively converts $50 million of its
fixed rate borrowings into a variable rate obligation. Under the terms of the
agreement, the Company makes payments at a variable rate which is based on
LIBOR and receives payments at a fixed interest rate. The net amount paid or
received is included in interest expense.
Cash flows to meet the Company's requirements for operating, investing
and financing activities in Third Quarter Fiscal 1998 are reported in the
Consolidated Statement of Cash Flows. For the thirty-nine week period ended
November 1, 1997, the Company experienced a negative cash flow from operating
activities of $31.2 million.
Working capital increased by $15.9 million from February 1, 1997 to
November 1, 1997.
The Company is in compliance with all terms and restrictive covenants of its
long-term debt agreements.
The Company expects to spend approximately $30 million on capital
expenditures, including capital leases, during Fiscal 1998. The Company expects
to finance such capital expenditures through internally generated cash flow,
borrowings under the Revolving Credit Facility, and new capital leases. Capital
expenditures will be principally for new stores, replacement stores and
remodeled store facilities and investments in technology.
- 11 -
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
-------------- -----------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fiscal quarter ended
November 1, 1997.
- 12 -
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 15, 1997 /s/- Phillip E. Hawkins
------------------------------
By: Phillip E. Hawkins
President, Chief Executive
Officer and Director
December 15, 1997 /s/- Robert J. Davis
------------------------------
By: Robert J. Davis
Senior Vice President and
Chief Financial Officer
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