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 August 1, 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 September 11, 1998
1 0f 18
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 TWENTY-SIX WEEKS ENDED
AUGUST 1, AUGUST 2, AUGUST 1, AUGUST 2,
1998 1997 1998 1997
--------- --------- ---------- ----------
TOTAL REVENUES $ 730,223 $ 773,890 $1,447,022 $1,533,278
COSTS AND OPERATING EXPENSES:
Cost of sales (including
buying and occupancy costs) 568,629 595,643 1,128,019 1,177,260
Selling and administrative
expenses (Note 2) 154,080 158,258 302,035 326,490
Restructuring charges (Note 2) 1,400 10,704
--------- --------- ---------- ----------
OPERATING INCOME 7,514 18,589 16,968 18,824
Interest expense 37,258 37,289 74,120 74,660
--------- --------- ---------- ----------
(LOSS) BEFORE INCOME TAXES (29,744) (18,700) (57,152) (55,836)
(Benefit) for income
taxes (Note 3) (6,246) (6,776) (16,596) (21,088)
--------- --------- ---------- ----------
NET (LOSS) $ (23,498) $ (11,924) $ (40,556) $ (34,748)
========= ========= ========== ==========
PER SHARE DATA (BASIC
AND DILUTED):
Net (loss) (Note 4) $ (2.22) $ (1.13) $ (3.84) $ (3.29)
========= ========= ========== ==========
See Notes to Interim Consolidated Financial Statements.
- 2 -
THE PENN TRAFFIC COMPANY
CONSOLIDATED BALANCE SHEET
(All dollar amounts in thousands)
UNAUDITED
AUGUST 1, 1998 JANUARY 31, 1998
-------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and short-term investments $ 45,419 $ 49,095
Accounts and notes receivable
(less allowance for doubtful accounts
of $5,028 and $3,597 respectively) 64,358 68,454
Inventories (Note 6) 310,473 327,389
Prepaid expenses and other current assets 15,399 16,032
---------- ----------
Total Current Assets 435,649 460,970
NONCURRENT ASSETS:
Capital leases - net 109,350 115,581
Property, plant and equipment - net 469,726 496,501
Goodwill - net 395,668 401,829
Other assets and deferred charges - net 88,823 88,705
---------- ----------
$1,499,216 $1,563,586
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of obligations
under capital leases $ 13,091 $ 13,518
Current maturities of long-term
debt (Note 8) 102,644 4,429
Trade accounts and drafts payable 148,340 149,389
Payroll and other accrued liabilities 69,071 79,763
Accrued interest expense 34,519 35,335
Payroll taxes and other taxes payable 18,756 19,208
Deferred income taxes 16,671
---------- ----------
Total Current Liabilities 386,421 318,313
NONCURRENT LIABILITIES:
Obligations under capital leases 115,457 121,436
Long-term debt (Note 8) 1,155,241 1,234,224
Other noncurrent liabilities 42,462 49,422
---------- ----------
Total Liabilities 1,699,581 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 (381,997) (340,470)
Minimum pension liability adjustment (10,667) (10,667)
Unearned compensation (383) (1,693)
Treasury stock, at cost (625) (625)
---------- ----------
Total Shareholders' Equity (200,365) (159,809)
---------- ----------
$1,499,216 $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)
TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED
AUGUST 1, 1998 AUGUST 2, 1997
-------------- --------------
OPERATING ACTIVITIES:
Net (loss) $(40,556) $ (34,748)
Adjustments to reconcile
net (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 32,484 37,289
Amortization of intangibles 7,458 8,136
Other - net (1,746) (4,031)
NET CHANGE IN ASSETS AND LIABILITIES:
Accounts receivable and prepaid expenses 4,729 5,967
Inventories 16,916 8,402
Payables and accrued expenses (13,009) 23,023
Deferred taxes (16,671) (21,162)
Deferred charges and other assets (1,447) (41)
-------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES (11,842) 22,835
-------- ---------
INVESTING ACTIVITIES:
Capital expenditures (8,028) (9,190)
Proceeds from sale of assets 3,368 1,980
Other - net 1,652
-------- ---------
NET CASH (USED IN) INVESTING ACTIVITIES (4,660) (5,558)
-------- ---------
FINANCING ACTIVITIES:
Payments to settle long-term debt (3,085) (1,165)
Borrowing of revolver debt 70,800 183,700
Repayment of revolver debt (48,483) (194,000)
Reduction of capital lease obligations (6,406) (6,566)
-------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 12,826 (18,031)
-------- ---------
(DECREASE) IN CASH AND
CASH EQUIVALENTS (3,676) (754)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 49,095 53,240
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 45,419 $ 52,486
======== =========
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 - SPECIAL CHARGES
For the 13-week and 26-week periods ended August 2, 1997 the Company
recorded pre-tax charges totaling $1.6 and $12.6 million, respectively,
associated with management reorganization and related corporate actions ($1.4
and $10.7 million, respectively, of these charges are included in a
restructuring charge and $0.2 and $1.9 million, respectively, are included in
selling and administrative expenses). In addition, during the 13-week and
26-week periods ended August 2, 1997 the Company recorded pre-tax charges of
$1.6 and $5.6 million, respectively, associated with the retention of certain
corporate executives, which are included in selling and administrative expenses.
NOTE 3 - TAX BENEFITS
The tax benefits for the 13-week and 26-week periods ended August 1,
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 that the recorded value of a
deferred tax asset will not be realized.
- 5 -
NOTE 4 - NET (Loss) PER SHARE
Net (Loss) per share is computed based 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, restricted stock and warrants) during the period.
The previously presented EPS amounts for the 13-week and the 26-week periods
ended August 2, 1997 have been restated to reflect the method of computation
required by SFAS 128. Shares used in the calculation of basic and diluted EPS
(weighted average shares outstanding) were 10,570,491 for the 13-week and
26-week periods ended August 1, 1998 and 10,569,341 for the 13-week and 26-week
periods ended August 2, 1997. The calculations of diluted EPS exclude the
effect of incremental dilutive potential securities aggregating 2,819 and
180,656 shares for the 13-week and 26-week periods ended August 1, 1998 and
August 2, 1997, respectively, since they would have been antidulutive given the
net loss.
NOTE 5 - SUPPLEMENTAL FINANCIAL INFORMATION
(In thousands of dollars)
Second Quarter Twenty-six Weeks
-------------- ----------------
FISCAL 1999
Operating Income $ 7,514 $ 16,968
Depreciation and Amortization 19,894 39,942
LIFO Provision 625 1,250
Cash Interest Expense 36,012 71,679
FISCAL 1998
Operating Income $ 18,589 $ 18,824
Operating Income before
special charges 21,739 37,016
Depreciation and Amortization 22,544 45,425
LIFO Provision 750 1,250
Cash Interest Expense 36,076 72,263
- 6 -
NOTE 6 - INVENTORIES
If the first-in, first-out (FIFO) method had been used by the Company,
inventories would have been $23,816,000 and $22,566,000 higher than reported at
August 1, 1998 and January 31, 1998, respectively.
NOTE 7 - ASSET DISPOSITION PROCESS
On June 4, 1998, the Company announced that it has 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 (the "Pennsylvania
Assets"). The Pennsylvania Assets being considered for disposition produced
revenues of approximately $675 million over the past twelve months.
Approximately 80% of these revenues were generated in Company supermarkets, with
the remainder being revenues from the Company's Pennsylvania wholesale/franchise
customer relationships. No assurance can be given that any transaction 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.
NOTE 8 - LONG-TERM DEBT AND CURRENT MATURITIES
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 (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 currently believe, based upon its current
operating performance, that it will be in compliance with some or all of the
financial covenants set forth in the Revolving Credit Facility after April 1,
1999 and as a result the Company will seek an additional waiver of such
covenants or renegotiation of the terms of the Revolving Credit Facility prior
to that date. Accordingly, the amount outstanding under the Revolving Credit
Facility as of August 1, 1998 ($99.9 million) has been classified as Current
Maturities of Long-Term Debt.
The Bank Lenders also consented in the Amendment to the sales of certain of
the Company's retail and wholesale assets in Pennsylvania. Upon the completion
of a substantial portion of the contemplated Pennsylvania asset sale
transactions, the Company will seek to renegotiate the terms of the Revolving
Credit Facility. This is expected to occur prior to April 1, 1999. Failure to
obtain an additional waiver of financial covenant noncompliance or complete a
satisfactory renegotiation of the terms of the Revolving Credit Facility may
cause an acceleration of the obligations under the Revolving Credit Facility.
There can be no assurance that the Bank Lenders will agree to any further waiver
of financial covenant noncompliance or renegotiation of the terms of the
Revolving Credit Facility on satisfactory terms or at all.
- 7 -
NOTE 9 - SUBSEQUENT EVENT
During the 13-week period ending October 31, 1998 the Company completed the
sale of two stores. In addition, the Company closed eight under-performing
Bi-Lo stores in Pennsylvania. The Company will record an as-yet undetermined
charge related to these actions during the 13-week period ending October 31,
1998. These 10 stores represented less than two percent of consolidated
revenues.
- 8 -
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; 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; labor
relations and labor costs.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ("SECOND QUARTER FISCAL 1999") AND TWENTY-SIX WEEKS ENDED
AUGUST 1, 1998 COMPARED TO THIRTEEN WEEKS ("SECOND QUARTER FISCAL 1998") AND
TWENTY-SIX WEEKS ENDED AUGUST 2, 1997
The following table sets forth Statement of Operations components expressed
as a percentage of total revenues for Second Quarter Fiscal 1999 and Second
Quarter Fiscal 1998, and for the 26-weeks ended August 1, 1998 and August 2,
1997, respectively:
Second Quarter Ended Twenty-six Weeks Ended
AUGUST 1, August 2, AUGUST 1, August 2,
1998 1997 1998 1997
-------- -------- -------- --------
Total revenues 100.0% 100.0% 100.0% 100.0%
Gross profit (1) 22.1 23.0 22.0 23.2
Selling and administrative
expenses excluding
special charges (2) 21.1 20.2 20.9 20.8
Selling and administrative
expenses 21.1 20.4 20.9 21.3
Restructuring charges 0.2 0.7
Operating income excluding
unusual items (3) 1.0 2.8 1.2 2.4
Operating income 1.0 2.4 1.2 1.2
Interest expense 5.1 4.8 5.1 4.9
(Loss) before income taxes (4.1) (2.4) (3.9) (3.6)
Net (loss) (3.2) (1.5) (2.8) (2.3)
(See notes on next page)
- 9 -
RESULTS OF OPERATIONS (CONTINUED)
(1) Total revenues less cost of sales.
(2) Selling and administrative expenses include pre-tax special charges for
Second Quarter Fiscal 1998 and the 26-week period ended August 2, 1997 of
(1) $1.6 and $5.6 million, respectively, associated with the retention of
certain corporate executives and (2) $0.2 and $1.9 million, respectively,
of other costs associated with a management reorganization and related
corporate actions (see Note 2).
(3) Operating income for the Second Quarter Fiscal 1998 and the 26-week period
ended August 2, 1997 excluding pre-tax special charges of $3.2 and $18.2
million, respectively (see Note 2).
Total revenues for Second Quarter Fiscal 1999 decreased to $730.2
million from $773.9 million in Second Quarter Fiscal 1998. Total revenues
for the 26-week period ended August 1, 1998 decreased to $1.447 billion from
$1.533 billion for the 26-week period ended August 2, 1997. The decrease in
revenues for the Second Quarter and the 26-week period ended August 1, 1998
is primarily attributable to a decline in same store sales and a decline in
wholesale revenues. Same store sales for Second Quarter Fiscal 1999 and the
26-week period ended August 1, 1998 declined 4.4% and 4.3%, respectively.
Wholesale supermarket revenues were $84.2 million in Second Quarter Fiscal
1999 compared to $93.3 million in Second Quarter Fiscal 1998. Wholesale
supermarket revenues were $164.9 million for the 26-weeks ended August 1,
1998 compared to $183.7 million for the 26-weeks ended August 2, 1997.
Gross profit in Second Quarter Fiscal 1999 was $161.6 million or 22.1%
of revenues compared to $178.2 million or 23.0% of revenues in Second Quarter
Fiscal 1998. Gross profit as a percentage of total revenues decreased to
22.0% for the 26-week period ended August 1, 1998 from 23.2% for the 26-week
period ended August 2, 1997. The decrease in gross profit as a percentage of
total revenues primarily resulted from investments in gross margins
associated with the Company's marketing program (initiated in September 1997)
and an increase in inventory shrink expense.
Selling and administrative expenses in Second Quarter Fiscal 1999 were
$154.1 million or 21.1% of revenues compared to $158.3 million or 20.4% of
revenues in Second Quarter Fiscal 1998. In Second Quarter Fiscal 1998,
selling and administrative expenses, excluding pre-tax special charges of
$1.8 million (see Note 2), were $156.5 million or 20.2% of revenues. Selling
and administrative expenses for the 26-week period ended August 1, 1998 were
$302.0 million or 20.9% of revenues compared to $326.5 million or 21.3% of
revenues for the 26-week period ended August 2, 1997. For the 26-week period
ended August 2, 1997, selling and administrative expenses, excluding pre-tax
special charges of $7.5 million (see Note 2), were $319.0 million or 20.8% of
revenues.
- 10 -
RESULTS OF OPERATIONS (CONTINUED)
Selling and administrative expenses, excluding special charges,
increased as a percentage of revenues 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 a non-recurring charge of
$1.0 million incurred in connection with the settlement of personal injury
litigation. These additional costs were partially offset by a decrease in
costs associated with the implementation of the Company's cost reduction
programs.
During Second Quarter Fiscal 1998 and the 26-week period ended August 2,
1997, the Company recorded special charges of $3.2 and $18.2 million in
connection with the management reorganization and related corporate actions,
and the retention of certain corporate executives(see Note 2).
Depreciation and amortization expense was $19.9 million in Second
Quarter Fiscal 1999 and $22.5 million in Second Quarter Fiscal 1998,
representing 2.7% and 2.9% of total revenues, respectively. Depreciation and
amortization expense was $40.0 million for the 26-week period ended August
1, 1998 and $45.4 million for the 26-week period ended August 2, 1997,
representing 2.8% and 3.0% of total revenues, respectively.
Operating income for the Second Quarter Fiscal 1999 was $7.5 million or
1.0% of total revenues compared to $18.6 million or 2.4% of total revenues in
Second Quarter Fiscal 1998. In the Second Quarter Fiscal 1998, operating
income, excluding pre-tax special charges of $3.2 million, was $21.8 million
or 2.8% of total revenues. Operating income, for the 26-week period ended
August 1, 1998 was $17.0 million or 1.2% of total revenues compared to $18.8
million or 1.2% of total revenues for the 26-week period ended August 2,
1997. Operating income for the 26-week period ended August 2, 1997, excluding
pre-tax special charges of $18.2 million, was $37.0 million or 2.4% of total
revenues.
Interest expense for both the Second Quarter Fiscal 1999 and Second
Quarter Fiscal 1998 was $37.3 million. Interest expense for the 26-week
period ended August 1, 1998 and August 2, 1997 was $74.1 million and $74.7
million, respectively.
Loss before income taxes was $29.7 million for Second Quarter Fiscal
1999 compared to a loss of $18.7 million for Second Quarter Fiscal 1998. The
loss before income taxes, excluding the effect of pre-tax special charges of
$3.2 million, was $15.5 million for Second Quarter Fiscal 1998. Loss before
income taxes was $57.2 million for the 26-week period ended August 1, 1998
compared to a loss of $55.8 million for the 26-week period ended August 2,
1997. The loss before income taxes, excluding the effect of pre-tax special
charges of $18.2 million, was $37.6 million for the 26-week period ended
August 2, 1997. The reason for the increase in the loss before income taxes
is the decrease in operating income for Second Quarter Fiscal 1999 and
26-week period ended August 1, 1998.
- 11 -
RESULTS OF OPERATIONS (CONTINUED)
The income tax benefit for Second Quarter Fiscal 1999 was $6.2 million
compared to a benefit of $6.8 million for Second Quarter Fiscal 1998. The
income tax benefit, excluding the effect of pre-tax special charges of $3.2
million, was $5.5 million for Second Quarter Fiscal 1998. The income tax
benefit for the 26-week period ended August 1, 1998 was $16.6 million
compared to a benefit of $21.1 million for the 26-week period ended August 2,
1997. The income tax benefit, excluding the effect of pre-tax special
charges of $18.2 million, was $13.6 million for the 26-week period ended
August 2, 1997. The effective tax rates for the Second Quarter and 26-week
period ended August 1, 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 Second Quarter Fiscal 1999 was $23.5 million compared to a
net loss of $11.9 million for Second Quarter Fiscal 1998. Net loss,
excluding the after-tax impact of special charges, was $10.1 million for
Second Quarter Fiscal 1998. The net loss for the 26-week period ended August
1, 1998 was $40.6 million compared to a net loss of $34.7 million for the
26-week period ended August 2, 1997. The net loss, excluding the after-tax
impact of special charges, was $24.0 million for the 26-week period ended
August 2, 1997.
- 12 -
LIQUIDITY AND CAPITAL RESOURCES
Payments of interest and principal on the Company's approximately $1.26
billion of debt (excluding capital leases) will restrict funds available to
the Company to finance capital expenditures and working capital. Amounts of
the Company's debt (excluding capital leases) maturing in the next five years
are outlined on the following table:
AMOUNT MATURING
FISCAL YEAR ($ in millions)
----------- ---------------
1999 1.3 *
2000 102.6 **
2001 7.5
2002 107.7
2003 125.4
* Amount due for the remainder of Fiscal 1999.
** Amount includes $99.9 million outstanding as of August 1, 1998, under
the Company's revolving credit facility.
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 August 1, 1998, additional availability
under the Revolving Credit Facility was $69.2 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 currently believe, based upon its current operating
performance, that it will be in compliance with some or all of the financial
covenants set forth in the Revolving Credit Facility after April 1, 1999 and
as a result the Company will seek an additional waiver of such covenants or
renegotiation of the terms of the Revolving Credit Facility prior to that
date.
- 13 -
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Bank Lenders also consented in the Amendment to the sales of certain
of the Company's retail and wholesale assets in Pennsylvania. Upon the
completion of a substantial portion of the contemplated Pennsylvania asset
sale transactions, the Company will seek to renegotiate the terms of the
Revolving Credit Facility. This is expected to occur prior to April 1, 1999.
Failure to obtain an additional waiver of financial covenant noncompliance or
complete a satisfactory renegotiation of the terms of the Revolving Credit
Facility may cause an acceleration of the obligations under the Revolving
Credit Facility. There can be no assurance that the Bank Lenders will agree
to any further waiver of financial covenant noncompliance or renegotiation of
the terms of the Revolving Credit Facility on satisfactory terms or at all.
During Second 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.
Cash flows to meet the Company's requirements for operating, investing
and financing activities in the 26-week period ended August 1, 1998 are
reported in the Consolidated Statement of Cash Flows. For the 26-week period
ended August 1, 1998, the Company experienced a negative cash flow from
operating activities of $11.8 million.
Working capital decreased by $93.4 million from January 31, 1998 to
August 1, 1998, primarily due to the reclassification of the Revolving Credit
Facility to Current Maturities of Long-Term Debt as discussed in Note 8 -
Long Term Debt and Current Maturities.
The Company expects to spend approximately $20 million on capital
expenditures (including capital leases) during Fiscal 1999. Capital
expenditures will be principally for new stores, remodeled store facilities
and investments in technology. 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 has 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 (the
"Pennsylvania Assets"). The Pennsylvania Assets being considered for
disposition produced revenues of approximately $675 million over the past
twelve months. Approximately 80% of these revenues were generated in Company
supermarkets, with the remainder being revenues from the Company's
Pennsylvania wholesale/franchise customer relationships. No assurance can be
given that any transaction 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.
- 14 -
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company intends to satisfy its long-term capital requirements by (1)
improving its results from operations thereby increasing its operating cash
flow, (2) applying the proceeds from contemplated sales of certain
Pennsylvania assets to repay a portion of its debt and working capital
obligations and (3) renegotiating and extending the Revolving Credit
Facility, as described above. If the Company does not accomplish some or all
of these objectives, Penn Traffic may seek or be required to sell additional
assets or sell additional debt or equity securities in public or private
transactions to satisfy its debt and other capital requirements or otherwise
seek to restructure its debt obligations. There can be no assurance that the
Company will accomplish any of the foregoing on satisfactory terms or at all.
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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.
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PART II. OTHER INFORMATION
All items which are not applicable or to which the answer is negative have
been omitted from this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
10.5S Amendment No. 18 to the Revolving Credit Facility
dated as of August 31, 1998.
10.20 Termination Agreement dated as of August 6, 1998
between the Company and Phillip E. Hawkins.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fiscal quarter ended
August 1, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PENN TRAFFIC COMPANY
September 14, 1998 /s/- Claude J. Incaudo
---------------------------------
By: Claude J. Incaudo
President and Chief Executive
Officer
September 14, 1998 /s/- Robert J. Davis
---------------------------------
By: Robert J. Davis
Senior Vice President and
Chief Financial Officer
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