UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended May 1, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ to _________
Commission file number 1-9930
THE PENN TRAFFIC COMPANY
(Debtor-in-Possession as of March 1, 1999)
(Exact name of registrant as specified in its charter)
Delaware 25-0716800
(State of incorporation) (IRS Employer Identification No.)
1200 State Fair Blvd., Syracuse, New York 13221-4737
(Address of principal executive offices) (Zip Code)
(315) 453-7284
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days.
YES |X|. NO |_|.
Common stock, par value $1.25 per share: 10,695,491 shares
outstanding as of May 28, 1999
Page 1 of 21
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE PENN TRAFFIC COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
(All dollar amounts in thousands,
except per share data)
THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED
MAY 1, 1999 MAY 2, 1998
----------- -----------
TOTAL REVENUES $ 615,045 $ 716,799
COSTS AND OPERATING EXPENSES:
Cost of sales (including
buying and occupancy costs) 478,305 559,390
Selling and administrative expenses 138,549 147,955
Unusual item (Note 4) (3,663)
---------- ----------
OPERATING INCOME 1,854 9,454
Interest expense (contractual
interest estimated at $36,116
for the thirteen week period
ended May 1, 1999) (Note 5) 16,540 36,862
Reorganization items (Note 6) 6,860
---------- ----------
(LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (21,546) (27,408)
Provision (benefit) for
income taxes (Note 7) 38 (10,350)
---------- ----------
(LOSS) BEFORE EXTRAORDINARY ITEM (21,584) (17,058)
Extraordinary item (Note 8) 1,507
---------- ----------
NET (LOSS) $ (23,091) $ (17,058)
========== ==========
PER SHARE DATA (BASIC AND DILUTED):
(Loss) before extraordinary item (2.04) (1.61)
Extraordinary item (0.14) (0.00)
---------- -----------
Net (loss) (Note 9) $ (2.18) $ (1.61)
========== ==========
See Notes to Interim Consolidated Financial Statements.
- 2 -
THE PENN TRAFFIC COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEET
(All dollar amounts in thousands)
UNAUDITED
MAY 1, 1999 JANUARY 30, 1999
----------- ----------------
ASSETS
CURRENT ASSETS:
Cash and short-term investments $ 44,104 $ 43,474
Accounts and notes receivable
(less allowance for doubtful accounts
of $5,917 and $5,731, respectively) 53,549 62,420
Inventories (Note 11) 268,025 283,631
Prepaid expenses and other current assets 12,897 14,619
----------- -----------
Total Current Assets 378,575 404,144
NONCURRENT ASSETS:
Capital leases - net 84,280 90,932
Property, plant and equipment - net 360,746 380,143
Goodwill - net 267,798 269,894
Other assets and deferred charges - net 66,648 82,948
----------- -----------
Total Assets $ 1,158,047 $ 1,228,061
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES:
Current portion of obligations
under capital leases $ 11,103 $ 11,516
Current maturities of long-term
debt (Note 12) 113,515 1,267,813
Trade accounts and drafts payable 124,451 134,432
Payroll and other accrued liabilities 76,552 81,867
Accrued interest expense (Note 5) 1,230 42,783
Payroll taxes and other taxes payable 15,570 15,420
----------- -----------
Total Current Liabilities 342,421 1,553,831
NONCURRENT LIABILITIES:
Obligations under capital leases 88,716 98,029
Other noncurrent liabilities 24,819 45,907
----------- -----------
Total liabilities not subject
to compromise 455,956 1,697,767
LIABILITIES SUBJECT TO COMPROMISE (NOTE 13) 1,194,888
----------- -----------
Total Liabilities 1,650,844 1,697,767
----------- -----------
STOCKHOLDERS' (DEFICIT):
Preferred Stock - authorized 10,000,000
shares, $1.00 par value; none issued
Common Stock - authorized 30,000,000
shares, $1.25 par value; 10,695,491
shares and 10,824,591 shares
issued and outstanding, respectively 13,425 13,425
Capital in excess of par value 179,882 179,882
Retained deficit (681,976) (658,820)
Minimum pension liability adjustment (3,470) (3,470)
Unearned compensation (33) (98)
Treasury stock, at cost (625) (625)
----------- -----------
Total Stockholders' (Deficit) (492,797) (469,706)
----------- -----------
Total Liabilities and Stockholders' (Deficit) $ 1,158,047 $ 1,228,061
=========== ===========
See Notes to Interim Consolidated Financial Statements.
- 3 -
THE PENN TRAFFIC COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
(All dollar amounts in thousands)
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
MAY 1, 1999 MAY 2, 1998
----------- -----------
OPERATING ACTIVITIES:
Net (loss) $ (23,091) $ (17,058)
Adjustments to reconcile
net (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 14,029 16,324
Amortization of intangibles 2,506 3,724
Gain on sold / closed stores (3,663) Reorganization Items:
Gain from rejected leases (12,830)
Write-off of unamortized financing fees 16,591
Extraordinary item 1,507
Other - net 2,635 (1,420)
NET CHANGE IN ASSETS AND LIABILITIES:
Accounts receivable and prepaid expenses 10,593 1,184
Inventories 15,606 5,070
Payables and accrued expenses (6,700) (20,916)
Deferred taxes (10,388)
Deferred charges and other assets 832 (1,536)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 18,015 (25,016)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (3,314) (4,434)
Proceeds from sale of assets 17,171 87
--------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 13,857 (4,347)
--------- ---------
FINANCING ACTIVITIES:
Payments to settle long-term debt (9,158) (2,392)
Borrowing of pre-petition revolver debt 31,100 68,000
Repayment of pre-petition revolver debt (144,000) (32,983)
Borrowing of DIP revolver debt 161,451
Repayment of DIP revolver debt (61,451)
Reduction of capital lease obligations (6,318) (3,542)
Payment of debt issuance costs (2,866)
--------- ---------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (31,242) 29,083
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 630 (280)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 43,474 49,095
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,104 $ 48,815
========= =========
See Notes to Interim Consolidated Financial Statements.
- 4 -
THE PENN TRAFFIC COMPANY
(DEBTOR-IN-POSSESSION)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 - DEBT RESTRUCTURING
On March 1, 1999 (the "Petition Date"), Penn Traffic and certain of its
subsidiaries filed petitions for relief (the "Bankruptcy Cases") under Chapter
11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
Since the Petition Date, Penn Traffic and these subsidiaries have continued to
operate their businesses as debtors-in-possession under the Bankruptcy Code. The
Bankruptcy Cases were commenced in order to implement a financial restructuring
of Penn Traffic and its subsidiaries that had been negotiated with holders of
more than 50% of the principal amount of both its senior and senior subordinated
Notes (the "Notes"). See Note 12 "Long-Term Debt" and Item 2 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Under the Company's Joint Plan of Reorganization (the "Plan"), holders of
Penn Traffic's $732.2 million of senior notes and $400 million of senior
subordinated notes will exchange their notes in the following manner: (a)
holders of senior notes will receive their pro rata share of $100 million of
newly issued 11% Senior Notes due 2009 (the "New Senior Notes") and 19,000,000
shares of new common stock of reorganized Penn Traffic (the "New Common Stock"),
and (b) holders of senior subordinated notes will receive their pro rata share
of 1,000,000 shares of New Common Stock and currently exercisable 6-year
warrants to purchase an additional 1,000,000 shares of New Common Stock at an
initial exercise price of $18.30 per share. In addition, under the Plan, holders
of Penn Traffic's existing common stock will be entitled to receive 1 share of
New Common Stock for each 100 shares of existing stock which they held prior to
the effective date of the Plan or 106,955 shares in the aggregate. The Plan also
provides for the reinstatement or payment in full of all other secured and
unsecured claims against Penn Traffic and its subsidiaries upon the effective
date of the Plan.
To maintain strong relationships with its vendors, on March 2, 1999, the
Company obtained an order from the Bankruptcy Court pursuant to which it has
been authorized to pay in full on normal trade terms all of its trade creditors
that continue to provide it with goods on customary terms and credit, or
otherwise acceptable to Penn Traffic. To date, all of Penn Traffic's trade
creditors have been providing acceptable trade terms to it, and Penn Traffic has
been paying them in the ordinary course of business.
In connection with the consummation of the Plan, the Company expects to
enter into a new secured credit facility (the "New Credit Facility") with a
bank group led by Fleet Capital Corporation as agent. Although the terms of
the New Credit Facility have not been finalized, the Company expects that the
New Credit Facility will provide for term and revolving credit facilities of
at least $300 million in total, with availability based in part on a
borrowing base of eligible inventory and accounts receivable. The lenders
under the New Credit Facility will have a first priority perfected security
interest in substantially all of the Company's assets. Proceeds from the New
Credit Facility will be used to satisfy the Company's obligations under its
debtor-in-possession facility and pay certain costs of the debt restructuring
process and for the Company's ongoing working capital and capital expenditure
requirements. The New Credit Facility is initially expected to have more than
$100 million in unused borrowing capacity.
- 5 -
On May 27, 1999, the Bankruptcy Court confirmed the Plan on the terms
specified above. Penn Traffic expects to consummate the Plan and enter into the
New Credit Facility by the end of June 1999.
Upon consummation of the Plan in June 1999, and taking into account all
costs and expenditures related to the debt restructuring and related
transactions, the Company expects to have approximately $330-$335 million of
outstanding indebtedness (including capital leases). Such indebtedness is
expected to include $100 million of New Senior Notes, approximately $100 million
of capitalized lease obligations and $130-$135 million of secured indebtedness
including borrowings under the New Credit Facility.
NOTE 2 - SUBSEQUENT EVENT
On May 27, 1999, the Bankruptcy Court confirmed the Plan under Chapter 11
of the Bankruptcy Code. The Plan is expected to become effective by the end of
June 1999.
NOTE 3 - 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 30, 1999.
All significant intercompany transactions and accounts have been
eliminated in consolidation.
Since the Petition Date the Company has operated its business as a
debtor-in-possession under the Bankruptcy Code. The American Institute of
Certified Public Accountant's Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") provides
guidance for financial reporting by entities that have filed petitions with the
Bankruptcy Court and expect to reorganize under Chapter 11 of the Bankruptcy
Code.
Under SOP 90-7, the financial statements of an entity in a Chapter 11
reorganization proceeding should distinguish transactions and events that are
directly associated with the reorganization from those of the operations of the
ongoing business as it evolves. Accordingly, SOP 90-7 requires the following
financial reporting or accounting treatments in respect to each of the financial
statements:
- 6 -
BALANCE SHEET
The balance sheet separately classifies pre-petition liabilities as those
subject to compromise (generally unsecured and undersecured claims) and those
not subject to compromise (including fully secured claims). Pre-petition
liabilities are reported on the basis of the expected amount of such allowed
claims, as opposed to the amounts for which those allowed claims may be settled.
Under an approved final plan of reorganization, those claims may be settled at
amounts substantially less than their allowed amounts.
When debt subject to compromise has become an allowed claim and that claim
differs from the net carrying amount of the debt (defined as the face amount of
the debt less unamortized debt issuance costs), the net carrying amount is
adjusted to the amount of the allowed claim. The resulting gain or loss is
classified as a reorganization item.
STATEMENT OF OPERATIONS
Pursuant to SOP 90-7, revenues and expenses, realized gains and losses,
and provisions for losses resulting from the reorganization and restructuring of
the business are reported in the statement of operations separately as
reorganization items. Professional fees are expensed as incurred. Interest
expense is reported only to the extent that it will be paid during the
proceeding or that it is probable that it will be an allowed claim.
STATEMENT OF CASH FLOWS
Reorganization items are reported separately within the operating,
investing and financing categories of the statement of cash flows.
FRESH START REPORTING
As of the effective date of the Plan, the Company will adopt "fresh
start" reporting pursuant to the guidance provided by SOP 90-7. Under "fresh
start" reporting, the reorganization value of the entity is allocated to the
entity's assets. The portion of the reorganization value that cannot be
attributed to specific tangible or identified intangible assets of the
Company will be classified as "reorganization value in excess of book". As a
result of adopting "fresh start" reporting upon emerging from Chapter 11
status, the Company's financial statements will not be comparable with those
prepared before the Plan is consummated, including the historical financial
statements included in this quarterly report.
NOTE 4 - UNUSUAL ITEM
During the 13-week period ended May 1, 1999 ("First Quarter Fiscal 2000"),
the Company recorded an unusual item (income) of $3.7 million related to a gain
on the disposition of 6 stores and certain other assets sold in connection with
the Company's store rationalization program.
During Fiscal 1999, the Company recorded special charges of $69.3 million
related to its store rationalization program (net of a $12.7 million gain on the
sale of assets in connection with the store rationalization program). At May 1,
1999 and January 30, 1999, the accrued liability related to these charges was
$26.6 million and $37.4 million, respectively.
- 7 -
NOTE 5 - INTEREST EXPENSE
As a result of the Chapter 11 filing, no principal or interest payments
will be made on the $1.132 billion of Notes. Accordingly, no interest expense
for these obligations has been accrued on or after the Petition Date. Had such
interest been accrued, interest expense for First Quarter Fiscal 2000 would have
been approximately $36.1 million.
NOTE 6 - REORGANIZATION ITEMS
Reorganization items recorded in the accompanying Consolidated Statement
of Operations are (a) a gain relating to the difference between the estimated
allowed claims for rejected leases and liabilities previously recorded for such
leases ($12.8 million), (b) the write-off of unamortized financing fees
resulting in a loss from adjustments of liabilities subject to compromise to
reflect allowed claims ($16.6 million), and (c) professional fees associated
with the Chapter 11 filing ($3.1 million). These professional fees include
accounting, legal and consulting services provided to the Company and the
Creditors' Committee.
NOTE 7 - TAX PROVISION
The tax provision for the First Quarter Fiscal 2000 is not recorded at
statutory rates due to (a) differences between the income calculations for
financial reporting and tax reporting purposes and (b) the recording of a
valuation allowance. A valuation allowance is required when it is more likely
than not the recorded value of a deferred tax asset will not be realized.
NOTE 8 - EXTRAORDINARY ITEM
The extraordinary item resulted from the write-off of unamortized
financing fees associated with the early retirement of the Company's
pre-petition revolving credit facility. No corresponding tax benefit has been
recorded.
NOTE 9 - NET (LOSS) PER SHARE
Net (Loss) per share is computed based on the requirements of Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). This
standard requires presentation of basic earnings per share ("EPS"), computed
based on the weighted average number of common shares outstanding for the
period, and diluted EPS, which gives effect to all dilutive potential shares
outstanding (i.e., options, restricted stock and warrants) during the period.
Shares used in the calculation of basic EPS were 10,570,491 for the quarters
ended May 1, 1999 and May 2, 1998. The calculation of diluted EPS excludes the
effect of incremental dilutive potential securities aggregating 76,617 shares
for the quarter ended May 2, 1998, since they would be antidilutive given the
net loss for the quarter. There were no incremental dilutive potential
securities for the quarter ended May 1, 1999.
- 8 -
NOTE 10 - SUPPLEMENTAL FINANCIAL INFORMATION
(In thousands of dollars)
FIRST QUARTER, FISCAL 2000
Operating Income $ 1,854
Operating (Loss) Before Unusual Item (1,809)
Depreciation and Amortization 16,535
LIFO Provision 625
Cash Interest Expense 15,616
FIRST QUARTER, FISCAL 1999
Operating Income $ 9,454
Depreciation and Amortization 20,048
LIFO Provision 625
Cash Interest Expense 35,667
NOTE 11 - INVENTORIES
Inventories are stated at the lower of cost or market using the last-in,
first-out ("LIFO") method of valuation. If the first-in, first-out ("FIFO")
method had been used by the Company, inventories would have been $24.3 million
and $23.6 million higher than reported at May 1, 1999 and January 30, 1999,
respectively.
NOTE 12 - LONG-TERM DEBT
On the Petition Date, Penn Traffic and certain of its subsidiaries filed
the Bankruptcy Cases under Chapter 11 of the Bankruptcy Code in the Bankruptcy
Court. Since the Petition Date, Penn Traffic and these subsidiaries have
continued to operate their businesses as debtors-in-possession under the
Bankruptcy Code. The Bankruptcy Cases were commenced in order to implement a
financial restructuring of Penn Traffic and its subsidiaries that had been
negotiated with holders of more than 50% of the principal amount of the Notes.
As described above, on May 27, 1999, the plan was confirmed by the Bankruptcy
Court.
Under the Plan, holders of Penn Traffic's $732.2 million of senior notes
and $400 million of senior subordinated notes will exchange their notes in the
following manner: (a) holders of senior notes will receive their pro rata share
of $100 million of the New Senior Notes and 19,000,000 shares of New Common
Stock, and (b) holders of senior subordinated notes will receive their pro rata
share of 1,000,000 shares of New Common Stock and currently exercisable 6-year
warrants to purchase an additional 1,000,000 shares of New Common Stock at an
initial exercise price of $18.30 per share. As a result of the Plan, the Notes
have been classified as liabilities subject to compromise (see Note 13).
- 9 -
In connection with the filing of the Bankruptcy Cases, shortly after the
Petition Date, the Bankruptcy Court approved, on an interim basis, $240 million
of a $300 million debtor-in-possession financing (the "DIP Facility"), with
Fleet Capital Corporation and a syndicate of lenders, the proceeds of which were
used to repay in full the Company's pre-petition revolving credit facility and a
mortgage financing on one of the Company's Syracuse distribution facilities. On
April 5, 1999, the Bankruptcy Court entered a final order approving the $300
million DIP Facility. The DIP Facility expires on the earlier of (a) March 3,
2000 or (b) the effective date of the Plan, and grants to the lenders a first
priority security interest in substantially all the assets of Penn Traffic and
its subsidiaries. Availability under the DIP Facility is calculated by reference
to a specified percentage of certain receivables, inventory, equipment and real
property interests, less certain agreed-to reserves. As of May l, 1999, Penn
Traffic had borrowings of $100.0 million and letters of credit of $46.1 million
outstanding under the DIP Facility, with $145.4 million available for borrowing
under the DIP Facility. The Company intends to continue to use the DIP Facility
during the pendency of the Bankruptcy Cases to finance its working capital and
capital expenditure requirements.
In connection with the consummation of the Plan, the Company expects to
enter into the New Credit Facility with a bank group led by Fleet Capital
Corporation as agent. Proceeds from the New Credit Facility will be used to
satisfy the Company's ongoing working capital and capital expenditure
requirements, obligations under the DIP Facility, and pay certain costs of the
debt restructuring process. The New Credit Facility is initially expected to
have more than $100 million in unused borrowing capacity.
- 10 -
NOTE 13 - LIABILITIES SUBJECT TO COMPROMISE
Liabilities Subject to Compromise refer to liabilities incurred prior to
the filing of a petition for protection under the Bankruptcy Code, except those
claims that will not be impaired. These liabilities subject to compromise
represent management's best estimate of known or potential claims to be resolved
in connection with the Chapter 11 filing. Such claims may be subject to future
adjustment depending on Bankruptcy Court action, further developments with
respect to disputed claims, or other events. The principal categories of claims
classified as Liabilities Subject to Compromise consist of the following:
May 1, 1999
(In millions)
Notes $1,132.2
Accrued interest payable on the Notes 50.0
Provision for rejected leases 12.7
--------
Total liabilities subject to compromise $1,194.9
========
Under the Bankruptcy Code, the Company may elect to assume or reject real
estate leases, employment contracts, personal property leases, service contracts
and other pre-petition executory contracts, subject to Bankruptcy Court
approval. The liabilities subject to compromise under reorganization proceedings
include a provision for the estimated amount that may be claimed by lessors and
allowed by the Bankruptcy Court in connection with the rejection of unexpired
leases.
Generally, actions to enforce or otherwise effect repayment of all
pre-Chapter 11 liabilities as well as all pending litigation against the Debtors
are stayed while the Debtors continue their business operations as
debtors-in-possession. Claims secured against the Debtor's assets ("secured
claims") also are stayed, although the holders of such claims have the right to
move the court for relief from the stay. Pre-petition secured claims are secured
by liens on certain of the Debtor's property, plant, and equipment. The Company
has received approval from the Bankruptcy Court to pay or otherwise honor in the
ordinary course of business certain of its pre-petition obligations, including
pre-petition wages, vacation pay, employee benefits and reimbursement of
employee business expenses. The Bankruptcy Court has also authorized the Company
to pay its trade creditors in full, on normal trade terms, all of its trade
creditors that continue during the pendency of the Bankruptcy Cases to provide
it with goods on customary terms and credit, or otherwise acceptable to Penn
Traffic. Finally, the Plan provides for the reinstatement or payment of all
secured and unsecured claims against Penn Traffic and its subsidiaries upon the
effective date of the Plan.
- 11 -
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: the success or failure of the
Company in implementing its current business and operational strategies;
availability, terms and access to capital and customary trade credit; general
economic and business conditions; competition; changes in the Company's business
strategy; availability, location and terms of sites for store development;
unexpected costs of year 2000 compliance or failure by the Company or other
entities with which it does business to achieve compliance; labor relations; the
outcome of pending or yet-to-be instituted legal proceedings; labor and employee
benefit costs; the ability of the Company to consummate its Chapter 11 plan and
the New Credit Facility; the amount of indebtedness outstanding when the Plan is
consummated; the amount of unused borrowing under the New Credit Facility; and
availability and terms of necessary or desirable financing or refinancing.
OVERVIEW
On March 1, 1999, (the "Petition Date") Penn Traffic and certain of its
subsidiaries filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court") in order to implement a
prenegotiated financial restructuring of Penn Traffic and its subsidiaries.
Since the Petition Date, Penn Traffic and these subsidiaries have continued to
operate their businesses as debtors-in-possession under the Bankruptcy Code. On
May 27, 1999, the Bankruptcy Court confirmed the Company's Joint Plan of
Reorganization (the "Plan").
- 12 -
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MAY 1, 1999 ("FIRST QUARTER FISCAL 2000") COMPARED
TO THIRTEEN WEEKS ENDED MAY 2, 1998 ("FIRST QUARTER FISCAL 1999")
The following table sets forth Statement of Operations components
expressed as percentages of total revenues for First Quarter Fiscal 2000 and
First Quarter Fiscal 1999:
PERCENTAGE OF TOTAL REVENUES
FIRST QUARTER ENDED
MAY 1, MAY 2,
1999 1998
------ ------
Total revenues 100.0% 100.0%
Gross profit (1) 22.2 22.0
Selling and administrative
expenses 22.5 20.6
Unusual item (0.6)
Operating income 0.3 1.3
Operating (loss) income before
unusual item (2) (0.3) 1.3
Interest expense 2.7 5.1
Reorganization items 1.1
Net (loss) (3.8) (2.4)
Net (loss) excluding unusual,
reorganization, and
extraordinary items (3) (3.0) (2.4)
(1) Total revenues less cost of sales.
(2) Operating (loss) income excluding an unusual item (income) of $3.7 million
during First Quarter Fiscal 2000 (see Note 4).
(3) Net (loss) excluding an unusual item (income) of $3.7 million,
reorganization items (expense) of $6.9 million and an extraordinary item
(expense) of $1.5 million in First Quarter Fiscal 2000 (see Notes 4, 6 and
8).
Total revenues for First Quarter Fiscal 2000 decreased to $615.0 million
from $716.8 million in First Quarter Fiscal 1999. The decrease in revenues is
primarily attributable to a reduction in the number of stores the Company
operated in the First Quarter Fiscal 2000 as compared to First Quarter Fiscal
1999 resulting from the Company's store rationalization program, a decline in
same store sales and a decline in wholesale revenues. Same store sales for First
Quarter Fiscal 2000 declined 4.5% from the comparable prior year period.
Wholesale supermarket revenues were $75.4 million in First Quarter Fiscal 2000
and $80.7 million for First Quarter Fiscal 1999. The decrease in wholesale
revenues resulted primarily from a reduction in the number of customers of the
Company's wholesale/franchise business.
- 13 -
RESULTS OF OPERATIONS (CONTINUED)
In First Quarter Fiscal 2000 gross profit was $136.7 million compared to
First Quarter Fiscal 1999 gross profit of $157.4 million, representing 22.2% and
22.0% of total revenues, respectively. Gross profit as a percentage of revenues
improved primarily due to (1) the positive effect of re-establishing the
Company's traditional high/low pricing strategy in the second half of the fiscal
year ended January 30, 1999 ("Fiscal 1999") and (2) reduced inventory shrink
expense as a percentage of revenues. These improvements in gross margin were
partially offset by (1) an increase in buying and occupancy costs as a
percentage of revenues due to the spreading of certain fixed and semi-fixed
costs over reduced revenues and (2) reduced allowance income from the Company's
vendors.
Selling and administrative expenses in First Quarter Fiscal 2000 were
$138.5 million or 22.5% of revenues compared to $148.0 million or 20.6% of
revenues in First Quarter Fiscal 1999. Selling and administrative expenses
increased as a percentage of revenues primarily due to increases in store
payroll costs as a percentage of revenues and advertising expenses as a
percentage of revenues. The increase in store payroll costs as a percentage of
revenues is due to (1) the Company's investment in store labor as part of an
effort to improve operations and focus on customer service and (2) the spreading
of certain fixed and semi-fixed costs over reduced revenues.
Depreciation and amortization expense was $16.5 million in First
Quarter Fiscal 2000 and $20.0 million in First Quarter Fiscal 1999,
representing 2.7% and 2.8% of total revenues, respectively. Depreciation and
amortization expense decreased primarily due (1) a reduction in the Company's
capital expenditure program, (2) the Company's store rationalization program,
commenced in the middle of Fiscal 1999, which involves the sale or closure of
certain stores and (3) the write-down of long-lived assets recorded in Fiscal
1999 in accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS 121").
Operating income for First Quarter Fiscal 2000 was $1.9 million or 0.3% of
total revenues compared to $9.5 million or 1.3% of total revenues in First
Quarter Fiscal 1999. Operating (loss) before unusual item for First Quarter
Fiscal 2000 was $1.8 million or (0.3%) of revenues. Operating income and
operating (loss) before unusual item declined as a percentage of revenues due to
an increase in selling and administrative expenses as a percentage of revenues
partially offset by an increase in gross margins as a percentage of revenues.
Interest expense for First Quarter Fiscal 2000 and First Quarter Fiscal
1999 was $16.5 million and $36.9 million, respectively. Interest expense
declined primarily due to the fact that on the Petition Date, the Company
discontinued the accrual of interest on the Notes.
Income tax provision was $0.0 million for First Quarter Fiscal 2000
compared to a tax benefit of $10.4 million in First Quarter Fiscal 1999. The
Company currently has a significant net deferred tax asset resulting
primarily from net operating loss carryforwards and various tax credits.
These net deferred tax assets have been completly offset by a previously
recorded 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. Since management presently believes that a valuation allowance
will be required for net deferred tax assets, no additional income tax
benefit was recorded for the First Quarter Fiscal 2000.
Net loss was $23.1 million in First Quarter Fiscal 2000 compared to net
loss of $17.1 million in First Quarter Fiscal 1999.
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LIQUIDITY AND CAPITAL RESOURCES
As a result of the consummation of the Plan, the Company will
substantially reduce the amount of its overall indebtedness. In connection with
the consummation of the Plan, approximately $1.13 billion of senior notes and
senior subordinated notes will be converted into $100 million of newly issued
11% Senior Notes due 2009 (the "New Senior Notes"), approximately 99.5% of the
shares of the new common stock of reorganized Penn Traffic (the "New Common
Stock") outstanding on the effective date of the Plan and warrants to purchase
additional shares of New Common Stock. Upon consummation of the Plan in June
1999, and taking into account all costs and expenditures related to the debt
restructuring and related transactions, the Company expects to have
approximately $330- $335 million of outstanding indebtedness (including capital
leases). Such indebtedness is expected to include $100 million of New Senior
Notes, approximately $100 million of capitalized lease obligations and $130-$135
million of secured indebtedness including borrowings under the New Credit
Facility.
Prior to the Petition Date the Company had a revolving credit facility
(the "Pre-petition Revolving Credit Facility") which provided for borrowings
of up to $250 million, subject to a borrowing base limitation measured by
eligible inventory and accounts receivable of the Company. Shortly after the
Petition Date, the Bankruptcy Court approved, on an interim basis, $240
million of a $300 million debtor-in-possession financing (the "DIP Facility")
with Fleet Capital Corporation and a syndicate of lenders. A portion of the
proceeds of the DIP Facility were used to repay, in full, the Company's
Pre-petition Revolving Credit Facility and a mortgage on one of the Company's
Syracuse distribution facilities. On April 5, 1999, the Bankruptcy Court
entered a final order approving the DIP Facility. The DIP Facility expires on
the earlier of (a) March 3, 2000 or (b) effective date of the Plan and grants
to the lenders a first priority security interest in substantially all the
assets of Penn Traffic and its subsidiaries. Availability under the DIP
Facility is calculated by reference to a specified percentage of certain
receivables, inventory, equipment and real property interests, less certain
agreed-to reserves. As of May 1, 1999, Penn Traffic had borrowings of $100.0
million and $46.1 million of letters of credit outstanding under the DIP
Facility, with $145.4 million available for borrowing under the DIP Facility.
The Company intends to continue to use the DIP Facility during the pendency
of the Bankruptcy Cases to finance its working capital and capital
expenditure requirements. The Company believes the DIP Facility will be
adequate to finance these requirements. In connection with consummation of
the Plan, the Company expects to enter into the New Credit Facility, the
proceeds of which will be used to repay the DIP Facility in full on the
effective date of the Plan.
Cash flows to meet the Company's operating requirements during First
Quarter Fiscal 2000 are reported in the Consolidated Statement of Cash Flows.
During the quarter ended May 1, 1999, the Company's net cash provided by
operating activities and investing activities was $18.0 million and $13.8
million, respectively. This amount was offset by net cash used in financing
activities of $31.2 million.
Working capital increased by $1.19 billion from January 30, 1999 to May
1, 1999, primarily due to the reclassification of the Company's senior and
senior subordinated notes to liabilities subject to compromise in accordance
with SOP 90-7.
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LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Pursuant to the terms of the indenture for the New Senior Notes, the
Company, at its election, can choose to pay interest on the New Senior Notes, at
the rate of 11% per annum for the first two years (i.e., the first four interest
payments) through the issuance of additional notes and thereafter, interest on
the New Senior Notes will be payable, at the rate of 11% per annum in cash. The
New Senior Notes do not contain any mandatory redemption or sinking fund
requirement provisions (other than pursuant to certain customary exceptions
including, without limitation, requiring the Company to make an offer to
repurchase the New Senior Notes upon the occurrence of a change of control), and
are optionally redeemable at prices at 106% of par beginning in the year 2004
and declining annually thereafter, and at 111% of par under other specified
circumstances as dictated by the Plan. The indenture for the New Senior Notes
will contain certain restrictions on the Company's total indebtedness, liens,
ability to pay dividends and repurchase New Common Stock and other negative
covenants, which are generally less restrictive than those contained in the DIP
Facility or that will be set forth in the New Credit Facility.
In connection with, and as a condition precedent to the consummation of
the Plan, the Company expects to enter into the New Credit Facility with a
syndicate of lenders led by Fleet Capital Corporation as agent, a portion of
the proceeds of which will be used to repay in full the DIP Facility at the
effective date of the Plan. Although the terms of the New Credit Facility
have not been finalized, the Company expects that the New Credit Facility
will provide for term and revolving credit facilities of at least $300
million in total, with availability based in part on a borrowing base of
eligible inventory and accounts receivable. The Company expects that the
lenders under the New Credit Facility will have a first priority perfected
security interest in substantially all of the Company's assets and that the
New Credit Facility will contain a variety of operational and financial
covenants intended to restrict the Company's operations. The Company intends
to use amounts available under the New Credit Facility after repayment in
full of the DIP Facility and payment of certain costs and expenses of the
debt restructuring process to satisfy its working capital and capital
expenditure requirements for the remainder of Fiscal 2000 and beyond.
During the fiscal year ending January 29, 2000, the Company expects to
invest approximately $40 million in capital expenditures (including capital
leases). Penn Traffic expects to finance such capital expenditures through cash
generated from operations, proceeds of asset sales and amounts available under
the DIP Facility and the New Credit Facility. Capital expenditures will be
principally for new stores, store remodels and investments in technology.
- 16 -
YEAR 2000
Year 2000 exposures arise from the inability of some computer based
systems and equipment to correctly interpret and process dates after December
31, 1999. The basis for the exposure is that many systems and equipment carry
only the last two digits of the year field. With the year 2000, these systems
and equipment will not be able to distinguish between the year 1900 and 2000.
For those processes and procedures that use the date in calculations,
significant problems can occur.
The Company is dependent on technology including computer hardware and
software and related electronic equipment. This technology supports key business
processes including product procurement, warehousing, product delivery,
inventory control, labor management, retail sales and financial reporting. All
of this technology and electrical equipment may be susceptible to Year 2000
problems.
The calendar year 1999 coincides with eleven months of the Company's
fiscal year 2000. All financial systems are functioning correctly in support of
fiscal year 2000.
In 1997, the Company assembled a project team consisting of
representatives across key departments in the organization to assess the state
of readiness and to initiate a plan and timetable to address issues encountered.
This working committee functioned under the control of the Company's Management
Information Systems Steering Committee and provided monthly updates to the
Company's senior management. The Year 2000 readiness plan addresses three major
segments: (a) Information Technology including infrastructure (i.e., mainframe,
server and personal computers and their associated networks), applications,
including all systems and operating software and in-store systems and equipment;
(b) Non-Information Technology, including telephones, time clocks, scales and
security devices and (c) External Entities, including product and service
providers and others with whom the Company interacts or exchanges information.
Each segment of the readiness plan includes data collection, assessment,
prioritization, resolution, testing, implementation, and ongoing monitoring of
compliance.
The table below sets forth the status and expected completion date of all
phases of the readiness plan at May 1999:
ESTIMATED
INFORMATION TECHNOLOGY PERCENT COMPLETE TARGET COMPLETION DATE
- ---------------------- ---------------- ----------------------
Server Computers 100% Complete
Personal Computers 90% July 1999
Applications 70% August 1999
Mainframe Computers 100% Complete
Operating Software 90% August 1999
In-Store systems/equipment 55% September 1999
NON-INFORMATION TECHNOLOGY
Phone Switches 90% July 1999
Other equipment 50% September 1999
EXTERNAL ENTITIES
Verification of critical
business partner readiness 75% September 1999
Electronic Data Interchange
business partners 25% September 1999
- 17 -
YEAR 2000 (CONTINUED)
The Year 2000 readiness plan has an overall strategy that combines system
replacement and remediation of existing legacy systems. Legacy financial,
payroll and human resource systems have been replaced. The remaining critical
legacy systems are subject to a three-part remediation effort. The first phase
uses a software tool to survey existing system code to determine where dates are
being used. The second phase is direct examination of date routines to determine
if they are involved in any calculations. The last phase is the actual change of
the code and subsequent test and implementation. The overall application
remediation effort is 70 percent complete with a target completion date of July
1999. This effort has utilized both in-house staff and outside consultants.
Delays in receiving standard Year 2000 software upgrades from key
equipment vendors has affected the timing of upgrades of certain of the
Company's point of sale equipment. The Company has now received the necessary
software upgrades. The installation of these upgrades is currently in process
and is expected to be completed by September 1999. After successful pilot store
installations for time and attendance, direct store delivery and pharmacy
systems, rollout of these systems to all stores began in January 1999 and is
scheduled for completion by the end of October 1999.
As part of the Company's Year 2000 readiness plan, the Company contacted
critical business partners (product suppliers, service providers and those with
whom the Company exchanges information) in the second quarter of 1998,
requesting information regarding the status of their individual Year 2000
compliance plans and progress. From that survey, the Company began a program to
test electronic communications with its critical business partners. As a result,
the Company currently expects that all critical electronic data interchange
business processes will have been tested and verified by September 1999.
Based on current information, the Company estimates the cost of Year 2000
compliance will be approximately $10 million including the purchase of certain
new hardware and software. To date such expenditures have totaled approximately
$6.5 million. The Company has and will continue to fund these expenditures by
utilizing the Company's operating cash flow as well as amounts available under
its then-existing credit facility. Separately, improvement in systems
functionality is being obtained from Year 2000 efforts particularly in the
infrastructure area. For example, equipment that will not be supported by the
vendor for Year 2000 is being replaced by more current technology.
Based on current information, management expects that the Company will not
experience significant disruption to operations due to Year 2000 compliance
issues. Management believes the Company assessment has been thorough and
compliance activities will be completed by September 1999. Notwithstanding the
substantial efforts of the Company and its key business partners, the Company
could experience disruptions to parts of its various activities and operations.
Consequently, the Company is formulating contingency plans for critical
functions and processes in the event of a Year 2000 problem. The contingency
plan is expected to be completed in July 1999. This plan will continually be
reviewed throughout the balance of calendar 1999 as additional information
becomes available.
- 18 -
YEAR 2000 (CONTINUED)
Because the Company's Year 2000 compliance is partially dependent upon key
business partners also being Year 2000 compliant on a timely basis, there can be
no guarantee that the Company's overall efforts will prevent a material adverse
impact on its results of operations, financial condition and cash flows. The
possible consequences to the Company of not being fully Year 2000 compliant
include temporary supermarket closings, delays in the delivery of merchandise,
errors in purchase orders and other financial transactions, and the inability to
efficiently process customer purchases. In addition, business disruptions could
result from the loss of power or the loss of communication links between
supermarkets, warehouse and headquarters locations.
- 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 1. LEGAL PROCEEDINGS
Chapter 11 Proceedings. Reference is made to Note 1 of the Consolidated
Financial Statements in Part I and is incorporated by reference herein.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The information required by Part II, Item 3, of Form 10-Q is
incorporated by reference from Notes 1 and 12 of the Consolidated Financial
Statements and Management's Discussion and Analysis of Financial Condition
and Results of Operations' Liquidity and Capital Resources, set forth herein.
In addition, Penn Traffic failed to make scheduled interest payments on
December 15, 1998 and February 15, 1999 with respect to its 8 5/8% Senior
Notes and 10 1/4% Senior Notes, respectively. As a result, Penn Traffic was
in default under these note issuances. The amount due on December 15, 1998
was $8.6 million and on February 15, 1999 was $6.4 million. With the
commencement of the Bankruptcy Cases, these defaults were automatically
stayed, and upon the effectiveness of the Plan, will be eliminated in their
entirety.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.5u Amendment No. 20, dated as of
February 12, 1999, to the Loan and
Security Agreement.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On March 2, 1999, the Company filed a report on Form 8-K relating to
the Company's filing, on March 1, 1999, of a Joint Plan of
Reorganization under chapter 11 of the U.S. Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware.
On June 11, 1999, the Company filed a report on Form 8-K relating to
the confirmation of the Company's and certain of its subsidiaries
Joint Plan of Reorganization under Chapter 11 of the US Bankruptcy
Code.
- 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
June 15, 1999 /s/ JOSEPH V. FISHER
---------------------------------
By: Joseph V. Fisher
President, Chief Executive
Officer and Director
June 15, 1999 /s/ ROBERT J. DAVIS
--------------------------------
By: Robert J. Davis
Senior Vice President and
Chief Financial Officer
- 21 -