<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission file number 0-8858
THE PENN TRAFFIC COMPANY
(Exact name of registrant as specified in its charter)
Delaware 25-0716800
(State of incorporation) (IRS Employer Identification No.)
1200 State Fair Blvd., Syracuse, New York 13221-4737
(Address of principal executive offices) (Zip Code)
(315) 453-7284
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days.
YES /X/ NO / /
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES /X/ NO / /
Common stock, par value $.01 per share: 20,106,955 shares
outstanding as of September 14, 1999
Page 1 of 30
<PAGE>
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)
<TABLE>
<CAPTION>
SUCCESSOR
COMPANY PREDECESSOR COMPANY
--------- ----------------------------
5 WEEKS 8 WEEKS 13 WEEKS
ENDED ENDED ENDED
JULY 31, JUNE 26, AUGUST 1,
1999 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Total Revenues $ 240,966 $ 391,759 $ 730,223
COSTS AND OPERATING EXPENSES:
Cost of sales (including
buying and occupancy
costs) (Note 4) 184,761 303,037 568,629
Selling and administrative
expenses 50,450 87,881 154,080
Amortization of excess
reorganization value 10,982
Unusual items (Note 5) (968)
--------- --------- ---------
OPERATING (LOSS) INCOME (5,227) 1,809 7,514
Interest expense (contractual
interest estimated at $22,656
for the eight week period
ended June 26, 1999) (Note 6) 3,520 5,254 37,258
Reorganization items (Note 7) 160,171
--------- --------- ---------
(LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEMS (8,747) (163,616) (29,744)
Provision (benefit) for
income taxes (Note 8) 15 22 (6,246)
--------- --------- ---------
(LOSS) BEFORE EXTRAORDINARY ITEMS (8,762) (163,638) (23,498)
Extraordinary items (Note 9) (656,435)
--------- --------- ---------
NET (LOSS) INCOME $ (8,762) $ 492,797 $ (23,498)
========= ========= =========
PER SHARE DATA (BASIC
AND DILUTED):
Net (loss) (Note 10) $ (0.44)
=========
</TABLE>
See Notes to Interim Consolidated Financial Statements. Per share data is not
presented for periods prior to June 26, 1999 due to the general lack of
comparability as a result of the revised capital structure of the Company.
- 2 -
<PAGE>
THE PENN TRAFFIC COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
(All dollar amounts in thousands,
except per share data)
<TABLE>
<CAPTION>
SUCCESSOR
COMPANY PREDECESSOR COMPANY
--------- -------------------------------
5 WEEKS 21 WEEKS 26 WEEKS
ENDED ENDED ENDED
JULY 31, JUNE 26, AUGUST 1,
1999 1999 1998
--------- ----------- -----------
<S> <C> <C> <C>
Total Revenues $ 240,966 $ 1,006,804 $ 1,447,022
COSTS AND OPERATING EXPENSES:
Cost of sales (including
buying and occupancy
costs) (Note 4) 184,761 781,342 1,128,019
Selling and administrative
expenses 50,450 226,430 302,035
Amortization of excess
reorganization value 10,982
Unusual items (Note 5) (4,631)
--------- ----------- -----------
OPERATING (LOSS) INCOME (5,227) 3,663 16,968
Interest expense (contractual
interest estimated at $58,772
for the twenty-one week period
ended June 26, 1999) (Note 6) 3,520 21,794 74,120
Reorganization items (Note 7) 167,031
--------- ----------- -----------
(LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEMS (8,747) (185,162) (57,152)
Provision (benefit) for
income taxes (Note 8) 15 60 (16,596)
--------- ----------- -----------
(LOSS) BEFORE EXTRAORDINARY ITEMS (8,762) (185,222) (40,556)
Extraordinary items (Note 9) (654,928)
--------- ----------- -----------
NET (LOSS) INCOME $ (8,762) $ 469,706 $ (40,556)
========= =========== ===========
PER SHARE DATA (BASIC
AND DILUTED):
Net (loss) (Note 10) $ (0.44)
=========
</TABLE>
See Notes to Interim Consolidated Financial Statements. Per share data is not
presented for periods prior to June 26, 1999 due to the general lack of
comparability as a result of the revised capital structure of the Company.
- 3 -
<PAGE>
THE PENN TRAFFIC COMPANY
CONSOLIDATED BALANCE SHEET
(All dollar amounts in thousands)
<TABLE>
<CAPTION>
UNAUDITED
JULY 31, 1999 JANUARY 30, 1999
------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and short-term investments $ 77,180 $ 43,474
Accounts and notes receivable
(less allowance for doubtful accounts
of $8,991 and $5,731, respectively) 44,096 62,420
Inventories (Note 12) 255,740 283,631
Prepaid expenses and other current assets 10,786 14,619
----------- -----------
Total Current Assets 387,802 404,144
NONCURRENT ASSETS:
Capital leases - net 65,041 90,932
Property, plant and equipment - net (Note 13) 222,487 380,143
Beneficial leases - net 60,603 14,785
Goodwill - net 269,894
Excess reorganization value - net 331,646
Other assets and deferred charges - net 20,631 68,163
----------- -----------
Total Assets $ 1,088,210 $ 1,228,061
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of obligations
under capital leases $ 9,903 $ 11,516
Current maturities of long-term
debt (Note 14) 282 1,267,813
Trade accounts and drafts payable 130,811 134,432
Payroll and other accrued liabilities 91,329 81,867
Accrued interest expense 2,309 42,783
Payroll taxes and other taxes payable 13,479 15,420
----------- -----------
Total Current Liabilities 248,113 1,553,831
NONCURRENT LIABILITIES:
Obligations under capital leases 87,562 98,029
Long-term debt (Note 14) 227,828
Deferred taxes 81,203
Other noncurrent liabilities 28,609 45,907
----------- -----------
Total Liabilities 673,315 1,697,767
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 15):
Preferred stock (Successor Company) -
authorized 1,000,000 shares,
$.01 par value; none issued
Common Stock (Successor Company) -
authorized 30,000,000 shares, $.01 par value;
20,106,955 shares issued and outstanding 201
Common Stock (Predecessor Company) -
authorized 30,000,000 shares, $1.25 par value;
10,824,591 shares issued and outstanding 13,425
Capital in excess of par value 416,207 179,882
Stock warrants 7,249
Retained deficit (8,762) (658,820)
Minimum pension liability adjustment (3,470)
Unearned compensation (98)
Treasury stock, at cost (625)
----------- -----------
Total Stockholders' Equity (Deficit) 414,895 (469,706)
----------- -----------
Total Liabilities and
Stockholders' Equity (Deficit) $ 1,088,210 $ 1,228,061
=========== ===========
</TABLE>
See Notes to Interim Consolidated Financial Statements.
- 4 -
<PAGE>
THE PENN TRAFFIC COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
(All dollar amounts
in thousands)
<TABLE>
<CAPTION>
SUCCESSOR
COMPANY PREDECESSOR COMPANY
----------- --------------------------
5 WEEKS 21 WEEKS 26 WEEKS
ENDED ENDED ENDED
JULY 31, JUNE 26, AUGUST 1,
1999 1999 1998
----------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (8,762) $ 469,706 $ (40,556)
Adjustments to reconcile
net (loss) income to net cash
provided by (used in)
operating activities:
Depreciation and amortization 4,615 25,832 39,942
Amortization of Excess
reorganization value 10,982
Gain on sold / closed stores (2,921)
Reorganization Items:
Gain from rejected leases (12,830)
Write-off of unamortized
deferred financing fees 16,591
Fresh-start adjustments 151,161
Extraordinary items (654,928)
Other - net 120
NET CHANGE IN ASSETS AND LIABILITIES:
Accounts receivable and prepaid
expenses 5,753 15,437 4,729
Inventories 1,387 22,321 16,916
Payables and accrued expenses (4,045) 13,800 (13,009)
Deferred taxes (16,671)
Deferred charges and
other assets (12) 1,464 (1,447)
Other noncurrent liabilities (207) (4,797) (1,746)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 9,711 40,956 (11,842)
--------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures (3,296) (6,279) (8,028)
Proceeds from sale of assets 17,273 3,368
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (3,296) 10,994 (4,660)
--------- --------- ---------
FINANCING ACTIVITIES:
Payments to settle
long-term debt (22) (9,598) (3,085)
Borrowing of pre-petition
revolver debt 31,100 70,800
Repayment of pre-petition
revolver debt (144,000) (48,483)
Borrowing of DIP revolver debt 166,751
Repayment of DIP revolver debt (166,751)
Borrowing of new term loan 115,000
Reduction of capital lease
obligations (746) (8,487) (6,406)
Payment of debt issuance costs (7,906)
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (768) (23,891) 12,826
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 5,647 28,059 (3,676)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 71,533 43,474 49,095
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 77,180 $ 71,533 $ 45,419
========= ========= =========
</TABLE>
See Notes to Interim Consolidated Financial Statements.
- 5 -
<PAGE>
THE PENN TRAFFIC COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 - REORGANIZATION
On March 1, 1999 (the "Petition Date"), the Penn Traffic Company (the
"Company") and certain of its subsidiaries filed petitions for relief (the
"Bankruptcy Cases") under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). On May 27, 1999, the Bankruptcy Court
confirmed the Company's chapter 11 plan of reorganization (the "Plan") and on
June 29, 1999 (the "Effective Date"), the Plan became effective in accordance
with its terms.
Consummation of the Plan has resulted in (a) the former $732.2 million
principal amount of senior notes being exchanged for $100 million of new senior
notes (the "New Senior Notes") and 19,000,000 shares of new common stock (the
"New Common Stock"), (b) the former $400 million principal amount of senior
subordinated notes being exchanged for 1,000,000 shares of New Common Stock and
six-year warrants to purchase 1,000,000 shares of New Common Stock having an
exercise price of $18.30 per share, (c) holders of Penn Traffic's formerly
issued common stock receiving one share of New Common Stock for each 100 shares
of common stock held immediately prior to the Petition Date, for a total of
106,955 new shares. As part of the Plan, the Company also authorized for
issuance to officers and key employees options to purchase up to 2,297,000
shares of New Common Stock. The Company's New Common Stock and warrants to
purchase common stock are currently trading on the OTC Bulletin Board under the
symbols "PETR" and "PETRW," respectively. The Company's application to list the
New Common Stock and warrants on the Nasdaq National Market has been approved.
Trading of the New Common Stock and warrants under the symbols "PNFT" and
"PNFTW," respectively, is expected to commence on or about September 15, 1999.
The Company's Plan also provides for the payment in full of all of the
Company's obligations to its other creditors.
On the Effective Date, in connection with the consummation of the Plan,
the Company entered into a new $320 million secured credit facility (the "New
Credit Facility"). The New Credit Facility includes (a) a $205 million revolving
credit facility (the "New Revolving Credit Facility") and (b) a $115 million
term loan (the "Term Loan"). The lenders under the New Credit Facility have a
first priority perfected security interest in substantially all of the Company's
assets. Proceeds from the New Credit Facility were used to satisfy the Company's
obligations under its debtor-in-possession financing (the "DIP Facility"), pay
certain costs of the reorganization process and are available to satisfy the
Company's ongoing working capital and capital expenditure requirements.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
- 6 -
<PAGE>
The results of operations for the interim periods are not necessarily
an indication of results to be expected for the year. In the opinion of
management, all adjustments necessary for a fair presentation of the results are
included for the interim periods, and all such adjustments are normal and
recurring, except for fresh-start adjustments (see Note 3). These unaudited
interim financial statements should be read in conjunction with the consolidated
financial statements and related notes contained in the Company's Annual Report
on Form 10-K for the fiscal year ended January 30, 1999 and the Company's
Quarterly Report on Form 10-Q for the thirteen weeks ended May 1, 1999. However,
as a result of the implementation of fresh-start reporting, the financial
statements of the Company after consummation of the Plan are not comparable to
the Company's financial statements for prior periods.
All significant intercompany transactions and accounts have been
eliminated in consolidation.
Certain amounts in the January 30, 1999 Consolidated Balance Sheet
and the Consolidated Statement of Cash Flows for the 21-week period ended
June 26, 1999 and the 26-week period ended August 1, 1998 have been
reclassified for comparative purposes.
NOTE 3 - FRESH-START REPORTING
As of the Effective Date of the Plan, the Company adopted fresh-start
reporting pursuant to the guidance provided by the American Institute of
Certified Public Accountant's Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). In
connection with the adoption of fresh-start reporting, a new entity has been
created for financial reporting purposes. The Effective Date of the Company's
emergence from bankruptcy is considered to be the close of business on June 26,
1999 for financial reporting purposes. The periods presented prior to June 26,
1999 have been designated "Predecessor Company" and the period subsequent to
June 26, 1999 has been designated "Successor Company". In accordance with
fresh-start reporting, all assets and liabilities are recorded at their
respective fair market values. The fair value of the Company's long-lived assets
were determined, in part, using information provided by third-party appraisers.
The reorganization value of the Company is now reflected as the debt
and equity value of the new company. To facilitate the calculation of the
reorganization value, the Company developed a set of financial projections.
Based on these financial projections, the reorganization value was determined by
the Company, with the assistance of a financial advisor, using various valuation
methods, including, (i) a comparison of the Company and its projected
performance to how the market values comparable companies, (ii) a calculation of
the present value of the free cash flows under the projections, including an
assumption for a terminal value, and (iii) negotiations with an informal
committee of the Company's noteholders. The estimated enterprise value is highly
dependent upon achieving the future financial results set forth in the
projections as well as the realization of certain other assumptions which are
not guaranteed.
- 7 -
<PAGE>
The total reorganization value as of the Effective Date was
approximately $750 million, which was approximately $342.6 million in excess of
the aggregate fair value of the Company's tangible and identifiable intangible
assets less non-interest bearing liabilities. Such excess is classified as
"Excess reorganization value" in the accompanying Consolidated Balance Sheet and
is being amortized on a straight-line basis over a three-year period.
The total outstanding indebtedness (including capital leases) as of
the Effective Date was approximately $326.3 million. The Stockholders' Equity
on the Effective Date of approximately $423.7 million was established by
deducting such total outstanding indebtedness of $326.3 million from the
reorganization value of $750 million. Stockholders' Equity includes $7.2
million representing the fair value of the warrants distributed in
conjunction with the consummation of the Plan.
- 8 -
<PAGE>
The reorganization and the adoption of fresh-start reporting resulted
in the following adjustments to the Company's Consolidated Balance Sheet as of
June 26, 1999 (in thousands):
<TABLE>
<CAPTION>
Predecessor Reorganized
Balance Sheet Reorganization Fresh-Start Balance Sheet
June 26, 1999 Adjustments Adjustments June 26, 1999
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and short-term
investments $ 40,776 $ 30,757 (a) $ 71,533
Accounts and notes
receivable - net 50,266 50,266
Inventories 261,310 $ (4,183)(i) 257,127
Prepaid expenses and
other current assets 10,369 10,369
---------- ---------- ---------- ----------
Total Current Assets 362,721 30,757 (4,183) 389,295
NONCURRENT ASSETS:
Capital leases - net 82,055 (16,127)(i) 65,928
Property, plant
and equipment - net 359,556 (137,232)(i) 222,324
Beneficial leases - net 14,610 46,588 (i) 61,198
Goodwill - net 266,434 (266,434)(j)
Excess reorganization
value - net 342,628 (k) 342,628
Other assets and
deferred charges - net 52,127 2,201 (b) (33,710)(i) 20,618
---------- ---------- ---------- ----------
Total Assets $1,137,503 $ 32,958 $ (68,470) $1,101,991
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Current portion of
obligations under
capital leases $ 9,598 $ 9,598
Current maturities
of long-term debt 493 $ (214)(c) 279
Trade accounts and
drafts payable 134,033 134,033
Payroll and other
accrued liabilities 78,721 13,878 (d) $ 1,578 (l) 94,177
Accrued interest
expense 1,135 (766)(e) 369
Payroll taxes and
other taxes payable 12,531 863 (m) 13,394
---------- ---------- ---------- ----------
Total Current Liabilities 236,511 12,898 2,441 251,850
NONCURRENT LIABILITIES:
Obligations under
capital leases 88,613 88,613
Long-term debt 93,019 134,834 (f) 227,853
Deferred taxes 81,203 (m) 81,203
Other noncurrent liabilities 29,768 (953)(l) 28,815
---------- ---------- ---------- ----------
Total liabilities not
subject to compromise 447,911 147,732 82,691 678,334
LIABILITIES SUBJECT
TO COMPROMISE 1,194,888 (1,194,888)(g)
---------- ---------- ---------- ----------
Total Liabilities 1,642,799 (1,047,156) 82,691 678,334
---------- ---------- ---------- ----------
TOTAL STOCKHOLDERS'
(DEFICIT) EQUITY (505,296) 1,080,114 (h) (151,161)(n) 423,657
---------- ---------- ---------- ----------
Total Liabilities
and Stockholders'
(Deficit) Equity $1,137,503 $ 32,958 $ (68,470) $1,101,991
========== ========== ========== ==========
</TABLE>
- 9 -
<PAGE>
The explanation of the reorganization and fresh-start adjustment columns of the
Consolidated Balance Sheet are as follows:
(a) Reflects the proceeds of the New Credit Facility net of (1) the
repayment of the Company's obligations under the DIP Facility, (2)
certain mortgages repaid in connection with the reorganization and (3)
the deferred financing costs of the New Credit Facility.
(b) Reflects (1) the establishment of deferred financing costs for the New
Credit Facility and (2) the elimination of unamortized deferred
financing costs related to the DIP Facility and certain mortgages
repaid in connection with the reorganization.
(c) Reflects the repayment of certain mortgages in connection with the
reorganization.
(d) Reflects (1) the reclassification of a liability for rejected leases
(which was included in Liabilities Subject to Compromise prior to the
effectiveness of the Plan) to Payroll and other accrued liabilities and
(2) the accrual of certain deferred financing costs of the New Credit
Facility not paid as of the Effective Date.
(e) Reflects the payment of the accrued interest on the DIP Facility and
certain mortgages repaid in connection with the reorganization.
(f) Reflects (1) the issuance of the New Senior Notes ($100 million) (2)
borrowings under the New Credit Facility on the Effective Date ($115
million Term Loan) and (3) the repayment of the DIP Facility and
certain mortgages.
(g) Reflects (1) the conversion of all the Company's obligations under its
pre-petition senior and senior subordinated notes into $100 million of
New Senior Notes, approximately 99.5% of the shares of the New Common
Stock of reorganized Penn Traffic and warrants to purchase additional
shares of New Common Stock and (2) the reclassification of a liability
for rejected leases to Payroll and other accrued liabilities.
(h) Reflects the adjustment to Stockholders' (Deficit) Equity in connection
with the consummation of the Plan.
(i) Reflects the adjustment of Inventories, Capital leases, Property
plant and equipment, Beneficial leases and Other assets and deferred
charges to fair value. The adjustment includes a provision for a
change in the method of accounting for inventories. Inventory
values in the Successor Company have been reduced for certain
related periodic vendor promotional discounts whereas the
Predecessor Company recorded inventories without reducing the value
for such promotional discounts.
(j) Reflects the elimination of Goodwill.
(k) Reflects the establishment of excess reorganization value (the
reorganization value ($750 million) in excess of the aggregate fair
value of the Company's tangible and identifiable intangible assets less
non-interest bearing liabilities).
(l) Reflects (1) the elimination of a pension liability in connection with
the adjustment of pension assets and liabilities to fair value and (2)
a revaluation of the Company's workmens compensation liabilities.
(m) Reflects the recording of deferred tax liabilities associated with the
difference between the book and tax base of the Company's assets and
liabilities.
(n) Reflects the net effect on Stockholders' (Deficit) Equity of
fresh-start adjustments to the Company's assets and liabilities.
- 10 -
<PAGE>
NOTE 4 - SPECIAL CHARGES
During the 8-week period ended June 26, 1999, the Company decided to
commence a process to refine the scope of the nonfood merchandise carried in its
15 Big Bear Plus combination stores to a smaller number of categories with a
greater depth of variety in these categories. Accordingly, during the 8-week
period ended June 26, 1999, the Company recorded a special charge of $3.9
million associated with this repositioning of these 15 Big Bear Plus combination
stores. This charge, which consists of estimated inventory markdowns for
discontinued product lines, is included in cost of sales.
During the third and fourth quarters of 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). In connection with the implementation of
this program, the Company has sold or closed 50 stores. At July 31, 1999 and
January 30, 1999, the accrued liability related to these charges was $18.5
million and $37.4 million, respectively.
NOTE 5 - UNUSUAL ITEMS
During the 8-week period ended June 26, 1999, the Company recorded
unusual items (income) of $1.0 million related to (1) a reduction of closed
store reserves previously accrued in connection with the Company's store
rationalization program, (2) a gain on the disposition of certain assets sold in
connection with the Company's store rationalization program and (3) an
adjustment to a gain on the disposition of certain assets sold in connection
with the Company's store rationalization program previously recorded in the
13-week period ended May 1, 1999.
During the 21-week period ended June 26, 1999, the Company recorded
unusual items (income) of $4.6 million related to (1) a reduction of closed
store reserves previously accrued in connection with the Company's store
rationalization program and (2) a gain on the disposition of certain assets
sold in connection with the Company's store rationalization program.
NOTE 6 - INTEREST EXPENSE
As a result of the Bankruptcy Cases, on and after the Petition Date no
principal or interest payments were made on the $1.132 billion of the Company's
former senior and senior subordinated notes. Accordingly, no interest expense
for these obligations has been accrued on or after the Petition Date. Had such
interest been accrued, interest expense for the 8-week and 21-week periods ended
June 26, 1999 would have been approximately $22.7 million and $58.8 million,
respectively.
- 11 -
<PAGE>
NOTE 7 - REORGANIZATION ITEMS
Reorganization items (expense) included in the accompanying
Consolidated Statements of Operations consist of the following items (in
thousands):
Predecessor Company
------------------------------
8 Weeks Ended 21 Weeks Ended
June 26, 1999 June 26, 1999
------------- --------------
Fresh-start adjustments $ 151,161 $ 151,161
Gain from rejected leases (12,830)
Write-off of unamortized
deferred financing fees 16,591
Professional fees 9,010 12,109
--------- ---------
Total Expense $ 160,171 $ 167,031
========= =========
The gain from rejected leases listed above is the difference between
the estimated allowed claims for rejected leases and liabilities previously
recorded for such leases. The professional fees listed above include
accounting, legal, consulting and other miscellaneous services associated
with the implementation of the Plan.
NOTE 8 - TAX PROVISION
The tax provisions for the 8-week and 21-week periods ended June 26,
1999 are not recorded at statutory rates due to (a) differences between the
income calculations for financial reporting and tax reporting purposes and (b)
the recording of a valuation allowance. A valuation allowance is required when
it is more likely than not the recorded value of a deferred tax asset will not
be realized.
The effective tax rate associated with the tax provision for the 5-week
period ended July 31, 1999 varies from statutory rates due to differences
between income for financial reporting and tax reporting purposes that result
primarily from the amortization of nondeductible excess reorganization value and
the fact that the Company is able to utilize its net operating loss
carryforwards to offset taxable income generated during the fiscal year ending
January 29, 2000.
At January 30, 1999, Penn Traffic had approximately $300 million of
federal net operating loss carryforwards and various tax credits. As a result of
the gain on debt discharge, during the fiscal year ending January 29, 2000 the
Company will use the entire amount of such net operating loss carryforwards and
tax credits. In addition, after January 29, 2000, the Company will lose the vast
majority of the tax basis of its long-term assets. This will reduce the amount
of tax depreciation and amortization that the Company will be able to utilize on
its tax returns, starting in the fiscal year ending January 28, 2001.
In connection with the implementation of fresh-start reporting the
Company recorded approximately $82 million of net deferred tax liabilities on
the Effective Date.
- 12 -
<PAGE>
NOTE 9 - EXTRAORDINARY ITEMS
As a result of the consummation of the Plan, the Company recognized an
extraordinary gain on debt discharge during the 8-week period ended June 26,
1999 as follows (in millions):
Elimination of the former senior and senior
subordinated notes including accrued interest $1,182.2
Write-off of unamortized deferred financing fees
for debt repaid in connection with the Plan (2.1)
Issuance of New Senior Notes (100.0)
Issuance of New Common Stock and warrants (423.7)
--------
Extraordinary gain on debt discharge $ 656.4
========
The extraordinary items recorded for the 21-week period ended June 26,
1999 of $654.9 million are comprised of the extraordinary gain on debt discharge
recognized in the 8-week period ended June 26, 1999 and the write-off of
unamortized deferred financing fees associated with the early retirement of the
Company's revolving credit facility prior to the Petition Date (the
"Pre-petition Revolving Credit Facility") ($1.5 million) which was recorded
during the 13-week period ended May 1, 1999. No corresponding tax benefit has
been recorded.
NOTE 10 - NET (LOSS) PER SHARE
Net (loss) per share is computed based on the requirements of Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
This standard requires presentation of basic earnings per share ("EPS"),
computed based on the weighted average number of common shares outstanding for
the period, and diluted EPS, which gives effect to all dilutive potential shares
outstanding (i.e., options and warrants) during the period. Shares used in the
calculation of basic and diluted EPS were 20,106,955 for the 5-week period ended
July 31, 1999. There were no incremental dilutive potential securities for the
5-week period ended July 31, 1999 as the exercise price for outstanding warrants
(1,000,000 shares) and options (1,837,500 shares) was greater than the average
market price of the New Common Stock.
Net (loss) per share data is not presented for periods prior to June
26, 1999 due to the general lack of comparability as a result of the revised
capital structure of the Company.
- 13 -
<PAGE>
NOTE 11 - SUPPLEMENTAL FINANCIAL INFORMATION
(In thousands of dollars)
Successor
Company Predecessor Company
---------- --------------------------
5 Weeks 8 Weeks 13 Weeks
Ended Ended Ended
July 31, June 26, August 1,
1999 1999 1998
--------- --------- ----------
EBITDA $10,611 $14,421 $28,033
Cash Interest Expense 3,439 4,777 36,012
5 Weeks 21 Weeks 26 Weeks
Ended Ended Ended
July 31, June 26, August 1,
1999 1999 1998
--------- --------- ----------
EBITDA $10,611 $29,772 $58,161
Cash Interest Expense 3,439 20,393 71,679
EBITDA is earnings before interest, depreciation, amortization,
amortization of excess reorganization value, LIFO provision, special charges,
unusual items, reorganization items, extraordinary items, the cumulative
effect of change in accounting principle and taxes. EBITDA should not be
interpreted as a measure of operating results, cash flow provided by
operating activities, a measure of liquidity, or as an alternative to any
generally accepted accounting principle measure of performance. The Company
is reporting EBITDA because it is a widely used financial measure of the
potential capacity of a company to incur and service debt. Penn Traffic's
reported EBITDA may not be comparable to similarly titled measures used by
other companies.
No interest expense for the Company's $1.132 billion of the Company's
former senior and senior subordinated notes have been accrued on or after the
Petition Date. Had such interest been accrued, cash interest expense for the
8-week and 21-week periods ended June 26, 1999 would have been approximately
$22.2 million and $57.4 million, respectively.
NOTE 12 - INVENTORIES
Inventories are stated at the lower of cost or market using the
last-in, first-out ("LIFO") method of valuation for the vast majority of the
Company's inventories. If the first-in, first-out ("FIFO") method had been used
by the Company, inventories would have been $0.2 million and $23.6 million
higher than reported at July 31, 1999 and January 30, 1999, respectively. In
connection with the implementation of fresh-start reporting the Company adjusted
the value of its LIFO inventories on the Effective Date to be equal to fair
value which approximates the FIFO value of inventories.
- 14 -
<PAGE>
NOTE 13 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment - net consists of the following (in
thousands):
July 31, 1999 January 30, 1999
------------- ----------------
Land $ 41,602 $ 16,525
Buildings 84,420 183,660
Furniture and fixtures 96,628 455,592
Vehicles 2,970 16,792
Leasehold improvements 171,007
--------- ---------
225,620 843,576
Less: Accumulated depreciation (3,133) (463,433)
--------- ---------
Property, plant and equipment - net $ 222,487 $ 380,143
========= =========
In connection with the implementation of fresh-start reporting, the
Company determined the fair value of each of its leases and recorded a
beneficial lease asset of approximately $61.2 million on June 26, 1999.
Accordingly, the Company eliminated the book value of its leasehold
improvements.
NOTE 14 - LONG-TERM DEBT
Prior to the Petition Date, the Company had the Pre-petition Revolving
Credit Facility which provided for borrowings of up to $250 million, subject to
a borrowing base limitation measured by eligible inventory and accounts
receivable of the Company. After the Petition Date, the Bankruptcy Court
approved the DIP Facility. A portion of the proceeds of the DIP Facility were
used to repay, in full, the Company's Pre-petition Revolving Credit Facility and
a mortgage on one of the Company's distribution facilities and to finance its
working capital and capital expenditure requirements. The DIP Facility matured
on June 29, 1999, the Effective Date.
The consummation of the Plan has resulted in the holders of Penn
Traffic's former senior and senior subordinated notes exchanging their notes in
the following manner: (a) the holders of the former outstanding $732.2 million
of senior notes received their pro rata share of $100 million of New Senior
Notes and 19,000,000 shares of New Common Stock, and (b) the holders of the
former outstanding $400 million of senior subordinated notes received their pro
rata share of 1,000,000 shares of New Common Stock and six-year warrants to
purchase 1,000,000 shares of New Common Stock having an exercise price of $18.30
per share.
The New Senior Notes mature on June 29, 2009 and do not contain any
mandatory redemption or sinking fund requirement provisions (other than pursuant
to certain customary exceptions including, without limitation, requiring the
Company to make an offer to repurchase the New Senior Notes upon the occurrence
of a change of control), and are optionally redeemable at prices 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. Pursuant to the
terms of the indenture for the New Senior Notes, the Company, at its election,
can choose to pay interest on the New Senior Notes, at the rate of 11% per annum
for the first two years (i.e., the first four interest payments) through the
issuance of additional notes and thereafter, interest on the New Senior Notes
will be payable, at the rate of 11% per annum in cash. Any notes issued in lieu
of interest would also mature on June 29, 2009 and bear interest at 11% per
annum.
- 15 -
<PAGE>
In connection with the consummation of the Plan, the Company entered
into the New Credit Facility. The New Credit Facility includes (a) the $205
million New Revolving Credit Facility and (b) the $115 million Term Loan. The
lenders under the New Credit Facility have a first priority perfected security
interest in substantially all of the Company's assets. Proceeds from the New
Credit Facility were used to satisfy the Company's obligations under its DIP
Facility, pay certain costs of the reorganization process and are available to
satisfy the Company's ongoing working capital and capital expenditure
requirements.
The Term Loan will mature on June 30, 2006. Amounts of the Term Loan
maturing in future fiscal years are outlined on the following table (in
thousands):
Fiscal Year Amount Maturing
----------- ---------------
2001 $ 2,000
2002 4,750
2003 6,750
2004 9,750
2005 12,750
2006 7,750
2007 71,250
--------
$115,000
========
Availability under the New Revolving Credit Facility is calculated
based on a specified percentage of eligible inventory and accounts receivable of
the Company. The New Revolving Credit Facility will mature on June 30, 2005. As
of July 31, 1999, there were no borrowings under the New Revolving Credit
Facility. Availability under the New Revolving Credit Facility was $130.1
million as of July 31, 1999.
Total debt outstanding on July 31, 1999 was (in thousands):
Current Maturities $ 282
--------
New Term Loan 115,000
Other Secured Debt 12,828
New Senior Notes 100,000
--------
Total Long-Term Debt 227,828
--------
Total Debt $228,110
========
- 16 -
<PAGE>
NOTE 15 - COMMON STOCK OPTIONS AND WARRANTS OUTSTANDING
Pursuant to the Plan, the Company is authorized to issue 30,000,000
shares of New Common Stock. As of July 31, 1999, 20,106,955 shares of common
stock have been issued.
Pursuant to the Plan, the Company is authorized to issue 1,000,000
shares of preferred stock. No shares have been issued.
Pursuant to the Plan, the 1999 Equity Incentive Plan (the "Equity
Plan") was adopted on the Effective Date. The Equity Plan makes available the
granting of options to acquire an aggregate of 2,297,000 shares of New Common
Stock. All of the Company's officers and employees are eligible to receive
options under the Equity Plan. Options to acquire an aggregate of 1,097,000
shares were issued as of the Effective Date. Options to acquire an additional
600,500 shares were granted during the 5-week period ended July 31, 1999 to
certain officers and employees of the Company. Options to acquire an additional
599,500 shares may be granted by the Board of Directors' Compensation Committee.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), defines a fair value based method of
accounting for an employee stock option by which compensation cost is measured
at the grant date based on the fair value of the award and is recognized over
the service period. A company may elect to adopt SFAS 123 or elect to continue
accounting for its stock option or similar equity awards using the method of
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), by which compensation cost is
measured at the date of grant based on the excess of the market value of the
underlying stock over the exercise price. The Company has elected to continue to
account for its stock-based compensation plan under the provisions of APB 25. No
compensation expense has been recognized in the accompanying interim financial
statements relative to the Company's Equity Plan.
During the 5-week period ended July 31, 1999, the Company adopted the
1999 Directors' Stock Option Plan (the "Directors' Plan"). The Directors' Plan
makes available to the Company's directors, who are not officers of the Company,
options to acquire up to 250,000 shares of New Common Stock. During the 5-week
period ended July 31, 1999, the Company granted options to purchase an aggregate
of 140,000 shares to seven of the Company's directors.
Pursuant to the Plan, the Company has also issued six-year warrants to
purchase 1,000,000 shares of New Common Stock at an exercise price of $18.30 per
share.
- 17 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements included in this Part I, Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Quarterly Report on Form 10-Q which are not statements of historical fact are
intended to be, and are hereby identified as, "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Without limiting the foregoing, the words "believe," "anticipate," "plan,"
"expect," "estimate," "intend" and other similar expressions are intended to
identify forward-looking statements. The Penn Traffic Company (the "Company")
cautions readers that forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
the success or failure of the Company in implementing its current business and
operational strategies; availability, terms and access to capital and customary
trade credit; general economic and business conditions; competition; changes in
the Company's business strategy; availability, location and terms of sites for
store development; unexpected costs of year 2000 compliance or failure by the
Company or other entities with which it does business to achieve compliance;
labor relations; the outcome of pending or yet-to-be instituted legal
proceedings; and labor and employee benefit costs.
OVERVIEW
As discussed in Note 1 to the accompanying Consolidated Financial
Statements, the Company emerged from its Chapter 11 proceedings effective
June 29, 1999 (the "Effective Date"). For financial reporting purposes, the
Company accounted for the consummation of its plan of reorganization (the
"Plan") effective June 26, 1999. In accordance with the American Institute of
Certified Public Accountant's Statement of Position 90-7 "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the
Company has applied fresh-start reporting as of June 26, 1999 which has
resulted in significant changes to the valuation of certain of the Company's
assets and liabilities, and to its stockholders' equity. In connection with
the adoption of fresh-start reporting, a new entity has been deemed created
for financial reporting purposes. The periods presented prior to June 26,
1999 have been designated "Predecessor Company" and the period subsequent to
June 26, 1999 has been designated "Successor Company". For purposes of the
discussion of Results of Operations for the 13-week and 26-week periods ended
July 31, 1999, the results of the Predecessor Company and Successor Company
have been combined since separate discussions of these periods are not
meaningful in terms of their operating results or comparisons to the prior
year.
- 18 -
<PAGE>
RESULTS OF OPERATIONS
THIRTEEN WEEKS ("SECOND QUARTER FISCAL 2000") AND TWENTY-SIX WEEKS ENDED
JULY 31, 1999 COMPARED TO THIRTEEN WEEKS ("SECOND QUARTER FISCAL 1999")
AND TWENTY-SIX WEEKS ENDED AUGUST 1, 1998
The following table sets forth Statement of Operations components
expressed as percentages of total revenues for Second Quarter Fiscal 2000 and
Second Quarter Fiscal 1999, and for the 26-week period ended July 31, 1999 and
August 1, 1998, respectively:
<TABLE>
<CAPTION>
Second Quarter Ended Twenty-six Weeks Ended
------------------------------ ---------------------------
JULY 31, August 1, JULY 31, August 1,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0% 100.0%
Gross profit (1) 22.9 22.1 22.6 22.0
Gross profit excluding
special charge (2) 23.5 22.1 22.9 22.0
Selling and administrative
expenses 21.9 21.1 22.2 20.9
Unusual items (3) (0.2) (0.4)
Amortization of excess
reorganization value 1.7 0.9
Operating (loss) income (0.5) 1.0 (0.1) 1.2
Operating income before
unusual items, special charge
and amortization of excess
reorganization value (4) 1.7 1.0 0.7 1.2
Interest expense 1.4 5.1 2.0 5.1
Reorganization items 25.3 13.4
Net income (loss) 76.5 (3.2) 36.9 (2.8)
Net income (loss) excluding
unusual items, special charge,
amortization of excess
reorganization value,
reorganization items, and
extraordinary items (5) 0.3 (3.2) (1.3) (2.8)
</TABLE>
(1) Total revenues less cost of sales.
(2) Gross profit excluding a special charge of $3.9 million in Second
Quarter Fiscal 2000 (see Note 4).
(3) Unusual items (income) of $1.0 million and $4.6 million for Second
Quarter Fiscal 2000 and the 26-week period ended July 31, 1999,
respectively.
- 19 -
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
(4) Operating (loss) for Second Quarter Fiscal 2000 excluding unusual
items (income) of $1.0 million, a special charge of $3.9 million,
and amortization of excess reorganization value of $11.0 million.
Operating (loss) for the 26-week period ended July 31, 1999
excluding a special charge of $3.9 million, unusual items (income)
of $4.6 million, and amortization of excess reorganization value of
$11.0 million (see Note 4 and Note 5).
(5) Net income for Second Quarter Fiscal 2000 excluding unusual items
(income) of $1.0 million, a special charge of $3.9 million,
amortization of excess reorganization value of $11.0 million,
reorganization items (expense) of $160.2 million and extraordinary
items (income) of $656.4 million. Net income for the 26-week period
ended July 31, 1999 excluding unusual items (income) of $4.6
million, a special charge of $3.9 million, amortization of excess
reorganization value of $11.0 million, reorganization items
(expense) of $167.0 million and extraordinary items (income) of
$654.9 million (see Notes 4, 5, 7 and 9).
Total revenues for Second Quarter Fiscal 2000 decreased to $632.7
million from $730.2 million in Second Quarter Fiscal 1999. Total revenues for
the 26-week period ended July 31, 1999 decreased to $1.248 billion from $1.447
billion for the 26-week period ended August 1, 1998. The decrease in revenues is
primarily attributable to a reduction in the number of stores the Company
operated in Second Quarter Fiscal 2000 as compared to Second 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 Second
Quarter Fiscal 2000 and the 26-week period ended July 31, 1999 declined 1.1% and
2.8%, respectively, from the comparable prior year period. Wholesale supermarket
revenues were $76.0 million in Second Quarter Fiscal 2000 compared to $84.2
million in Second Quarter Fiscal 1999. Wholesale supermarket revenues were
$151.4 million for the 26-week period ended July 31, 1999 compared to $164.9
million for the 26-week period ended August 1, 1998. The decrease in wholesale
revenues resulted primarily from a reduction in the number of customers of the
Company's wholesale/franchise business.
Gross profit in Second Quarter Fiscal 2000 was 22.9% of revenues
compared to 22.1% of revenues in Second Quarter Fiscal 1999. In Second Quarter
Fiscal 2000, gross profit, excluding a special charge of $3.9 million associated
with the repositioning of the Company's 15 Big Bear Plus Stores (see Note 4),
was 23.5% of revenues. Gross profit in the 26-week period ended July 31, 1999
was 22.6% of revenues compared to 22.0% of revenues for the 26-week period ended
August 1, 1998. For the 26-week period ended July 31, 1999 gross profit,
excluding a special charge of $3.9 million, was 22.9% of revenues. The increase
in gross profit, excluding the special charge of $3.9 million, as a percentage
of revenues in Second Quarter Fiscal 2000 and the 26-week period ended July 31,
1999 was primarily due to (1) the positive effect of re-establishing the
Company's traditional high/low pricing strategy in the second half of the fiscal
year ended January 30, 1999 ("Fiscal 1999") (2) reduced inventory shrink expense
as a percentage of revenues and (3) a reduction in depreciation and amortization
expense (as described below). In addition, during Second Quarter Fiscal 2000
gross profit was positively impacted by the Company's store rationalization
program which has involved the sale or closure of approximately 50 stores which
generally had lower gross margins than the average for the Company. These
improvements in gross profit were partially offset by reduced allowance income
from the Company's vendors in the 26-week period ended July 31, 1999.
- 20 -
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
Selling and administrative expenses in Second Quarter Fiscal 2000
were 21.9% of revenues compared to 21.1% of revenues in Second Quarter Fiscal
1999. For the 26-week period ended July 31, 1999 selling and administrative
expenses were 22.2% of revenues compared to 20.9% of revenues for the 26-week
period ended August 1, 1998. The increase in selling and administrative
expenses as a percentage of revenues in Second Quarter Fiscal 2000 and the
26-week period ended July 31, 1999 was primarily due to (1) the Company's
investment in store labor as part of an effort to improve operations and
focus on customer service, (2) the spreading of certain fixed and semi-fixed
costs over reduced revenues, (3) an increase in promotional expenses (the
Company accounts for certain promotional expenses in the selling and
administrative expenses line of the Consolidated Statement of Operations) and
(4) an adjustment to allowance for doubtful accounts as described below.
Included in selling and administrative expenses in Second Quarter Fiscal 2000
is a $1.9 million adjustment to allowance for doubtful accounts primarily
related to certain receivables arising from the Company's pharmacy operations
in prior periods whose collection now appears doubtful. These increases in
selling and administrative expenses as a percentage of revenues were
partially offset by a reduction in goodwill amortization resulting from (1)
the Company's store rationalization program, commenced in the middle of
Fiscal 1999, which involves the sale or closure of certain stores and (2) the
elimination of goodwill on June 26, 1999 in connection with the
implementation of fresh-start reporting (see Note 3).
Depreciation and amortization expense was $13.9 million in Second
Quarter Fiscal 2000 and $19.9 million in Second Quarter Fiscal 1999,
representing 2.2% and 2.7% of revenues, respectively. Depreciation and
amortization expense was $30.4 million for the 26-week period ended July 31,
1999 and $40.0 million for the 26-week period ended August 1, 1998, representing
2.4% and 2.8% of total revenues, respectively. Depreciation and amortization
expense decreased primarily due to (1) a reduction in the Company's capital
expenditure program, (2) the Company's store rationalization program, commenced
in the middle of Fiscal 1999, which involved the sale or closure of certain
stores, (3) the write-down of long-lived assets recorded in Fiscal 1999 in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS 121"), (4) a reduction in the carrying value of property, plant and
equipment associated with the implementation of fresh-start reporting and (5)
the elimination of goodwill on June 26, 1999 associated with the implementation
of fresh-start reporting.
During the 8-week and 21-week periods ended June 26, 1999, the Company
recorded unusual items (income) of $1.0 million and $4.6 million, respectively,
related to the Company's store rationalization program (see Note 5).
Operating (loss) for Second Quarter Fiscal 2000 was $3.4 million or
(0.5%) of total revenues compared to operating income of $7.5 million or 1.0%
of total revenues in Second Quarter Fiscal 1999. In Second Quarter Fiscal
2000, operating income before unusual items (income), a special charge and
amortization of excess reorganization value was $10.5 million or 1.7% of
revenues. Operating income decreased as a percentage of revenues in Second
Quarter Fiscal 2000 due to the establishment of excess reorganization value
in connection with the implementation of fresh-start reporting and the
recording of a special charge of $3.9 million. Operating income before
unusual items, special charge and amortization of excess reorganization value
as a percentage of revenues increased due to the increase in gross profit
excluding a special charge as a percentage of revenues partially offset by an
increase in selling and administrative expenses as a percentage of revenues.
- 21 -
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
Operating (loss) for the 26-week period ended July 31, 1999 was $1.6
million or (0.1%) of total revenues compared to operating income of $17.0
million or 1.2% of revenues for the 26-week period ended August 1, 1998.
Operating income before unusual items, a special charge and amortization of
excess reorganization value for the 26-week period ended July 31, 1999 was $8.7
million or 0.7% of revenues. Operating income before unusual items, a special
charge and amortization of excess reorganization value as a percentage of
revenues decreased in the 26-week period ended July 31, 1999 due to an increase
in selling and administrative expenses as a percentage of revenues partially
offset by an increase in gross profit excluding special charge as a percentage
of revenues.
Interest expense for Second Quarter Fiscal 2000 and Second Quarter
Fiscal 1999 was $8.8 million and $37.3 million, respectively. Interest expense
for the 26-week period ended July 31, 1999 and August 1, 1998 was $25.3 million
and $74.1 million, respectively. Interest expense declined primarily due to (1)
the fact that on March 1, 1999 (the "Petition Date"), the Company discontinued
the accrual of interest on the Company's former senior and senior subordinated
notes and (2) the implementation of the Plan on June 29, 1999, which has
substantially reduced the Company's debt.
During Second Quarter Fiscal 2000 and the 26-week period ended July 31,
1999, the Company recorded reorganization items (expense) of $160.2 million and
$167.0 million, respectively (see Note 7).
Income tax provision was $0.0 million for Second Quarter Fiscal 2000
compared to a tax benefit of $6.2 million in Second Quarter Fiscal 1999. Income
tax provision for the 26-week period ended July 31, 1999 was $0.0 million
compared to a tax benefit of $16.6 million for the 26-week period ended August
1, 1998. The Company currently has a significant net deferred tax asset
resulting primarily from net operating loss carryforwards and various tax
credits. For accounting periods prior to the implementation of fresh-start
reporting on June 26, 1999 these net deferred tax assets have been completely
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. For the 5-week period ended July 31, 1999, the
Company was able to utilize such net operating loss carryforwards to offset an
income tax provision that the Company would have otherwise recognized in such
period (see Note 8).
During Second Quarter Fiscal 2000 and the 26-week period ended July 31,
1999, the Company recorded an extraordinary gain on debt discharge of $656.4
million and $654.9 million, respectively (see Note 9).
Net income for Second Quarter Fiscal 2000 was $484.0 million compared
to a net (loss) of $23.5 million for Second Quarter Fiscal 1999. Net income
excluding unusual items (income), a special charge, amortization of excess
reorganization value, reorganization items (expense) and extraordinary items
(income) was $1.7 million for Second Quarter Fiscal 2000. Net income for the
26-week period ended July 31, 1999 was $460.9 million compared to a net (loss)
of $40.6 million for the 26-week period ended August 1, 1998. Net (loss)
excluding unusual items (income), a special charge, amortization of excess
reorganization value, reorganization items (expense) and extraordinary items
(income) was $16.7 million for the 26-week period ended July 31, 1999.
- 22 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As a result of the consummation of the Plan, the Company substantially
reduced the amount of its overall indebtedness. In connection with the
consummation of the Plan, approximately $1.13 billion of senior notes and senior
subordinated notes were converted into $100 million of newly issued 11% Senior
Notes due 2009 (the "New Senior Notes"), approximately 99.5% of the shares of
the new common stock of reorganized Penn Traffic (the "New Common Stock")
outstanding on the Effective Date of the Plan and warrants to purchase
additional shares of New Common Stock. Upon consummation of the Plan on June 29,
1999, the Company had approximately $326 million of outstanding indebtedness
(including capital leases).
The New Senior Notes mature on June 29, 2009 and do not contain any
mandatory redemption or sinking fund requirement provisions (other than pursuant
to certain customary exceptions including, without limitation, requiring the
Company to make an offer to repurchase the New Senior Notes upon the occurrence
of a change of control), and are optionally redeemable at prices at 106% of par
beginning in the year 2004 and declining annually thereafter, and at 111% of par
under other specified circumstances as dictated by the Plan. Pursuant to the
terms of the indenture for the New Senior Notes, the Company, at its election,
can choose to pay interest on the New Senior Notes, at the rate of 11% per annum
for the first two years (i.e., the first four interest payments) through the
issuance of additional notes and thereafter, interest on the New Senior Notes
will be payable, at the rate of 11% per annum in cash. Any notes issued in lieu
of interest would also mature on June 29, 2009 and bear interest at 11% per
annum.
Prior to the Petition Date, the Company had a revolving credit facility
(the "Pre-petition Revolving Credit Facility") which provided for borrowings of
up to $250 million, subject to a borrowing base limitation measured by eligible
inventory and accounts receivable of the Company. After the Petition Date, the
United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court") approved a $300 million debtor-in-possession financing (the "DIP
Facility"). A portion of the proceeds of the DIP Facility were used to repay, in
full, the Company's Pre-petition Revolving Credit Facility and a mortgage on one
of the Company's distribution facilities and to finance its working capital and
capital expenditure requirements. The DIP Facility matured on June 29, 1999, the
Effective Date of the Plan.
On June 29, 1999, in connection with the consummation of the Plan, the
Company entered into a new $320 million secured credit facility (the "New Credit
Facility"). The New Credit Facility includes (a) a $205 million revolving credit
facility (the "New Revolving Credit Facility") and (b) a $115 million term loan
(the "Term Loan"). The lenders under the New Credit Facility have a first
priority perfected security interest in substantially all of the Company's
assets and the New Credit Facility contains a variety of operational and
financial covenants intended to restrict the Company's operations. Proceeds from
the New Credit Facility were used to satisfy the Company's obligations under its
DIP Facility, pay certain costs of the reorganization process and are available
to satisfy the Company's ongoing working capital and capital expenditure
requirements.
- 23 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Term Loan will mature on June 30, 2006. Amounts of the Term Loan
maturing in future fiscal years are outlined on the following table (in
thousands):
Fiscal Year Amount Maturing
----------- ---------------
2001 $ 2,000
2002 4,750
2003 6,750
2004 9,750
2005 12,750
2006 7,750
2007 71,250
--------
$115,000
========
Availability under the New Revolving Credit Facility is calculated
based on a specified percentage of eligible inventory and accounts receivable of
the Company. The New Revolving Credit Facility will mature on June 30, 2005. As
of July 31, 1999, there were no borrowings under the New Revolving Credit
Facility. Availability under the New Revolving Credit Facility was $130.1
million as of July 31, 1999.
During Second Quarter Fiscal 2000, the Company's internally generated
funds from operations and amounts available under the DIP Facility and the New
Credit Facility provided sufficient liquidity to meet the Company's operating,
capital expenditure and debt service needs. The Company expects to utilize
internally generated funds from operations and amounts available under the New
Credit Facility to satisfy its operating, capital expenditure and debt service
needs for the remainder of Fiscal 2000.
Cash flows to meet the Company's operating requirements during the
26-week period ended July 31, 1999 are reported in the Consolidated Statement
of Cash Flows. During the 5-week period ended July 31, 1999, the Company's
net cash provided by operating activities was $9.7 million. This amount was
partially offset by net cash used in investing activities and net cash used
in financing activities of $3.3 million and $0.8 million, respectively.
During the 21-week period ended June 26, 1999, the Company's net cash
provided by operating activities and net cash provided by investing
activities were $41.0 million and $11.0 million, respectively. These amounts
were partially offset by net cash used in financing activities of $23.9
million. As of July 31, 1999, the Company had not paid approximately $20
million of expenditures related to its debt restructuring.
During the fiscal year ending January 29, 2000, the Company expects to
invest approximately $45 million in capital expenditures (including capital
leases). The Company expects to finance such capital expenditures through cash
generated from operations and amounts available under the New Credit Facility.
Capital expenditures will be principally for new stores, store remodels and
investments in technology.
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<PAGE>
YEAR 2000
Year 2000 exposures arise from the inability of some computer-based
systems and equipment to correctly interpret and process dates after December
31, 1999. The basis for the exposure is that many systems and equipment carry
only the last two digits of the year field. With the year 2000, these systems
and equipment will not be able to distinguish between the year 1900 and 2000.
For those processes and procedures that use the date in calculations,
significant problems can occur.
The Company is dependent on technology including computer hardware and
software and related electronic equipment. This technology supports key business
processes including product procurement, warehousing, product delivery,
inventory control, labor management, retail sales and financial reporting. All
of this technology and electrical equipment may be susceptible to Year 2000
problems.
The calendar year 1999 coincides with eleven months of the Company's
fiscal year 2000. All financial systems have been and currently are functioning
correctly in support of fiscal year 2000.
In 1997, the Company assembled a project team consisting of
representatives across key departments in the organization to assess the state
of readiness and to initiate a plan and timetable to address issues encountered.
This working committee functioned under the control of the Company's Management
Information Systems Steering Committee and provided monthly updates to the
Company's senior management. The Year 2000 readiness plan addresses three major
segments: (a) Information Technology including infrastructure (i.e., mainframe,
server and personal computers and their associated networks), applications,
including all systems and operating software and in-store systems and equipment;
(b) Non-Information Technology, including telephones, time clocks, scales and
security devices and (c) External Entities, including product and service
providers and others with whom the Company interacts or exchanges information.
Each segment of the readiness plan includes data collection, assessment,
prioritization, resolution, testing, implementation, and ongoing monitoring of
compliance.
The table below sets forth the status and expected completion date of
all phases of the readiness plan at August 31, 1999:
Estimated
Information Technology Percent Complete Target Completion Date
- ---------------------- ---------------- ----------------------
Server Computers 100% Complete
Personal Computers 100% Complete
Applications 80% November 1999
Mainframe Computers 100% Complete
Operating Software 100% Complete
In-Store systems/equipment 75% November 1999
Non-Information Technology
- --------------------------
Phone Switches 90% September 1999
Other equipment 70% October 1999
External Entities
- -----------------
Verification of critical
business partner readiness 75% October 1999
Electronic Data Interchange
business partners 60% October 1999
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<PAGE>
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 80 percent complete with a target completion date of
October 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 November 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 November 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 October 1999.
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 November 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 plan considers
the potential for disruption in utilities such as power and telecommunications,
banking, state and local government, and transportation industries, and will
address provisioning of inventory and supplying stores and customers in the
weeks leading up to and beyond January 1, 2000, communication with employees and
customers, payment to employees and remittance to suppliers, and other areas.
The contingency plan is expected to be completed in October 1999 and will
continually be reviewed throughout the balance of the calendar year as
additional information becomes available.
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<PAGE>
YEAR 2000 (CONTINUED)
Based on current information, the Company estimates the cost of Year
2000 compliance will be approximately $9 million including the purchase of
certain new hardware and software. To date such expenditures have totaled
approximately $7.5 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 New 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.
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.
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<PAGE>
PART II. OTHER INFORMATION
All items which are not applicable or to which the answer is negative
have been omitted from this report.
ITEM 1. LEGAL PROCEEDINGS
Reorganization. Reference is made to Note 1 of the Consolidated
Financial Statements in Part I and is incorporated by reference herein.
ITEM 2. CHANGE IN SECURITIES
On June 29, 1999, the Company consummated its plan of
reorganization. In connection with the Plan, the Company canceled its former
notes, preferred stock, common Stock, restricted stock, stock warrants and
stock options. There are 30,000,000 shares of New Common Stock authorized
under the Company's Certificate of Incorporation. Of such authorized shares,
20,106,955 shares, representing 100% of the issued and outstanding shares of
New Common Stock, have been distributed to the holders of the former senior
and senior subordinated notes and common stock. In connection with the Plan,
Penn Traffic also issued the New Senior Notes and six-year warrants to
purchase 1,000,000 shares of New Common Stock, having an exercise price of
$18.30 per share. For further information concerning the issuance of the new
securities, reference is made to Note 1 accompanying the financial statements.
ITEM 5. OTHER INFORMATION
The Company's New Common Stock and new warrants issued are currently
trading on the OTC Bulletin Board under the ticker symbols "PETR" and "PETRW,"
respectively. The Company's application to list the New Common Stock and
warrants on the Nasdaq National Market has been approved. Trading of the New
Common Stock and warrants under the symbols "PNFT" and "PNFTW," respectively, is
expected to commence on or about September 15, 1999.
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<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
10.21A Amendment to Employment Agreement
of Joseph Fisher, dated June 29, 1999
10.22 Employment Agreement of Leslie Knox,
dated August 14, 1999
10.23 Management Agreement of Hirsch & Fox LLC,
dated June 29, 1999
10.24 1999 Equity Incentive Plan
10.25 1999 Directors' Stock Option Plan
10.26 Supplemental Retirement Plan for
Non-Employee Executives
10.27 Registration Rights Agreement,
dated June 29, 1999
27.1 Financial Data Schedule
27.2 Financial Data Schedule
(b) Reports on Form 8-K
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 U.S. Bankruptcy Code.
On July 14, 1999, the Company filed a report on Form 8-K relating to
the consummation of the Company's and certain of its subsidiaries Joint Plan of
Reorganization under Chapter 11 of the U.S. Bankruptcy Code.
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<PAGE>
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 22, 1999 /s/ Joseph V. Fisher
---------------------------------
By: Joseph V. Fisher
President, Chief Executive
Officer and Director
September 22, 1999 /s/ Martin A. Fox
---------------------------------
By: Martin A. Fox
Vice Chairman of the
Executive Committee and
Chief Financial Officer
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