10-Q 1 a2052134z10-q.txt 10-Q 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 5, 2001 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: 20,056,112 shares outstanding as of June 8, 2001 Page 1 of 19 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)
13 WEEKS 13 WEEKS ENDED ENDED MAY 5, APRIL 29, 2001 2000 --------- --------- REVENUES $ 608,422 $ 592,617 COST AND OPERATING EXPENSES: Cost of sales (including buying and occupancy costs) 464,295 450,539 Selling and administrative expenses 133,855 130,754 Amortization of excess reorganization value 27,318 27,325 Unusual item (Note 2) 358 --------- --------- OPERATING LOSS (17,046) (16,359) Interest expense 9,530 9,651 --------- --------- LOSS BEFORE INCOME TAXES (26,576) (26,010) Provision for income taxes (Note 3) 559 717 --------- --------- NET LOSS $ (27,135) $ (26,727) ========= ========= PER SHARE (BASIC AND DILUTED): Net loss (Note 4) $ (1.35) $ (1.33) ========= =========
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS. -2- THE PENN TRAFFIC COMPANY CONSOLIDATED BALANCE SHEET (All dollar amounts in thousands)
UNAUDITED AUDITED MAY 5, FEBRUARY 3, 2001 2001 --------- --------- ASSETS CURRENT ASSETS: Cash and short-term investments $ 41,735 $ 42,529 Accounts and notes receivable (less allowance for doubtful accounts of $5,022 and $4,634, respectively) 42,261 46,113 Inventories 273,893 271,704 Prepaid expenses and other current assets 9,458 9,338 --------- --------- 367,347 369,684 --------- --------- NONCURRENT ASSETS: Capital leases - net 51,127 50,812 Property, plant and equipment - net 257,365 255,507 Goodwill - net 9,167 9,197 Beneficial leases - net 48,952 50,549 Excess reorganization value - net 123,986 151,304 Other assets - net 23,361 22,517 --------- --------- $ 881,305 $ 909,570 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of obligations under capital leases 8,201 7,878 Current maturities of long-term debt 5,067 5,062 Trade accounts and drafts payable 126,225 119,905 Other accrued liabilities 77,204 76,857 Accrued interest expense 5,555 3,478 Taxes payable 16,654 16,971 --------- --------- 238,906 230,151 --------- --------- NONCURRENT LIABILITIES: Obligations under capital leases 72,893 73,396 Long-term debt 228,631 238,112 Deferred income tax 74,826 76,141 Other noncurrent liabilities 31,980 28,483 STOCKHOLDERS' EQUITY: Preferred stock - authorized 1,000,000 shares $.01 par value; none issued Common Stock - authorized 30,000,000 shares; $.01 par value; 20,054,112 and 20,106,955 shares outstanding, respectively 201 201 Capital in excess of par value 416,207 416,207 Stock warrants 7,249 7,249 Retained deficit (187,130) (159,995) Accumulated other comprehensive loss (2,083) Treasury stock, at cost (375) (375) --------- --------- TOTAL STOCKHOLDERS' EQUITY 234,069 263,287 --------- --------- $ 881,305 $ 909,570 ========= =========
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS. -3- THE PENN TRAFFIC COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS UNAUDITED (All dollar amounts in thousands)
13 WEEKS 13 WEEKS ENDED ENDED MAY 5, APRIL 29, 2001 2000 -------- -------- OPERATING ACTIVITIES: Net loss $(27,135) $(26,727) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 10,454 10,224 Amortization of excess reorganization value 27,318 27,325 Other - net 127 (116) NET CHANGE IN ASSETS AND LIABILITIES: Accounts receivable and prepaid expenses 3,732 7,018 Inventories (2,189) 974 Payables and accrued expenses 10,544 3,582 Deferred income taxes 133 3,002 Other assets (844) (95) Other noncurrent liabilities (34) (324) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 22,106 24,863 -------- -------- INVESTING ACTIVITIES Capital expenditures (9,116) (21,789) Proceeds from sale of assets 20 117 -------- -------- NET CASH USED IN INVESTING ACTIVITIES (9,096) (21,672) -------- -------- FINANCING ACTIVITIES: Net increase (decrease) in drafts payables (2,115) 393 Payments to settle long-term debt (1,076) (75) Borrowing of revolver debt 55,300 Repayment of revolver debt (63,700) Reduction of capital lease obligations (2,213) (2,125) -------- -------- NET CASH USED IN FINANCING ACTIVITIES (13,804) (1,807) -------- -------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (794) 1,384 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,529 51,759 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 41,735 $ 53,143 ======== ========
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS. -4- THE PENN TRAFFIC COMPANY Notes To Interim Consolidated Financial Statements Unaudited NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States 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 Company's Annual Report on Form 10-K for the fiscal year ended February 3, 2001. All significant intercompany transactions and accounts have been eliminated in consolidation. NEW ACCOUNTING STANDARDS Penn Traffic adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") as amended by SFAS 138 at the beginning of the 13-week period ended May 5, 2001 ("First Quarter Fiscal 2002"). SFAS 133 requires that all derivative financial instruments be carried on the balance sheet at fair value, with changes in fair value recorded in net income or comprehensive income depending on the nature of the instrument. The Company currently holds interest rate swap contracts with a notional value of $50 million for the purpose of hedging interest rate risk associated with variable rate debt. These contracts have been designated as cash flow hedges under SFAS 133 and, accordingly, changes in the fair value of the contracts (net of income taxes) are recorded in other comprehensive income. Upon adoption of SFAS 133, the Company recognized, in accumulated other comprehensive income, a loss of approximately $1.8 million (after tax) representing the cumulative effect of adoption of this new accounting standard. Excluding this $1.8 million loss associated with the adoption of SFAS 133, total comprehensive loss for First Quarter Fiscal 2002 was $27.4 million. -5- In May 2000, the FASB Emerging Issues Task Force ("EITF") issued a new accounting pronouncement, EITF Issue Number 00-14, "Accounting for Certain Sales Incentives" ("EITF 00-14"), which addresses the recognition, measurement and income statement classification for certain sales incentives offered by companies in the form of discounts, coupons or rebates. The implementation of this new accounting pronouncement will require Penn Traffic to make certain reclassifications between Revenues and Costs and Operating Expenses in the Company's Consolidated Statement of Operations. Penn Traffic currently expects to implement EITF 00-14 in the first quarter of Fiscal 2003 (the 52-week period ending February 1, 2003). Penn Traffic expects that the implementation of EITF 00-14 will result in an equal decrease to the Company's reported Revenues and Costs and Operating Expenses. In accordance with such implementation, Penn Traffic will also reclassify certain prior period financial statements for comparability purposes. NOTE 2 - UNUSUAL ITEM In January 2000, Penn Traffic began a process to (1) reduce the number of distribution centers the Company utilizes for nonperishable grocery products from four to three and (2) transfer the distribution of general merchandise and health and beauty care items from a leased facility in Columbus, Ohio to the Company's Jamestown, New York facility (an owned 267,000 square foot facility which had supplied grocery products to certain stores in upstate New York and northern Pennsylvania until January 2000). This process was completed in June 2000. During the 13-week period ended April 29, 2000 ("First Quarter Fiscal 2001"), the Company recorded an unusual item of $0.4 million related to the implementation of this warehouse consolidation project. NOTE 3 - INCOME TAXES The tax provisions for First Quarter Fiscal 2002 and First Quarter Fiscal 2001 are not recorded at statutory rates due to differences between income calculations for financial reporting and tax reporting purposes that result primarily from the nondeductible amortization of excess reorganization value. NOTE 4 - 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". 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. In the calculation of basic EPS, 20,054,112 and 20,106,955 shares were used for First Quarter Fiscal 2002 and First Quarter Fiscal 2001, respectively. The calculations of diluted EPS exclude the effect of incremental common stock equivalents aggregating 42,191 shares for First Quarter Fiscal 2002, since they would have been antidilutive given the net loss for the quarter. -6- NOTE 5 - STOCKHOLDERS' EQUITY On June 29, 2000, the Company announced that its Board of Directors had authorized the Company to repurchase up to an aggregate value of $10 million of Penn Traffic's common stock from time to time in the open market or privately negotiated transactions. The timing and amounts of purchases will be governed by prevailing market conditions and other considerations. Penn Traffic's ability to repurchase its common stock is subject to limitations contained in the Company's debt instruments. The Company is currently allowed to repurchase approximately $8 million of common shares under these agreements. This amount will change on a quarterly basis based on the Company's financial results. To date, the Company has repurchased 53,000 shares of common stock at an average price of $7.08 per share. NOTE 6 - SUPPLEMENTAL FINANCIAL INFORMATION (In thousands of dollars)
13 WEEKS 13 WEEKS ENDED ENDED MAY 5, APRIL 29, 2001 2000 -------- -------- EBITDA $21,351 $22,048 Cash Interest Expense 9,311 9,434
"EBITDA" is earnings before interest, depreciation, amortization, amortization of excess reorganization value, LIFO provision, unusual items 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. -7- 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, as amended. Without limiting the foregoing, the words "anticipate," "believe," "estimate," "expect," "intend," "plan," "project" 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 other things, the success or failure of the Company in implementing its current business and operational strategies; general economic and business conditions; competition; availability, location and terms of sites for store development; the successful implementation of the Company's capital expenditure program (including store remodeling); labor relations; labor and employee benefit costs; the performance of the stores formerly leased under the New England Operating Agreement (as defined in "Liquidity and Capital Resources" below); the impact of EITF 00-14 on the Company's financial statements and financial results (as discussed in "Impact of New Accounting Standards" below); the impact of the introduction of loyalty card programs on the Company's operating results; availability, terms and access to capital; the Company's liquidity and other financial considerations; the ability of the Company to repurchase its common stock in open market purchases and the prices at which it repurchases its common stock; restrictions on the Company's ability to repurchase its shares under its debt instruments; and the outcome of pending or yet-to-be instituted legal proceedings. -8- RESULTS OF OPERATIONS THIRTEEN WEEKS ENDED MAY 5, 2001 ("FIRST QUARTER FISCAL 2002") COMPARED TO THIRTEEN WEEKS ENDED APRIL 29, 2000 ("FIRST QUARTER FISCAL 2001") The following table sets forth Consolidated Statement of Operations components expressed as percentages of total revenues for First Quarter Fiscal 2002 and First Quarter Fiscal 2001:
First Quarter Ended MAY 5, April 29, 2001 2000 ------ ------ Total revenues 100.0% 100.0% Gross profit (1) 23.7 24.0 Selling and administrative expenses 22.0 22.1 Amortization of excess reorganization value 4.5 4.6 Unusual item 0.0 0.1 Operating loss (2.8) (2.8) Operating income excluding unusual item and amortization of excess reorganization value (2) 1.7 1.9 Interest expense 1.6 1.6 Net loss (4.5) (4.5) Net income (loss) excluding New England lease income, unusual item and amortization of excess reorganization value (3) 0.0 (0.2)
---------- (1) Total revenues less cost of sales. -9- (2) Operating loss for First Quarter Fiscal 2002 excluding amortization of excess reorganization value of $27.3 million. Operating loss for First Quarter Fiscal 2001 excluding an unusual item (expense) of $0.4 million (see Note 2) and amortization of excess reorganization value of $27.3 million. (3) Net loss for First Quarter Fiscal 2002 excluding amortization of excess reorganization value of $27.3 million. Net loss for First Quarter Fiscal 2001 excluding New England lease income of $1.7 million (after tax), an unusual item (expense) $0.2 million (after tax) and amortization of excess reorganization value of $27.3 million. REVENUES Total revenues for First Quarter Fiscal 2002 increased to $608.4 million from $592.6 million in First Quarter Fiscal 2001. The increase in revenues for First Quarter Fiscal 2002 is primarily attributable to an increase in same store sales and the commencement of the Company's operation of 10 New England stores (see "Liquidity and Capital Resources" below). Same store sales for First Quarter Fiscal 2002 increased 0.4% from the comparable prior year period. Wholesale supermarket revenues were $68.7 million in First Quarter Fiscal 2002 compared to $67.7 million in First Quarter Fiscal 2001. GROSS PROFIT Gross profit for First Quarter Fiscal 2002 was 23.7% of revenues compared to 24.0% of revenues in First Quarter Fiscal 2001. The decrease in gross profit as a percentage of revenues in First Quarter Fiscal 2002 was due to the expiration of the Company's prior agreement with another supermarket company for the lease of 10 stores in New England (the "New England Operating Agreement") on July 31, 2000 (gross profit for First Quarter Fiscal 2001 includes $2.9 million of income attributable to the New England Operating Agreement). This reduction in gross profit as a percentage of revenues was partially offset by a reduction in inventory shrink expense. -10- RESULTS OF OPERATIONS (CONTINUED) SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses for First Quarter Fiscal 2002 were 22.0% of revenues compared to 22.1% of revenues in First Quarter Fiscal 2001. The reduction in selling and administrative expenses as a percentage of revenues in First Quarter Fiscal 2002 was due to the benefits of the Company's cost reduction programs, including initiatives to reduce store labor costs. These cost reductions were partially offset by an increase in promotional spending as a percentage of revenues (the Company accounts for certain promotional expenses in the "Selling and administrative expenses" line of the Consolidated Statement of Operations). DEPRECIATION AND AMORTIZATION Depreciation and amortization expense was $10.5 million in First Quarter Fiscal 2002 and $10.2 million in First Quarter Fiscal 2001, representing 1.7% in each quarter. The increase in depreciation and amortization expense is a result of the Company's capital expenditure program. During First Quarter Fiscal 2002 and First Quarter Fiscal 2001, amortization of excess reorganization value was $27.3 million. The excess reorganization value asset of $327.8 million, which was established in June 1999 in connection with the implementation of fresh-start reporting, is being amortized on a straight-line basis over a three-year period. UNUSUAL ITEM During First Quarter Fiscal 2001, the Company recorded an unusual item of $0.4 million related to the implementation of a warehouse consolidation project (see Note 2). OPERATING LOSS; OPERATING INCOME EXCLUDING UNUSUAL ITEM AND AMORTIZATION OF EXCESS REORGANIZATION VALUE Operating loss for First Quarter Fiscal 2002 was $17.0 million or 2.8% of total revenues compared to an operating loss of $16.4 million or 2.8% of total revenues in First Quarter Fiscal 2001. For First Quarter Fiscal 2002, operating income excluding amortization of excess reorganization value was $10.3 million or 1.7% of revenues. For First Quarter Fiscal 2001, operating income excluding an unusual item and amortization of excess reorganization value was $11.3 million or 1.9% of revenues. Operating income excluding -11- RESULTS OF OPERATIONS (CONTINUED) unusual item and amortization of excess reorganization value as a percentage of revenues decreased due to the reduction in gross profit as a percentage of revenues associated with the expiration of the New England Operating Agreement. INTEREST EXPENSE Interest expense for First Quarter Fiscal 2002 was $9.5 million compared to $9.7 million in First Quarter Fiscal 2001. INCOME TAXES Income tax provision was $0.6 million for First Quarter Fiscal 2002 compared to $0.7 million in First Quarter Fiscal 2001. The effective tax rates for First Quarter Fiscal 2002 and First Quarter Fiscal 2001 vary from statutory rates due to differences between income for financial reporting and tax reporting purposes that result primarily from the nondeductible amortization of excess reorganization value. NET LOSS; NET INCOME (LOSS) EXCLUDING NEW ENGLAND LEASE INCOME, UNUSUAL ITEM AND AMORTIZATION OF EXCESS REORGANIZATION VALUE Net loss for First Quarter Fiscal 2002 was $27.1 million compared to a net loss of $26.7 million for First Quarter Fiscal 2001. Net income excluding New England lease income, unusual item and amortization of excess reorganization value was $0.2 million for First Quarter Fiscal 2002 compared to a loss of $0.9 million for First Quarter Fiscal 2001. -12- LIQUIDITY AND CAPITAL RESOURCES In connection with the completion of the Company's financial restructuring in June 1999, the Company issued $100 million of senior notes (the "Senior Notes") and entered into a new $320 million secured credit facility (the "Credit Facility"). Certain terms of the Senior Notes and the Credit Facility are summarized below. The Senior Notes mature on June 29, 2009. Pursuant to the terms of the indenture for the Senior Notes (the "Indenture"), the Company, at its election, can choose to pay interest on the Senior Notes at the rate of 11% per annum for the first two years (i.e., the first four semi-annual interest payments) through the issuance of additional notes; thereafter, interest on the 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. The Company paid the interest on the Senior Notes in cash for the first three semi-annual interest periods. The Company also currently expects to make the fourth semi-annual interest payment on June 29, 2001, in cash instead of through the issuance of any additional notes. The Indenture contains certain negative covenants that, among other things, restrict the Company's ability to incur additional indebtedness, permit additional liens and make certain restricted payments. The Credit Facility includes (1) a $205 million revolving credit facility (the "Revolving Credit Facility") and (2) a $115 million term loan (the "Term Loan"). The lenders under the Credit Facility have a first priority perfected security interest in substantially all of the Company's assets. The Credit Facility contains a variety of operational and financial covenants intended to restrict the Company's operations. These include, among other things, restrictions on the Company's ability to incur debt, make capital expenditures and make restricted payments as well as requirements that the Company achieve required levels for Consolidated EBITDA, interest coverage, fixed charge coverage and funded debt ratio (all as defined in the Credit Facility). The Term Loan will mature on June 30, 2006. Amounts of the Term Loan maturing in each fiscal year are outlined in the following table (in thousands):
FISCAL YEAR ENDING AMOUNT MATURING ------------------ --------------- February 2, 2002 $ 4,750 February 1, 2003 6,750 January 31, 2004 9,750 January 29, 2005 12,750 January 28, 2006 7,750 February 3, 2007 71,250 -------- $113,000 ========
-13- LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) Availability under the Revolving Credit Facility is calculated based on a specified percentage of eligible inventory and accounts receivable of the Company. The Revolving Credit Facility will mature on June 30, 2005. Availability under the Revolving Credit Facility was approximately $148 million as of May 5, 2001. During April 2000, the Company entered into interest rate swap agreements, which expire in April 2005, that effectively convert $50 million of its variable rate borrowings into fixed rate obligations. Under the terms of these agreements, the Company makes payments at a weighted average fixed interest rate of 7.08% and receives payments at variable interest rates based on the London InterBank Offered Rate ("LIBOR"). During First Quarter Fiscal 2002, the Company's internally generated funds from operations and amounts available under the Revolving Credit Facility provided sufficient liquidity to meet the Company's operating, capital expenditure, and debt service needs and fund expenditures related to the Company's financial restructuring. For the next year, the Company expects to utilize internally generated funds from operations, amounts available under the Revolving Credit Facility and new capital leases to satisfy its operating, capital expenditure and debt service needs, to fund any repurchase of shares of its common stock under its stock repurchase program and to pay the remaining expenditures related to the Company's financial restructuring. Cash flows used to meet the Company's operating requirements during First Quarter Fiscal 2002 are reported in the Consolidated Statement of Cash Flows. During First Quarter Fiscal 2002, the Company's net cash used in investing activities was $9.1 million and net cash used in financing activities was $13.8 million. This amount was financed by net cash provided by operating activities of $22.1 million and a reduction in cash and cash equivalents of $0.8 million. In July 1990, the Company entered into the New England Operating Agreement with the Grand Union Company ("Grand Union") pursuant to which Grand Union acquired the right to operate 13 stores in Vermont and New Hampshire under the "Grand Union" trade name until July 31, 2000. Prior to July 1990, these stores had been operated by Penn Traffic under the Company's "P&C" trade name. By August 1, 2000, the Company had regained operating control of the remaining 10 stores that had been subject to the New England Operating Agreement. Nine of these stores were opened for business in August 2000. -14- LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) The Revenues account of the Company's Consolidated Statement of Operations includes approximately $2.9 million and $2.8 million income from the New England Operating Agreement in the 13-week periods ended April 29, 2000, and July 29, 2000, respectively. In contrast, during the second half of the 53-week period ended February 3, 2001 ("Fiscal 2001"), the Company incurred approximately $1 million of operating losses in connection with the commencement of operation of these 10 stores. The Company expects to continue to invest in promotional activities to reacquaint customers with the Company's offerings in the startup period for these 10 New England stores, which the Company expects will conclude in the first half of the 52-week period ended February 2, 2002 ("Fiscal 2002"). Accordingly, the Company does not expect such stores to contribute to the Company's operating income in the first half of Fiscal 2002. While the Company currently expects these stores to contribute to the Company's operating income in the second half of Fiscal 2002, Penn Traffic believes that the operating income allocable to such stores will be significantly less than the income received pursuant to the New England Operating Agreement. The Company competes with several supermarket chains, independent grocery stores, supercenters (combination supermarket and general merchandise stores) and other retailers, many of which have greater resources than Penn Traffic. The number of competitors and the degree of competition encountered by the Company's supermarkets vary by location. Any significant change in the number of the Company's competitors, the number or size of competitors' stores, or in the pricing and promotion practices of the Company's competitors could have an impact on the Company's results of operations. During Fiscal 2001, the Company commenced implementation of a loyalty card program in its 70 Big Bear stores in Ohio and West Virginia. Fiscal 2001 operating income was reduced by an estimated $1.5 million in connection with the launch of this loyalty card program. Penn Traffic currently expects to roll out the program to other markets in the second half of Fiscal 2002. Such introduction will result in additional costs of an, as yet, undetermined amount. During Fiscal 2002, the Company expects to invest approximately $60 million (including capital leases). Capital expenditures will be principally for new stores, store remodels, and investments in the Company's distribution infrastructure and technology. The Company expects to finance such expenditures through cash generated from operations, amounts available under the Revolving Credit Facility and new capital leases. -15- LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) On June 29, 2000, the Company announced that its Board of Directors had authorized the Company to repurchase up to an aggregate value of $10 million of Penn Traffic's common stock from time to time in the open market or privately negotiated transactions. The timing and amounts of purchases will be governed by prevailing market conditions and other considerations. Penn Traffic's ability to repurchase its common stock is subject to limitations contained in the Company's debt instruments. The Company is currently allowed to repurchase approximately $8 million of common shares under these agreements. This amount will change on a quarterly basis based on the Company's financial results. To date, the Company has repurchased 53,000 shares of common stock at an average price of $7.08 per share. -16- IMPACT OF NEW ACCOUNTING STANDARDS Penn Traffic adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") as amended by SFAS 138 at the beginning of the First Quarter Fiscal 2002. SFAS 133 requires that all derivative financial instruments be carried on the balance sheet at fair value, with changes in fair value recorded in net income or comprehensive income depending on the nature of the instrument. The Company currently holds interest rate swap contracts with a notional value of $50 million for the purpose of hedging interest rate risk associated with variable rate debt. These contracts have been designated as cash flow hedges under SFAS 133 and, accordingly, changes in the fair value of the contracts (net of income taxes) are recorded in other comprehensive income. Upon adoption of SFAS 133, the Company recognized, in accumulated other comprehensive income, a loss of approximately $1.8 million (after tax) representing the cumulative effect of adoption of this new accounting standard. Existing generally accepted accounting principles do not provide specific guidance on the accounting for sales incentives that many companies offer to their customers. The FASB Emerging Issues Task Force ("EITF"), a group responsible for promulgating changes to accounting policies and procedures, has issued a new accounting pronouncement, EITF Issue Number 00-14, "Accounting for Certain Sales Incentives" ("EITF 00-14") which addresses the recognition, measurement and income statement classification for certain sales incentives offered by companies in the form of discounts, coupons or rebates. The implementation of this new accounting pronouncement will require Penn Traffic to make certain reclassifications between Revenues and Costs and Operating Expenses in the Company's Consolidated Statement of Operations. Penn Traffic currently expects to implement EITF 00-14 in the first quarter of the Company's Fiscal 2003 (the 52-week period ending February 1, 2003). In accordance with such implementation, Penn Traffic will also reclassify certain prior period financial statements for comparability purposes. Penn Traffic expects that the implementation of EITF 00-14 will result in an equal decrease to the Company's reported Revenues and Costs and Operating Expenses. Accordingly, while Penn Traffic is currently reviewing this pronouncement with its auditors and therefore cannot quantify the precise effect on reported Revenues, Costs and Operating Expenses or same store sales results, the Company believes that the implementation of EITF 00-14 will not have an effect on Penn Traffic's reported Operating Income (Loss), EBITDA or Net Income (Loss). The Company currently estimates that had EITF 00-14 been implemented in First Quarter Fiscal 2002, same store sales in First Quarter Fiscal 2002 would have been reduced from that reported under the Company's existing income statement classifications. -17- PART II. OTHER INFORMATION All items which are not applicable or to which the answer is negative have been omitted from this report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K No reports on Form 8-K were filed during the fiscal quarter ended May 5, 2001. -18- 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 18, 2001 /s/ Joseph V. Fisher -------------------------------------- By: Joseph V. Fisher President, Chief Executive Officer and Director June 18, 2001 /s/ Martin A. Fox -------------------------------------- By: Martin A. Fox Executive Vice President, Chief Financial Officer and Director -19-