-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J9V2CttLz/e9Jz5+8QDoCLegP0R2HXdOVWjeb/K27SUF57g32SdYjfL71u1Goa3f UbIg8pEY4nGXyPduIfcvIA== 0000912057-02-035891.txt : 20020918 0000912057-02-035891.hdr.sgml : 20020918 20020918153037 ACCESSION NUMBER: 0000912057-02-035891 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020803 FILED AS OF DATE: 20020918 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENN TRAFFIC CO CENTRAL INDEX KEY: 0000077155 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 250716800 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09930 FILM NUMBER: 02766907 BUSINESS ADDRESS: STREET 1: 1200 STATE FAIR BLVD CITY: SRYACUSE STATE: NY ZIP: 13221-4737 BUSINESS PHONE: 8145369900 MAIL ADDRESS: STREET 1: 1200 STATE FAIR BLVD CITY: SYRACUSE STATE: NY ZIP: 13221-4737 10-Q 1 a2089386z10-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 August 3, 2002 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: 20,064,264 shares outstanding as of September 6, 2002 ================================================================================ PART I. FINANCIAL INFORMATION - ------------------------------ ITEM 1. FINANCIAL STATEMENTS THE PENN TRAFFIC COMPANY CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) UNAUDITED
RESTATED 13 WEEKS 13 WEEKS ENDED ENDED AUGUST 3, AUGUST 4, 2002 2001 (NOTE 1) ------------------ ------------------ REVENUES $ 597,984 $ 611,383 COST AND OPERATING EXPENSES: Cost of sales 436,560 447,108 Selling and administrative expenses 147,274 147,135 Amortization of excess reorganization value 27,452 -------------- -------------- OPERATING INCOME (LOSS) 14,150 (10,312) Interest expense 8,708 9,043 -------------- -------------- INCOME (LOSS) BEFORE INCOME TAXES 5,442 (19,355) Provision for income taxes (Note 2) 2,703 3,513 -------------- -------------- NET INCOME (LOSS) $ 2,739 $ (22,868) ============== ============== PER SHARE (BASIC AND DILUTED): Basic earnings (loss) per share (Note 3) $ 0.14 $ (1.14) ============= ============= Diluted earnings (loss) per share (Note 3) $ 0.13 $ (1.14) ============= =============
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS. -2- THE PENN TRAFFIC COMPANY CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) UNAUDITED
RESTATED 26 WEEKS 26 WEEKS ENDED ENDED AUGUST 3, AUGUST 4, 2002 2001 (NOTE 1) ------------------ ------------------ REVENUES $ 1,174,156 $ 1,190,168 COST AND OPERATING EXPENSES: Cost of sales 854,553 871,198 Selling and administrative expenses 296,030 292,552 Amortization of excess reorganization value 54,904 -------------- -------------- OPERATING INCOME (LOSS) 23,573 (28,486) Interest expense 17,219 18,573 -------------- -------------- INCOME (LOSS) BEFORE INCOME TAXES 6,354 (47,059) Provision for income taxes (Note 2) 3,182 3,664 -------------- -------------- NET INCOME (LOSS) $ 3,172 $ (50,723) ============== ============== PER SHARE (BASIC AND DILUTED): Earnings (loss) per share (Note 3) $ 0.16 $ (2.53) ============= =============
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS. -3- THE PENN TRAFFIC COMPANY CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
RESTATED UNAUDITED AUDITED AUGUST 3, FEBRUARY 2, 2002 2002 (NOTE 1) ----------------- ----------------- ASSETS CURRENT ASSETS: Cash and short-term investments $ 40,160 $ 39,562 Accounts and notes receivable (less allowance for doubtful accounts of $2,098 and $2,107, respectively) 41,338 49,710 Inventories 262,805 274,845 Prepaid expenses and other current assets 10,405 9,506 ----------- ----------- 354,708 373,623 ----------- ----------- NONCURRENT ASSETS: Capital leases 38,386 44,747 Property, plant and equipment 296,386 273,436 Goodwill 8,990 8,990 Beneficial leases 43,557 46,920 Excess reorganization value 42,238 42,238 Other assets 22,612 16,414 ----------- ----------- $ 806,877 $ 806,368 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt (Note 4) $ 144,200 $ 140,666 Current portion of obligations under capital leases 6,792 8,329 Trade accounts and drafts payable 126,997 129,158 Other accrued liabilities 75,661 77,590 Accrued interest expense 2,363 2,514 Taxes payable and deferred taxes 15,437 15,125 ----------- ----------- 371,450 373,382 ----------- ----------- NONCURRENT LIABILITIES: Long-term debt (Note 4) 111,898 112,046 Obligations under capital leases 63,712 67,075 Deferred taxes 66,171 63,770 Other noncurrent liabilities 51,835 51,471 STOCKHOLDERS' EQUITY: Preferred stock - authorized 1,000,000 shares; $.01 par value; none issued Common Stock - authorized 30,000,000 shares; $.01 par value; 20,063,407 and 20,056,264 shares issued and outstanding, respectively 201 201 Capital in excess of par value (Note 5) 417,308 416,597 Stock warrants 7,249 7,249 Retained deficit (259,132) (262,304) Accumulated other comprehensive loss (Note 5) (23,440) (22,744) Treasury stock, at cost (Note 5) (375) (375) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 141,811 138,624 ----------- ----------- $ 806,877 $ 806,368 =========== ===========
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS. -4- THE PENN TRAFFIC COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) UNAUDITED
RESTATED 26 WEEKS 26 WEEKS ENDED ENDED AUGUST 3, AUGUST 4, 2002 2001 (NOTE 1) ------------------ ------------------ OPERATING ACTIVITIES: Net income (loss) $ 3,172 $ (50,723) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 21,076 20,986 Amortization of excess reorganization value 54,904 Other - net 514 121 NET CHANGE IN ASSETS AND LIABILITIES: Accounts receivable and prepaid expenses 7,473 2,772 Inventories 12,040 2,524 Payables and accrued expenses (9,052) 5,175 Deferred income taxes 6,931 514 Other assets (5,556) (1,275) Other noncurrent liabilities (816) (269) ------------ ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 35,782 34,729 ------------ ------------ INVESTING ACTIVITIES: Capital expenditures (35,881) (20,204) Proceeds from sale of assets 177 41 ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (35,704) (20,163) ------------- ------------- FINANCING ACTIVITIES: Net increase in drafts payables 2,003 4,683 Payments to settle long-term debt (2,914) (2,900) Borrowing of revolving debt 94,300 70,700 Repayment of revolving debt (88,000) (82,600) Reduction of capital lease obligations (4,900) (4,480) Exercise of stock options 31 8 ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 520 (14,589) ------------ ------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 598 (23) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 39,562 42,529 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 40,160 $ 42,506 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid 16,870 19,109 Income taxes paid 1,736 1,118
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS. -5- 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 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 of America 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 statement 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/A for the fiscal year ended February 2, 2002 and the Company's Quarterly Report on Form 10-Q/A for the 13-week period ended May 4, 2002. All significant intercompany transactions and accounts have been eliminated in consolidation. During the third quarter of the fiscal year ended February 2, 2002, the Company implemented EITF Issue Number 00-14, "Accounting for Certain Sales Incentives" as codified by EITF Issue Number 01-9, "Accounting for Consideration Given by a Vendor to a Customer" and made certain other income statement reclassifications. Accordingly, certain amounts in the Consolidated Statement of Operations for the 13-week and 26-week periods ended August 4, 2001 have been reclassified for comparability purposes. -6- RESTATEMENT In August 2002, Penn Traffic announced that it would restate its financial results after discovering that an employee of its Penny Curtiss bakery manufacturing subsidiary had made false accounting entries which primarily involved the overstatement of inventory over a period of approximately three and one-quarter years. Based on the preliminary findings of an internal review, the Company's Audit Committee engaged independent legal counsel to conduct an independent investigation, who in turn engaged KPMG LLP to assist in this investigation, which is substantially complete. The Company has concluded that the false accounting entries were limited to its Penny Curtiss bakery manufacturing subsidiary. As a result of these false accounting entries and based on the investigation into the misconduct, the Company has restated its financial results for the 13-week period ended May 4, 2002, the fiscal years ended February 2, 2002 and February 3, 2001, the 31-week period ended January 29, 2000 and the 21-week period ended June 26, 1999. The aggregate effect of the restatement was to reduce net income over this three and one-quarter year period by $7.3 million. In addition, the restatement reduced operating income for the 21-week period ended June 26, 1999 by $1.1 million; this amount was offset in the Company's Consolidated Statement of Operations by an adjustment associated with the Company's adoption of fresh-start reporting in 1999. The aggregate effect of the correction of the misstatements on previously reported EBITDA was a reduction of $11 million over the three and one-quarter year period ended May 4, 2002. EBITDA is earnings before interest, taxes, depreciation, amortization, amortization of excess reorganization value, LIFO provision, special charges, unusual items, write-down of long-lived assets, reorganization items and extraordinary items. EBITDA should not be interpreted as a measure of operating results, cash flow provided by operating activities or liquidity, or as an alternative to any generally accepted accounting principle measure of performance. The Company reports 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. The restatement also includes the reclassification of $0.9 million and $1.9 million of expenses for the 13-week and 26-week periods ended August 4, 2001, respectively, from Selling and administrative expenses to Cost of Sales to more appropriately reflect the classification of certain indirect manufacturing expenses associated with the Penny Curtiss bakery manufacturing subsidary. -7- The effect of the correction of the misstatements for the 13-week and 26-week periods ended August 4, 2001 was to (1) increase the previously reported net loss by $0.9 million and $1.6 million and net loss per share - diluted by $0.04 and $0.08 and (2) reduce previously reported EBITDA by $1.2 million and $2.2 million, respectively. The financial statement line items which were restated are Revenues, Cost of sales, Selling and administrative expenses, Amortization of excess reorganization value, Provision for income taxes, Inventories, Prepaid expenses and other current assets, Excess reorganization value, Trade accounts and drafts payable, Taxes payable and deferred taxes and Retained deficit. The consolidated financial statements for the 13-week and 26-week periods ended August 4, 2001, and notes thereto included in this Form 10-Q, have been restated to include the effects of the correction of these misstatements and the reclassification of all amounts outstanding under the Company's $320 million secured credit facility (the "Credit Facility") at February 2, 2002 as Current maturities of long-term debt (see Note 4) as follows: -8-
13 WEEKS ENDED 26 WEEKS ENDED AUGUST 4, 2001 AUGUST 4, 2001 ----------------------------------- ----------------------------------- AS AS PREVIOUSLY PREVIOUSLY REPORTED (1) RESTATED REPORTED (1) RESTATED ----------------- ----------------- ----------------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS Revenues $ 611,504 $ 611,383 $ 1,190,559 $ 1,190,168 Cost of sales 445,058 447,108 867,470 871,198 Selling and administrative expenses 148,066 147,135 294,437 292,552 Amortization of excess reorganization value 27,318 27,452 54,636 54,904 ------------ ------------ ------------ ------------ Operating loss (8,938) (10,312) (25,984) (28,486) Interest expense 9,043 9,043 18,573 18,573 ------------ ------------ ------------ ------------ Loss before income taxes (17,981) (19,355) (44,557) (47,059) Provision for income taxes 4,021 3,513 4,580 3,664 ------------ ------------ ------------ ------------ Net (loss) $ (22,002) $ (22,868) $ (49,137) $ (50,723) ============ ============ ============ ============ Per share (Basic and Diluted) $ (1.10) $ (1.14) $ (2.45) $ (2.53) ============ ============ ============ ============
FEBRUARY 2, 2002 --------------------------------------------- AS PREVIOUSLY REPORTED RESTATED ------------------- ------------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET Inventories $ 284,221 $ 274,845 Prepaid expenses and other current assets 9,697 9,506 Total current assets 383,190 373,623 Excess reorganization value 42,032 42,238 Total assets 815,729 806,368 Trade accounts and drafts payable 128,872 129,158 Taxes payable and deferred taxes 18,179 15,125 Current maturities of long-term debt 7,066 140,666 Total current liabilities 242,550 373,382 Long-term debt 245,646 112,046 Retained deficit (255,711) (262,304) Total stockholders' equity 145,217 138,624 Total liabilities and stockholders' equity 815,729 806,368 - ------------
(1) Includes effect of income statement reclassifications made in the third quarter of the fiscal year ended February 2, 2002 as described above. -9- NEW ACCOUNTING STANDARDS Penn Traffic adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") in the 13-week period ending May 4, 2002 ("First Quarter Fiscal 2003"). SFAS 142 provides that intangible assets with finite useful lives be amortized, and that goodwill and intangible assets with indefinite useful lives not be amortized but tested at least annually for impairment. Accordingly, the Company no longer records amortization of excess reorganization value or goodwill in its Consolidated Statement of Operations. In conjunction with the adoption of SFAS 142, Penn Traffic performed a comprehensive test of the carrying value of the excess reorganization value and goodwill assets for impairment. As a result of this review, no assets were deemed impaired. Excess reorganization value and goodwill had a carrying value of approximately $51 million at the date of adoption of this standard. In October 2001, the Financial Accounting Standards Board ("FASB") issued statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supercedes 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 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principle Board Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The Company adopted this standard in First Quarter Fiscal 2003. The adoption of this standard did not have a material effect on the Company's financial statements. -10- NOTE 2 - INCOME TAXES - --------------------- The provision for income taxes for the 13-week and 26-week periods ended August 3, 2002 and August 4, 2001 are not recorded at statutory rates due to differences between income calculations for financial reporting and tax reporting purposes. The effective tax rates for the 13-week and 26-week periods ended August 3, 2002 reflect the recognition of tax expense based on the estimated effective annual tax rate for the fiscal year ending February 1, 2003. The effective tax rate for the 13-week and 26-week periods ended August 4, 2001 has not been annualized due to the net loss reported for the fiscal year ended February 2, 2002. NOTE 3 - NET INCOME (LOSS) PER SHARE - ------------------------------------ In the calculation of Basic earnings per share, 20,063,407 and 20,060,835 shares were used for the 13-week and 26-week periods ended August 3, 2002, respectively, and 20,055,518 and 20,054,815 shares were used for the 13-week and 26-week periods ended August 4, 2001, respectively. The calculation of Diluted earnings per share utilized 20,421,262 and 20,402,414 shares for the 13-week and 26-week periods ended August 3, 2002, respectively. The calculation of Diluted earnings per share for the 13-week and 26-week periods ended August 4, 2001 excludes the effect of incremental common stock equivalents aggregating 31,457 and 36,824 shares, since they would have been antidilutive given the net loss for these periods. -11- NOTE 4 - DEBT - ------------- The Company's debt (excluding capital leases) is shown below:
AUGUST 3, FEBRUARY 2, 2002 2002 ------------- ------------- (IN THOUSANDS) Secured Term Loan $ 105,500 $ 108,250 Secured Revolving Credit Facility 38,400 32,100 Other Secured Debt 12,198 12,362 11% Senior Notes due June 29, 2009 100,000 100,000 ------------- ------------- Total Debt $ 256,098 $ 252,712 Less: Current maturities of long-term debt (144,200) (140,666) ------------- ------------- Total Long-Term Debt $ 111,898 $ 112,046 ============= =============
The Company's 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 covenants include, among other things, restrictions on the Company's ability to incur debt, make capital expenditures and 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). As discussed below, the lenders under the Credit Facility have waived and agreed to forbear until October 31, 2002 (or, if earlier, the date on which certain other events specified in the Waiver and Forbearance Agreement occur) from exercising any remedies as a result of an event of default that arose due to the accounting restatement that resulted from the false accounting entries at the Company's Penny Curtiss bakery manufacturing subsidiary. Accordingly, notwithstanding the scheduled maturities of the Revolving Credit Facility and Term Loan described below, in accordance with generally accepted accounting principles, all amounts outstanding under the Credit Facility ($143.9 million at August 3, 2002 and $140.4 million at February 2, 2002) have been reclassified as Current maturities of long-term debt. -12- 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 is scheduled to mature on June 30, 2005. Availability under the Revolving Credit Facility was approximately $109 million as of August 3, 2002. The Term Loan is scheduled to mature on June 30, 2006. Amounts of the Term Loan scheduled to mature in each fiscal year are outlined in the following table (in thousands):
FISCAL YEAR ENDING AMOUNT MATURING ------------------ --------------- (In thousands of dollars) 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 ------------- $ 108,250 =============
On August 14, 2002, the Company received a letter waiving certain events of default that arose under the Credit Facility as a result of the accounting restatement that resulted from the false accounting entries at the Company's Penny Curtiss bakery manufacturing subsidiary (see Note 1). The waiver letter also stated that the lenders under the Credit Facility would forbear from taking any action under the Credit Facility as a result of such defaults and permitted the Company to borrow, repay and reborrow under the Credit Facility through August 30, 2002. On August 29, 2002, the Company received a further extension of the waiver and forbearance from the lenders under the Credit Facility and entered into a Waiver and Forbearance Agreement dated as of August 30, 2002. The Waiver and Forbearance Agreement waives certain events of default that arose under the Credit Facility as a result of the accounting restatement that resulted from the false accounting entries at the Company's Penny Curtiss bakery manufacturing subsidiary or could arise as a result of the Company's noncompliance with certain financial covenants in the Credit Facility until October 31, 2002 (or, if earlier, the date on which certain other events specified in the Waiver and Forbearance Agreement occur). The Waiver and Forbearance Agreement also provides that the lenders would forbear from taking any action under the Credit Facility as a result of such defaults and permits the Company to borrow, repay and reborrow under the Credit Facility through October 31, 2002. -13- The Waiver and Forbearance Agreement will enable Penn Traffic to assess whether any other modifications to the Credit Facility would be required, including modifications to the existing financial covenants. Penn Traffic anticipates that on or prior to October 31, 2002, it will enter into a longer-term amendment to the Credit Facility with the lenders that will enable Penn Traffic to continue to borrow, repay and reborrow under the Revolving Credit Facility. In the event the Company was unable to negotiate and enter into such a longer-term amendment on a satisfactory basis with the lenders under the Credit Facility, the Company believes that it could refinance the amounts outstanding under the Credit Facility with an alternate lender. There can be no assurance, however, that the Company would be able to complete any such financing on terms comparable to the terms of the Credit Facility or otherwise acceptable to the Company. -14- NOTE 5 - STOCKHOLDERS' EQUITY - ----------------------------- Comprehensive income (loss) for 13-week and 26-week periods ended August 3, 2002 and the 13-week and 26-week periods ended August 4, 2001 consists of net income (loss), the effects of accounting for hedges under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," and unrealized gains or losses on marketable securities. Total comprehensive income for the 13-week and 26-week periods ended August 3, 2002 was $1.7 million and $2.5 million, respectively. Total comprehensive loss for the 13-week and 26-week periods ended August 4, 2001 was $22.9 million and $52.9 million, respectively. Capital in excess of par value includes accumulated compensation expense related to certain stock options subject to variable accounting of $1.1 million and $0.4 million as of August 3, 2002 and February 2, 2002, respectively. 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. To date, the Company has repurchased 53,000 shares of common stock at an average price of $7.08 per share. -15- NOTE 6 - SUPPLEMENTAL FINANCIAL INFORMATION - -------------------------------------------
RESTATED 13 WEEKS 13 WEEKS ENDED ENDED AUGUST 3, AUGUST 4, 2002 2001 ------------------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) EBITDA (1) $ 25,044 $ 28,297 Cash interest expense 8,428 8,823 Adjusted net income (2) 2,739 4,584 Adjusted basic earnings per share (3) $ 0.14 $ 0.23 Adjusted diluted earnings per share (3) $ 0.13 $ 0.23
RESTATED 26 WEEKS 26 WEEKS ENDED ENDED AUGUST 3, AUGUST 4, 2002 2001 ------------------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) EBITDA (1) $ 45,524 $ 48,654 Cash interest expense 16,719 18,134 Adjusted net income (2) 3,172 4,181 Adjusted earnings per share (Basic and Diluted) (3) $ 0.16 $ 0.21 - ------------------------------
See notes below -16- NOTE 6 - SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED) - ------------------------------------------------------- (1) EBITDA is earnings before interest, taxes, depreciation, amortization, amortization of excess reorganization value and LIFO provision. 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. (2) Adjusted net income for the 13-week and 26-week periods ended August 3, 2002 is net income. Adjusted net income for the 13-week and 26-week periods ended August 4, 2001 is net loss excluding amortization of excess reorganization value of $27.5 million and $54.9 million, respectively. (3) The calculation of Basic adjusted earnings per share utilized 20,063,407 and 20,060,835 shares for the 13-week and 26-week periods ended August 3, 2002, respectively. The calculation of Basic adjusted earnings per share utilized 20,055,518 and 20,054,815 shares for the 13-week and 26-week periods ended August 4, 2001, respectively. The calculation of Diluted adjusted earnings per share utilized 20,421,262 and 20,402,414 shares for the 13-week and 26-week periods ended August 3, 2002. The calculation of Diluted adjusted earnings per share utilized 20,086,975 and 20,091,639 shares for the 13-week and 26-week periods ended August 4, 2001, respectively. -17- NOTE 7 - AMORTIZATION OF EXCESS REORGANIZATION VALUE AND GOODWILL - ----------------------------------------------------------------- Penn Traffic's adoption of SFAS 142 eliminates the amortization of excess reorganization value and goodwill beginning in First Quarter Fiscal 2003. The following table presents a comparison of 13-week and 26-week periods ended August 3, 2002 with net income to the reported net loss for 13-week and 26-week periods ended August 4, 2001 adjusted to exclude the amortization of excess reorganization value and goodwill ("Pro forma net income"):
PRO FORMA PRO FORMA RESTATED RESTATED 13 WEEKS 13 WEEKS 26 WEEKS 26 WEEKS ENDED ENDED ENDED ENDED AUGUST 3, AUGUST 4, AUGUST 3, AUGUST 4, 2002 2001 2002 2001 ----------------- ---------------- ----------------- --------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Reported net income (loss) $ 2,739 $ (22,868) $ 3,172 $ (50,723) Amortization of excess reorganization value 27,452 54,904 Goodwill amortization, net of tax 35 70 ------------ ------------ ------------ ------------ Pro forma net income $ 2,739 $ 4,619 $ 3,172 $ 4,251 ============ ============ ============ ============ Basic earnings per share: Reported net income (loss) $ 0.14 $ (1.14) $ 0.16 $ (2.53) Amortization of excess reorganization value 1.37 2.74 Goodwill amortization, net of tax ------------ ------------ ------------ ------------ Pro forma basic earnings per share $ 0.14 $ 0.23 $ 0.16 $ 0.21 ============ ============ ============ ============ Diluted earnings per share: Reported net income (loss) $ 0.13 $ (1.14) $ 0.16 $ (2.53) Amortization of excess reorganization value 1.37 2.74 Goodwill amortization, net of tax ------------ ------------ ------------ ------------ Pro forma diluted earnings per share $ 0.13 $ 0.23 $ 0.16 $ 0.21 ============ ============ ============ ============
-18- NOTE 8 - SEGMENT INFORMATION - ---------------------------- The table below presents Revenues and EBITDA by reportable segment:
WHOLESALE RETAIL FOOD FOOD DISTRIBUTION TOTAL ------------------- ------------------- ---------------- (IN THOUSANDS) 13-WEEK PERIOD ENDED AUGUST 3, 2002 Revenues $ 525,039 $ 68,151 $ 593,190 EBITDA 33,452 4,411 37,863 RESTATED 13-WEEK PERIOD ENDED AUGUST 4, 2001 Revenues $ 538,139 $ 69,351 $ 607,490 EBITDA 38,397 4,537 42,934 26-WEEK PERIOD ENDED AUGUST 3, 2002 Revenues $ 1,031,744 $ 132,890 $ 1,164,634 EBITDA 64,512 8,892 73,404 RESTATED 26-WEEK PERIOD ENDED AUGUST 4, 2001 Revenues $ 1,046,605 $ 135,702 $ 1,182,307 EBITDA 69,930 8,652 78,582
-19- The table below reconciles (a) Total segment revenues to Consolidated revenues and (b) Total EBITDA for reportable segments to Income (loss) before income taxes:
RESTATED 13 WEEKS 13 WEEKS ENDED ENDED AUGUST 3, AUGUST 4, 2002 2001 ------------- ------------- (IN THOUSANDS) REVENUES: Total segment revenues $ 593,190 $ 607,490 Other revenues 4,794 3,893 ------------- ------------- Consolidated revenues $ 597,984 $ 611,383 ============= ============= EBITDA (1): Total EBITDA for reportable segments $ 37,863 $ 42,934 Unallocated expenses/income (12,819) (14,637) Depreciation and amortization (10,519) (10,532) Amortization of excess reorganization value (27,452) LIFO provision (375) (625) Interest expense (8,708) (9,043) ------------- ------------- Income (loss) before income taxes $ 5,442 $ (19,355) ============= =============
RESTATED 26 WEEKS 26 WEEKS ENDED ENDED AUGUST 3, AUGUST 4, 2002 2001 ------------------- ------------------- (IN THOUSANDS) REVENUES: Total segment revenues $ 1,164,634 $ 1,182,307 Other revenues 9,522 7,861 ------------- ------------- Consolidated revenues $ 1,174,156 $ 1,190,168 ============= ============= EBITDA (1): Total EBITDA for reportable segments $ 73,404 $ 78,582 Unallocated expenses/income (27,880) (29,928) Depreciation and amortization (21,076) (20,986) Amortization of excess reorganization value (54,904) LIFO provision (875) (1,250) Interest expense (17,219) (18,573) ------------- ------------- Income (loss) before income taxes $ 6,354 $ (47,059) ============= ============= - --------------------------------------------
See notes below (1) EBITDA is earnings before interest, taxes, depreciation, amortization, amortization of excess reorganization value and LIFO provision. -20- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Management's Discussion and Analysis of Financial Condition and Results of Operations presented below reflects the impact of the restatements to the Company's previously reported Consolidated Financial Statements for the 13-week period ended May 4, 2002, the fiscal years ended February 2, 2002 and February 3, 2001, the 31-week period ended January 29, 2000 and the 21-week period ended June 26, 1999 (see "--Liquidity and Capital Resources" below). The Company restated its financial results for these periods after discovering in August 2002 that an employee of its Penny Curtiss bakery manufacturing subsidiary had made false accounting entries which primarily involved the overstatement of inventory. The aggregate effect of the restatement was to reduce net income over this three and one-quarter year period by $7.3 million. In addition, the restatement reduced operating income for the 21-week period ended June 26, 1999 by $1.1 million; this amount was offset in the Company's Consolidated Statement of Operations by an adjustment associated with the Company's adoption of fresh-start reporting in 1999. The effect of the correction of the misstatements for the 13-week and 26-week periods ended August 4, 2001 was to increase the previously reported net loss by $0.9 million and $1.6 million and net loss per share - diluted by $0.04 and $0.08, respectively. The financial statement line items which were restated are Revenues, Cost of sales, Selling and administrative expenses, Amortization of excess reorganization value, Provision for income taxes, Inventories, Prepaid expenses and other current assets, Excess reorganization value, Trade accounts and drafts payable, Taxes payable and deferred taxes and Retained deficit. -21- 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 including increased capital investment and promotional activity by the Company's competitors; availability, location and terms of sites for store development; the successful implementation of the Company's capital expenditure program (including store remodeling and investments in the Company's technology infrastructure including point-of-sale systems); labor relations; labor and employee benefit costs including increases in health care and pension costs; the impact of the Company's loyalty card program; availability and terms of and access to capital; the Company's liquidity and other financial considerations; the ability of the Company to successfully negotiate modifications or amendments to its Credit Facility or negotiate any new credit facility; 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; the outcome of internal and external investigations into the previously mentioned false accounting entries and the costs of such investigation; and the outcome of pending or yet-to-be instituted legal proceedings. Penn Traffic cautions that the foregoing list of important factors is not exhaustive. -22- RESULTS OF OPERATIONS THIRTEEN WEEKS ("SECOND QUARTER FISCAL 2003") AND TWENTY-SIX WEEKS ENDED AUGUST 3, 2002 COMPARED TO THIRTEEN WEEKS ("SECOND QUARTER FISCAL 2002") AND TWENTY-SIX WEEKS ENDED AUGUST 4, 2001. - ---------------------------------------------------------------------------- The following table sets forth Consolidated Statement of Operations components expressed as a percentage of revenues for Second Quarter Fiscal 2003 and Second Quarter Fiscal 2002, and for the 26-week periods ended August 3, 2002 and August 4, 2001, respectively:
Second Quarter Ended Twenty-six Weeks Ended RESTATED RESTATED AUGUST 3, AUGUST 4, AUGUST 3, AUGUST 4, 2002 2001 2002 2001 ---------------- ---------------- ---------------- ---------------- Revenues 100.0% 100.0% 100.0% 100.0% Gross profit (1) 27.0 26.9 27.2 26.8 Selling and administrative expenses 24.6 24.1 25.2 24.6 Amortization of excess reorganization value 4.5 4.6 Operating income (loss) 2.4 (1.7) 2.0 (2.4) Adjusted operating income (2) 2.4 2.8 2.0 2.2 Interest expense 1.5 1.5 1.5 1.6 Net income (loss) 0.5 (3.7) 0.3 (4.3) Adjusted net income (3) 0.5 0.7 0.3 0.4 - --------------------------------------
See notes below (1) Revenues less cost of sales. (2) Operating income for Second Quarter Fiscal 2003 and the 26-week period ended August 3, 2002. Operating loss for Second Quarter Fiscal 2002 and the 26-week period ended August 4, 2001 excluding amortization of excess reorganization value of $27.5 million and $54.9 million, respectively. (3) Net income for Second Quarter Fiscal 2003 and the 26-week period ended August 3, 2002. Net loss for Second Quarter Fiscal 2002 and the 26-week period ended August 4, 2001 excluding amortization of excess reorganization value of $27.5 million and $54.9 million, respectively. -23- RESULTS OF OPERATIONS (CONTINUED) REVENUES Total revenues for Second Quarter Fiscal 2003 were $598.0 million, a decrease of 2.2% from $611.4 million in Second Quarter Fiscal 2002. Total revenues for the 26-week period ended August 3, 2002 were $1.174 billion, a decrease of 1.3% from $1.190 billion for the 26-week period ended August 4, 2001. The decrease in revenues in Second Quarter Fiscal 2003 is primarily attributable to (1) the reduction in the number of stores the Company operated (2) a decrease in same store sales and (3) a decline in wholesale food distribution revenues. Same store sales for Second Quarter Fiscal 2003 decreased 1.0% from the comparable prior year period. Same store sales for the 26-week period ended August 3, 2002 decreased 0.2% from the comparable prior year period. The Company believes that the decrease in same store sales was due to the challenging economic and competitive environment and a lack of food inflation. Wholesale food distribution revenues were $68.2 million in Second Quarter Fiscal 2003 compared to $69.4 million in Second Quarter Fiscal 2002. Wholesale food distribution revenues were $132.9 million for the 26-week period ended August 3, 2002 compared to $135.7 million for the 26-week period ended August 4, 2001. GROSS PROFIT Gross profit for Second Quarter Fiscal 2003 was 27.0% of revenues compared to 26.9% of revenues in Second Quarter Fiscal 2002. Gross profit for the 26-week period ended August 3, 2002 was 27.2% of revenues compared to 26.8% of revenues for the 26-week period ended August 4, 2001. The Company's ability to more effectively promote its offerings with its new loyalty card, a reduction in inventory shrink expense and a decrease in the LIFO provision contributed to the improvement in gross profit as a percentage of revenues in Second Quarter Fiscal 2003 and the 26-week period ended August 3, 2002. Gross profit for such periods were also impacted by increases in promotional spending designed to maintain or improve sales in a challenging economic and competitive environment (as discussed in greater detail under "--Liquidity and Capital Resources" below). -24- RESULTS OF OPERATIONS (CONTINUED) SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses for Second Quarter Fiscal 2003 were 24.6% of revenues compared to 24.1% of revenues in Second Quarter Fiscal 2002. Selling and administrative expenses for the 26-week period ended August 3, 2002 were 25.2% of revenues compared to 24.6% of revenues for the 26-week period ended August 4, 2001. The increases in selling and administrative expenses as a percentage of revenues for Second Quarter Fiscal 2003 and the 26-week period ended August 3, 2002 were primarily due to increases in wage, pension and health insurance costs during a period with little or no food inflation and decreases in revenues. These factors were partially offset by the benefit of the Company's various cost reduction initiatives. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense was $10.5 million in Second Quarter Fiscal 2003 and Second Quarter Fiscal 2002, representing 1.8% and 1.7% of revenues, respectively. Depreciation and amortization expense was $21.1 million in the 26-week period ended August 3, 2002 and $21.0 million in the 26-week period ended August 4, 2001, representing 1.8% of revenues for both periods. Amortization of excess reorganization value for Second Quarter Fiscal 2002 and the 26-week period ended August 4, 2001 was $27.5 million and $54.9 million, respectively. The excess reorganization value asset, which was established in June 1999 in connection with the implementation of fresh-start reporting, was being amortized on a straight-line basis over a three-year period. Beginning in the 13-week period ended May 4, 2002, the Company is no longer amortizing the excess reorganization value asset in accordance with SFAS 142 (see "--Impact of New Accounting Standards" below). OPERATING INCOME (LOSS); ADJUSTED OPERATING INCOME Operating income for Second Quarter Fiscal 2003 was $14.2 million or 2.4% of revenues compared to an operating loss of $10.3 million or 1.7% of revenues in Second Quarter Fiscal 2002. Adjusted operating income for Second Quarter Fiscal 2003 was $14.2 million or 2.4% of revenues compared to $17.1 million or 2.8% of revenues in Second Quarter Fiscal 2002. The decrease in adjusted operating income as a percentage of revenues in Second Quarter Fiscal 2003 was due to an increase in selling and administrative expenses as a percentage of revenues partially offset by an increase in gross profit as a percentage of revenues. -25- RESULTS OF OPERATIONS (CONTINUED) Operating income for the 26-week period ended August 3, 2002 was $23.6 million or 2.0% of revenues compared to an operating loss of $28.5 million or 2.4% of revenues for the 26-week period ended August 4, 2001. Adjusted operating income for the 26-week period ended August 3, 2002 was $23.6 million or 2.0% of revenues compared to $26.4 million or 2.2% of revenues for the 26-week period ended August 4, 2001. The decrease in adjusted operating income as a percentage of revenues in the 26-week period ended August 3, 2002 was due to an increase in selling and administrative expenses as a percentage of revenues partially offset by an increase in gross profit as a percentage of revenues. INTEREST EXPENSE Interest expense for Second Quarter Fiscal 2003 was $8.7 million compared to $9.0 million in Second Quarter Fiscal 2002. Interest expense for the 26-week period ended August 3, 2002 was $17.2 million compared to $18.6 million for the 26-week period ended August 4, 2001. The decrease in interest expense in Second Quarter Fiscal 2003 was due to a decrease in the interest rate on the Company's variable rate debt from the prior year. INCOME TAXES Income tax provision was $2.7 million for Second Quarter Fiscal 2003 compared to $3.5 million in Second Quarter Fiscal 2002. Income tax provision for the 26-week period ended August 3, 2002 was $3.2 million compared to $3.7 million for the 26-week period ended August 4, 2001. The tax provisions for the Second Quarter Fiscal 2003 and Second Quarter Fiscal 2002 and the 26-week periods ended August 3, 2002 and August 4, 2001 are not recorded at statutory rates due to differences between income calculations for financial reporting and tax reporting purposes. The effective tax rate for Second Quarter Fiscal 2003 and the 26-week period ended August 3, 2002 reflects the recognition of tax expense based on the estimated effective annual tax rate for the fiscal year ending February 1, 2003. The effective tax rate for Second Quarter Fiscal 2002 and the 26-week period ended August 4, 2001 has not been annualized due to the net loss reported for Fiscal 2002. -26- RESULTS OF OPERATIONS (CONTINUED) NET INCOME (LOSS); ADJUSTED NET INCOME Net income for Second Quarter Fiscal 2003 was $2.7 million compared to a net loss of $22.9 million for Second Quarter Fiscal 2002. Adjusted net income for Second Quarter Fiscal 2003 was $2.7 million compared to $4.6 million in Second Quarter Fiscal 2002. Net income for the 26-week period ended August 3, 2002 was $3.2 million compared to a net loss of $50.7 million for the 26-week period ended August 4, 2001. Adjusted net income for the 26-week period ended August 3, 2002 was $3.2 million compared to $4.2 million for the 26-week period ended August 4, 2001. -27- CRITICAL ACCOUNTING POLICIES Critical accounting policies are those accounting policies which are very important to the portrayal of the Company's financial condition and results and which require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company believes that estimates for reserve for store closures, impairment of long-lived assets, liabilities for employee benefit plans and self-insurance liabilities are critical accounting policies. Materially different amounts could be reported under different conditions or using different assumptions for these items. These estimates and assumptions are evaluated on an ongoing basis, based on historical experience and on various other factors that are believed to be reasonable. There are no significant changes to these estimates and assumptions since the issuance of the Company's Form 10-K/A for the 52-week period ended February 2, 2002. -28- LIQUIDITY AND CAPITAL RESOURCES The Company's debt (excluding capital leases) consists primarily of $100 million of 11% Senior Notes due June 29, 2009 (the "Senior Notes") and amounts outstanding under a $320 million secured credit facility that consists of a term loan and a revolving credit facility (the "Credit Facility") as shown below:
AUGUST 3, FEBRUARY 2, 2002 2002 ------------- ------------- (IN THOUSANDS) Secured Term Loan $ 105,500 $ 108,250 Secured Revolving Credit Facility 38,400 32,100 Other Secured Debt 12,198 12,362 11% Senior Notes due June 29, 2009 100,000 100,000 ------------- ------------- Total Debt $ 256,098 $ 252,712 Less: Current maturities of long-term debt (144,200) (140,666) ------------- ------------- Total Long-Term Debt $ 111,898 $ 112,046 ============= =============
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 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). As discussed below, the lenders under the Credit Facility have waived and agreed to forbear until October 31, 2002 (or, if earlier the date on which certain other events specified in the waiver forbearance agreement occur) from exercising any remedies as a result of an event of default that arose as a result of the accounting restatement that resulted from the false accounting entries at the Company's Penny Curtiss bakery manufacturing subsidiary or could arise as a result of the Company's noncompliance with certain financial covenants in the Credit Facility. Accordingly, notwithstanding the scheduled maturities of the Revolving Credit Facility and Term Loan described below, in accordance with generally accepted accounting principles, all amounts outstanding under the Credit Facility ($143.9 million at August 3, 2002 and $140.4 at February 2, 2002) have been classified as Current maturities of long-term debt. -29- 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 is scheduled to mature on June 30, 2005. Availability under the Revolving Credit Facility was approximately $109 million as of August 3, 2002. The Term Loan is scheduled to mature on June 30, 2006. Amounts of the Term Loan scheduled to mature in each fiscal year are outlined in the following table (in thousands):
FISCAL YEAR ENDING AMOUNT MATURING ------------------ --------------- (In thousands of dollars) 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 ------------- $ 108,250 =============
On August 8, 2002, the Company announced that it had discovered that an employee of its Penny Curtiss bakery manufacturing subsidiary had made false accounting entries which primarily involved the overstatement of inventory over a period of approximately three and one-quarter years. Based on the preliminary findings of an internal review, the Company's Audit Committee engaged independent legal counsel to conduct an independent investigation, who in turn engaged KPMG LLP to assist in this investigation, which is substantially complete. The Company has concluded that the false accounting entries were limited to its Penny Curtiss bakery manufacturing subsidiary and that the aggregate effect of the restatements was to reduce net income over the three and one-quarter period ended May 4, 2002 by $7.3 million. In addition, the restatement reduced operating income for the 21-week period ended June 26, 1999 by $1.1 million; this amount was offset in the Company's Consolidated Statement of Operations by an adjustment associated with the Company's adoption of fresh-start reporting in 1999. The aggregate effect of the restatements on EBITDA was a reduction of $11 million over the three and one-quarter year period ended May 4, 2002. The Company is cooperating with all appropriate regulators with respect to the false accounting entries. The Company anticipates that it will incur significant costs in connection with this investigation. -30- LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) On August 14, 2002, the Company received a letter waiving certain events of default that arose under the Credit Facility as a result of the restatements described above. The waiver letter also stated that the lenders under the Credit Facility would forbear from taking any action under the Credit Facility as a result of such defaults and permitted the Company to borrow, repay and reborrow under the Credit Facility through August 30, 2002. On August 29, 2002, the Company received a further extension of the waiver from the lenders under the Credit Facility and entered into a Waiver and Forbearance Agreement dated as of August 30, 2002. The Waiver and Forbearance Agreement waives certain events of default that arose under the Credit Facility as a result of the accounting restatement arising from the employee misconduct at the Company's Penny Curtiss bakery manufacturing subsidiary or could arise as a result of the Company's noncompliance with certain financial covenants in the Credit Facility until October 31, 2002 (or, if earlier, the date on which certain other events specified in the Waiver and Forbearance Agreement occur). The Waiver and Forbearance Agreement also provides that the lenders would forbear from taking any action under the Credit Facility as a result of such defaults and permits the Company to borrow, repay and reborrow under the Credit Facility through October 31, 2002. The Waiver and Forbearance Agreement will enable Penn Traffic to assess whether any other modifications to the Credit Facility would be required. Penn Traffic anticipates that on or prior to October 31, 2002, it will enter into a longer-term amendment to the Credit Facility with the lenders that will enable Penn Traffic to continue to borrow, repay and reborrow under the Revolving Credit Facility. In the event the Company was unable to negotiate and enter into such a longer-term amendment on a satisfactory basis with the lenders under the Credit Facility, the Company believes that it could refinance the amounts outstanding under the Credit Facility with an alternate lender. There can be no assurance however that the Company would be able to complete any such financing on terms comparable to the terms of the Credit Facility or otherwise acceptable to the Company. In addition, the revised terms of the Credit Facility, as well as other factors, could impact the ability of the Company to invest in new and existing stores and the Company's infrastructure, which could adversely affect the Company's results of operations. The indenture for the Senior Notes 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. -31- LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) The Company's Senior Notes are rated B3 by Moody's Investor Service and B- (with a negative outlook) by Standard and Poor's Ratings Group as of September 17, 2002. Future rating changes could affect the availability and cost of financing to the Company. Cash flows used to meet the Company's operating requirements during the 26-week period ended August 3, 2002 are reported in the Consolidated Statement of Cash Flows. During the 26-week period ended August 3, 2002, the Company's net cash used in investing activities was $35.7 million and the Company had an increase in cash and cash equivalents of $0.6 million. This amount was financed by net cash provided by operating activities of $35.8 million and net cash provided by financing activities of $0.5 million. During the 26-week period ended August 3, 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. For the next year, the Company expects to utilize internally generated funds from operations, amounts available under the Revolving Credit Facility and new mortgages, capital leases and/or sale/leasebacks to satisfy its operating, capital expenditure and debt service needs and to fund any repurchase of shares of its common stock under its stock repurchase program. Certain external factors, however, such as unfavorable economic conditions, competition and increases in wage and benefit costs, could have a significant impact on cash generated from operations. In addition, the Company's ability to obtain new mortgages, capital leases and/or sale/leasebacks in order to fund a portion of its capital expenditure program is, in part, dependent upon the Company's financial performance and overall conditions in the capital markets. 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. -32- LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) In the 52-week period ending February 1, 2003 ("Fiscal 2003"), the Company has generally encountered an increase in competitive price and promotional activity. This has resulted from, among other factors, the sluggish sales environment in the supermarket industry, which the Company believes has been caused by the current weaker economic conditions and an increase in the penetration of the retail food industry by alternative channels of trade such as supercenters. In addition, in Fiscal 2003, a greater number of competitive new stores have opened in the Company's markets than in recent years. In this environment, Penn Traffic has been investing in additional promotions designed to preserve both its market share and the positive sales momentum the Company has established in many of its markets as a result of its strategic initiatives. These factors have impacted and may continue to impact the Company's results of operations. During calendar year 2000, two new competitors entered the central Ohio market in which Penn Traffic operates a number of stores under the Big Bear trade name. As a consequence of the entry of these new competitors and the current challenging retail environment, the Company is facing increased competition from these new competitors and from the two other established competitors in the central Ohio market who have reduced prices and/or increased their level of promotional activity in an attempt to maintain or improve their sales levels in the market. Because of this increased competitive activity, the Company's results of operations have been adversely affected and may continue to be adversely affected. The Company's long-term strategy in the Ohio market is to (1) emphasize Big Bear's quality perishables, customer service and convenient locations and (2) implement programs to reduce expenses to help fund the cost of maintaining competitive pricing and promotion programs. Penn Traffic is incurring significant increases in employee benefit costs in Fiscal 2003 comprised of (1) increases in health care costs which the Company believes are, on a percentage basis, generally consistent with overall increasing costs in the health care industry and (2) an increase in pension expense that the Company will record in Fiscal 2003 as a result of declining returns in the equity markets over the past two years. Penn Traffic competes against some companies which do not provide the same levels of employee benefits as the Company does. It is not certain what portion of these cost increases Penn Traffic will be able to offset through its cost reduction programs, merchandising enhancements or market pricing adjustments. -33- LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) Penn Traffic currently sponsors five tax-qualified defined benefit pension plans (the "Plans"), primarily for its non-union employees, and also contributes to multi-employer pension funds which cover union employees under collective bargaining agreements. Due to the strong performance of the equity markets in the 1990's and the higher prevailing interest rates which were used to measure pension obligations, Penn Traffic recorded net pension income with respect to the Plans under Statement of Financial Accounting Standards No. 87 "Employers' Accounting for Pensions," for the fiscal years ended February 2, 2002, February 3, 2001, the 31-week period ended January 29, 2000, the 21-week period ended June 26, 1999 and the fiscal year ended January 30, 1999. The Company expects to record pension income of less than $0.1 million for these Plans in Fiscal 2003 compared to $2.4 million in fiscal year ended February 2, 2002. As both the aggregate value of the equity markets and long-term interest rates have declined since early calendar year 2000, the Plans have gone from an overfunded position to an underfunded position. This change resulted in an after-tax charge to equity of approximately $20 million at the end of Fiscal 2002. Based on the current value of Plan assets, the Company believes that it is likely that it will need to record an undetermined additional charge to equity at the end of Fiscal 2003. During Fiscal 2002, Penn Traffic began making contribution to the Plans at higher levels than the current minimum requirements of ERISA. Contributions to the Plans totaled $5.6 million in Fiscal 2002 compared to $2.3 million and $0.9 million in the preceding two years. In addition, Penn Traffic contributed an aggregate of $5.3 million to the Plans in the 26-week period ended August 3, 2002. The Company believes that it is likely that the Company's future annual contributions to Plans will be greater than contributions made in Fiscal 2002 or to date in Fiscal 2003. Such higher contributions would have an impact on the Company's cash provided from operations, which, in turn, could impact the level of the Company's future capital investment. During 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% per annum and receives payments at variable interest rates based on the London InterBank Offered Rate. -34- LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) During Fiscal 2003, Penn Traffic expects to invest approximately $60 million in capital expenditures (including capital leases). Capital expenditures will be principally for new stores, store remodels and investments in the Company's distribution system and technology infrastructure (including new point-of-sale systems in a number of the Company's stores). The Company expects to finance such expenditures through cash generated from operations, amounts available under the Revolving Credit Facility and new mortgages and/or sale/leasebacks. 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. To date, the Company has repurchased 53,000 shares of common stock at an average price of $7.08 per share. During the 13-week and 26-week periods ended August 3, 2002, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, the Company does not engage in trading activities involving non-exchange traded contracts. As such, the Company is not materially exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships. Penn Traffic does not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with the Company or its related parties other than what is disclosed in Note 15 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K/A for the year ended February 2, 2002. -35- IMPACT OF NEW ACCOUNTING STANDARDS The Company's Consolidated Statement of Operations and same store sales results for the 13-week and 26-week periods ended August 4, 2001 reflect the Company's implementation of EITF Issue Number 00-14, "Accounting for Certain Sales Incentives," as codified by EITF Issue Number 01-9, "Accounting for Consideration Given by Vendors to a Customer" ("EITF 00-14") and certain other income statement classifications the Company made during the fiscal year ended February 2, 2002. The implementation of EITF 00-14 and these other reclassifications do not have any effect on Penn Traffic's reported Operating Income (Loss), EBITDA or Net Income (Loss). Penn Traffic adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), in the 13-week period ended May 4, 2002 ("First Quarter Fiscal 2003"). SFAS 142 provides that intangible assets with finite useful lives be amortized, and that goodwill and intangible assets with indefinite useful lives not be amortized but tested at least annually for impairment. The Company no longer records amortization of excess reorganization value or goodwill in its Consolidated Statement of Operations. In conjunction with the adoption of SFAS 142, Penn Traffic performed a comprehensive test of the carrying value of the excess reorganization value and goodwill assets for impairment. As a result of this review, no assets were deemed impaired. Excess reorganization value and goodwill had a carrying value of approximately $51 million at the date of adoption of this standard. In October 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supercedes 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 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principle Board Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The Company adopted this standard in First Quarter Fiscal 2003. The adoption of this standard did not have a material effect on the Company's financial statements. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement of No. 13, and Technical Corrections," ("SFAS 145"). SFAS 145 becomes effective for the Company for the fiscal year ending January 31, 2004. The Company is currently analyzing the effect this standard will have on its financial statements. -36- ITEM 4. CONTROLS AND PROCEDURES In the fiscal quarter ended August 3, 2002, the Company did not make any significant changes in, nor take any corrective actions regarding, the Company's internal controls or other factors that could significantly affect these controls. Penn Traffic periodically reviews its internal controls for effectiveness and plans to conduct an evaluation of our disclosure controls and procedures each quarter. In addition, the Company's Audit Committee will make certain recommendations with respect to the Company's internal controls as a result of its investigation of the false accounting entries at the Company's Penny Curtiss bakery manufacturing subsidiary and the resulting investigation by independent legal counsel and KPMG LLP. The Company anticipates receiving these recommendations during the fiscal quarter ending November 2, 2002 and implementing them promptly thereafter. -37- 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. On May 10, 2001, The Grand Union Company ("Grand Union") instituted an Adversary Proceeding in the United States Bankruptcy Court for the District of New Jersey alleging Penn Traffic defaulted as purchaser under the Court-ordered bankruptcy sale of Grand Union's Plattsburgh, New York store. On August 7, 2002, the bankruptcy court denied Penn Traffic's motion for summary judgment dismissing the adversary proceeding of Grand Union to enforce the Company's purported agreement to buy the Plattsburgh, New York store and granted Grand Union's motion for partial summary judgment against Penn Traffic as to liability in respect of such purported agreement. On August 16, 2002, Penn Traffic filed a notice of appeal with respect to this judgment with the United States District Court of New Jersey. While Penn Traffic believes that its appeal is meritorious, it is not able to predict the amount, if any, of Grand Union's damages in the event the appeal is unsuccessful. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Penn Traffic's Annual Meeting of Stockholders was held on July 17, 2002. At the meeting, nine directors were elected to serve for a term of one year on the Company's Board of Directors by the following votes:
FOR ABSTAINED --- --------- Byron E. Allumbaugh 18,569,163 18,441 Kevin P. Collins 18,569,559 18,045 Joseph V. Fisher 18,568,554 19,050 Martin A. Fox 18,568,964 18,640 David B. Jenkins 18,569,934 17,670 Gabriel S. Nechamkin 18,569,258 18,346 Lief D. Rosenblatt 18,367,900 219,704 Mark D. Sonnino 18,569,386 18,218 Peter L. Zurkow 18,570,793 16,811
At the Annual Meeting, the selection of PricewaterhouseCoopers LLP as auditors for the Company for Fiscal 2003 was ratified by a vote of 18,577,249 shares in favor, 6,092 shares opposed and 4,262 abstentions. No other matters were considered at the Company's Annual Meeting. -38- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following are filed as Exhibits to this Report:
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.8D Waiver and Forbearance Agreement by and among Penn Traffic, certain of its subsidiaries, Fleet Capital Corporation and the lenders party thereto (incorporated by reference to Exhibit 99.1 to Form 8-K filed on August 30, 2002). 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Forms 8-K 1. Form 8-K dated August 8, 2002 was filed pursuant to Item 5 and Item 7 on August 8, 2002 attaching a press release reporting on the false accounting entries at the Company's Penny Curtiss bakery manufacturing subsidiary. 2. Form 8-K dated August 14, 2002 was filed pursuant to Item 5 and Item 7 on August 16, 2002 reporting on and including an interim bank waiver. 3. Form 8-K dated August 29, 2002 was filed pursuant to Item 5 and Item 7 on August 30, 2002 reporting on and including an interim bank waiver. -39- 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 18, 2002 /s/- Joseph V. Fisher ------------------------------------------ By: Joseph V. Fisher President and Chief Executive Officer September 18, 2002 /s/- Martin A. Fox ------------------------------------------ By: Martin A. Fox Executive Vice President and Chief Financial Officer -40- CERTIFICATION I, Joseph V. Fisher, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Penn Traffic Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; Date: September 18, 2002 /s/ Joseph V. Fisher - ------------------------------------- Joseph V. Fisher President and Chief Executive Officer -41- CERTIFICATION I, Martin A. Fox, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Penn Traffic Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; Date: September 18, 2002 /s/ Martin A. Fox - ---------------------------- Martin A. Fox Executive Vice President and Chief Financial Officer -42- Exhibit Index
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.8D Waiver and Forbearance Agreement by and among Penn Traffic, certain of its subsidiaries, Fleet Capital Corporation and the lenders party thereto (incorporated by reference to Exhibit 99.1 to Form 8-K filed on August 30, 2002). 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
-43- EX-99.1 3 a2089386zex-99_1.txt EXHIBIT 99.1 EXHIBIT 99.1 THE PENN TRAFFIC COMPANY CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of The Penn Traffic Company (the "Company") on Form 10-Q for the period ending August 3, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joseph V. Fisher, President & Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Joseph V. Fisher - ------------------------------- Joseph V. Fisher President & Chief Executive Officer September 18, 2002 EX-99.2 4 a2089386zex-99_2.txt EXHIBIT 99.2 EXHIBIT 99.2 THE PENN TRAFFIC COMPANY CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of The Penn Traffic Company (the "Company") on Form 10-Q for the period ending August 3, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Martin A. Fox, Executive Vice President & Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Martin A. Fox - ------------------------------ Martin A. Fox Executive Vice President & Chief Financial Officer September 18, 2002 -----END PRIVACY-ENHANCED MESSAGE-----