UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended August 1, 2009
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 or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
|
|
|
|
|
1200 State Fair Blvd., Syracuse, New York
|
|
13221-4737
|
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(315)
453-7284
(Registrant’s
telephone number, including area code)
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 90 days. YES
x
NO
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). YES
o
NO
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer
o
|
|
Accelerated
filer
o
|
|
Non-accelerated
filer
o
(Do
not check if a smaller reporting company)
|
|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES
o
NO
x
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
o
Common Stock, par value $.01
per share: 8,779,832 shares outstanding as of September
15, 2009
FORM 10-Q
INDEX
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|
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PAGE
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PART
I. FINANCIAL INFORMATION
|
|
|
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Item
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1.
|
Financial
Statements
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4
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Item
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2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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16
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Item
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3.
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Quantitative
and Qualitative Disclosures about Market Risk
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24
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Item
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4T.
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Controls
and Procedures
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24
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PART
II. OTHER INFORMATION
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Item
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1.
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Legal
Proceedings
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25
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Item
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6.
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Exhibits
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25
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SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
Certain
statements included in this Form 10-Q, including without limitation, statements
included in Item 2 - “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” 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, reflecting management’s current analysis and expectations,
based on what management believes to be reasonable assumptions. These
forward-looking statements include statements relating to our anticipated
financial performance and business prospects. Statements preceded by,
followed by or that include words such as “believe”, “anticipate”, “estimate”,
“expect”, “could”, “may”, and other similar expressions are to be considered
such forward-looking statements. Forward-looking statements may
involve known and unknown risks, uncertainties and other factors, which may
cause the actual results to differ materially from those projected, stated or
implied, depending on such factors as the risks set forth in Item 1A – “Risk
Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31,
2009; general economic and business conditions; economic and competitive
uncertainties; our ability to improve operating performance and effectuate
business plans; our ability to operate pursuant to the terms of our credit
facilities and to comply with the terms of our lending agreements or to amend or
modify the terms of such agreements as may be needed from time to time; our
ability to generate cash; our ability to attract and maintain adequate capital;
our ability to refinance our indebtedness; increases in prevailing interest
rates; our ability to obtain trade credit, and shipments and terms with vendors
and service providers for current orders; our ability to maintain contracts that
are critical to our operations; potential adverse developments with respect to
our liquidity or results of operations; competition, including increased capital
investment and promotional activity by our competitors; availability, location
and terms of sites for store development; the successful implementation of our
capital expenditure program; labor relations; labor and employee benefit costs
including increases in health care and pension costs and the level of
contributions to our sponsored pension plans; the result of our pursuit of
strategic alternatives; our ability to pursue strategic alternatives; changes in
strategies; changes in generally accepted accounting principles; adverse changes
in economic and political climates around the world, including terrorist
activities and international hostilities; and the outcome of pending, or the
commencement of any new, legal proceedings against, or governmental
investigations of us. We caution that the foregoing list of important
factors is not exhaustive. Accordingly, there can be no assurance
that we will meet future results, performance or achievements expressed or
implied by such forward-looking statements, which are generally required to be
revised as circumstances change, and which we undertake no obligation to
update.
PART
I
ITEM
1. Financial
Statements
The Penn
Traffic Company
Condensed
Consolidated Balance Sheets
(In
thousands)
|
|
|
August 1,
|
|
|
January 31,
|
|
|
|
|
2009
|
|
|
2009
|
|
|
|
|
(unaudited)
|
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|
ASSETS
|
|
|
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Current
assets:
|
|
|
|
|
|
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Cash
and cash equivalents
|
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$
|
32,351
|
|
|
$
|
56,434
|
|
|
Accounts
and notes receivable (less allowance for
|
|
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doubtful
accounts of $1,876 and $2,676, respectively)
|
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18,213
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|
|
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19,454
|
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Inventories
|
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40,817
|
|
|
|
44,306
|
|
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Prepaid
expenses and other current assets
|
|
|
6,054
|
|
|
|
5,990
|
|
|
Total
current assets
|
|
|
97,435
|
|
|
|
126,184
|
|
|
|
|
|
|
|
|
|
|
|
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Capital
leases:
|
|
|
|
|
|
|
|
|
|
Capital
leases
|
|
|
10,768
|
|
|
|
10,768
|
|
|
Less:
Accumulated amortization
|
|
|
(3,850
|
)
|
|
|
(3,357
|
)
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|
Capital
leases, net
|
|
|
6,918
|
|
|
|
7,411
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets:
|
|
|
|
|
|
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Land
|
|
|
9,036
|
|
|
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9,036
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|
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Buildings
|
|
|
12,670
|
|
|
|
12,538
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|
|
Equipment
and furniture
|
|
|
79,308
|
|
|
|
80,819
|
|
|
Vehicles
|
|
|
8,077
|
|
|
|
8,020
|
|
|
Leasehold
improvements
|
|
|
12,366
|
|
|
|
10,906
|
|
|
Total
fixed assets
|
|
|
121,457
|
|
|
|
121,319
|
|
|
Less:
Accumulated depreciation
|
|
|
(73,993
|
)
|
|
|
(68,019
|
)
|
|
Fixed
assets, net
|
|
|
47,464
|
|
|
|
53,300
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
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Intangible
assets, net
|
|
|
2,532
|
|
|
|
2,883
|
|
|
Other
assets
|
|
|
3,541
|
|
|
|
3,936
|
|
|
Total
other assets
|
|
|
6,073
|
|
|
|
6,819
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
157,890
|
|
|
$
|
193,714
|
|
The
accompanying notes are an integral part of these statements.
The Penn
Traffic Company
Condensed
Consolidated Balance Sheets, continued
(In
thousands, except share and per share data)
|
|
|
August 1,
|
|
|
January 31,
|
|
|
|
|
2009
|
|
|
2009
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of obligations under capital leases
|
|
$
|
1,383
|
|
|
$
|
1,519
|
|
|
Current
maturities of long-term debt (Note 5)
|
|
|
16,308
|
|
|
|
17,296
|
|
|
Accounts
payable
|
|
|
11,866
|
|
|
|
8,119
|
|
|
Other
current liabilities
|
|
|
35,374
|
|
|
|
39,848
|
|
|
Deferred
income taxes (Note 6)
|
|
|
7,240
|
|
|
|
7,373
|
|
|
Total
current liabilities
|
|
|
72,171
|
|
|
|
74,155
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities:
|
|
|
|
|
|
|
|
|
|
Obligations
under capital leases
|
|
|
6,832
|
|
|
|
7,443
|
|
|
Long-term
debt (Note 5)
|
|
|
3,181
|
|
|
|
19,338
|
|
|
Defined
benefit pension plan liability (Note 8)
|
|
|
25,196
|
|
|
|
25,903
|
|
|
Deferred
income taxes (Note 6)
|
|
|
528
|
|
|
|
523
|
|
|
Other
non-current liabilities
|
|
|
30,431
|
|
|
|
30,265
|
|
|
Total
non-current liabilities
|
|
|
66,168
|
|
|
|
83,472
|
|
|
Total
liabilities
|
|
|
138,339
|
|
|
|
157,627
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Notes 4, 5, 8, and 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity (Note 10):
|
|
|
|
|
|
|
|
|
|
Preferred
stock - authorized 1,000,000 shares, $.01 par value; 8,000
and
|
|
|
|
|
|
|
|
|
|
10,000
shares issued and outstanding at August 1, 2009
|
|
|
|
|
|
|
|
|
|
and
January 31, 2009, respectively
|
|
|
-
|
|
|
|
-
|
|
|
Common
stock - authorized 15,000,000 shares, $.01 par value;
|
|
|
|
|
|
|
|
|
|
8,779,832
and 8,641,676 shares issued and outstanding at August 1,
2009
|
|
|
|
|
|
|
|
|
|
and
January 31, 2009, respectively
|
|
|
88
|
|
|
|
86
|
|
|
Capital
in excess of par value
|
|
|
128,246
|
|
|
|
128,248
|
|
|
Deficit
|
|
|
(108,513
|
)
|
|
|
(91,953
|
)
|
|
Accumulated
other comprehensive loss
|
|
|
(270
|
)
|
|
|
(294
|
)
|
|
Total
stockholders’ equity
|
|
|
19,551
|
|
|
|
36,087
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
157,890
|
|
|
$
|
193,714
|
|
The
accompanying notes are an integral part of these statements.
The Penn
Traffic Company
Condensed
Consolidated Statements of Operations
(In
thousands, except share and per share data)
(unaudited)
|
|
|
Quarter Ended
|
|
|
Year to Date
|
|
|
|
|
August 1, 2009
|
|
|
August 2, 2008
|
|
|
August 1, 2009
|
|
|
August 2, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
208,792
|
|
|
$
|
228,303
|
|
|
$
|
408,868
|
|
|
$
|
440,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
and operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
144,587
|
|
|
|
159,061
|
|
|
|
282,395
|
|
|
|
305,050
|
|
|
Selling
and administrative expenses
|
|
|
69,570
|
|
|
|
70,500
|
|
|
|
138,528
|
|
|
|
144,700
|
|
|
Gain
on sale of assets
|
|
|
(108
|
)
|
|
|
(177
|
)
|
|
|
(58
|
)
|
|
|
(661
|
)
|
|
Loss
on store closings
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
519
|
|
|
Asset
impairment charge
|
|
|
-
|
|
|
|
276
|
|
|
|
123
|
|
|
|
1,086
|
|
|
|
|
|
214,049
|
|
|
|
229,660
|
|
|
|
421,000
|
|
|
|
450,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(5,257
|
)
|
|
|
(1,357
|
)
|
|
|
(12,132
|
)
|
|
|
(10,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
1,647
|
|
|
|
1,330
|
|
|
|
3,667
|
|
|
|
2,859
|
|
|
Reorganization
and other expenses
|
|
|
130
|
|
|
|
71
|
|
|
|
152
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(7,034
|
)
|
|
|
(2,758
|
)
|
|
|
(15,951
|
)
|
|
|
(13,324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit) / expense (Note 6)
|
|
|
(58
|
)
|
|
|
120
|
|
|
|
(93
|
)
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(6,976
|
)
|
|
|
(2,878
|
)
|
|
|
(15,858
|
)
|
|
|
(13,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
(290
|
)
|
|
|
(519
|
)
|
|
|
(702
|
)
|
|
|
(2,227
|
)
|
|
Net
loss
|
|
$
|
(7,266
|
)
|
|
$
|
(3,397
|
)
|
|
$
|
(16,560
|
)
|
|
$
|
(15,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share - basic and diluted: (Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share from continuing operations
|
|
$
|
(0.82
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(1.87
|
)
|
|
$
|
(1.62
|
)
|
|
Loss
per share from discontinued operations
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share - basic and diluted
|
|
$
|
(0.85
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
(1.95
|
)
|
|
$
|
(1.88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
8,761,614
|
|
|
|
8,650,110
|
|
|
|
8,701,645
|
|
|
|
8,650,110
|
|
The
accompanying notes are an integral part of these statements.
The Penn
Traffic Company
Condensed
Consolidated Statements of Cash Flows
(In
thousands)
(unaudited)
|
|
|
For the Period
|
|
|
For the Period
|
|
|
|
|
February 1, 2009
|
|
|
February 3, 2008
|
|
|
|
|
to August 1, 2009
|
|
|
to August 2, 2008
|
|
|
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(16,560
|
)
|
|
$
|
(15,828
|
)
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
9,294
|
|
|
|
11,412
|
|
|
Provision
for doubtful accounts
|
|
|
82
|
|
|
|
582
|
|
|
Loss
/ (gain) on sale of assets
|
|
|
151
|
|
|
|
(1,801
|
)
|
|
Asset
impairment charge
|
|
|
123
|
|
|
|
3,003
|
|
|
Amortization
of deferred finance costs
|
|
|
530
|
|
|
|
466
|
|
|
Deferred
income taxes
|
|
|
(128
|
)
|
|
|
285
|
|
|
Phantom
stock compensation expense / (benefit)
|
|
|
45
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
and notes receivable
|
|
|
1,159
|
|
|
|
3,833
|
|
|
Prepaid
expenses and other current assets
|
|
|
(64
|
)
|
|
|
316
|
|
|
Inventories
|
|
|
3,489
|
|
|
|
4,998
|
|
|
Other
assets
|
|
|
(136
|
)
|
|
|
24
|
|
|
Accounts
payable and other current liabilities
|
|
|
(1,036
|
)
|
|
|
(17,363
|
)
|
|
Liabilities
subject to compromise
|
|
|
-
|
|
|
|
(1,103
|
)
|
|
Defined
benefit pension plan liability
|
|
|
(683
|
)
|
|
|
(1,499
|
)
|
|
Other
non-current liabilities
|
|
|
336
|
|
|
|
(1,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(3,398
|
)
|
|
|
(14,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(3,017
|
)
|
|
|
(4,250
|
)
|
|
Proceeds
from sale of assets
|
|
|
224
|
|
|
|
4,128
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(2,793
|
)
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
Payment
of mortgages
|
|
|
(145
|
)
|
|
|
(139
|
)
|
|
Net
repayments under revolving credit facility
|
|
|
(17,000
|
)
|
|
|
-
|
|
|
Reduction
in capital lease obligations
|
|
|
(747
|
)
|
|
|
(664
|
)
|
|
Payment
of deferred financing costs
|
|
|
-
|
|
|
|
(1,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(17,892
|
)
|
|
|
(1,887
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(24,083
|
)
|
|
|
(16,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
56,434
|
|
|
|
20,916
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
32,351
|
|
|
$
|
4,792
|
|
The
accompanying notes are an integral part of these statements.
The Penn
Traffic Company
Condensed
Consolidated Statements of Stockholders’ Equity
For the
unaudited period January 31, 2009 to August 1, 2009
(In
thousands, except share data)
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
Accumulated Other
|
|
|
Total
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Excess of
|
|
|
|
|
|
Comprehensive
|
|
|
Stockholders'
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Par Value
|
|
|
Deficit
|
|
|
(Loss) / Income
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 31, 2009
|
|
$
|
-
|
|
|
$
|
86
|
|
|
$
|
128,248
|
|
|
$
|
(91,953
|
)
|
|
$
|
(294
|
)
|
|
$
|
36,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,560
|
)
|
|
|
|
|
|
|
(16,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of 138,156 shares of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
in conversion of preferred stock
|
|
|
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of net actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
net pension benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at August 1, 2009
|
|
$
|
-
|
|
|
$
|
88
|
|
|
$
|
128,246
|
|
|
$
|
(108,513
|
)
|
|
$
|
(270
|
)
|
|
$
|
19,551
|
|
The
accompanying notes are an integral part of these statements.
The Penn
Traffic Company
Notes to
Condensed Consolidated Financial Statements
Note
1 – Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements of The Penn
Traffic Company and subsidiaries (the “Company”) have been prepared in
accordance with accounting principles generally accepted in the United States
(“GAAP”) for interim financial information and with the instructions for Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete audited financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring deferrals and accruals) considered necessary for a fair presentation
have been included. The operating results for the periods presented are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the audited consolidated financial statements and
footnotes thereto included in the Company’s Annual Report on Form 10-K for the
fiscal year ended January 31, 2009.
The
balance sheet as of January 31, 2009, has been derived from the audited
consolidated financial statements as of such date, but does not include all of
the information and footnotes required by GAAP for complete financial
statements. The Company emerged from Chapter 11 bankruptcy
proceedings and applied fresh-start reporting effective April 16, 2005, in
accordance with Statement of Position 90-7, “Financial Reporting by Entities in
Reorganization under the Bankruptcy Code”.
All
significant intercompany transactions and accounts have been eliminated in
consolidation.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts could differ from those
estimates. Certain prior year amounts have been reclassified to
conform to current year presentation.
Reporting
Periods
The
Company’s fiscal year ends on the Saturday closest to January
31. Fiscal year 2010 is the 52-week period ending January 30,
2010. Fiscal year 2009 was the 52-week period ended January
31, 2009. The information presented in this Quarterly Report on
Form 10-Q is for the 13-week periods ended (“quarter ended”) and the 26-week
periods ended (“year to date ended”) August 1, 2009, and August 2,
2008.
Operating
Segments
On
December 21, 2008, the Company completed the sale of its wholesale food
distribution business segment. Subsequent to that date, the Company
consists of one operating segment, the retail food segment.
Note
2 – Recent Accounting Standards
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” (“SFAS 157”), effective for fiscal years
beginning after November 15, 2007. SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements. In February 2008, the FASB issued FASB Staff Position
(“FSP”) 157-2, which delays the effective date of the application of SFAS 157 to
fiscal years beginning after November 15, 2008, for all non-financial assets and
non-financial liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis. Effective February 1,
2009, the Company adopted FSP 157-2, which did not have a material effect on the
Company’s consolidated financial statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which
replaces SFAS 141. SFAS 141(R) changes the accounting for business
combinations, and applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Additionally,
for business combinations in which the acquisition date was before the effective
date of SFAS 141(R), the requirements of SFAS 109, “Accounting for Income
Taxes”, as amended by SFAS 141(R), are applied prospectively. The
Company currently maintains a full valuation allowance against its deferred tax
assets. Prior to the effective date of SFAS 141(R), deferred income
tax benefits resulting from the reversal of valuation allowances related to net
operating loss carry-forwards and deductible temporary differences that existed
at the time of our emergence from bankruptcy protection reduced intangible
assets. Under SFAS 141(R), these income tax benefits are recognized
as an adjustment to income tax expense. Effective February 1, 2009,
the Company adopted SFAS 141(R), which did not have a material effect on the
Company’s consolidated financial statements for the quarter ended May 2, 2009,
but which could have a significant impact on our future financial
statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB 51” (“SFAS 160”), which changes the accounting and reporting
for minority interests. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008. Effective February 1, 2009, the
Company adopted SFAS 160, which had no impact on the Company’s consolidated
financial statements.
In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets”. This FSP amends SFAS
No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other
Postretirement Benefits”, to provide guidance on an employer’s disclosures about
plan assets of a defined benefit pension or other postretirement plan on
investment policies and strategies, major categories of plan assets, inputs and
valuation techniques used to measure the fair value of plan assets and
significant concentrations of risk within plan assets. FSP 132(R)-1
is effective for fiscal years ending after December 15, 2009, and will
enhance the disclosures associated with postretirement benefit plans in the
Company’s consolidated financial statements for the fiscal year ending January
30, 2010.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments”. This FSP amends SFAS
No. 107, “Disclosures about Fair Value of Financial Instruments”, and APB
28, “Interim Financial Reporting”, to require companies to include the
disclosures about the fair value of financial instruments required by SFAS 107
whenever it issues interim financial information. This FSP is
effective for interim periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. The
Company elected to adopt this FSP and include the required disclosures beginning
with the period ended May 2, 2009.
In May
2009, the FASB issued Statement of Financial Accounting Standards No. 165,
“Subsequent Events” (“SFAS 165”). SFAS 165 requires disclosure of the
date through which an entity has evaluated subsequent events and whether that
represents the date the financial statements were issued or were available to be
issued. SFAS 165 is effective for interim and fiscal periods ending
after June 15, 2009. The Company adopted this standard in the current
period.
In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
Codification
TM
and the
Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB
Statement No. 162” (SFAS 168). SFAS 168 replaces FASB Statement
No. 162, “The Hierarchy of Generally Accepted Accounting Principles” and
establishes the “FASB Accounting Standards Codification
TM
”
(Codification) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with generally accepted accounting principles
in the United States. All guidance contained in the Codification carries an
equal level of authority. On the effective date of SFAS 168, the
Codification will supersede all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification will become non-authoritative. SFAS 168 is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The Company expects that the adoption of this
statement will not have a material effect on the consolidated financial
statements or disclosures.
Note
3 - Per Share Data
Basic and
diluted net loss per share is based on the net loss available to common
stockholders and the number of shares of common stock issued and estimated to be
issued pursuant to the Company’s bankruptcy reorganization
plan. Diluted loss per share for the fiscal quarters ended August 1,
2009 and August 2, 2008, does not include 561,216 and 652,468 shares of common
stock, respectively, issuable on the conversion of preferred stock, which was
issued in December 2007, as the effect is anti-dilutive. The
following table details the calculation of our basic and diluted per share data
(amounts in thousands, except share and per share data):
|
|
|
Quarter
Ended
|
|
|
Year
to Date
|
|
|
|
|
August
1, 2009
|
|
|
August
2, 2008
|
|
|
August
1, 2009
|
|
|
August
2, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(6,976
|
)
|
|
$
|
(2,878
|
)
|
|
$
|
(15,859
|
)
|
|
$
|
(13,601
|
)
|
|
Less:
cumulative preferred stock dividends
|
|
|
(167
|
)
|
|
|
(200
|
)
|
|
|
(369
|
)
|
|
|
(400
|
)
|
|
Loss
available to common stock holders
|
|
|
(7,143
|
)
|
|
|
(3,078
|
)
|
|
|
(16,228
|
)
|
|
|
(14,001
|
)
|
|
Loss
from discontinued operations
|
|
|
(290
|
)
|
|
|
(519
|
)
|
|
|
(702
|
)
|
|
|
(2,227
|
)
|
|
Net
loss available to common stockholders
|
|
$
|
(7,433
|
)
|
|
$
|
(3,597
|
)
|
|
$
|
(16,930
|
)
|
|
$
|
(16,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
8,761,614
|
|
|
|
8,650,110
|
|
|
|
8,701,645
|
|
|
|
8,650,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share from continuing operations
|
|
$
|
(0.82
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(1.87
|
)
|
|
$
|
(1.62
|
)
|
|
Loss
per share from discontinued operations
|
|
|
(0.03
|
)
|
|
|
(0.06
|
)
|
|
|
(0.08
|
)
|
|
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share - basic and diluted
|
|
$
|
(0.85
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
(1.95
|
)
|
|
$
|
(1.88
|
)
|
Note
4 – Liabilities Subject to Compromise
In
connection with the Company’s Chapter 11 bankruptcy proceedings, from which the
Company emerged April 16, 2005, the Ohio Bureau of Workers’ Compensation
(“OBWC”) filed priority and administrative claims aggregating $13.4 million
for pre-petition unpaid workers’ compensation premiums and for reserves to pay
future claims arising from existing injuries. The OBWC also filed
claims aggregating $1.8 million for alleged non-payment of post-petition
premiums and for reserves to pay future claims arising from existing
injuries. On August 22, 2008, the Company and the OBWC filed a Notice
of Presentment of Stipulation and Order with Respect to Settlement of Ohio
Bureau of Workers’ Compensation Claims (the “Stipulation”) with the United
States Bankruptcy Court for the Southern District of New York, pursuant to which
the Company and the OBWC have agreed that the OBWC releases all potential claims
against the Company in exchange for the following: payment by the Company to the
OBWC of $500,000 on September 9, 2008; payments of $217,500 on each
of the following dates: March 2, 2009, September 1, 2009, March 1, 2010, and
September 1, 2010 (the Stipulation further provides that the payments to be made
in 2010 shall be backed by a letter of credit); and, the issuance of 290,491
shares of the Company's common stock, par value $0.01 per share, to the OBWC
during the year ended January 31, 2009. The Bankruptcy Court approved the
Stipulation on September 5, 2008, and the Company has satisfied all of its
obligations through August 2009. As of August 1, 2009, the Company
has accrued $652,500 related to the OBWC Chapter 11 claim, recording $435,000 in
current liabilities and $217,500 in other non-current liabilities based upon the
payment terms of the Stipulation.
Note
5 – Long-term Debt
The
Company has a revolving credit and term loan facility with a group of financial
institutions providing for a $50 million revolving credit facility
commitment that includes a maximum sub-limit commitment for letters of credit of
$47.5 million, and a $6 million term loan. The Company also has
a supplemental real estate credit facility with another group of lenders under
which the Company has borrowed an additional $10 million. The
maturity date of both facilities is April 13, 2010. Borrowings under
the revolving credit and term loan facility are secured by substantially all the
assets of the Company, subject to first liens on certain property by other
lenders. Borrowings under the real estate facility are secured by a
first lien on substantially all leasehold interests of the Company, and a second
lien on real estate owned by the Company. On February 6, 2009, the
Company repaid the entire outstanding balance of $17 million under the revolving
credit facility.
Provisions
of both credit facilities require the maintenance of $13.5 million of
availability under the revolving credit facility and limit, among other things,
the assumption of additional debt and the payment of
dividends. Availability under both credit facilities is equal to the
sum of eligible accounts receivable, inventory and certain other assets (the
Company’s “asset borrowing base”), plus certain cash deposits totaling $28.0
million at August 1, 2009, less outstanding borrowings and letters of
credit. As of August 1, 2009, we had approximately $26.1 million
of availability under our revolving credit facility, which is $12.6 million
greater than the required minimum of $13.5 million. Outstanding
letters of credit under the revolving credit facility, which are primarily
associated with supporting workers’ compensation obligations, were approximately
$37.6 million at August 1, 2009. All borrowing by and issuances of
letters of credit for the Company under the revolving credit facility are
subject to the approval of the agents for the lenders.
The
carrying amount of debt reported in our balance sheet approximates fair value as
of August 1, 2009, and January 31, 2009.
The
Company also has $3.5 million in borrowings under mortgages that mature at
various dates through 2021 and are secured by first liens on the related
properties.
Note
6 – Income Taxes
The
Company maintains a full valuation allowance against substantially all of its
deferred tax assets including amounts resulting from net operating loss
carry-forwards. The valuation allowance will be maintained until
there is sufficient positive evidence to conclude that it is more likely than
not that the deferred tax assets will be realized.
The
Company does not have any material tax positions that meet a
“more-likely-than-not” recognition threshold. As such, the Company has not
recorded any liabilities for uncertain tax positions. During the quarter and
year-to-date ended August 1, 2009, there have been no material changes to the
amount of uncertain tax positions.
For
federal tax purposes, the Company is subject to a review of its fiscal year
ended 2008 tax return. The New York State Department of Taxation and
Finance has concluded a desk examination of the Company's New York State tax
returns for the fiscal years ended 2004-2008. The New York State examination
resulted in no significant changes to the tax returns. For other states tax
purposes, the Company is subject to a review of its fiscal years ended 2005
through 2008 state tax returns.
Note
7 – Dispositions and Discontinued Operations
Dispositions
During
the quarter ended August 1, 2009, the Company closed one store. The Company
anticipated that revenues would continue to be generated from customers
migrating to one of two Company stores located in the same vicinity.
Accordingly, the results of operations of that store are reported within
continuing operations. No impairment loss was recognized with respect to assets
related to the closed store in accordance with Statement of Financial Accounting
Standards No. 144, “Accounting for the Impairment or Disposal of Long-lived
Assets”. Also, no liability was recorded for the present value of the remaining
lease rentals reduced by estimated sublease rentals that could be reasonably
obtained for the closed store in accordance with Statement of Financial
Accounting Standards No. 146, “Accounting for Costs Associated with Exit or
Disposal Activities”.
During
the year-to-date ended August 1, 2009, the Company has closed a total of four
stores. The results of operations of three of these stores are included within
continuing operations. In connection with these store closures, the Company has
recognized a cumulative impairment loss of $0.1 million in accordance with
Statement of Financial Accounting Standards No. 144, “Accounting for the
Impairment or Disposal of Long-lived Assets”, and a cumulative liability of less
than $0.1 million in accordance with Statement of Financial Accounting Standards
No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities”.
During
the year to date ended August 2, 2008, the Company closed six stores (including
one in the second quarter) and sold four others (including three in the second
quarter). It is anticipated that revenues will continue to be generated from
customers of one of the six closed stores from the Company stores located in the
same vicinity. The Company will no longer have a presence in the vicinity of the
other five closed stores and have reported the results of operations of those
stores within discontinued operations. The results of operations of the four
stores that were sold are also included within discontinued operations. The
stores that were sold resulted in cash proceeds of $3.3 million and associated
gain on sale of leasehold and fixed assets of $1.3 million for the year to date
ended August 2, 2008. The Company obtained waivers related to the sale of store
assets in accordance with the terms of the credit facilities.
During
the year-to-date ended August 2, 2008, an impairment loss of $3.0 million
(including $0.4 million recognized in the second quarter) was recognized with
respect to assets related to closed stores. In addition, the Company recorded a
liability of $0.9 million representing the present value of the remaining lease
rentals reduced by estimated sublease rentals that could be reasonably obtained
for five of the six closed stores (one closed store location was owned by the
Company). Also, certain ongoing maintenance expenses related to the Company’s
former bakery manufacturing facilities, which it operationally closed on
February 2, 2008, are classified as discontinued operations in the quarter and
year-to-date ended August 2, 2008.
Discontinued
Operations
Discontinued
operations consist of the following for the quarters and year-to-date ended
August 1, 2009, and August 2, 2008 (in thousands):
|
|
|
Quarter
Ended
|
|
|
Year
to Date
|
|
|
|
|
August
1,
|
|
|
August
2,
|
|
|
August
1,
|
|
|
August
2,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bakery
- results of operations
|
|
$
|
-
|
|
|
$
|
(70
|
)
|
|
$
|
-
|
|
|
$
|
(80
|
)
|
|
Wholesale
food distribution - gain on sale of assets
|
|
|
(209
|
)
|
|
|
-
|
|
|
|
(209
|
)
|
|
|
-
|
|
|
Wholesale
food distribution - results of operations
|
|
|
-
|
|
|
|
1,368
|
|
|
|
-
|
|
|
|
2,156
|
|
|
Retail
stores - (loss) / gain on sale of assets
|
|
|
-
|
|
|
|
(251
|
)
|
|
|
-
|
|
|
|
1,139
|
|
|
Retail
stores - loss on store closings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(402
|
)
|
|
Retail
stores - asset impairment charge
|
|
|
-
|
|
|
|
(123
|
)
|
|
|
-
|
|
|
|
(1,918
|
)
|
|
Retail
stores - results of operations
|
|
|
(81
|
)
|
|
|
(1,443
|
)
|
|
|
(493
|
)
|
|
|
(3,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
$
|
(290
|
)
|
|
$
|
(519
|
)
|
|
$
|
(702
|
)
|
|
$
|
(2,227
|
)
|
Wholesale
food distribution results of operations include revenues of $59.4 million and
$112.5 million for the period and year to date ended August 2, 2008,
respectively. Retail stores results of operations include revenues of $19.5
million and $41.7 million for the period and year to date ended August 2, 2008,
respectively. Interest expense of $0.9 million and $1.7 million is included
within “Wholesale food distribution - results of operations” for the period and
year to date ended August 2, 2008, respectively. The amounts were based on the
principal amount of debt that was required to be paid with the proceeds from the
sale of the segment.
Note
8 – Retirement Plans
The
Company has three noncontributory defined benefit pension plans covering certain
union personnel. The Company’s policy is to fund pension benefits to the extent
contributions are deductible for tax purposes and in compliance with federal
laws and regulations.
The
following table provides the components of net periodic pension cost / (benefit)
(in thousands):
|
|
|
Quarter
Ended
|
|
|
Year
to Date
|
|
|
|
|
August
1,
|
|
|
August
2,
|
|
|
August
1,
|
|
|
August
2,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
269
|
|
|
$
|
313
|
|
|
$
|
538
|
|
|
$
|
626
|
|
|
Interest
cost
|
|
|
1,444
|
|
|
|
1,474
|
|
|
|
2,888
|
|
|
|
2,948
|
|
|
Expected
return on plan assets
|
|
|
(1,217
|
)
|
|
|
(1,593
|
)
|
|
|
(2,434
|
)
|
|
|
(3,186
|
)
|
|
Amortization
of unrecognized actuarial loss / (gain)
|
|
|
20
|
|
|
|
(236
|
)
|
|
|
40
|
|
|
|
(472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic pension cost / (benefit)
|
|
$
|
516
|
|
|
$
|
(42
|
)
|
|
$
|
1,032
|
|
|
$
|
(84
|
)
|
For the
quarters ended August 1, 2009 and August 2, 2008, the Company contributed $0.8
million and $0.6 million, respectively, to the defined benefit pension plans.
For the year to date ended August 1, 2009 and August 2, 2008, the Company
contributed $1.7 million and $1.4 million, respectively, to the defined benefit
pension plans.
The
Company maintains a 401(k) savings plan for eligible employees. The plan
provides for contributions by the Company for all employees not covered by other
union pension plans. The Company’s contributions aggregated $0.3 million and
$0.4 million for the quarters August 1, 2009 and August 2, 2008, respectively.
For the year to date ended August 1, 2009 and August 2, 2008, the Company
contributed $0.5 million and $0.7 million, respectively, to the 401(k)
plans.
The
Company also participates in three union-sponsored, multi-employer defined
benefit pension plans. The Company recognizes as net pension expense any
required contributions made during the period as well as any required amounts,
such as a withdrawal liability, that are due and unpaid, or for which it is
probable that such an obligation exists for the Company’s portion of the
unfunded benefit obligations. For the quarters ended August 1, 2009 and August
2, 2008, the Company made required contributions of $2.7 million and $1.2
million, respectively, to the multi-employer defined benefit pension plans. For
the year to date ended August 1, 2009 and August 2, 2008, the Company made
required contributions of $3.9 million and $2.4 million, respectively, to the
multi-employer defined benefit pension plans. During the quarter ended August 1,
2009, it became probable that a withdrawal liability obligation exists for the
Company’s portion of the unfunded benefit obligations of one of the three
multi-employer plans. Accordingly, the Company recorded a liability of $1.5
million related to this plan.
Approximately
88% of the Company’s employees are unionized, 93% of whom are members of one
union. We are party to fourteen collective bargaining agreements. As of August
1, 2009, five bargaining agreements are scheduled to expire during the next 12
months.
Note
9 – Commitments and Contingencies
The
United States Attorney Office for the Northern District of New York (the “USAO”)
and the Securities and Exchange Commission (“SEC”) have been conducting
investigations relating to certain of the Company’s accounting practices and
policies prior to the Company’s emergence from bankruptcy in April
2005.
On
September 30, 2008, the Company reached a settlement with the SEC with respect
to its ongoing investigation. Without admitting or denying the allegations in
the SEC’s complaint, the Company agreed to settle the charges by consenting to a
permanent injunction against any future violations of the federal securities
laws. The SEC imposed no fines or monetary penalties on the Company. As part of
the settlement, the Company has hired an independent examiner who will provide
annual reports to the SEC, the USAO and the Company’s board on, among other
things, the Company’s promotional-allowance internal controls and financial
reporting. The examiner will serve for three years. Other settlement terms
included the Company’s consent to reform its internal controls and policies and
procedures related to promotional allowances, as well as implementation of a
telephone hotline for associates and vendors to anonymously notify the Company
of misconduct related to promotional allowances.
On
October 28, 2008, the Company entered into a non-prosecution agreement with the
USAO. Under the agreement, the USAO has agreed not to prosecute the Company for
any crimes committed by its employees between 2001 and 2004 relating to the
matters that were the subject of the USAO’s previously announced investigation
of, among other things, the Company’s accounting policies, practices and related
conduct. The USAO’s obligations under the agreement are subject to a number of
conditions, including the Company’s:
·
acceptance of
responsibility for the conduct of its employees between 2001 and
2004;
·
adoption of the
remedial measures required under, and compliance with the terms of, the
previously announced settlement of the SEC’s investigation of the Company,
including its compliance with specified federal securities laws;
and
·
provision of full
cooperation to the USAO and Federal Bureau of Investigation with respect to
their ongoing investigations through the conclusion of any and all related
criminal trials.
If the
USAO determines that the Company has deliberately given false, incomplete or
misleading information under the agreement, or if the Company commits a crime or
otherwise knowingly, intentionally and materially violates any provision of the
agreement, then the Company may be subject to prosecution for any federal
criminal violation of which the USAO has knowledge, including any federal
criminal violation relating to the matters subject to the USAO’s investigation.
The Company agreed that any such prosecutions that are not time-barred by the
applicable statute of limitations on the date of the agreement may be commenced
against the Company notwithstanding the expiration of the statute of limitations
after the date of the agreement.
On
September 17, 2007, the SEC filed civil fraud charges against the Company’s
former Chief Marketing Officer and former Vice President, Non-Perishables
Marketing alleging that such individuals orchestrated a scheme to inflate the
Company’s income and other financial results by prematurely recognizing
promotional allowances received from vendors from approximately the second
quarter of fiscal year 2001 through at least the fourth quarter of fiscal year
2003. These officers had been terminated by the Company in February 2006. The
SEC's complaint further alleges that the individuals deceived the Company’s
accounting personnel to carry out their fraudulent scheme and aided and abetted
the Company’s violations of the Securities Exchange Act of 1934 and rules
thereunder. In addition, on the same date, the USAO announced that a federal
grand jury has returned an indictment against the above-mentioned individuals on
related criminal charges. On August 28, 2009, the two former employees pled
guilty to causing false and misleading information and reports to be filed with
the SEC; sentencing is scheduled for January 8, 2010.
The
Company has incurred significant legal costs associated with the USAO and SEC
investigations since their inception. These costs have been recorded in selling
and administrative expenses as incurred. As a result of the aforementioned
guilty pleas by the two former employees, the Company anticipates that its legal
costs, including individuals' legal reimbursement costs pursuant to an
advancement and indemnification obligation, will decrease beginning in the
current fiscal quarter and end altogether by the end of the fiscal
year.
On March
12, 2008, the Company commenced an action in the Supreme Court for the State of
New York for the County of Onondaga seeking declaratory judgment to resolve a
dispute over the lease term for commercial property pertaining to a store that
was closed in 2007. The Company is seeking an order declaring the proper and
effective lease termination date to be November 30, 2009, rather than June 30,
2017, the date asserted by the landlord. The Company estimates that the
increased rent expense for the additional lease term asserted by the landlord to
be approximately $2.8 million. At present, the Company is unable to estimate the
likelihood of an unfavorable outcome and accordingly, no liability has been
recorded for this contingency.
The
Company enters into various purchase commitments in the ordinary course of
business. In the opinion of management, no losses are expected to result from
these purchase commitments. In connection with the supply agreement for grocery
and other non-perishable merchandise, the Company is obligated to generate
annual fees of at least $3.0 million to the supplier. In connection with the
five-year supply agreement for general merchandise and health and beauty
products, the Company is obligated to pay a fee of 1.5% of the amount by which
purchases by the Company are less than $20 million in each six-month period
during the term of the agreement.
We
purchase substantially all of our retail merchandise from a single vendor. Any
material change in this vendor’s results of operation or a termination or
material modification of our contractual relationships could have an adverse
impact on our supply chain, sales, and earnings.
The
consideration received by the Company for the sale of the wholesale food
distribution business is subject to a true-up calculation based on the volume of
shipments to certain wholesale customers in the twelve months immediately
following the sale compared to the Company’s fiscal year ended February 2, 2008.
As a result of a shortfall in case volume, the Company recorded a liability of
less than $0.2 million during the quarter ended August 1, 2009, which is
reported within discontinued operations (see Note 7).
The
Company experienced a $2.1 million increase in workers' compensation expense
after one of its insurers asserted a right to several years' worth of
retrospective premium adjustments and effected a draw down of such amount from
collateral in the form of a standby letter of credit. The Company has disputed
the insurer's actions and is seeking restitution.
Note
10 – Stockholders’ Equity
On
December 15, 2006, the Company established the 2006 Omnibus Award Plan (the
“Award Plan”). Pursuant to the provisions of the Award Plan, the
Company can grant stock options, restricted stock, phantom stock and stock
appreciation rights. The number of shares of common stock that can be
granted are limited to 902,268 in the aggregate.
At August
1, 2009, there were 188,260 shares of phantom stock granted, 150,000 shares of
phantom stock forfeited (50,000 of which were forfeited during the quarter ended
August 1, 2009), and 38,260 shares of phantom stock outstanding to officers and
non-officer directors. There are no shares of phantom stock unvested
as of August 1, 2009. In accordance with Statement of Financial
Accounting Standards No. 123(R), “Share-Based Payment,” the awards are being
accounted for as compensation expense and a corresponding liability over the
period to settlement date based on changes in the value of the Company’s common
stock.
On May
14, 2009, the holder of 2,000 shares of Penn Traffic preferred stock elected to
convert their shares into shares of Penn Traffic common stock. In
accordance with the provisions of the preferred stock, the Company issued
138,156 shares of common stock to the holder on the date of
conversion.
Note
11 – Subsequent Events
The
Company has evaluated potential subsequent events through September 15, 2009,
which represents the date the financial statements were
issued. There were no events that occurred subsequent to
the date of the financial statements through the date of issuance that would
have had a significant impact on the financial statements and accompanying
notes.
ITEM
2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
The Penn
Traffic Company and its subsidiaries (the “Company”) are engaged in the retail
food business. As of August 1, 2009, we operated 79 stores
under the “P&C”, “Quality”, and “Bi-Lo” banners in upstate New York,
Pennsylvania, Vermont, and New Hampshire. We service these retail
stores through four distribution centers. Prior to December 21, 2008,
we also operated a Wholesale food distribution business that serviced
independent stores. On December 21, 2008, we completed the sale of
our Wholesale food distribution business segment, which allowed us to
significantly pay down our long-term debt, shed a low-margin business from the
Company, and, most importantly, to focus our resources and efforts on our Retail
Food business.
Our
primary objective is to enhance the in-store experience of our customers and
improve our long-term financial performance. Under the direction of
our senior team, we are focusing on rebuilding our core
business. This means re-establishing basic disciplines and
reemphasizing and instilling a much stronger profitable growth culture around
sales and margin, as well as delivering an increased economic return on
assets.
The
global economy has recently seen a pronounced economic downturn. Global
financial markets are continuing to experience disruptions, including severely
diminished liquidity and credit availability, declines in consumer confidence,
declines in economic growth, increases in unemployment rates, volatility in
interest and currency exchange rates and overall uncertainty about economic
stability. There may be further deterioration and volatility in the global
economy and the global financial markets. Although the economic downturn has
negatively impacted our operations in the year to date ended August 1, 2009, we
believe that the steps we’ve taken in the past twelve months have positioned the
Company to withstand the current economic climate.
The
following table sets forth certain Consolidated Statement of Operations
components expressed as percentages of revenues for the quarters and years to
date ended August 1, 2009 and August 2, 2008.
|
|
|
Quarter
Ended
|
|
|
Year
to Date
|
|
|
|
|
August
1, 2009
|
|
|
August
2, 2008
|
|
|
August
1, 2009
|
|
|
August
2, 2008
|
|
|
|
|
(unaudited)
|
|
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit (1)
|
|
|
30.8
|
%
|
|
|
30.3
|
%
|
|
|
30.9
|
%
|
|
|
30.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administrative expenses
|
|
|
33.3
|
%
|
|
|
30.9
|
%
|
|
|
33.9
|
%
|
|
|
32.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
/ (gain) on sale of assets
|
|
|
0.0
|
%
|
|
|
-0.1
|
%
|
|
|
0.0
|
%
|
|
|
-0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on store closings
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairment charge
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
-2.5
|
%
|
|
|
-0.6
|
%
|
|
|
-3.0
|
%
|
|
|
-2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
0.8
|
%
|
|
|
0.7
|
%
|
|
|
0.9
|
%
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization
and other expenses
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
-3.4
|
%
|
|
|
-1.3
|
%
|
|
|
-3.9
|
%
|
|
|
-3.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
-3.4
|
%
|
|
|
-1.4
|
%
|
|
|
-3.9
|
%
|
|
|
-3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
-0.1
|
%
|
|
|
-0.1
|
%
|
|
|
-0.2
|
%
|
|
|
-0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-3.5
|
%
|
|
|
-1.5
|
%
|
|
|
-4.1
|
%
|
|
|
-3.6
|
%
|
(1) Revenues
less cost of sales.
Quarter
Ended August 1, 2009 and Quarter Ended August 2, 2008
Revenues
Revenues
for the quarter ended August 1, 2009 decreased to $208.8 million from $228.3
million for the quarter ended August 2, 2008. The $19.5 million
decrease in revenues was mainly attributable to a reduction in the number of
stores reported within continuing operations, from 86 at August 2, 2008, to 79
at August 1, 2009, as well as a 6.8% decline in same store sales. The
Company monitors customer traffic counts and average items per order in order to
assess the causes for fluctuations in sales. While our customer
counts were down slightly, by less than 2.0%, our average items sold per
shopping order decreased more than 6.0% in the quarter ended August 1, 2009,
compared to the quarter ended August 2, 2008. We believe this is a
reflection of the economic downturn in the United States and particularly in the
markets we serve, many of which are experiencing unemployment rates in excess of
the national average.
Gross
Profit
Gross
profit was $64.2 million, or 30.8% of revenues, for the quarter ended August 1,
2009, compared to $69.2 million, or 30.3% of revenues, for the quarter
ended August 2, 2008. The $5.0 million decrease is primarily the
result of decreased sales discussed above. Gross profit percentage
increased 0.5%, reflecting slight decreases in commodity costs. We
estimate these decreased costs have increased gross profits by approximately
$1.1 million. We believe a portion of the decrease in our commodity
costs is due to our improved purchasing power as a result of entering into more
favorable supply agreements in the past twelve months.
Selling
and Administrative Expenses
Selling
and administrative expenses for the quarter ended August 1, 2009 were
$69.6 million, or 33.3% of revenues, compared to $70.5 million, or 30.9% of
revenues, for the quarter ended August 2, 2008. The $0.9 million
decrease in selling and administrative expenses is comprised primarily of
decreases in salary and wages of $1.3 million, utilities of $1.3 million,
advertising of $0.8 million, and other cost reductions of $1.1 million driven by
the reduction in stores and cost-reduction initiatives, offset by an increase in
workers’ compensation expense of $2.1 million (see Note 9 to the financial
statements) and the recognition of a withdrawal liability related to one of our
multi-employer pension plans of $1.5 million (see Note 8 to the financial
statements).
Depreciation
and Amortization
Depreciation
and amortization expense was $4.3 million, or 2.1% of revenues, for the quarter
ended August 1, 2009, compared to $5.7 million, or 2.5% of revenues, for the
quarter ended August 2, 2008. The $1.4 million decrease in
depreciation and amortization during the quarter ended August 1, 2009, was
primarily due to a $6.8 million write-down of intangible assets made in fiscal
year 2009 in conjunction with the recognition of deferred income tax benefits
attributable to the reversal of valuation allowance of pre-reorganization net
operating loss carry-forwards for prior years, as well as a decrease in gross
depreciable assets relating to the closure of 14 stores since the quarter ended
August 2, 2008.
Gain
on Sale of Assets and Loss on Store Closings
Gain on
sale of assets and loss on store closings totaled $0.1 million, or less than
0.1% of revenues, for the quarter ended August 1, 2009, compared to a net of
gain of $0.2 million, or less than 0.1% of revenues, for the quarter ended
August 2, 2008, due to the timing and proceeds of asset disposals.
Asset
Impairment Charge
There
were no asset impairment charges during the quarter ended August 1, 2009,
compared to $0.3 million, or less than 0.1% of revenues, for the quarter ended
August 2, 2008, which is reflective of the decrease in store closings year over
year.
Operating
Loss
Operating
loss for the quarter ended August 1, 2009, was $5.3 million, or 2.5% of
revenues, compared to the operating loss of $1.4 million, or 0.6% of revenues,
for the quarter ended August 2, 2008. The increase in operating
loss is primarily the result of the increase in workers’ compensation and
pension cost discussed above.
Interest
Expense
Interest
expense for the quarter ended August 1, 2009, was $1.6 million, or 0.8% of
revenues, compared to the interest expense of $1.3 million, or 0.7% of revenues,
for the quarter ended August 2, 2008. The increase is primarily the
result of miscellaneous financing and legal fees associated with the payment of
our revolving line of credit during the quarter ended August 1, 2009, as well as
increased amortization of deferred financing fees compared to the prior
year. Additionally, interest expense for the quarter ended August 2,
2008, excludes $0.9 million of interest expense attributable to the wholesale
business, which is included within discontinued operations.
Loss
from Continuing Operations before Income Taxes
Loss from
continuing operations before income taxes for the quarter ended August 1, 2009
was $7.1 million, or 3.4% of revenues, compared to $2.8 million, or 1.3% of
revenues, for the quarter ended August 2, 2008. The $4.4 million
increase in loss from continuing operations before income taxes is primarily due
the increase in workers’ compensation and pension cost discussed
above.
Discontinued
Operations
Loss from
discontinued operations for the quarter ended August 1, 2009, was $0.3 million,
or 0.1% of revenues, compared to $0.5 million, or 0.1% of revenues, for the
quarter ended August 2, 2008. The decrease reflects the decline in
store closings in the quarter ended August 1, 2009, compared to the quarter
ended August 2, 2008.
Net
Loss
Net loss
for the quarter ended August 1, 2009, was $7.3 million, or 3.5% of
revenues, compared to a net loss of $3.4 million, or 1.5% of revenues,
during the quarter ended August 2, 2008, primarily as the result of the decrease
in revenues and gross profit.
Year
to Date Ended August 1, 2009 and Year to Date Ended August 2, 2008
Revenues
Revenues
for the year to date ended August 1, 2009 decreased to $408.9 million from
$440.4 million for the year to date ended August 2, 2008. The $31.5
million decrease in revenues was mainly attributable to a reduction in the
number of stores reported within continuing operations, from 86 at August 2,
2008, to 79 at August 1, 2009, as well as a 5.9% decline in same store
sales.
Gross
Profit
Gross
profit was $126.5 million, or 30.9% of revenues, for the year to date ended
August 1, 2009, compared to $135.4 million, or 30.7% of revenues, for the year
to date ended August 2, 2008. The $8.9 million decrease is primarily the result
of decreased sales discussed. Gross profit percentage increased 0.2%, reflecting
slight decreases in commodity costs. We estimate these decreased costs have
increased gross profits by approximately $0.7 million. Additionally, sales of
our higher-margin private label and signature products continue to grow as a
percentage of our total revenue, from approximately 22% in the prior year to
approximately 23% in the current year.
Selling
and Administrative Expenses
Selling
and administrative expenses for the year to date ended August 1, 2009 were
$138.5 million, or 33.9% of revenues, compared to $144.7 million, or 32.9%
of revenues, for the year to date ended August 2, 2008. The $6.2
million decrease in selling and administrative expenses is comprised primarily
of decreases in payroll of $2.6 million, utilities of $2.0 million, advertising
of $1.8 million, retail management consulting fees of $1.7 million, and other
cost reductions of $1.7 million driven by the reduction in stores and
cost-reduction initiatives, offset by increases in workers’ compensation expense
of $2.1 million (see Note 9 to the financial statements) and multi-employer
pension withdrawal liability of $1.5 million (see Note 8 to the financial
statements). The overall decrease in selling and administrative expenses
was largely driven by the closure of stores detailed
above. Additionally, we are continuing to see the positive impact of
cost-reduction initiatives implemented during fiscal years 2009 and
2010.
Depreciation
and Amortization
Depreciation
and amortization expense was $9.3 million, or 2.3% of revenues, for the year to
date ended August 1, 2009, compared to $11.4 million, or 2.6% of revenues, for
the year to date ended August 2, 2008. The decrease during the year
to date ended August 1, 2009, was primarily due to a $6.8 million write-down of
intangible assets made in fiscal year 2009 in conjunction with the recognition
of deferred income tax benefits attributable to the reversal of valuation
allowance of pre-reorganization net operating loss carry-forwards for prior
years, as well as a decrease in gross depreciable assets relating to the closure
of 14 stores since the year to date ended August 2, 2008.
Gain
on Sale of Assets and Loss on Store Closings
Gain on
sale of assets and loss on store closings was $0.1 million, or less than 0.1% of
revenues, for the year to date ended August 1, 2009, compared to a net of gain
of $0.1 million, or 0.1% of revenues, for the year to date ended August 2, 2008,
due to the timing and proceeds of asset disposals.
Asset
Impairment Charge
Asset
impairment charge was $0.1 million, or less than 0.1% of revenues, for the year
to date ended August 1, 2009, compared to $1.1 million, or less than 0.1% of
revenues, for the year to date ended August 2, 2008, which reflects the
decrease in store closings year over year.
Operating
Loss
Operating
loss for the year to date ended August 1, 2009, was $12.1 million, or 3.0% of
revenues, compared to the operating loss of $10.3 million, or 2.3% of revenues,
for the year to date ended August 2, 2008. The increase in
operating loss is primarily the result of the increase in workers’ compensation
and pension cost discussed above.
Interest
Expense
Interest
expense for the year to date ended August 1, 2009, was $3.7 million, or 0.9% of
revenues, compared to the interest expense of $2.9 million, or 0.7% of revenues,
for the year to date ended August 2, 2008. The increase is primarily
the result of miscellaneous financing and legal fees associated with the payment
of our revolving line of credit during the year to date ended August 1, 2009, as
well as increased amortization of deferred financing fees compared to the prior
year. Additionally, interest expense for the year to date ended
August 2, 2008, excludes $1.7 million of interest expense attributable to the
wholesale business, which is included within discontinued
operations.
Loss
from Continuing Operations before Income Taxes
Loss from
continuing operations before income taxes for the year to date ended August 1,
2009 was $16.0 million, or 3.9% of revenues, compared to $13.3 million, or 3.1%
of revenues, for the year to date ended August 2, 2008. The $2.9
million increase in loss from continuing operations before income taxes is
primarily due the increase in workers’ compensation and pension cost discussed
above.
Discontinued
Operations
Loss from
discontinued operations for the year to date ended August 1, 2009, was $0.7
million, or 0.2% of revenues, compared to $2.3 million, or 0.5% of revenues, for
the year to date ended August 2, 2008. The decrease reflects the
decline in store closings in the year to date ended August 1, 2009 compared to
the year to date ended August 2, 2008.
Net
Loss
Net loss
for the year to date ended August 1, 2009, was $16.6 million, or 4.1% of
revenues, compared to a net loss of $15.8 million, or 3.6% of revenues,
during the year to date ended August 2, 2008, primarily as the result of the
decrease in revenues and gross profit.
Liquidity
and Capital Resources
Overview
As of
August 1, 2009, we had cash and cash equivalents of $32.4 million and total debt
outstanding of $27.7 million (consisting of $6.0 million in a term loan
facility, $10.0 million in a supplemental real estate credit facility, $3.5
million in mortgages payable, and $8.2 million in capital lease
obligations). We also have a $50.0 million revolving credit
commitment.
Our
credit facilities currently mature in April of 2010. We have engaged
an outside firm to assist us in assessing our financing needs and reviewing
alternatives for refinancing our credit facilities. We currently
believe we will obtain the necessary financing by April 2010, and that our
existing cash on hand, combined with available borrowings under replacement
credit facilities and other sources of cash will be sufficient to satisfy our
currently anticipated cash requirements for at least the next 12
months. However, we cannot be certain that future events or
developments, including, but not limited to, customer trip consolidation,
decreased customer counts, continued economic and financial volatility, and the
inability to extend or obtain current or new financing, will not change that
assessment.
Financial
Results
Operating
Activities
Cash used
in operating activities for the year to date ended August 1, 2009, was $3.4
million compared to cash used in operating activities of $14.1 million for the
year to date ended August 2, 2008. For the year to date ended August
1, 2009, we incurred a net loss of $16.6 million, adjustments for non cash items
of $10.1 million, and a net decrease in operating assets of $3.1 million, driven
primarily by inventory. For the year to date ended August 2, 2008, we
incurred a net loss of $15.5 million, adjustments for non-cash items of $13.8
million, and a net increase in operating assets of $12.1 million.
Investing
Activities
Cash used
in investing activities for the year to date ended August 1, 2009, was $2.8
million compared to cash used in investing activities of $0.1 million for the
year to date ended August 2, 2008. The $2.8 million increase was
due to a decrease in proceeds from the sale of fixed assets ($0.2 million
compared to $4.2 million), the result of closing fewer stores in the year
to date ended August 1, 2009.
Financing
Activities
Cash used
in financing activities for the years to date ended August 1, 2009, and August
2, 2008, was $17.9 million and $1.9 million, respectively. The
increase primarily reflects the $17.0 million payment of our revolving line of
credit during the year to date ended August 1, 2009.
Borrowings
The
Company maintains a revolving credit and term loan facility with a group of
financial institutions providing for a $50 million revolving credit
facility commitment which includes a maximum sub-limit commitment for letters of
credit of $47.5 million, and a $6 million term loan. The Company
also maintains a supplemental real estate credit facility with another group of
lenders, providing for additional term loan borrowings of up to
$10 million. The maturity date of both facilities is April 13,
2010. Borrowings under the revolving credit and term loan facility
are secured by substantially all the assets of the Company, subject to first
liens on certain property by other lenders. Borrowings under the real estate
facility are secured by a first lien on substantially all leasehold interests of
the Company, and a second lien on real estate owned by the
Company. Availability under both credit facilities is dependent on
levels of eligible accounts receivable, inventory and certain other
assets. On February 6, 2009, the Company repaid the entire
outstanding balance of $17.0 million on the revolving credit
facility.
Provisions
of both credit facilities require the maintenance of $13.5 million of
availability under the revolving credit facility and limit, among other things,
the assumption of additional debt and the payment of
dividends. Availability is based on a calculation of the Company’s
asset borrowing base less outstanding borrowings and letters of credit, which is
also increased by certain cash deposits totaling $28.0 million at August 1,
2009. Outstanding letters of credit under the revolving credit
facility, which are primarily associated with supporting workers’ compensation
obligations, were approximately $37.6 million at August 1,
2009. Total availability in excess of outstanding borrowings and
letters of credit was approximately $26.1 million at August 1, 2009,
leaving us $12.6 million above the minimum requirement. Actual
borrowings are limited to the $50 million credit commitment and the $47.5
million letter of credit sub-limit. Revolving loan advances in excess
of outstanding balances are at the discretion of the lenders.
The
Company also has $3.5 million in borrowings under mortgages that mature at
various dates through 2021 and are secured by first liens on the related
properties.
Off-Balance
Sheet Arrangements
We do not
have any material off-balance sheet arrangements.
Critical
Accounting Policies
Preparation
of our financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
and expenses. Critical accounting policies are those accounting
policies that are important to the portrayal of our financial condition 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. Our significant accounting policies are
summarized in Note 1 to the consolidated financial statements in our Annual
Report on Form 10-K for the year ended January 31, 2009. There have
been no significant changes in our critical accounting estimates during the year
to date ended August 1, 2009.
We
believe the following accounting policies to be critical and could result in
materially different amounts being reported under different conditions or using
different assumptions.
Store
Closing Costs
Store
closing costs are recorded in accordance with Statement of Financial Accounting
Standard No. 146, “Accounting for Costs Associated with Exit and Disposal
Activities” (“SFAS 146”). We record a liability for the
estimated future cash flows (including future lease commitments, net of
estimated cost recoveries) and miscellaneous closing costs. Future
cash flows are estimated based on our knowledge of the market in which the
closed stores are located. The estimates of future cash flows are
then discounted to present value, based on the credit-adjusted risk-free rate of
interest. These estimates of discounted future cash flows could be
affected by changes in real estate markets, other economic conditions, and the
interest rate used in such calculations. Any one-time termination
benefits are recognized at the time the benefits are communicated to the
employees. Other related costs are recognized in the period when the
liability is incurred.
Impairment
of Long-Lived Assets
In
accordance with Statement of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), we review our
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be
recoverable. The carrying value of an asset is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset. In estimating future cash
flows, management considers historical performance and assesses the effect of
projected changes in competition, maturation of new stores and store remodels,
merchandising and marketing strategies, and general market
conditions. No assurance can be given that the actual future cash
flows will be sufficient to recover the carrying value of long-lived
assets.
In the
event that the carrying value of an asset is both not recoverable and exceeds
fair value, the asset is written down to its fair value. Fair values
are determined either by management, based on management’s knowledge of local
real estate markets and the value of equipment utilized in the supermarket
industry, or by an independent third-party valuation firm. Any
reductions in the carrying value of an asset resulting from the application of
this policy are reflected in the Consolidated Statement of Operations as an
“asset impairment charge.”
Inventories
Our
inventories are stated at the lower of cost or market. We follow the
link-chain, dollar-value LIFO method when calculating our LIFO charge or
credit. Vendor allowances, including early payment discounts, volume
rebates, and funds for product placement and advertising, are generally recorded
as a reduction of inventory cost based on average inventory turnover rates by
product category.
We take
physical counts of inventories throughout the year and record inventory
shortages based on our physical counts. Where physical counts are not
available, we record an allowance for inventory shortages based on historical
shrinkage percentages.
Intangible
Assets
We have
recorded intangible assets for favorable leases, pharmacy prescription files,
computer software, and goodwill. We amortize our favorable leases
over the remaining life of the lease including all favorable
options. We amortize both the pharmacy prescription files and the
computer software over five years. We consider these assets during
our SFAS 144 impairment testing. Our intangible assets were reduced
by approximately $6.8 million during fiscal year 2009 as a result of the
application of Statement of Financial Accounting Standard No. 109 (“SFAS
109”). To the extent net operating loss carryforwards or deductible
temporary differences arising prior to the Company’s emergence from Chapter 11
proceedings for which a valuation allowance has been provided are realized, the
resulting benefits have been allocated to reduce intangible assets.
Allowance
for Doubtful Accounts
We
evaluate the collectability of our accounts and notes receivable based on our
analysis of past due accounts and historical loss trends. We record
an allowance for doubtful accounts against the receivable based on the amount
that we believe is reasonably collectible. It is possible that our
estimation process could differ materially from the actual amounts
collected.
Income
Taxes
Income
taxes are provided based on the liability method of
accounting. Deferred income taxes are recorded to reflect the tax
consequences in future years of net operating loss carryovers and temporary
differences between the tax basis of assets and liabilities and their
corresponding financial reporting amounts at each year-end.
Self-Insurance
Liability
We are
primarily self-insured for workers’ compensation and general liability
claims. Self-insurance liabilities are primarily calculated based on
claims filed and an estimate of claims incurred but not yet
reported. Workers’ compensation and general liability reserves are
determined based on historical loss history, industry development factors and
trends related to actual payments. We have limited our total exposure
related to self-insured liability claims incurred by maintaining stop-loss
coverage with third party insurers, as defined in the applicable insurance
policies, for claims incurred in excess of established stop-loss levels and
policy deductibles. Projection of losses concerning these liabilities
is subject to a high degree of variability due to factors such as claim
settlement patterns, litigation trends, legal interpretations and future levels
of health care. Should a greater amount of claims occur compared to
what was estimated or costs of health care increase beyond what was anticipated,
reserves recorded may not be adequate and additional expense could be required
in the consolidated financial statements.
Vendor
Allowances
Vendor
allowances relating to our purchasing and merchandising functions are recorded
as a reduction of cost of sales as they are earned based on each specific
agreement and its associated event date. Our inventory is adjusted
for these vendor allowances following EITF Abstract Issue No. 02-16, “Accounting
by a Customer for Certain Consideration Received from a Vendor” (“EITF 02-16”),
based on the allowance event date and the inventory turns for the specific
department. These vendor allowances come in many
forms: promotional allowances tied to weekly advertised items which
are recognized when the inventory is sold, warehouse slotting allowances which
are recorded when the item has been distributed to the stores and are available
for sale to the consumer, long-term contractual agreements such as exclusivity
programs or signing bonuses which are recognized on a straight-line basis over
the life of the agreement, volume incentive agreements which are recognized when
the incentive is deemed probable and estimable based on purchase or sales
targets, and allowances for running items in our weekly ad which are recognized
at the end of the ad week. Cash discounts for prompt payments of
invoices are also recorded as a reduction in cost of sales when the payment is
made to the vendor.
Defined
Benefit Pension Plans
In
accordance with the provisions of SOP 90-7, upon emergence from bankruptcy, the
Company recorded the underfunded status of each of the defined benefit pension
plans as a liability on the balance sheet. The Company elected early
application and adopted Statement of Financial Accounting Standards No. 158,
“Employers’ Accounting for Defined Benefit Pension Plans and Other
Postretirement Plans” (“SFAS 158”), effective as of
January 28, 2006. The Company adjusted the liability
account to reflect the underfunded status of the plans in its balance sheet at
that date. Any gains or losses that arise during the period but are
not recognized as components of net periodic pension (benefit) / cost are
recognized as a component of other comprehensive income / (loss). The
Company measures its plan assets and benefit obligations at its
year-end.
Recent
Accounting Pronouncements
See Note
2 to the Consolidated Condensed Financial Statements for a discussion of new
accounting pronouncements.
ITEM
3. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
Our
financial results are subject to risk from interest rate changes on debt that
has variable interest rates. Total variable rate debt outstanding under our loan
agreements at August 1, 2009, was $16.0 million with a weighted average interest
rate of 12.5%. A 1.0% change in interest rates under our credit
facilities would impact pre-tax income by $0.2 million on an annual basis,
based on the debt outstanding August 1, 2009. In addition to the
variable rate debt, we had $3.5 million of fixed rate debt outstanding at August
1, 2009 with a weighted average interest rate of 6.5%. We view the
fixed rate debt as a partial hedge against interest rate
fluctuations.
ITEM
4T. CONTROLS AND PROCEDURES
Disclosure
controls and procedures under Rule 13a-15(e) of the Securities Exchange Act of
1934 (the “Exchange Act”) are those controls and other procedures of a company
that are designed to ensure that information required to be disclosed by the
company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rule and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports it files or
submits under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
Pursuant
to Rule 13a-15(e) under the Exchange Act, our management evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures with the participation of our principal executive and principal
financial officers. Based on their current observations, these
members of management, with input, where appropriate, from members of the audit
committee, have concluded that our disclosure controls and procedures were
effective as of August 1, 2009, in providing reasonable assurance that material
information requiring disclosure was brought to management’s attention on a
timely basis and that our financial reporting was reliable.
Change
in our Internal Control over Financial Reporting
There
have been no changes during the quarter ended August 1, 2009, that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART
II – OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
Reference
is made to Item 3 of the Company’s Annual Report on Form 10-K for the year ended
January 31, 2009, and to Note 9 to the Consolidated Condensed Financial
Statements included in Part I of this Report on Form 10-Q.
ITEM
6. EXHIBITS
The
following are filed as Exhibits to this Report:
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Exhibit No.
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Description
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31.1
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Certification
of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities
Exchange Act of 1934, as amended.
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31.2
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Certification
of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities
Exchange Act of 1934, as amended.
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32.1
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Certification
of CEO pursuant to Rule 13a-14(b) under the Securities Exchange Act of
1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United
States Code.
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32.2
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Certification
of CFO pursuant to Rule 13a-14(b) under the Securities Exchange Act of
1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United
States Code.
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Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
THE
PENN TRAFFIC COMPANY
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By:
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/s/
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Gregory J. Young
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Name:
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Gregory
J. Young
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Title:
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Chief
Executive Officer and President
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By:
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/s/
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Tod A. Nestor
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Name:
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Tod
A. Nestor
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Title:
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Senior
Vice President and Chief Financial
Officer
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