Friday, June 09, 2000 6:55:29 PM
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTER ENDED COMMISSION FILE NUMBER
APRIL 29, 2000 1-5287
PATHMARK STORES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2879612
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 MILIK STREET 07008
CARTERET, NEW JERSEY (Zip Code)
(Address of principal executive offices)
(732) 499-3000
(Registrant's telephone number, including area code)
-------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
JUNIOR SUBORDINATED DEFERRED COUPON NOTES DUE 2003
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
-------------------
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
---------- ----------
As of June 1, 2000, there were outstanding 100 shares of Common Stock, $0.10
par value, all of which are privately owned and not traded on a public market.
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands)
13 WEEKS ENDED
-------------------------
APRIL 29, MAY 1,
2000 1999
---------- ----------
Sales $ 919,196 $ 894,457
Cost of sales (exclusive of depreciation
and amortization shown separately below) 661,544 639,473
---------- ----------
Gross profit 257,652 254,984
Selling, general and administrative expenses 217,833 206,509
Depreciation and amortization 18,928 18,203
---------- ----------
Operating earnings 20,891 30,272
Interest expense (42,124) (39,504)
---------- ----------
Loss before income taxes (21,233) (9,232)
Income tax provision (16) (9)
---------- ----------
Net loss $ (21,249) $ (9,241)
========== ==========
See notes to consolidated financial statements (unaudited).
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
APRIL 29, JANUARY 29,
2000 2000
------------ ------------
ASSETS
Current assets
Cash $ 12,802 $ 15,906
Accounts receivable, net 14,197 15,787
Income taxes receivable 407 707
Merchandise inventories 151,691 141,559
Deferred income taxes, net 3,002 3,223
Prepaid expenses 21,738 21,183
Due from suppliers 47,858 53,975
Other current assets 16,754 18,254
------------ ------------
Total current assets 268,449 270,594
Property and equipment, net 466,019 472,157
Deferred financing costs, net 11,657 11,805
Deferred income taxes, net 44,091 43,870
Other noncurrent assets 47,406 43,953
------------ ------------
$ 837,622 $ 842,379
------------ ------------
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities
Accounts payable and book overdrafts $ 80,759 $ 89,434
Current maturities of long-term debt 1,343,670 78,982
Accrued payroll and payroll taxes 45,463 50,766
Current portion of lease obligations 24,286 25,192
Accrued interest payable 53,830 26,850
Accrued expenses and other current liabilities 84,966 80,067
------------ ------------
Total current liabilities 1,632,974 351,291
------------ ------------
Long-term debt -- 1,264,103
------------ ------------
Lease obligations, long-term 181,488 173,289
------------ ------------
Other noncurrent liabilities 207,805 216,739
------------ ------------
Commitments and contingencies
Stockholder's deficiency
Common stock, $0.10 par value -- --
Authorized, issued and outstanding: 100 shares
Paid-in capital 77,878 76,579
Accumulated deficit (1,227,697) (1,205,980)
Note receivable from PTK Holdings, Inc. (34,826) (33,642)
------------ ------------
Total stockholder's deficiency (1,184,645) (1,163,043)
------------ ------------
$ 837,622 $ 842,379
============ ============
See notes to consolidated financial statements (unaudited).
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY (UNAUDITED)
(in thousands)
NOTE
RECEIVABLE
FROM PTK TOTAL
COMMON PAID-IN ACCUMULATED HOLDINGS, STOCKHOLDER'S
STOCK CAPITAL DEFICIT INC. DEFICIENCY
----- ----------- ------------ ------------ ------------
Balance, January 30, 1999 $-- $ 71,897 $(1,174,554) $ (29,249) $(1,131,906)
Net loss -- -- (31,426) -- (31,426)
Accretion on note receivable from
PTK Holdings, Inc. -- 4,393 -- (4,393) --
Capital contribution from SMG-II
Holdings Corporation -- 289 -- -- 289
----- ----------- ------------ ------------ ------------
Balance, January 29, 2000 -- 76,579 (1,205,980) (33,642) (1,163,043)
Net loss -- -- (21,249) -- (21,249)
Accretion on note receivable from
PTK Holdings, Inc. -- 1,184 -- (1,184) --
Capital contribution from SMG-II
Holdings Corporation -- 115 -- -- 115
Assumption of affiliate liability -- -- (468) -- (468)
----- ----------- ------------ ------------ ------------
Balance, April 29, 2000 $-- $ 77,878 $(1,227,697) $ (34,826) $(1,184,645)
===== =========== ============ ============ ============
See notes to consolidated financial statements (unaudited).
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
13 WEEKS ENDED
----------------------------
APRIL 29, MAY 1,
2000 1999
--------- ---------
Operating Activities
Net loss $(21,249) $ (9,241)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Depreciation and amortization 21,072 19,045
Interest accruable but not payable 8 5,597
Amortization of original issue discount 89 89
Amortization of deferred financing costs 1,108 1,084
Gain on sale or disposal of property and equipment (1,801) (382)
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net 1,590 929
Income taxes receivable 300 (303)
Merchandise inventories (10,132) (7,307)
Due from suppliers 6,117 2,558
Other current assets (1,186) (3,946)
Noncurrent assets (3,482) (3,605)
Accounts payable (12,005) (4,498)
Accrued interest payable 26,995 18,315
Accrued expenses and other current liabilities (404) (8,611)
Noncurrent liabilities (8,697) (8,383)
--------- ---------
Cash provided by (used for) operating activities (1,677) 1,341
--------- ---------
Investing Activities
Property and equipment expenditures (9,282) (12,179)
Proceeds from sale or disposal of property and equipment 9,799 880
--------- ---------
Cash provided by (used for) investing activities 517 (11,299)
--------- ---------
Financing Activities
Increase in working capital facility borrowings 6,700 11,900
Repayments of the term loan (5,229) (1,892)
Repayment of other long-term debt (982) (605)
Increase in book overdrafts 3,330 6,549
Reduction in lease obligations (4,803) (4,714)
Deferred financing costs (960) (427)
--------- ---------
Cash provided by (used for) financing activities (1,944) 10,811
--------- ---------
Increase (decrease) in cash (3,104) 853
Cash at beginning of period 15,906 7,661
--------- ---------
Cash at end of period $ 12,802 $ 8,514
========= =========
Supplemental Disclosures of Cash Flow Information
Interest paid $ 13,892 $ 14,358
========= =========
Income taxes paid $ 16 $ 342
========= =========
Noncash Investing and Financing Activities
Capital lease obligations $ 12,503 $ 13,840
========= =========
//
See notes to consolidated financial statements (unaudited).
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1-MANAGEMENT'S FINANCIAL RESTRUCTURING PLAN
The consolidated financial statements of Pathmark Stores, Inc. (the
"Company") indicated that, at April 29, 2000, current liabilities exceeded
current assets by $1.4 billion and the stockholder's deficiency was $1.2
billion. Historically, cash flows generated from operations, supplemented by the
unused borrowing capacity under the Company's working capital facility and the
availability of capital lease financing were sufficient to pay the Company's
debts as they came due, provide for its capital expenditure program and meet its
other cash requirements.
Management evaluated its Fiscal 2000 cash flow projections and debt service
requirements and based upon this evaluation, the Company does not anticipate
making all of its scheduled debt payments. The Company's Fiscal 2000 debt
requirements increase substantially over the prior year due primarily to the
semi-annual interest payments of $12.1 million on the 10.75% Junior Subordinated
Deferred Coupon Notes (the "Junior Subordinated Notes") which, for the first
time, was required to be paid in cash on May 1, 2000 and the sinking fund
payment of $50.0 million on the 11.625% Subordinated Notes due 2002
("Subordinated Notes") on June 15, 2000.
On May 1, 2000, the Company elected not to make interest payments of
$21.2 million on its $440 million of 9.625% Senior Subordinated Notes due
2003 (the "Senior Subordinated Notes") and $12.1 million on its Junior
Subordinated Notes. On May 31, 2000, the grace period under each of the
Indentures governing the Senior Subordinated Notes and Junior Subordinated
Notes expired. The failure to make these scheduled interest payments
constitutes an Event of Default under the Indentures governing the applicable
bonds and also constitutes an Event of Default pursuant to the Credit
Agreement. In addition, the Company was not in compliance with several of its
financial covenants under the Credit Agreement at April 29, 2000 and based on
management's projections, the Company believes that it most likely will not
comply with such covenants throughout Fiscal 2000. However, the Company and its
lenders under the Credit Agreement have entered into a Waiver Agreement
pursuant to which said lenders have agreed to waive compliance by the Company
with certain provisions of the Credit Agreement through July 29, 2000,
including financial covenants and any Event of Default to the extent arising
out of a failure to pay any material indebtedness. As a result of such
defaults, the Company's long-term debt in the amount of $1.3 billion became
due currently and has been classified as current at April 29, 2000.
On March 22, 2000, the Company disclosed that it had retained Wasserstein
Perella & Co. to assist it in developing a financial restructuring plan and
that an ad hoc committee of its bondholders (the "Bondholder Committee") had
been formed. The Company commenced discussions with the Bondholder Committee
towards developing a consensual financial restructuring plan. The Company
announced on June 2, 2000 that it had reached an agreement with the
Bondholder Committee regarding a financial restructuring plan of the Company.
Members of the Bondholder Committee hold or control $445.7 million principal
amount, or approximately 46% of the Company's total bond indebtedness
outstanding, including over 37% of the outstanding principal amount of the
Senior Subordinated Notes, 48% of the outstanding principal amount of the
Subordinated Notes, 65% of the outstanding principal amount of the 12.625%
Subordinated Debentures due 2002 (the "Subordinated Debentures") and 49% of
the outstanding principal amount of the Junior Subordinated Notes.
Solicitation of acceptances of the financial restructuring plan, to be
accomplished through a prepackaged plan of reorganization (the "Prepackaged
Plan"), commenced on June 8, 2000. The Prepackaged Plan provides that, upon
consummation of the reorganization, current holders of the Company's bond
indebtedness will receive 100% of the opening common stock of the reorganized
Company ("New Common Stock"). Such ownership is subject to dilution from (1)
the exercise of ten-year warrants to purchase 15% of the diluted New Common
Stock of the reorganized Company (the "New Warrants"), (2) the exercise of
any options to purchase New Common Stock issued pursuant to the Company's
long-term management incentive plan, and (3) the grant to the Chief Executive
Officer of restricted New Common Stock. In addition to New Common Stock,
holders of the Subordinated Notes, the Subordinated Debentures and the Junior
Subordinated Notes will receive New Warrants. The New Warrants will be
exercisable at the opening reorganization equity value established in
connection with the Prepackaged Plan.
Pursuant to the Prepackaged Plan and in full satisfaction of their
claims, (1) holders of Senior Subordinated Notes will receive 77.57% of the
New Common Stock (2) holders of Subordinated Notes and Subordinated
Debentures will receive their ratable share of 19.29% of the New Common Stock
and 75% of the New Warrants, (3) holders of Junior Subordinated Notes will
receive 2.97% of the New Common Stock and 25% of the New Warrants, and (4)
holders of approximately $0.98 million of 11.625% Supermarkets General
Holdings Corporation ("Holdings") Subordinated Notes due 2002, which
Subordinated Notes are guaranteed by the Company, will receive 0.17% of the
New Common Stock, subject to dilution as described in the preceding paragraph.
The Prepackaged Plan provides that holders of Holdings' Cumulative
Exchangeable Redeemable Preferred Stock ("Exchangeable Preferred Stock") are
to receive their ratable portions of cash of $0.5 million payable upon the
effective date of the Prepackaged Plan.
As part of the Prepackaged Plan, trade creditors will not be affected and
there will be no employee layoffs.
The Company is seeking to obtain acceptances from a majority in number of
holders and at least 66-2/3% of the dollar amount of each class of bonds
voting on the Prepackaged Plan. Unless extended by the Company, the voting
deadline with respect to the Prepackaged Plan is July 7, 2000. Upon the
requisite acceptances being obtained, it is the Company's intention to
promptly file the Prepackaged Plan under Chapter 11 of the U.S. Bankruptcy
Code and to exit from Bankruptcy in the third quarter of this year.
In connection with its financial restructuring plan, the Company received
a commitment from The Chase Manhattan Bank for a $75 million
debtor-in-possession ("DIP") financing facility in support of the Prepackaged
Plan and a $600 million senior secured credit facility (the "Exit
Financing"). The DIP financing, which is subject to approval by the
Bankruptcy Court, will enable the Company to continue normal business
operations during the restructuring proceedings. The Exit Financing will be
used to repay in full the existing Credit Agreement and the DIP financing
facility, pay expenses of the Prepackaged Plan and will provide approximately
$200 million of liquidity for its post-reorganization operations.
The consolidated financial statements of the Company presented herein
reflect $5.1 million of professional fees related to the financial
reorganization, of which $4.2 million is included in accrued expenses.
NOTE 2-ORGANIZATION AND BASIS OF PRESENTATION
The Company operated 135 supermarkets as of April 29, 2000, primarily in the
New York, New Jersey and Philadelphia metropolitan areas, and is a wholly owned
subsidiary of PTK Holdings, Inc. ("PTK") and an indirect wholly owned subsidiary
of Holdings. Holdings is a wholly owned subsidiary of SMG-II Holdings
Corporation ("SMG-II").
The unaudited consolidated financial statements included herein have been
prepared by the Company in accordance with the same accounting principles
followed in the presentation of the Company's annual financial statements for
the year ended January 29, 2000, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
consolidated financial statements included herein reflect all adjustments
which are of a normal and recurring nature and are necessary to present
fairly the results of operations and financial position of the Company. This
report should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended January 29, 2000.
Income taxes for the interim period are based on the estimated effective tax
rate expected to be applicable for the full fiscal year. The Company has
recorded a valuation allowance related to the income tax benefit for the first
quarters of Fiscal 2000 and Fiscal 1999; therefore, no income tax benefit has
been recognized.
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 3-LONG-TERM DEBT
Long-term debt is comprised of the following (dollars in thousands):
APRIL 29, JANUARY 29,
2000 2000
----------- -----------
Term Loan ("Term Loan") $ 236,213 $ 241,442
Working Capital Facility ("Working Capital Facility") 116,500 109,800
9.625% Senior Subordinated Notes due 2003 ("Senior Subordinated Notes") 438,933 438,844
11.625% Subordinated Notes due 2002 ("Subordinated Notes") 199,017 199,017
12.625% Subordinated Debentures due 2002 ("Subordinated Debentures") 95,750 95,750
10.75% Junior Subordinated Deferred Coupon Notes due 2003
("Junior Subordinated Notes") 225,141 225,133
Debt payable to Holdings 983 983
Industrial revenue bonds 8,195 8,217
Other debt (primarily mortgages) 22,938 23,899
----------- -----------
Total debt 1,343,670 1,343,085
Less: current maturities 1,343,670(a) 78,982
----------- -----------
Long-term portion $ -- $1,264,103
=========== ===========
- ---------
(a) Current maturities would have been $125.8 million without the Event of
Default (see Note 1).
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 4-INTEREST EXPENSE
Interest expense is comprised of the following (dollars in thousands):
13 WEEKS ENDED
--------------------------
APRIL 29, MAY 1,
2000 1999
--------- --------
Term Loan $ 5,180 $ 4,837
Working Capital Facility 2,268 1,101
Senior Subordinated Notes
Amortization of original issue discount 89 89
Currently payable(a) 10,587 10,587
Subordinated Notes 5,813 5,813
Subordinated Debentures 3,022 3,022
Junior Subordinated Notes
Accrued but not payable 8 5,597
Currently payable(a) 6,053 --
Amortization of debt issuance costs 1,108 1,084
Lease obligations 5,367 5,102
Other, net 2,629 2,272
------- -------
Interest expense $42,124 $39,504
------- -------
- ---------
(a) See Note 1.
NOTE 5-COMMITMENTS AND CONTINGENCIES
RICKEL:
In connection with the sale of its home centers segment in Fiscal 1994,
the Company, as lessor, entered into ten leases for certain of the Company's
owned real estate properties, including a distribution center, with Rickel as
tenant. In addition, the Company assigned 25 third-party leases to Rickel. In
1996, Rickel filed for bankruptcy protection under Chapter 11 of the United
States Bankruptcy Code. Subsequent to the bankruptcy filing, of the 35 locations
leased to Rickel, 16 leases were assigned by Rickel in 1998 to Staples, Inc.,
13 leases have either been terminated, sold or assigned to third parties,
including Rickel's distribution center which was sold by the Company during
Fiscal 1998, and six leases, which were rejected, are being actively marketed
by the Company to other prospective tenants.
Management has assessed its exposure with respect to this matter and has
concluded that it has sufficient reserves to cover any resulting liability which
may occur, including the future rent and real estate taxes, net of expected
recoveries.
INFORMATION SERVICES OUTSOURCING:
In August 1991, the Company entered into a ten-year agreement with IBM to
provide a wide range of information systems services. Under the agreement, IBM
has taken over the Company's data center operations and mainframe processing and
information system functions and is providing business applications and systems
designed to enhance the Company's customer service and efficiency. The charges
under this agreement are based upon the services requested at predetermined
rates. The Company may terminate the agreement upon 90 days notice with payment
of a specified termination charge. The Company is in discussions with IBM for an
extension of the agreement.
OTHER:
The Company is a party to a number of legal proceedings in the ordinary
course of business. Management believes that the ultimate resolution of these
proceedings will not, in the aggregate, have a material adverse impact on the
financial condition, results of operations, cash flows or business of the
Company.
PATHMARK STORES, INC.
NOTE 6-SUBSEQUENT EVENT
During the second quarter of Fiscal 1998, in conjunction with the paydown
of debt by PTK, Pathmark loaned $26.5 million to PTK in the form of a 14.5%
discount note, due May 12, 2003 (the "PTK Note"), accreting to a maturity
value of $53.3 million. PTK is not required to pay cash interest on this
note. The note receivable from PTK has been reflected as a separate component
of stockholder's deficiency in Pathmark's consolidated financial statements
and Pathmark is not reflecting interest income in its consolidated statements
of operations related to this note. Accordingly, the accretion of the PTK
Note is offset by a corresponding credit to paid-in capital. In conjunction
with the Prepackaged Plan, on May 30, 2000, Pathmark cancelled the PTK Note.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES:
Sales in the first quarter of Fiscal 2000 were $919.2 million compared to
$894.5 million in the prior year, an increase of 2.8%. The sales increase was
primarily due to new stores opened in Fiscal 2000. In addition, same store sales
increased 0.7% in the first quarter of Fiscal 2000. The Company operated 135 and
133 supermarkets at the end of the first quarters of Fiscal 2000 and Fiscal
1999, respectively.
GROSS PROFIT:
Gross profit in the first quarter of Fiscal 2000 was $257.7 million or
28.0% of sales compared with $255.0 million or 28.5% of sales in the prior year.
The increase in gross profit dollars for the first quarter of Fiscal 2000
compared to the prior year was primarily due to higher sales partially offset by
higher shrink and promotional expenses. The cost of goods sold comparisons were
affected by a pretax LIFO charge of $0.4 million in each of the first quarters
of Fiscal 2000 and Fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"):
SG&A in the first quarter of Fiscal 2000 increased $11.3 million or
5.5% compared to the prior year primarily due to higher store labor and
labor-related expenses and nonrecurring expenses of $5.1 million related to
the financial restructuring plan, partially offset by a gain on the sale of
certain real estate of $1.8 million. As a percentage of sales, SG&A was 23.7%
in the first quarter of Fiscal 2000, compared to 23.1% in the prior year.
Excluding the nonrecurring expenses related to the financial restructuring
plan, SG&A as a percentage to sales was 23.1% in the first quarter of Fiscal
2000.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization of $18.9 million in the first quarter of
Fiscal 2000 was $0.7 million higher than the prior year of $18.2 million
primarily due to property and equipment additions. Depreciation and amortization
excludes video tape amortization, which is recorded in cost of goods sold, of
$2.0 million in the first quarter of Fiscal 2000, compared to $0.8 million in
the prior year.
OPERATING EARNINGS:
Operating earnings in the first quarter of Fiscal 2000 were $20.9 million
compared with the prior year of $30.3 million. The decrease in operating
earnings in the first quarter of Fiscal 2000 compared to the prior year was due
to higher SG&A and depreciation and amortization expense, partially offset by
higher gross profit.
INTEREST EXPENSE:
Interest expense was $42.1 million in the first quarter of Fiscal 2000
compared to $39.5 million in the prior year. The increase in interest expense in
the first quarter of Fiscal 2000 compared to the prior year was primarily due to
higher levels of borrowings and higher rates under the Working Capital
Facility and the debt accretion on the Junior Subordinated Notes.
INCOME TAXES:
Income taxes for the interim period are based on the estimated effective
tax rate expected to be applicable for the full fiscal year. The Company has
recorded a valuation allowance related to the income tax benefit for the first
quarters of Fiscal 2000 and Fiscal 1999; therefore, no income tax benefit has
been recognized. The Company believes that it is more likely than not that
the net deferred income tax asset of $47.1 million at April 29, 2000 will be
realized through the implementation of tax strategies which could generate
taxable income.
During the first quarter of Fiscal 2000, the Company made income tax
payments of $0.02 million and received income tax refunds of $0.3 million.
During the first quarter of Fiscal 1999, the Company made income tax payments of
$0.3 million and received income tax refunds of $0.03 million.
SUMMARY OF OPERATIONS:
The Company's net loss in the first quarter of Fiscal 2000 was $21.2
million compared to a net loss of $9.2 million for the prior year. The increase
in net loss in the first quarter of Fiscal 2000 compared to the prior year was
primarily due to lower operating earnings and higher interest expense.
COMPREHENSIVE INCOME:
The Company has no items of comprehensive income other than net income
and, accordingly, the total comprehensive loss is the same as the reported net
loss for all periods presented.
EBITDA-FIFO:
EBITDA-FIFO was $45.7 million and $49.3 million in the first quarters of
Fiscal 2000 and Fiscal 1999, respectively. EBITDA-FIFO represents net earnings
before interest expense, income taxes, depreciation and amortization, expenses
related to the financial reorganization plan, the gain on sale of certain real
estate and the LIFO charge. EBITDA-FIFO is a widely accepted financial indicator
of a company's ability to service and/or incur debt. EBITDA-FIFO should not be
construed as an alternative to, or a better indicator of, operating earnings or
to cash flows from operating activities, as determined in accordance with
generally accepted accounting principles.
FINANCIAL CONDITION
DEBT SERVICE:
During the first quarter of Fiscal 2000, total debt increased $0.6 million
from Fiscal 1999 year end due to increased borrowings under the Working Capital
Facility, partially offset by reductions in the Term Loan and a decrease in
certain mortgages. Borrowings under the Working Capital Facility were $116.5
million at April 29, 2000 and $103.3 million at June 7, 2000. In addition,
during the first quarter of Fiscal 2000, total lease obligations increased $7.3
million from Fiscal 1999 year end.
The indebtedness under the Working Capital Facility and the Term Loan bear
interest at floating rates and, therefore, cash interest payments on that
indebtedness may vary in future years. The Company does not currently maintain
any interest rate hedging arrangements due to the reasonable risk that near term
interest rates will not rise significantly. The Company is continuously
evaluating this risk and will implement interest rate hedging arrangements if
deemed appropriate.
LIQUIDITY:
The consolidated financial statements of the Company indicated that, at
April 29, 2000, current liabilities exceeded current assets by $1.4 billion and
the stockholder's deficiency was $1.2 billion. Historically, cash flows
generated from operations, supplemented by the unused borrowing capacity under
the Company's working capital facility and the availability of capital lease
financing were sufficient to pay the Company's debts as they came due, provide
for its capital expenditure program and meet its other cash requirements.
Management evaluated its Fiscal 2000 cash flow projections and debt
service requirements and based upon this evaluation, the Company does not
anticipate making all of its scheduled debt payments. The Company's Fiscal 2000
debt requirements increase substantially over the prior year due primarily to
the semi-annual interest payments of $12.1 million on the Junior Subordinated
Notes which, for the first time, was required to be paid in cash on May 1,
2000 and the sinking fund payment of $50.0 million on the Subordinated Notes
on June 15, 2000.
On May 1, 2000, the Company elected not to make interest payments of
$21.2 million on its $440 million of Senior Subordinated Notes and $12.1
million on its Junior Subordinated Notes. On May 31, 2000, the grace period
under each of the Indentures governing the Senior Subordinated Notes and
Junior Subordinated Notes expired. The failure to make these scheduled
interest payments constitutes an Event of Default under the Indentures
governing the applicable bonds and also constitutes an Event of Default
pursuant to the Credit Agreement. In addition, the Company was not in
compliance with several of its financial covenants under the Credit Agreement
at April 29, 2000 and based on management's projections, the Company believes
that it most likely will not comply with such covenants throughout Fiscal
2000. However, the Company and its lenders under the Credit Agreement have
entered into a Waiver Agreement pursuant to which said lenders have agreed to
waive compliance by the Company with certain provisions of the Credit
Agreement through July 29, 2000, including financial covenants and any Event
of Default to the extent arising out of a failure to pay any material
indebtedness. As a result of such defaults, the Company's long-term debt in
the amount of $1.3 billion became due currently and has been classified as
current at April 29, 2000.
On March 22, 2000, the Company disclosed that it had retained Wasserstein
Perella & Co. to assist it in developing a financial restructuring plan and
that Bondholder Committee had been formed. The Company commenced discussions
with the Bondholder Committee towards developing a consensual financial
restructuring plan. The Company announced on June 2, 2000 that it had reached
an agreement with the Bondholder Committee regarding a financial
restructuring plan of the Company. Members of the Bondholder Committee hold
or control $445.7 million principal amount, or approximately 46% of the
Company's total bond indebtedness outstanding, including over 37% of the
outstanding principal amount of the Senior Subordinated Notes, 48% of the
outstanding principal amount of the Subordinated Notes, 65% of the
outstanding principal amount of the (Subordinated Debentures) and 49% of the
outstanding principal amount of the Junior Subordinated Notes. Solicitation
of acceptances of the financial restructuring plan, to be accomplished
through the Prepackaged Plan, commenced on June 8, 2000. The Prepackaged Plan
provides that, upon consummation of the reorganization, current holders of
the Company's bond indebtedness will receive 100% of the New Common Stock.
Such ownership is subject to dilution from (1) the exercise of the New
Warrants, (2) the exercise of any options to purchase New Common Stock issued
pursuant to the Company's long-term management incentive plan, and (3) the
grant to the Chief Executive Officer of restricted New Common Stock. In
addition to New Common Stock, holders of the Subordinated Notes, the
Subordinated Debentures and the Junior Subordinated Notes will receive New
Warrants. The New Warrants will be exercisable at the opening reorganization
equity value established in connection with the Prepackaged Plan.
Pursuant to the Prepackaged Plan and in full satisfaction of their
claims, (1) holders of Senior Subordinated Notes will receive 77.57% of the
New Common Stock (2) holders of Subordinated Notes and Subordinated
Debentures will receive their ratable share of 19.29% of the New Common Stock
and 75% of the New Warrants, (3) holders of Junior Subordinated Notes will
receive 2.97% of the New Common Stock and 25% of the New Warrants, and (4)
holders of approximately $0.98 million of 11.625% Holdings' Subordinated Notes
due 2002, which Subordinated Notes are guaranteed by the Company, will
receive 0.17% of the New Common Stock, subject to dilution as described in
the preceeding paragraph.
The Prepackaged Plan provides that holders of the Holdings'
Exchangeable Preferred Stock are to receive their ratable portions of cash of
$0.5 million payable upon the effective date of the Prepackaged Plan.
As part of the Prepackage Plan, trade creditors will not be affected
and there will be no employee layoffs.
The Company is seeking to obtain acceptances from a majority in number
of holders and at least 66-2/3% of the dollar amount of each class of bonds
voting on the Prepackaged Plan. Unless extended by the Company, the voting
deadline with respect to the Prepackaged Plan is July 7, 2000. Upon the
requisite acceptances being obtained, it is the Company's intention to
promptly file the Prepackaged Plan under Chapter 11 of the U.S. Bankruptcy
Code and to exit from Bankruptcy in the third quarter of this year.
In connection with its financial restructuring plan, the Company
received a commitment from The Chase Manhattan Bank for a $75 million DIP
financing facility in support of the Prepackaged Plan and $600 million Exit
Financing. The DIP financing, which is subject to approval by the Bankruptcy
Court, will enable the Company to continue normal business operations during
the restructuring proceedings. The Exit Financing will be used to repay in
full the existing Credit Agreement and the DIP financing facility, pay
expenses of the Prepackaged Plan and will provide approximately $200 million
of liquidity for its post-reorganization operations.
The consolidated financial statements of the Company presented herein
reflect $5.1 million of professional fees related to the financial
reorganization, of which $4.2 million is included in accrued expenses.
CAPITAL EXPENDITURES:
Capital expenditures for the first quarter of Fiscal 2000, including
property acquired under capital leases, were $21.8 million compared to $26.0
million for the prior year. During the first quarter of Fiscal 2000, the Company
opened one new store as a replacement for one store closed during the quarter
and completed one enlargement to an existing supermarket. Subsequent to April
29, 2000, the Company opened one new store and during the remainder of Fiscal
2000 expects to open two additional stores and complete up to an aggregate of 28
renovations and enlargements. Capital expenditures for Fiscal 2000, including
property to be acquired under capital leases, are estimated to be $101.7
million. Management believes that cash flows generated from operations,
supplemented by the unused borrowing capacity under the Working Capital Facility
and the availability of capital lease financing, will be sufficient to provide
for the Company's capital expenditure program.
CASH FLOWS:
Cash used for operating activities was $1.7 million in the first quarter
of Fiscal 2000 compared to cash provided by operating activities of $1.3 million
in the prior year. The change in cash flow from operating activities was
primarily due to the increase in the net loss, the decrease in noncash interest
expense and the decrease in cash used for operating assets and liabilities. Cash
provided by investing activities was $0.5 million in the first quarter of Fiscal
2000 compared to cash used for investing activities of $11.3 million in the
prior year. The change in cash flow from investing activities was primarily due
to a decrease in expenditures for property and equipment and an increase in
proceeds from property sales or disposals. Cash used for financing activities
was $1.9 million in the first quarter of Fiscal 2000 compared to cash provided
by financing activities of $10.8 million in the prior year. The change in cash
flow from financing activities was primarily due to a decrease in borrowings
under the working capital facility, an increase in repayments of the term loan
and a decrease in book overdrafts.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 represents a
comprehensive framework of accounting rules that standardizes the accounting for
all derivatives. SFAS No. 133 applies to all entities and to all types of
derivatives. In June 1999, the FASB issued SFAS No.137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133", which delayed the effective date of SFAS No. 133 for
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
has not determined the impact, if any, that the adoption of SFAS No. 133 will
have on its financial position or results of operations.
FORWARD-LOOKING INFORMATION
The matters discussed herein, with the exception of historical information,
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks, uncertainties and other factors that could cause actual results to differ
materially from future results expressed or implied by such forward-looking
statements. For additional information about the Company and its various risk
factors, see the Company's most recent Form 10-K dated January 29, 2000, as
filed with the Securities and Exchange Commission on April 28, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company due to
adverse changes in financial rates. The Company is exposed to market risk in the
area of interest rates. This exposure is directly related to its Term Loan and
borrowing activities under the Working Capital Facility. The Company does not
currently maintain any interest rate hedging arrangements due to the reasonable
risk that near-term interest rates will not rise significantly. The Company is
continuously evaluating this risk and will implement interest rate hedging
arrangements when deemed appropriate.
PATHMARK STORES, INC.
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On May 1, 2000, the Company elected not to make interest payments of $21.2
million on its $440 million of 9.625% Senior Subordinated Notes due 2003
("Senior Subordinated Notes") and $12.1 million on its $225 million of 10.75%
Junior Deferred Coupon Notes ("Junior Subordinated Notes"). On May 31, 2000, the
grace period under each of the Indentures governing the Senior Subordinated
Notes and Junior Subordinated Notes, respectively, expired constituting an Event
of Default under each such Indenture. As of the date of the filing of this
report, the Company is in arrears with respect to interest on the Senior
Subordinated Notes in the amount of $26.2 million and $14.9 million with respect
to the Junior Subordinated Notes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT:
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K: The registrant did not file a report on Form 8-K
during the quarter for which this report is filed.
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.
PATHMARK STORES, INC.
BY /s/ FRANK VITRANO
-----------------------------------------
(FRANK VITRANO)
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
BY /s/ JOSEPH ADELHARDT
-----------------------------------------
(JOSEPH ADELHARDT)
SENIOR VICE PRESIDENT AND CONTROLLER,
CHIEF ACCOUNTING OFFICER
DATE: June 13, 2000