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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
AUGUST 2, 1997 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.)
301 BLAIR ROAD, P.O. BOX 5301 07095-0915
WOODBRIDGE, NEW JERSEY (Zip Code)
(Address of principal executive offices)
(732) 499-3000
(Registrant's telephone number, including area code)
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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
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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
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As of August 2, 1997, 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 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands)
13 WEEKS ENDED 26 WEEKS ENDED
------------------------------- -------------------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Sales.............................................. $ 931,833 $ 931,237 $ 1,854,152 $ 1,844,074
Cost of sales (exclusive of depreciation and
amortization shown separately below)............ 669,683 656,540 1,332,740 1,303,353
------------ ------------ ------------ ------------
Gross profit....................................... 262,150 274,697 521,412 540,721
Selling, general and administrative expenses....... 213,095 214,957 425,436 428,637
Depreciation and amortization...................... 19,942 21,410 40,116 42,049
------------ ------------ ------------ ------------
Operating earnings................................. 29,113 38,330 55,860 70,035
Interest expense................................... (41,262) (40,470) (82,552) (80,359)
------------ ------------ ------------ ------------
Loss before income tax benefit and
extraordinary items............................. (12,149) (2,140) (26,692) (10,324)
Income tax benefit................................. 4,836 699 10,537 4,020
------------ ------------ ------------ ------------
Loss before extraordinary items.................... (7,313) (1,441) (16,155) (6,304)
Extraordinary items, net of an income tax
benefit......................................... (7,488) (204) (7,488) (877)
------------ ------------ ------------ ------------
Net loss........................................... $ (14,801) $ (1,645) $ (23,643) $ (7,181)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See notes to consolidated financial statements (unaudited).
1
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands except share amounts)
AUGUST 2, FEBRUARY 1,
1997 1997
------------- -------------
ASSETS
Current Assets
Cash and cash equivalents.......................... $ 7,669 $ 9,880
Accounts receivable, net........................... 11,413 12,492
Merchandise inventories............................ 196,339 216,931
Income taxes receivable............................ 1,725 --
Deferred income taxes.............................. 7,029 7,111
Prepaid expenses................................... 24,998 24,951
Due from suppliers................................. 10,856 13,923
Other current assets............................... 7,505 5,908
------------- -------------
Total current assets............................ 267,534 291,196
Property and equipment, net............................ 560,616 603,577
Deferred financing costs, net.......................... 20,802 28,743
Deferred income taxes.................................. 38,920 22,846
Other assets........................................... 45,684 43,534
------------- -------------
$ 933,556 $ 989,896
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Accounts payable................................... $ 149,668 $ 166,199
Book overdrafts.................................... 32,779 41,085
Current maturities of long-term debt............... 17,661 74,431
Income taxes payable............................... -- 860
Accrued payroll and payroll taxes.................. 57,505 56,335
Current portion of lease obligations............... 22,488 23,133
Accrued interest payable........................... 19,001 20,712
Accrued expenses and other current liabilities..... 88,182 90,589
------------- -------------
Total current liabilities......................... 387,284 473,344
------------- -------------
Long-term debt......................................... 1,253,112 1,185,639
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Lease obligations, long-term........................... 172,013 175,353
------------- -------------
Other noncurrent liabilities........................... 186,456 197,226
------------- -------------
Commitments and Contingencies (Note 4)
Stockholder's Deficit
Common Stock, $.10 par value....................... -- --
Authorized, issued and outstanding: 100 shares
Paid-in capital.................................... 68,703 68,703
Accumulated deficit................................ (1,134,012) (1,110,369)
------------- -------------
TOTAL STOCKHOLDER'S DEFICIT..................... (1,065,309) (1,041,666)
------------- -------------
$ 933,556 $ 989,896
------------- -------------
------------- -------------
See notes to consolidated financial statements (unaudited).
2
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT (Unaudited)
(in thousands)
TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT DEFICIT
----- ------- ----------- -------------
Balance, February 1, 1997................. $ -- $ 68,703 $ (1,110,369) $ (1,041,666)
Net loss.............................. -- -- (23,643) (23,643)
----- --------- ------------- -------------
Balance, August 2, 1997................... $ -- $ 68,703 $ (1,134,012) $ (1,065,309)
----- --------- ------------- -------------
----- --------- ------------- -------------
Balance, February 3, 1996................. $ -- $ 65,303 $ (1,089,534) $ (1,024,231)
Net loss.............................. -- -- (7,181) (7,181)
----- --------- ------------- -------------
Balance, August 3, 1996................... $ -- $ 65,303 $ (1,096,715) $ (1,031,412)
----- --------- ------------- -------------
----- --------- ------------- -------------
See notes to consolidated financial statements (unaudited).
3
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
26 WEEKS ENDED
---------------------------
AUGUST 2, AUGUST 3,
1997 1996
---------- ----------
Operating activities
Net loss $ (23,643) $ (7,181)
Adjustments to reconcile net loss to net cash provided by operating activities:
Extraordinary loss on early extinguishment of debt..................................... 7,488 877
Depreciation and amortization.......................................................... 42,133 43,741
Deferred income tax benefit............................................................ (15,993) (1,678)
Interest accruable but not payable..................................................... 9,013 8,122
Amortization of original issue discount................................................ 177 177
Amortization of debt issuance costs.................................................... 3,510 3,637
(Gain) loss on disposal of property and equipment...................................... 89 (5,461)
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net.............................................................. 1,079 (389)
Merchandise inventories............................................................... 20,592 18,015
Income taxes 2,871 (3,556)
Other current assets.................................................................. (336) (795)
Other assets ...................................................................... (1,794) (4,535)
Accounts payable...................................................................... (16,531) (10,529)
Accrued interest payable.............................................................. (1,711) 1,823
Accrued expenses and other current liabilities........................................ (1,177) (8,466)
Other noncurrent liabilities.......................................................... (14,008) 1,935
---------- ----------
Cash provided by operating activities............................................... 11,759 35,737
---------- ----------
Investing Activities
Property and equipment expenditures...................................................... (13,608) (23,634)
Proceeds from disposition of property and equipment...................................... 25,470 6,655
---------- ----------
Cash provided by (used for) investing activities.................................... 11,862 (16,979)
---------- ----------
Financing Activities
Borrowings under term loan in connection with the new Credit Agreement................... 300,000 --
Repayments of former term loan........................................................... (243,127) (20,799)
Increase (decrease) in working capital facility borrowings............................... (52,600) 16,000
Increase (decrease) in book overdrafts................................................... (8,306) 780
Increase in other borrowings............................................................. 1,562 875
Repayment of other long-term borrowings.................................................. (4,322) (6,457)
Premiums incurred in early extinguishment of debt........................................ (132) (352)
Reduction in lease obligations........................................................... (10,615) (10,022)
Deferred financing fees.................................................................. (8,292) (1,566)
---------- ----------
Cash used for financing activities.................................................. (25,832) (21,541)
---------- ----------
Decrease in cash and cash equivalents....................................................... (2,211) (2,783)
Cash and cash equivalents at beginning of period............................................ 9,880 11,648
---------- ----------
Cash and cash equivalents at end of period.................................................. $ 7,669 $ 8,865
========== ==========
Supplemental Disclosures of Cash Flow Information
Interest paid $ 71,507 $ 66,312
========== ==========
Income taxes paid........................................................................ $ 3,143 $ 3,952
========== ==========
Noncash Investing and Financing Activities
Capital lease obligations................................................................ $ 13,669 $ 19,392
========== ==========
See notes to consolidated financial statements (unaudited).
4
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1--Organization and Basis of Presentation
Pathmark Stores, Inc. (the "Company") operated 138 supermarkets as of
August 2, 1997, 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 Supermarkets General Holdings
Corporation ("Holdings").
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 February 1, 1997, 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 Form 10-K Annual Report for the year ended February 1, 1997.
Income taxes for the interim period are based on the estimated effective
tax rate expected to be applicable for the full fiscal year.
NOTE 2--LONG-TERM DEBT
Long-term debt is comprised of the following (dollars in thousands):
AUGUST 2, FEBRUARY 1,
1997 1997
------------ ------------
Term Loan.................................................................... $ 300,000 $ --
Working Capital Facility..................................................... 20,900 --
Former term loan............................................................. -- 243,127
Former working capital facility.............................................. -- 73,500
9.625% Senior Subordinated Notes due 2003 ("Senior Subordinated Notes")...... 437,957 437,780
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% Deferred Coupon Notes due 2003 ("Ceferred Coupon Notes").............. 177,572 168,559
Debt payable to Holdings..................................................... 983 983
Industrial revenue bonds..................................................... 6,375 6,375
Other debt (primarily mortgages)............................................. 32,219 34,979
---------- ----------
Total debt................................................................... 1,270,773 1,260,070
Less: current maturities..................................................... 17,661 74,431
---------- ----------
Long-term portion............................................................ $1,253,112 $1,185,639
========== ==========
On June 30, 1997, the Company entered into a new $500 million bank
credit agreement (the "Credit Agreement") with a group of lenders led by The
Chase Manhattan Bank. The Credit Agreement includes a $300 million term loan
(the "Term Loan") and a $200 million working capital facility (the "Working
Capital Facility"). The Company repaid in full the former term loan and former
working capital facility with the borrowings obtained under the Credit
Agreement.
5
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
NOTE 2--LONG-TERM DEBT--(CONTINUED)
Under the Credit Agreement, the Term Loan and Working Capital Facility
bear interest at floating rates, ranging from LIBOR plus 2.25% to LIBOR plus
2.50%. The Company is required to repay a portion of its borrowings under the
Term Loan each year, so as to retire such indebtedness in its entirety by
December 15, 2001. Under the Working Capital Facility, which expires on June
15, 2001, the Company can borrow or obtain letters of credit in an aggregate
amount not to exceed $200 million, of which the maximum of $125 million can be
in letters of credit. In addition, pursuant to a Permitted Subordinated Debt
Refinancing (as defined in the Credit Agreement), the Working Capital Facility
and a portion of the Term Loan can be extended up to an additional two and
one-half years and the remainder of the Term Loan can be extended up to an
additional three and one-half years from the original expiration dates.
The Credit Agreement contains certain covenants, including financial
covenants concerning levels of operating cash flow, minimum interest and rent
expense coverage, maximum leverage ratio, maximum senior debt leverage ratio,
maximum consolidated rental payments and maximum capital expenditures. The
Credit Agreement also contains other covenants including, but not limited to,
covenants with respect to the following matters: (i) limitation on
indebtedness; (ii) limitation on liens; (iii) restriction on mergers; (iv)
restriction on investments, loans, advances, guarantees and acquisitions;
(v) restriction on assets sales and sale/leaseback transactions; (vi)
restriction on certain payments of indebtedness and incurrence of certain
agreements and (vii) restriction on transactions with affiliates.
NOTE 3--INTEREST EXPENSE
Interest expense is comprised of the following (dollars in thousands):
13 WEEKS ENDED 26 WEEKS ENDED
--------------------------- ---------------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
1997 1996 1997 1996
--------- --------- --------- ---------
Term Loans.......................................... $ 5,393 $ 5,813 $ 10,523 $ 11,714
Working Capital Facilities.......................... 1,705 1,446 3,472 2,656
Senior Subordinated Notes
Amortization of Original Issue Discount......... 89 89 177 177
Currently payable............................... 10,587 10,587 21,175 21,175
Deferred Coupon Notes
Accrued but not payable......................... 4,565 4,114 9,013 8,122
Subordinated Debentures............................. 3,022 3,022 6,044 6,044
Subordinated Notes.................................. 5,812 5,812 11,625 11,625
Amortization of debt issuance costs................. 1,609 1,821 3,510 3,637
Lease obligations................................... 5,589 4,787 11,070 9,230
Other, net.......................................... 2,891 2,979 5,943 5,979
--------- --------- --------- ---------
Interest expense.................................... $ 41,262 $ 40,470 $ 82,552 $ 80,359
========= ========= ========= =========
The majority of the cash interest payments are scheduled in the second
and fourth quarters.
6
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
NOTE 4--CONTINGENCIES
RICKEL:
In connection with the sale of its home centers segment in Fiscal
1994, the Company, as lessor, entered into leases for certain of the Company's
owned real estate properties with Rickel, as tenant (the "Leases"), pursuant to
which the Company is entitled to receive annual aggregate rentals of
approximately $4.2 million. In addition, as part of the sale, the Company
assigned to Rickel and Rickel assumed various liabilities of the home centers
segment, primarily third party leases (the "Assumed Liabilities"). As of August
2, 1997, the estimated present value of obligations under the Assumed
Liabilities approximated $27.6 million.
In January 1996, Rickel filed for bankruptcy protection under Chapter
11 of the United States Bankruptcy Code. Since the inception of Rickel's
bankruptcy, Rickel has rejected five Leases and two third party leases. The
five rejected Leases had annual rentals of approximately $2.7 million. One of
the rejected third party leases has been settled with the landlord and the
estimated present value of the other third party lease obligation is
approximately $4.2 million at August 2, 1997. The Company is actively marketing
these properties to other prospective tenants. Management has concluded that
the Company has sufficient reserves to cover any resulting liability which may
occur with respect to these rejected leases. Since the bankruptcy is not
concluded, the Company cannot determine whether Rickel will reject any
additional Leases or the extent to which the Company will become liable with
respect to the Assumed Liabilities in the event of Rickel's nonpayment thereof.
OTHER:
The Company is also 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 or business of the Company.
7
PATHMARK STORES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 which could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. Potential risks and uncertainties include, but are
not limited to, the competitive environment in which the Company operates and
the general economic conditions in the Company's trading areas.
RESULTS OF OPERATIONS
SALES:
Sales in the second quarter of Fiscal 1997 were $931.8 million
compared to $931.2 million in the prior year, an increase of 0.1%. For the
six-month period of Fiscal 1997, sales were $1,854.2 million compared to
$1,844.1 million in the prior year, an increase of 0.5%. Same store sales
increased 1.1% and 0.9% for the second quarter and six-month period,
respectively, primarily from the Company's promotional pricing program which
commenced in the first quarter of Fiscal 1997. Sales in Fiscal 1997 compared to
Fiscal 1996 were also impacted by new store openings and remodels offset by sold
and closed stores. The Company operated 138 and 143 supermarkets at the end of
the second quarters of Fiscal 1997 and Fiscal 1996, respectively, including 55
and 51 Pathmark 2000 format stores, respectively.
GROSS PROFIT:
Gross profit in the second quarter of Fiscal 1997 was $262.2 million
or 28.1% of sales compared to $274.7 million or 29.5% of sales for the prior
year. For the six-month period of Fiscal 1997, gross profit was $521.4 million
or 28.1% of sales compared to $540.7 million or 29.3% for the prior year. The
decrease in gross profit in both dollars and as a percentage of sales for the
second quarter and six-month period of Fiscal 1997 compared to the prior year
was primarily due to the promotional pricing program introduced during the first
quarter of Fiscal 1997. The cost of goods sold comparisons were affected by a
pretax LIFO charge of $0.5 million and $0.8 million in the second quarters of
Fiscal 1997 and Fiscal 1996, respectively, and a pretax LIFO charge of $0.9
million and $1.7 million in the six-month period of Fiscal 1997 and Fiscal 1996,
respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"):
SG&A in the second quarter of Fiscal 1997 decreased $1.9 million or
0.9% compared to the prior year and decreased $3.2 million or 0.7% in the
six-month period of Fiscal 1997 compared to the prior year. As a percentage of
sales, SG&A was 22.9% in the second quarter of Fiscal 1997, down from 23.1% in
the prior year and was 22.9% for the six-month period of Fiscal 1997 down from
23.2% the prior year. The decrease in SG&A as a percentage of sales in the
second quarter and six-month period of Fiscal 1997 compared to the prior year
was primarily due to lower administrative, advertising and utilities expenses,
partially offset by higher store labor expenses.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization of $19.9 million in the second quarter
of Fiscal 1997 was $1.5 million lower than the prior year of $21.4 million. For
the six-month period of Fiscal 1997, depreciation and amortization of $40.1
million was $1.9 million lower than the prior year of $42.0 million. The
decrease in depreciation and amortization expense in the second quarter and
six-month period of Fiscal 1997 compared to the prior year was primarily due to
the write down in the fourth quarter of Fiscal 1996 of certain fixed
8
PATHMARK STORES, INC.
assets held for sale, principally in the Company's southern region, partially
offset by capital expenditures in Fiscal 1997. Depreciation and amortization
excludes video tape amortization, which is recorded in cost of goods sold, of
$0.9 million and $0.75 million in the second quarters of Fiscal 1997 and
Fiscal 1996, respectively, and $1.7 million and $1.5 million in the six-month
period of Fiscal 1997 and Fiscal 1996, respectively.
OPERATING EARNINGS:
Operating earnings in the second quarter of Fiscal 1997 were $29.1
million compared to the prior year of $38.3 million. For the six-month period
of Fiscal 1997, operating earnings were $55.9 million compared with $70.0
million in the prior year. The decrease in operating earnings in the second
quarter and six-month period of Fiscal 1997 compared to the prior year was due
to lower gross profit, partially offset by lower SG&A and depreciation and
amortization expense.
INTEREST EXPENSE:
Interest expense was $41.3 million in the second quarter of Fiscal
1997 compared to $40.5 million in the prior year and $82.6 million for the
six-month period of Fiscal 1997 compared to $80.4 million in the prior year,
primarily due to increases in lease obligations, the debt accretion on the
Deferred Coupon Notes, higher levels of borrowings under the former working
capital facility and higher interest rates, partially offset by reductions in
the former term loan.
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
income tax benefit in the second quarter and six-month period of Fiscal 1997 was
$4.8 million and $10.5 million, respectively. The income tax benefit for the
second quarter and six-month period of Fiscal 1996 was $0.7 million and $4.0
million, respectively.
During the six-month period of Fiscal 1997, the Company made income
tax payments of $3.1 million and received income tax refunds of $0.5 million.
During the six-month period of Fiscal 1996, the Company made income tax payments
of $4.0 million and received income tax refunds of $0.9 million.
EXTRAORDINARY ITEMS:
During the second quarter of Fiscal 1997, in connection with the
Credit Agreement, the Company wrote off deferred financing fees of $12.8 million
related to the former bank credit agreement, resulting in a net loss on early
extinguishment of debt of $7.4 million. In addition, during the second quarter
of Fiscal 1997, in connection with the sale of certain mortgaged property, the
Company made a mortgage paydown of $2.9 million, including accrued interest and
debt premiums, resulting in a net loss on early extinguishment of debt of $0.1
million.
During the second quarter of Fiscal 1996, in connection with the sale
of certain mortgaged property, the Company made a mortgage paydown of $5.3
million, including accrued interest and debt premiums, resulting in a net loss
on early extinguishment of debt of $0.2 million. In addition, during the first
quarter of Fiscal 1996, in connection with the termination of the Plainbridge,
Inc. credit agreement due to the reacquisition of Plainbridge, Inc. by Pathmark,
the Company wrote off deferred financing fees resulting in a net loss on early
extinguishment of debt of $0.7 million.
9
PATHMARK STORES, INC.
SUMMARY OF OPERATIONS:
For the second quarter of Fiscal 1997, the Company's net loss was
$14.8 million compared to a net loss of $1.6 million for the prior year. For
the six-month period of Fiscal 1997, the Company's net loss was $23.6 million
compared to a net loss of $7.2 in the prior year. The increase in net loss in
the second quarter and six-month period of Fiscal 1997 compared to the prior
year was primarily due to lower operating earnings, the extraordinary loss on
early extinguishment of debt and higher interest expense, partially offset by a
higher income tax benefit.
EBITDA-FIFO:
EBITDA-FIFO was $50.6 million and $61.5 million in the second quarters
of Fiscal 1997 and Fiscal 1996, respectively, and $98.9 million and $115.7
million for the six-month period of Fiscal 1997 and Fiscal 1996, respectively.
EBITDA-FIFO represents net earnings before interest expense, income taxes,
depreciation, amortization, the LIFO charge (credit) and unusual transactions.
EBITDA-FIFO is a widely accepted financial indicator of a company's ability to
service and/or incur debt and should not be construed as an alternative to, or a
better indicator of, operating income or cash flows from operating activities,
as determined in accordance with generally accepted accounting principles.
FINANCIAL CONDITION
DEBT SERVICE:
During the six-month period of Fiscal 1997, total debt increased $10.7
million from Fiscal 1996 year end primarily due to debt accretion on the
Deferred Coupon Notes. On June 30, 1997, the Company entered into the Credit
Agreement with a group of lenders led by The Chase Manhattan Bank. The Credit
Agreement includes a $300 million Term Loan and a $200 million Working Capital
Facility. In connection with this refinancing, the Company repaid in full the
former term loan ($230.5 million) and the former working capital facility ($57.5
million) with the borrowings obtained under the Credit Agreement. Borrowings
under the Working Capital Facility were $20.9 million at August 2, 1997 and have
decreased to $19.5 million at September 11, 1997.
During the second quarter of Fiscal 1997, the Company sold four of the
12 supermarkets that it announced for divestiture at the end of Fiscal 1996 for
$14.9 million and sold two former operating sites, primarily drug stores, for
$11.1 million. There was no gain or loss recognized on these transactions. The
proceeds were used to paydown a portion of the former working capital facility
and certain mortgages.
Under the Credit Agreement, the Term Loan and Working Capital Facility
bear interest at floating rates, ranging from LIBOR plus 2.25% to LIBOR plus
2.50%. The Company is required to repay a portion of its borrowings under the
Term Loan each year, so as to retire such indebtedness in its entirety by
December 15, 2001. Under the Working Capital Facility, which expires on June
15, 2001, the Company can borrow or obtain letters of credit in an aggregate
amount not to exceed $200 million, of which the maximum of $125 million can be
in letters of credit. In addition, pursuant to a Permitted Subordinated Debt
Refinancing (as defined in the Credit Agreement), the Working Capital Facility
and a portion of the Term Loan can be extended up to an additional two and
one-half years and the remainder of the Term Loan can be extended up to an
additional three and one-half years from the original expiration dates.
However, there can be no assurance that the Company will undertake such
refinancing.
10
The Credit Agreement contains certain covenants, including financial
covenants concerning levels of operating cash flow, minimum interest and rent
expense coverage, maximum leverage ratio, maximum senior debt leverage ratio,
maximum consolidated rental payments and maximum capital expenditures. The
Credit Agreement also contains other covenants including, but not limited to,
covenants with respect to the following matters: (i) limitation on
indebtedness; (ii) limitation on liens; (iii) restriction on mergers; (iv)
restriction on investments, loans, advances, guarantees and acquisitions;
(v) restriction on assets sales and sale/leaseback transactions; (vi)
restriction on certain payments of indebtedness and incurrence of certain
agreements and (vii) restriction on transactions with affiliates.
The Company does not currently maintain any interest rate hedging
arrangements. The Company is continuously evaluating this risk and will
implement interest rate hedging arrangements if deemed appropriate.
The majority of the cash interest payments are scheduled in the second
and fourth quarters.
The amount of principal payments required each year on outstanding
long-term debt (excluding the original issue discount with respect to the
Deferred Coupon Notes) are as follows (dollars in millions):
Principal
Fiscal Years Payments
------------ ---------
1997(a) $ 12.7
1998 37.5
1999 16.5
2000 81.6
2001 311.2
2002 195.8
2003 615.5
- ---------------
(a) Subsequent to August 2, 1997.
LIQUIDITY:
The consolidated financial statements of the Company indicate that, at
August 2, 1997, current liabilities exceeded current assets by $119.8 million
and stockholder's deficit was $1.07 billion. 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 pay the Company's debts as they come due,
provide for its capital expenditure program and meets its other cash
requirements.
The Company believes that it will be able to make the scheduled
payments or refinance its obligations with respect to its indebtedness through a
combination of operating funds and borrowing facilities. Future refinancing
will be necessary if the Company's cash flow from operations is not sufficient
to meet its debt service requirements related to the maturity of certain
mortgages in Fiscal 1998, the maturity of the Term Loan and Working Capital
Facility in Fiscal 2001 and the maturity of the Subordinated Notes and
Subordinated Debentures in Fiscal 2002. The Company expects that it will be
necessary to refinance all or a portion of the Senior Subordinated Notes and the
Deferred Coupon Notes due in Fiscal 2003. The Company may undertake a
refinancing of some or all of such indebtedness sometime prior to its maturity.
The Company was in compliance with its various debt covenants at August 2, 1997,
and, based on management's operating projections for Fiscal 1997, the Company
believes that it will continue to be in compliance with its debt covenants. The
Company's ability to make scheduled payments, to refinance or otherwise meet its
obligations with respect to its indebtedness depends on its financial and
operating
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PATHMARK STORES, INC.
performance, which in turn, is subject to prevailing economic conditions and
to financial, business and other factors beyond its control. Although the
Company's cash flow from its operations and borrowings has been sufficient to
meet its debt service obligations, there can be no assurance that the
Company's operating results will continue to be sufficient or that future
borrowing facilities will be available for payment or refinancing of the
Company's indebtedness.
The Board of Directors has approved, to the extent permitted by the
new Credit Agreement, that the Company may repurchase a portion of the
Subordinated Notes and Subordinated Debentures in such amounts and for
such consideration as the Company shall determine, in light of prevailing
market conditions.
While it is the Company's intention to enter into other refinancings
that it considers advantageous, there can be no assurances that the
prevailing market conditions will be favorable to the Company. In the event
the Company obtains any future refinancing on less than favorable terms, the
holders of outstanding indebtedness could experience increased credit risk
and could experience a decrease in the market value of their investment,
because the Company might be forced to operate under terms that would
restrict its operations and might find its cash flow reduced.
CAPITAL EXPENDITURES:
Capital expenditures for the second quarter of Fiscal 1997,
including property acquired under capital leases, were $15.5 million compared
to $27.8 million for the prior year and for the six-month period of Fiscal
1997 were $27.3 million compared to $43.0 million for the prior year. During
the six-month period of Fiscal 1997, the Company opened two new Pathmark 2000
format stores, completed five major renovations and enlargements to existing
supermarkets and sold four and closed four of the 12 stores announced for
divestiture at the end of Fiscal 1996. Subsequent to the second quarter of
Fiscal 1997, the Company closed an additional three of the 12 stores
announced for divestiture. During the remainder of Fiscal 1997, the Company
does not plan to open any new Pathmark 2000 format stores and expects to
complete up to an aggregate of seven major renovations and enlargements.
CASH FLOWS:
Cash provided by operating activities amounted to $11.8 million in
the six-month period of Fiscal 1997 compared to $35.7 million in the prior
year. The decrease in net cash provided by operating activities was primarily
due to an increase in the net loss and an increase in cash used for operating
assets and liabilities. Cash provided by investing activities was $11.9
million in the six-month period of Fiscal 1997 compared to cash used for
investing activities of $17.0 million in the prior year. The increase in
cash provided by investing activities was primarily due to an increase in
proceeds from property dispositions and a decrease in expenditures of
property and equipment. Cash used for financing activities was $25.8 million
in the six-month period of Fiscal 1997 compared to $21.5 million in the prior
year. The increase in cash used for financing activities was primarily due
to a decrease in book overdrafts and an increase in deferred financing fees
related to the Credit Agreement, partially offset by an increase in
borrowings in conjunction with the Credit Agreement, net of repaying in full
the former term loan and former working capital facility.
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PATHMARK STORES, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
NO. DESCRIPTION
--- -----------
4.4 Credit Agreement dated as of June 30, 1997 among Pathmark Stores,
Inc., the Lenders listed therein and The Chase Manhattan Bank as
Administrative Agent.
(b) REPORTS ON FORM 8-K:
The registrant filed one Form 8-K during the quarter for which this
report is filed.
DATE OF REPORT ITEM
-------------- ----
July 9, 1997 Announcement of $500 million Credit Agreement.
SIGNATURE
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/ RON MARSHALL
----------------------------
(RON MARSHALL)
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
BY /S/ JOSEPH ADELHARDT
-----------------------------
(JOSEPH ADELHARDT)
SENIOR VICE PRESIDENT AND CONTROLLER,
CHIEF ACCOUNTING OFFICER
Date: September 16, 1997
13