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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 3, 1996 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)
908-499-3000
(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
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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
------------ ------------
As of August 3, 1996, 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 3, JULY 29, AUGUST 3, JULY 29,
1996 1995 1996 1995
--------- ----------- ----------- -----------
Sales........................................................... $ 994,589 $ 1,020,672 $ 1,955,684 $ 2,053,709
Cost of sales (exclusive of depreciation and amortization
shown separately below)..................................... 697,642 726,206 1,374,122 1,462,068
--------- ----------- ----------- -----------
Gross profit.................................................... 296,947 294,466 581,562 591,641
Selling, general and administrative expenses.................... 237,207 233,210 469,478 466,685
Depreciation and amortization................................... 21,410 20,083 42,049 40,028
--------- ----------- ----------- -----------
Operating earnings.............................................. 38,330 41,173 70,035 84,928
Gain on disposition of freestanding drug stores ................ -- 15,535 -- 15,535
Interest expense................................................ (40,470) (41,883) (80,359) (82,988)
--------- ----------- ----------- -----------
Earnings (loss) before income tax benefit and extraordinary
items........................................................ (2,140) 14,825 (10,324) 17,475
Income tax benefit.............................................. 699 1,676 4,020 1,348
--------- ----------- ----------- -----------
Earnings (loss) before extraordinary items...................... (1,441) 16,501 (6,304) 18,823
Extraordinary items, net of an income tax benefit............... (204) -- (877) --
--------- ----------- ----------- -----------
Net earnings (loss)............................................. $ (1,645) $ 16,501 $ (7,181) $ 18,823
========= =========== =========== ===========
See notes to consolidated financial statements (unaudited).
1
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
AUGUST 3, FEBRUARY 3,
1996 1996
--------- ------------
ASSETS
Currents Assets
Cash and cash equivalents ............. $ 8,865 $ 11,648
Accounts receivable, net............... 10,942 10,553
Merchandise inventories................ 207,433 225,448
Deferred income taxes ................. 3,749 4,156
Prepaid expenses....................... 25,048 25,189
Due from suppliers..................... 14,661 13,178
Other current assets................... 4,311 5,854
------------ -------------
Total Current Assets ............ 275,009 296,026
Property and Equipment, Net................ 599,220 602,888
Deferred Financing Costs, Net.............. 30,500 33,685
Deferred Income Taxes...................... 16,873 13,243
Other Assets............................... 42,297 39,915
------------ -------------
$ 963,899 $ 985,757
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Accounts payable....................... $ 173,553 $ 184,082
Book overdrafts ....................... 44,500 43,720
Current maturities of long-term
debt................................. 58,639 51,753
Income taxes payable .................. -- 4,057
Accrued payroll and payroll taxes...... 51,569 54,322
Current portion of obligations
under capital leases................. 20,605 20,680
Accrued interest payable............... 21,132 19,309
Accrued expenses and other
current liabilities.................. 86,973 91,223
----------- ------------
Total Current Liabilities....... 456,971 469,146
----------- ------------
Long-Term Debt............................. 1,205,677 1,214,645
----------- ------------
Obligations Under Capital
Leases, Long-Term........................ 144,692 140,161
----------- ------------
Other Noncurrent Liabilities............... 187,971 186,036
----------- ------------
Commitments and Contingencies (Note 6)
Stockholder's Deficit
Common Stock, $.10 par value......... -- --
Authorized, issued and
outstanding: 100 shares
Paid-in Capital...................... 65,303 65,303
Accumulated Deficit.................. (1,096,715) (1,089,534)
----------- ------------
Total Stockholder's
Deficit........................ (1,031,412) (1,024,231)
----------- ------------
$ 963,899 $ 985,757
=========== ============
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 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)
============== ========== =============== =============
Balance, January 28, 1995 ........................ $ -- $ 91,809 $ (1,122,281) $ (1,030,472)
Net earnings ................................. -- -- 18,823 18,823
Dividend to PTK Holdings, Inc.,
in conjunction with the disposition
of the freestanding drug stores ........ -- (21,800) -- (21,800)
Dividend to PTK Holdings, Inc.,
in conjunction with the disposal
of the home centers segment............. -- (4,706) -- (4,706)
-------------- ---------- --------------- -------------
Balance, July 29, 1995............................ $ -- $ 65,303 $ (1,103,458) $ (1,038,155)
============== ========== =============== =============
See notes to consolidated financial statements (unaudited).
3
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
26 WEEKS ENDED
---------------------------
AUGUST 3, JULY 29,
1996 1995
--------- ---------
Operating Activities
Net earnings (loss)......................................................... $ (7,181) $ 18,823
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of debt ................. 877 --
Depreciation and amortization....................................... 43,741 41,328
Deferred income tax benefit......................................... (1,678) (15,404)
Interest accruable but not payable.................................. 8,122 7,318
Amortization of original issue discount............................. 177 177
Amortization of debt issuance costs ................................ 3,637 3,558
Gain on disposal of property and equipment.......................... (5,461) (42)
Gain on disposition of freestanding drug stores .................... -- (15,535)
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net........................................ (389) 700
Merchandise inventories......................................... 18,015 8,493
Income taxes ................................................... (3,556) 19,560
Other current assets............................................ (795) 6,689
Other assets.................................................... (4,535) (2,457)
Accounts payable................................................ (10,529) (9,547)
Accrued interest payable........................................ 1,823 1,183
Accrued expenses and other current liabilities ................ (8,466) (7,837)
Other noncurrent liabilities.................................... 1,935 413
--------- ---------
Cash provided by operating activities...................... 35,737 57,420
--------- ---------
Investing Activities
Property and equipment expenditures......................................... (23,634) (26,377)
Proceeds from disposition of property and equipment......................... 6,655 717
Proceeds from sale of home centers segment ................................. -- 4,706
Net proceeds from disposition of freestanding drug stores .................. -- 60,521
--------- ---------
Cash provided by (used for) investing activities........... (16,979) 39,567
--------- ---------
Financing Activities
Increase (decrease) in Working Capital Facilities borrowings ............... 16,000 (34,000)
Decrease in Term Loan....................................................... (20,799) (42,500)
Increase in book overdrafts ................................................ 780 4,487
Increase in other borrowings ............................................... 875 808
Repayment of other long-term borrowings .................................... (6,457) (2,346)
Premiums incurred in early extinguishment of debt........................... (352) --
Reduction in obligations under capital leases............................... (10,022) (8,853)
Deferred financing fees .................................................... (1,566) --
Dividend to PTK Holdings, Inc............................................... -- (26,506)
--------- ---------
Cash used for financing activities ......................... (21,541) (108,910)
--------- ---------
Decrease in cash and cash equivalents .......................................... (2,783) (11,923)
Cash and cash equivalents at beginning of period ............................... 11,648 22,012
--------- ---------
Cash and cash equivalents at end of period ..................................... $ 8,865 $ 10,089
========= =========
Supplemental Disclosures of Cash Flow Information:
Interest paid .............................................................. $ 63,830 $ 67,642
========= =========
Income taxes paid .......................................................... $ 3,952 $ 2,348
========= =========
Noncash Investing and Financing Activities:
Capital lease obligations .................................................. $ 19,392 $ 10,564
========= =========
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") is a regional supermarket currently
operating 143 supermarkets, including 51 Pathmark 2000 format stores, primarily
in the New York-New Jersey and Philadelphia metropolitan areas. The Company is a
wholly owned subsidiary of PTK Holdings, Inc. ("PTK") and an indirect wholly
owned subsidiary of Supermarkets General Holdings Corporation ("Holdings"). On
March 1, 1996, the Company reacquired all of the outstanding capital stock of
Plainbridge, Inc. ("Plainbridge") by means of a capital contribution from PTK.
Since the acquisition of the capital stock of Plainbridge is a transfer of
interest among entities under common control, it is being accounted for at
historical cost in a manner similar to pooling-of-interests accounting.
Accordingly, the consolidated financial statements presented herein reflect the
assets and liabilities and related results of operations of the combined entity
for all periods.
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 3, 1996, except for the new accounting standard adopted
effective February 4, 1996 (see Note 2), 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 3, 1996.
The accompanying consolidated financial statements of the Company indicated
that, at August 3, 1996, current liabilities exceed current assets by $182.0
million and stockholder's deficit approximates $1.03 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 meet its seasonal cash
requirements. Further, the Company believes it will be in compliance throughout
the fiscal year with its various debt covenants.
Income taxes for the interim period are based on the estimated effective tax
rate expected to be applicable for the full fiscal year.
Since the Company is a wholly owned subsidiary, earnings (loss) per share
information is not presented.
NOTE 2-NEW ACCOUNTING STANDARD
Effective February 4, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). SFAS No.
121 establishes accounting standards for the measurement of the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets. SFAS No. 121 requires that an asset to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
5
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
NOTE 2-NEW ACCOUNTING STANDARD-(CONTINUED)
The Company has performed its review based upon groups of assets and the
undiscounted estimated future cash flows from such assets and determined that
the carrying value of such assets were recoverable from the respective cash
flows. The adoption of SFAS No. 121 did not have an effect on the financial
position or results of operations of the Company.
Selling, general and administrative expenses for the 26 weeks ended August
3, 1996 are net of a gain of $5.6 million related to the sale of certain real
estate.
NOTE 3-LONG-TERM DEBT
Long-term debt is comprised of the following (dollars in thousands):
AUGUST 3, FEBRUARY 3,
1996 1996
------------ -------------
Term Loan ............................................. $ 267,156 $ 287,955
Working Capital Facilities ............................ 62,000 46,000
9.625% Senior Subordinated Notes due 2003 ............. 437,603 437,426
10.75% Deferred Coupon Notes due 2003 ................. 160,002 151,881
12.625% Subordinated Debentures due 2002 .............. 95,750 95,750
11.625% Subordinated Notes due 2002 ................... 199,017 199,017
Debt payable to Holdings .............................. 983 983
Industrial revenue bonds .............................. 6,375 6,375
Other debt (primarily mortgages) ...................... 35,430 41,011
------------ -------------
Total debt ............................................ 1,264,316 1,266,398
Less: current maturities .............................. 58,639 51,753
------------ -------------
Long-term portion ..................................... $1,205,677 $1,214,645
============ =============
NOTE 4-INTEREST EXPENSE
Interest expense is comprised of the following (dollars in thousands):
13 WEEKS ENDED 26 WEEKS ENDED
---------------------- -----------------------
AUGUST 3, JULY 29, AUGUST 3, JULY 29,
1996 1995 1996 1995
--------- --------- --------- ---------
Term Loan ..................................... $ 5,813 $ 7,730 $11,714 $15,655
Working Capital Facilities .................... 1,446 1,690 2,656 2,980
9.625% Senior Subordinated Notes due 2003
Amortization of original issue discount ... 89 89 177 177
Currently payable ......................... 10,587 10,587 21,175 21,175
10.75% Deferred Coupon Notes due 2003
Accrued but not payable ................... 4,114 3,707 8,122 7,318
12.625% Subordinated Debentures due 2002 ...... 3,022 3,022 6,044 6,044
11.625% Subordinated Notes due 2002............ 5,812 5,812 11,625 11,625
Amortization of debt issuance costs ........... 1,821 1,779 3,637 3,558
Obligations under capital leases .............. 4,687 4,036 9,025 8,084
Other, net .................................... 3,079 3,431 6,184 6,372
========= ========= ========= =========
Interest expense .............................. $40,470 $41,883 $80,359 $82,988
========= ========= ========= =========
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 5-EXTRAORDINARY ITEMS
During the second quarter of Fiscal 1996, in connection with the proceeds
from the sale of certain mortgaged property, the Company made a mortgage paydown
of $5.3 million, including accrued interest and debt premium, resulting in a net
loss on early extinguishment of debt of $0.2 million, net of an income tax
benefit of $0.1 million.
During the first quarter of Fiscal 1996, in connection with the termination
of the Plainbridge credit agreement due to the reacquisition of Plainbridge by
Pathmark, the Company wrote off deferred financing fees, resulting in a net loss
on early extinguishment of debt of $0.7 million, net of an income tax benefit of
$0.5 million.
NOTE 6-CONTINGENCIES
In connection with the sale of its home centers segment, the Company has, as
lessor, entered into leases for certain real property with Rickel Home Centers
Inc. ("Rickel"), as tenant (the "Leases"), pursuant to which the Company is
entitled to receive annual aggregate rentals of approximately $6.9 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 February 3, 1996, the estimated
present value of obligations under the Assumed Liabilities is approximately
$33.0 million. In January 1996, Rickel filed for bankruptcy protection under
Chapter 11 of the United States Bankruptcy Code. On April 29, 1996, the Company
filed its proofs of claim in connection with the bankruptcy proceedings. On
August 6, 1996, Rickel filed an order with the Bankruptcy court to reject the
lease at Totowa, NJ. The estimated present value of this lease obligation is
approximately $5.1 million. Since the bankruptcy is in its early stages it is
too early to determine whether Rickel will reject any additional Leases or the
extent to which the Company may become liable with respect to the Assumed
Liabilities in the event of Rickel's nonpayment thereof.
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 or business of the Company.
7
PATHMARK STORES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
With the exception of historical information, the matters discussed herein
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 for the second quarter of Fiscal 1996 were $994.6 million compared to
$1,020.7 million in the prior year. For the six-month period, sales were
$1,955.7 million compared to $2,053.7 million in the prior year. Fiscal 1996
sales were impacted by the disposition of the freestanding drug stores during
Fiscal 1995. Sales generated by the freestanding drug stores were $41.0 million
in the second quarter of Fiscal 1995 and $86.5 million in the six-month period
of Fiscal 1995. Same store sales from supermarkets increased 0.8% in the second
quarter and decreased 1.4% in the six-month period. The same store sales for the
six-month period of Fiscal 1996 were negatively impacted by the 3.5% decrease in
same store sales during the first quarter due to the inclement weather during
the quarter compared to the unusually mild weather in the same period last year,
as well as a significant increase in competitive new store openings and
remodels.
At quarter end, the Company operated 143 supermarkets, including 51 Pathmark
2000 format stores compared with the end of Fiscal 1995 when the Company
operated 144 supermarkets, including 44 Pathmark 2000 format stores.
GROSS PROFIT:
Gross profit for the second quarter of Fiscal 1996 was $296.9 million or
29.9% of sales compared with $294.5 million or 28.9% of sales for the prior year
and for the six-month period was $581.6 million or 29.7% of sales compared with
$591.6 million or 28.8% for the prior year. Excluding the impact of the
disposition of the freestanding drug stores, gross profit as a percentage of
sales was 29.1% for both the second quarter and six-month period of Fiscal 1995.
The improvement in gross profit as a percentage of sales for the second quarter
and six-month period of Fiscal 1996 of $581.6 million compared to the prior year
of $591.6 million was primarily due to increased focus on merchandising
programs, the impact of the disposition of the freestanding drug stores, as well
as the Company's continuing emphasis on the Pathmark 2000 format stores which
allow expanded variety in all departments particularly high margin perishables.
The decrease in gross profit for the six-month period of Fiscal 1996 of $581.6
million compared to the prior year of $591.6 million was primarily attributable
to the lower sales, as discussed above, in the first quarter of Fiscal 1996. The
cost of goods sold comparisons were affected by a pretax LIFO charge of $0.8
million and $0.5 million for the second quarter of Fiscal 1996 and Fiscal 1995,
respectively, and a pretax LIFO charge of $1.7 million and $1.3 million for the
six-month period of Fiscal 1996 and Fiscal 1995, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"):
SG&A for the second quarter of Fiscal 1996 increased $4.0 million or 1.7%
compared to the prior year and increased $2.8 million or 0.6% for the six-month
period compared with the prior year. SG&A, on a proforma basis eliminating the
SG&A impact of the freestanding drug stores, increased 6.0% and 5.2%,
respectively, for the second quarter and six-month period compared to the prior
year. As a percentage of sales, SG&A were 23.8% for the second quarter of Fiscal
1996, up from 22.8% in the prior year and were 24.0% for the six-month period of
Fiscal 1996, up from 22.7% for the prior year. The increase in SG&A as a
percentage of sales for the second quarter and six-month period of Fiscal 1996
compared to the prior year was primarily due to higher labor and labor related
expenses, promotional expenses and occupancy costs, partially offset by the
impact of the disposition of the freestanding drug stores in Fiscal 1995 and a
curtailment gain of $2.0 million due to the elimination of postretirement
medical coverage for active non-union associates in Fiscal 1996. SG&A for the
six-month period of Fiscal 1996 also included a first quarter provision of $5.8
million representing the termination costs for two
8
PATHMARK STORES, INC.
former executives of the Company and a first quarter gain of $5.6 million
recognized on the sale of certain real estate.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization of $21.4 million for the second quarter of
Fiscal 1996 was $1.3 million higher than the prior year of $20.1 million. For
the six-month period of Fiscal 1996 depreciation and amortization of $42.0
million was $2.0 million higher than the prior year of $40.0 million. The
increase in depreciation and amortization expense for the second quarter and
six-month period of Fiscal 1996 compared to the prior year was primarily due to
capital expenditures. Depreciation and amortization excludes video tape
amortization, which is recorded in cost of goods sold, of $0.75 million and
$0.65 million in the second quarter of Fiscal 1996 and Fiscal 1995,
respectively, and $1.5 million and $1.3 million for the six-month period of
Fiscal 1996 and Fiscal 1995, respectively.
DISPOSITION OF FREESTANDING DRUG STORES:
During the second quarter of Fiscal 1995, the Company made a decision to
dispose of its 36 freestanding drug stores and, on July 28, 1995, completed the
sale of 30 of its freestanding drug stores, including merchandise inventory, to
Rite-Aid Corporation for $59.9 million. The Company recorded a pretax gain on
the disposition of its freestanding drug stores of $15.5 million, net of a
$19.0 million charge related to the estimated exit costs of the remaining six
freestanding drug stores. Five of the remaining six freestanding drug stores
closed during Fiscal 1995 and the sixth store closed during the second quarter
of Fiscal 1996.
OPERATING EARNINGS:
Operating earnings for the second quarter of Fiscal 1996 were $38.3 million
compared with the prior year of $41.2 million. For the six-month period of
Fiscal 1996, operating earnings were $70.0 million compared with $84.9 million
for the prior year. The decrease in operating earnings during the second quarter
of Fiscal 1996 compared to the prior year was due to higher SG&A and
depreciation and amortization expense, partially offset by higher gross profit.
The decrease in operating earnings during the six-month period of Fiscal 1996
compared to the prior year was due to lower sales in the first quarter of Fiscal
1996 and higher SG&A and depreciation and amortization expense.
INTEREST EXPENSE:
Interest expense was $40.5 million for the second quarter of Fiscal 1996
compared to $41.9 million in the prior year and $80.4 million for the six-month
period of Fiscal 1996 compared to $83.0 million in the prior year primarily due
to reductions in the Term Loan along with lower interest rates.
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
for the second quarter and the six-month period of Fiscal 1996 was $0.7 million
and $4.0 million, respectively. Although the Company generated a $4.0 million
income tax benefit for the six-month period, management expects an annual tax
provision as a result of taxable income for the full fiscal year. The income tax
benefit for the second quarter and the six-month period of Fiscal 1995 was $1.7
million and $1.3 million, respectively, reflecting the reversal of the valuation
allowance related to the deferred income tax assets.
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. During
the six-month period of Fiscal 1995,
9
PATHMARK STORES, INC.
the Company made income tax payments of $2.3 million and received income tax
refunds of $8.0 million.
EXTRAORDINARY ITEMS:
During the second quarter of Fiscal 1996, in connection with the proceeds
from 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.
During the first quarter of Fiscal 1996, in connection with the termination
of the Plainbridge credit agreement due to the reacquisition of Plainbridge by
Pathmark, the Company wrote off deferred financing fees resulting in a net loss
on early extinguishment of debt of $0.7 million.
SUMMARY OF OPERATIONS:
For the second quarter of Fiscal 1996, the Company's net loss was $1.6
million compared to net earnings of $16.5 million for the prior year. The
decrease in net earnings for the second quarter of Fiscal 1996 compared to the
prior year was due to lower operating earnings, the gain on the disposition of
the freestanding drug stores in Fiscal 1995 and a higher income tax benefit in
Fiscal 1995, partially offset by lower interest expense in Fiscal 1996.
For the six-month period of Fiscal 1996, the Company's net loss was $7.2
million compared to net earnings of $18.8 million for the prior year. The
decrease in net earnings for the six-month period of Fiscal 1996 compared to the
prior year was due to lower operating earnings, an extraordinary loss on early
extinguishment of debt and the gain on disposition of the freestanding drug
stores in Fiscal 1995, partially offset by lower interest expense and a higher
income tax benefit in Fiscal 1996.
FINANCIAL CONDITION
DEBT SERVICE:
During the six-month period of Fiscal 1996, total debt decreased $2.1
million from Fiscal 1995 year end primarily due to scheduled Term Loan
repayments partially offset by borrowings under the Working Capital Facility and
debt accretion on the Deferred Coupon Notes. Borrowings under the Working
Capital Facility were $62.0 million at August 3, 1996 and have decreased to
$28.5 million at September 12, 1996.
In conjunction with the reacquisition of the Plainbridge capital stock, the
outstanding obligations of Plainbridge under its credit agreement were satisfied
by the Company and the Plainbridge credit agreement was terminated. The Company
simultaneously entered into an amendment to its credit agreement with its
existing lenders increasing the Company's Working Capital Facility from $175
million to $200 million (of which the maximum of $125.0 million can be in
letters of credit) to satisfy any additional liquidity needs and prospectively
modifying certain of its financial covenants to take into account the operations
of Plainbridge. The Working Capital Facility is subject to an annual cleandown
provision. Under the terms of the cleandown provision, in each fiscal year loans
cannot exceed $60.0 million (formerly $50.0 million) under the Working Capital
Facility for a period of 30 consecutive days. The Company satisfied the terms of
the Fiscal 1996 cleandown provision during the first quarter.
The indebtedness under the Working Capital Facility and the Term Loan bear
interest at floating rates and 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.
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PATHMARK STORES, INC.
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
----------
1996(a) ...................................... $ 30.7
1997 ......................................... 55.5
1998 ......................................... 156.0
1999 ......................................... 128.1
2000 ......................................... 50.2
2001 ......................................... 50.0
2002 ......................................... 194.8
2003 ......................................... 599.0
- ----------
(a) Subsequent to August 3, 1996.
LIQUIDITY:
The consolidated financial statements of the Company indicate that at August
3, 1996, current liabilities exceed its current assets by $182.0 million and the
stockholder's deficit approximates $1.03 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 meet its seasonal cash
requirements. Further, the Company believes it will continue to be in compliance
with its various debt covenants, which include certain levels of operating cash
flow (as defined), minimum interest coverage and a maximum leverage ratio.
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 a portion of the Term
Loan, the Working Capital Facility and certain mortgages in Fiscal 1998, the
amortization and subsequent maturity of the balance of the Term Loan in Fiscal
1999 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's ability to make
scheduled payments or to refinance its obligations with respect to its
indebtedness depends on its financial and operating 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. While it is the
Company's intention to enter into 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.
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PATHMARK STORES, INC.
CAPITAL EXPENDITURES:
Capital expenditures for the second quarter of Fiscal 1996, including
property acquired under capital leases, were approximately $27.8 million
compared to approximately $20.8 million for the prior year and for the six-month
period of Fiscal 1996 were approximately $43.0 million compared to $36.9 million
for the prior year. During the six-month period of Fiscal 1996, the Company
opened three new Pathmark 2000 format stores, two of which replaced smaller
stores, and completed six major renovations and enlargements to existing
supermarkets. During the remainder of Fiscal 1996, the Company plans to open as
many as three new Pathmark 2000 format stores and complete up to 21 major
renovations and enlargements.
CASH FLOWS:
Cash provided by operating activities amounted to $35.7 million in the
six-month period of Fiscal 1996 compared to $57.4 million in the prior year. The
decrease in net cash provided by operating activities is primarily due to a
decline in cash provided by operating assets and liabilities and a decrease in
net earnings. Cash used for investing activities in the six-month period of
Fiscal 1996 was $17.0 million primarily due to expenditures of property and
equipment, partially offset by proceeds from property dispositions. During the
six-month period of Fiscal 1995, cash provided by investing activities was $39.6
million primarily reflecting the net proceeds from the disposition of the
freestanding drug stores and the disposal of the home centers segment, partially
offset by expenditures for property and equipment. Cash used for financing
activities in the six-month period of Fiscal 1996 was $21.5 million compared to
$108.9 million in the prior year. The decrease in cash used for financing
activities is primarily due to an increase in borrowings under the Working
Capital Facility, a decrease in dividends to PTK and a paydown of $25.0 million
on the Term Loan in Fiscal 1995 in conjunction with the disposition of the
freestanding drug stores, partially offset by a decrease in book overdrafts.
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PATHMARK STORES, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter for which this
report has been filed.
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, 1996
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