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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 1, 1998 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)
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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
--------------- ---------------
As of August 1, 1998, 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 1, August 2, August 1, August 2,
1998 1997 1998 1997
---------- --------- ------------ -----------
Sales............................................... $ 922,909 $ 931,833 $ 1,838,924 $ 1,854,152
Cost of sales (exclusive of depreciation
and amortization shown separately below)........ 661,084 669,683 1,312,946 1,332,740
---------- --------- ------------ -----------
Gross profit........................................ 261,825 262,150 525,978 521,412
Selling, general and administrative expenses........ 204,339 213,095 415,404 425,436
Depreciation and amortization....................... 19,713 19,942 39,361 40,116
---------- --------- ------------ -----------
Operating earnings.................................. 37,773 29,113 71,213 55,860
Interest expense.................................... (39,938) (41,262) (80,812) (82,552)
---------- --------- ------------ -----------
Loss before income tax (provision) benefit and
extraordinary items.............................. (2,165) (12,149) (9,599) (26,692)
Income tax (provision) benefit...................... (13) 4,836 (40) 10,537
---------- --------- ------------ -----------
Loss before extraordinary items..................... (2,178) (7,313) (9,639) (16,155)
Extraordinary items, net of an income tax
benefit.......................................... -- (7,488) -- (7,488)
---------- --------- ------------ -----------
Net loss............................................ $ (2,178) $ (14,801) $ (9,639) $ (23,643)
---------- --------- ------------ -----------
---------- --------- ------------ -----------
See notes to consolidated financial statements (unaudited).
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands except share amounts)
August 1, January 31,
1998 1998
----------- ----------
ASSETS
Current Assets
Cash and cash equivalents........................................ $ 10,348 $ 60,076
Accounts receivable, net......................................... 10,778 10,928
Merchandise inventories.......................................... 153,978 148,775
Deferred income taxes, net....................................... 10,551 10,621
Prepaid expenses................................................. 22,925 21,449
Due from suppliers............................................... 43,419 13,027
Other current assets............................................. 12,383 11,331
------------ ------------
Total Current Assets.......................................... 264,382 276,207
Property and Equipment, Net.......................................... 500,488 529,542
Deferred Financing Costs, Net........................................ 16,601 18,547
Deferred Income Taxes, Net........................................... 44,170 43,389
Other Assets......................................................... 33,927 32,687
------------ ------------
$ 859,568 $ 900,372
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current Liabilities
Accounts payable and book overdrafts............................. $ 97,047 $ 154,814
Current maturities of long-term debt............................. 36,037 43,478
Income taxes payable............................................. 604 1,771
Accrued payroll and payroll taxes................................ 49,011 49,533
Current portion of lease obligations............................. 23,614 24,337
Accrued interest payable......................................... 20,478 18,300
Accrued expenses and other current liabilities................... 91,041 93,297
------------ ------------
Total Current Liabilities..................................... 317,832 385,530
------------ ------------
Long-Term Debt....................................................... 1,249,546 1,177,898
------------ ------------
Lease Obligations, Long-Term......................................... 169,781 170,273
------------ ------------
Other Noncurrent Liabilities......................................... 235,760 244,011
------------ ------------
Commitments and Contingencies (Note 6)
Stockholder's Deficiency
Common Stock, $.10 par value..................................... -- --
Authorized, issued and outstanding: 100 shares
Paid-in Capital.................................................. 69,603 68,703
Accumulated Deficit.............................................. (1,155,682) (1,146,043)
Note Receivable from PTK Holdings, Inc........................... (27,272) --
------------ ------------
Total Stockholder's Deficiency................................ (1,113,351) (1,077,340)
------------ ------------
$ 859,568 $ 900,372
------------ ------------
------------ ------------
See notes to consolidated financial statements (unaudited).
2
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY (Unaudited)
(in thousands)
Note
Receivable Total
Common Paid-in Accumulated from PTK Stockholder's
Stock Capital Deficit Holdings, Inc. Deficiency
------- -------- ------------- -------------- -------------
Balance, January 31, 1998...................... $ -- $ 68,703 $ (1,146,043) $ -- $ (1,077,340)
Net loss.................................... -- -- (9,639) -- (9,639)
Note receivable from PTK
Holdings, Inc.............................. -- -- -- (26,471) (26,471)
Accretion on note receivable from
PTK Holdings, Inc.......................... -- 801 -- (801) --
Dividend to PTK Holdings, Inc............... -- (20) -- -- (20)
Capital contribution from SMG-II
Holdings Corporation....................... -- 119 -- -- 119
------- -------- ------------- --------- -------------
Balance, August 1, 1998....................... $ -- $ 69,603 $ (1,155,682) $ (27,272) $ (1,113,351)
------- -------- ------------- --------- -------------
------- -------- ------------- --------- -------------
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)
------- -------- ------------- --------- -------------
------- -------- ------------- --------- -------------
See notes to consolidated financial statements (unaudited).
3
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
26 Weeks Ended
-------------------------
August 1, August 2,
1998 1997
--------- ---------
Operating Activities
Net loss................................................................................. $ (9,639) $ (23,643)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Extraordinary loss on early extinguishment of debt.................................... -- 7,488
Depreciation and amortization......................................................... 41,171 42,133
Deferred income tax benefit........................................................... (711) (15,993)
Interest accruable but not payable.................................................... 10,055 9,013
Amortization of original issue discount............................................... 178 177
Amortization of debt issuance costs................................................... 2,053 3,510
(Gain) loss on disposal of property and equipment..................................... (4,562) 89
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net............................................................ 150 1,079
Merchandise inventories............................................................. (5,203) 20,592
Income taxes........................................................................ 552 2,871
Other current assets................................................................ (34,259) (336)
Other assets........................................................................ 877 (1,794)
Accounts payable.................................................................... (31,437) (16,531)
Accrued interest payable............................................................ 2,172 (1,711)
Accrued expenses and other current liabilities...................................... (4,583) (1,177)
Other noncurrent liabilities........................................................ (18,071) (14,008)
--------- ---------
Cash provided by (used for) operating activities.................................. (51,257) 11,759
--------- ---------
Investing Activities
Property and equipment expenditures...................................................... (16,905) (13,608)
Proceeds from disposition of property and equipment...................................... 28,267 25,470
--------- ---------
Cash provided by investing activities............................................. 11,362 11,862
--------- ---------
Financing Activities
Increase (decrease) in working capital facilities borrowings............................. 63,400 (52,600)
Repayments of term loans................................................................. (3,783) (243,127)
Decrease in book overdrafts.............................................................. (26,330) (8,306)
Increase in other borrowings............................................................. 3,129 1,562
Repayment of other long-term borrowings.................................................. (8,772) (4,322)
Reduction in lease obligations........................................................... (10,879) (10,615)
Deferred financing fees.................................................................. (107) (8,292)
Note receivable from PTK Holdings, Inc................................................... (26,471) --
Dividend to PTK Holdings, Inc............................................................ (20) --
Borrowings under Term Loan in connection with the Credit Agreement....................... -- 300,000
Premiums incurred in early extinguishment of debt........................................ -- (132)
--------- ---------
Cash used for financing activities................................................ (9,833) (25,832)
--------- ---------
Decrease in cash and cash equivalents....................................................... (49,728) (2,211)
Cash and cash equivalents at beginning of period............................................ 60,076 9,880
--------- ---------
Cash and cash equivalents at end of period.................................................. $ 10,348 $ 7,669
--------- ---------
--------- ---------
Supplemental Disclosures of Cash Flow Information
Interest paid............................................................................ $ 66,496 $ 71,507
--------- ---------
--------- ---------
Income taxes paid........................................................................ $ 2,346 $ 3,143
--------- ---------
--------- ---------
Noncash Investing and Financing Activities
Capital lease obligations................................................................ $ 10,460 $ 13,669
--------- ---------
--------- ---------
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 135 supermarkets as of August
1, 1998, 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 January 31, 1998, 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 January 31, 1998.
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 second
quarter and six-month period of Fiscal 1998; therefore, no income tax benefit
has been recognized.
Note 2--Long-Term Debt
Long-term debt is comprised of the following (dollars in thousands):
August 1, January 31,
1998 1998
----------- -----------
Term loan ("Term Loan")............................................................. $ 259,467 $ 263,250
Working capital facility ("Working Capital Facility")............................... 63,400 --
9.625% Senior Subordinated Notes due 2003 ("Senior Subordinated Notes")............. 438,312 438,134
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 ("Deferred Coupon Notes")..................... 197,123 187,068
Debt payable to Holdings............................................................ 983 983
Industrial revenue bonds............................................................ 8,561 6,375
Other debt (primarily mortgages).................................................... 22,970 30,799
----------- -----------
Total debt.......................................................................... 1,285,583 1,221,376
Less: current maturities............................................................ 36,037 43,478
----------- -----------
Long-term portion................................................................... $ 1,249,546 $ 1,177,898
----------- -----------
----------- -----------
Note 3--Stockholder's Deficiency
During the second quarter of Fiscal 1998, in conjunction with the pay down
of debt by PTK, Pathmark loaned $26.5 million to PTK in the form of a 14 1/2%
discount note, due May 12, 2003, 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 and
Pathmark is not reflecting interest income in its statement of operations
related to this note. Accordingly, the accretion on this note is offset by a
corresponding credit to paid-in capital.
In addition, during the second quarter of Fiscal 1998, SMG-II Holdings
Corporation ("SMG-II"), the Company's ultimate parent, issued restricted stock
grants ("Stock Grants") to certain officers and key employees of the Company.
The Stock Grants will vest in seven years or earlier with the occurrence of an
employment-related event, as defined, and will be forfeited in their entirety
upon the occurrence of a termination event, as defined. The Stock Grants were
valued at $5.0 million at the date of issuance, based on an independent
appraisal, and are being amortized as compensation expense in the Company's
statement of operations over the seven-year vesting period, with a corresponding
credit to paid-in capital.
5
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
Note 3--Stockholder's Deficiency--(Continued)
During the second quarter of Fiscal 1998, the Company paid a dividend of
$20.0 thousand to its stockholder to pay for its administrative expenses. Such
dividend is limited to $100.0 thousand per year in accordance with the bank
credit agreement ("Credit Agreement").
Note 4--Selling, General and Administrative Expenses ("SG&A")
SG&A for the second quarter and six-month period of Fiscal 1998 are net of
a gain of $5.1 million related to the sale of certain real estate.
Note 5--Interest Expense
Interest expense is comprised of the following (dollars in thousands):
13 Weeks Ended 26 Weeks Ended
------------------------- ------------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
--------- -------- ------- --------
Term loans.......................................... $ 5,361 $ 5,393 $ 10,665 $ 10,523
Working capital facilities.......................... 1,458 1,705 1,998 3,472
Senior Subordinated Notes
Amortization of original issue discount......... 89 89 178 177
Currently payable............................... 10,587 10,587 21,175 21,175
Subordinated Notes.................................. 5,812 5,812 11,625 11,625
Subordinated Debentures............................. 3,022 3,022 6,044 6,044
Deferred Coupon Notes
Accrued but not payable......................... 5,118 4,565 10,055 9,013
Amortization of debt issuance costs................. 1,022 1,609 2,053 3,510
Lease obligations................................... 5,419 5,589 10,908 11,070
Other, net.......................................... 2,050 2,891 6,111 5,943
--------- -------- ------- --------
Interest expense.................................... $ 39,938 $ 41,262 $ 80,812 $ 82,552
--------- -------- --------- --------
--------- -------- --------- --------
The majority of the cash interest payments are scheduled in the second and
fourth quarters.
Note 6--Contingencies
Rickel:
In connection with the sale of its home centers segment in Fiscal 1994,
the Company, as lessor, entered into nine leases for certain of the Company's
owned real estate properties with Rickel Home Centers, Inc. ("Rickel"), as
tenant.
In addition, the Company assigned to Rickel 26 third party leases.
In 1996, Rickel filed for bankruptcy protection under Chapter 11 of the
United States Bankruptcy Code. Subsequent to the filing, of the 35 locations
leased to Rickel, Rickel entered into an agreement in 1998 to assign the leases
of 16 locations to Staples, Inc., nine leases have either been terminated or
assigned to third parties and ten rejected leases 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 sublease recoveries.
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.
6
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 1998 were $922.9 million compared to
$931.8 million in the prior year, a decrease of 1.0%. For the six-month period
of Fiscal 1998, sales were $1,838.9 million compared to $1,854.2 million in the
prior year, a decrease of 0.8%. However, same store sales increased 0.5% and
1.1% for the second quarter and six-month period, respectively. Sales in the
second quarter and six-month period of Fiscal 1998 compared to the prior year
were impacted by sold and closed stores, partially offset by new store openings
and same store sales increases. The Company operated 135 and 138 supermarkets at
the end of the second quarters of Fiscal 1998 and Fiscal 1997, respectively.
Gross Profit:
Gross profit in the second quarter of Fiscal 1998 was $261.8 million or
28.4% of sales compared with $262.2 million or 28.1% of sales in the prior year.
For the six-month period of Fiscal 1998, gross profit was $526.0 million or
28.6% of sales compared to $521.4 million or 28.1% for the prior year. The
increase in gross profit as a percentage of sales for the second quarter and
six-month period of Fiscal 1998 compared to the prior year was primarily due to
the savings realized from the Company's outsourcing at the end of Fiscal 1997 of
certain of its distribution center operations to C&S Wholesale Grocers, Inc.
("C&S") and improvements in the perishables mix. The cost of goods sold amounts
were affected by a pretax LIFO charge of $0.35 million and $0.5 million in the
second quarters of Fiscal 1998 and Fiscal 1997, respectively, and a pretax LIFO
charge of $0.7 million and $0.9 million in the six-month periods of Fiscal 1998
and Fiscal 1997, respectively.
SG&A:
SG&A in the second quarter of Fiscal 1998 decreased $8.8 million or 4.1%
compared to the prior year and decreased $10.0 million or 2.4% in the six-month
period of Fiscal 1998 compared to the prior year. As a percentage of sales, SG&A
was 22.1% in the second quarter of Fiscal 1998, down from 22.9% in the prior
year and was 22.6% for the six-month period of Fiscal 1998 down from 22.9% in
the prior year. The decrease in SG&A in the second quarter and six-month period
of Fiscal 1998 compared to the prior year was primarily due to the gain
recognized on the sale of certain real estate, lower advertising and insurance
expense, along with lower operating costs which resulted from sold and closed
stores. Excluding the gain on the sale of real estate, SG&A as a percentage of
sales were 22.7% and 22.9% for the second quarter and six-month period of Fiscal
1998.
Depreciation and Amortization:
Depreciation and amortization of $19.7 million in the second quarter of
Fiscal 1998 was $0.2 million lower than the prior year of $19.9 million. For the
six-month period of Fiscal 1998, depreciation and amortization of $39.4 million
was $0.7 million lower than the prior year of $40.1 million. The decrease in
depreciation and amortization expense in the second quarter and six-month period
of Fiscal 1998 compared to the prior year was primarily due to the sale of
certain of the Company's distribution center facilities at the end of Fiscal
1997 as part of its transaction with C&S, partially offset by capital
expenditures. Depreciation and amortization excludes video tape amortization,
which is recorded in cost of goods sold, of $0.7 million and $0.9 million in the
second quarters of Fiscal 1998 and Fiscal 1997, respectively, and $1.5 million
and $1.7 million in the six-month periods of Fiscal 1998 and Fiscal 1997,
respectively.
7
PATHMARK STORES, INC.
Operating Earnings:
Operating earnings in the second quarter of Fiscal 1998 were $37.8 million
compared with the prior year of $29.1 million. For the six-month period of
Fiscal 1998, operating earnings were $71.2 million compared with $55.9 million
in the prior year. The increase in operating earnings in the second quarter of
Fiscal 1998 compared to the prior year was due to lower SG&A. The increase in
operating earnings in the six-month period of Fiscal 1998 compared to the prior
year was due to higher gross profit and lower SG&A.
Interest Expense:
Interest expense was $39.9 million in the second quarter of Fiscal 1998
compared to $41.3 million in the prior year and $80.8 million for the six-month
period of Fiscal 1998 compared to $82.6 million. The decrease in interest
expense in the second quarter and six-month period of Fiscal 1998 compared to
the prior year was primarily due to lower levels of borrowings under the working
capital facilities and lower amortization of debt issuance costs, partially
offset by the debt accretion on the Deferred Coupon 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
and second quarters of Fiscal 1998; therefore, no income tax benefit has been
recognized. The Company believes that it is more likely than not that the net
deferred income tax assets of $54.7 million at August 1, 1998 will be realized
through the implementation of tax strategies which could generate taxable
income. The income tax benefit for the second quarter and six-month period of
Fiscal 1997 was $4.8 million and $10.5 million, respectively.
During the six-month period of Fiscal 1998, the Company made income tax
payments of $2.3 million and received income tax refunds of $0.5 million. 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.
Extraordinary Items:
During the second quarter of Fiscal 1997, in connection with the then
executed $500 million 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.
Summary of Operations:
The Company's net loss in the second quarter of Fiscal 1998 was $2.2 million
compared to a net loss of $14.8 million for the prior year. For the six-month
period of Fiscal 1998, the Company's net loss was $9.6 million compared to a net
loss of $23.6 million in the prior year. The decrease in net loss in the second
quarter and six-month period of Fiscal 1998 compared to the prior year was
primarily due to higher operating earnings and lower interest expense in Fiscal
1998 and the extraordinary loss in Fiscal 1997, partially offset by a reduction
in the income tax benefit.
EBITDA-FIFO:
EBITDA-FIFO was $53.6 million and $50.6 million in the second quarters of
Fiscal 1998 and Fiscal 1997, respectively and $107.9 million and $98.9 million
for the six-month period of Fiscal 1998 and Fiscal 1997, respectively.
EBITDA-FIFO represents net earnings before interest expense, income taxes,
depreciation, amortization, the gain on sale of 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 income or to cash flows from operating
activities, as determined in accordance with generally accepted accounting
principles.
8
PATHMARK STORES, INC.
Financial Condition
Debt Service:
During the six-month period of Fiscal 1998, total debt increased $64.2
million from Fiscal 1997 year end due to borrowings under the Working Capital
Facility and debt accretion on the Deferred Coupon Notes, partially offset by a
decrease in certain mortgages. Borrowings under the Working Capital Facility
were $63.4 million at August 1, 1998 and $68.8 million at September 10, 1998. In
addition, during the six-month period of Fiscal 1998, total lease obligations
decreased $1.2 million from Fiscal 1997 year end.
During the second quarter of Fiscal 1998, in conjunction with the pay down
of debt by PTK, Pathmark loaned $26.5 million to PTK in the form of a 14 1/2%
discount note, due May 12, 2003, accreting to a maturity value of $53.3 million.
PTK is not required to pay cash interest on this note.
During the first six months of Fiscal 1998, the Company sold certain real
estate for $26.9 million and recognized a gain of $5.1 million in the second
quarter of Fiscal 1998. The proceeds were used to pay down the related mortgages
and a portion of the Working Capital Facility.
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.
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) is as follows (dollars in millions):
Principal
Fiscal Years Payments
------------ --------
1998(a)................................... $ 29.5
1999...................................... 12.1
2000...................................... 75.1
2001...................................... 336.0
2002...................................... 195.9
2003...................................... 636.7
Thereafter................................ 0.3
---------
Total..................................... $ 1,285.6
---------
---------
- ------------
(a) Subsequent to August 1, 1998
Liquidity:
The consolidated financial statements of the Company indicate that, at
August 1, 1998, current liabilities exceeded current assets by $53.5 million and
stockholder's deficiency was $1.1 billion. Cash used for operating activities
was $51.3 million in the six-month period of Fiscal 1998 compared to cash
provided by operating activities of $11.8 million in the prior year. The change
in cash flow from operating activities was primarily due to cash used for
operating assets and liabilities, resulting from the paydown of trade accounts
payable, utilizing the proceeds received at the end of Fiscal 1997 related to
the C&S transaction, and an increase in due from suppliers related to the C&S
transition, partially offset by a decrease in the net loss. Management believes
that cash flows generated from operations (excluding the C&S transitional
related items), 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.
9
PATHMARK STORES, INC.
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 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 1, 1998
and, based on management's operating projections for Fiscal 1998, the Company
believes that it will continue to be in compliance with its various debt
covenants. The Company's ability to make scheduled payments or to refinance or
otherwise meet 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 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 1998, including
property acquired under capital leases, were $7.9 million compared to $15.5
million for the prior year and for the six-month period of Fiscal 1998 were
$27.4 million compared to $27.3 million for the prior year. During the six-month
period of Fiscal 1998, the Company completed nine renovations to existing
supermarkets. During the remainder of Fiscal 1998, the Company plans to open one
new Pathmark store and complete up to an aggregate of 11 renovations and
enlargements. In addition, the Company has announced the closing of three
stores, which will occur during the third quarter of Fiscal 1998. Capital
expenditures for Fiscal 1998, including property to be acquired under capital
leases, are estimated to be $79.0 million. Management believes that cash flows
generated from operations (excluding the C&S transitional related items),
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 $51.3 million in the six-month
period of Fiscal 1998 compared to cash provided by operating activities of $11.8
million in the prior year. The change in cash flow from operating activities was
primarily due to cash used for operating assets and liabilities, resulting from
the paydown of trade accounts payable, utilizing the proceeds received at the
end of Fiscal 1997 related to the C&S transaction, and an increase in due from
suppliers related to the C&S transition, partially offset by a decrease in the
net loss. Cash provided by investing activities was $11.4 million in the
six-month period of Fiscal 1998 compared to $11.9 million in the prior year. The
decrease in cash provided by investing activities was primarily due to an
increase in expenditures of property and equipment, partially offset by an
increase in proceeds from property dispositions. Cash used for financing
activities was $9.8 million in the six-month period of Fiscal 1998 compared to
$25.8 million in the prior year. The decrease in cash used for financing
activities was primarily due to an increase in borrowings under the Working
Capital Facility in Fiscal 1998, as compared to the borrowings under the Term
Loan, net of repaying in full the former term loan and former working capital
facility in conjunction with the Credit Agreement in Fiscal 1997 and a decrease
in deferred financing fees related to the Credit Agreement in Fiscal 1997,
partially offset by a decrease in book overdrafts related to the C&S transition
and the note receivable from PTK.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: none
(b) Reports on Form 8-K: not applicable
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/ Frank Vitrano
-------------------------------
(Frank Vitrano)
Senior Vice President and
Chief Financial Officer
By /s/ Joseph Adelhardt
-------------------------------
(Joseph Adelhardt)
Senior Vice President and Controller,
Chief Accounting Officer
Date: September 15, 1998
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