<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
NOVEMBER 2, 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
-------------------
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 November 2, 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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<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
-------------------------- --------------------------
NOVEMBER 2, OCTOBER 28, NOVEMBER 2, OCTOBER 28,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales ......................................................... $ 973,786 $ 991,923 $ 2,929,470 $ 3,045,632
Cost of sales (exclusive of
depreciation and amortization shown
separately below)............................................ 683,276 709,500 2,057,398 2,171,568
----------- ----------- ----------- -----------
Gross profit................................................... 290,510 282,423 872,072 874,064
Selling, general and administrative expenses................... 235,583 229,401 705,061 696,086
Depreciation and amortization ................................. 20,488 20,100 62,537 60,128
----------- ----------- ----------- -----------
Operating earnings............................................. 34,439 32,922 104,474 117,850
Gain on disposition of freestanding drug stores ............... -- -- -- 15,535
Interest expense............................................... (40,304) (40,318) (120,663) (123,306)
----------- ----------- ----------- -----------
Earnings (loss) before income tax benefit and
extraordinary items........................................... (5,865) (7,396) (16,189) 10,079
Income tax benefit............................................. 2,314 3,673 6,334 5,021
----------- ----------- ----------- -----------
Earnings (loss) before extraordinary items..................... (3,551) (3,723) (9,855) 15,100
Extraordinary items, net of an income tax benefit.............. -- -- (877) --
----------- ----------- ----------- -----------
Net earnings (loss) ........................................... $ (3,551) $ (3,723) $ (10,732) $ 15,100
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements (unaudited).
1
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOVEMBER 2, FEBRUARY 3,
1996 1996
-------------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ........................... $ 11,122 $ 11,648
Accounts receivable, net ............................ 11,340 10,553
Merchandise inventories ............................. 230,800 225,448
Deferred income taxes ............................... 2,935 4,156
Prepaid expenses .................................... 26,543 25,189
Income taxes receivable ............................. 1,900 --
Due from suppliers .................................. 14,461 13,178
Other current assets ................................ 5,642 5,854
----------- -----------
Total Current Assets ......................... 304,743 296,026
Property and Equipment, Net ........................... 597,462 602,888
Deferred Financing Costs, Net ......................... 29,941 33,685
Deferred Income Taxes ................................. 18,706 13,243
Other Assets .......................................... 40,299 39,915
----------- -----------
$ 991,151 $ 985,757
=========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Accounts payable .................................... $ 187,094 $ 184,082
Book overdrafts 38,007 43,720
Current maturities of long-term debt ................ 69,842 51,753
Income taxes payable ................................ -- 4,057
Accrued payroll and payroll taxes ................... 52,027 54,322
Current portion of lease obligations ................ 21,316 20,680
Accrued interest payable ............................ 19,244 19,309
Accrued expenses and other current liabilities 87,853 91,223
----------- -----------
Total Current Liabilities .................... 475,383 469,146
----------- -----------
Long-Term Debt ........................................ 1,195,986 1,214,645
----------- -----------
Lease Obligations, Long-Term .......................... 165,139 140,161
----------- -----------
Other Noncurrent Liabilities .......................... 189,606 186,036
----------- -----------
Commitments and Contingencies (Note 7)
Stockholder's Deficit
Common Stock, $.10 par value ........................ -- --
Authorized, issued and outstanding: 100 shares
Paid-in Capital ..................................... 65,303 65,303
Accumulated Deficit ................................. (1,100,266) (1,089,534)
----------- -----------
Total Stockholder's Deficit .................. (1,034,963) (1,024,231)
----------- ----------
991,151 $ 985,757
=========== ===========
</TABLE>
See notes to consolidated financial statements (unaudited).
2
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT (UNAUDITED)
(IN THOUSANDS)
See notes to consolidated financial statements (unaudited).
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT DEFICIT
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, February 3, 1996...................... $ -- $ 65,303 $(1,089,534) $(1,024,231)
Net loss .................................... -- -- (10,732) (10,732)
----------- ----------- ----------- -----------
Balance, November 2, 1996...................... $ -- $ 65,303 $(1,100,266) $(1,034,963)
=========== =========== =========== ==========
Balance, January 28, 1995...................... $ -- $ 91,809 $(1,122,281) $(1,030,472)
Net earnings ................................ -- -- 15,100 15,100
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, October 28, 1995...................... $ -- $ 65,303 $(1,107,181) $(1,041,878)
=========== ========== ============ ===========
</TABLE>
See notes to consolidated financial statements (unaudited).
3
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE><CAPTION>
39 WEEKS ENDED
----------------------------------
NOVEMBER 2, OCTOBER 28,
1996 1995
---------------- ---------------
<S> <C> <C>
Operating Activities
Net earnings (loss) ....................................................... $ (10,732) $ 15,100
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of debt ...................... 877 --
Depreciation and amortization ........................................... 65,120 62,078
Deferred income tax benefit.............................................. (4,908) (15,926)
Interest accruable but not payable ...................................... 12,344 11,123
Amortization of original issue discount ................................. 265 265
Amortization of debt issuance costs ..................................... 5,555 5,341
(Gain) loss on disposal of property and equipment ....................... (5,332) 38
Gain on disposition of freestanding drug stores ......................... -- (15,535)
Cash provided by (used for) operating assets and liabilities: ...........
Accounts receivable, net .............................................. (787) 2,312
Merchandise inventories ............................................... (5,352) 867
Income taxes .......................................................... (5,344) 16,032
Other current assets .................................................. (3,504) 3,453
Other assets........................................................... (1,245) (2,915)
Accounts payable ...................................................... 3,012 10,561
Accrued interest payable .............................................. (65) 19,617
Accrued expenses and other current liabilities ........................ (8,278) (14,172)
Other noncurrent liabilities .......................................... 3,571 1,138
--------- ---------
Cash provided by operating activities ............................... 45,197 99,377
--------- ---------
Investing Activities
Property and equipment expenditures ..................................... (38,023) (52,936)
Proceeds from disposition of property and equipment ..................... 8,059 831
Proceeds from disposal of home centers segment .......................... -- 4,706
Net proceeds from disposition of freestanding drug stores ............... -- 59,876
--------- ---------
Cash provided by (used for) investing activities .................... (29,964) 12,477
--------- ---------
Financing Activities
Increase (decrease) in Working Capital Facilities borrowings ............ 25,000 (31,000)
Decrease in Term Loan ................................................... (32,890) (50,589)
Decrease in book overdrafts ............................................. (5,713) (11,358)
Increase in other borrowings ............................................ 2,052 6,559
Repayment of other long-term borrowings ................................. (7,342) (3,929)
Reduction in lease obligations .......................................... (14,993) (13,228)
Premiums incurred in early extinguishment of debt ....................... (352) --
Proceeds from lease financing ........................................... 21,405 --
Deferred financing fees ................................................. (2,926) --
Dividend to PTK Holdings, Inc. .......................................... -- (26,506)
--------- ---------
Cash used for financing activities ............................... (15,759) (130,051)
--------- ---------
Decrease in cash and cash equivalents ..................................... (526) (18,197)
Cash and cash equivalents at beginning of period .......................... 11,648 22,012
--------- ---------
Cash and cash equivalents at end of period ................................ $ 11,122 $ 3,815
========= =========
Supplemental Disclosures of Cash Flow Information
Interest paid ........................................................... $ 98,946 $ 82,598
========= =========
Income taxes paid ....................................................... $ 3,970 $ 2,767
========= =========
Noncash Investing and Financing Activities
Capital lease obligations ............................................... $ 24,424 $ 21,609
========= =========
</TABLE>
See notes to consolidated financial statements (unaudited).
4
<PAGE>
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 operating
143 supermarkets as of November 2, 1996, including 52 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, pursuant to the rules and regulations of the
Securities and Exchange Commission, except for the new accounting standard
adopted effective February 4, 1996 (see Note 2). 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 November 2, 1996, current liabilities exceed current assets by $170.6
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. The Company was in compliance with its various debt covenants at
the end of the third quarter of Fiscal 1996. In December 1996, the Company
amended its bank credit agreement ("Bank Credit Agreement") with its existing
lenders modifying certain of its covenants, including those financial covenants
concerning levels of operating cash flow (as defined), minimum interest coverage
and maximum leverage ratio.
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.
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.
5
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 2--NEW ACCOUNTING STANDARD--(CONTINUED)
Selling, general and administrative expenses for the 39 weeks ended
November 2, 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):
NOVEMBER 2, FEBRUARY 3,
1996 1996
------------ ------------
Term Loan.................................... $ 255,065 $ 287,955
Working Capital Facilities................... 71,000 46,000
9.625% Senior Subordinated Notes due 2003.... 437,692 437,426
10.75% Deferred Coupon Notes due 2003........ 164,225 151,881
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)............. 35,721 41,011
------------ -----------
Total debt................................... 1,265,828 1,266,398
Less: current maturities..................... 69,842 51,753
------------ -----------
Long-term portion.............................. $1,195,986 $1,214,645
============ ===========
NOTE 4--INTEREST EXPENSE
Interest expense is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
---------------------------------------------------
NOVEMBER 2, OCTOBER 28, NOVEMBER 2, OCTOBER 28,
1996 1995 1996 1995
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Term Loan .................................................... $ 5,519 $ 6,494 $ 17,233 $ 22,149
Working Capital Facilities.................................... 1,299 1,015 3,955 3,995
9.625% Senior Subordinated Notes due 2003.....................
Amortization of original issue discount ................. 88 88 265 265
Currently payable........................................ 10,588 10,588 31,763 31,763
10.75% Deferred Coupon Notes due 2003
Accrued but not payable ................................. 4,222 3,805 12,344 11,123
12.625% Subordinated Debentures due 2002...................... 3,022 3,022 9,066 9,066
11.625% Subordinated Notes due 2002 .......................... 5,813 5,813 17,438 17,438
Amortization of debt issuance costs .......................... 1,918 1,783 5,555 5,341
Obligations under capital leases ............................. 4,277 4,116 13,302 12,200
Other, net ................................................... 3,558 3,594 9,742 9,966
--------- --------- -------- -----------
Interest expense .............................................$ 40,304 $ 40,318 $120,663 $123,306
========= ========= ======== ===========
</TABLE>
The majority of the cash interest payments are scheduled in the second and
fourth quarters. However, the November 1 semi-annual interest payment of $21.2
million on the 9.625% Senior Subordinated Notes was paid in the third quarter of
Fiscal 1996 and the fourth quarter of Fiscal 1995 due to the timing of the
quarter end dates.
6
<PAGE>
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--LEASE FINANCING
During the third quarter of Fiscal 1996, the Company sold three of its
supermarket properties for $19.3 million, net of fees of $1.4 million and income
taxes of $0.7 million and simultaneously leased back the properties. The net
proceeds were used to paydown debt, primarily the Working Capital Facility. Due
to the Company's continuing involvement in such properties, no gain has been
recorded and the transaction has been accounted for as a financing, with the
associated liability of $21.4 million included in Lease Obligations.
NOTE 7--CONTINGENCIES
In connection with the sale of its home centers segment in Fiscal 1994, the
Company, as lessor, entered into leases for certain real estate properties 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
approximated $33.0 million.
In January 1996, Rickel filed for bankruptcy protection under Chapter 11 of
the United States Bankruptcy Code. In April 1996, the Company filed its proofs
of claim in connection with the bankruptcy proceedings. In August 1996, Rickel
filed an order with the Bankruptcy court to reject a third party lease. The
estimated present value of this lease obligation is approximately $5.1 million.
In November 1996, Rickel filed an order with the Bankruptcy Court to reject four
Leases with aggregate annual rentals of approximately $2.4 million. The Company
is actively marketing these properties to other prospective tenants. Since the
bankruptcy is not concluded, the Company cannot 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
<PAGE>
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 for the third quarter of Fiscal 1996 were $973.8 million compared to
$991.9 million in the prior year. For the nine-month period, sales were $2,929.5
million compared to $3,045.6 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 $11.2 million in the third
quarter of Fiscal 1995 and $97.7 million in the nine-month period of Fiscal
1995. Same store sales from supermarkets decreased 1.3% in both the third
quarter and the nine-month period primarily due to a significant increase in
competitive new store openings and remodels.
At quarter end, the Company operated 143 supermarkets, including 52
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 third quarter of Fiscal 1996 was $290.5 million or
29.8% of sales compared with $282.4 million or 28.5% of sales for the prior year
and for the nine-month period was $872.1 million or 29.8% of sales compared with
$874.1 million or 28.7% for the prior year. Excluding the impact of the
disposition of the freestanding drug stores, gross profit as a percentage of
sales was 28.6% for the third quarter and 28.9% for the nine-month period of
Fiscal 1995. The improvement in gross profit as a percentage of sales for the
third quarter and nine-month period of Fiscal 1996 compared to the prior year
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 nine-month period of Fiscal 1996 of $872.1 million compared
to the prior year of $874.1 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 which was zero for
the third quarter of Fiscal 1996 and $0.8 million for the prior year, and a
pretax LIFO charge of $1.7 million and $2.1 million for the nine-month period of
Fiscal 1996 and Fiscal 1995, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"):
SG&A for the third quarter of Fiscal 1996 increased $6.2 million or 2.7%
compared to the prior year and increased $9.0 million or 1.3% for the nine-month
period compared with the prior year. SG&A, on a proforma basis eliminating the
SG&A impact of the freestanding drug stores, increased 3.9% and 4.7%,
respectively, for the third quarter and nine-month period compared to the prior
year. As a percentage of sales, SG&A were 24.2% for the third quarter of Fiscal
1996, up from 23.1% in the prior year and were 24.1% for the nine-month period
of Fiscal 1996, up from 22.9% the prior year. The increase in SG&A as a
percentage of sales for the third quarter and nine-month period of Fiscal 1996
compared to the prior year was primarily due to the impact of lower sales,
higher labor and labor related expenses, coupon expense,
8
<PAGE>
PATHMARK STORES, INC.
claims expenses and occupancy costs, partially offset by lower advertising
expenses and the impact of the disposition of the freestanding drug stores in
Fiscal 1995. SG&A for the nine-month period of Fiscal 1996 also included a first
quarter provision of $5.8 million representing the termination costs for two
former executives of the Company, a first quarter gain of $5.6 million
recognized on the sale of certain real estate and a curtailment gain of $2.0
million due to the elimination of postretirement medical coverage for active
non-union associates in Fiscal 1996.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization of $20.5 million for the third quarter of
Fiscal 1996 was $0.4 million higher than the prior year of $20.1 million. For
the nine-month period of Fiscal 1996 depreciation and amortization of $62.5
million was $2.4 million higher than the prior year of $60.1 million. The
increase in depreciation and amortization expense for the third quarter and
nine-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 $0.8 million and $0.65
million in the third quarter of Fiscal 1996 and Fiscal 1995, respectively, and
$2.3 million and $1.95 million for the nine-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 third quarter of Fiscal 1996 were $34.4
million compared with the prior year of $32.9 million. For the nine-month period
of Fiscal 1996, operating earnings were $104.5 million compared with $117.9
million for the prior year. The increase in operating earnings during the third
quarter of Fiscal 1996 compared to the prior year was due to higher gross
profit, partially offset by higher SG&A. The decrease in operating earnings
during the nine-month period of Fiscal 1996 compared to the prior year was due
to lower sales and higher SG&A and depreciation and amortization expense.
INTEREST EXPENSE:
Interest expense was $40.3 million in both the third quarters of Fiscal
1996 and Fiscal 1995 and $120.7 million for the nine-month period of Fiscal
1996 compared to $123.3 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 third quarter and the nine-month period of Fiscal 1996 was
$2.3 million and $6.3 million, respectively. The income tax benefit for the
third quarter and the nine-month period of Fiscal 1995 was $3.7 million and
$5.0 million, respectively. The income tax benefit of $5.0 million in the
prior year reflects the reversal of the valuation allowance of $9.1 million
related to the deferred income tax assets.
During the nine-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 nine-month period of Fiscal 1995, the Company made income tax payments of
$2.8 million and received income tax refunds of $8.1 million.
9
<PAGE>
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 third quarter of Fiscal 1996, the Company's net loss was $3.6
million compared to a net loss of $3.7 million for the prior year. The decrease
in net loss for the third quarter of Fiscal 1996 compared to the prior year was
due to higher operating earnings, partially offset by a lower income tax
benefit.
For the nine-month period of Fiscal 1996, the Company's net loss was $10.7
million compared to net earnings of $15.1 million for the prior year. The
decrease in net earnings for the nine-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.
For the month of November 1996, total sales and same store sales were
below the comparable prior year period and the Company expects this trend to
continue throughout the remainder of the fourth quarter. The Company is
restructuring its operations to reduce operating costs, refocus on its core
business and improve customer service. In conjunction with this process, the
Company anticipates recording a restructuring charge in the fourth quarter.
FINANCIAL CONDITION
DEBT SERVICE:
During the nine-month period of Fiscal 1996, total debt decreased $0.6
million from Fiscal 1995 year end primarily due to Term Loan repayments of $32.9
million, including repayments of $1.7 million from asset sale proceeds,
partially offset by borrowings under the Working Capital Facility and debt
accretion on the Deferred Coupon Notes. Borrowings under the Working Capital
Facility were $71.0 million at November 2, 1996 and have decreased to $47.0
million at December 12, 1996.
During the third quarter of Fiscal 1996, the Company sold three of its
supermarket properties for $19.3 million, net of fees of $1.4 million and income
taxes of $0.7 million and simultaneously leased back the properties. The net
proceeds were used to paydown debt, primarily the Working Capital Facility.
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.
10
<PAGE>
PATHMARK STORES, INC.
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.
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) .......................... $ 19.3
1997 ............................. 65.4
1998 ............................. 155.6
1999 ............................. 127.2
2000 ............................. 50.2
2001 ............................. 50.0
2002 ............................. 194.8
2003 ............................. 603.3
- ----------
(a) Subsequent to November 2, 1996.
LIQUIDITY:
The consolidated financial statements of the Company indicate that at
November 2, 1996, current liabilities exceed its current assets by $170.6
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. The Company was in compliance with its various debt covenants at
the end of the third quarter of Fiscal 1996. In December 1996, the Company
amended its Bank Credit Agreement with its existing lenders modifying certain of
its covenants, including those financial covenants concerning levels of
operating cash flow (as defined), minimum interest coverage and 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
11
<PAGE>
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.
CAPITAL EXPENDITURES:
Capital expenditures for the third quarter of Fiscal 1996, including
property acquired under capital leases, were approximately $19.4 million
compared to approximately $36.7 million for the prior year and for the
nine-month period of Fiscal 1996 were approximately $62.4 million compared to
$73.7 million for the prior year. During the nine-month period of Fiscal 1996,
the Company opened three new Pathmark 2000 format stores, two of which replaced
smaller stores, and completed 18 major renovations and enlargements to existing
supermarkets. Subsequent to November 2, 1996, the Company opened one new
Pathmark 2000 format store and plans to complete up to four major renovations
and enlargements during the remainder of Fiscal 1996.
CASH FLOWS:
Cash provided by operating activities amounted to $45.2 million in the
nine-month period of Fiscal 1996 compared to $99.4 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 nine-month period of
Fiscal 1996 was $30.0 million primarily due to expenditures of property and
equipment, partially offset by proceeds from property dispositions. Cash
provided by investing activities in the nine-month period of Fiscal 1995 was
$12.5 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 nine-month period of Fiscal 1996 was $15.8 million compared to
$130.1 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, the proceeds from the lease financing of three supermarket
locations, 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.
12
<PAGE>
PATHMARK STORES, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
One report on Form 8-K has been filed during the quarter for which this
report has been filed. On October 7, 1996, the registrant filed a report on Form
8-K reporting information under "Item 5. Other Events" concerning the
announcement of James Donald as the new Chairman, President and Chief Executive
Officer of the Company.
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: December 16, 1996
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Pathmark
Stores, Inc. Consolidated Statement of Operations for the 39 weeks ended
November 2, 1996 and Consolidated Balance Sheet as of November 2, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> NOV-02-1996
<CASH> 11,122
<SECURITIES> 0
<RECEIVABLES> 12,468
<ALLOWANCES> (1,128)
<INVENTORY> 230,800
<CURRENT-ASSETS> 304,743
<PP&E> 993,147
<DEPRECIATION> (395,685)
<TOTAL-ASSETS> 991,151
<CURRENT-LIABILITIES> 475,383
<BONDS> 1,195,986
0
0
<COMMON> 0
<OTHER-SE> (1,034,963)
<TOTAL-LIABILITY-AND-EQUITY> 991,151
<SALES> 2,929,470
<TOTAL-REVENUES> 2,929,470
<CGS> 2,057,398
<TOTAL-COSTS> 2,057,398
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (271)
<INTEREST-EXPENSE> (120,663)
<INCOME-PRETAX> (16,189)
<INCOME-TAX> 6,334
<INCOME-CONTINUING> (9,855)
<DISCONTINUED> 0
<EXTRAORDINARY> (877)
<CHANGES> 0
<NET-INCOME> (10,732)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
