<PAGE>
Rule 424(b)(3)
File No. 33-59612
PROSPECTUS SUPPLEMENT NO. 3 DATED DECEMBER 16, 1997
TO PROSPECTUS DATED JUNE 27, 1997
PATHMARK STORES, INC.
9-5/8% SENIOR SUBORDINATED NOTES DUE 2003
11-5/8% SUBORDINATED NOTES DUE 2002
12-5/8% SUBORDINATED DEBENTURES DUE 2002
JUNIOR SUBORDINATED DEFERRED COUPON NOTES DUE 2003
THIS PROSPECTUS SUPPLEMENT IS INTENDED TO BE READ IN CONJUNCTION WITH
THE PROSPECTUS DATED JUNE 27, 1997
Attached hereto is the Company's Quarterly Report on Form 10-Q for the quarter
ended November 1, 1997 which includes, among other things, the unaudited
consolidated financial statements of the Company for the three and nine months
ended November 1, 1997 and Management's Discussion and Analysis of Financial
Condition and Results of Operations for the three and nine months ended
November 1, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------------
<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 1, 1997 1-5287
PATHMARK STORES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2879612
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 BLAIR ROAD, P.O. BOX 5301 07095-0915
WOODBRIDGE, NEW JERSEY (Zip Code)
(Address of principal executive offices)
(732) 499-3000
(Registrant's telephone number, including area code)
-------------------
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 1, 1997, there were outstanding 100 shares of Common
Stock, $0.10 par value, all of which are privately owned and not traded on a
public market.
===============================================================================
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands)
13 WEEKS ENDED 39 WEEKS ENDED
-------------------------- -------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1997 1996 1997 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales.............................................. $ 900,986 $ 911,099 $ 2,755,138 $ 2,755,173
Cost of sales (exclusive of depreciation and
amortization shown separately below)............ 652,812 644,352 1,985,552 1,947,705
----------- ------------ ------------ ------------
Gross profit....................................... 248,174 266,747 769,586 807,468
Selling, general and administrative expenses....... 205,292 211,820 630,728 640,457
Depreciation and amortization...................... 21,366 20,488 61,482 62,537
----------- ------------ ------------ ------------
Operating earnings................................. 21,516 34,439 77,376 104,474
Interest expense................................... (40,368) (40,304) (122,920) (120,663)
----------- ------------ ------------ ------------
Loss before income tax benefit and
extraordinary items............................. (18,852) (5,865) (45,544) (16,189)
Income tax benefit................................. 7,630 2,314 18,167 6,334
----------- ------------ ------------ ------------
Loss before extraordinary items.................... (11,222) (3,551) (27,377) (9,855)
Extraordinary items, net of an income tax
benefit of $5,456 in Fiscal 1997 and $613
in Fiscal 1996.................................. -- -- (7,488) (877)
----------- ------------ ------------ ------------
Net loss........................................... $ (11,222) $ (3,551) $ (34,865) $ (10,732)
=========== ============ ============ ============
</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 1, FEBRUARY 1,
1997 1997
----------- ----------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents........................................ $ 8,352 $ 9,880
Accounts receivable, net......................................... 9,919 12,492
Merchandise inventories.......................................... 202,803 216,931
Income taxes receivable.......................................... 1,250 --
Deferred income taxes............................................ 6,710 7,111
Prepaid expenses................................................. 24,619 24,951
Due from suppliers............................................... 11,206 13,923
Other current assets............................................. 10,061 5,908
------------ ------------
$ 989,896
Total Current Assets.......................................... 274,920 291,196
Property and Equipment, Net.......................................... 550,298 603,577
Deferred Financing Costs, Net........................................ 19,734 28,743
Deferred Income Taxes................................................ 47,357 22,846
Other Assets......................................................... 35,766 43,534
------------ ------------
$ 928,075 $ 989,896
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Accounts payable................................................. $ 142,313 $ 166,199
Book overdrafts.................................................. 30,511 41,085
Current maturities of long-term debt............................. 17,493 74,431
Income taxes payable............................................. -- 860
Accrued payroll and payroll taxes................................ 51,742 56,335
Current portion of lease obligations............................. 24,887 23,133
Accrued interest payable......................................... 37,579 20,712
Accrued expenses and other current liabilities................... 90,284 90,589
------------ ------------
Total Current Liabilities..................................... 394,809 473,344
------------ ------------
Long-Term Debt....................................................... 1,259,681 1,185,639
------------ ------------
Lease Obligations, Long-Term......................................... 167,288 175,353
------------ ------------
Other Noncurrent Liabilities......................................... 182,828 197,226
------------ ------------
Commitments and Contingencies (Note 5)
Stockholder's Deficit
Common Stock, $.10 par value..................................... -- --
Authorized, issued and outstanding: 100 shares
Paid-in Capital.................................................. 68,703 68,703
Accumulated Deficit.............................................. (1,145,234) (1,110,369)
------------ ------------
Total Stockholder's Deficit................................... (1,076,531) (1,041,666)
------------ ------------
$ 928,075 $ 989,896
============ ============
</TABLE>
See notes to consolidated financial statements (unaudited).
2
<PAGE>
<TABLE>
<CAPTION>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT (UNAUDITED)
(in thousands)
TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT DEFICIT
------ ------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, February 1, 1997................. $ -- $ 68,703 $ (1,110,369) $ (1,041,666)
Net loss.................................. -- -- (34,865) (34,865)
------ -------- -------------- -------------
Balance, November 1, 1997................. $ -- $ 68,703 $ (1,145,234) $ (1,076,531)
====== ======== ============== =============
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)
====== ======== ============== =============
</TABLE>
See notes to consolidated financial statements (unaudited).
3
<PAGE>
<TABLE>
<CAPTION>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
39 WEEKS ENDED
-------------------------
NOVEMBER 1, NOVEMBER 2,
1997 1996
--------- ---------
Operating Activities
<S> <C> <C>
Net loss................................................................................. $ (34,865) $ (10,732)
Adjustments to reconcile net loss to net cash provided by operating activities:
Extraordinary loss on early extinguishment of debt.................................... 7,488 877
Depreciation and amortization......................................................... 64,499 65,120
Deferred income tax benefit........................................................... (23,622) (4,908)
Interest accruable but not payable.................................................... 13,700 12,344
Amortization of original issue discount............................................... 265 265
Amortization of debt issuance costs................................................... 4,526 5,555
(Gain) loss on disposal of property and equipment..................................... 117 (5,332)
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net............................................................ 2,573 (787)
Merchandise inventories............................................................. 14,128 (5,352)
Income taxes........................................................................ 3,346 (5,344)
Other current assets................................................................ (3,400) (3,504)
Other assets........................................................................ 6,124 (1,245)
Accounts payable.................................................................... (23,886) 3,012
Accrued interest payable............................................................ 15,169 (65)
Accrued expenses and other current liabilities...................................... (3,144) (8,278)
Other noncurrent liabilities........................................................ (17,597) 3,571
--------- ---------
Cash provided by operating activities............................................. 25,421 45,197
--------- ---------
Investing Activities
Property and equipment expenditures...................................................... (20,702) (38,023)
Proceeds from disposition of property and equipment...................................... 25,475 8,059
--------- ---------
Cash provided by (used for) investing activities.................................. 4,773 (29,964)
--------- ---------
Financing Activities
Borrowings under Term Loan in connection with the new Credit Agreement................... 300,000 --
Repayments of term loans................................................................. (245,252) (32,890)
Increase (decrease) in working capital facilities borrowings............................. (48,300) 25,000
Decrease in book overdrafts.............................................................. (10,574) (5,713)
Increase in other borrowings............................................................. 1,956 2,052
Repayment of other long-term borrowings.................................................. (5,265) (7,342)
Reduction in lease obligations........................................................... (15,902) (14,993)
Deferred financing fees.................................................................. (8,253) (2,926)
Premiums incurred in early extinguishment of debt........................................ (132) (352)
Proceeds from lease financing............................................................ -- 21,405
--------- ---------
Cash used for financing activities................................................ (31,722) (15,759)
--------- ---------
Decrease in cash and cash equivalents....................................................... (1,528) (526)
Cash and cash equivalents at beginning of period............................................ 9,880 11,648
--------- ---------
Cash and cash equivalents at end of period.................................................. $ 8,352 $ 11,122
========= =========
Supplemental Disclosures of Cash Flow Information
Interest paid............................................................................ $ 87,455 $ 102,656
========= =========
Income taxes paid........................................................................ $ 3,158 $ 3,970
========= =========
Noncash Investing and Financing Activities
Capital lease obligations................................................................ $ 17,917 $ 24,424
========= =========
</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") operated 135 supermarkets as of
November 1, 1997, primarily in the New York-New Jersey and Philadelphia
metropolitan areas and is a wholly owned subsidiary of PTK Holdings, Inc.
("PTK") and an indirect wholly owned subsidiary of Supermarkets General Holdings
Corporation ("Holdings").
The unaudited consolidated financial statements included herein have been
prepared by the Company in accordance with the same accounting principles
followed in the presentation of the Company's annual financial statements for
the year ended February 1, 1997, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
consolidated financial statements included herein reflect all adjustments which
are of a normal and recurring nature and are necessary to present fairly the
results of operations and financial position of the Company. This report should
be read in conjunction with the financial statements and notes thereto included
in the Company's Form 10-K Annual Report for the year ended February 1, 1997.
Income taxes for the interim period are based on the estimated effective tax
rate expected to be applicable for the full fiscal year.
NOTE 2--SUPPLY AND DISTRIBUTION AGREEMENTS
During the third quarter of Fiscal 1997, the Company entered into a
fifteen year supply agreement with C&S Wholesale Grocers, Inc. ("C&S") which
will supply substantially all of the Company's grocery, frozen and perishable
merchandise. Simultaneously, the Company and C&S entered into an agreement
pursuant to which C&S the wholesaler will purchase Pathmark's Woodbridge, New
Jersey warehouse complex and assume the leases of other distribution
facilities in North Brunswick and Dayton, New Jersey, including the fixtures,
equipment and inventory at each facility. The transactions, which are subject
to a number of conditions, are expected to be closed by the end of the fiscal
year. In addition, the Company outsourced its trucking operations to a third
party trucking company, pursuant to a ten year trucking services agreement
effective October 5, 1997, in which the trucking company will deliver
merchandise to all of the Company's stores.
Also during the third quarter, the Company entered into a three year
agreement with a pharmaceutical wholesaler to supply pharmaceutical products to
the Company on a consignment basis. In connection with such agreement, the
pharmaceutical wholesaler purchased the Company's warehouse pharmaceutical
inventory for $5.2 million and plans to purchase certain store pharmaceutical
products throughout Fiscal 1998. Current year results for the third quarter and
nine-month period include a $2.0 million gain on a LIFO liquidation related to
the sale of such warehouse inventory.
5
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 3--LONG-TERM DEBT
Long-term debt is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
NOVEMBER 1, FEBRUARY 1,
1997 1997
----------- ------------
<S> <C> <C>
Term Loan............................................................................ $ 297,875 $ --
Working Capital Facility............................................................. 25,200 --
Former term loan..................................................................... -- 243,127
Former working capital facility...................................................... -- 73,500
9.625% Senior Subordinated Notes due 2003 ("Senior Subordinated Notes").............. 438,045 437,780
11.625% Subordinated Notes due 2002 ("Subordinated Notes")........................... 199,017 199,017
12.625% Subordinated Debentures due 2002 ("Subordinated Debentures")................. 95,750 95,750
10.75% Deferred Coupon Notes due 2003 ("Deferred Coupon Notes")...................... 182,259 168,559
Debt payable to Holdings............................................................. 983 983
Industrial revenue bonds............................................................. 6,375 6,375
Other debt (primarily mortgages)..................................................... 31,670 34,979
----------- ------------
Total debt........................................................................... 1,277,174 1,260,070
Less: current maturities............................................................. 17,493 74,431
----------- ------------
Long-term portion.................................................................... $ 1,259,681 $ 1,185,639
=========== ============
</TABLE>
On June 30, 1997, the Company entered into a new $500 million bank credit
agreement (the "Credit Agreement") with a group of lenders led by The Chase
Manhattan Bank. The Credit Agreement includes a $300 million term loan (the
"Term Loan") and a $200 million working capital facility (the "Working Capital
Facility"). The Company repaid in full the former term loan and former working
capital facility with the borrowings obtained under the Credit Agreement.
Under the Credit Agreement, the Term Loan and Working Capital Facility
bear interest at floating rates, ranging from LIBOR plus 2.25% to LIBOR plus
2.50%. The Company is required to repay a portion of its borrowings under the
Term Loan each year, so as to retire such indebtedness in its entirety by
December 15, 2001. Under the Working Capital Facility, which expires on June 15,
2001, the Company can borrow or obtain letters of credit in an aggregate amount
not to exceed $200 million, of which the maximum of $125 million can be in
letters of credit. In addition, pursuant to a Permitted Subordinated Debt
Refinancing (as defined in the Credit Agreement), the Working Capital Facility
and a portion of the Term Loan can be extended up to an additional two and
one-half years and the remainder of the Term Loan can be extended up to an
additional three and one-half years from the original expiration dates.
The Credit Agreement contains certain covenants, including financial
covenants concerning levels of operating cash flow, minimum interest and rent
expense coverage, maximum leverage ratio, maximum senior debt leverage ratio,
maximum consolidated rental payments and maximum capital expenditures. The
Credit Agreement also contains other covenants including, but not limited to,
covenants with respect to the following matters: (i) limitation on indebtedness;
(ii) limitation on liens; (iii) restriction on mergers; (iv) restriction on
investments, loans, advances, guarantees and acquisitions; (v) restriction on
assets sales and sale/leaseback transactions; (vi) restriction on certain
payments of indebtedness and incurrence of certain agreements and (vii)
restriction on transactions with affiliates.
6
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 4--INTEREST EXPENSE
Interest expense is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
------------------------- ------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Term loans.......................................... $ 6,156 $ 5,519 $ 16,679 $ 17,233
Working capital facilities.......................... 671 1,299 4,143 3,955
Senior Subordinated Notes
Amortization of original issue discount......... 88 88 265 265
Currently payable............................... 10,588 10,588 31,763 31,763
Subordinated Notes.................................. 5,813 5,813 17,438 17,438
Subordinated Debentures............................. 3,022 3,022 9,066 9,066
Deferred Coupon Notes
Accrued but not payable......................... 4,687 4,222 13,700 12,344
Amortization of debt issuance costs................. 1,016 1,918 4,526 5,555
Lease obligations................................... 5,390 4,740 16,460 13,970
Other, net.......................................... 2,937 3,095 8,880 9,074
--------- --------- --------- ---------
Interest expense.................................... $ 40,368 $ 40,304 $ 122,920 $ 120,663
========= ========= ========= =========
</TABLE>
The majority of the cash interest payments are scheduled in the second and
fourth quarters.
NOTE 5--CONTINGENCIES
RICKEL:
In connection with the sale of its home centers segment in Fiscal 1994,
the Company, as lessor, entered into leases for certain of the Company's owned
real estate properties with Rickel, as tenant (the "Leases"), pursuant to which
the Company is entitled to receive annual aggregate rentals of approximately
$4.2 million. In addition, as part of the sale, the Company assigned to Rickel
and Rickel assumed various liabilities of the home centers segment, primarily
third party leases (the "Assumed Liabilities"). As of November 1, 1997, the
estimated present value of obligations under the Assumed Liabilities
approximated $25.6 million.
In January 1996, Rickel filed for bankruptcy protection under Chapter
11 of the United States Bankruptcy Code. Since the inception of Rickel's
bankruptcy, Rickel has rejected five Leases and two third party leases. The
five rejected Leases had annual rentals of approximately $2.7 million. One of
the rejected third party leases has been settled with the landlord and the
estimated present value of the other third party lease obligation is
approximately $4.6 million at November 1, 1997. The Company is actively
marketing these properties to other prospective tenants. In addition to the
above leases, Rickel has also assigned one of its third party leases to a
large retailer. Management has concluded that the Company has sufficient
reserves to cover any resulting liability which may occur with respect to
these matters. In September 1997, Rickel announced that it is terminating
its retail operations and is liquidating its retail inventory. Since Rickel's
bankruptcy is not concluded, the Company cannot determine whether Rickel will
reject any additional Leases or the extent to which the Company will become
liable with respect to the Assumed Liabilities in the event of Rickel's
nonpayment thereof.
OTHER:
The Company is also a party to a number of legal proceedings in the
ordinary course of business. Management believes that the ultimate resolution of
these proceedings will not, in the aggregate, have a material adverse impact on
the financial condition, results of operations or business of the Company.
7
<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 in the third quarter of Fiscal 1997 were $901.0 million compared to
$911.1 million in the prior year, a decrease of 1.1%. For the nine-month period
of Fiscal 1997, sales were $2,755.1 million compared to $2,755.2 million in the
prior year. Same store sales increased 0.6% and 0.8% for the third quarter and
nine-month period, respectively, primarily from the Company's promotional
pricing program which commenced in the first quarter of Fiscal 1997. Sales in
Fiscal 1997 compared to Fiscal 1996 were also impacted by new store openings and
remodels offset by sold and closed stores. The Company operated 135 and 143
supermarkets at the end of the third quarters of Fiscal 1997 and Fiscal 1996,
respectively.
GROSS PROFIT:
Gross profit in the third quarter of Fiscal 1997 was $248.2 million or
27.5% of sales compared to $266.7 million or 29.3% of sales for the prior year.
For the nine-month period of Fiscal 1997, gross profit was $769.6 million or
27.9% of sales compared to $807.5 million or 29.3% for the prior year. The
decrease in gross profit in both dollars and as a percentage of sales for the
third quarter and nine-month period of Fiscal 1997 compared to the prior year
was due to the promotional pricing program introduced during the first quarter
of Fiscal 1997, as well as the pre-Thanksgiving holiday promotions during the
third quarter of Fiscal 1997. The cost of goods sold comparisons were impacted
by a pretax LIFO credit of $1.7 million in the third quarter of Fiscal 1997
compared to no LIFO adjustment in the third quarter of Fiscal 1996, and by a
pretax LIFO credit of $0.8 million and a pretax LIFO charge of $1.7 million in
the nine-month period of Fiscal 1997 and Fiscal 1996, respectively. The pretax
LIFO credit for the current year third quarter and the nine-month period include
a $2.0 million gain on a LIFO liquidation related to the sale of the Company's
pharmaceutical warehouse inventory (See Note 2 to the Consolidated Financial
Statements).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"):
SG&A in the third quarter of Fiscal 1997 decreased $6.5 million or 3.1%
compared to the prior year and decreased $9.7 million or 1.5% in the nine-month
period of Fiscal 1997 compared to the prior year. As a percentage of sales, SG&A
was 22.8% in the third quarter of Fiscal 1997, down from 23.2% in the prior year
and was 22.9% for the nine-month period of Fiscal 1997 down from 23.2% the prior
year. The decrease in SG&A as a percentage of sales in the third quarter and
nine-month period of Fiscal 1997 compared to the prior year was primarily due to
lower administrative, advertising, claims and utilities expenses, partially
offset by higher store labor expenses.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization of $21.4 million in the third quarter of
Fiscal 1997 was $0.9 million higher than the prior year of $20.5 million. For
the nine-month period of Fiscal 1997, depreciation and amortization of $61.5
million was $1.0 million lower than the prior year of $62.5 million. The
increase in depreciation and amortization expense in the third quarter of Fiscal
1997 compared to the prior year was
8
<PAGE>
PATHMARK STORES, INC.
primarily due to capital expenditures in Fiscal 1997. The decrease in
depreciation and amortization expense in the nine-month period of Fiscal 1997
compared to the prior year was primarily due to the write down in the fourth
quarter of Fiscal 1996 of certain fixed assets held for sale, principally in the
Company's southern region, partially offset by capital expenditures in Fiscal
1997. Depreciation and amortization excludes video tape amortization, which is
recorded in cost of goods sold, of $0.9 million and $0.8 million in the third
quarters of Fiscal 1997 and Fiscal 1996, respectively, and $2.6 million and $2.3
million in the nine-month period of Fiscal 1997 and Fiscal 1996, respectively.
OPERATING EARNINGS:
Operating earnings in the third quarter of Fiscal 1997 were $21.5 million
compared to the prior year of $34.4 million. For the nine-month period of Fiscal
1997, operating earnings were $77.4 million compared with $104.5 million in the
prior year. The decrease in operating earnings in the third quarter and
nine-month period of Fiscal 1997 compared to the prior year was primarily due to
lower gross profit, partially offset by lower SG&A.
INTEREST EXPENSE:
Interest expense was $40.4 million in the third quarter of Fiscal 1997
compared to $40.3 million in the prior year and $122.9 million for the
nine-month period of Fiscal 1997 compared to $120.7 million in the prior year.
The increase in interest expense in the nine-month period of Fiscal 1997
compared to the prior year was primarily due to increases in lease obligations,
the debt accretion on the Deferred Coupon Notes, and higher interest rates,
partially offset by lower amortization of debt issuance costs.
INCOME TAXES:
Income taxes for the interim period are based on the estimated effective
tax rate expected to be applicable for the full fiscal year. The income tax
benefit in the third quarter and nine-month period of Fiscal 1997 was $7.6
million and $18.2 million, respectively. The income tax benefit for the third
quarter and nine-month period of Fiscal 1996 was $2.3 million and $6.3 million,
respectively.
During the nine-month period of Fiscal 1997, the Company made income tax
payments of $3.2 million and received income tax refunds of $0.5 million. 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.
EXTRAORDINARY ITEMS:
During the second quarter of Fiscal 1997, in connection with the Credit
Agreement, the Company wrote off deferred financing fees of $12.8 million
related to the former bank credit agreement, resulting in a net loss on early
extinguishment of debt of $7.4 million. In addition, during the second quarter
of Fiscal 1997, in connection with the sale of certain mortgaged property, the
Company made a mortgage paydown of $2.9 million, including accrued interest and
debt premiums, resulting in a net loss on early extinguishment of debt of $0.1
million.
During the second quarter of Fiscal 1996, in connection with the sale of
certain mortgaged property, the Company made a mortgage paydown of $5.3 million,
including accrued interest and debt premiums, resulting in a net loss on early
extinguishment of debt of $0.2 million. During the first quarter of Fiscal 1996,
in connection with the termination of the Plainbridge, Inc. credit agreement due
to the reacquisition of Plainbridge, Inc. by Pathmark, the Company wrote off
deferred financing fees resulting in a net loss on early extinguishment of debt
of $0.7 million.
9
<PAGE>
PATHMARK STORES, INC.
SUMMARY OF OPERATIONS:
For the third quarter of Fiscal 1997, the Company's net loss was $11.2
million compared to a net loss of $3.6 million for the prior year. For the
nine-month period of Fiscal 1997, the Company's net loss was $34.9 million
compared to a net loss of $10.7 million in the prior year. The increase in the
net loss in the third quarter of Fiscal 1997 compared to the prior year was
primarily due to lower operating earnings, partially offset by a higher income
tax benefit. The increase in net loss in the nine-month period of Fiscal 1997
compared to the prior year was primarily due to lower operating earnings, the
extraordinary loss on early extinguishment of debt and higher interest expense,
partially offset by a higher income tax benefit.
EBITDA-FIFO:
EBITDA-FIFO was $42.2 million and $55.8 million in the third quarters of
Fiscal 1997 and Fiscal 1996, respectively, and $141.1 million and $171.5 million
for the nine-month period of Fiscal 1997 and Fiscal 1996, respectively.
EBITDA-FIFO represents net earnings before interest expense, income taxes,
depreciation, amortization, the LIFO charge (credit) and unusual transactions.
EBITDA-FIFO is a widely accepted financial indicator of a company's ability to
service and/or incur debt and should not be construed as an alternative to, or a
better indicator of, operating income or cash flows from operating activities,
as determined in accordance with generally accepted accounting principles.
FINANCIAL CONDITION
DEBT SERVICE:
During the nine-month period of Fiscal 1997, total debt increased $17.1
million from Fiscal 1996 year end primarily due to debt accretion on the
Deferred Coupon Notes and a net increase in borrowings under the Credit
Agreement compared to the former credit agreement. On June 30, 1997, the Company
entered into the Credit Agreement with a group of lenders led by The Chase
Manhattan Bank. The Credit Agreement includes a $300 million Term Loan and a
$200 million Working Capital Facility. In connection with this refinancing, the
Company repaid in full the former term loan ($230.5 million) and the former
working capital facility ($57.5 million) with the borrowings obtained under the
Credit Agreement. Borrowings under the Working Capital Facility were $25.2
million at November 1, 1997 and have increased to $26.8 million at December 9,
1997.
During the second quarter of Fiscal 1997, the Company sold four of the 12
supermarkets that it announced for divestiture at the end of Fiscal 1996 for
$14.9 million and sold two former operating sites, primarily drug stores, for
$11.1 million. There was no gain or loss recognized on these transactions. The
proceeds were used to paydown a portion of the former working capital facility
and certain mortgages.
The Company does not currently maintain any interest rate hedging
arrangements. The Company is continuously evaluating this risk and will
implement interest rate hedging arrangements if deemed appropriate.
The majority of the cash interest payments are scheduled in the second and
fourth quarters.
10
<PAGE>
PATHMARK STORES, INC.
The amount of principal payments required each year on outstanding
long-term debt (excluding the original issue discount with respect to the
Deferred Coupon Notes) are as follows (dollars in millions):
PRINCIPAL
FISCAL YEARS PAYMENTS
- ------------ --------
1997(a).................................................... $ 10.1
1998....................................................... 37.5
1999....................................................... 16.5
2000....................................................... 81.6
2001....................................................... 315.5
2002....................................................... 195.8
2003....................................................... 620.2
- --------
(a) Subsequent to November 1, 1997.
LIQUIDITY:
The consolidated financial statements of the Company indicate that, at
November 1, 1997, current liabilities exceeded current assets by $119.9 million
and stockholder's deficit was $1.08 billion. Management believes that cash flows
generated from operations, supplemented by the unused borrowing capacity under
the Working Capital Facility and the availability of capital lease financing
will be sufficient to pay the Company's debts as they come due, provide for its
capital expenditure program and meets its other cash requirements.
The Company believes that it will be able to make the scheduled payments
or refinance its obligations with respect to its indebtedness through a
combination of operating funds and borrowing facilities. Future refinancing will
be necessary if the Company's cash flow from operations is not sufficient to
meet its debt service requirements related to the maturity of 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 November 1,
1997, and, based on management's operating projections for the remainder of
Fiscal 1997, the Company believes that it will continue to be in compliance with
its debt covenants. The Company's ability to make scheduled payments 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.
11
<PAGE>
PATHMARK STORES, INC.
CAPITAL EXPENDITURES:
Capital expenditures for the third quarter of Fiscal 1997, including
property acquired under capital leases, were $11.3 million compared to $19.4
million for the prior year and for the nine-month period of Fiscal 1997 were
$38.6 million compared to $62.4 million for the prior year. During the
nine-month period of Fiscal 1997, the Company opened two new Pathmark stores,
completed five major renovations and enlargements to existing supermarkets and
sold four and closed seven of the 12 stores announced for divestiture at the end
of Fiscal 1996. During the remainder of Fiscal 1997, the Company does not plan
to open any new Pathmark stores and expects to complete up to an aggregate of 12
major renovations and enlargements.
CASH FLOWS:
Cash provided by operating activities amounted to $25.4 million in the
nine-month period of Fiscal 1997 compared to $45.2 million in the prior year.
The decrease in net cash provided by operating activities was primarily due to
an increase in the net loss and an increase in cash used for operating assets
and liabilities. Cash provided by investing activities was $4.8 million in the
nine-month period of Fiscal 1997 compared to cash used for investing activities
of $30.0 million in the prior year. The increase in cash provided by investing
activities was primarily due to an increase in proceeds from property
dispositions and a decrease in expenditures of property and equipment. Cash used
for financing activities was $31.7 million in the nine-month period of Fiscal
1997 compared to $15.8 million in the prior year. The increase in cash used for
financing activities was primarily due to the proceeds from the lease financing
of three supermarket locations in Fiscal 1996, a decrease in book overdrafts and
an increase in deferred financing fees related to the Credit Agreement in Fiscal
1997, partially offset by an increase in borrowings in conjunction with the
Credit Agreement, net of repaying in full the former term loan and former
working capital facility.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
During the third quarter of Fiscal 1997, the Company entered into a
fifteen year supply agreement with C&S Wholesale Grocers, Inc. ("C&S")
wholesaler which will supply substantially all of the Company's grocery,
frozen and perishable merchandise. Simultaneously, the Company and C&S
entered into an agreement pursuant to which C&S will purchase Pathmark's
Woodbridge, New Jersey warehouse complex and assume the leases of other
distribution facilities in North Brunswick and Dayton, New Jersey, including
the fixtures, equipment and inventory at each facility. The transactions,
which are subject to a number of conditions, are expected to be closed by the
end of the fiscal year. In addition, the Company outsourced its trucking
operations to a third party trucking company, pursuant to a ten year trucking
services agreement effective October 5, 1997, in which the trucking company
will deliver merchandise to all of the Company's stores.
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: December 16, 1997
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 1, 1997 AND CONSOLIDATED BALANCE SHEET AS OF NOVEMBER 1, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> NOV-01-1997
<CASH> 8,352
<SECURITIES> 0
<RECEIVABLES> 11,319
<ALLOWANCES> (1,400)
<INVENTORY> 202,803
<CURRENT-ASSETS> 274,920
<PP&E> 968,210
<DEPRECIATION> (417,912)
<TOTAL-ASSETS> 928,075
<CURRENT-LIABILITIES> 394,809
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<TOTAL-LIABILITY-AND-EQUITY> 928,075
<SALES> 2,755,138
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<CGS> 1,985,552
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<LOSS-PROVISION> 148
<INTEREST-EXPENSE> (122,920)
<INCOME-PRETAX> (45,544)
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