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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended Commission File Number
January 31, 1998 1-5287
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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:
Title of each Class Name of exchange on which registered
Junior Subordinated Deferred New York Stock Exchange
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 __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / X /
As of April 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.
Documents Incorporated by Reference: None
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PART I
ITEM 1. Business*
General
The predecessor of the registrant was incorporated in the state of
Delaware in June 1987 as a wholly owned subsidiary of Supermarkets General
Holdings Corporation ("Holdings"). In October 1987, Holdings acquired
Supermarkets General Corporation ("SGC"). In 1990, SGC was merged into the
registrant and the registrant retained the name SGC. In connection with the
1993 recapitalization referred to below, the registrant changed its name from
SGC to Pathmark Stores, Inc. ("Pathmark" or the "Company").
Pathmark consummated a recapitalization plan (the "Recapitalization") on
October 26, 1993. In connection with the Recapitalization, its former parent,
Holdings, transferred all of the capital stock of Pathmark to PTK Holdings,
Inc. ("PTK"), a then newly formed, wholly owned subsidiary of Holdings. PTK
was incorporated in the State of Delaware in 1993 and owns 100% of the
capital stock of Pathmark.
During the fiscal year ended February 1, 1997 ("Fiscal 1996"), the Company
reported that it had decided to divest 12 supermarkets located in its southern
region. During the course of the fiscal year ended January 31, 1998 ("Fiscal
1997"), the Company sold or closed 11 of the 12 stores held for divestiture and
decided to continue to operate the remaining store.
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.
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* Except as otherwise indicated, information contained in this Item is given as
of January 31, 1998.
1
On January 29, 1998, the Company sold its Woodbridge, New Jersey
distribution center and office complex and its leasehold interests in its two
distribution centers and its banana ripening facility in North Brunswick, New
Jersey, Dayton, New Jersey and Avenel, New Jersey, respectively (all of the
foregoing buildings are hereinafter referred to as, collectively, the
"Facilities"), to C&S Wholesale Grocers, Inc. ("C&S"), including the fixtures,
equipment and inventory in each of those Facilities, for approximately $104
million (approximately $60 million, excluding inventory) ("the C&S Purchase
Agreement"). The Company used a portion of the net proceeds to partially reduce
borrowings under the Credit Agreement. At the same time, the term of the
Company's 15 year supply agreement with C&S (the "Supply Agreement") commenced,
pursuant to which C&S will supply substantially all of the Company's grocery,
frozen and perishable merchandise requirements, formerly owned and warehoused by
the Company (see Item 1. Business - Supply and Distribution).
Business
At January 31, 1998, Pathmark operated 135 supermarkets primarily in the
densely populated New York-New Jersey and Philadelphia metropolitan areas. These
metropolitan areas contain over 10% of the population and grocery sales in the
United States. These supermarkets are located in New Jersey, New York,
Pennsylvania, Delaware and Connecticut and consist of 5.2 million selling square
footage and 7.1 million total square footage.
Business Strategy
Pathmark's business strategy is to increase sales, profitability and market
penetration in its existing markets by focusing on the following five operating
priorities: concentrate on core business, Pathmark "GREAT" service, lower
operating costs, spend capital wisely and have the right management team. By
concentrating on and implementing these five priorities, the Company expects to
accomplish its strategic goals (i) by providing superior perishable and
non-perishable merchandise, value and service to its customers through its
marketing, merchandising and customer service programs; (ii) through increased
operating efficiencies; and (iii) through efficient use of capital to renovate
and enlarge its existing store base.
Marketing and Merchandising
- Super Center Format. Of Pathmark's 135 stores, 132 are Super Centers. The
average Pathmark Super Center is approximately 39% larger than the average
size supermarket in the United States and offers greater convenience by
providing one-stop shopping and a wider assortment of foods and general
merchandise than is offered by conventional supermarkets. The Pathmark
Super Center format is designed to provide Pathmark customers with a
substantially greater selection of quality perishable products and to be
more "customer friendly", with wider aisles, more accessible customer
service and information departments, improved signs and graphics, and
increased availability of Pathmark associates, particularly in the
perishable departments. All of Pathmark's new supermarkets and enlargements
completed in Fiscal 1997 were Super Centers and Pathmark expects that all
new stores and enlargements thereafter will employ the same concept.
- Flexible Merchandising. Pathmark believes that its large-store format gives
it considerable flexibility to respond to changing consumer demands and
competition by varying and enhancing its merchandise selection. Pathmark's
"Big Deals" program, currently consisting of over 500 merchandise items,
offers large-sized merchandise at prices that Pathmark believes are
competitive with those available in "warehouse" and "club" stores. Pathmark
emphasizes competitive pricing plus weekly sales and
2
promotions supported by extensive advertising, primarily in print media.
Merchandising flexibility and effectiveness is enhanced through the
increased utilization of a category management approach. In addition,
Pathmark offers for sale over 3,000 items through its private label
program.
- Pharmacy. Pathmark provides full pharmacy services in virtually all of its
stores. Pathmark's broad market coverage within its marketing area has
enabled it to become a leading filler of third-party prescriptions.
Pathmark believes that its well-established pharmacy operations provide a
competitive advantage in attracting and retaining customers.
Store Expansion and Renovation Program
- New Stores, Enlargements and Renovations. During Fiscal 1997, Pathmark
opened two new Pathmark Super Centers, closed 11 other stores, and
completed five renovations and eight enlargements. During the fiscal year
ending January 30, 1999 ("Fiscal 1998"), Pathmark plans to open up to two
new Super Centers and to complete up to an aggregate of 19 renovations and
enlargements.
- Pathmark recognizes the importance of keeping its stores looking fresh and
up-to-date; thus, each store typically receives a renovation or enlargement
every five years. At the end of Fiscal 1997, Pathmark derived approximately
77% of its supermarket sales from stores that were opened, enlarged or
renovated during the last five years.
- Core Market Focus. Pathmark has identified over 50 potential locations for
new supermarkets within its current marketing areas and expects that all
new stores opened during the current and next two fiscal years will be
located in these areas. Pathmark believes that, by opening stores in its
current marketing areas, it can achieve additional operating economies and
other benefits from its store expansion program without the risks and costs
associated with opening stores in new marketing areas.
Operating Efficiencies
- Technology. Pathmark has made a significant and continuing investment in
information technology. All Pathmark supermarket checkout terminals have
third-generation IBM 4680 scanner systems supported by a RISC 6000
application processor in each store. These systems allow consumer credit
and electronic fund transfer ("EFT") transactions, greatly facilitate
system-wide promotion and merchandising programs, and improve the speed and
control of consumer transactions. In addition, all Pathmark supermarkets
utilize radio frequency technology for direct vendor receivings and shelf
labels.
- Cost Reduction. The Company is continuously evaluating its operations in an
effort to reduce operating costs consistent with its overall objective of
providing a high level of customer service. During Fiscal 1997, the Company
took several steps to accomplish this goal. The Company closed or sold 11
stores, which had experienced unprofitable operating results. The Company
reevaluated its merchandise distribution methods, resulting in decisions to
outsource its trucking business and hire a trucking company to meet its
transportation needs, to outsource its pharmacy merchandise requirements to
a drug wholesaler, and to sell its grocery, frozen and perishable
distribution centers to and enter into a 15 year supply arrangement with
C&S, thereby lowering the Company's distribution costs (see Item 1 -
Business - Supply and Distribution).
3
- Demographic and Geographic Concentration. The Company's stores serve
densely populated communities. In addition, all Pathmark supermarkets are
located within 100 miles of its corporate headquarters in Carteret, New
Jersey and the principal warehousing facilities that serve them. The high
population density, as well as the geographic concentration of stores,
provide substantial economy of scale opportunities.
Pathmark Supermarkets
Pathmark operated 135 supermarkets at January 31, 1998. Super Centers
accounted for approximately 98% of Pathmark's supermarket sales for Fiscal 1997.
The following table presents selected data reflecting supermarket sales and
stores for the last five fiscal years.
Fiscal Years
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1997 1996 1995(a) 1994 1993
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(Dollars in millions)
Supermarket sales................................. $ 3,692 $ 3,701 $ 3,853 $ 3,785 $3,839
Average sales per Supermarket(b).................. 27.5 26.1 26.4 25.9 25.4
Number of Supermarkets:
Renovations(c).............................. 5 16 14 14 12
Enlargements(d)............................. 8 5 4 11 5
Opened...................................... 2 4 5 4 4
Closed...................................... 11 4 4 6 5
Type of Supermarket(e):
Super Center................................ 132 139 139 137 138
Conventional................................ 3 5 5 6 7
Total Supermarkets Open at Year End......... 135 144 144 143 145
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(a) Fiscal 1995 was a 53-week year.
(b) Computed on the basis of aggregate sales of stores open for the full year,
based on a 52-week period.
(c) Renovations involve an investment of $400,000 or more and in Fiscal 1997
averaged over $1.0 million per store.
(d) Enlargements involve the addition of selling space and in Fiscal 1997
averaged an investment in excess of $3.5 million.
(e) Includes two stores not wholly owned. The sales figures for these stores
are not included above.
By industry standards, Pathmark stores are large and productive, averaging
approximately 52,500 square feet in size and generating high average sales
volume of approximately $27.5 million per store ($712 per selling square foot)
for stores open for all of Fiscal 1997. Pathmark's 135 supermarkets at January
31, 1998 ranged from 26,008 to 66,463 square feet in size and included 126
supermarkets that are 40,000 square feet or larger in size. All Pathmark stores
carry a broad variety of food and drug store products, including an extensive
variety of the Pathmark, No Frills and Pathmark Preferred brands. All but five
supermarkets contained in-store pharmacy departments at the end of Fiscal 1997.
Pathmark pioneered the development of the large "superstore" in the Middle
Atlantic States, opening the first "Pathmark Super Center" in 1977, and
currently operates 132 such stores. The majority of Super Centers were created
through the enlargement or renovation of existing stores. In addition to the
broad variety of food and non-food items carried in conventional Pathmark
stores, a typical Super Center includes a customer service center, videotape
rental, a pharmacy, expanded produce department, meat department, cheese shop,
bakery, seafood, service delicatessen department and expanded health and beauty
care department. All Super Centers have EFT and credit transaction capability at
their checkout terminals, and 77 supermarkets also feature in-store automated
teller machines. During Fiscal 1996, the Company entered into master licensing
agreements with two regional banking institutions to place up to 98
4
in-store banks in Pathmark supermarkets over the next two years. Each bank,
which occupies approximately 400 square feet, offers a full array of
financial services and is open seven days a week. The license agreements have
an initial term of five years with optional renewal periods. At the close of
Fiscal 1997, 58 stores had in-store banks and Pathmark expects to have 36
additional in-store banks by the end of Fiscal 1998.
Over the past several years, Pathmark stores have been designed to be more
"customer friendly", with wider aisles, more accessible customer service and
information departments, improved signs and graphics, and increased availability
of Pathmark associates. For example, Pathmark has introduced "GREAT" service, a
customer service program emphasizing proactive, inter-personal communication
between store associates and customers. All of Pathmark's new supermarkets and a
majority of supermarket enlargements completed in Fiscal 1997 were Super Centers
and Pathmark expects that virtually all new stores and enlargements will employ
the same concept.
Pathmark's supermarket business is generally not seasonal, although sales in
the second and fourth quarters tend to be slightly higher than those in the
first and third quarters.
Store Expansion and Renovation Program
A key to Pathmark's business strategy has been, and will continue to be, the
expansion of the total selling square footage of its operations. Pathmark
believes, that by adding new stores and increasing the selling area of existing
stores, it can improve its competitive position and operating margins by
achieving economies of scale in merchandising, advertising, distribution and
supervision. During the five years ending with Fiscal 1997, Pathmark completed
94 renovations and enlargements and opened 19 new supermarkets. At the close of
Fiscal 1997, sales in these stores accounted for approximately 77% of its total
supermarket sales. Pathmark currently expects to open up to two non-replacement
Pathmark Super Centers and to complete up to 19 renovations and enlargements
during Fiscal 1998.
Advertising and Promotion
As part of its marketing strategy, Pathmark emphasizes value through its
competitive pricing and weekly sales and promotions supported by extensive
advertising. Additional savings are offered each week from Pathmark "super
coupons" in newspapers and circulars. Pathmark's advertising expenditures are
concentrated on print advertising, including advertisements and circulars in
local and area newspapers and advertising flyers distributed in stores, and
radio. Several years ago, Pathmark introduced "Smart Coupons" in its
advertisements. With "Smart Coupons", customers no longer are required to cut
out Pathmark coupons from its advertisement and physically present them at the
cash registers. Rather, when a coupon item is scanned during the check-out
process, the coupon savings is automatically deducted from the price. Pathmark
believes that its "Smart Coupons" greatly convenience its customers and improve
customer service at the checkout.
Consumer Research
Pathmark conducts numerous ongoing and special consumer research projects.
These typically involve customer surveys (both in-store and by telephone) as
well as focus groups. The information derived from these projects is used to
evaluate consumers' attitudes and purchasing patterns and helps shape Pathmark's
marketing programs.
5
Technology
Pathmark has made a significant and continuing investment in information
technology. All Pathmark supermarket checkout terminals have IBM 4680 scanner
systems supported by a RlSC 6000 application processor in each store. These
systems allow consumer credit and EFT transactions, greatly facilitate
system-wide promotion and merchandising programs, and improve the speed and
control of customer transactions. This technology and the data generated by
scanning have not only led to lower labor costs, improved price control and
shelf allocation, and quicker customer check-out, but have also assisted in the
analysis of product movement, profit contribution and demographic merchandising.
Pathmark also has a computer-assisted ordering system that enables it to
replenish inventory to avoid "out of stocks" at store level while maintaining
optimum overall inventory levels. In addition, all Pathmark supermarkets utilize
radio frequency technology for direct vendor receivings and shelf labels.
All of the pharmacies are equipped with pharmacy computers. In addition to
improving customer service, these computers aid pharmacists in detecting drug
interactions, improve the collection of third-party receivables and help to
attract third-party businesses, such as health maintenance organizations and
union welfare plans.
In August 1991, Pathmark entered into a ten year facilities management and
systems integration agreement with IBM Company. Under the agreement, IBM has
taken over Pathmark's data center operations, mainframe processing and
information system functions and is providing business applications and systems
designed to enhance Pathmark's customer service and efficiency.
Supply and Distribution
During the third quarter of Fiscal 1997, the Company decided to outsource
its trucking operations and retained a local trucking company to provide the
requisite trucking services. Management believes that the outsourcing
arrangement will result in lower transportation costs to the Company.
Beginning in January 1998, the Supply Agreement with C&S commenced. Under
the Supply Agreement, C&S supplies to the Company and distributes from the
Facilities substantially all of the grocery, frozen and perishable (includes
meat, produce, seafood and delicatessen items) merchandise formerly owned and
warehoused by the Company. Management believes that the Supply Agreement with
C&S enhances the Company's ability to offer consistently fresh and high quality
products to its customers at a reduced distribution cost to the Company. Prior
to the Supply Agreement, products purchased for resale by the Company were
purchased directly from a large group of unaffiliated suppliers, including large
consumer products companies.
The Company continues to operate a 266,000 square foot leased general
merchandise, health and beauty care products and tobacco distribution center in
Edison, New Jersey (the "GMDC"), which opened in 1980. During Fiscal 1997, the
Company outsourced its pharmacy merchandise distribution requirements to a
pharmaceutical wholesaler. In addition, Chefmark Inc., an affiliate of the
Company, owns and operates a 16,000 square foot commissary in Somerset, New
Jersey (the "Chefmark Facility") in which high quality cooked meat products and
salads are prepared for sale and supplied to the Company for sale in the
Company's delicatessen departments. The Chefmark Facility opened in 1976.
Prior to the Supply Agreement with C&S, the Company operated, in addition to
the GMDC and Chefmark Facility, four distribution centers and a banana ripening
facility, aggregating approximately 1.3 million square feet.
6
In addition to reducing the Company's distribution and transportation costs,
management believes that the logistics outsourcing will enhance its ability to
better concentrate on the core business of the Company.
Competition
The supermarket business is highly competitive and is characterized by high
asset turnover and narrow profit margins. Pathmark's earnings are primarily
dependent on the maintenance of relatively high sales volume per supermarket,
efficient product purchasing and distribution, and cost-effective store
operating and distribution techniques. Pathmark's main competitors are national,
regional and local supermarkets, drug stores, convenience stores, discount
merchandisers, "warehouse" and "club" stores and other local retailers in the
areas served. Principal competitive factors include price, store location,
advertising and promotion, product mix, quality and service.
Trade Names, Service Marks and Trademarks
Pathmark has registered a variety of trade names, service marks and
trademarks with the United States Patent and Trademark Office, each for an
initial period of 20 years, renewable for as long as the use thereof continues.
Pathmark considers its Pathmark service marks to be of material importance to
its business and actively defends and enforces such service marks.
Regulation
Pathmark's food and drug business requires it to hold various licenses and
to register certain of its facilities with state and federal health, drug and
alcoholic beverage regulatory agencies. By virtue of these licenses and
registration requirements, Pathmark is obligated to observe certain rules and
regulations, and a violation of such rules and regulations could result in a
suspension or revocation of the licenses or registrations. In addition, most of
Pathmark's licenses require periodic renewals. Pathmark has experienced no
material difficulties with respect to obtaining, effecting or retaining its
licenses and registrations.
Employees
At January 31, 1998, the Company employed approximately 28,000 people, of
whom approximately 20,500 were employed on a part-time basis.
Approximately 88% of the Company's employees are covered by 18 collective
bargaining agreements (typically having three or four year terms) negotiated
with approximately 15 different local unions. During Fiscal 1998, eight
contracts, covering approximately 13,000 Pathmark associates in approximately
90% of the stores and approximately 130 associates in GMDC, will expire. The
Company does not anticipate any difficulty in renegotiating these contracts.
The Company believes that its relationship with its employees is generally
satisfactory.
ITEM 2. Properties**
Reference is made to the answer to Item 1, "Business" of this report for
information concerning the states in which the Company's supermarkets and
distribution facilities are located. See "Business of Pathmark-Supply and
Distribution" in Item 1 of this report for information concerning the Company's
distribution facilities.
7
Pathmark's 135 supermarkets have an aggregate selling area of approximately
5.2 million square feet. Eighteen of the supermarkets are owned by Pathmark and
the remaining 117 are leased. These supermarkets are either freestanding stores
or are located in shopping centers. Twenty-nine leases expire during the current
and next four calendar years and Pathmark has options to renew all of them.
Pathmark leases its corporate headquarters in Carteret, NJ in premises
totaling approximately 150,000 square feet in size.
Most of the facilities owned by Pathmark are owned subject to mortgages.
Pathmark plans to acquire leasehold or fee interests in any property on which
new stores or other facilities are opened and will consider entering into
sale/leaseback or mortgage transactions with respect to owned properties if
Pathmark believes such transactions are financially advantageous.
ITEM 3. Legal Proceedings
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.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
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** Except as otherwise indicated, information contained in this Item is given as
of January 31, 1998.
8
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters (as of April 1, 1998)
All of registrant's outstanding Common Stock is held by PTK and not traded
on the public market. All of PTK's outstanding common stock is held by Holdings.
All of Holdings outstanding common stock is held by SMG-II Holdings Corporation
("SMG-II").
The authorized preferred stock of Holdings consists of 9,000,000 shares of
$3.52 Cumulative Exchangeable Redeemable Preferred Stock, of which 4,890,671
shares were issued and outstanding at April 1, 1998 (the "Exchangeable Preferred
Stock"). The Exchangeable Preferred Stock has a liquidation preference of $25
per share and its terms provide for cumulative quarterly dividends at an annual
rate of $3.52 per share, when as, and if declared by the Board of Directors of
Holdings.
The Exchangeable Preferred Stock is non-voting, except that if an amount
equal to six quarterly dividends is in arrears in whole or in part, the holders
thereof, voting as a class, are entitled to elect an additional two members of
the board of directors of Holdings. Holdings is currently in arrears on payment
of more than six quarterly dividends on the Exchangeable Preferred Stock and
does not expect to receive cash flow sufficient to permit payments of dividends
on the Exchangeable Preferred Stock in the foreseeable future. The holders of
the Exchangeable Preferred Stock reelected two persons to Holdings' Board of
Directors at Holdings' 1997 annual meeting.
The authorized capital stock of SMG-II consists of 3,000,000 shares of
SMG-II Class A Common Stock, 3,000,000 shares of SMG-II Class B Common Stock, of
which 672,476 and 320,000 shares, respectively, were issued and outstanding at
April 1, 1998, and 4,000,000 shares of SMG-II Preferred Stock, of which
1,500,000 shares are designated SMG-II Series A Preferred Stock, 1,500,000
shares are designated SMG-II Series B Preferred Stock, and 33,520 shares are
designated SMG-II Series C Preferred Stock (the three series of Preferred Stock
hereinafter collectively referred to as "SMG-II Preferred Stock").
At April 1, 1998, there were outstanding 236,731 shares of SMG-II Series A
Preferred Stock, 180,769 shares of SMG-II Series B Preferred Stock and 8,520
shares of SMG-II Series C Preferred Stock.
SMG-II's capital stock is held beneficially as follows: (i) SMG-II Class A
Common Stock by approximately 55 holders, including six affiliates of Merrill
Lynch & Co., Inc. (The "ML Common Investors"), Chemical Investments, Inc.
("CII"), an affiliate of Chase Manhattan Corp., and 48 current and former
members of the Company's management or their heirs (the "Management Investors");
(ii) SMG-II Series A Preferred Stock by five affiliates of Merrill Lynch & Co.,
Inc. (the "ML Preferred Investors", the ML Common Investors and ML Preferred
Investors hereinafter collectively referred to as the "ML Investors"); (iii)
SMG-II Class B Common Stock held by three holders, including CII, The Equitable
Life Assurance Society of the United States ("Equitable") and an affiliate of
Equitable (collectively, the "Equitable Investors"); (iv) SMG-II Series B
Preferred Stock held by three holders, including CII and the Equitable
Investors; and (v) SMG-II Series C Preferred Stock held by one Management
Investor. Holders of shares of SMG-II Class A Common Stock are entitled to one
vote per share on all matters to be voted on by stockholders. Holders of shares
of SMG-II Class B Common Stock are not entitled to any voting rights, except as
required by law or as otherwise provided in the Restated Certificate of
Incorporation of SMG-II. Subject to compliance with certain procedures, holders
of shares of SMG-II Class B Common Stock may exchange their shares for shares of
SMG-II Class A Common Stock and holders of shares of SMG-II Class A Common Stock
may exchange their shares for shares of SMG-II Class B Common Stock, in each
case on a share-for-shares basis. All holders of SMG-II capital stock are
parties to a Stockholders Agreement dated as of February 4, 1991, as amended,
with SMG-II (the "Stockholders Agreement").
9
SMG-II Preferred Stock has a stated value and liquidation preference of $200
per share and bears dividends at the rate of 10% of the stated value per annum,
payable annually. At the option of SMG-II, dividends are payable in cash or may
accumulate (and the amount thereof shall compound annually).
Holders of shares of SMG-II Series A Preferred Stock and SMG-II Series C
Preferred Stock are entitled to one vote per share of SMG-II Class A Common
Stock into which such SMG-II Series A Preferred Stock and SMG-II Series C
Preferred Stock are convertible on all matters to be voted on by SMG-II
stockholders, subject to increase to 1.11 votes per share upon the occurrence of
certain events. Holders of shares of SMG-II Series B Preferred Stock are
entitled to one vote per share of SMG-II Class B Common Stock into which such
SMG-II Series B Preferred Stock is convertible for the purpose of voting on any
consolidation or merger, sale, lease or exchange of substantially all of the
assets or any liquidation, dissolution or winding up, of SMG-II. Additionally,
holders of SMG-II Preferred Stock have separate voting rights with respect to
alteration in the voting powers, rights and preferences and certain other terms
affecting the SMG-II Preferred Stock. Subject to compliance with certain
procedures, holders of SMG-II Series B Preferred Stock may exchange their shares
for shares of SMG-II Series A Preferred Stock and holders of SMG-II Series A
Preferred Stock may exchange their shares for shares of SMG-II Series B
Preferred Stock, on a share-for-share basis. Each series of SMG-II Preferred
Stock ranks pari passu with each other series.
At the option of the holder, SMG-II Preferred Stock is convertible into
SMG-II Common Stock at any time, on or prior to the occurrence of certain
events, including an initial public offering of in excess of 25% of the number
of outstanding shares of common stock of SMG-II, at a conversion ratio of one
share of the corresponding class of SMG-II Common Stock for each share of SMG-II
Preferred Stock, subject to adjustment upon the occurrence of certain events.
Holders of SMG-II Preferred Stock are party with the holders of SMG-II
Common Stock to the Stockholders Agreement which, among other things, restricts
the transferability of SMG-II capital stock and relates to the corporate
governance of SMG-II. None of SMG-II's capital stock is publicly traded on any
market. See Item 12, "Security Ownership of Certain Beneficial Owners and
Management."
The payment of dividends to the holders of registrant's Common Stock is
prohibited under the Credit Agreement and subject to restrictions in its other
debt instruments. During Fiscal 1996 and Fiscal 1997, the Company paid no
dividends to its sole stockholder. The Company does not currently anticipate
paying dividends during Fiscal 1998.
10
ITEM 6. Selected Financial Data
The following table represents selected financial data for the last five
fiscal years and should be read in conjunction with the Company's Consolidated
Financial Statements in Item 8 of this report.
PATHMARK STORES, INC.
SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS
(in millions)
Fiscal Years(a)
----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Sales..................................................... $3,696 $3,710 $3,972 $3,968 $4,021
Cost of sales (exclusive of depreciation and
amortization shown separately below)................... 2,652 2,619 2,838 2,866 2,952
------- ------- -------- ------- ------
Gross profit.............................................. 1,044 1,091 1,134 1,102 1,069
Selling, general and administrative expenses.............. 841 857 866 851 837
Depreciation and amortization(b).......................... 84 89 80 75 70
Restructuring charge(c)................................... -- 9 -- -- --
Lease commitment charge(d)................................ -- 9 -- -- --
Gain on disposition of freestanding drug stores(e)........ -- -- 16 -- --
Recapitalization expense(f)............................... -- -- -- -- 17
Provision for store closings(g)........................... -- -- -- -- 6
------- ------- -------- ------- ------
Operating earnings........................................ 119 127 204 176 139
Interest expense, net(h).................................. (164) (161) (165) (148) (172)
------- ------- -------- ------- ------
Earnings (loss) from continuing operations before income
taxes, gain on disposal of home centers segment,
extraordinary items and cumulative effect of
accounting changes....................................... (45) (34) 39 28 (33)
Income tax benefit (provision)............................ 17 14 (6) (4) 20
------- ------- -------- ------- ------
Earnings (loss) from continuing operations before gain on disposal of home
centers segment, extraordinary
items and cumulative effect of accounting changes........ (28) (20) 33 24 (13)
Loss from discontinued operations......................... -- -- -- (2) --
Gain on disposal of home centers segment, net of tax(i)... -- -- -- 17 --
------- ------- -------- ------- ------
Earnings (loss) before extraordinary items and cumulative
effect of accounting changes............................. (28) (20) 33 39 (13)
Extraordinary items, net of tax(j)........................ (8) (1) -- -- (97)
------- ------- -------- ------- ------
Earnings (loss) before cumulative effect of accounting
changes................................................ (36) (21) 33 39 (110)
Cumulative effect of accounting changes, net of tax(k).... -- -- -- -- (38)
------- ------- -------- ------- ------
Net earnings (loss)....................................... $ (36) $ (21) $ 33 $ 39 $ (148)
------- ------- -------- ------- ------
------- ------- -------- ------- ------
Ratio of earnings to fixed charges(l)..................... -- -- 1.22x 1.17x --
------- ------- -------- ------- ------
------- ------- -------- ------- ------
Deficiency in earnings available to cover fixed charges(m) $ 45 $ 34 $ -- $ -- $ 33
------- ------- -------- ------- ------
------- ------- -------- ------- ------
As of
----------------------------------------------------------------------------
Jan. 31, Feb. 1, Feb. 3, Jan. 28, Jan. 29,
1998 1997 1996 1995 1994
------- ------- ------ ------- -------
Balance Sheet Data:
Total assets...................................... $ 900 $ 990 $ 986 $1,018 $1,119
Working capital deficiency........................ 109 182 173 122 107
Lease obligations, long-term...................... 170 175 140 127 132
Long-term debt, net of current maturities......... 1,178 1,186 1,215 1,273 1,286
Stockholder's deficiency.......................... 1,077 1,042 1,024 1,030 1,001
(footnotes on following page)
11
PATHMARK STORES, INC.
NOTES TO SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS
(a) The Company's fiscal year ends on the Saturday nearest to January 31 of
the following calendar year. Fiscal years consist of 52 weeks, except for
53 weeks in Fiscal 1995.
(b) Fiscal 1996 depreciation and amortization includes a $5 million pretax
charge to write down certain fixed assets held for sale to their
estimated net realizable values. See Note 6 of the Notes to Consolidated
Financial Statements at Item 8, Part II of this Form 10-K.
(c) During Fiscal 1996, the Company recorded a pretax charge of $9 million
for reorganization and restructuring costs related to its administrative
operations. See Note 18 of the Notes to Consolidated Financial Statements
at Item 8, Part II of this Form 10-K.
(d) During Fiscal 1996, the Company recorded a pretax charge of $9 million
related to unfavorable lease commitments of certain unprofitable stores
in the Company's southern region. See Note 19 of the Notes to
Consolidated Financial Statements at Item 8, Part II of this Form 10-K.
(e) During Fiscal 1995, the Company recorded a pretax gain of $16 million
related to the disposition of its freestanding drug stores. See Note 20
of the Notes to Consolidated Financial Statements at Item 8, Part II of
this Form 10-K.
(f) In connection with the Recapitalization in Fiscal 1993, the Company
recorded a pretax charge of $17 million related to reorganization and
restructuring costs.
(g) During Fiscal 1993, the Company closed or disposed of five stores and
recorded a pretax charge of $6 million.
(h) Prior to Fiscal 1995, interest expense was net of interest charged to
discontinued operations.
(i) During Fiscal 1994, the Company sold its home centers segment, which
resulted in a gain on sale of $17 million, net of $2 million of income
taxes.
(j) During Fiscal 1997, the Company recorded an extraordinary charge of $8
million, net of an income tax benefit of $5 million and during Fiscal
1996, the Company recorded an extraordinary charge of $1 million, net of
an income tax benefit, both related to the early extinguishment of debt.
See Note 17 of the Notes to Consolidated Financial Statements at Item 8,
Part II of this Form 10-K. During Fiscal 1993, in connection with the
Recapitalization, the Company recorded an extraordinary charge of $97
million, net of an income tax benefit of $15 million, related to the
early extinguishment of debt.
(k) The cumulative effect of accounting changes in Fiscal 1993 of $38
million, net of an income tax benefit of $28 million, reflects the
adoption of Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits other than Pensions";
the adoption of Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits"; the change in the
method utilized to calculate last-in, first-out (LIFO) inventories; and
the change in the determination of the discount rate utilized to record
the present value of certain noncurrent liabilities. All of the
accounting changes were made as of the beginning of Fiscal 1993.
(l) For the purpose of this calculation, earnings before fixed charges
consist of earnings from continuing operations before income taxes plus
fixed charges. Fixed charges consist of interest expense on all
indebtedness (including amortization of deferred debt issuance costs) and
the portion of operating lease rental expense that is representative of
the interest factor (deemed to be one-third of operating lease rentals).
(m) For purposes of determining the deficiency in earnings available to cover
fixed charges, earnings are defined as earnings (loss) from continuing
operations before income taxes plus fixed charges. Fixed charges consist
of interest expense on all indebtedness (including amortization of
deferred debt issuance costs) and the portion of operating lease rental
expense that is representative of the interest factor (deemed to be
one-third of operating lease rentals).
12
ITEM 7. 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
Fiscal 1997 v. Fiscal 1996
Sales: Sales in Fiscal 1997 were $3.70 billion compared to $3.71
billion in the prior year, a decrease of 0.4%. Same store sales increased
0.8% for the year. Sales in Fiscal 1997 compared to Fiscal 1996 were also
impacted by new store openings and remodels, offset by sold and closed
stores. During Fiscal 1997, the Company opened two new Pathmark stores,
completed 13 major renovations and enlargements to existing supermarkets, and
sold four and closed seven stores. The Company operated 135 and 144
supermarkets at the end of Fiscal 1997 and Fiscal 1996, respectively.
Gross Profit: Gross profit in Fiscal 1997 was $1.04 billion or 28.2% of
sales compared to $1.09 billion or 29.4% of sales for the prior year. The
decrease in gross profit in both dollars and as a percentage of sales for 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 $5.4
million and $1.3 million in Fiscal 1997 and Fiscal 1996, respectively. The
pretax LIFO credit for Fiscal 1997 includes a $2.0 million gain on a LIFO
liquidation related to the sale of the Company's pharmaceutical warehouse
inventory and a $0.8 million gain on a LIFO liquidation related to the sale of
the Company's grocery, frozen and perishable merchandise in connection with the
C&S Supply Agreement (see Note 3 of the Notes to the Consolidated Financial
Statements at Item 8, Part II of this Form 10-K).
Selling, General and Administrative Expenses ("SG&A"): SG&A in Fiscal 1997
decreased $16.4 million or 1.9% compared to the prior year. As a percentage of
sales, SG&A was 22.8% in Fiscal 1997, down from 23.1% in the prior year. The
decrease in SG&A as a percentage of sales in 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 $83.4
million in Fiscal 1997 was $5.6 million lower than the prior year of $89.0
million. The decrease in depreciation and amortization expense in Fiscal 1997
compared to the prior year was primarily due to a pretax charge of $5.4 million
in Fiscal 1996 to write down 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 $3.4 million and $3.1 million in Fiscal 1997
and Fiscal 1996, respectively.
Operating Earnings: Operating earnings in Fiscal 1997 were $119.3 million
compared to the prior year of $127.1 million. The decrease in operating earnings
in Fiscal 1997 compared to the prior year was primarily due to lower gross
profit, partially offset by lower SG&A and depreciation expense in Fiscal 1997
and the restructuring charge and the lease commitment charge in Fiscal 1996.
13
Interest Expense: Interest expense was $164.2 million in Fiscal 1997
compared to $161.5 million in the prior year. The increase in interest expense
in Fiscal 1997 compared to the prior year was primarily due to increases in
lease obligations and the debt accretion on the Deferred Coupon Notes, partially
offset by lower amortization of debt issuance costs.
Income Taxes: The income tax benefit was $16.7 million and $14.4 million
in Fiscal 1997 and Fiscal 1996, respectively. The 1997 benefit is net of a $1.9
million increase in the valuation allowance related to the Company's deferred
income tax assets. The Company believes that it is more likely than not that the
net deferred income tax assets of $54.0 million at January 31, 1998 will be
realized through the implementation of tax strategies which could generate
taxable income.
During Fiscal 1997, the Company made income tax payments of $4.8 million
and received income tax refunds of $4.3 million. During Fiscal 1996, the Company
made income tax payments of $4.6 million and received income tax refunds of $5.5
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.
Summary of Operations: For Fiscal 1997, the Company's net loss was $35.7
million compared to a net loss of $20.8 million for the prior year. The increase
in net loss in 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 $201.2 million and $236.4 million in 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.
Fiscal 1996 (52-week year) v. Fiscal 1995 (53-week year)
Sales: Sales in Fiscal 1996 were $3.71 billion compared to $3.97 billion
in Fiscal 1995. Sales comparisons were impacted by the extra week in the prior
year and the disposition of the freestanding drug stores during Fiscal 1995.
Sales generated by the freestanding drug stores were $110.8 million in Fiscal
1995. Same store sales from supermarkets decreased 2.8% for the year primarily
due to a significant increase in competitive new store openings and remodels,
particularly in the Company's southern region.
14
During Fiscal 1996, the Company opened four new Pathmark stores, two of which
replaced smaller stores, and completed 21 major renovations and enlargements to
existing supermarkets. Two stores were closed and not replaced during the year.
The Company operated 144 supermarkets at the end of both Fiscal 1996 and Fiscal
1995.
Gross Profit: Gross profit in Fiscal 1996 was $1.09 billion or 29.4% of
sales compared with $1.13 billion or 28.6% of sales in Fiscal 1995. Excluding
the impact of the disposition of the freestanding drug stores, gross profit as a
percentage of sales was 28.8% in Fiscal 1995. The improvement in gross profit,
as a percentage of sales in Fiscal 1996 compared to Fiscal 1995, 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 was primarily
attributable to the lower sales. The cost of goods sold comparisons were
affected by a pretax LIFO credit of $1.3 million and a pretax LIFO charge of
$1.1 million in Fiscal 1996 and Fiscal 1995, respectively.
Selling, General and Administrative Expenses ("SG&A"): SG&A decreased $8.4
million or 1.0% in Fiscal 1996 compared with Fiscal 1995. SG&A, on a proforma
basis eliminating the SG&A impact of the freestanding drug stores, increased
2.0% in Fiscal 1996 compared to Fiscal 1995. As a percentage of sales, SG&A were
23.1% in Fiscal 1996, up from 21.8% in Fiscal 1995 due to the impact of lower
sales, higher labor and labor related expenses, 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 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 second
quarter curtailment gain of $2.0 million due to the elimination of
postretirement medical coverage for active non-union associates. SG&A for Fiscal
1995 also included a fourth quarter gain of $3.4 million recognized on the sale
of a former warehouse of Purity Supreme, Inc., a previously divested company.
Depreciation and Amortization: Depreciation and amortization of $89.0
million in Fiscal 1996 was $8.6 million higher than $80.4 million in Fiscal
1995. The increase for Fiscal 1996 was primarily due to a pretax charge of $5.4
million to write down certain fixed assets held for sale, principally in the
Company's southern region, to their estimated net realizable values and capital
expenditures. Depreciation and amortization excludes video tape amortization,
which is recorded in cost of goods sold, of $3.1 million and $2.8 million in
Fiscal 1996 and Fiscal 1995, respectively.
Restructuring Charge: During the fourth quarter of Fiscal 1996, the
Company recorded a pretax charge of $9.1 million for reorganization and
restructuring costs related to its administrative operations. The restructuring
charge included $4.2 million for the costs of a voluntary early retirement
program and $1.2 million for severance and termination benefits. The remaining
charge of $3.7 million primarily relates to consulting fees incurred in
connection with the restructuring and exit costs for facility consolidation.
Lease Commitment Charge: During the fourth quarter of Fiscal 1996, the
Company decided to divest a group of its southern region stores, certain of
which have experienced unprofitable operating results. The Company concluded
that the operating losses being experienced by these stores were other than
temporary and that the projected operating results of such stores would not be
sufficient to recover their long-lived assets and their contractual lease
commitments. Further, the Company believes that these lease costs will not be
significantly recoverable through any future sublease. Therefore, the Company
recorded a $8.8 million pretax charge related to these unfavorable lease
commitments, in addition to writing down the long-lived assets of these stores
(see "Depreciation and Amortization" above).
15
Operating Earnings: Operating earnings for Fiscal 1996 were $127.1 million
compared with $203.4 million for Fiscal 1995. The decrease in operating earnings
during Fiscal 1996 compared to Fiscal 1995 was due to lower sales, higher
depreciation and amortization expense, the restructuring charge and the lease
commitment charge in Fiscal 1996 and the gain on disposition of freestanding
drug stores in Fiscal 1995, partially offset by lower SG&A.
Interest Expense: Interest expense was $161.5 million for Fiscal 1996
compared to $164.7 million in Fiscal 1995 primarily due to reductions in the
Term Loan along with lower interest rates.
Income Taxes: The income tax benefit for Fiscal 1996 was $14.4 million.
The income tax provision for Fiscal 1995 was $5.9 million reflecting the
reversal of the valuation allowance of $9.1 million related to the Company's
deferred income tax assets. The reversal was recorded in conjunction with the
Company's continuing evaluation of its deferred income tax assets.
During Fiscal 1996, the Company made income tax payments of $4.6 million
and received income tax refunds of $5.5 million. During Fiscal 1995, the Company
made income tax payments of $21.9 million and received income tax refunds of
$10.3 million.
Extraordinary Items: 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. 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.
Summary of Operations: The Company's net loss in Fiscal 1996 was $20.8
million compared to net earnings of $32.7 million in Fiscal 1995. The decrease
in net earnings for Fiscal 1996 compared to Fiscal 1995 was due to lower
operating earnings in Fiscal 1996, partially offset by lower interest expense
and an income tax benefit in Fiscal 1996 compared to an income tax provision in
Fiscal 1995.
EBITDA-FIFO: EBITDA-FIFO was $236.4 million in Fiscal 1996 and $268.9
million in Fiscal 1995, respectively.
Financial Condition
Debt Service: During Fiscal 1997, total long-term debt decreased $38.7
million from Fiscal 1996 year end primarily due to a net decrease in borrowings
under the Credit Agreement compared to the former credit agreement and a
decrease in certain mortgages, partially offset by debt accretion on the
Deferred Coupon Notes. In addition, during Fiscal 1997, total lease obligations
decreased $3.9 million from Fiscal 1996.
On January 29, 1998, the Company sold its fee and leasehold interests in the
Facilities to C&S for approximately $104 million (approximately $60 million,
excluding inventory) in connection with the C&S Purchase Agreement.
Simultaneously, Pathmark and C&S commenced the 15 year Supply Agreement,
pursuant to which C&S will supply Pathmark with substantially all of its
grocery, frozen and perishable merchandise requirements. In conjunction with the
C&S Purchase Agreement, the Company used $32.5 million of the net proceeds to
pay down a portion of the Term Loan. The remainder of the net proceeds were used
to pay down the Working Capital Facility and invest in marketable securities of
$52.0 million at January 31, 1998. As a result, there were no borrowings under
the Working Capital Facility at January 31, 1998. However, subsequent to Fiscal
1997, the Company utilized its marketable securities and borrowings
16
under the Working Capital Facility, which have increased to $15.0 million at
April 21, 1998, primarily to paydown trade accounts payable related to the
inventory sold in connection with the C&S Purchase Agreement and other
liabilities.
During the second quarter of Fiscal 1997, the Company sold four supermarkets
that it announced for divestiture at the end of Fiscal 1996 for $14.9 million
and sold two former 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 related mortgages.
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.
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 Company is required to make sinking fund payments on the Subordinated
Notes (as defined in Note 9 of the Notes to Consolidated Financial Statements at
Item 8, Part II of this Form 10-K) in the amount of 25% of the original
aggregate principal amount of the Subordinated Notes on each of June 15, 2000
and June 15, 2001. The Subordinated Debentures (as defined in Note 9 of the
Notes to Consolidated Financial Statements at Item 8, Part II of this Form 10-K)
and the remaining Subordinated Notes mature on June 15, 2002. The Senior
Subordinated Notes (as defined in Note 9 of the Notes to Consolidated Financial
Statements at Item 8, Part II of this Form 10-K) and the Deferred Coupon Notes
mature in Fiscal 2003. The Company has no payment obligations, through
intercompany notes or otherwise, with respect to its parent's indebtedness.
The majority of the cash interest payments are scheduled in the second and
fourth quarters.
The amounts 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
------------ --------
1998........................... $ 43.5
1999........................... 14.9
2000........................... 78.2
2001........................... 263.8
2002........................... 195.8
2003........................... 625.2
17
Liquidity: The consolidated financial statements of the Company indicate
that, at January 31, 1998, current liabilities exceeded current assets by $109.3
million and stockholder's deficiency was $1.08 billion. Management believes that
cash flows generated from operations, supplemented by the unused borrowing
capacity under the Working Capital Facility (refer to Notes 1 and 9 of the Notes
to Consolidated Financial Statements at Item 8, Part II of this Form 10-K) 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 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 a portion 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 January 31, 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, 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 Fiscal 1997, including
property acquired under capital leases, were $57.9 million compared to $94.1
million for Fiscal 1996 and $110.6 million for Fiscal 1995. During Fiscal 1997,
the Company opened two new Pathmark stores, completed 13 major renovations and
enlargements to existing supermarkets, and sold four and closed seven stores.
During Fiscal 1998, the Company plans to open up two new Pathmark stores, close
one store and complete up to an aggregate of 19 major renovations and
enlargements. Capital expenditures for Fiscal 1998, including property to be
acquired under capital leases, are estimated to be $70.0 million. 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 provide for the Company's capital
expenditure program.
Cash Flows: Cash provided by operating activities amounted to $56.5 million
in Fiscal 1997 compared to $73.6 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 $95.5 million in Fiscal 1997 compared to
cash used for investing activities of $46.8 million in the prior year. The
increase in cash provided by investing activities was primarily due to an
increase in proceeds related to the C&S Purchase Agreement, property
dispositions and a decrease in expenditures of property and equipment. Cash used
for financing activities was $101.8
18
million in Fiscal 1997 compared to $28.6 million in the prior year. The
increase in cash used for financing activities was primarily due to a decrease
in borrowings in conjunction with the Credit Agreement, net of repaying in full
the former term loan and former working capital facility in Fiscal 1997, 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.
Cash provided by operating activities amounted to $73.6 million in Fiscal
1996 compared to $118.3 million in Fiscal 1995. The decrease in net cash
provided by operating activities was 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 Fiscal 1996 was $46.8 million due to expenditures of
property and equipment of $55.0 million, offset by proceeds from property
dispositions of $8.2 million. Cash used for investing activities in Fiscal 1995
was $0.7 million primarily due to property and equipment expenditures of $69.5
million, partially offset by the net proceeds from the disposition of the
freestanding drug stores of $59.9 million, the proceeds from the sale of real
estate of $3.4 million and the proceeds from the disposal of home centers
segment of $4.7 million. Cash used for financing activities in Fiscal 1996 was
$28.6 million compared to $128.0 million in Fiscal 1995. The decrease in cash
used for financing activities is primarily due to an increase in borrowings
under the former 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. During Fiscal 1995, the Company
paid a dividend to PTK of $26.5 million from the net proceeds related to the
disposition of the freestanding drug stores and the sale of the home centers
segment.
Year 2000 Compliance: The Company has initiated a program to prepare the
Company's computer systems and applications for the year 2000. This is necessary
because computer programs have been written using two digits rather than four to
define the applicable year. Any of the Company's computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process normal business transactions.
The Company expects that the principal costs will be those associated
with the remediation and testing of its computer applications. Through IBM,
this effort is under way across the Company, and is following a process of
inventory, scoping and analysis, modification, testing and certification, and
implementation. A major portion of these costs will be met under the existing
agreement with IBM through a reprioritization of technology development
initiatives, with the remainder representing incremental costs (refer to Note
22 of the Notes to Consolidated Financial Statements at Item 8, Part II of
this Form 10-K). The Company does not believe that the total cost of such
compliance will be material. Additionally, the Company believes, based on
available information, that it will be able to manage its total year 2000
transition without any material adverse effect on its operations.
In addition, the Company is communicating with major vendors to determine
the extent to which the Company is vulnerable to third-party year 2000
compliance issues.
19
New Accounting Standards Not Yet Adopted
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is not expected
to have an effect on the Company's financial statements currently being
presented because the Company, at this time, has no items of comprehensive
income other than net income.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS No. 131"), which will be effective for financial statements beginning
after December 15, 1997. SFAS No. 131 redefines how operating segments are
determined and requires expanded quantitative disclosures relating to a
company's operating statements. SFAS No. 131, which the Company is evaluating,
will impact the financial statements to the extent that it is necessary to
provide additional disclosure about the Company's segments.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits ("SFAS No. 132"), which will be effective for financial
statements beginning after December 15, 1997. SFAS No. 132 revises employers'
disclosure about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. The Company will adopt
SFAS No. 132 in Fiscal 1998 and believes it will impact the financial statements
to the extent that it is necessary to provide additional disclosure about the
Company's pensions and other postretirement benefits.
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company due to
adverse changes in financial rates. The Company is exposed to market risk in the
area of interest rates. This exposure is directly related to its Term Loan and
borrowing activities under the Working Capital Facility. 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 when deemed appropriate.
20
ITEM 8. Consolidated Financial Statements.
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
January 31, February 1, February 3,
1998 1997 1996
------------ -------------- --------------
Sales...................................................... $ 3,695,865 $ 3,710,523 $ 3,971,593
Cost of sales (exclusive of depreciation and
amortization shown separately below)..................... 2,652,289 2,619,277 2,837,631
------------ ------------ -----------
Gross profit............................................... 1,043,576 1,091,246 1,133,962
Selling, general and administrative expenses............... 840,886 857,290 865,679
Depreciation and amortization.............................. 83,413 88,956 80,408
Restructuring charge....................................... -- 9,137 --
Lease commitment charge.................................... -- 8,763 --
Gain on disposition of freestanding drug stores............ -- -- 15,535
------------ ------------ -----------
Operating earnings......................................... 119,277 127,100 203,410
Interest expense........................................... (164,168) (161,469) (164,749)
------------ ------------ -----------
Earnings (loss) before income taxes and
extraordinary items..................................... (44,891) (34,369) 38,661
Income tax benefit (provision)............................. 16,705 14,411 (5,914)
------------ ------------ -----------
Earnings (loss) before extraordinary items................. (28,186) (19,958) 32,747
Extraordinary items, net of an income tax benefit of
$5,456 in Fiscal 1997 and $613 in Fiscal 1996........... (7,488) (877) --
------------ ------------ -----------
Net earnings (loss)........................................ $ (35,674) $ (20,835) $ 32,747
------------ ------------ -----------
------------ ------------ -----------
See notes to consolidated financial statements.
21
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
January 31, February 1,
1998 1997
----------- ---------
ASSETS
Current Assets
Cash and cash equivalents.................................................. $ 60,076 $ 9,880
Accounts receivable, net................................................... 10,928 12,492
Merchandise inventories.................................................... 148,775 216,931
Deferred income taxes, net................................................. 10,621 7,111
Prepaid expenses........................................................... 21,449 24,951
Due from suppliers......................................................... 13,027 13,923
Other current assets....................................................... 11,331 5,908
----------- ---------
Total Current Assets..................................................... 276,207 291,196
Property and Equipment, Net................................................... 529,542 603,577
Deferred Financing Costs, Net................................................. 18,547 28,743
Deferred Income Taxes, Net.................................................... 43,389 22,846
Other Assets.................................................................. 32,687 43,534
----------- ---------
$ 900,372 $ 989,896
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current Liabilities
Accounts payable........................................................... $ 128,484 $ 166,199
Book overdrafts............................................................ 26,330 41,085
Current maturities of long-term debt....................................... 43,478 74,431
Income taxes payable....................................................... 1,771 860
Accrued payroll and payroll taxes.......................................... 49,533 56,335
Current portion of lease obligations....................................... 24,337 23,133
Accrued interest payable................................................... 18,300 20,712
Accrued expenses and other current liabilities............................. 93,297 90,589
----------- ---------
Total Current Liabilities................................................ 385,530 473,344
----------- ---------
Long-Term Debt................................................................ 1,177,898 1,185,639
----------- ---------
Lease Obligations, Long-Term.................................................. 170,273 175,353
----------- ---------
Other Noncurrent Liabilities.................................................. 244,011 197,226
----------- ---------
Commitments and Contingencies (Notes 3, 12 and 22)
Stockholder's Deficiency
Common Stock $.10 par value................................................... -- --
Authorized, issued and outstanding: 100 shares
Paid-in Capital............................................................... 68,703 68,703
Accumulated Deficit........................................................... (1,146,043) (1,110,369)
----------- ---------
Total Stockholder's Deficiency........................................... (1,077,340) (1,041,666)
----------- ---------
$ 900,372 $ 989,896
----------- ---------
----------- ---------
See notes to consolidated financial statements.
22
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY
(in thousands)
Total
Common Paid-in Accumulated Stockholder's
Stock Capital Deficit Deficiency
--------- ----------- --------------- -----------------
Balance, January 28, 1995............................ $ -- $ 91,809 $ (1,122,281) $ (1,030,472)
Net earnings...................................... -- -- 32,747 32,747
Dividend to PTK Holdings, Inc. in conjunction
with the disposition of 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, February 3, 1996............................ -- 65,303 (1,089,534) (1,024,231)
Net loss.......................................... -- -- (20,835) (20,835)
Capital contribution from SMG-II Holdings
Corporation..................................... -- 3,400 -- 3,400
--------- ----------- --------------- ---------
Balance, February 1, 1997............................ -- 68,703 (1,110,369) (1,041,666)
Net loss.......................................... -- -- (35,674) (35,674)
--------- ----------- --------------- ---------
Balance, January 31, 1998............................ $ -- $ 68,703 $ (1,146,043) $ (1,077,340)
--------- ----------- --------------- ---------
--------- ----------- --------------- ---------
See notes to consolidated financial statements.
23
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
52 Weeks Ended 52 Weeks Ended 53 Weeks Ended
January 31, 1998 February 1, 1997 February 3, 1996
---------------- ---------------- ----------------
Operating Activities
Net earnings (loss)......................................... $(35,674) $(20,835) $ 32,747
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of debt........ 7,488 877 --
Depreciation and amortization............................. 87,341 92,485 83,263
Deferred income tax (benefit) expense..................... (24,053) (12,558) 6,417
Interest accruable but not payable........................ 18,509 16,678 15,028
Amortization of original issue discount................... 354 354 354
Amortization of debt issuance costs....................... 5,542 7,426 7,140
(Gain) loss on disposal of property and equipment......... 127 (5,347) 200
Gain on disposition of freestanding drug stores........... -- -- (15,535)
Gain on sale of real estate............................... -- -- (3,371)
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net................................ 1,564 (1,939) 2,380
Merchandise inventories................................. 22,170 8,517 15,653
Income taxes............................................ 6,367 (2,584) 8,932
Prepaid expenses........................................ (861) (2,889) (1,631)
Due from suppliers...................................... 896 (745) 5,079
Other current assets.................................... (4,749) (3,009) 2,221
Other assets............................................ 9,700 2,309 (23,419)
Accounts payable........................................ (37,715) (17,883) (9,114)
Accrued payroll and payroll taxes....................... (6,802) 2,013 780
Accrued interest payable................................ (2,289) 1,403 (363)
Accrued expenses and other current liabilities.......... 2,708 (1,867) (6,997)
Other noncurrent liabilities............................ 5,860 11,191 (1,462)
---------- ---------- -------------
Cash provided by operating activities................. 56,483 73,597 118,302
---------- ---------- -------------
Investing Activities
Property and equipment expenditures......................... (34,322) (54,963) (69,544)
Proceeds from disposition of property and equipment......... 26,132 8,170 896
Net proceeds in connection with the C&S Purchase Agreement.. 103,728 -- --
Net proceeds from disposition of freestanding drug stores... -- -- 59,876
Net proceeds from sale of real estate....................... -- -- 3,371
Net proceeds from disposal of home centers segment.......... -- -- 4,706
---------- ---------- -------------
Cash provided by (used for) investing activities...... 95,538 (46,793) (695)
---------- ---------- -------------
Financing Activities
Borrowings under Term Loan in connection with new Credit 300,000 -- --
Agreement...................................................
Repayments of term loans.................................... (279,877) (44,828) (60,295)
Increase (decrease) in working capital facilities borrowings (73,500) 27,500 (17,000)
Decrease in book overdrafts................................. (14,755) (2,635) (1,262)
Increase in other borrowings................................ 1,956 2,052 895
Repayment of other long-term borrowings..................... (6,136) (8,085) (5,208)
Reduction in lease obligations.............................. (21,337) (20,032) (18,221)
Premiums incurred in early extinguishment of debt........... (132) (352) --
Deferred financing fees..................................... (8,044) (3,597) (374)
Proceeds from lease financing............................... -- 21,405 --
Dividend to PTK Holdings, Inc............................... -- -- (26,506)
---------- ---------- -------------
Cash used for financing activities.................... (101,825) (28,572) (127,971)
---------- ---------- -------------
Increase (decrease) in cash and cash equivalents............... 50,196 (1,768) (10,364)
Cash and cash equivalents at beginning of period............... 9,880 11,648 22,012
---------- ---------- -------------
Cash and cash equivalents at end of period..................... $ 60,076 $ 9,880 $ 11,648
---------- ---------- -------------
---------- ---------- -------------
See notes to consolidated financial statements.
24
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continiued)
Note 1-Business
Organization and Basis of Presentation:
Pathmark Stores, Inc. (the "Company") operated 135 supermarkets as of
January 31, 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").
Holdings was formed by Merrill Lynch Capital Partners, Inc., a wholly
owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."), to effect the
acquisition (the "Acquisition") of the Company. On June 15, 1987, Holdings
completed the first step in the Acquisition when it acquired 32.8 million shares
(approximately 85%) of the Company's common stock through a tender offer. The
remaining outstanding common stock of the Company was acquired by Holdings on
October 5, 1987 pursuant to a Merger Agreement dated April 22, 1987, as amended.
The Acquisition of the Company by Holdings was accounted for as a purchase and,
accordingly, Holdings recorded the assets and liabilities of the Company at
their fair values at the date of the Acquisition. The accompanying consolidated
financial statements of the Company reflect Holdings' basis. The tax basis for
the assets and liabilities acquired was retained.
During Fiscal 1993, the Board of Directors of Holdings authorized
management of the Company and Holdings to proceed with a recapitalization plan
(the "Recapitalization"), which included a refinancing of Holdings' debt and the
distribution to Holdings of certain of the Company's assets and liabilities. In
conjunction with the Recapitalization, the assets, liabilities and related
operations of the Company's home centers segment, as well as certain assets and
liabilities of the warehouse, distribution and processing facilities which
service the Company's supermarkets and drug stores, and certain inventories and
real property were contributed to Plainbridge, Inc. ("Plainbridge"), a then
newly formed wholly owned subsidiary of the Company and the shares of
Plainbridge were then distributed to PTK, a then newly formed wholly owned
subsidiary of Holdings (the "Plainbridge Spin-Off"). Following the Plainbridge
Spin-Off, PTK held 100% of the capital stock of both Plainbridge and the
Company. On May 3, 1993, the Company contributed total assets of $1.7 million
and total liabilities of $1.8 million, which represented the Chefmark deli food
preparation operations and the related warehouse and a leased banana ripening
warehouse to Chefmark, Inc. ("Chefmark"), a then newly formed Delaware
corporation, and distributed the shares of Chefmark to Holdings.
On March 1, 1996, the Company reacquired all of the outstanding capital
stock of Plainbridge by means of a capital contribution from PTK. As a result,
Plainbridge is a wholly-owned subsidiary of the Company. 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.
Management's Plan:
The consolidated financial statements of the Company indicated that, at
January 31, 1998, current liabilities exceeded current assets by $109.3 million
and the stockholder's deficiency was $1.08 billion. Management believes that
cash flows generated from operations, supplemented by the unused borrowing
capacity under its working capital facility (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 other cash requirements.
25
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 1-Business-(Continued)
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 Company repaid in
full the former term loan and former working capital facility with the
borrowings obtained under the Credit Agreement (see Note 9).
Note 2-Summary of Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All intercompany
transactions have been eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The accompanying consolidated balance sheets include reserves for self
insured claims relating to customer, employee and vehicle accidents and covered
employee medical benefits. The liabilities for customer and employee accident
claims are recorded at present value, due to the long-term payout of these
claims (see Note 8). While the Company believes that the amounts provided are
adequate to cover its self-insured liabilities, it is reasonably possible that
the final resolution of these claims may differ from the amounts provided.
Fiscal Year:
The Company's fiscal year ends on the Saturday nearest to January 31 of
the following calendar year. Normally, each fiscal year consists of 52 weeks,
but every five or six years the fiscal year consists of 53 weeks. Fiscal 1995
consists of 53 weeks.
Statements of Cash Flows:
All investments and marketable securities with a maturity of three month
or less are considered to be cash equivalents. The Company had $52.0 million of
cash equivalent investments as of January 31, 1998 and had no cash equivalent
investments as of February 1, 1997.
Merchandise Inventories:
Merchandise inventories are valued at the lower of cost or market. Cost
for substantially all merchandise inventories is determined on a last-in,
first-out ("LIFO") basis.
Rental Video Tapes:
Video tapes purchased for rental purposes are capitalized and amortized
over their estimated useful lives. The amortization of video tapes, included in
cost of goods sold, approximated $3.4 million, $3.1 million and $2.8 million in
Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively.
26
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 2-Summary of Significant Accounting Policies-(Continued)
Software:
Externally purchased software is capitalized and amortized over a three
year period. The amortization of capitalized software included in selling,
general and administrative expenses approximated $0.5 million, $0.4 million and
$0.1 million in Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively.
Internally developed software, including software developed by IBM (see Note
22), is expensed as incurred.
Property and Equipment:
Property and equipment are stated at cost. Depreciation and amortization
expense on owned property and equipment is computed on the straight-line method
over the following useful lives: buildings, 40 years; fixtures and equipment,
3-10 years; and leasehold improvements, 8-15 years or lease term, whichever is
shorter. Capital leases are recorded at the present value of minimum lease
payments or fair market value of the related property, whichever is less.
Amortization of property under capital leases is computed on the straight-line
method over the term of the lease or the leased property's estimated useful
life, whichever is shorter.
Long-Lived Assets:
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 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 carrying value of
long-lived assets, which are being used in the Company's operations, are
assessed for recoverability based upon groups of assets and the related cash
flow generated by such assets. Assets held for sale are reviewed for impairment
based upon the estimated net realizable value of such assets. The adoption of
SFAS No. 121, on February 4, 1996, had no effect on the Company's
financial condition or results of operations.
Deferred Financing Costs:
Deferred financing costs are amortized utilizing the interest method over
the life of the related indebtedness.
Book Overdraft:
Under the Company's cash management system, checks issued but not
presented to banks result in overdraft balances for accounting purposes and are
classified as book overdrafts.
Revenue Recognition:
Revenue is recognized at the point of sale to the customer.
Advertising Costs:
Advertising costs, net of vendor reimbursements, are expensed as incurred
and were $18.9 million, $23.7 million and $30.6 million in Fiscal 1997, Fiscal
1996 and Fiscal 1995, respectively.
27
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 2-Summary of Significant Accounting Policies-(Continued)
Store Preopening and Closing Costs:
Store preopening costs are expensed as incurred. Store closing costs, such
as future rent and real estate taxes subsequent to the actual store closing, net
of expected sublease recovery, are recorded at present value when management
makes a decision to close a store (see Note 8).
Income Taxes:
The Company's income taxes are computed based on a tax sharing agreement
with its ultimate parent, SMG-II Holdings Corporation ("SMG-II"), in which the
Company computes a hypothetical tax return as if the Company was not joined in a
consolidated or combined return with SMG-II. The Company must pay SMG-II the
positive amount of any such hypothetical tax. If the hypothetical tax return
shows entitlement to a refund, including any refund attributable to a carryback,
then SMG-II will pay to the Company the amount of such refund.
Earnings (Loss) Per Common Share:
Since the Company is a wholly owned subsidiary, earnings (loss) per share
is not presented.
Reclassifications:
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the Fiscal 1997 presentation.
New Accounting Standards Not Yet Adopted:
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is not expected
to have an effect on the Company's financial statements currently being
presented because the Company, at this time, has no items of comprehensive
income other than net income.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS No. 131"), which will be effective for financial statements beginning
after December 15, 1997. SFAS No. 131 redefines how operating segments are
determined and requires expanded quantitative disclosures relating to a
company's operating statements. SFAS No. 131, which the Company is evaluating,
will impact the financial statements to the extent that it is necessary to
provide additional disclosure about the Company's segments.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits ("SFAS No. 132"), which will be effective for financial
statements beginning after December 15, 1997. SFAS No. 132 revises employers'
disclosure about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. The Company will adopt
SFAS No. 132 in Fiscal 1998 and believes it will impact the financial statements
to the extent that it is necessary to provide additional disclosure about the
Company's pensions and other postretirement benefits.
28
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 3-Supply and Distribution Agreements
On January 29, 1998, the Company sold its Woodbridge, New Jersey
distribution center and office complex and its leasehold interests in its two
distribution centers and its banana ripening facility in North Brunswick, New
Jersey, Dayton, New Jersey and Avenel, New Jersey, respectively (all of the
foregoing buildings are hereinafter referred to as, collectively the
"Facilities"), to C&S Wholesale Grocers, Inc. ("C&S"), including the fixtures,
equipment and inventory in each of those Facilities, for $104.4 million (the
"C&S Purchase Agreement"). The Company used $32.5 million of the net proceeds to
pay down a portion of the Term Loan. A portion of the net proceeds were used to
pay down the Working Capital Facility at the end of Fiscal 1997. The remainder
of the proceeds were invested in marketable securities and subsequent to year
end were utilized to pay down accounts payable related to the inventory sold in
connection with the C&S Purchase Agreement and other liabilities.
Simultaneously, the Company and C&S entered into a 15 year supply agreement (the
"Supply Agreement") pursuant to which C&S will supply substantially all of the
Company's grocery, frozen and perishable merchandise requirements, formerly
owned and warehoused by the Company. As a result of these agreements, the
Company recorded deferred income of $60.8 million. Such deferred income consists
of (i) $25.0 million received by the Company for future trade discounts and
rebates, which will be amortized to operations by the Company as it is earned,
and (ii) $35.8 million in net proceeds received in excess of the fair value of
the assets sold; such excess has been deferred and will be amortized to
operations over the life of the Supply Agreement. In addition, current year
results include a $0.8 million gain on a LIFO liquidation related to the sale of
such inventory.
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.
Note 4-Accounts Receivable
Accounts receivable are comprised of the following (dollars in thousands):
January 31, February 1,
1998 1997
--------- ---------
Prescription plans..................................... $ 10,074 $ 10,397
Other.................................................. 2,048 3,366
--------- ---------
Accounts receivable.................................... 12,122 13,763
Less: allowance for doubtful accounts(a)............... 1,194 1,271
--------- ---------
Accounts receivable, net............................... $ 10,928 $ 12,492
--------- ---------
--------- ---------
---------
(a) Fiscal 1997 includes a credit of $0.2 million and a recovery of $0.1
million. Fiscal 1996 includes a provision of $0.1 million and a recovery of
$0.3 million.
Note 5--Merchandise Inventories
Merchandise inventories are comprised of the following (dollars in
thousands):
January 31, February 1,
1998 1997
--------- -------------