FORM 10-Q
| (Mark One) | |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal quarter ended April 30, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
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Commission file number 1-5287
PATHMARK STORES, INC.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
22-2879612 (I.R.S. Employer Identification No.) |
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200 Milik Street Carteret, New Jersey (Address of principal executive office) |
07008 (Zip Code) |
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(732) 499-3000 (Registrant’s telephone number, including area code) |
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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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ý No o
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ý No o
As of June 2, 2005, 30,071,192 shares of the Common Stock were outstanding.
| 13 Weeks Ended |
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|---|---|---|---|---|---|---|---|---|
| April 30, 2005 |
May 1, 2004 | |||||||
| Sales | $ | 1,002.5 | $ | 990.1 | ||||
| Cost of goods sold | (717.5 | ) | (710.7 | ) | ||||
| Gross profit | 285.0 | 279.4 | ||||||
| Selling, general and administrative expenses | (250.9 | ) | (244.6 | ) | ||||
| Depreciation and amortization | (22.2 | ) | (21.5 | ) | ||||
| Operating earnings | 11.9 | 13.3 | ||||||
| Interest expense | (16.3 | ) | (16.5 | ) | ||||
| Loss before income taxes | (4.4 | ) | (3.2 | ) | ||||
| Income tax benefit | 2.3 | 1.4 | ||||||
| Net loss | $ | (2.1 | ) | $ | (1.8 | ) | ||
| Weighted average number of shares outstanding – basic and diluted | 30.1 | 30.1 | ||||||
| Net loss per share – basic and diluted | $ | (0.07 | ) | $ | (0.06 | ) | ||
See notes to financial statements (unaudited).
2
| (Unaudited) April 30, 2005 |
January 29, 2005 | |||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 44.3 | $ | 42.6 | ||||
| Accounts receivable, net | 18.9 | 19.9 | ||||||
| Merchandise inventories | 193.8 | 182.2 | ||||||
| Due from suppliers | 65.6 | 74.7 | ||||||
| Other current assets | 29.3 | 21.4 | ||||||
| Total current assets | 351.9 | 340.8 | ||||||
| Property and equipment, net | 560.6 | 575.0 | ||||||
| Goodwill | 144.7 | 144.7 | ||||||
| Other noncurrent assets | 196.8 | 192.9 | ||||||
| Total assets | $ | 1,254.0 | $ | 1,253.4 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 120.9 | $ | 102.1 | ||||
| Current maturities of long-term debt | 34.1 | 36.6 | ||||||
| Current portion of lease obligations | 15.2 | 15.1 | ||||||
| Accrued expenses and other current liabilities | 156.4 | 160.3 | ||||||
| Total current liabilities | 326.6 | 314.1 | ||||||
| Long-term debt | 444.7 | 444.6 | ||||||
| Long-term lease obligations | 174.8 | 178.3 | ||||||
| Deferred income taxes | 69.1 | 72.0 | ||||||
| Other noncurrent liabilities | 175.7 | 179.2 | ||||||
| Total liabilities | 1,190.9 | 1,188.2 | ||||||
| Stockholders' equity | ||||||||
| Preferred stock | — | — | ||||||
| Authorized: 5,000,000 shares; no shares issued | ||||||||
| Common stock, par value $0.01 per share | 0.3 | 0.3 | ||||||
| Authorized: 100,000,000 shares; issued: 30,099,510 shares | ||||||||
| at April 30, 2005 and at January 29, 2005 | ||||||||
| Common stock warrants | 60.0 | 60.0 | ||||||
| Paid-in capital | 607.9 | 607.9 | ||||||
| Accumulated deficit | (600.4 | ) | (598.3 | ) | ||||
| Accumulated other comprehensive loss | (4.0 | ) | (4.0 | ) | ||||
| Treasury stock, at cost: 28,318 shares at April 30, 2005 and | ||||||||
| at January 29, 2005 | (0.7 | ) | (0.7 | ) | ||||
| Total stockholders' equity | 63.1 | 65.2 | ||||||
| Total liabilities and stockholders' equity | $ | 1,254.0 | $ | 1,253.4 | ||||
See notes to financial statements (unaudited).
3
| 13 Weeks Ended |
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|---|---|---|---|---|---|---|---|---|
| April 30, 2005 |
May 1, 2004 | |||||||
| Operating Activities | ||||||||
| Net loss | $ | (2.1 | ) | $ | (1.8 | ) | ||
| Adjustments to reconcile the net loss to cash provided by operating activities: | ||||||||
| Depreciation and amortization | 22.2 | 21.5 | ||||||
| Amortization of deferred financing costs | 0.4 | 0.5 | ||||||
| Deferred income tax benefit | (3.1 | ) | (2.3 | ) | ||||
| Gain on sale of real estate | — | (1.2 | ) | |||||
| Cash provided by (used for) operating assets and liabilities: | ||||||||
| Accounts receivable | 1.0 | 0.6 | ||||||
| Merchandise inventories | (11.6 | ) | (13.7 | ) | ||||
| Due from suppliers | 9.1 | 15.2 | ||||||
| Other current assets | (7.9 | ) | 2.7 | |||||
| Noncurrent assets | (5.4 | ) | (1.9 | ) | ||||
| Accounts payable | 18.8 | 6.6 | ||||||
| Accrued expenses and other current liabilities | (3.7 | ) | (4.6 | ) | ||||
| Noncurrent liabilities | (3.6 | ) | (4.4 | ) | ||||
| Cash provided by operating activities | 14.1 | 17.2 | ||||||
| Investing Activities | ||||||||
| Capital expenditures, including technology investments | (6.7 | ) | (22.1 | ) | ||||
| Acquisition of Community Supermarket Corporation | — | (4.5 | ) | |||||
| Proceeds from the sale of real estate | — | 2.5 | ||||||
| Cash used for investing activities | (6.7 | ) | (24.1 | ) | ||||
| Financing Activities | ||||||||
| Repayments of capital lease obligations | (3.4 | ) | (3.9 | ) | ||||
| Borrowings (repayments) under the working capital facility, net | (1.8 | ) | 15.9 | |||||
| Repayments of other debt, net | (0.5 | ) | (2.2 | ) | ||||
| Cash provided by (used for) financing activities | (5.7 | ) | 9.8 | |||||
| Increase in cash | 1.7 | 2.9 | ||||||
| Cash at beginning of period | 42.6 | 8.9 | ||||||
| Cash at end of period | $ | 44.3 | $ | 11.8 | ||||
| Supplemental Disclosures of Cash Flow Information | ||||||||
| Interest paid | $ | 22.8 | $ | 23.3 | ||||
| Income taxes paid | $ | 0.1 | $ | 0.7 | ||||
| Non-Cash Investing and Financing Activities | ||||||||
| Capital lease obligations incurred | $ | — | $ | 8.8 | ||||
See notes to financial statements (unaudited).
4
Business. Pathmark Stores, Inc. (the "Company" or "Pathmark") operated 142 supermarkets as of April 30, 2005, primarily in the New York-New Jersey and Philadelphia metropolitan areas.
Basis of Presentation. The unaudited consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, the consolidated financial statements included herein reflect all adjustments which are of a normal and recurring nature and are necessary to present fairly the results of operations and financial position of the Company. This report should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 29, 2005.
Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are 100% owned. All intercompany transactions have been eliminated in consolidation.
The Company accounts for stock-based compensation plans using the intrinsic value recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Since the exercise price of all stock options granted under the Company’s stock-based compensation plans was equal to the market price of the underlying common stock on the grant date, no stock-based compensation expense is recognized in the Company’s operating results.
The following proforma disclosure illustrates the effect on the net loss and net loss per share as if the Company had applied the fair value recognition provisions of the Financial Accounting Standards Board (the “FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123, as amended by SFAS No. 148 (in millions, except per share amounts):
| 13 Weeks Ended |
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|---|---|---|---|---|---|---|---|---|
| April 30, 2005 |
May 1, 2004 | |||||||
| Net loss, as reported | $ | (2.1 | ) | $ | (1.8 | ) | ||
| Less: stock-based compensation expense, net of related tax effect | (0.8 | ) | (1.1 | ) | ||||
| Net loss, proforma | $ | (2.9 | ) | $ | (2.9 | ) | ||
| Weighted average number of shares outstanding - basic and diluted | 30.1 | 30.1 | ||||||
| Net loss per share - basic and diluted, as reported | $ | (0.07 | ) | $ | (0.06 | ) | ||
| Less: stock-based compensation expense, net of related tax effect | (0.03 | ) | (0.04 | ) | ||||
| Net loss per share - basic and diluted, proforma | $ | (0.10 | ) | $ | (0.10 | ) | ||
For purposes of the proforma disclosures, the estimated fair value of the options issued is assumed to be expensed over the options’ vesting period. The Company will adopt SFAS No. 123 (revised 2004), “Share-Based Payment,” effective with the first quarter reporting period ending April 29, 2006 (see New Accounting Pronouncement in Item 2).
5
Long-term debt is comprised of the following (in millions):
| April 30, 2005 |
January 29, 2005 | |||||||
|---|---|---|---|---|---|---|---|---|
| Senior subordinated notes | $ | 353.3 | $ | 353.4 | ||||
| Term loan | 70.0 | 70.0 | ||||||
| Working capital facility | 32.6 | 34.4 | ||||||
| Mortgages | 20.8 | 21.0 | ||||||
| Other debt | 2.1 | 2.4 | ||||||
| Total debt | 478.8 | 481.2 | ||||||
| Less: current maturities and the working capital facility | (34.1 | ) | (36.6 | ) | ||||
| Long-term debt | $ | 444.7 | $ | 444.6 | ||||
The Company has outstanding $350 million aggregate principal amount of 8.75% Senior Subordinated Notes, due 2012 (the “Senior Subordinated Notes”), including $150 million issued at a premium, which pay cash interest semi-annually on February 1 and August 1. The indenture relating to the Senior Subordinated Notes (the “Indenture”) contains a number of restrictive covenants, including a restriction on our ability to declare cash dividends on our common stock. The Company was in compliance with all related covenants as of April 30, 2005.
On October 1, 2004, the Company entered into an amended and restated $250 million senior secured credit facility (the “Credit Agreement”) with a group of lenders led by Fleet Retail Group, a Bank of America company. The term of the Credit Agreement is five years and consists of a $180 million revolving working capital facility (the “Working Capital Facility”) (including a maximum of $125 million in letters of credit) and a $70 million term loan (the “Term Loan”). The proceeds from the Credit Agreement were used to completely repay the outstanding balance under the Company’s credit agreement dated September 19, 2000 (the “2000 Credit Agreement”). Interest on borrowings under the Credit Agreement bear interest at floating rates equal to LIBOR plus a premium that ranges between 1.5% to 2.25%, depending on the average availability under the Credit Agreement, and at April 30, 2005, was at LIBOR plus 2.0%. Pursuant to the Credit Agreement, there are three financial covenants: minimum annual consolidated EBITDA of $135 million, minimum inventory of $150 million and maximum annual cash capital expenditures of $110 million. The Company was in compliance with all Credit Agreement covenants as of April 30, 2005.
There are no credit agency ratings-related triggers in either the Indenture or the Credit Agreement that would adversely impact the cost of borrowings, annual amortization of principal or related debt maturities.
6
Interest expense is comprised of the following (in millions):
| 13 Weeks Ended |
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|---|---|---|---|---|---|---|---|---|
| April 30, 2005 |
May 1, 2004 | |||||||
| Senior subordinated notes | $ | 7.7 | $ | 7.7 | ||||
| Term loan | 0.8 | 0.6 | ||||||
| Working capital facility | 0.5 | 0.5 | ||||||
| Lease obligations | 4.8 | 5.1 | ||||||
| Mortgages | 0.4 | 0.4 | ||||||
| Amortization of deferred financing costs | 0.4 | 0.5 | ||||||
| Other | 1.7 | 1.7 | ||||||
| Interest expense | $ | 16.3 | $ | 16.5 | ||||
In the normal course of business, the Company has assigned to third parties various leases related to former businesses that the Company sold as well as former operating Pathmark supermarkets (the “Assigned Leases”). When the Assigned Leases were assigned, the Company generally remained secondarily liable with respect to these lease obligations. As such, if any of the assignees were to become unable to continue making payments under the Assigned Leases, the Company could be required to assume the lease obligation. As of April 30, 2005, 65 Assigned Leases remain in place. Assuming that each respective assignee became unable to continue to make payments under an Assigned Lease, an event the Company believes to be remote, management estimates its maximum potential obligation with respect to the Assigned Leases to be approximately $106 million, which could be partially or totally offset by reassigning or subletting such leases. The Company has recognized a liability on its consolidated balance sheet as of April 30, 2005 of $2.6 million, which represents certain guarantees attributable to the Company’s secondary liability in connection with Assigned Leases.
The Company sponsors a tax-qualified pension plan which covers substantially all non-union and certain union associates and several nonqualified pension plans for certain of its associates as well as retiree health and life insurance benefits, primarily for union groups and retired non-union associates. The components of net periodic benefit cost (cost reduction) are as follows (in millions):
Pension Benefits:
| 13 Weeks Ended |
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|---|---|---|---|---|---|---|---|---|
| April 30, 2005 |
May 1, 2004 | |||||||
| Service cost | $ | 0.9 | $ | 0.8 | ||||
| Interest cost | 3.1 | 3.0 | ||||||
| Expected return on plan assets | (5.8 | ) | (5.6 | ) | ||||
| Amortization of prior service costs | 0.1 | 0.1 | ||||||
| Amortization of losses | 1.0 | 0.7 | ||||||
| Net periodic benefit cost reduction | $ | (0.7 | ) | $ | (1.0 | ) | ||
7
Other Postretirement Benefits:
| 13 Weeks Ended |
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|---|---|---|---|---|---|---|---|---|
| April 30, 2005 |
May 1, 2004 | |||||||
| Service cost | $ | 0.2 | $ | 0.2 | ||||
| Interest cost | 0.5 | 0.4 | ||||||
| Amortization of prior service costs | (0.2 | ) | — | |||||
| Amortization of losses | 0.3 | 0.2 | ||||||
| Net periodic benefit cost | $ | 0.8 | $ | 0.8 | ||||
As disclosed in our Annual Report on Form 10-K for the year ended January 29, 2005, Pathmark and certain investment funds affiliated with The Yucaipa Companies LLC (“Yucaipa”), a Los Angeles based private equity firm, entered into a stock purchase agreement under which Yucaipa will invest $150 million in Pathmark and executed a five-year management agreement pursuant to which Yucaipa will provide consulting services following the closing on corporate strategy, marketing, operations, finance and retail development to Pathmark.
Under the terms of the agreement, Yucaipa will purchase 20,000,000 newly-issued shares of the Company’s common stock, representing approximately 40.0% of the Company’s outstanding common stock, 10,060,000 Series A warrants to purchase a further 9.9% of the Company’s common stock, and 15,046,350 Series B warrants to purchase a further 10.0% of the Company’s common stock. The Series A warrants have an exercise price of $8.50 per share and a three-year term. The Series B warrants have an exercise price of $15.00 per share and a ten-year term, but will not become exercisable until certain conditions are satisfied. Upon closing, the Company’s Board of Directors is expected to be comprised of six current or new independent directors and five additional directors nominated by Yucaipa. The independent directors will have the right to nominate their successors. The transaction, which was unanimously approved by the Company’s Board of Directors, is subject to customary closing conditions and stockholder approval. The transaction is expected to close in June 2005.
Approximately $1.7 million of costs directly attributable to the proposed issuance of the Company’s common stock to Yucaipa have been deferred and recorded in noncurrent assets. Such costs will be netted against the proceeds from the common stock issuance.
8
The following represents the consolidating financial statements of Pathmark and its 100% owned guarantor and non-guarantor subsidiaries. The guarantor subsidiaries are comprised of six 100% owned entities, including Pathmark’s distribution subsidiary, and guarantee on a full and unconditional and joint and several basis, the Senior Subordinated Notes. The non-guarantor subsidiaries are comprised of four 100% owned single-purpose entities. Each of those entities owns the real estate on which a supermarket leased to Pathmark is located.
| Pathmark |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Intercompany Elimination |
Consolidated Total |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | |||||||||||||||||
| Consolidating Statements of Operations: | |||||||||||||||||
| For the 13 Weeks Ended April 30, 2005 | |||||||||||||||||
| Sales | $ | 1,002.5 | $ | 607.4 | $ | — | $ | (607.4 | ) | $ | 1,002.5 | ||||||
| Cost of goods sold | (717.5 | ) | (607.4 | ) | — | 607.4 | (717.5 | ) | |||||||||
| Gross profit | 285.0 | — | — | — | 285.0 | ||||||||||||
| Selling, general and administrative expenses | (253.4 | ) | 1.6 | 0.9 | — | (250.9 | ) | ||||||||||
| Depreciation and amortization | (20.4 | ) | (1.4 | ) | (0.4 | ) | — | (22.2 | ) | ||||||||
| Operating earnings | 11.2 | 0.2 | 0.5 | — | 11.9 | ||||||||||||
| Interest expense | (15.9 | ) | (0.1 | ) | (0.3 | ) | — | (16.3 | ) | ||||||||
| Equity in earnings of subsidiaries | 0.3 | — | — | (0.3 | ) | — | |||||||||||
| Earnings (loss) before income taxes | (4.4 | ) | 0.1 | 0.2 | (0.3 | ) | (4.4 | ) | |||||||||
| Income tax benefit | 2.3 | — | — | — | 2.3 | ||||||||||||
| Net earnings (loss) | $ | (2.1 | ) | $ | 0.1 | $ | 0.2 | $ | (0.3 | ) | $ | (2.1 | ) | ||||
| For the 13 Weeks Ended May 1, 2004 | |||||||||||||||||
| Sales | $ | 990.1 | $ | 601.8 | $ | — | $ | (601.8 | ) | $ | 990.1 | ||||||
| Cost of goods sold | (711.4 | ) | (601.1 | ) | — | 601.8 | (710.7 | ) | |||||||||
| Gross profit | 278.7 | 0.7 | — | — | 279.4 | ||||||||||||
| Selling, general and administrative expenses | (247.0 | ) | 1.5 | 0.9 | — | (244.6 | ) | ||||||||||
| Depreciation and amortization | (19.4 | ) | (1.8 | ) | (0.3 | ) | — | (21.5 | ) | ||||||||
| Operating earnings | 12.3 | 0.4 | 0.6 | — | 13.3 | ||||||||||||
| Interest expense | (16.0 | ) | (0.1 | ) | (0.4 | ) | — | (16.5 | ) | ||||||||
| Equity in earnings of subsidiaries | 0.5 | — | — | (0.5 | ) | — | |||||||||||
| Earnings (loss) before income taxes | (3.2 | ) | 0.3 | 0.2 | (0.5 | ) | (3.2 | ) | |||||||||
| Income tax benefit | 1.4 | — | — | — | 1.4 | ||||||||||||
| Net earnings (loss) | $ | (1.8 | ) | $ | 0.3 | $ | 0.2 | $ | (0.5 | ) | $ | (1.8 | ) | ||||
9
| Pathmark |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Intercompany Elimination |
Consolidated Total |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | |||||||||||||||||
| Consolidating Balance Sheets: | |||||||||||||||||
| As of April 30, 2005 | |||||||||||||||||
| Merchandise inventories | $ | 167.9 | $ | 25.9 | $ | — | $ | — | $ | 193.8 | |||||||
| Other current assets | 153.7 | 3.9 | 0.5 | — | 158.1 | ||||||||||||
| Total current assets | 321.6 | 29.8 | 0.5 | — | 351.9 | ||||||||||||
| Property and equipment, net | 474.2 | 56.8 | 29.6 | — | 560.6 | ||||||||||||
| Goodwill | 144.7 | — | — | — | 144.7 | ||||||||||||
| Investment in subsidiaries | 57.6 | — | — | (57.6 | ) | — | |||||||||||
| Other noncurrent assets | 196.2 | — | 0.6 | — | 196.8 | ||||||||||||
| Total assets | $ | 1,194.3 | $ | 86.6 | $ | 30.7 | $ | (57.6 | ) | $ | 1,254.0 | ||||||
| Accounts payable | $ | 106.8 | $ | 14.1 | $ | — | $ | — | $ | 120.9 | |||||||
| Other current liabilities | 203.5 | 1.4 | 0.8 | — | 205.7 | ||||||||||||
| Total current liabilities | 310.3 | 15.5 | 0.8 | — | 326.6 | ||||||||||||
| Long-term debt | 424.4 | — | 20.3 | — | 444.7 | ||||||||||||
| Long-term lease obligations | 166.2 | 8.6 | — | — | 174.8 | ||||||||||||
| Other noncurrent liabilities | 230.3 | 14.5 | — | — | 244.8 | ||||||||||||
| Total liabilities | 1,131.2 | 38.6 | 21.1 | — | 1,190.9 | ||||||||||||
| Stockholders' equity | 63.1 | 48.0 | 9.6 | (57.6 | ) | 63.1 | |||||||||||
| Total liabilities and stockholders' equity | $ | 1,194.3 | $ | 86.6 | $ | 30.7 | $ | (57.6 | ) | $ | 1,254.0 | ||||||
| As of January 29, 2005 | |||||||||||||||||
| Merchandise inventories | $ | 159.8 | $ | 22.4 | $ | — | $ | — | $ | 182.2 | |||||||
| Other current assets | 154.6 | 3.4 | 0.6 | — | 158.6 | ||||||||||||
| Total current assets | 314.4 | 25.8 | 0.6 | — | 340.8 | ||||||||||||
| Property and equipment, net | 487.1 | 58.0 | 29.9 | — | 575.0 | ||||||||||||
| Goodwill | 144.7 | — | — | — | 144.7 | ||||||||||||
| Investment in subsidiaries | 57.8 | — | — | (57.8 | ) | — | |||||||||||
| Other noncurrent assets | 192.2 | — | 0.7 | — | 192.9 | ||||||||||||
| Total assets | $ | 1,196.2 | $ | 83.8 | $ | 31.2 | $ | (57.8 | ) | $ | 1,253.4 | ||||||
| Accounts payable | $ | 93.5 | $ | 8.6 | $ | — | $ | — | $ | 102.1 | |||||||
| Other current liabilities | 209.9 | 1.3 | 0.8 | — | 212.0 | ||||||||||||
| Total current liabilities | 303.4 | 9.9 | 0.8 | — | 314.1 | ||||||||||||
| Long-term debt | 424.2 | — | 20.4 | — | 444.6 | ||||||||||||
| Long-term lease obligations | 169.6 | ||||||||||||||||