================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------
For the Quarter Ended Commission File Number
October 30, 1999 1-5287
Pathmark Stores, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-2879612
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Milik Street 07008
Carteret, New Jersey (Zip Code)
(Address of principal executive
offices)
(732) 499-3000
(Registrant's telephone number, including area code)
-------------------
Securities registered pursuant to Section 12(b) of the Act:
Junior Subordinated Deferred Coupon Notes due 2003
Securities registered pursuant to Section 12(g) of the Act: None
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
As of October 30, 1999, 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.
================================================================================
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands)
13 Weeks Ended 39 Weeks Ended
------------------------------ ------------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Sales ...................................... $ 924,854 $ 899,990 $ 2,742,039 $ 2,738,914
Cost of sales (exclusive of depreciation
and amortization shown separately below) . 663,795 644,463 1,961,106 1,957,409
----------- ----------- ----------- -----------
Gross profit ............................... 261,059 255,527 780,933 781,505
Selling, general and administrative expenses 214,806 210,383 633,550 625,787
Depreciation and amortization .............. 19,085 19,577 55,646 58,938
----------- ----------- ----------- -----------
Operating earnings ......................... 27,168 25,567 91,737 96,780
Interest expense ........................... (41,057) (39,801) (120,958) (120,613)
----------- ----------- ----------- -----------
Loss before income taxes ................... (13,889) (14,234) (29,221) (23,833)
Income tax provision ....................... (9) (34) (27) (74)
----------- ----------- ----------- -----------
Net loss ................................... $ (13,898) $ (14,268) $ (29,248) $ (23,907)
=========== =========== =========== ===========
See notes to consolidated financial statements (unaudited).
1
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands except share amounts)
October 30, January 30,
1999 1999
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents ...................... $ 8,678 $ 7,661
Accounts receivable, net ....................... 15,502 13,792
Merchandise inventories ........................ 166,848 143,212
Income taxes receivable ........................ 2,214 1,493
Deferred income taxes, net ..................... 5,109 5,912
Prepaid expenses ............................... 23,374 21,522
Due from suppliers ............................. 51,733 49,600
Other current assets ........................... 17,115 11,202
----------- -----------
Total Current Assets ......................... 290,573 254,394
Property and Equipment, Net ...................... 481,412 470,726
Deferred Financing Costs, Net .................... 12,871 15,723
Deferred Income Taxes, Net ....................... 44,090 43,481
Other Assets ..................................... 44,374 40,831
----------- -----------
$ 873,320 $ 825,155
=========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current Liabilities
Accounts payable and book overdrafts ........... $ 100,515 $ 98,940
Current maturities of long-term debt ........... 76,064 15,902
Accrued payroll and payroll taxes .............. 44,508 52,014
Current portion of lease obligations ........... 23,775 21,869
Accrued interest payable ....................... 38,811 21,325
Accrued expenses and other current liabilities . 89,077 86,413
----------- -----------
Total Current Liabilities .................... 372,750 296,463
----------- -----------
Long-Term Debt ................................... 1,268,608 1,258,539
----------- -----------
Lease Obligations, Long-Term ..................... 177,616 160,708
----------- -----------
Other Noncurrent Liabilities ..................... 215,326 241,351
----------- -----------
Commitments and Contingencies (Note 4)
Stockholder's Deficiency
Common stock $.10 par value .................... -- --
Authorized, issued and outstanding: 100 shares
Paid-in capital ................................ 75,294 71,897
Accumulated deficit ............................ (1,203,802) (1,174,554)
Note receivable from PTK Holdings, Inc. ........ (32,472) (29,249)
----------- -----------
Total Stockholder's Deficiency ............... (1,160,980) (1,131,906)
----------- -----------
$ 873,320 $ 825,155
=========== ===========
See notes to consolidated financial statements (unaudited).
2
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY (Unaudited)
(in thousands)
Note
Receivable Total
Common Paid-in Accumulated from PTK Stockholder's
Stock Capital Deficit Holdings, Inc. Deficiency
------ ------- ----------- -------------- -------------
Balance, January 30, 1999 ................... $ -- $ 71,897 $(1,174,554) $ (29,249) $(1,131,906)
Net loss .................................. -- -- (29,248) -- (29,248)
Accretion on note receivable from
PTK Holdings, Inc ....................... -- 3,223 -- (3,223) --
Capital contribution from SMG-II
Holdings Corporation .................... -- 174 -- -- 174
---- ----------- ----------- ----------- -----------
Balance, October 30, 1999 ................... $ -- $ 75,294 $(1,203,802) $ (32,472) $(1,160,980)
==== =========== =========== =========== ===========
Balance, January 31, 1998 ................... $ -- $ 68,703 $(1,146,043) $ -- $(1,077,340)
Net loss .................................. -- -- (23,907) -- (23,907)
Note receivable from PTK
Holdings, Inc. .......................... -- -- -- (26,471) (26,471)
Accretion on note receivable from
PTK Holdings, Inc. ...................... -- 1,762 -- (1,762) --
Dividend to PTK Holdings, Inc. ............ -- (40) -- -- (40)
Capital contribution from SMG-II
Holdings Corporation .................... -- 297 -- -- 297
---- ----------- ----------- ----------- -----------
Balance, October 31, 1998 ................... $ -- $ 70,722 $(1,169,950) $ (28,233) $(1,127,461)
==== =========== =========== =========== ===========
See notes to consolidated financial statements (unaudited).
3
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
39 Weeks Ended
---------------------------
October 30, October 31,
1999 1998
----------- -----------
Operating Activities
Net loss ....................................................................................... $(29,248) $(23,907)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Depreciation and amortization ................................................................ 58,525 61,716
Deferred income tax benefit .................................................................. -- (583)
Interest accruable but not payable ........................................................... 17,246 15,362
Amortization of original issue discount ...................................................... 266 266
Amortization of debt issuance costs .......................................................... 3,283 3,069
Gain on disposal of property and equipment ................................................... (426) (4,560)
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net ................................................................... (1,710) (2,377)
Merchandise inventories .................................................................... (23,636) (19,520)
Income taxes ............................................................................... (527) 2,165
Due from suppliers ......................................................................... (2,133) (36,546)
Other current assets ....................................................................... (8,076) (2,443)
Other assets ............................................................................... (3,655) (2,695)
Accounts payable ........................................................................... 6,116 (16,381)
Accrued interest payable ................................................................... 17,636 20,910
Accrued expenses and other current liabilities ............................................. (4,842) (4,321)
Other noncurrent liabilities ............................................................... (24,250) (24,496)
-------- --------
Cash provided by (used for) operating activities ......................................... 4,569 (34,341)
-------- --------
Investing Activities
Property and equipment expenditures ............................................................ (37,259) (27,932)
Proceeds from disposition of property and equipment ............................................ 888 28,377
-------- --------
Cash provided by (used for) investing activities ......................................... (36,371) 445
-------- --------
Financing Activities
Increase in Working Capital Facility borrowings ................................................ 62,700 57,800
Repayment of Term Loan ......................................................................... (9,012) (5,674)
Repayment of other long-term debt .............................................................. (969) (29,459)
Decrease in book overdrafts .................................................................... (4,541) (20,198)
Reduction in lease obligations ................................................................. (14,928) (17,944)
Deferred financing fees ........................................................................ (431) (777)
Increase in other long-term debt ............................................................... -- 26,652
Note receivable from PTK Holdings, Inc. ........................................................ -- (26,471)
Dividend to PTK Holdings, Inc. ................................................................. -- (40)
-------- --------
Cash provided by (used for) financing activities ......................................... 32,819 (16,111)
-------- --------
Increase (decrease) in cash and cash equivalents ................................................. 1,017 (50,007)
Cash and cash equivalents at beginning of period ................................................. 7,661 60,076
-------- --------
Cash and cash equivalents at end of period ....................................................... $ 8,678 $ 10,069
======== ========
Supplemental Disclosures of Cash Flow Information
Interest paid .................................................................................. $ 82,613 $ 81,085
======== ========
Income taxes paid .............................................................................. $ 416 $ 2,361
======== ========
Noncash Investing and Financing Activities
Capital lease obligations ...................................................................... $ 34,981 $ 10,425
======== ========
See notes to consolidated financial statements (unaudited).
4
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1--Organization and Basis of Presentation
Pathmark Stores, Inc. (the "Company") operated 134 supermarkets as of
October 30, 1999, 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 is a wholly owned subsidiary of SMG-II
Holdings Corporation ("SMG-II").
On March 9, 1999, Ahold Acquisitions, Inc. ("the Purchaser"), an indirect
wholly owned subsidiary of the Netherlands based international food retailer,
Koninklijke Ahold N.V. ("Ahold"), announced it will acquire all of the issued
and outstanding shares of the capital stock of SMG-II, subject to the completion
of a number of conditions (see Note 4).
The unaudited consolidated financial statements included herein have been
prepared by the Company in accordance with the same accounting principles
followed in the presentation of the Company's annual financial statements for
the year ended January 30, 1999, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
consolidated financial statements included herein reflect all adjustments which
are of a normal and recurring nature and are necessary to present fairly the
results of operations and financial position of the Company. This report should
be read in conjunction with the financial statements and notes thereto included
in the Company's Form 10-K Annual Report for the year ended January 30, 1999.
Income taxes for the interim period are based on the estimated effective
tax rate expected to be applicable for the full fiscal year. The Company has
recorded a valuation allowance related to the income tax benefit for the third
quarters and nine-month periods of Fiscal 1999 and Fiscal 1998; therefore, no
income tax benefit has been recognized.
Note 2--Long-Term Debt
Long-term debt is comprised of the following (dollars in thousands):
October 30, January 30,
1999 1999
---------- ----------
Term loan ("Term Loan") ............................................... $ 246,672 $ 255,684
Working capital facility ("Working Capital Facility") ................. 105,700 43,000
9.625% Senior Subordinated Notes due 2003 ("Senior Subordinated Notes") 438,755 438,489
11.625% Subordinated Notes due 2002 ("Subordinated Notes") ............ 199,017 199,017
12.625% Subordinated Debentures due 2002 ("Subordinated Debentures") .. 95,750 95,750
10.75% Junior Subordinated Deferred Coupon Notes due 2003 ("Deferred
Coupon Notes") ...................................................... 225,126 207,880
Debt payable to Holdings .............................................. 983 983
Industrial revenue bonds .............................................. 8,239 8,302
Other debt (primarily mortgages) ...................................... 24,430 25,336
---------- ----------
Total debt ............................................................ 1,344,672 1,274,441
Less: current maturities .............................................. 76,064 15,902
---------- ----------
Long-term portion ..................................................... $1,268,608 $1,258,539
========== ==========
The increase in the current maturities is primarily due to the sinking
fund payment of $50.0 million, due June 15, 2000, related to the Subordinated
Notes.
5
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
Note 3--Interest Expense
Interest expense is comprised of the following (dollars in thousands):
13 Weeks Ended 39 Weeks Ended
------------------------- -------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Term Loan ............................... $ 4,932 $ 5,275 $ 14,538 $ 15,940
Working Capital Facility ................ 1,778 1,622 4,567 3,620
Senior Subordinated Notes
Amortization of original issue discount 88 88 266 266
Currently payable ..................... 10,588 10,588 31,762 31,763
Subordinated Notes ...................... 5,813 5,813 17,438 17,438
Subordinated Debentures ................. 3,022 3,022 9,066 9,066
Deferred Coupon Notes
Accrued but not payable ............... 5,902 5,307 17,246 15,362
Amortization of debt issuance costs ..... 1,097 1,016 3,283 3,069
Lease obligations ....................... 5,557 5,245 15,914 16,153
Other, net .............................. 2,280 1,825 6,878 7,936
-------- -------- -------- --------
Interest expense ........................ $ 41,057 $ 39,801 $120,958 $120,613
======== ======== ======== ========
Note 4--Contingencies
Ahold Acquisition:
As previously described in the Company's Annual Report on Form 10-K for
the year ended January 30, 1999, and its periodic report on Form 10-Q for the
six months ended July 31, 1999, the Company's indirect parent corporations,
Supermarkets General Holdings Corporation ("SGHC") and SMG-II Holdings
Corporation ("SMG-II"), Ahold Acquisitions, Inc. (the "Purchaser"), an indirect,
wholly owned subsidiary of the Netherlands based international food retailer,
Koninklijke Ahold N.V. ("Ahold"), and the directors of SGHC are defendants
(collectively, the "Defendants") in a purported stockholder class action lawsuit
entitled Wolfson v. Supermarkets General Holdings Corporation, et al., C.A. No.
17047 (the "Action"), in which the Plaintiff alleged, among other things, that
the defendant directors of SGHC and SMG-II breached their fiduciary duties to
the holders of SGHC's $3.52 Cumulative Exchangeable Redeemable Preferred Stock
(the "Preferred Stock"). The Plaintiff, by his counsel, has entered into a
Settlement Agreement, dated June 9, 1999 (the "Settlement Agreement"), with the
Defendants (by their counsel) pursuant to which the parties have agreed to
settle the Action. The proposed settlement is subject to, among other things,
the approval of the settlement by the court of Chancery of the State of Delaware
(the "Court").
The Settlement Agreement provides for, among other things, the
certification of the action as a class action under the rules of the Court,
which class would consist of all holders of the Preferred Stock of SGHC from and
including March 9, 1999 (the "Class") Through and including the consummation of
the merger pursuant to the Agreement and Plan of Merger by and among Ahold, the
Purchaser and SMG-II dated March 9, 1999 (the "SMG-II Merger") or, if the SMG-II
Merger fails to close, the stock purchase pursuant to the Stock Purchase
Agreement dated March 9, 1999 by and among Ahold, the Purchaser, SMG-II and PTK
Holdings, Inc. (the "Alternative Transaction"). In addition, pursuant to the
terms of the Settlement Agreement, the Defendants have agreed, subject to Final
Court Approval (as defined below), that the Purchaser shall increase its tender
offer price to $40.25 per share of Preferred Stock (from $38.25), less the total
amount awarded as fees and expenses to Plaintiff's counsel by the Court divided
by the total number of outstanding shares of Preferred Stock (the "New Offer
Price"). Plaintiff's counsel has applied to the Court for an award of fees and
expenses in an aggregate amount of $1,956,268, or $0.40 per share of Preferred
Stock.
6
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
Note 4--Contingencies--(Continued)
The Settlement Agreement also provides, among other things, that any of
the Defendants shall have the right to withdraw from the proposed settlement in
the event that (i) any claims related to the SMG-II Merger, the Alternative
Transaction, or the subject matter of the Action are commenced by any member of
the Class against any Defendants or certain others employed by, affiliated with
or retained by the Defendants in any court prior to Final Court Approval of the
settlement, and the court in which such claims are pending denies Defendants'
application to dismiss or stay such action in contemplation of dismissal, or
(ii) any of the other conditions to the consummation of the settlement described
below shall not have been satisfied. The consummation of the settlement is
subject to (i) Final Court Approval of the settlement; (ii) dismissal of the
Action by the Court with prejudice and without awarding fees or costs to any
party; and (iii) the Purchaser closing (A) its tender offer and the SMG-II
Merger, or (B) the Alternative Transaction.
For purposes of the Settlement Agreement, "Final Court Approval" of the
settlement means an order entered by the Court approving the settlement and
awarding Plaintiff's counsel's fees and expenses and such order is finally
affirmed, without modification of any substantive right of any party to the
Settlement Agreement, on appeal, or is no longer subject to appeal and time for
any petition for reargument, appeal or review, by certiorari or otherwise, has
expired, provided that any modification of the order approving the settlement
with respect to the amount of attorneys' fees and expenses awarded and/or any
additional supplemental disclosure required shall not be considered a
modification of a substantive right affecting Final Court Approval.
After notice and a hearing, on July 22, 1999 the Court approved the
settlement and the fee application of the Plaintiff's attorneys. As of August
23, 1999, all applicable appeal periods have expired, thus constituting Final
Court Approval. As a result of the settlement, the New Offer Price will be
$39.85 per share of Preferred Stock.
Rickel:
In connection with the sale of its home centers segment in Fiscal 1994,
the Company, as lessor, entered into ten leases for certain of the Company's
owned real estate properties, including a distribution center, with Rickel as
tenant. In addition, the Company assigned to Rickel 25 third-party leases.
In 1996, Rickel filed for bankruptcy protection under Chapter 11 of the
United States Bankruptcy Code. Subsequent to the bankruptcy filing, of the 35
locations leased to Rickel, 16 leases have been assigned by Rickel in 1998 to
Staples, Inc., 12 leases have either been terminated or assigned to third
parties, including Rickel's distribution center which was sold by the Company
during Fiscal 1998, and seven leases were rejected and are being actively
marketed by the Company to other prospective tenants.
Management has assessed its exposure with respect to this matter and has
concluded that it has sufficient reserves to cover any resulting liability which
may occur, including the future rent and real estate taxes, net of expected
recoveries.
Other:
The Company is a party to a number of other 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, cash flows or business of the
Company.
7
PATHMARK STORES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Sales:
Sales in the third quarter of Fiscal 1999 were $924.8 million compared to
$900.0 million in the prior year, an increase of 2.8%. For the nine-month period
of Fiscal 1999, sales were $2,742.0 million compared to $2,738.9 million in the
prior year, an increase of 0.1%. Same store sales increased 1.4% and 0.1% for
the third quarter and nine-month period of Fiscal 1999, respectively. The sales
increase in the third quarter was primarily due to new stores in Fiscal 1999 and
same store sales increases, partially offset by stores which were closed or
divested in the prior year. The Company operated 134 and 132 supermarkets at the
end of the third quarters of Fiscal 1999 and Fiscal 1998, respectively.
Gross Profit:
Gross profit in the third quarter of Fiscal 1999 was $261.1 million or
28.2% of sales compared with $255.5 million or 28.4% of sales in the prior year.
For the nine-month period of Fiscal 1999, gross profit was $780.9 million or
28.5% of sales compared to $781.5 million or 28.5% for the prior year. The
increase in gross profit dollars for the third quarter of Fiscal 1999 compared
to the prior year was primarily due to higher sales, partially offset by higher
promotional costs. The decrease in gross profit dollars for the nine-month
period of Fiscal 1999 compared to the prior year was primarily due to higher
promotional expenses, partially offset by higher sales and lower shrink. The
cost of goods sold comparisons were affected by a pretax LIFO charge of $0.4
million and $0.35 million in the third quarters of Fiscal 1999 and 1998,
respectively and a pretax LIFO charge of $1.2 million and $1.1 million in the
nine-month periods of Fiscal 1999 and Fiscal 1998, respectively.
Selling, General and Administrative Expenses ("SG&A"):
SG&A in the third quarter of Fiscal 1999 increased $4.4 million or 2.1%
compared to the prior year and increased $7.8 million or 1.2% in the nine-month
period of Fiscal 1999 compared to the prior year. The increase in SG&A in the
third quarter and nine-month period of Fiscal 1999 was primarily due to higher
expenses related to general liability claims, the Ahold acquisition of SMG-II,
Year 2000 remediation and bank charges, partially offset by lower incentive and
store labor expenses. SG&A in the nine-month period of Fiscal 1998 is net of a
$5.1 million gain recognized on the sale of certain real estate. As a percentage
of sales, SG&A was 23.2% in the third quarter of Fiscal 1999, down from 23.4% in
the prior year and was 23.1% for the nine-month period of Fiscal 1999 up from
22.8% in the prior year. Excluding the gain on the sale of real estate, SG&A as
a percentage of sales was 23.0% for the nine-month period of Fiscal 1998.
Depreciation and Amortization:
Depreciation and amortization of $19.1 million in the third quarter of
Fiscal 1999 was $0.5 million lower than the prior year of $19.6 million. For the
nine-month period of Fiscal 1999, depreciation and amortization of $55.6 million
was $3.3 million lower than the prior year of $58.9 million. The decrease in
depreciation and amortization expense in the third quarter and nine-month period
of Fiscal 1999 compared to the prior year was primarily due to property and
equipment dispositions during Fiscal 1998, partially offset by capital
expenditures. Depreciation and amortization excludes video tape amortization,
which is recorded in cost of goods sold, of $1.0 million and $0.8 million in the
third quarters of Fiscal 1999 and 1998, respectively and $2.6 million and $2.3
million in the nine-month periods of Fiscal 1999 and Fiscal 1998, respectively.
8
PATHMARK STORES, INC.
Operating Earnings:
Operating earnings in the third quarter of Fiscal 1999 were $27.2 million
compared with the prior year of $25.6 million. For the nine-month period of
Fiscal 1999, operating earnings were $91.7 million compared with $96.8 million
in the prior year. The increase in operating earnings in the third quarter of
Fiscal 1999 compared to the prior year was due to higher gross profit and lower
depreciation and amortization expenses, partially offset by higher SG&A. The
decrease in operating earnings in the nine-month period of Fiscal 1999 compared
to the prior year was due to higher SG&A and lower gross profit, partially
offset by lower depreciation and amortization expense; operating earnings in the
nine-month period of Fiscal 1998 include a $5.1 million gain on the sale of
certain real estate.
Interest Expense:
Interest expense was $41.1 million in the third quarter of Fiscal 1999
compared to $39.8 million in the prior year and $121.0 million for the
nine-month period of Fiscal 1999 compared to $120.6 million in the prior year.
The increase in interest expense in the third quarter of Fiscal 1999 compared to
the prior year was primarily due to higher levels of borrowings under the
Working Capital Facility and debt accretion on the Deferred Coupon Notes and an
increase in lease obligations, partially offset by reductions in the Term Loan.
The increase in interest expense for the nine-month period of Fiscal 1999
compared to the prior year was primarily due to higher levels of borrowings
under the Working Capital Facility and the debt accretion on the Deferred Coupon
Notes, partially offset by reductions in the Term Loan and the paydown of
certain mortgages.
Income Taxes:
Income taxes for the interim period are based on the estimated effective
tax rate expected to be applicable for the full fiscal year. The Company has
recorded a valuation allowance related to the income tax benefit for the third
quarters and nine-month periods of Fiscal 1999 and Fiscal 1998; therefore, no
income tax benefit has been recognized. The Company believes that it is more
likely than not that the net deferred income tax assets of $49.2 million at
October 30, 1999 will be realized through the implementation of tax strategies
which could generate taxable income.
During the nine-month period of Fiscal 1999, the Company made income tax
payments of $0.4 million and received income tax refunds of $0.09 million.
During the nine-month period of Fiscal 1998, the Company made income tax
payments of $2.4 million and received income tax refunds of $4.2 million.
Summary of Operations:
The Company's net loss in the third quarter of Fiscal 1999 was $13.9
million compared to a net loss of $14.3 million for the prior year. For the
nine-month period of Fiscal 1999, the Company's net loss was $29.2 million
compared to a net loss of $23.9 million in the prior year. The decrease in the
net loss in the third quarter of Fiscal 1999 compared to the prior year was
primarily due to higher operating earnings, partially offset by higher interest
expense. The increase in net loss in the nine-month period of Fiscal 1999
compared to the prior year was primarily due to lower operating earnings.
EBITDA-FIFO:
EBITDA-FIFO was $47.8 million and $46.5 million in the third quarters of
Fiscal 1999 and Fiscal 1998, respectively and $151.1 million and $154.4 million
for the nine-month period of Fiscal 1999 and Fiscal 1998, respectively.
EBITDA-FIFO represents net earnings before interest expense, income taxes,
depreciation, amortization, the gain on sale of real estate and the LIFO charge.
EBITDA-FIFO is a widely accepted financial indicator of a company's ability to
service and/or incur debt. EBITDA-FIFO should not be construed as an alternative
to, or a better indicator of, operating income or to cash flows from operating
activities, as determined in accordance with generally accepted accounting
principles.
9
PATHMARK STORES, INC.
Financial Condition
Debt Service:
During the nine-month period of Fiscal 1999, total debt increased $70.2
million from Fiscal 1998 year end due to borrowings under the Working Capital
Facility and debt accretion on the Deferred Coupon Notes, partially offset by
reductions in the Term Loan and a decrease in certain mortgages. Borrowings
under the Working Capital Facility were $105.7 million at October 30, 1999 and
$109.3 million at December 8, 1999. In addition, during the nine-month period of
Fiscal 1999, total lease obligations increased $18.8 million from Fiscal 1998
year end.
The indebtedness under the Working Capital Facility and the Term Loan bear
interest at floating rates and, therefore, cash interest payments on that
indebtedness may vary in future years. The Company does not currently maintain
any interest rate hedging arrangements due to the reasonable risk that near term
interest rates will not rise significantly. The Company is continuously
evaluating this risk and will implement interest rate hedging arrangements if
deemed appropriate.
The majority of the cash interest payments are scheduled in the second and
fourth quarters.
The amount of principal payments required each year on outstanding
long-term debt (excluding the original issue discount with respect to the
Deferred Coupon Notes) is as follows (dollars in millions):
Principal
Fiscal Years Payments
------------ ---------
1999(a) .......................................... $ 5.8
2000 ............................................. 79.0
2001 ............................................. 370.1
2002 ............................................. 196.3
2003 ............................................. 672.0
Thereafter ....................................... 21.5
--------
Total ............................................ $1,344.7
========
- ----------
(a) Subsequent to October 30, 1999
Liquidity:
The consolidated financial statements of the Company indicate that, at
October 30, 1999, current liabilities exceeded current assets by $82.2 million
and stockholder's deficiency was $1.2 billion. Management believes that cash
flows generated from operations, supplemented by the unused borrowing capacity
under the Working Capital Facility and the availability of capital lease
financing, will be sufficient to pay the Company's debts as they come due,
provide for its capital expenditure program and meets its other cash
requirements.
The Company believes that it will be able to make the scheduled payments
or refinance its obligations with respect to its indebtedness through a
combination of operating funds and borrowing facilities. Refinancing will be
necessary in Fiscal 2000 to meet the debt service requirements related to the
interest payment on the Deferred Coupon Notes and the sinking fund payment on
the Subordinated Notes. The Company also expects that it will be necessary to
refinance the Term Loan and Working Capital Facility in Fiscal 2001, the
Subordinated Notes and Subordinated Debentures in Fiscal 2002 and 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 October 30, 1999 and, based on management's operating projections for Fiscal
1999, the Company believes that it will continue to be in compliance with its
various debt covenants. The Company's ability to make scheduled payments or to
refinance or otherwise meet its obligations with respect to its indebtedness
depends on its financial and operating performance, which, in turn, is subject
to prevailing economic conditions and to financial, business and other factors
beyond its control. Although the Company's cash flow from its operations and
borrowings has been sufficient to meet its debt service obligations, there can
be no assurance that the
10
PATHMARK STORES, INC.
Company's operating results will continue to be sufficient or that future
borrowing facilities will be available for payment or refinancing of the
Company's indebtedness.
While it is the Company's intention to enter into other refinancings that
it considers advantageous, there can be no assurances that the prevailing market
conditions will be favorable to the Company. In the event the Company obtains
any future refinancing on less than favorable terms, the holders of outstanding
indebtedness could experience increased credit risk and could experience a
decrease in the market value of their investment, because the Company might be
forced to operate under terms that would restrict its operations and might find
its cash flow reduced.
Capital Expenditures:
Capital expenditures for the third quarter of Fiscal 1999, including
property acquired under capital leases, were $24.5 million compared to $11.0
million for the prior year and for the nine-month period of Fiscal 1999 were
$72.2 million compared to $38.4 million for the prior year. During the
nine-month period of Fiscal 1999, the Company opened two new stores and
completed 27 renovations to existing supermarkets. Subsequent to October 30,
1999, the Company opened one additional store and during the remainder of Fiscal
1999, the Company expects to complete two renovations. Capital expenditures for
Fiscal 1999, including property to be acquired under capital leases, are
estimated to be $90.0 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 was $4.6 million in the nine-month
period of Fiscal 1999 compared to cash used for operating activities of $34.3
million in the prior year. The change in cash flow from operating activities was
primarily due to cash provided by operating assets and liabilities. Cash used
for operating activities in the prior year was impacted by the transition to C&S
Wholesalers, Inc ("C&S"). Cash used for investing activities was $36.4 million
in the nine-month period of Fiscal 1999 compared to cash provided by investing
activities of $0.4 million in the prior year. The increase in cash used for
investing activities was primarily due to an increase in expenditures of
property and equipment, partially offset by a decrease in proceeds from property
dispositions. Cash provided by financing activities was $32.8 million in the
nine-month period of Fiscal 1999 compared to cash used for financing activities
of $16.1 million in the prior year. The increase in cash provided by financing
activities was primarily due to an increase in book overdrafts in Fiscal 1999;
cash used for financing activities in Fiscal 1998 included a $26.5 million note
receivable from PTK.
Year 2000 Readiness:
This disclosure is a year 2000 ("Year 2000") Readiness Disclosure within
the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998 to
the extent that the disclosure relates to the Year 2000 processing of the
Company.
The Company has prepared its computer systems and hardware to deal with
the issues related to the Year 2000. This is necessary because certain 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 miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process normal business transactions. In addition, many of the Company's
vendors and service providers are also faced with similar issues related to the
Year 2000.
11
PATHMARK STORES, INC.
In order to address the Year 2000 issues, the Company formed a project
team of senior managers. This project team assessed the Company's information
systems, including its hardware, software programs and embedded systems
contained in the Company's stores, distribution facility and corporate
headquarters. Based on the findings of this assessment, the Company commenced a
plan to upgrade or replace the Company's hardware and software programs to
ensure Year 2000 readiness, as well as to assess the Year 2000 readiness of the
Company's vendors and service providers. In addition, the Company's management
has developed contingency plans, which, in the event that the Company is unable
to fully achieve Year 2000 readiness in a timely manner, or any of the Company's
vendors or service providers fail to achieve Year 2000 readiness, may be
implemented to minimize the risks of interruptions of the Company's business.
The Audit Committee of the Board of Directors is advised periodically on the
status of the Company's Year 2000 readiness program.
The Company has communicated with its principal vendors to determine the
extent to which it will be vulnerable to third-party Year 2000 readiness
problems. Based on its assessment to date of the Year 2000 readiness of the
Company's key suppliers, including C&S, vendors, service providers and other
third parties on which the Company relies for business operations, the Company
believes that its principal vendors, service providers and other third parties
have addressed the Year 2000 issues. The Company has tested Year 2000 readiness
with certain key suppliers; however, the Company has limited ability to test and
control such third parties' Year 2000 readiness, and the Company cannot provide
assurance that failure of such third parties to address the Year 2000 issues
will not cause an interruption of the Company's business.
The Company has expended significant resources in connection with
resolving its Year 2000 issues, primarily related to the remediation and testing
of its computer applications. Through IBM, this effort is basically completed
and followed a process of inventory, analysis, modification, testing and
implementation. A major portion of these costs have been met under the existing
agreement with IBM through a reprioritization of systems development projects,
with the remainder representing incremental costs. Those systems development
projects, which have been deferred due to the Year 2000 readiness program, are
not deemed to be critical to the Company's operations. The Company believes that
its information systems, including hardware, software programs and embedded
systems contained in the Company's stores, distribution facility and corporate
headquarters are Year 2000 ready; additional Year 2000 testing of the Company's
critical remediated systems will continue through December 1999. The Company
estimates that the total costs associated with achieving Year 2000 readiness
will be approximately $17.0 million (of which approximately $13.2 million has
been expended through October 30, 1999), consisting of system remediation costs
of $10.7 million and equipment replacement of $6.3 million. The Company
anticipates that it will finance the cost of its Year 2000 remediation using its
existing sources of liquidity. The remaining $3.8 million in costs is being
expended primarily through the IBM information systems service agreement.
The Company's business could be interrupted if its Year 2000 remediation
efforts and contingency plans are not successful, and if the Company's vendors,
service providers or other third parties are not Year 2000 ready. Any such
business interruptions could have a material adverse effect on the Company's
results of operation, liquidity or financial condition by impairing its ability
to process customer transactions, as well as to order and receive merchandise
for sale in a timely manner.
12
PATHMARK STORES, INC.
Forward-Looking Information
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, the
general economic conditions in the Company's trading areas and the ability of
the Company, its key suppliers, vendors and others with whom the Company has
significant business relationships to identify and remediate all Year 2000
issues.
13
PATHMARK STORES, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously described in the Company's Annual Report on Form 10-K for
the year ended January 30, 1999, and its periodic reports on Form 10-Q for the
periods ended May 1, 1999 and July 31, 1999, respectively, the Company's
indirect parent corporations, Supermarkets General Holdings Corporation ("SGHC")
and SMG-II Holdings Corporation ("SMG-II"), Ahold Acquisitions, Inc. (the
"Purchaser"), an indirect, wholly owned subsidiary of the Netherlands based
international food retailer, Koninklijke Ahold N.V. ("Ahold"), and the directors
of SGHC are defendants (collectively, the "Defendants") in a purported
stockholder class action lawsuit entitled Wolfson V. Supermarkets General
Holdings Corporation, et al., C.A. No. 17047 (the "Action"), in which the
Plaintiff alleged, among other things, that the defendant directors of SGHC and
SMG-II breached their fiduciary duties to the holders of SGHC's $3.52 Cumulative
Exchangeable Redeemable Preferred Stock (the "Preferred Stock"). The Plaintiff,
by his counsel, has entered into a Settlement Agreement, dated June 9, 1999 (the
"Settlement Agreement"), with the Defendants (by their counsel) pursuant to
which the parties have agreed to settle the Action. The proposed settlement is
subject to, among other things, the approval of the settlement by the court of
Chancery of the State of Delaware (the "Court").
The Settlement Agreement provides for, among other things, the
certification of the action as a class action under the rules of the Court,
which class would consist of all holders of the Preferred Stock of SGHC from and
including March 9, 1999 (the "Class") through and including the consummation of
the merger pursuant to the Agreement and Plan of Merger by and among Ahold, the
Purchaser and SMG-II dated March 9, 1999 (the "SMG-II Merger") or, if the SMG-II
Merger fails to close, the stock purchase pursuant to the Stock Purchase
Agreement dated March 9, 1999 by and among Ahold, the Purchaser, SMG-II and PTK
Holdings, Inc. (the "Alternative Transaction"). In addition, pursuant to the
terms of the Settlement Agreement, the Defendants have agreed, subject to Final
Court Approval (as defined below), that the Purchaser shall increase its tender
offer price to $40.25 per share of Preferred Stock (from $38.25), less the total
amount awarded as fees and expenses to Plaintiffs counsel by the Court divided
by the total number of outstanding shares of Preferred Stock (the "New Offer
Price"). Plaintiffs counsel has applied to the Court for an award of fees and
expenses in an aggregate amount of $1,956,268, or $0.40 per share of Preferred
Stock.
The Settlement Agreement also provides, among other things, that any of
the Defendants shall have the right to withdraw from the proposed settlement in
the event that (i) any claims related to the SMG-II Merger, the Alternative
Transaction, or the subject matter of the Action are commenced by any member of
the Class against any Defendants or certain others employed by, affiliated with
or retained by the Defendants in any court prior to Final Court Approval of the
settlement, and the court in which such claims are pending denies Defendants'
application to dismiss or stay such action in contemplation of dismissal, or
(ii) any of the other conditions to the consummation of the settlement described
below shall not have been satisfied. The consummation of the settlement is
subject to (i) Final Court Approval of the settlement; (ii) dismissal of the
Action by the Court with prejudice and without awarding fees or costs to any
party; and (iii) the Purchaser closing (A) its tender offer and the SMG-II
Merger, or (B) the Alternative Transaction.
For purposes of the Settlement Agreement, "Final Court Approval" of the
settlement means an order entered by the Court approving the settlement and
awarding Plaintiffs counsel's fees and expenses and such order is finally
affirmed, without modification of any substantive right of any party to the
Settlement Agreement, on appeal, or is no longer subject to appeal and time for
any petition for reargument, appeal or review, by certiorari or otherwise, has
expired, provided that any modification of the order approving the settlement
with respect to the amount of attorneys' fees and expenses awarded and/or any
additional supplemental disclosure required shall not be considered a
modification of a substantive right affecting Final Court Approval.
14
PATHMARK STORES, INC.
After notice and a hearing, on July 22, 1999 the Court approved the
settlement and the fee application of the Plaintiff's attorneys. As of August
23, 1999, all applicable appeal periods have expired, thus constituting Final
Court Approval. As a result of the settlement, the New Offer Price will be
$39.85 per share of Preferred Stock.
The Company is a party to a number of other 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, cash flows or business of the
Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
Undersigned thereunto duly authorized.
PATHMARK STORES, INC.
By /s/ Frank Vitrano
---------------------------
(Frank Vitrano)
Senior Vice President and
Chief Financial Officer
By /s/ Joseph Adelhardt
---------------------------
(Joseph Adelhardt)
Senior Vice President and
Controller,
Chief Accounting Officer
Date: December 13, 1999
15