<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
OCTOBER 31, 1998 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 31, 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.
================================================================================
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
-------------------------- -------------------------
OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales............................................... $ 899,990 $ 900,986 $2,738,914 $2,755,138
Cost of sales (exclusive of depreciation
and amortization shown separately below)........ 644,463 652,812 1,957,409 1,985,552
---------- ---------- ---------- ----------
Gross profit........................................ 255,527 248,174 781,505 769,586
Selling, general and administrative expenses........ 210,383 205,292 625,787 630,728
Depreciation and amortization....................... 19,577 21,366 58,938 61,482
---------- ---------- ---------- ----------
Operating earnings.................................. 25,567 21,516 96,780 77,376
Interest expense.................................... (39,801) (40,368) (120,613) (122,920)
---------- ---------- ---------- ----------
Loss before income tax (provision) benefit and
extraordinary items.............................. (14,234) (18,852) (23,833) (45,544)
Income tax (provision) benefit...................... (34) 7,630 (74) 18,167
---------- ---------- ---------- ----------
Loss before extraordinary items..................... (14,268) (11,222) (23,907) (27,377)
Extraordinary items, net of an income tax
benefit.......................................... -- -- -- (7,488)
---------- ---------- ---------- ----------
Net loss............................................ $ (14,268) $ (11,222) $ (23,907) $ (34,865)
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements (unaudited).
1
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands except share amounts)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1998 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................................ $ 10,069 $ 60,076
Accounts receivable, net......................................... 13,305 10,928
Merchandise inventories.......................................... 168,295 148,775
Deferred income taxes, net....................................... 6,622 10,621
Prepaid expenses................................................. 22,371 21,449
Due from suppliers............................................... 49,573 13,027
Other current assets............................................. 10,697 11,331
------------ ------------
Total Current Assets.......................................... 280,932 276,207
Property and Equipment, Net.......................................... 491,155 529,542
Deferred Financing Costs, Net........................................ 16,255 18,547
Deferred Income Taxes, Net........................................... 44,471 43,389
Other Assets......................................................... 37,552 32,687
------------ ------------
$ 870,365 $ 900,372
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current Liabilities
Accounts payable and book overdrafts............................. $ 118,235 $ 154,814
Current maturities of long-term debt............................. 19,250 43,478
Income taxes payable............................................. 436 1,771
Accrued payroll and payroll taxes................................ 47,300 49,533
Current portion of lease obligations............................. 22,053 24,337
Accrued interest payable......................................... 39,255 18,300
Accrued expenses and other current liabilities................... 91,295 93,297
------------ ------------
Total Current Liabilities..................................... 337,824 385,530
------------ ------------
Long-Term Debt....................................................... 1,267,073 1,177,898
------------ ------------
Lease Obligations, Long-Term......................................... 164,268 170,273
------------ ------------
Other Noncurrent Liabilities......................................... 228,661 244,011
------------ ------------
Commitments and Contingencies (Note 6)
Stockholder's Deficiency
Common Stock, $.10 par value..................................... -- --
Authorized, issued and outstanding: 100 shares
Paid-in Capital.................................................. 70,722 68,703
Accumulated Deficit.............................................. (1,169,950) (1,146,043)
Note Receivable from PTK Holdings, Inc. ......................... (28,233) --
------------ ------------
Total Stockholder's Deficiency................................ (1,127,461) (1,077,340)
------------ ------------
$ 870,365 $ 900,372
============ ============
</TABLE>
See notes to consolidated financial statements (unaudited).
2
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NOTE
RECEIVABLE TOTAL
COMMON PAID-IN ACCUMULATED FROM PTK STOCKHOLDER'S
STOCK CAPITAL DEFICIT HOLDINGS, INC. DEFICIENCY
------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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)
======= ======== ============= ========= =============
Balance, February 1, 1997...................... $ -- $ 68,703 $ (1,110,369) $ -- $ (1,041,666)
Net loss.................................... -- -- (34,865) -- (34,865)
------- -------- ------------- --------- -------------
Balance, November 1, 1997...................... $ -- $ 68,703 $ (1,145,234) $ -- $ (1,076,531)
======= ======== ============= ========= =============
</TABLE>
See notes to consolidated financial statements (unaudited).
3
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
39 WEEKS ENDED
---------------------------
OCTOBER 31, NOVEMBER 1,
1998 1997
----------- -----------
<S> <C> <C>
Operating Activities
Net loss................................................................................. $ (23,907) $ (34,865)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Extraordinary loss on early extinguishment of debt.................................... -- 7,488
Depreciation and amortization......................................................... 61,716 64,499
Deferred income tax benefit........................................................... (583) (23,622)
Interest accruable but not payable.................................................... 15,362 13,700
Amortization of original issue discount............................................... 266 265
Amortization of debt issuance costs................................................... 3,069 4,526
(Gain) loss on disposal of property and equipment..................................... (4,560) 117
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net............................................................ (2,377) 2,573
Merchandise inventories............................................................. (19,520) 14,128
Income taxes........................................................................ 2,165 3,346
Due from suppliers.................................................................. (36,546) 2,717
Other current assets................................................................ (2,443) (6,117)
Other assets........................................................................ (2,695) 6,124
Accounts payable.................................................................... (16,381) (23,886)
Accrued interest payable............................................................ 20,910 15,169
Accrued expenses and other current liabilities...................................... (4,321) (3,144)
Other noncurrent liabilities........................................................ (24,496) (17,597)
--------- ---------
Cash provided by (used for) operating activities.................................. (34,341) 25,421
--------- ---------
Investing Activities
Property and equipment expenditures...................................................... (27,932) (20,702)
Proceeds from disposition of property and equipment...................................... 28,377 25,475
--------- ---------
Cash provided by investing activities............................................. 445 4,773
--------- ---------
Financing Activities
Increase (decrease) in working capital facilities borrowings............................. 57,800 (48,300)
Repayments of term loans................................................................. (5,674) (245,252)
Decrease in book overdrafts.............................................................. (20,198) (10,574)
Increase in other borrowings............................................................. 26,652 1,956
Repayment of other long-term borrowings.................................................. (29,459) (5,265)
Reduction in lease obligations........................................................... (17,944) (15,902)
Deferred financing fees.................................................................. (777) (8,253)
Note receivable from PTK Holdings, Inc. ................................................. (26,471) --
Dividend to PTK Holdings, Inc............................................................ (40) --
Borrowings under Term Loan in connection with the Credit Agreement....................... -- 300,000
Premiums incurred in early extinguishment of debt........................................ -- (132)
--------- ---------
Cash used for financing activities................................................ (16,111) (31,722)
--------- ---------
Decrease in cash and cash equivalents....................................................... (50,007) (1,528)
Cash and cash equivalents at beginning of period............................................ 60,076 9,880
--------- ---------
Cash and cash equivalents at end of period.................................................. $ 10,069 $ 8,352
========= =========
Supplemental Disclosures of Cash Flow Information
Interest paid............................................................................ $ 83,115 $ 87,455
========= =========
Income taxes paid........................................................................ $ 2,361 $ 3,158
========= =========
Noncash Investing and Financing Activities
Capital lease obligations................................................................ $ 10,425 $ 17,917
========= =========
</TABLE>
See notes to consolidated financial statements (unaudited).
4
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
Pathmark Stores, Inc. (the "Company") operated 132 supermarkets as of
October 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").
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 31, 1998, 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 31, 1998.
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
quarter and nine-month period of 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):
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1998 1998
------------ ------------
<S> <C> <C>
Term loan ("Term Loan")............................................................. $ 257,576 $ 263,250
Working capital facility ("Working Capital Facility")............................... 57,800 --
9.625% Senior Subordinated Notes due 2003 ("Senior Subordinated Notes")............. 438,400 438,134
11.625% Subordinated Notes due 2002 ("Subordinated Notes").......................... 199,017 199,017
12.625% Subordinated Debentures due 2002 ("Subordinated Debentures")................ 95,750 95,750
10.75% Deferred Coupon Notes due 2003 ("Deferred Coupon Notes")..................... 202,430 187,068
Debt payable to Holdings............................................................ 983 983
Industrial revenue bonds............................................................ 8,529 6,375
Other debt (primarily mortgages).................................................... 25,838 30,799
----------- -----------
Total debt.......................................................................... 1,286,323 1,221,376
Less: current maturities............................................................ 19,250 43,478
----------- -----------
Long-term portion................................................................... $ 1,267,073 $ 1,177,898
=========== ===========
</TABLE>
During the third quarter of Fiscal 1998, the Company paid in full $20.1
million of mortgages, due December 1998, on six properties through a $23.3
million refinancing of four of these properties. The new mortgages are payable
in installments through Fiscal 2008, including a scheduled final payment of
$18.6 million. In connection with the refinancing, $5.0 million was placed in
escrow and the Company expects to receive such $5.0 million in the fourth
quarter of Fiscal 1998.
NOTE 3--STOCKHOLDER'S DEFICIENCY
During the second quarter of Fiscal 1998, in conjunction with the paydown
of debt by PTK, Pathmark loaned $26.5 million to PTK in the form of a 14 1/2%
discount note, due May 12, 2003, accreting to a maturity value of $53.3 million.
PTK is not required to pay cash interest on this note. The note receivable from
PTK has been reflected as a separate component of stockholder's deficiency and
Pathmark is not reflecting interest income in its consolidated statements of
operations related to this note. Accordingly, the accretion on this note is
offset by a corresponding credit of $1.8 million to paid-in capital.
5
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 3--STOCKHOLDER'S DEFICIENCY--(CONTINUED)
In addition, during the second quarter of Fiscal 1998, SMG-II Holdings
Corporation ("SMG-II"), the Company's ultimate parent, issued restricted stock
grants ("Stock Grants") to certain officers and key employees of the Company.
The Stock Grants will vest in seven years or earlier with the occurrence of an
employment-related event, as defined, and will be forfeited in their entirety
upon the occurrence of a termination event, as defined. The Stock Grants were
valued at $5.0 million at the date of issuance, based on an independent
appraisal, and are being amortized as compensation expense in the Company's
consolidated statements of operations over the seven-year vesting period, with a
corresponding credit of $0.3 million to paid-in capital.
During the nine-month period of Fiscal 1998, the Company paid a dividend of
$40.0 thousand to its stockholder to pay for its administrative expenses. Such
dividend is limited to $0.1 million per year in accordance with the bank credit
agreement ("Credit Agreement").
NOTE 4--SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
SG&A for the nine-month period of Fiscal 1998 are net of a gain of $5.1
million related to the sale of certain real estate.
NOTE 5--INTEREST EXPENSE
Interest expense is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
------------------------- -------------------------
OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Term loans.......................................... $ 5,275 $ 6,156 $ 15,940 $ 16,679
Working capital facilities.......................... 1,622 671 3,620 4,143
Senior Subordinated Notes
Amortization of original issue discount......... 88 88 266 265
Currently payable............................... 10,588 10,588 31,763 31,763
Subordinated Notes.................................. 5,813 5,813 17,438 17,438
Subordinated Debentures............................. 3,022 3,022 9,066 9,066
Deferred Coupon Notes
Accrued but not payable......................... 5,307 4,687 15,362 13,700
Amortization of debt issuance costs................. 1,016 1,016 3,069 4,526
Lease obligations................................... 5,245 5,390 16,153 16,460
Other, net.......................................... 1,825 2,937 7,936 8,880
--------- --------- --------- ---------
Interest expense.................................... $ 39,801 $ 40,368 $ 120,613 $ 122,920
========= ========= ======== =========
</TABLE>
The majority of the cash interest payments are scheduled in the second and
fourth quarters.
NOTE 6--CONTINGENCIES
RICKEL:
In connection with the sale of its home centers segment in Fiscal 1994,
the Company, as lessor, entered into nine leases for certain of the Company's
owned real estate properties, including a distribution center, with Rickel Home
Centers, Inc. ("Rickel"), as tenant. In addition, the Company assigned to Rickel
26 third party leases.
6
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 6--CONTINGENCIES--(CONTINUED)
In 1996, Rickel filed for bankruptcy protection under Chapter 11 of the
United States Bankruptcy Code. Subsequent to the filing, of the 35 locations
leased to Rickel, Rickel entered into an agreement in 1998 to assign the leases
of 16 locations to Staples, Inc., 10 leases have either been terminated or
assigned to third parties and nine rejected leases are being actively marketed
by the Company to other prospective tenants. Subsequent to the end of the third
quarter of Fiscal 1998, the Company sold the distribution center, previously
leased to Rickel, for $22.9 million.
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 sublease recoveries and asset sales.
OTHER:
The Company is also a party to a number of legal proceedings in the
ordinary course of business. Management believes that the ultimate resolution of
these proceedings will not, in the aggregate, have a material adverse impact on
the financial condition, results of operations or business of the Company.
7
<PAGE>
PATHMARK STORES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES:
Sales in the third quarter of Fiscal 1998 were $900.0 million compared to
$901.0 million in the prior year, a decrease of 0.1%. For the nine-month period
of Fiscal 1998, sales were $2,738.9 million compared to $2,755.1 million in the
prior year, a decrease of 0.6%. However, same store sales increased 1.3% and
1.2% for the third quarter and nine-month period, respectively. Sales in the
third quarter of Fiscal 1998 compared to the prior year were impacted by sold
and closed stores, partially offset by same store sales increases. Sales in the
nine-month period of Fiscal 1998 compared to the prior year were impacted by
sold and closed stores, partially offset by new store openings and same store
sales increases. The Company operated 132 and 135 supermarkets at the end of the
third quarters of Fiscal 1998 and Fiscal 1997, respectively.
GROSS PROFIT:
Gross profit in the third quarter of Fiscal 1998 was $255.5 million or
28.4% of sales compared with $248.2 million or 27.5% of sales in the prior year.
For the nine-month period of Fiscal 1998, gross profit was $781.5 million or
28.5% of sales compared to $769.6 million or 27.9% for the prior year. The
increase in gross profit in both dollars and as a percentage of sales for the
third quarter and nine-month period of Fiscal 1998 compared to the prior year
was primarily due to the savings realized from the Company's outsourcing at the
end of Fiscal 1997 of certain of its distribution center operations, lower
shrink and improvements in the perishables mix. The cost of goods sold
comparisons were affected by a pretax LIFO charge of $0.35 million and a pretax
LIFO credit of $1.7 million in the third quarters of Fiscal 1998 and Fiscal
1997, respectively, and a pretax LIFO charge of $1.1 million and a pretax LIFO
credit of $0.8 million in the nine-month periods of Fiscal 1998 and Fiscal 1997,
respectively. The pretax LIFO credit for the prior year third quarter and
nine-month period includes a $2.0 million gain on a LIFO liquidation related to
the sale of the Company's pharmaceutical warehouse inventory to a wholesaler.
SG&A:
SG&A in the third quarter of Fiscal 1998 increased $5.1 million compared
to the prior year and decreased $4.9 million in the nine-month period of Fiscal
1998 compared to the prior year. As a percentage of sales, SG&A was 23.4% in the
third quarter of Fiscal 1998, up from 22.8% in the prior year and was 22.8% for
the nine-month period of Fiscal 1998 down from 22.9% in the prior year. The
increase in SG&A in the third quarter of Fiscal 1998 compared to the prior year
was primarily due to higher incentive and store labor expenses, partially offset
by lower insurance expense. The decrease in SG&A in the nine-month period of
Fiscal 1998 compared to the prior year was primarily due to the gain recognized
on the sale of certain real estate, lower advertising and insurance expense,
along with lower operating costs which resulted from sold and closed stores,
partially offset by higher incentive expense. 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 $19.6 million in the third quarter of
Fiscal 1998 was $1.8 million lower than the prior year of $21.4 million. For the
nine-month period of Fiscal 1998, depreciation and amortization of $58.9 million
was $2.6 million lower than the prior year of $61.5 million. The decrease in
depreciation and amortization expense in the third quarter and nine-month period
of Fiscal 1998 compared to the prior year was primarily due to the sale of
certain of the Company's distribution center facilities at the end of Fiscal
1997, as part of its transaction with C&S Wholesale Grocers, Inc. ("C&S"),
partially offset by capital expenditures. Depreciation and amortization excludes
video tape amortization, which is recorded in cost of goods sold, of $0.8
million and $0.9 million in the third quarters of Fiscal 1998 and Fiscal 1997,
respectively, and $2.3 million and $2.6 million in the nine-month periods of
Fiscal 1998 and Fiscal 1997, respectively.
8
<PAGE>
PATHMARK STORES, INC.
OPERATING EARNINGS:
Operating earnings in the third quarter of Fiscal 1998 were $25.6 million
compared with the prior year of $21.5 million. For the nine-month period of
Fiscal 1998, operating earnings were $96.8 million compared with $77.4 million
in the prior year. The increase in operating earnings in the third quarter of
Fiscal 1998 compared to the prior year was due to higher gross profit and lower
depreciation and amortization expense, partially offset by higher SG&A. The
increase in operating earnings in the nine-month period of Fiscal 1998 compared
to the prior year was due to higher gross profit, lower SG&A and lower
depreciation and amortization expense.
INTEREST EXPENSE:
Interest expense was $39.8 million in the third quarter of Fiscal 1998
compared to $40.4 million in the prior year and $120.6 million for the
nine-month period of Fiscal 1998 compared to $122.9 million in the prior year.
The decrease in interest expense in the third quarter of Fiscal 1998 compared to
the prior year was primarily due to reductions in the Term Loan and the paydown
of certain mortgages, partially offset by higher levels of borrowings under the
Working Capital Facility and the debt accretion on the Deferred Coupon Notes.
The decrease in interest expense in the nine-month period of Fiscal 1998
compared to the prior year was primarily due to reductions in the Term Loan,
lower levels of borrowing under the working capital facilities, lower
amortization of debt issuance costs and the paydown of certain mortgages,
partially offset by the debt accretion on the Deferred Coupon Notes.
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
quarter and nine-month period of 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 $51.1 million at October 31, 1998 will be
realized through the implementation of tax strategies which could generate
taxable income. The income tax benefit for the third quarter and nine-month
period of Fiscal 1997 was $7.6 million and $18.2 million, respectively.
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. During
the nine-month period of Fiscal 1997, the Company made income tax payments of
$3.2 million and received income tax refunds of $0.5 million.
EXTRAORDINARY ITEMS:
During the second quarter of Fiscal 1997, in connection with the then
executed $500 million 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.
SUMMARY OF OPERATIONS:
The Company's net loss in the third quarter of Fiscal 1998 was $14.3
million compared to a net loss of $11.2 million for the prior year. For the
nine-month period of Fiscal 1998, the Company's net loss was $23.9 million
compared to a net loss of $34.9 million in the prior year. The increase in net
loss in the third quarter of Fiscal 1998 compared to the prior year was
primarily due to a reduction in the income tax benefit, partially offset by
higher operating earnings. The decrease in net loss in the nine-month period of
Fiscal 1998 compared to the prior year was primarily due to higher operating
earnings and lower interest expense in Fiscal 1998 and the extraordinary loss in
Fiscal 1997, partially offset by a reduction in the income tax benefit.
9
<PAGE>
PATHMARK STORES, INC.
EBITDA-FIFO:
EBITDA-FIFO was $46.5 million and $42.2 million in the third quarters of
Fiscal 1998 and Fiscal 1997, respectively and $154.4 million and $141.1 million
for the nine-month periods of Fiscal 1998 and Fiscal 1997, 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.
FINANCIAL CONDITION
DEBT SERVICE:
During the nine-month period of Fiscal 1998, total debt increased $64.9
million from Fiscal 1997 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 net decrease in certain mortgages. Borrowings
under the Working Capital Facility were $57.8 million at October 31, 1998 and
$54.2 million at December 9, 1998. In addition, during the nine-month period of
Fiscal 1998, total lease obligations decreased $8.3 million from Fiscal 1997
year end.
During the third quarter of Fiscal 1998, the Company paid in full $20.1
million of mortgages, due December 1998, on six properties through a $23.3
million refinancing of four of these properties. The new mortgages are payable
in installments through Fiscal 2008, including a scheduled final payment of
$18.6 million. In connection with the refinancing, $5.0 million was placed in
escrow and the Company expects to receive such $5.0 million in the fourth
quarter of Fiscal 1998.
During the second quarter of Fiscal 1998, in conjunction with the paydown
of debt by PTK, Pathmark loaned $26.5 million to PTK in the form of a 14 1/2%
discount note, due May 12, 2003, accreting to a maturity value of $53.3 million.
PTK is not required to pay cash interest on this note.
During the first and second quarters of Fiscal 1998, the Company sold
certain real estate for $26.9 million and recognized a gain of $5.1 million. The
proceeds were used to paydown the related mortgages and a portion of the
Working Capital Facility. Subsequent to the end of the third quarter of Fiscal
1998, the Company sold the distribution center, previously leased to Rickel, for
$22.9 million. The proceeds were used to paydown a portion of the Working
Capital Facility.
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.
10
<PAGE>
PATHMARK STORES, INC.
The amount of principal payments required each year on outstanding
long-term debt (excluding the original issue discount with respect to the
Deferred Coupon Notes) is as follows (dollars in millions):
PRINCIPAL
FISCAL YEARS PAYMENTS
------------ ---------
1998(a)................................ $ 7.0
1999................................... 12.6
2000................................... 75.5
2001................................... 330.8
2002................................... 196.3
2003................................... 642.6
Thereafter............................. 21.5
---------
Total.................................. $ 1,286.3
=========
--------------
(a) Subsequent to October 31, 1998
LIQUIDITY:
The consolidated financial statements of the Company indicate that, at
October 31, 1998, current liabilities exceeded current assets by $56.9 million
and stockholder's deficiency was $1.1 billion. Cash used for operating
activities was $34.3 million in the nine-month period of Fiscal 1998 compared to
cash provided by operating activities of $25.4 million in the prior year. The
change in cash flow from operating activities was primarily due to cash used for
operating assets and liabilities, resulting from the paydown of trade accounts
payable, through the utilization of the proceeds received at the end of Fiscal
1997 related to the C&S transaction, and an increase in due from suppliers
related to the C&S transition, partially offset by a decrease in the net loss.
Management believes that cash flows generated from operations (excluding the C&S
transitional related items), supplemented by the unused borrowing capacity under
the Working Capital Facility and the availability of capital lease financing,
will be sufficient to pay the Company's debts as they come due, provide for its
capital expenditure program and meets its other cash requirements.
The Company believes that it will be able to make the scheduled payments
or refinance its obligations with respect to its indebtedness through a
combination of operating funds and borrowing facilities. Future refinancing will
be necessary if the Company's cash flow from operations is not sufficient to
meet its debt service requirements related to the maturity of the Term Loan and
Working Capital Facility in Fiscal 2001, and the maturity of the Subordinated
Notes and Subordinated Debentures in Fiscal 2002. The Company expects that it
will be necessary to refinance all or a portion of the Senior Subordinated Notes
and the Deferred Coupon Notes due in Fiscal 2003. The Company may undertake a
refinancing of some or all of such indebtedness sometime prior to its maturity.
The Company was in compliance with its various debt covenants at October 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 or to refinance or
otherwise meet its obligations with respect to its indebtedness depends on its
financial and operating performance, which, in turn, is subject to prevailing
economic conditions and to financial, business and other factors beyond its
control. Although the Company's cash flow from its operations and borrowings has
been sufficient to meet its debt service obligations, there can be no assurance
that the Company's operating results will continue to be sufficient or that
future borrowing facilities will be available for payment or refinancing of the
Company's indebtedness.
While it is the Company's intention to enter into other refinancings that
it considers advantageous, there can be no assurances that the prevailing market
conditions will be favorable to the Company. In the event the Company obtains
any future refinancing on less than favorable terms, the holders of outstanding
indebtedness could experience increased credit risk and could experience a
decrease in the market value of their investment, because the Company might be
forced to operate under terms that would restrict its operations and might find
its cash flow reduced.
11
<PAGE>
PATHMARK STORES, INC.
CAPITAL EXPENDITURES:
Capital expenditures for the third quarter of Fiscal 1998, including
property acquired under capital leases, were $11.0 million compared to $11.3
million for the prior year and for the nine-month period of Fiscal 1998 were
$38.4 million compared to $38.6 million for the prior year. During the
nine-month period of Fiscal 1998, the Company completed nine renovations to
existing supermarkets and closed three stores. During the remainder of Fiscal
1998, the Company expects to complete up to an aggregate of seven renovations
and enlargements. The one supermarket the Company planned to open in the fourth
quarter of Fiscal 1998 is expected to open in the first quarter of Fiscal 1999.
Capital expenditures for Fiscal 1998, including property to be acquired under
capital leases, are estimated to be $60.0 million. Management believes that cash
flows generated from operations (excluding the C&S transitional related items),
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 used for operating activities was $34.3 million in the nine-month
period of Fiscal 1998 compared to cash provided by operating activities of $25.4
million in the prior year. The change in cash flow from operating activities was
primarily due to cash used for operating assets and liabilities, resulting from
the paydown of trade accounts payable, utilizing the proceeds received at the
end of Fiscal 1997 related to the C&S transaction, and an increase in due from
suppliers related to the C&S transition, partially offset by a decrease in the
net loss. Cash provided by investing activities was $0.4 million in the
nine-month period of Fiscal 1998 compared to $4.8 million in the prior year. The
decrease in cash provided by investing activities was primarily due to an
increase in expenditures of property and equipment, partially offset by an
increase in proceeds from property dispositions. Cash used for financing
activities was $16.1 million in the nine-month period of Fiscal 1998 compared to
$31.7 million in the prior year. The decrease in cash used for financing
activities was primarily due to an increase in borrowings under the Working
Capital Facility in Fiscal 1998, as compared to the borrowings under the Term
Loan, net of repaying in full the former term loan and former working capital
facility in conjunction with the Credit Agreement in Fiscal 1997 and a decrease
in deferred financing fees related to the Credit Agreement in Fiscal 1997,
partially offset by a decrease in book overdrafts related to the C&S transition
and the note receivable from PTK.
YEAR 2000 READINESS
This disclosure is a 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 Year 2000 processing of the Company.
The Company is preparing its computer systems and hardware to deal with the
issues related to the year 2000 ("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.
In order to address the Year 2000 issues, the Company has formed a
project team of senior managers. This project team has assessed the Company's
information systems, including its hardware, software programs and embedded
systems contained in the Company's stores, distribution facilities and
corporate headquarters. Based on the findings of this assessment, the Company
has 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 is currently formulating 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.
12
<PAGE>
PATHMARK STORES, INC.
The Company is communicating 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
are taking action related to the Year 2000. The Company plans to test 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 issue will not cause an interruption of the Company's business.
The Company has committed significant resources in connection with
resolving its Year 2000 issues. 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, analysis, modification, testing and
implementation. A major portion of these costs will be met under the existing
agreement with IBM through a repriorization 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. As of December 1,
1998, the Company believes that approximately 30% of its information systems
are Year 2000 ready. The Company estimates that the total costs associated
with achieving Year 2000 readiness will be approximately $17.0 million (of
which approximately $5.0 million has been expended through October 31, 1998),
consisting of system remediation costs of $9.0 million and equipment
replacement of $8.0 million. The Company anticipates that it will finance the
cost of its Year 2000 remediation using its existing sources of liquidity.
The Company expects to complete its Year 2000 remediation by August 1999.
However, the Company's ability to execute its plan in a timely manner may be
adversely affected by a variety of factors, some of which are beyond the
Company's control, including turnover of key employees, availability and
continuity of IBM consultants and the potential for unforeseen implementation
problems. The Company's business could be interrupted if the Year 2000 plan is
not implemented in a timely manner, if the Company's vendors, service providers
or other third parties are not Year 2000 ready or if the Company's contingency
plans are not successful. 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.
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
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)EXHIBITS: none
(b)REPORTS ON FORM 8-K: not applicable
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 15, 1998
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extratced from Pathmark
Stores, Inc. Consolidated Statement of Operations for the 39 weeks ended October
31, 1998 and Consolidated Balance Sheet as of October 31, 1998 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 10,069
<SECURITIES> 0
<RECEIVABLES> 14,541
<ALLOWANCES> (1,236)
<INVENTORY> 168,295
<CURRENT-ASSETS> 280,932
<PP&E> 896,408
<DEPRECIATION> (405,253)
<TOTAL-ASSETS> 870,365
<CURRENT-LIABILITIES> 337,824
<BONDS> 1,267,073
0
0
<COMMON> 0
<OTHER-SE> (1,127,461)
<TOTAL-LIABILITY-AND-EQUITY> 870,365
<SALES> 2,738,914
<TOTAL-REVENUES> 2,738,914
<CGS> 1,957,409
<TOTAL-COSTS> 1,957,409
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 83
<INTEREST-EXPENSE> (120,613)
<INCOME-PRETAX> (23,833)
<INCOME-TAX> (74)
<INCOME-CONTINUING> (23,907)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,907)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
