<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
MAY 1, 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 May 1, 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.
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<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
------------------------
MAY 1, MAY 2,
1999 1998
--------- ---------
<S> <C> <C>
Sales ............................................ $ 894,457 $ 916,015
Cost of sales (exclusive of depreciation
and amortization shown separately below) ..... 639,473 651,862
--------- ---------
Gross profit ..................................... 254,984 264,153
Selling, general and administrative expenses ..... 206,509 211,065
Depreciation and amortization .................... 18,203 19,648
--------- ---------
Operating earnings ............................... 30,272 33,440
Interest expense ................................. (39,504) (40,874)
--------- ---------
Loss before income taxes ......................... (9,232) (7,434)
Income tax provision ............................. (9) (27)
--------- ---------
Net loss ......................................... $ (9,241) $ (7,461)
========= =========
</TABLE>
See notes to consolidated financial statements (unaudited).
1
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands except share amounts)
<TABLE>
<CAPTION>
MAY 1, JANUARY 30,
1999 1999
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ..................... $ 8,514 $ 7,661
Accounts receivable, net ...................... 12,863 13,792
Merchandise inventories ....................... 150,519 143,212
Income taxes receivable ....................... 1,796 1,493
Deferred income taxes, net .................... 5,565 5,912
Prepaid expenses .............................. 23,444 21,522
Due from suppliers ............................ 47,042 49,600
Other current assets .......................... 12,464 11,202
----------- -----------
Total Current Assets ........................ 262,207 254,394
Property and Equipment, Net ...................... 478,038 470,726
Deferred Financing Costs, Net .................... 15,066 15,723
Deferred Income Taxes, Net ....................... 43,828 43,481
Other Assets ..................................... 44,541 40,831
----------- -----------
$ 843,680 $ 825,155
=========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current Liabilities
Accounts payable and book overdrafts .......... $ 100,991 $ 98,940
Current maturities of long-term debt .......... 18,836 15,902
Accrued payroll and payroll taxes ............. 44,150 52,014
Current portion of lease obligations .......... 23,226 21,869
Accrued interest payable ...................... 39,594 21,325
Accrued expenses and other current liabilities 85,666 86,413
----------- -----------
Total Current Liabilities ................... 312,463 296,463
----------- -----------
Long-Term Debt ................................... 1,270,694 1,258,539
----------- -----------
Lease Obligations, Long-Term ..................... 168,523 160,708
----------- -----------
Other Noncurrent Liabilities ..................... 232,968 241,351
----------- -----------
Commitments and Contingencies (Note 4)
Stockholder's Deficiency
Common stock $.10 par value ................... -- --
Authorized, issued and outstanding: 100 shares
Paid-in capital ............................... 73,104 71,897
Accumulated deficit ........................... (1,183,795) (1,174,554)
Note receivable from PTK Holdings, Inc. ....... (30,277) (29,249)
----------- -----------
Total Stockholder's Deficiency .............. (1,140,968) (1,131,906)
----------- -----------
$ 843,680 $ 825,155
=========== ===========
</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 30, 1999...................... $ -- $ 71,897 $ (1,174,554) $ (29,249) $ (1,131,906)
Net loss.................................... -- -- (9,241) -- (9,241)
Accretion on note receivable from
PTK Holdings, Inc. ........................ -- 1,028 -- (1,028) --
Capital contribution from SMG-II
Holdings Corporation....................... -- 179 -- -- 179
------- --------- -------------- --------- -------------
Balance, May 1, 1999........................... $ -- $ 73,104 $ (1,183,795) $ (30,277) $ (1,140,968)
======= ========= ============== ========= =============
Balance, January 31, 1998...................... $ -- $ 68,703 $ (1,146,043) $ -- $ (1,077,340)
Net loss.................................... -- -- (7,461) -- (7,461)
------- --------- -------------- --------- -------------
Balance, May 2, 1998........................... $ -- $ 68,703 $ (1,153,504) $ -- $ (1,084,801)
======= ========= ============== ========= =============
</TABLE>
See notes to consolidated financial statements (unaudited).
3
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
13 WEEKS ENDED
--------------------
MAY 1, MAY 2,
1999 1998
-------- --------
<S> <C> <C>
Operating Activities
Net loss ................................................................................. $ (9,241) $ (7,461)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Depreciation and amortization ......................................................... 19,045 20,552
Deferred income tax benefit ........................................................... -- (636)
Interest accruable but not payable .................................................... 5,596 4,937
Amortization of original issue discount ............................................... 89 89
Amortization of debt issuance costs ................................................... 1,084 1,031
(Gain) loss on disposal of property and equipment ..................................... (382) 533
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net ............................................................ 929 (1,977)
Merchandise inventories ............................................................. (7,307) (7,405)
Income taxes ........................................................................ (303) 1,085
Due from suppliers .................................................................. 2,558 (28,200)
Other current assets ................................................................ (3,946) (4,980)
Other assets ........................................................................ (3,605) 2,815
Accounts payable .................................................................... (4,498) (33,711)
Accrued interest payable ............................................................ 18,315 674
Accrued expenses and other current liabilities ...................................... (8,611) (5,372)
Other noncurrent liabilities ........................................................ (8,383) (6,146)
-------- --------
Cash provided by (used for) operating activities .................................. 1,340 (64,172)
-------- --------
Investing Activities
Property and equipment expenditures ...................................................... (12,179) (9,076)
Proceeds from disposition of property and equipment ...................................... 880 8,926
-------- --------
Cash used for investing activities ................................................ (11,299) (150)
-------- --------
Financing Activities
Increase in Working Capital Facility borrowings .......................................... 11,900 45,200
Repayments of Term Loan .................................................................. (1,891) (1,891)
Increase in other long-term debt ......................................................... -- 2,000
Repayment of other long-term debt ........................................................ (605) (4,347)
Increase (decrease) in book overdrafts ................................................... 6,549 (23,755)
Reduction in lease obligations ........................................................... (4,714) (5,503)
Deferred financing fees .................................................................. (427) (21)
-------- --------
Cash provided by financing activities ............................................. 10,812 11,683
-------- --------
Increase (decrease) in cash and cash equivalents ............................................ 853 (52,639)
Cash and cash equivalents at beginning of period ............................................ 7,661 60,076
-------- --------
Cash and cash equivalents at end of period .................................................. $ 8,514 $ 7,437
======== ========
Supplemental Disclosures of Cash Flow Information
Interest paid ............................................................................ $ 14,358 $ 34,097
======== ========
Income taxes paid ........................................................................ $ 342 $ 72
======== ========
Noncash Investing and Financing Activities
Capital lease obligations ................................................................ $ 13,840 $ 10,425
======== ========
</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 133 supermarkets as of May 1,
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 first
quarters 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):
<TABLE>
<CAPTION>
MAY 1, JANUARY 30,
1999 1999
---------- ----------
<S> <C> <C>
Term loan ("Term Loan") ............................................... $ 253,793 $ 255,684
Working capital facility ("Working Capital Facility") ................. 54,900 43,000
9.625% Senior Subordinated Notes due 2003 ("Senior Subordinated Notes") 438,578 438,489
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") ..................................................... 213,476 207,880
Debt payable to Holdings .............................................. 983 983
Industrial revenue bonds .............................................. 8,281 8,302
Other debt (primarily mortgages) ...................................... 24,752 25,336
---------- ----------
Total debt ............................................................ 1,289,530 1,274,441
Less: current maturities .............................................. 18,836 15,902
---------- ----------
Long-term portion ..................................................... $1,270,694 $1,258,539
========== ==========
</TABLE>
5
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 3--INTEREST EXPENSE
Interest expense is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
13 WEEKS ENDED
--------------------
MAY 1, MAY 2,
1999 1998
------- -------
<S> <C> <C>
Term Loan ............................................ $ 4,837 $ 5,304
Working Capital Facility ............................. 1,101 540
Senior Subordinated Notes
Amortization of original issue discount .......... 89 89
Currently payable ................................ 10,587 10,588
Subordinated Notes ................................... 5,813 5,813
Subordinated Debentures .............................. 3,022 3,022
Deferred Coupon Notes
Accrued but not payable .......................... 5,596 4,937
Amortization of debt issuance costs .................. 1,084 1,031
Lease obligations .................................... 5,102 5,489
Other, net ........................................... 2,273 4,061
------- -------
Interest expense ..................................... $39,504 $40,874
======= =======
</TABLE>
The majority of the cash interest payments are scheduled in the second and
fourth quarters. However, the semi-annual interest payment of $21.2 million on
the Senior Subordinated Notes was paid in the second quarter of Fiscal 1999
compared to the first quarter of Fiscal 1998, due to the timing of the
quarter-end dates.
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, Holdings, SMG-II, the Purchaser, Ahold and the
directors of the Company 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
Holdings and SMG-II breached their fiduciary duties to the holders of Holdings'
$3.52 Cumulative Exchangeable Redeemable Preferred Stock (the "Preferred
Stock"). The Plaintiff, by his counsel, has entered into a Memorandum of
Understanding, dated May 19, 1999 (the "Memorandum of Understanding"), 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 Memorandum of Understanding 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 Holdings
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 (the "Alternative Transaction"). In addition,
pursuant to the terms of the Memorandum of Understanding, 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 currently intends to apply 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. Thus, if the Court approves the settlement and the fees and
expenses of counsel for the Plaintiff in full, the New Offer Price will be
$39.85 per share of Preferred Stock.
6
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 4--CONTINGENCIES--(CONTINUED)
The Memorandum of Understanding 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 which 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) the drafting and execution of the settlement
documents and the other agreements necessary to effectuate the terms of the
proposed settlement; (ii) Final Court Approval of the settlement; (iii)
dismissal of the Action by the Court with prejudice and without awarding fees or
costs to any party; and (iv) the Purchaser closing (A) its tender offer and the
SMG-II Merger, or (B) the Alternative Transaction.
For purposes of the Memorandum of Understanding, "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 firmly
affirmed, without modification of any substantive right of any party to the
Memorandum of Understanding, 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 attorney's 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.
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
<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 first quarter of Fiscal 1999 were $894.5 million compared to
$916.0 million in the prior year, a decrease of 2.4%. The sales reduction was
primarily due to closed and divested stores in Fiscal 1998, partially offset by
a new store opening in Fiscal 1999. In addition, same store sales decreased 0.8%
in the first quarter of Fiscal 1999. The Company operated 133 and 135
supermarkets at the end of the first quarters of Fiscal 1999 and Fiscal 1998,
respectively.
GROSS PROFIT:
Gross profit in the first quarter of Fiscal 1999 was $255.0 million or 28.5%
of sales compared with $264.2 million or 28.8% of sales in the prior year. The
decrease in gross profit in both dollars and as a percentage of sales for the
first quarter of Fiscal 1999 compared to the prior year was primarily due to
lower sales and higher promotional expenses, partially offset by lower shrink.
The cost of goods sold comparisons were affected by a pretax LIFO charge of $0.4
million in each of the first quarters of Fiscal 1999 and 1998, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"):
SG&A in the first quarter of Fiscal 1999 decreased $4.6 million or 2.2%
compared to the prior year primarily due to lower incentive and store labor
expenses, insurance claims and utilities expenses. As a percentage of sales,
SG&A was 23.1% in the first quarter of Fiscal 1999, compared to 23.0%in the
prior year.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization of $18.2 million in the first quarter of
Fiscal 1999 was $1.4 million lower than the prior year of $19.6 million
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 $0.8
million in each of the first quarters of Fiscal 1999 and 1998, respectively.
OPERATING EARNINGS:
Operating earnings in the first quarter of Fiscal 1999 were $30.3 million
compared with the prior year of $33.4 million. The decrease in operating
earnings in the first quarter of Fiscal 1999 compared to the prior year was due
to lower gross profit, partially offset by lower SG&A and lower depreciation and
amortization expense.
INTEREST EXPENSE:
Interest expense was $39.5 million in the first quarter of Fiscal 1999
compared to $40.9 million in the prior year. The decrease in interest expense in
the first quarter of Fiscal 1999 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.
8
<PAGE>
PATHMARK STORES, INC.
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 first
quarters 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 $49.4 million at May 1, 1999 will be realized
through the implementation of tax strategies which could generate taxable
income.
During the first quarter of Fiscal 1999, the Company made income tax
payments of $0.3 million and received income tax refunds of $0.03 million.
During the first quarter of Fiscal 1998, the Company made income tax payments of
$0.1 million and received income tax refunds of $0.5 million.
SUMMARY OF OPERATIONS:
The Company's net loss in the first quarter of Fiscal 1999 was $9.2 million
compared to a net loss of $7.5 million for the prior year. The increase in net
loss in the first quarter of Fiscal 1999 compared to the prior year was
primarily due to lower operating earnings, partially offset by lower interest
expense.
EBITDA-FIFO:
EBITDA-FIFO was $49.3 million and $54.3 million in the first quarters 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.
FINANCIAL CONDITION
DEBT SERVICE:
During the first quarter of Fiscal 1999, total debt increased $15.1 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 $54.9 million at May 1, 1999 and $75.1 million at
June 9, 1999. In addition, during the first quarter of Fiscal 1999, total lease
obligations increased $9.2 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. However, the semi-annual interest payment of $21.2 million on
the Senior Subordinated Notes was paid in the second quarter of Fiscal 1999
compared to the first quarter of Fiscal 1998, due to the timing of the
quarter-end dates.
9
<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):
<TABLE>
<CAPTION>
PRINCIPAL
FISCAL YEARS PAYMENTS
------------ ---------
<S> <C>
1999(a)................................... $ 13.4
2000...................................... 78.8
2001...................................... 319.3
2002...................................... 196.3
2003...................................... 660.2
Thereafter................................ 21.5
---------
Total..................................... $ 1,289.5
=========
</TABLE>
- ----------
(a) Subsequent to May 1, 1999
LIQUIDITY:
The consolidated financial statements of the Company indicate that, at May
1, 1999, current liabilities exceeded current assets by $50.3 million and
stockholder's deficiency was $1.1 billion. Management believes that cash flows
generated from operations, supplemented by the unused borrowing capacity under
the Working Capital Facility and the availability of capital lease financing,
will be sufficient to pay the Company's debts as they come due, provide for its
capital expenditure program and meets its other cash requirements.
The Company believes that it will be able to make the scheduled payments or
refinance its obligations with respect to its indebtedness through a combination
of operating funds and borrowing facilities. Future refinancing will be
necessary if the Company's cash flow from operations is not sufficient to meet
its debt service requirements related to the maturity of the Term Loan and
Working Capital Facility in Fiscal 2001, and the maturity of the Subordinated
Notes and Subordinated Debentures in Fiscal 2002. The Company expects that it
will be necessary to refinance all or a portion of the Senior Subordinated Notes
and the Deferred Coupon Notes due in Fiscal 2003. The Company may undertake a
refinancing of some or all of such indebtedness sometime prior to its maturity.
The Company was in compliance with its various debt covenants at May 1, 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 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 first quarter of Fiscal 1999, including
property acquired under capital leases, were $26.0 million compared to $19.5
million for the prior year. During the first quarter of Fiscal 1999, the Company
opened one new store and completed seven renovations to existing supermarkets.
Subsequent to May 1, 1999, the Company opened another new store and during the
remainder of Fiscal 1999, expects to open two additional stores and complete up
to an aggregate of 38 renovations and enlargements. Capital expenditures for
Fiscal 1999, including property to be acquired under capital leases, are
estimated to be $99.0 million.
10
<PAGE>
PATHMARK STORES, INC.
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 $1.3 million in the first
quarter of Fiscal 1999 compared to cash used for operating activities of
$64.2 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 $11.3 million in the first quarter of Fiscal 1999
compared to $0.2 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 and a decrease in proceeds from property dispositions.
Cash provided by financing activities was $10.8 million in the first quarter
of Fiscal 1999 compared to $11.7 million in the prior year. The decrease in
cash provided by financing activities was primarily due to a decrease in
borrowings under the Working Capital Facility, partially offset by an
increase in book overdrafts and the Fiscal 1998 paydown of a mortgage in
connection with the sale of a former supermarket property.
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 is preparing 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.
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.
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.
11
<PAGE>
PATHMARK STORES, INC.
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 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. As of May 31, 1999, the Company believes
that approximately 65% of its mainframe 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 $8.3
million has been expended through May 1, 1999), 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.
12
<PAGE>
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, Supermarkets General Holdings Corporation
("Holdings"), its parent, 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 Holdings 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 Holdings and SMG-II breached their fiduciary duties to
the holders of Holdings' $3.52 Cumulative Exchangeable Redeemable Preferred
Stock (the "Preferred Stock"). The Plaintiff, by his counsel, has entered into a
Memorandum of Understanding, dated May 19, 1999 (the "Memorandum of
Understanding"), 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 Memorandum of Understanding 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 Holdings 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 Memorandum of Understanding, 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 currently intends to apply 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. Thus, if the Court approves the settlement and the
fees and expenses of counsel for the Plaintiff in full, the New Offer Price will
be $39.85 per share of Preferred Stock.
The Memorandum of Understanding 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 which 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) the drafting and execution of the settlement
documents and the other agreements necessary to effectuate the terms of the
proposed settlement; (ii) Final Court Approval of the settlement; (iii)
dismissal of the Action by the Court with prejudice and without awarding fees or
costs to any party; and (iv) the Purchaser closing (A) its tender offer and the
SMG-II Merger, or (B) the Alternative Transaction.
For purposes of the Memorandum of Understanding, "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 firmly
affirmed, without modification of any substantive right of any party to the
Memorandum of Understanding, 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 attorney's 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.
13
<PAGE>
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:
The registrant filed one Form 8-K during the quarter for which this
report is filed.
Date of Report Item
-------------- ----
March 11, 1999 Agreement and Plan of Merger among
Koninklijke Ahold N.V., Ahold Acquisition,
Inc. and SMG-II Holdings Corporation
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: June 15, 1999
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Pathmark
Stores, Inc. Consolidated Statement of Operations for the 13 weeks ended May 1,
1999 and Consolidated Balance Sheet as of May 1, 1999 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-29-2000
<PERIOD-END> MAY-01-1999
<CASH> 8,514
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<RECEIVABLES> 14,150
<ALLOWANCES> (1,287)
<INVENTORY> 150,519
<CURRENT-ASSETS> 262,207
<PP&E> 862,512
<DEPRECIATION> (384,474)
<TOTAL-ASSETS> 843,680
<CURRENT-LIABILITIES> 312,463
<BONDS> 1,270,694
0
0
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<OTHER-SE> (1,140,968)
<TOTAL-LIABILITY-AND-EQUITY> 843,680
<SALES> 894,457
<TOTAL-REVENUES> 894,457
<CGS> 639,473
<TOTAL-COSTS> 639,473
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 21
<INTEREST-EXPENSE> (39,504)
<INCOME-PRETAX> (9,232)
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