<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
JULY 29, 2000 1-5287
PATHMARK STORES, INC.
(DEBTOR-IN-POSSESSION AS OF JULY 12, 2000)
(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:
100,000,000 SHARES OF COMMON STOCK AND
5,294,118 WARRANTS TO PURCHASE
5,294,118 SHARES OF COMMON STOCK
-------------------
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 September 1, 2000, 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 I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PATHMARK STORES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
------------------------- -------------------------
JULY 29, JULY 31, JULY 29, JULY 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales ...................................... $ 929,597 $ 922,728 $ 1,848,793 $ 1,817,185
Cost of sales (exclusive of depreciation
and amortization shown separately below) 667,228 657,838 1,328,772 1,297,311
----------- ----------- ----------- -----------
Gross profit ............................... 262,369 264,890 520,021 519,874
Selling, general and administrative expenses 215,604 212,235 428,303 418,744
Reorganization items ....................... 4,753 -- 9,887 --
Depreciation and amortization .............. 19,626 18,358 38,554 36,561
----------- ----------- ----------- -----------
Operating earnings ......................... 22,386 34,297 43,277 64,569
Interest expense ........................... (45,701) (40,397) (87,825) (79,901)
----------- ----------- ----------- -----------
Loss before income taxes ................... (23,315) (6,100) (44,548) (15,332)
Income tax provision ....................... (16) (9) (32) (18)
----------- ----------- ----------- -----------
Net loss ................................... $ (23,331) $ (6,109) $ (44,580) $ (15,350)
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements (unaudited).
1
<PAGE>
PATHMARK STORES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands except share amounts)
<TABLE>
<CAPTION>
JULY 29, JANUARY 29,
2000 2000
------------ -----------
<S> <C> <C>
ASSETS
Current assets
Cash ........................................... $ 15,461 $ 15,906
Accounts receivable, net ....................... 16,341 15,787
Income taxes receivable ........................ 402 707
Merchandise inventories ........................ 138,670 141,559
Deferred income taxes, net ..................... 2,829 3,223
Prepaid expenses ............................... 20,942 21,183
Due from suppliers ............................. 46,334 53,975
Other current assets ........................... 21,300 18,254
----------- -----------
Total current assets ....................... 262,279 270,594
Property and equipment, net ....................... 461,609 472,157
Deferred financing costs, net ..................... 13,008 11,805
Deferred income taxes, net ........................ 44,264 43,870
Other noncurrent assets ........................... 57,124 43,953
----------- -----------
$ 838,284 $ 842,379
=========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities
Accounts payable and book overdrafts ........... $ 76,997 $ 89,434
Current maturities of long-term debt ........... 382,939 78,982
Accrued payroll and payroll taxes .............. 45,197 50,766
Current portion of lease obligations ........... 22,900 25,192
Accrued interest payable ....................... 6,111 26,850
Accrued expenses and other current liabilities . 87,557 80,067
----------- -----------
Total current liabilities .................. 621,701 351,291
----------- -----------
Long-term debt .................................... -- 1,264,103
----------- -----------
Long-term lease obligations ....................... 185,060 173,289
----------- -----------
Other noncurrent liabilities ...................... 166,529 216,739
----------- -----------
Liabilities subject to discharge and exchange ..... 1,072,855 --
----------- -----------
Commitments and contingencies
Stockholder's deficiency
Common stock, $0.10 par value .................. -- --
Authorized, issued and outstanding: 100 shares
Paid-in capital ................................ 43,167 76,579
Accumulated deficit ............................ (1,251,028) (1,205,980)
Note receivable from PTK Holdings, Inc. ........ -- (33,642)
----------- -----------
Total stockholder's deficiency ............. (1,207,861) (1,163,043)
----------- -----------
$ 838,284 $ 842,379
=========== ===========
</TABLE>
See notes to consolidated financial statements (unaudited).
2
<PAGE>
PATHMARK STORES, INC.
(DEBTOR-IN-POSSESSION)
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 ............................... -- -- (31,426) -- (31,426)
Accretion on note receivable from
PTK Holdings, Inc. .................... -- 4,393 -- (4,393) --
Capital contribution from SMG-II
Holdings Corporation .................. -- 289 -- -- 289
---- ----------- ----------- ----------- -----------
Balance, January 29, 2000 ................. -- 76,579 (1,205,980) (33,642) (1,163,043)
Net loss ............................... -- -- (44,580) -- (44,580)
Accretion on note receivable from
PTK Holdings, Inc. .................... -- 2,572 -- (2,572) --
Cancellation of the note receivable from
PTK Holdings, Inc. .................... -- (36,214) -- 36,214 --
Capital contribution from SMG-II
Holdings Corporation .................. -- 230 -- -- 230
Assumption of affiliate liability ...... -- -- (468) -- (468)
---- ----------- ----------- ----------- -----------
Balance, July 29, 2000 .................... $ -- $ 43,167 $(1,251,028) $ -- $(1,207,861)
==== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements (unaudited).
3
<PAGE>
PATHMARK STORES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
26 WEEKS ENDED
--------------------------
JULY 29, JULY 31,
2000 1999
--------- ---------
<S> <C> <C>
Operating Activities
Net loss ..................................................................... $(44,580) $(15,350)
Adjustments to reconcile net loss to net cash provided by (used for) operating
activities:
Depreciation and amortization ............................................. 41,026 38,328
Amortization of original issue discount ................................... 89 178
Amortization of deferred financing costs .................................. 2,566 2,186
Gain on sale or disposal of property and equipment ........................ (1,883) (369)
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net ................................................ (554) 1,013
Income taxes receivable ................................................. 305 (345)
Merchandise inventories ................................................. 2,889 (4,128)
Due from suppliers ...................................................... 7,641 3,454
Other current assets .................................................... (5,251) (4,836)
Noncurrent assets ....................................................... (12,672) (2,408)
Accounts payable ........................................................ (3,255) 1,864
Accrued interest payable ................................................ 54,140 11,250
Accrued expenses and other current liabilities .......................... 1,921 (8,858)
Noncurrent liabilities .................................................. (11,151) (15,974)
-------- --------
Cash provided by operating activities ................................. 31,231 6,005
-------- --------
Investing Activities
Property and equipment expenditures .......................................... (18,660) (24,476)
Proceeds from sale or disposal of property and equipment ..................... 9,799 886
-------- --------
Cash used for investing activities .................................... (8,861) (23,590)
-------- --------
Financing Activities
(Decrease) increase in working capital facility borrowings ................... (4,800) 27,600
Repayments of the term loan .................................................. (5,229) (3,783)
Repayment of other long-term debt ............................................ (689) (620)
(Decrease) increase in book overdrafts ....................................... (9,182) 5,055
Reduction in lease obligations ............................................... (9,446) (9,590)
Deferred financing costs ..................................................... (3,769) (431)
Increase in DIP financing facility borrowings ................................ 10,300 --
-------- --------
Cash provided by (used for) financing activities ...................... (22,815) 18,231
-------- --------
Increase (decrease) in cash ..................................................... (445) 646
Cash at beginning of period ..................................................... 15,906 7,661
-------- --------
Cash at end of period ........................................................... $ 15,461 $ 8,307
======== ========
Supplemental Disclosures of Cash Flow Information
Interest paid ................................................................ $ 31,223 $ 66,412
======== ========
Income taxes paid ............................................................ $ 26 $ 393
======== ========
Noncash Investing and Financing Activities
Capital lease obligations .................................................... $ 24,436 $ 23,217
======== ========
</TABLE>
See notes to consolidated financial statements (unaudited)
4
<PAGE>
PATHMARK STORES, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. RESTRUCTURING PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
Historically, the cash flows that Pathmark Stores, Inc. ("the Company")
generated from operations, supplemented by the unused borrowing capacity under
the working capital facility (the "Working Capital Facility") and the
availability of capital lease financing were sufficient to pay the Company's
debts as they came due, provide for its capital expenditure program and meet its
other cash requirements. Management evaluated its Fiscal 2000 cash flow
projections and debt service requirements and based upon this evaluation, the
Company elected not to make all of its scheduled debt payments. The Company's
Fiscal 2000 debt requirements increase substantially over the prior year due
primarily to the semi-annual interest payments of $12.1 million on the 10.75%
Junior Subordinated Deferred Coupon Notes (the "Junior Subordinated Notes")
which, for the first time, was required to be paid in cash on May 1, 2000 and
the sinking fund payment of $50.0 million on the 11.625% Subordinated Notes due
2002 (the "Subordinated Notes") on June 15, 2000.
On May 1, 2000, the Company elected not to make interest payments of $21.2
million on its $440 million of 9.625% Senior Subordinated Notes due 2003 (the
"Senior Subordinated Notes") and $12.1 million on its Junior Subordinated Notes.
On June 15, 2000, the Company elected not to make interest payments of $6.0
million on its $95.6 million of 12.625% Subordinated Debentures due 2002 (the
"Subordinated Debentures") and $11.6 million on its Subordinated Notes. Also, on
June 15, 2000, the Company elected not to make a sinking fund payment of $50.0
million on its Subordinated Notes. The grace period under each of the Indentures
governing the various notes has expired constituting an Event of Default under
each such Indenture.
On July 12, 2000 (the "Petition Date"), the Company, along with its direct
and indirect parent companies and certain of its subsidiaries, filed a voluntary
petition (the "Petition") under Chapter 11 of Title 11 of the United States Code
(the "Bankruptcy Code"). The Petition was filed in the United States Bankruptcy
Court for the District of Delaware (the "Court") under case numbers 00-02963
through 00-2968 (the "Bankruptcy Case"). As of the Petition Date, the Company
was in arrears with respect to interest on its Senior Subordinated Notes in the
amount of $37.6 million, on its Subordinated Notes in the amount of $13.4
million, on its Subordinated Debentures in the amount of $6.9 million, and on
its Junior Subordinated Notes in the amount of $16.9 million. The Company
continues to manage its affairs and operate its business as a
debtor-in-possession ("DIP") while the Bankruptcy Case is pending. The
Bankruptcy Case was commenced to implement a prepackaged plan of reorganization
(the "Prepackaged Plan") developed jointly with an ad hoc committee of the
Company's bondholders (the "Bondholders Committee"). Members of the Bondholders
Committee hold or control $445.7 million principal amount, or approximately 46%
of the Company's total bond indebtedness outstanding. Over 99% of the principal
amount of bond indebtedness voted agreed to accept the Prepackaged Plan.
The Prepackaged Plan provides that, upon consummation of the
reorganization, current holders of the Company's bond indebtedness will receive
100% of the opening common stock of the reorganized Company (the "New Common
Stock"). In addition to New Common Stock, holders of the Subordinated Notes, the
Subordinated Debentures and the Junior Subordinated Notes will receive
ten-year warrants to purchase 15% of the diluted New Common Stock of the
reorganized Company (the "New Warrants"). The New Warrants will be exercisable
at the opening reorganization equity value established in connection with the
Prepackaged Plan. Such ownership is subject to dilution from (1) the exercise of
the New Warrants, (2) the exercise of any options to purchase New Common Stock
issued pursuant to the Company's long-term management incentive plan, and (3)
the grant to the Chief Executive Officer of restricted New Common Stock.
Pursuant to the Prepackaged Plan and in full satisfaction of their claims,
(1) holders of the Senior Subordinated Notes will receive 78.24% of the New
Common Stock, (2) holders of the Subordinated Notes and the Subordinated
Debentures will receive their ratable share of 18.71% of the New Common Stock
and 75% of the New Warrants, (3) holders of the Junior Subordinated Notes will
receive 2.88% of the New Common Stock and 25% of the New Warrants, and (4)
holders of approximately $0.98 million of the 11.625% Supermarkets General
Holdings Corporation ("Holdings") Subordinated Notes due 2002, which
Subordinated Notes are guaranteed by the Company, will receive 0.17% of the New
Common Stock, subject to dilution as described in the preceding paragraph.
5
<PAGE>
PATHMARK STORES, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 1. RESTRUCTURING PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY
CODE--(CONTINUED)
The Prepackaged Plan provides that holders of Holdings' Cumulative
Exchangeable Redeemable Preferred Stock ("Exchangeable Preferred Stock") are to
receive their ratable portions of $0.5 million in cash payable upon the
effective date of the Prepackaged Plan.
In connection with its financial restructuring plan, the Company received a
commitment from The Chase Manhattan Bank for a $75 million revolving credit
agreement (the "DIP Financing Facility") in support of the Prepackaged Plan and
a $600 million senior secured credit facility (the "Exit Financing"). The DIP
Financing Facility, which was approved by the Court on July 28, 2000, will
enable the Company to continue normal business operations during the
restructuring proceedings. The Exit Financing will be used to repay in full the
existing Credit Agreement and the DIP Financing Facility, pay expenses of the
Prepackaged Plan and provide approximately $200 million of liquidity for
post-reorganization operations.
On July 13, 2000, the Court approved various "first day" requests
including, among other things, the payment of prepetition claims of employees,
utilities, critical trade vendors and other key constituents. The Court also
granted the Company's motion to reject 16 unexpired real estate leases, related
to closed stores. Under Bankruptcy Law, the Company's liability to the landlord
on claims resulting from such rejections is capped at the greater of 15% of the
remaining lease payments (limited to three years' lease payments) or one year's
lease payments. Rejection of these leases, however, does not limit the Company's
obligation with respect to damages arising from the rejection of any
corresponding subleases. Outstanding claims related to these 16 rejected
leases approximate $10.6 million.
On September 7, 2000, the Court entered an order confirming the Prepackaged
Plan, which is expected to become effective on or about September 19, 2000, at
which point the Company will formally exit Chapter 11.
NOTE 2. ORGANIZATION AND BASIS OF PRESENTATION
The Company operated 137 supermarkets as of July 29, 2000, 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 Holdings. Holdings is a wholly-owned subsidiary of SMG-II Holdings
Corporation ("SMG-II").
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 29, 2000, pursuant to the rules and regulations of the
Securities and Exchange Commission. Since the Petition Date, the Company has
operated its business as a debtor-in-possession under the Bankruptcy Code. The
American Institute of Certified Public Accountant's Statement of Position 90-7
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7") provides guidance for financial reporting by entities that have
filed petitions with a bankruptcy court and expect to reorganize under Chapter
11 of the Bankruptcy Code. 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 Annual Report on Form 10-K for the year ended January 29, 2000.
CONSOLIDATED STATEMENT OF OPERATIONS:
Expenses directly attributable to the Prepackaged Plan, including employee
retention bonuses and professional fees related to legal, accounting and
consulting services, are expensed as incurred and reported in the consolidated
statement of operations separately as reorganization items. Interest expense on
bond indebtedness, as of July 29, 2000, has been accrued through the Petition
Date, except for the Senior Subordinated Notes, which has been accrued through
September 19, 2000; such interest accrual is in accordance with the Prepackaged
Plan, presuming the Company exits from Chapter 11 on or before
6
<PAGE>
PATHMARK STORES, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 2. ORGANIZATION AND BASIS OF PRESENTATION--(CONTINUED)
September 19, 2000. Income taxes 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
second quarters and six-month periods of Fiscal 2000 and Fiscal 1999;
therefore, no income tax benefit has been recognized.
CONSOLIDATED BALANCE SHEET:
The consolidated balance sheet separately classifies liabilities subject to
discharge and exchange, which refer to those impaired liabilities incurred prior
to the Petition Date. The liabilities subject to discharge and exchange
represent management's best estimate in connection with the Bankruptcy Case
and may be subject to future adjustment depending on Court action, further
developments with respect to disputed claims or other events. The liabilities
subject to discharge and exchange consist of the following (dollars in
thousands):
<TABLE>
<S> <C>
Bond indebtedness, including accrued interest.. $ 1,034,629(a)
Rejected leases on closed stores .............. 38,226(b)
-------------
Liabilities subject to discharge and exchange.. $ 1,072,855
=============
</TABLE>
----------
(a) See Note 4.
(b) Represents the liability for closed stores related to the 16 rejected
leases.
NOTE 3. LONG-TERM DEBT
Long-term debt, excluding liabilities subject to discharge and exchange, is
comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
JULY 29, JANUARY 29,
2000 2000
----------- -----------
<S> <C> <C>
Term Loan ............................... $ 236,213 $ 241,442
Working Capital Facility ................ 105,000 109,800
DIP Financing Facility .................. 10,300 --
Industrial revenue bonds ................ 8,173 8,217
Other debt (primarily mortgages) ........ 23,253 23,899
---------- ----------
Subtotal ........................... 382,939 383,358
Senior Subordinated Notes ............... -- 438,844
Subordinated Notes ...................... -- 199,017
Subordinated Debentures ................. -- 95,750
Junior Subordinated Notes ............... -- 225,133
Debt payable to Holdings ................ -- 983
---------- ----------
Total debt .............................. 382,939(a) 1,343,085
Less: current maturities ................ 382,939 78,982
---------- ----------
Long-term portion ....................... $ -- $1,264,103
========== ==========
</TABLE>
--------
(a) As a result of the filing of the Petition, all debt has been classified as
current (see Note 1).
7
<PAGE>
PATHMARK STORES, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 4. BOND INDEBTEDNESS SUBJECT TO DISCHARGE AND EXCHANGE
Bond indebtedness subject to discharge and exchange, including
accrued interest, is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
BOND ACCRUED
INDEBTEDNESS INTEREST TOTAL
------------ ---------- ----------
<S> <C> <C> <C>
Senior Subordinated Notes ............................. $ 438,933 $ 37,616 $ 476,549
Subordinated Notes .................................... 199,017 13,311 212,328
Subordinated Debentures ............................... 95,750 6,955 102,705
Junior Subordinated Notes ............................. 225,141 16,857 241,998
Debt related to the 11.625% Holdings Subordinated Notes 983 66 1,049
---------- ---------- ----------
Bond indebtedness subject to discharge and exchange..... $ 959,824 $ 74,805 $1,034,629
========== ========== ==========
</TABLE>
NOTE 5. INTEREST EXPENSE
Interest expense is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
--------------------- ---------------------
JULY 29, JULY 31, JULY 29, JULY 31,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Term Loan ......................... $ 5,518 $ 4,769 $10,698 $ 9,606
Working Capital Facility .......... 2,594 1,688 4,863 2,789
DIP Financing Facility ............ 44 -- 44 --
Senior Subordinated Notes ......... 16,441 10,676 27,117 21,352
Subordinated Notes ................ 4,658 5,812 10,471 11,625
Subordinated Debentures ........... 2,422 3,022 5,444 6,044
Junior Subordinated Notes ......... 4,750 5,748 10,811 11,344
Amortization of debt issuance costs 1,458 1,102 2,566 2,186
Lease obligations ................. 5,462 5,255 10,829 10,357
Other, net ........................ 2,354 2,325 4,982 4,598
------- ------- ------- -------
Interest expense .................. $45,701 $40,397 $87,825 $79,901
======= ======= ======= =======
</TABLE>
NOTE 6. PTK NOTE
During the second quarter of Fiscal 1998, in conjunction with the paydown
of debt by PTK, the Company loaned $26.5 million to PTK in the form of a 14.5%
discount note, due May 12, 2003 (the "PTK Note"), 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 in the consolidated financial statements and the
Company is not reflecting interest income in the consolidated statements of
operations related to this note. Accordingly, the accretion of the PTK Note is
offset by a corresponding credit to paid-in capital. In conjunction with the
Prepackaged Plan, on May 30, 2000, the Company cancelled the PTK Note.
NOTE 7. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS:
See Note 1, "Restructuring Proceedings under Chapter 11 of the Bankruptcy
Code".
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 25 third-party leases to Rickel. 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 were assigned by Rickel in 1998 to Staples, Inc.,
13 leases have either been terminated, sold or assigned to third parties,
including Rickel's distribution center which was sold by the Company during
Fiscal 1998, and two leases have been rejected by the Company as part of its
Prepackaged Plan. The remaining four Rickel leases, representing three sites
owned bythe Company and one site jointly leased with the Company, are
activel being marketed by the Company.
INFORMATION SERVICES OUTSOURCING:
In August 1991, the Company entered into a ten-year agreement with IBM to
provide a wide range of information systems services. Under the agreement, IBM
has taken over the Company's data center operations and mainframe processing and
information system functions and is providing business applications and systems
designed to enhance the Company's customer service and efficiency. The charges
under this agreement are based upon the services requested at predetermined
rates. The Company may terminate the agreement upon 90 days notice with payment
of a specified termination charge. The Company is in discussions with IBM for an
extension of the agreement.
OTHER:
The Company is a party to a number of legal proceedings in the ordinary
course of business. Management believes that the ultimate resolution of these
proceedings will not, in the aggregate, have a material adverse impact on the
financial condition, results of operations, cash flows or business of the
Company.
8
<PAGE>
PATHMARK STORES, INC.
(DEBTOR-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES:
Sales in the second quarter of Fiscal 2000 were $929.6 million compared to
$922.7 million in the prior year, an increase of 0.7%. For the six-month period
of Fiscal 2000, sales were $1,848.8 million compared to $1,817.2 million in the
prior year, an increase of 1.7%. The sales increase was primarily due to new
stores opened in Fiscal 2000. In addition, same store sales decreased 0.2% for
the second quarter of Fiscal 2000 and increased 0.2% for the six-month period of
Fiscal 2000. The Company operated 137 and 134 supermarkets at the end of the
second quarters of Fiscal 2000 and Fiscal 1999, respectively.
GROSS PROFIT:
Gross profit in the second quarter of Fiscal 2000 was $262.4 million or
28.2% of sales compared with $264.9 million or 28.7% of sales in the prior year.
For the six-month period of Fiscal 2000, gross profit was $520.0 million or
28.1% of sales compared to $519.9 million or 28.6% for the prior year. The
decrease in gross profit of $2.5 million for the second quarter of Fiscal 2000
compared to the prior year was primarily due to higher shrink. The increase in
gross profit of $0.1 million for the six-month period of Fiscal 2000 compared to
the prior year was primarily due to higher sales, offset by higher shrink and
promotional expenses. The cost of goods sold comparisons were affected by a
pretax LIFO charge of $0.4 million in each of the second quarters of Fiscal 2000
and Fiscal 1999 and a pretax LIFO charge of $0.8 million in each of the
six-month periods of Fiscal 2000 and Fiscal 1999, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"):
SG&A in the second quarter of Fiscal 2000 increased $3.4 million or 1.6%
compared to the prior year and $9.6 million or 2.3% in the six-month period of
Fiscal 2000 compared to the prior year. The increase in SG&A for the second
quarter and the six-month period of Fiscal 2000 compared to the prior year was
primarily due to higher store labor and labor-related expenses. Included in the
six-month periods were gains on the sale of certain real estate of $1.8 million
and $0.4 million in Fiscal 2000 and Fiscal 1999, respectively. As a percentage
of sales, SG&A was 23.2% in the second quarter and the six-month period of
Fiscal 2000, compared to 23.0% in the second quarter and the six-month period of
Fiscal 1999.
REORGANIZATION ITEMS:
Reorganization items in the second quarter and the six-month period of
Fiscal 2000 were $4.8 million and $9.9 million, respectively. Such items, which
are expensed as incurred, primarily consist of employee retention bonuses and
professional fees related to legal, accounting and consulting services directly
attributable to the Prepackaged Plan.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization of $19.6 million in the second quarter of
Fiscal 2000 was $1.2 million higher than the $18.4 million in the prior year
primarily due to property and equipment additions. For the six-month period of
Fiscal 2000, depreciation and amortization of $38.6 million was $2.0 million
higher than the $36.6 million in the prior year primarily due to property and
equipment additions. Depreciation and amortization excludes video tape
amortization, which is recorded in cost of goods sold, of $0.2 million and $0.8
million in the second quarters of Fiscal 2000 and Fiscal 1999, respectively, and
$2.2 million and $1.6 million in the six-month periods of Fiscal 2000 and Fiscal
1999, respectively.
9
<PAGE>
PATHMARK STORES, INC.
(DEBTOR-IN-POSSESSION)
OPERATING EARNINGS:
Operating earnings in the second quarter of Fiscal 2000 were $22.4 million
compared with the prior year of $34.3 million. For the six-month period of
Fiscal 2000, operating earnings were $43.3 million compared with $64.6 million
in the prior year. The decrease in operating earnings in the second quarter of
Fiscal 2000 compared to the prior year was due to lower gross margin, higher
SG&A, reorganization items and higher depreciation and amortization expense. The
decrease in operating earnings in the six-month period of Fiscal 2000 compared
to the prior year was due to higher SG&A, reorganization items and higher
depreciation and amortization expense, partially offset by higher gross profit.
INTEREST EXPENSE:
Interest expense was $45.7 million in the second quarter of Fiscal 2000
compared to $40.4 million in the prior year and $87.8 million for the six-month
period of Fiscal 2000 compared to $79.9 million in the prior year. The increase
in interest expense in the second quarter and the six-month period of Fiscal
2000 compared to the prior year was primarily due to higher rates on borrowings
under the Term Loan and higher levels of borrowings and higher rates under the
Working Capital Facility. Interest expense on bond indebtedness, as of July 29,
2000, has been accrued through the Petition Date, except for the Senior
Subordinated Notes, which has been accrued through September 19, 2000; such
interest accrual is in accordance with the allocations set forth in the
Prepackaged Plan, presuming the Company exits Chapter 11 on or about September
19, 2000.
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
and second quarters of Fiscal 2000 and Fiscal 1999; therefore, no income tax
benefit has been recognized. The Company believes that it is more likely than
not that the net deferred income tax asset of $47.1 million at July 29, 2000
will be realized through the implementation of tax strategies which could
generate taxable income. During the six-month period of Fiscal 2000, the Company
made income tax payments of $0.03 million and received income tax refunds of
$0.4 million. During the six-month period of Fiscal 1999, the Company made
income tax payments of $0.4 million and received income tax refunds of $0.03
million.
SUMMARY OF OPERATIONS:
The Company's net loss in the second quarter of Fiscal 2000 was $23.3
million compared to a net loss of $6.1 million for the prior year. For the
six-month period of Fiscal 2000, the Company's net loss was $44.6 million
compared to a net loss of $15.4 million in the prior year. The increase in net
loss in the second quarter and six-month period of Fiscal 2000 compared to the
prior year was primarily due to lower operating earnings and higher interest
expense.
COMPREHENSIVE INCOME:
The Company has no items of comprehensive income other than net income and,
accordingly, the total comprehensive loss is the same as the reported net loss
for all periods presented.
EBITDA-FIFO:
EBITDA-FIFO was $47.5 million and $54.0 million in the second quarters of
Fiscal 2000 and Fiscal 1999, respectively and $93.2 million and $103.3 million
for the six-month period of Fiscal 2000 and Fiscal 1999, respectively.
EBITDA-FIFO represents net earnings before interest expense, income taxes,
depreciation and amortization, reorganization items, the gain on sale of certain
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 earnings or to cash flows from operating activities, as determined in
accordance with generally accepted accounting principles.
10
<PAGE>
PATHMARK STORES, INC.
(DEBTOR-IN-POSSESSION)
FINANCIAL CONDITION
DEBT SERVICE:
During the second quarter of Fiscal 2000, total debt, excluding bond
indebtedness subject to discharge and exchange, decreased $0.4 million from
Fiscal 1999 year end due to reductions in the Term Loan and the Working
Capital Facility, partially offset by the DIP Financing Facility. Borrowings
under the Working Capital Facility and the DIP Financing Facility were $105.0
million and $10.3 million, respectively at July 29, 2000 and $105.0 million
and $6.2 million, respectively at September 6, 2000. In addition, during the
six-month period of Fiscal 2000, total lease obligations increased $9.5
million from Fiscal 1999 year end.
The indebtedness under the Term Loan, the Working Capital Facility and the
DIP Financing Facility bear interest at floating rates and, therefore, cash
interest payments on that indebtedness may vary. 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.
LIQUIDITY:
Historically, the cash flows that the Company generated from operations,
supplemented by the unused borrowing capacity under the Working Capital Facility
and the availability of capital lease financing were sufficient to pay the
Company's debts as they came due, provide for its capital expenditure program
and meet its other cash requirements. Management evaluated its Fiscal 2000 cash
flow projections and debt service requirements and based upon this evaluation,
the Company elected not to make all of its scheduled debt payments. The
Company's Fiscal 2000 debt requirements increase substantially over the prior
year due primarily to the semi-annual interest payments of $12.1 million on the
Junior Subordinated Notes which, for the first time, was required to be paid in
cash on May 1, 2000 and the sinking fund payment of $50.0 million on the
Subordinated Notes on June 15, 2000.
On May 1, 2000, the Company elected not to make interest payments of
$21.2 million on its $440 million of Senior Subordinated Notes and $12.1
million on its Junior Subordinated Notes. On June 15, 2000, the Company
elected not to make interest payments of $6.0 million on its $95.6 million of
Subordinated Debentures and $11.6 million on its Subordinated Notes. Also, on
June 15, 2000, the Company elected not to make a sinking fund payment of
$50.0 million on its Subordinated Notes. The grace period under each of the
Indentures governing the various notes has expired constituting an Event of
Default under each such Indenture.
On the Petition Date, the Company, along with its direct and indirect
parent companies and certain of its subsidiaries, filed a Petition under the
Bankruptcy Code. The Petition was filed in the Court under the Bankruptcy
Case. As of the Petition Date, the Company was in arrears with respect to
interest on the Senior Subordinated Notes in the amount of $37.6 million, on
the Subordinated Notes in the amount of $13.4 million, on the Subordinated
Debentures in the amount of $6.9 million, and on the Junior Subordinated
Notes in the amount of $16.9 million. The Company continues to manage its
affairs and operate its business as a DIP while the Bankruptcy Case is
pending. The Bankruptcy Case was commenced to implement the Prepackaged Plan
developed jointly with the Bondholders Committee. Members of the Bondholders
Committee hold or control $445.7 million principal amount, or approximately 46%
of the Company's total bond indebtedness outstanding. Over 99% of the principal
amount of bond indebtedness voted agreed to accept the Prepackaged Plan.
The Prepackaged Plan provides that, upon consummation of the
reorganization, current holders of the Company's bond indebtedness will receive
100% of the New Common Stock. In addition to New Common Stock, holders of the
Subordinated Notes, the Subordinated Debentures and the Junior Subordinated
Notes will receive the New Warrants. The New Warrants will be exercisable at the
opening reorganization equity value established in connection with the
Prepackaged Plan. Such ownership is subject to dilution from (1) the exercise of
the New Warrants, (2) the exercise of any options to purchase New Common Stock
issued pursuant to the Company's long-term management incentive plan, and (3)
the grant to the Chief Executive Officer of restricted New Common Stock.
11
<PAGE>
PATHMARK STORES, INC.
(DEBTOR-IN-POSSESSION)
Pursuant to the Prepackaged Plan and in full satisfaction of their claims,
(1) holders of the Senior Subordinated Notes will receive 78.24% of the New
Common Stock, (2) holders of the Subordinated Notes and the Subordinated
Debentures will receive their ratable share of 18.71% of the New Common Stock
and 75% of the New Warrants, (3) holders of the Junior Subordinated Notes will
receive 2.88% of the New Common Stock and 25% of the New Warrants, and (4)
holders of approximately $0.98 million of the Holdings Subordinated Notes due
2002, which Subordinated Notes are guaranteed by the Company, will receive 0.17%
of the New Common Stock, subject to dilution as described in the preceding
paragraph.
The Prepackaged Plan provides that holders of the Exchangeable Preferred
Stock are to receive their ratable portions of $0.5 million in cash payable upon
the effective date of the Prepackaged Plan.
In connection with its financial restructuring plan, Pathmark received a
commitment from The Chase Manhattan Bank for the DIP Financing Facility in
support of the Prepackaged Plan and the Exit Financing. The DIP Financing
Facility, which was approved by the Court on July 28, 2000, will enable the
Company to continue normal business operations during the restructuring
proceedings. The Exit Financing will be used to repay in full the existing
Credit Agreement and the DIP Financing Facility, pay expenses of the Prepackaged
Plan and provide approximately $200 million of liquidity for post-reorganization
operations.
On July 13, 2000, the Court approved various "first day" requests
including, among other things, the payment of prepetition claims of employees,
utilities, critical trade vendors and other key constituents. The Court also
granted the Company's motion to reject 16 unexpired real estate leases, related
to closed stores. Under Bankruptcy Law, the Company's liability to the landlord
on claims resulting from such rejections is capped at the greater of 15% of the
remaining lease payments (limited to three years' lease payments) or one year's
lease payments. Rejection of these leases, however, does not limit the Company's
obligation with respect to damages arising from the rejection of any
corresponding subleases. Outstanding claims related to these 16 rejected
leases approximate $10.6 million.
On September 7, 2000, the Court entered an order confirming the Prepackaged
Plan, which is expected to become effective on or about September 19, 2000, at
which point the Company will formally exit Chapter 11.
CAPITAL EXPENDITURES:
Capital expenditures for the second quarter of Fiscal 2000, including
property acquired under capital leases, were $21.3 million compared to $21.7
million for the prior year and for the six-month period of Fiscal 2000 were
$43.1 million compared to $47.7 million for the prior year. During the six-month
period of Fiscal 2000, the Company opened three new stores, closed one store and
completed one store enlargement. During the remainder of Fiscal 2000, the
Company expects to open one additional store and complete up to an aggregate of
25 renovations and enlargements. Capital expenditures for Fiscal 2000, including
property to be acquired under capital leases, are estimated to be $100
million. Management believes that cash flows generated from operations,
supplemented by the unused borrowing capacity under the DIP Financing Facility
and Exit Financing and the availability of capital lease financing, will be
sufficient to provide for the Company's capital expenditure program, subject to
the successful completion of its financial restructuring plan.
CASH FLOWS:
Cash provided by operating activities was $31.2 million in the second
quarter of Fiscal 2000 compared to $6.0 million in the prior year. The change in
cash flow from operating activities was primarily due to the increase in the net
loss, the reduction in cash interest paid due to the Prepackaged Plan, partially
offset by the decrease in cash used for other operating assets and liabilities.
Cash used for investing activities was $8.9 million in the six-month period of
Fiscal 2000 compared to $23.6 million in the prior year. The change in cash flow
from investing activities was primarily due to a decrease in expenditures for
property and equipment and an increase in proceeds from property sales or
disposals. Cash used for financing activities was $22.8 million in the six-month
period of Fiscal 2000 compared to cash provided by financing activities of $18.2
million in the prior year. The change in cash flow from financing activities was
primarily due to the impact of the Prepackaged Plan.
12
<PAGE>
PATHMARK STORES, INC.
(DEBTOR-IN-POSSESSION)
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 represents a
comprehensive framework of accounting rules that standardizes the accounting for
all derivatives. SFAS No. 133 applies to all entities and to all types of
derivatives. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133", which delayed the effective date of SFAS No. 133 for
all fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000,
the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities", an amendment of SFAS No. 133. The Company has not
determined the impact, if any, that the adoption of SFAS No. 133 and SFAS No.
138 will have on its financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
No. 101"). SAB No. 101 provides guidance on the recognition, presentation and
disclosure of revenue, and is effective for the Company in the quarter
ending February 3, 2001. The Company continues to study SAB No. 101, however it
is anticipated that its adoption will not affect the Company's financial
position or results of operations.
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 that could cause actual results to differ
materially from future results expressed or implied by such forward-looking
statements. For additional information about the Company and its various risk
factors, see the Company's Form 10-K dated January 29, 2000, as filed with the
Securities and Exchange Commission on April 28, 2000 and its Form 10-Q dated
April 29, 2000, as filed on June 13, 2000 and other documents as filed with the
Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company due to
adverse changes in financial rates. The Company is exposed to market risk in the
area of interest rates. This exposure is directly related to its Term Loan and
borrowing activities under the Working Capital Facility and the DIP Financing
Facility. The Company does not currently maintain any interest rate hedging
arrangements due to the reasonable risk that near-term interest rates will not
rise significantly. The Company is continuously evaluating this risk and will
implement interest rate hedging arrangements when deemed appropriate.
13
<PAGE>
PATHMARK STORES, INC.
(DEBTOR-IN-POSSESSION)
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part 1, Note 1, "Restructuring Proceedings under Chapter 11 of the
Bankruptcy Code", incorporated by reference.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On May 1, 2000, the Company elected not to make interest payments of $21.2
million on its $440 million of 9.625% Senior Subordinated Notes due 2003
("Senior Subordinated Notes") and $12.1 million on its $225 million of 10.75%
Junior Subordinated Deferred Coupon Notes due 2003 ("Junior Subordinated
Notes"). On June 15, 2000, the Company elected not to make interest payments of
$6.0 million on its $95.6 million of 12.625% Subordinated Debentures due 2002
(the "Subordinated Debentures") and $11.6 million on its $199.0 million of
11.625% Subordinated Notes due 2002 (the "Subordinated Notes"). Also, on June
15, 2000, the Company elected not to make a sinking fund payment of $50 million
with respect to the Subordinated Notes. The grace period under each of the
Indentures governing the various notes has expired constituting an Event of
Default under each such Indenture. Additionally, on July 12, 2000, the Company
filed a voluntary petition under Chapter 11 of the Bankruptcy Code which also
constitutes an Event of Default under each of the abovementioned securities. On
the date hereof, the Company was in arrears with respect to interest on its
Senior Subordinated Notes in the amount of $37.6 million, on its Subordinated
Notes in the amount of $13.4 million, on its Subordinated Debentures in the
amount of $6.9 million, and on its Junior Subordinated Notes in the amount of
$16.9 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT:
Exhibit 27 -- Financial Data Schedule
(b) REPORTS ON FORM 8-K: A current report on Form 8-K was filed on July 21,
2000, reporting that the Company had filed a voluntary petition under
Chapter 11 of the Bankruptcy Code.
14
<PAGE>
PATHMARK STORES, INC.
(DEBTOR-IN-POSSESSION)
SIGNATURES
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)
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
BY /S/ JOSEPH ADELHARDT
-----------------------------
(JOSEPH ADELHARDT)
SENIOR VICE PRESIDENT AND
CONTROLLER, CHIEF
ACCOUNTING OFFICER
DATE: September 12, 2000
15
