AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1996
REGISTRATION NO. 33-59612
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
POST-EFFECTIVE AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
PATHMARK STORES, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 5411 22-2879612
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification Number)
incorporation or
organization)
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301 BLAIR ROAD
P.O. BOX 5301
WOODBRIDGE, NEW JERSEY 07095-0915
(908) 499-3000
(Address, including zip code, and telephone number, including
area code, of Joint Registrants' principal executive offices)
-------------------
MARC STRASSLER, ESQ.
VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
PATHMARK STORES, INC.
301 BLAIR ROAD
P.O. BOX 5301
WOODBRIDGE, NEW JERSEY 07095-0915
(908) 499-3000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
WITH A COPY TO:
ROHAN S. WEERASINGHE, ESQ.
SHEARMAN & STERLING
599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the date on which the Registration Statement becomes
effective.
Pursuant to Rule 429 under the Securities Act of 1933, as amended, (the
"Securities Act") the prospectus included in the Registration Statement is a
combined prospectus relating also to Registration No. 33-59616 previously filed
by the registrant on Form S-1 and declared efffective on May 26, 1993 and
Registration No. 33-50053 previously filed by the registrant on Form S-1 and
declared effective on September 22, 1993. This Post-Effective Amendment No. 3
constitutes Post-Effective Amendment No. 3 to Registration Statement no.
33-50053 and Post Effective Amendment No. 4 to Registration Statement no.
33-59616.
-------------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. X
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PATHMARK STORES, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
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FORM S-1 CAPTION OR LOCATION
ITEM NUMBER AND HEADING IN PROSPECTUS
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1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus.................. Cross Reference Sheet; Outside Front
Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus............... Inside Front Cover Page; Outside
Back Cover Page
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges............................. Prospectus Summary; Pathmark;
Investment Considerations; Selected
Historical Consolidated Financial
Data; Consolidated Financial
Statements
4. Use of Proceeds..................... Use of Proceeds
5. Determination of Offering Price..... Not Applicable
6. Dilution............................ Not Applicable
7. Selling Security Holders............ Not Applicable
8. Plan of Distribution................ Not Applicable
9. Description of Securities to Be
Registered.......................... Outside Front Cover Page; Prospectus
Summary; Description of the
Securities
10. Interests of Named Experts and
Counsel............................. Legal Opinions; Experts
11. Information with Respect to the
Registrant.......................... Outside Front Cover Page; Prospectus
Summary; Risk Factors;
Pathmark; Capitalization; Selected
Historical Consolidated Financial
Data; Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business; Certain Transactions;
Management; Principal
Stockholders; Certain Indebtedness
of the Company; Consolidated
Financial Statements
12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities................... Not Applicable
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PROSPECTUS
PATHMARK STORES, INC.
9 5/8% SENIOR SUBORDINATED NOTES DUE 2003
11 5/8% SUBORDINATED NOTES DUE 2002
12 5/8% SUBORDINATED DEBENTURES DUE 2002
JUNIOR SUBORDINATED DEFERRED COUPON NOTES DUE 2003
-------------------
Interest on the 9 5/8% Senior Subordinated Notes due 2003 (the "Senior
Subordinated Notes") is payable semiannually on May 1 and November 1. Interest
on the 11 5/8% Subordinated Notes due 2002 (the "Subordinated Notes") is payable
semiannually on June 15 and December 15. Interest on the 12 5/8% Subordinated
Debentures due 2002 (the "Subordinated Debentures", and together with the
Subordinated Notes, the "Subordinated Securities") is payable semiannually on
June 15 and December 15. The issue price of the Junior Subordinated Deferred
Coupon Notes due 2003 (the "Deferred Coupon Notes", and together with the
Subordinated Securities and the Senior Subordinated Notes are collectively
referred to as the "Securities") was $532.74 per $1,000 principal amount at
maturity (53.274% of the principal amount at maturity), representing a yield to
maturity of 10 3/4% (computed on a semiannual bond equivalent basis) calculated
from October 26, 1993. Cash interest will not accrue on the Deferred Coupon
Notes prior to November 1, 1999. Commencing May 1, 2000, cash interest on the
Deferred Coupon Notes will be payable on May 1 and November 1 of each year at a
rate of 10 3/4% per annum. See "Description of The Securities" and "Certain
Federal Income Tax Considerations". Because the Deferred Coupon Notes do not
accrue cash prior to November 1, 1999, the Deferred Coupon Notes are not
suitable investments for investors seeking current income.
The Securities are redeemable at the option of Pathmark Stores, Inc. (the
"Company"), in whole or in part, at any time on or after November 1, 1998, in
the case of the Senior Subordinated Notes, June 15, 1997, in the case of the
Subordinated Notes, and November 1, 1999, in the case of the Deferred Coupon
Notes, at the redemption prices set forth herein plus accrued interest, if any,
to the date of redemption. The Subordinated Debentures currently are redeemable.
Notwithstanding the foregoing, on or prior to November 1, 1996, the Company may
redeem up to 35% of the initial principal amount of the Senior Subordinated
Notes and may redeem Deferred Coupon Notes which represent an aggregate
principal amount at final maturity which shall not exceed 35% of the original
aggregate principal amount at final maturity of the Deferred Coupon Notes with
the net proceeds of any issuance of Qualified Capital Stock (as defined), of the
Company or PTK Holdings, Inc. ("PTK"), a newly formed, wholly owned subsidiary
of Supermarkets General Holdings Corporation ("Holdings") that owns 100% of the
capital stock of the Company, at the redemption prices set forth herein plus
accrued interest, if any, to the date of redemption. Prior to November 1, 1998,
in the case of the Senior Subordinated Notes, and prior to November 1, 1999, in
the case of the Deferred Coupon Notes, upon a Change in Control (as defined),
the Company will have the option to redeem the Senior Subordinated Notes and
Deferred Coupon Notes, respectively, in whole or in part, at a redemption price
equal to the principal amount or the Accreted Amount (as defined), as the case
may be, plus accrued and unpaid interest, if any, to the date of redemption,
plus the Applicable Premium (as defined). In addition, upon a Change in Control
and the satisfaction of certain conditions regarding Senior Indebtedness (as
defined), each holder of the Securities may require the Company to repurchase
such holder's Securities at 101% of the principal amount or 101% of the Accreted
Amount thereof, as the case may be, together with accrued and unpaid interest
(including any defaulted interest in the case of the Securities other than the
Deferred Coupon Notes), if any, to the date of repurchase. In the case of the
Subordinated Notes, the Company will deposit an amount in cash equal to 25% of
the original aggregate principal amount of the Subordinated Notes with the
Trustee under the Subordinated Notes Indenture on June 15 in each of 2000 and
2001 for the redemption of the Subordinated Notes at a redemption price equal
to 100% of the principal amount thereof, plus accrued interest to the date of
redemption.
The Deferred Coupon notes are listed on the New York Stock Exchange ("NYSE").
The Securities are subordinated to all existing and future Senior
Indebtedness of the Company. The Subordinated Debentures rank pari passu with
the Subordinated Notes. The Deferred Coupon Notes are subordinated to the Senior
Subordinated Notes and the Subordinated Securities. The Subordinated Securities
are subordinated to the Senior Subordinated Notes. The amount of Senior
Indebtedness outstanding at February 3, 1996, was $616.3 million with respect to
the Senior Subordinated Notes, $1,053.7 million with respect to the Subordinated
Securities, and $1,348.5 million with respect to the Deferred Coupon Notes, in
each case including $74.1 million of standby letters of credit.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN EVALUATING AN INVESTMENT IN THE
SECURITIES.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------
This Prospectus, accompanied when appropriate by a prospectus supplement, is
to be used by Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") in connection with offers and sales of the Securities in market-making
transactions at negotiated prices related to prevailing market prices at the
time of sale. Merrill Lynch may act as principal or as agent in such
transaction.
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The date of this Prospectus is June , 1996.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act, as amended, (the "Exchange Act") and in accordance therewith is
required to file periodic reports and other information with the Commission.
Such information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, or at the Commission's Regional Offices located at
Suite 1400, Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois
60661 and at Seven World Trade Center, 13th Floor, New York, New York 10048, and
copies of such material can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Copies of such materials and other information concerning the Company also will
be available for inspection at the NYSE, 20 Broad Street, New York, New York
10005.
The Company has filed with the Commission Registration Statements (which
term shall include all amendments, exhibits and schedules thereto) on Form S-1
under the Securities Act with respect to the Securities offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission, and to which reference is hereby made. Statements
made in this Prospectus as to the contents of any document referred to are not
necessarily complete. With respect to each such document filed as an exhibit to
the Registration Statements, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. The Registration Statements
may be inspected at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
The Indentures for the Securities provide that the Company will furnish
copies of the periodic reports required to be filed with the Commission under
the Exchange Act to the holders of the Securities. If the Company is not subject
to the periodic reporting and informational requirements of the Exchange Act, it
will provide the holders of the Securities with annual reports containing the
information required to be contained in Items 1, 2, 3, 5, 6, 7, 8, 9, 10, 11, 12
and 13 of Form 10-K promulgated under the Exchange Act, quarterly reports
containing the information required to be contained in Form 10-Q promulgated
under the Exchange Act and from time to time such other information required to
be contained in Form 8-K promulgated under the Exchange Act.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Prospective investors are urged to read this
Prospectus in its entirety. Unless the context otherwise requires, references in
this Prospectus to the "Company" or "Pathmark" mean Pathmark Stores, Inc., a
Delaware corporation, and its subsidiaries. Unless otherwise indicated,
references herein to fiscal years and quarters are to the Company's 52-week
fiscal year (which ends on the Saturday nearest to January 31 in the following
calendar year) and related fiscal quarters. For example, "Fiscal 1995" refers to
the Company's fiscal year ended February 3, 1996. All fiscal years for which
financial information is included in this Prospectus had 52 weeks, except for
Fiscal 1995 which had 53 weeks.
PATHMARK
GENERAL
Pathmark is the leading supermarket retailer, based on sales volume,
operating under a single trade name in the Middle Atlantic States and the
fifteenth largest in the United States. At February 3, 1996, Pathmark operated
144 supermarkets (including 137 in-store pharmacy departments), primarily in the
New York-New Jersey and Philadelphia metropolitan areas. These metropolitan
areas account for over 10% of the population and grocery sales in the United
States. During Fiscal 1995, Pathmark sold 30 of its 36 freestanding drug stores,
including inventory, to the Rite Aid Corporation for $59.9 million and closed
five others. The last freestanding drug store was closed in the current fiscal
year (Fiscal 1996).
Pathmark pioneered the development of the large "superstore" in the
northeast United States, opening the first Pathmark "Super Center" in 1977. By
industry standards, Pathmark supermarkets are large and productive, averaging
approximately 51,200 total square feet in size and generating high average sales
volume of approximately $28.5 million per store ($765 per selling square foot)
for stores open for all of Fiscal 1995 based on a 52-week period. Pathmark
believes that its large stores give it flexibility to expand and vary its
merchandise offerings in response to changing competitive conditions.
BUSINESS STRATEGY
Pathmark's business strategy is to increase profitability and market
penetration in its existing markets (i) by providing superior value to its
customers through its marketing and merchandising programs, (ii) through store
openings, enlargements and renovations and (iii) through increased operating
efficiencies. In implementing this strategy, Pathmark has used and will continue
to use a large-store format to increase operating efficiencies and to expand its
offering of higher margin merchandise and services, most notably, perishable
products.
Marketing and Merchandising
. Super Center Format. The average Pathmark Super Center is approximately 50%
larger than the average size supermarket in the United States and offers
greater convenience by providing one-stop shopping and a wider assortment of
foods and general merchandise than is offered by conventional supermarkets.
Pathmark expects that its new stores opened during the current and next two
fiscal years will average approximately 60,000 square feet.
. Pathmark 2000. Pathmark 2000 is a new, larger Super Center format designed to
provide Pathmark customers with a substantially greater selection of
perishable products, particularly produce. Pathmark 2000 stores are also
designed to be more "customer friendly", with wider aisles, more accessible
customer service and information departments, improved signs and graphics, and
increased availability of Pathmark associates. Implementation of elements of
this format in certain stores has significantly enhanced sales and operating
margins in these stores. All of Pathmark's new supermarket and supermarket
enlargements completed in Fiscal 1995 employed the Pathmark 2000 concept,
3
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and Pathmark expects that virtually all new stores and enlargements thereafter
will employ the same concept. At February 3, 1996, 44 of Pathmark's
supermarkets were Pathmark 2000s.
. Flexible Merchandising. Pathmark believes that its large-store format gives it
considerable flexibility to respond to changing consumer demands and
competition by varying and enhancing its merchandise selection. Pathmark's
"Big Deals" program, currently consisting of over 500 merchandise items,
offers large-sized merchandise at prices that Pathmark believes are
competitive with those available in "warehouse" and "club" stores. Pathmark
emphasizes competitive pricing plus weekly sales and promotions supported by
extensive advertising, primarily in print media. Merchandising flexibility and
effectiveness is enhanced through the increased utilization of a category
management approach.
. Pathmark Label. Pathmark believes that it is one of the leading supermarket
retailers of private label merchandise in the United States offering for sale
over 3,300 items through its private label program. Pathmark's private label
brands are called Pathmark, No Frills and its newest brand, Pathmark
Preferred.
. Pharmacy. Pathmark provides full pharmacy services in virtually all of its
stores. Pathmark's broad market coverage within its marketing area has enabled
it to become a leading filler of third-party prescriptions in this area.
Pathmark believes that its well-established pharmacy operations provide a
competitive advantage in attracting and retaining customers.
Store Expansion and Renovation Program
. New Stores, Enlargements and Renovations. During Fiscal 1995, Pathmark opened
five new Pathmark 2000s, closed four smaller stores, and completed 18 major
renovations and enlargements. During Fiscal 1996, Pathmark plans to open an
aggregate of up to six new Pathmark 2000s, two of which will replace smaller
Pathmark stores, and to complete up to an aggregate of 18 major renovations
and enlargements.
Pathmark recognizes the importance of keeping its stores looking fresh and
up-to-date; thus, each store typically receives a major renovation or
enlargement every five years. At the end of Fiscal 1995, Pathmark derived
approximately 80% of its supermarket sales from stores that were opened or
enlarged or underwent major renovations during the last five years.
. Core Market Focus. Pathmark has identified approximately 65 potential
locations for new supermarkets within its current marketing areas and expects
that all new stores opened during the current and next two fiscal years will
be located in these areas. Pathmark believes that, by opening stores in its
current marketing areas, it can achieve additional operating economies and
other benefits from its store expansion program without the risks and costs
associated with opening stores in new marketing areas.
Operating Efficiencies
. Technology. Pathmark has made a significant and continuing investment in
information technology and believes it is a leader in the supermarket industry
in this area. All Pathmark supermarket checkout terminals have
third-generation "state of the art" IBM 4680 scanner systems supported by a
RISC 6000 application processor in each store. These systems allow consumer
credit and electronic fund transfer ("EFT") transactions, greatly facilitate
system-wide promotion and merchandising programs, and improve the speed and
control of customer transactions. In addition, all Pathmark supermarkets
utilize radio frequency technology for direct vendor receivings and shelf
labels.
. Geographic Concentration. All of the Pathmark supermarkets are located within
100 miles of the Pathmark headquarters and principal warehousing facilities
that service them. This allows for more efficient management supervision,
increased speed of delivery and reduced transportation costs. All of the
stores which Pathmark expects to open in the current fiscal year will be
within this 100 mile radius.
4
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THE SECURITIES
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Senior Subordinated Notes:
Aggregate Principal
Amount................. $440.0 million
Maturity Date............ May 1, 2003
Interest Payment Dates... Interest on the Senior Subordinated Notes is payable in cash
semi-annually on May 1 and November 1 of each year.
Market................... The Senior Subordinated Notes are not listed on any
securities exchange. However, the Senior Subordinated Notes
are traded in the over-the-counter market. Merrill Lynch
currently makes a market in the Senior Subordinated Notes,
although it is not obligated to do so, and such market
making may be discontinued at any time without notice. All
of the Senior Subordinated Notes were sold to the public
in a public offering pursuant to a prospectus dated
October 19, 1993. See "Risk Factors--Trading Market is
Not Assured".
Subordinated Notes:
Aggregate Principal
Amount................. $199.0 million
Maturity Date............ June 15, 2002
Interest Payment Dates... Interest on the Subordinated Notes is payable in cash
semiannually on June 15 and December 15 of each year.
Sinking Fund............. The Company will deposit an amount in cash equal to 25% of
the original aggregate principal amount of the Subordinated
Notes with the Trustee under the Subordinated Notes
Indenture on June 15 in each of 2000 and 2001 for the
redemption of the Subordinated Notes at a redemption price
equal to 100% of the principal amount thereof, plus
accrued interest to the date of redemption.
Market................... The Subordinated Notes are not listed on any securities
exchange. However, the Subordinated Notes are traded in the
over-the-counter market. Merrill Lynch currently makes a
market in the Subordinated Notes, although it is not
obligated to do so, and such market making may be
discontinued at any time without notice. The Subordinated
Notes were offered by the Company in exchange for the
Holdings 11 5/8% Subordinated Notes due 2002 (the
"Holdings Subordinated Notes") pursuant to a prospectus
dated September 22, 1993. See "Pathmark--The Recapitaliza-
tion" and "Risk Factors--Trading Market is Not Assured."
Subordinated Debentures:
Aggregate Principal
Amount................. $95.8 million
Maturity Date............ June 15, 2002
Interest Payment Dates... Interest on the Subordinated Debentures is payable in cash
semi-annually on June 15 and December 15 of each year.
Market................... The Subordinated Debentures are not listed on any securities
exchange. However, the Subordinated Debentures are traded
in the over-the-counter market. Merrill Lynch currently
makes a market in the Subordinated Debentures, although it
is not obligated to do so, and such market making may be
discontinued at any time without notice. The Subordinated
Debentures were offered by the Company in exchange for
$95.8 million aggregate principal amount of the $415.0
million aggregate principal
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5
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amount outstanding of Holdings' 12 5/8% Subordinated
Debentures due 2002 (the "Holdings Subordinated
Debentures") pursuant to a prospectus dated September 22,
1993. See "Pathmark-- The Recapitalization" and
"Risk Factors--Trading Market is Not Assured."
Deferred Coupon Notes:
Maturity Date............ November 1, 2003
Issue Price.............. $532.74 per $1,000 principal amount at final maturity.
Yield and Interest....... 10 3/4% per annum (computed on a semiannual bond equivalent
basis) calculated from October 26, 1993. Cash interest
will not accrue on the Deferred Coupon Notes prior to
November 1, 1999. Commencing May 1, 2000, cash interest on
the Deferred Coupon Notes will be payable on May 1 and
November 1 of each year at a rate of 10 3/4% per annum.
For federal income tax purposes, purchasers of the
Deferred Coupon Notes will be required to include amounts
in gross income in advance of the receipt of the cash
payments to which the income is attributable. See "Certain
Federal Income Tax Considerations".
Market................... The Deferred Coupon Notes are listed on the NYSE. Merrill
Lynch currently makes a market in the Deferred Coupon Notes
as permitted by the rules applicable to members of the
NYSE and the Securities Act, although it is not obligated
to do so, and any such market making may be discontinued
at any time without notice, at the sole discretion of
Merrill Lynch. All of the Deferred Coupon Notes were sold
to the public in a public offering pursuant to a
prospectus dated October 19, 1993. See "Risk
Factors--Trading Market is Not Assured".
THE SECURITIES
Optional Redemption of
Securities................ The Securities are redeemable at the option of the Company,
in whole or in part, on or after November 1, 1998 in the
case of the Senior Subordinated Notes, June 15, 1997 in
the case of the Subordinated Notes and November 1, 1999
in the case of the Deferred Coupon Notes, at the
redemption prices set forth herein, plus accrued interest,
if any, to the date of redemption. The Subordinated
Debentures currently are redeemable. Notwithstanding the
foregoing, on or prior to November 1, 1996, the Company
may redeem up to 35% of the initial principal amount of
the Senior Subordinated Notes and may redeem Deferred
Coupon Notes which represent an aggregate principal amount
at final maturity which shall not exceed 35% of the
original aggregate principal amount at final maturity of
the Deferred Coupon Notes with the net proceeds of any
issuance of Qualified Capital Stock of the Company or PTK
at the redemption prices set forth herein plus accrued
interest, if any, to the date of redemption.
Change in Control.......... Prior to November 1, 1998, in the case of the Senior
Subordinated Notes and prior to November 1, 1999, in the
case of the Deferred Coupon Notes, upon a Change in
Control, the Company will have the option to redeem the
Senior Subordinated Notes and the Deferred Coupon Notes,
respectively, in whole or in part, at a redemption price
equal to the principal amount or the Accreted Amount, as
the case may be, plus accrued and unpaid interest, if any,
to the date of redemption, plus the Applicable Premium. In
addition, upon a Change in Control and the satisfaction of
certain conditions regarding Senior Indebtedness, each
holder of the Securities will have the right to require
the Company to repurchase such holder's Securities at 101%
of the principal amount or 101% of the Accreted Amount
thereof, as the case may be, together with accrued
interest, (including any defaulted interest
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in the case of the Securities other than the Deferred
Coupon Notes) if any, to the date of repurchase.
Subordination of
Securities................ The Securities are subordinated to all existing and future
Senior Indebtedness of the Company. The Subordinated
Debentures rank pari passu with the Subordinated Notes.
The Deferred Coupon Notes are subordinated to the Senior
Subordinated Notes and the Subordinated Securities. The
Subordinated Securities are subordinated to the Senior
Subordinated Notes. The amount of Senior Indebtedness
outstanding at February 3, 1996 was $616.3 million with
respect to the Senior Subordinated Notes, $1,053.7 million
with respect to the Subordinated Securities, and $1,348.5
million with respect to the Deferred Coupon Notes in each
case, including $74.1 million of standby letters of
credit.
Original Issue Discount of
Deferred Coupon Notes..... Each Deferred Coupon Note was sold at an original issue
discount for federal income tax purposes. Thus, although
cash interest will not accrue on the Deferred Coupon Notes
until November 1, 1999, and there will be no periodic
payments of interest on the Deferred Coupon Notes prior to
May 1, 2000, original issue discount (i.e., the difference
between the stated redemption price at final maturity and
the issue price of the Deferred Coupon Notes) will accrue
from the issue date of the Deferred Coupon Notes and will
be includible as interest income periodically (including
for periods ending prior to November 1, 1999) in a
holder's gross income for federal income tax purposes in
advance of receipt of the cash payments to which the
income is attributable. See "Certain Federal Income Tax
Considerations--Accrual of OID on the Deferred Coupon
Notes".
Certain Covenants of
Securities............... The Indentures for the Securities contain covenants,
including, but not limited to, covenants with respect to the
following matters: (i) limitation on indebtedness; (ii)
limitation on restricted payments; (iii) limitation on
transactions with affiliates; (iv) limitation on liens;
(v) limitation on the issuance of preferred stock by
subsidiaries; (vi) limitation on issuances of guarantees
of indebtedness by subsidiaries; (vii) limitation on
transfer of assets to subsidiaries; (viii) limitation on
dividends and other payment restrictions affecting
subsidiaries; (ix) limitation on unrestricted
subsidiaries; (x) restriction on mergers and transfers of
assets; and (xi) with respect to the Senior Subordinated
Notes, a limitation on other senior subordinated
indebtedness.
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THE RECAPITALIZATION
The predecessor of the registrant was incorporated in the state of Delaware
in June 1987 as a wholly owned subsidiary of Supermarkets General Holdings
Corporation ("Holdings"). In October 1987, Holdings acquired Supermarkets
General Corporation ("The Acquisition"). In 1990, Supermarkets General
Corporation was merged into the registrant and the registrant retained the name
Supermarkets General Corporation. In connection with the recapitalization
referred to below, the registrant changed its name from Supermarkets General
Corporation to Pathmark Stores, Inc. ("Pathmark" or the "Company").
Pathmark consummated a recapitalization plan (the "Recapitalization") on
October 26, 1993. In connection with the Recapitalization, its former parent,
Holdings, transferred all of the capital stock of Pathmark to PTK Holdings, Inc.
("PTK"), a then newly formed, wholly owned subsidiary of Holdings. PTK was
incorporated in the State of Delaware in Fiscal 1993 and owns 100% of the
capital stock of Pathmark. The Recapitalization reduced Pathmark's interest
expense and has allowed Pathmark to devote its capital to growing its core
supermarket and drug store business.
In connection with the Recapitalization, Pathmark contributed its Rickel
home centers segment (the "Home Centers Segment"), the warehouse, distribution
and transportation operations and the inventory therein that service the
Pathmark supermarkets and drug stores and certain other assets to Plainbridge
Inc., a then newly formed subsidiary ("Plainbridge") and distributed the shares
of Plainbridge to PTK (the "Plainbridge Spin-Off"). In addition, Pathmark
contributed to Chefmark, Inc., a newly formed Delaware corporation ("Chefmark"),
the Chefmark deli food preparation operations and a related warehouse and a
leased banana ripening warehouse and distributed the shares of Chefmark to
Holdings (the "Chefmark Spin-Off", and, together with the Plainbridge Spin-Off,
the "Spin-Offs"). In connection with the Plainbridge Spin-Off, Pathmark entered
into a logistical services agreement with Plainbridge (the "Logistical Services
Agreement") that provided for the continuing supply of merchandise to the
Pathmark supermarkets and drug stores and for the provision of warehousing,
distribution and logistical services relating to the supply of such merchandise.
On March 1, 1996, PTK contributed 100% of the capital stock of Plainbridge
to Pathmark, making Plainbridge a wholly-owned subsidiary of Pathmark. In
connection therewith, Pathmark amended its existing Credit Agreement by
prospectively modifying certain of its financial covenants (interest coverage,
leverage and consolidated adjusted earnings before interest, taxes, depreciation
and amortization) to account for the effects of Plainbridge's operations and by
increasing its working capital facility under the Credit Agreement by $25
million to $200 million. Such capital contribution was permitted under the terms
of the indentures governing the Securities. In addition, Pathmark and
Plainbridge have terminated the Logistical Services Agreement and the Blair
Services Agreement (as hereafter defined). As used herein, "Pathmark" or the
"Company" means Pathmark and its wholly-owned subsidiaries.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that
should be considered by prospective purchasers of the Securities offered hereby.
USE OF PROCEEDS
This Prospectus is to be used by Merrill Lynch in connection with offers and
sales of the Securities in market-making transactions at negotiated prices
related to prevailing market prices at the time of sale. The Company does not
receive any proceeds from such market-making transactions.
8
<PAGE>
PATHMARK STORES, INC.
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents summary historical consolidated financial data
of the Company for each of the five fiscal years in the period ended February 3,
1996. On March 1, 1996, the Company reacquired all of the outstanding capital
stock of Plainbridge by means of a capital contribution from PTK. Since the
acquisition is a transfer of interest among entities under common control, it is
being accounted for at historical cost in a manner similar to
pooling-of-interests accounting. Accordingly, the consolidated financial
statements presented herein reflect the assets and liabilities and related
results of operations of the combined entity for all periods. The Company sold
its home centers segment in November 1994 and the accompanying consolidated
statements of operations include the operating results of the Company's home
centers segment as discontinued operations. The data that follows should be read
in conjunction with "Capitalization", "Selected Historical Consolidated
Financial Data", "Pathmark--The Recapitalization" and the Consolidated Financial
Statements of the Company and notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS(A)
--------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
STATEMENTS OF OPERATIONS DATA:
Sales............................. $ 4,182 $ 4,189 $ 4,239 $ 4,311 $4,354
Gross profit...................... 1,216 1,186 1,158 1,156 1,115
Selling, general and
administrative expenses.......... 951 935 926 894 862
Depreciation and amortization..... 80 75 70 69 73
Recapitalization expenses(b)...... -- -- 17 -- --
Provision for store closings(c)... -- -- 6 -- --
Amortization of goodwill.......... -- -- -- 18 17
Goodwill write-off................ -- -- -- 601 --
Operating earnings (loss)......... 185 176 139 (426) 144(d)
Interest expense, net(e).......... (165) (148) (172) (183) (149)
Earnings (loss) from continuing
operations before income taxes,
gain on disposal of home centers
segment, extraordinary items and
cumulative effect of accounting
changes........................... 39(f) 28 (33) (609) (1)(g)
Earnings (loss) from continuing
operations before gain on
disposal of home center segment,
extraordinary items and
cumulative effect of accounting
changes........................... 33 24 (13) (617) (6)
Loss from discontinued
operations........................ -- (2) -- (1) (191)(h)
Net earnings (loss)............... 33 39(i) (148)(j)(k)(623)(l) (197)
Ratio of earnings to fixed
charges(m)........................ 1.21x 1.16x -- -- --
Deficiency in earnings available
to cover fixed charges(n)........ $ -- $ -- $ 33 $ 609 $ 1
OTHER OPERATING DATA:
Interest expense(o)............... $ (165) $ (159) $ (186) $ (196) $ (179)
EBITDA-FIFO(p).................... 269 253 232 267 262
EBITDA-FIFO coverage(p)(q)........ 1.6x 1.6x 1.2x 1.4x 1.5x
Capital expenditures and capital
leases............................ $ 111 $ 105 $ 96 $ 74 $ 57
Net debt (repayments)
borrowings........................ (82) (13) 166 (48) (92)
</TABLE>
(footnotes on following page)
9
<PAGE>
PATHMARK STORES, INC.
NOTES TO SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
<TABLE>
<C> <S>
(a) The Company's fiscal year ends on the Saturday nearest to January 31 of the following
calendar year. Fiscal years consist of 52 weeks, except for 53 weeks in Fiscal 1995.
(b) In connection with the Recapitalization, the Company recorded a pretax charge of $17
million related to reorganization and restructuring costs. See Note 21 to the Company's
Consolidated Financial Statements included elsewhere in this Prospectus.
(c) During Fiscal 1993, the Company decided to close or dispose of the five stores and
recorded a pretax charge of $6 million. See Note 22 to the Company's Consolidated
Financial Statements included elsewhere in this Prospectus.
(d) Includes the impact of a charge of $19 million related to the disposal of Purity
Supreme, Inc. ("Purity") by Holdings.
(e) Prior to Fiscal 1995, interest expense is net of interest charged to discontinued
operations. See Note 13 to the Company's Consolidated Financial Statements included
elsewhere in this Prospectus.
(f) During Fiscal 1995, the Company recognized a pretax net gain of $16 million in
connection with the disposition of its 36 freestanding drug stores and a pretax gain of
$3 million in connection with the sale of a former warehouse of Purity, a previously
divested company.
(g) Includes a $4 million pretax gain on sale of the Company's Costal Photo photofinishing
plant to Quality Photo Systems (East), Inc. (a subsidiary of Konica Corporation).
(h) Includes a pretax loss of $24 million in connection with the disposition of certain
Rickel stores and a charge of $170 million accelerating the remaining amortization of
the goodwill related to the home centers segment.
(i) Includes a gain of $17 million, net of $2.3 million of income taxes, relating to the
sale of the Company's home centers segment. See Note 19 to the Company's Consolidated
Financial Statements included elsewhere in this prospectus.
(j) Includes an extraordinary charge of $97 million, net of an income tax benefit, relating
to the early extinguishment of debt in connection with the Recapitalization. See Notes
21 and 24 to the Company's Consolidated Financial Statements included elsewhere in this
Prospectus.
(k) Includes the cumulative effect of accounting changes in Fiscal 1993 of $38 million, net
of an income tax benefit of $28 million, reflecting the adoption of Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits other than Pensions"; the adoption of Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits"; the change in
the method utilized to calculate last-in, first-out (LIFO) inventories; and the change
in the determination of the discount rate utilized to record the present value of
certain noncurrent liabilities. All of the accounting changes were made as of the
beginning of Fiscal 1993. See Note 25 to the Company's Consolidated Financial Statements
included elsewhere in this Prospectus.
(l) During Fiscal 1992, the Company recorded an extraordinary charge of $5 million, net of
income tax benefit, relating to the early extinguishment of debt.
(m) For the purpose of this calculation, earnings before fixed charges consist of earnings
from continuing operations before income taxes plus fixed charges. Fixed charges consist
of interest expense on all indebtedness (including amortization of deferred debt
issuance costs) and the portion of operating lease rental expense that is representative
of the interest factor (deemed to be one-third of operating lease rentals).
(n) For purposes of determining the deficiency in earnings available to cover fixed charges,
earnings are defined as earnings (loss) from continuing operations before income taxes
plus fixed charges. Fixed charges consist of interest expense on all indebtedness
(including amortization of deferred debt issuance costs) and the portion of operating
lease rental expense that is representative of the interest factor (deemed to be
one-third of operating lease rentals).
(o) Represents interest expense before the charge to discontinued operations.
(p) EBITDA-FIFO represents earnings from continuing operations before income taxes, net
interest expense, depreciation, amortization (including amortization of video tapes) and
the LIFO charge. The Company's LIFO charge during Fiscal 1995 was $1 million, Fiscal
1994 and Fiscal 1993 were a $1 million and $2 million LIFO credit, respectively and the
Company's LIFO charge in Fiscal 1992 and Fiscal 1991 was $2 million and $6 million,
respectively. EBITDA-FIFO excludes in Fiscal 1993, a charge of $17 million related to
recapitalization expenses and a charge of $6 million related to a provision for store
closings and excludes in Fiscal 1991, a charge of $19 million related to the disposal of
the Purity Operations by Holdings. EBITDA-FIFO is a widely accepted financial indicator
of a company's ability to service and/or incur debt. However, EBITDA-FIFO should not be
construed as an alternative to operating income (as determined in accordance with
generally accepted accounting principles) or to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles) and should not
be construed as an indication of the Company's operating performance or as a measure of
liquidity. For a discussion of the Company's operating performance and liquidity, see
"Management's Discussion and Analysis of Financial Condition and Results of Operations".
(q) Calculated by dividing EBITDA-FIFO by interest expense, excluding interest charged to
discontinued operations.
</TABLE>
10
<PAGE>
RISK FACTORS
The following factors, as well as information contained elsewhere in this
Prospectus, should be carefully considered before investing in the Securities
offered hereby.
LEVERAGE AND DEBT SERVICE
As of February 3, 1996 the Company's long-term debt, including obligations
under capital leases, was $1,354.8 million and its stockholder's deficit was
$1,024.2 million. This long-term debt consists of $244.7 million of borrowings
under the term loan facility (the "Term Loan"), $46.0 million of borrowings
under the Pathmark working capital facility (the "Working Capital Facility" and,
together with the Term Loan, the "Bank Credit Agreement"), $437.4 million of
Senior Subordinated Notes, $199.0 million of Subordinated Notes, $95.8 million
of Subordinated Debentures, $151.9 million of Deferred Coupon Notes and $180.0
million of other long-term debt primarily consisting of capital leases. In
addition, the Company as of February 3, 1996 had current debt of $72.4 million,
which included $43.2 million of borrowings under the Term Loan and $20.7 million
of obligations under capital leases. See "Capitalization". The Company may incur
additional indebtedness in the future, subject to certain limitations contained
in the instruments governing its indebtedness. The Company is highly
leveraged and has substantial debt service obligations. For a description of the
Bank Credit Agreement, the Senior Subordinated Notes, the Subordinated Notes,
the Subordinated Debentures and the Deferred Coupon Notes, see "Description of
the Securities" and "Certain Indebtedness of the Company".
The degree to which the Company is leveraged could have important
consequences to holders of the Securities, including, but not limited to, the
following: (i) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes may be impaired; (ii) a significant portion
of the Company's cash flow from operations must be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing the funds available
to the Company for its operations; (iii) certain of the Company's borrowings are
and will continue to be at variable rates of interest, which could result in
higher interest expenses in the event of increases in interest rates; and (iv)
such indebtedness contains and will contain financial and restrictive covenants,
the failure to comply with which may result in an event of default which, if not
cured or waived, could have a material adverse effect on the Company. See
"Certain Indebtedness of the Company".
The Company is required to repay a portion of its borrowings under the Term
Loan each year, which repayment requirement commenced in January 1994, so as to
retire such indebtedness in its entirety by October 1999. The Company also will
be required to make sinking fund payments on the Subordinated Notes in an amount
in cash equal to 25% of the original aggregate principal amount of the
Subordinated Notes on each of June 15, 2000 and June 15, 2001. The Subordinated
Notes and Subordinated Debentures will mature on June 15, 2002. See "Certain
Indebtedness of the Company". The Senior Subordinated Notes will mature on May
1, 2003 and the Deferred Coupon Notes will mature on November 1, 2003. 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 future borrowing facilities not currently in place.
Future refinancing will be necessary if the Company's cash flow from operations
is not sufficient to meet its debt service requirements related to maturity of
the Working Capital Facility and certain mortgages in Fiscal 1998, the
amortization and the subsequent maturity of the Term Loan in Fiscal 1999, 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 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's ability to make
scheduled payments or to refinance 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
11
<PAGE>
its control. Although the Company's cash flow from its operations and borrowings
have 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
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 Company
might be forced to operate under terms that would restrict its operations and
reduce its cash flow. In such event, the holders of the Securities 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.
LOSSES AND STOCKHOLDER'S DEFICIT
During the period from the Acquisition in October 1987 through February 3,
1996, the Company had aggregate net losses of $1,089.5 million, of which
approximately $890.7 million represents the amortization and write-off of
goodwill associated with the Acquisition. At February 3, 1996, the Company had a
stockholder's deficit of $1,024.2 million.
SUBORDINATION
The right to payment of principal of and premium, if any, and interest on
the Securities is subordinated to the prior payment in full of all Senior
Indebtedness (as defined in the Indentures for the respective Securities, See
"Description of The Securities,") of the Company. Indebtedness of the Company
under the Bank Credit Agreement is Senior Indebtedness under the Indentures for
all four series of the Securities. The Deferred Coupon Notes are subordinated to
the Senior Subordinated Notes and the Subordinated Securities and the
Subordinated Securities are Subordinated to the Senior Subordinated Notes. The
amount of Senior Indebtedness outstanding at February 3, 1996 was approximately
$616.3 million with respect to the Senior Subordinated Notes, $1,053.7 million
with respect to the Subordinated Securities $1,348.5 million with respect to the
Deferred Coupon Notes (in each case, including $74.1 million of standby letters
of credit). No payment of principal of or premium, if any, or interest on the
Securities may be made during the continuance of specified defaults under the
Senior Indebtedness. In addition, in the event of the dissolution, liquidation
or other winding up of the Company or upon acceleration of the Securities prior
to their stated maturity, all obligations with respect to Senior Indebtedness
must first be paid in full before any payment may be made with respect to the
Securities.
CONTROLLING STOCKHOLDER; RELATIONSHIP TO THE UNDERWRITER AND DEALER MANAGER
Holdings owns 100% of the outstanding capital stock of PTK and through PTK
controls 100% of the Company and has the ability to elect a majority of the
directors of the Company. Investment partnerships indirectly controlled by
Merrill Lynch & Co., Inc. ("ML&Co.") beneficially own 88.6% of the outstanding
shares of voting stock of Holdings. As a result, ML&Co. controls Holdings and,
through Holdings and PTK, controls the Company. See "Principal Stockholders".
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is a wholly
owned subsidiary of ML&Co. Merrill Lynch & Co., MLPF&S ("Merrill Lynch") acted
as an underwriter or dealer manager as the case may be, in connection with the
offerings of the Securities. Merrill Lynch also has acted in various capacities
for the Company and Holdings in the past. See "Certain Transactions--Certain
Relationships and Related Transactions".
ORIGINAL ISSUE DISCOUNT OF DEFERRED COUPON NOTES
The Deferred Coupon Notes were issued at a substantial discount from their
principal amount. Consequently, purchasers of the Deferred Coupon Notes should
be aware that, although cash interest
12
<PAGE>
will not accrue on the Deferred Coupon Notes prior to November 1, 1999, and
there will be no periodic payments of cash interest on the Deferred Coupon Notes
prior to May 1, 2000, original issue discount will be included on an accrual
basis in the gross income of a holder of Deferred Coupon Notes in advance of the
receipt of cash payments on the Deferred Coupon Notes. A holder of a Deferred
Coupon Note will be required to include in income, as interest, original issue
discount on the Deferred Coupon Note, but generally will not be required to
include in income any cash payments received by such holder on the Deferred
Coupon Note, even if denominated as interest. See "Certain Federal Income Tax
Considerations" for a more detailed discussion of the federal income tax
consequences to the holders of the Deferred Coupon Notes regarding the purchase,
ownership and disposition of the Deferred Coupon Notes.
If a bankruptcy case is commenced by or against the Company under the United
States Bankruptcy Code after the issuance of the Deferred Coupon Notes, the
claim of a holder of Deferred Coupon Notes with respect to the principal amount
thereof may be limited to an amount equal to the sum of (i) the initial offering
price and (ii) that portion of the original issue discount which is not deemed
to constitute "unmatured interest" for purposes of the United States Bankruptcy
Code. Any original issue discount that was not amortized as of any such
bankruptcy filing would constitute "unmatured interest".
INTERESTS OF AFFILIATES
As discussed above, ML&Co., through Holdings and PTK, continues to control
the Company. See "Principal Stockholders". In the Spin-Offs, Holdings received
the capital stock of Chefmark. See "The Recapitalization". In connection with
the Spin-Offs, the Company entered into the Logistical Services Agreement and
two Services Agreements with Plainbridge and has entered into a Services
Agreement with Chefmark. Subsequent to February 3, 1996, only one Service
Agreement with Chefmark remains. This agreement governs the provision of
services and payment of fees between the Company and Chefmark. See "Certain
Transactions--The Spin-Offs and Related Agreements". In addition, Merrill Lynch,
an affiliate of ML&Co., acted as an underwriter or dealer manager as the case
may be, in connection with the offerings of the Securities and as financial
advisor to the Company and Holdings and has received certain fees for providing
such services.
COMPETITION
The supermarket business is highly competitive and is characterized by high
asset turnover and narrow profit margins. Pathmark's competitors are national
and regional supermarkets, drug stores, convenience stores, discount
merchandisers, "warehouse" and "club" stores and other local retailers in the
market areas served. See "Business--Competition".
13
<PAGE>
TRADING MARKET IS NOT ASSURED
Merrill Lynch is currently making offers and sales of the Senior
Subordinated Notes and the Subordinated Securities in market-making transactions
and may continue to do so in the future. However, it is not obligated to do so,
and any such market making may be discontinued at any time without notice, at
the sole discretion of Merrill Lynch. Furthermore, Merrill Lynch may be required
to discontinue its market-making activities during periods when the Company is
seeking to sell certain of its securities or when Merrill Lynch, such as by
means of its affiliate's ownership interest in the Company, learns of material
non-public information relating to the Company. Merrill Lynch would not be able
to recommence its market-making activities until such sale has been completed or
such information has become publicly available. It is not possible to forecast
the impact, if any, that any such discontinuance may have on the market for the
Senior Subordinated Notes and the Subordinated Securities. While other
broker/dealers may make a market in the Senior Subordinated Notes and the
Subordinated Securities from time to time, there can be no assurance that any
other broker/dealer will do so at any time when Merrill Lynch discontinues its
market-making activities. In addition, any such broker/dealer that is engaged in
market-making activities may thereafter discontinue such activities at any time
at its sole option.
The Deferred Coupon Notes are listed on the NYSE. Merrill Lynch is currently
making offers and sales of the Deferred Coupon Notes in market-making
transactions as permitted by the rules applicable to members of the NYSE and the
Securities Act, although it is not obligated to do so, and any such market
making may be discontinued at any time without notice, at the sole discretion of
Merrill Lynch.
There can be no assurance as to the liquidity of the trading market for the
Securities or that an active public market for the Securities will develop. If
an active public market does not develop, the market price and liquidity of the
Securities may be adversely affected. See "Market Making Activities of Merrill
Lynch".
14
<PAGE>
PATHMARK
Pathmark is the leading supermarket retailer, based on sales volume,
operating under a single trade name in the Middle Atlantic States and the
fifteenth largest in the United States. At February 3, 1996, Pathmark operated
144 supermarkets (including 137 in-store pharmacy departments), primarily in the
New York-New Jersey and Philadelphia metropolitan areas. These metropolitan
areas account for over 10% of the population and grocery sales in the United
States. During Fiscal 1995, Pathmark sold 30 of its 36 freestanding drug stores,
including inventory, to the Rite Aid Corporation for $59.9 million and closed
five others. The last freestanding drug store was closed in the current fiscal
year (Fiscal 1996).
Pathmark pioneered the development of the large "superstore" in the
northeast United States, opening the first "Pathmark Super Center" in 1977. By
industry standards, Pathmark supermarkets are large and productive, averaging
approximately 51,200 total square feet in size and generating high average sales
volume of approximately $28.5 million per store ($765 per selling square foot)
for stores open for all of Fiscal 1995, based on a 52-week period. Pathmark
believes that its large stores give it flexibility to expand and vary its
merchandise offerings in response to changing competitive conditions.
The principal executive offices of the Company are located at 301 Blair
Road, P.O. Box 5301, Woodbridge, New Jersey 07095-0915, and its telephone number
is (908) 499-3000.
THE RECAPITALIZATION
The predecessor of the registrant was incorporated in the state of Delaware
in June 1987 as a wholly owned subsidiary of Supermarkets General Holdings
Corporation ("Holdings"). In October 1987, Holdings acquired Supermarkets
General Corporation. In 1990, Supermarkets General Corporation was merged into
the registrant and the registrant retained the name Supermarkets General
Corporation. In connection with the recapitalization referred to below, the
registrant changed its name from Supermarkets General Corporation to Pathmark
Stores, Inc. ("Pathmark" or the "Company").
Pathmark consummated a recapitalization plan (the "Recapitalization") on
October 26, 1993. In connection with the Recapitalization, its former parent,
Holdings, transferred all of the capital stock of Pathmark to PTK Holdings, Inc.
("PTK"), a then newly formed, wholly owned subsidiary of Holdings. PTK was
incorporated in the State of Delaware in Fiscal 1993 and owns 100% of the
capital stock of Pathmark. The Recapitalization reduced Pathmark's interest
expense and has allowed Pathmark to devote its capital to growing its core
supermarket and drug store business.
In connection with the Recapitalization, Pathmark contributed its Rickel
home centers segment (the "Home Centers Segment"), the warehouse, distribution
and transportation operations and the inventory therein that service the
Pathmark supermarkets and drug stores and certain other assets to Plainbridge
Inc., a then newly formed subsidiary ("Plainbridge") and distributed the shares
of Plainbridge to PTK (the "Plainbridge Spin-Off"). In addition, Pathmark
contributed to Chefmark, Inc., a newly formed Delaware corporation ("Chefmark"),
the Chefmark deli food preparation operations and a related warehouse and a
leased banana ripening warehouse and distributed the shares of Chefmark to
Holdings (the "Chefmark Spin-Off", and, together with the Plainbridge Spin-Off,
the "Spin-Offs"). In connection with the Plainbridge Spin-Off, Pathmark entered
into a logistical services agreement with Plainbridge (the "Logistical Services
Agreement") that provided for the continuing supply of merchandise to the
Pathmark supermarkets and drug stores and for the provision of warehousing,
distribution and logistical services relating to the supply of such merchandise.
On March 1, 1996, PTK contributed 100% of the capital stock of Plainbridge
to Pathmark, making Plainbridge a wholly-owned subsidiary of Pathmark. In
connection therewith, Pathmark amended its existing Credit Agreement by
prospectively modifying certain of its financial covenants (interest coverage,
leverage and consolidated adjusted earnings before interest, taxes, depreciation
and amortization) to account for the effects of Plainbridge's operations and by
increasing its working capital facility under the Credit Agreement by $25
million to $200 million. In addition, Pathmark and Plainbridge have terminated
the Logistical Services Agreement and the Blair Services Agreement (as hereafter
15
<PAGE>
defined). As used herein, "Pathmark" or the "Company" means Pathmark and its
wholly-owned subsidiaries.
USE OF PROCEEDS
This Prospectus is to be used by Merrill Lynch in connection with offers and
sales of the Securities in market-making transactions at negotiated prices
related to prevailing market prices at the time of sale. The Company does not
receive any proceeds from such market-making transactions.
RECENT DEVELOPMENTS
Sales for the first quarter of Fiscal 1996 were $961.1 million compared to
$1,033.0 million in the prior year period. Fiscal 1996 sales were impacted by
the disposition of its freestanding drug stores during Fiscal 1995. The
freestanding drug stores generated sales of $0.4 million and $45.5 million for
the first quarter of Fiscal 1996 and 1995, respectively. Same store sales from
supermarkets decreased 3.5% in the first quarter. Same store sales were
negatively impacted by the inclement weather during the quarter compared to the
unusually mild weather in the same period last year and a significant increase
in competitive new store openings and remodels. Operating earnings for the first
quarter of Fiscal 1996 were $31.7 million compared to $43.8 million in the prior
year period. Interest expense for the first quarter of Fiscal 1996 was $39.9
million compared to $41.1 million in the prior year period. The net loss for the
first quarter of Fiscal 1996 was $5.5 million compared to net earnings of $2.3
million in the prior year period. The results of the current quarter include a
$0.6 million extraordinary item representing the loss on early extinguishment
of debt.
16
<PAGE>
PATHMARK STORES, INC.
CAPITALIZATION
The following table sets forth the historical consolidated current debt and
capitalization of the Company at February 3, 1996. This table should be read in
conjunction with the "The Recapitalization," "Certain Indebtedness of the
Company" and "Selected Historical Consolidated Financial Data."
<TABLE>
<CAPTION>
FEBRUARY 3, 1996
---------------------
<S> <C>
(IN MILLIONS)
Current Debt(1):
Current portion of obligations under capital leases...................... $ 21
Current portion of Term Loan............................................. 43
Current portion of other long-term debt.................................. 8
-------
Total current debt................................................... $ 72
-------
-------
Long-term Debt(1):
Bank Credit Agreement:
Term Loan.............................................................. $ 245
Working Capital Facilities (2)......................................... 46
Senior Subordinated Notes due 2003....................................... 437
Intercompany Note in respect of Holdings Subordinated Notes.............. 1
Subordinated Notes due 2002.............................................. 199
Subordinated Debentures due 2002......................................... 96
Deferred Coupon Notes due 2003........................................... 152
Mortgages and notes payable.............................................. 39
Obligations under capital leases......................................... 140
-------
Total long-term debt................................................. 1,355
-------
Stockholder's Deficit:
Common stock, 100 shares authorized, 100 shares issued................... --
Paid-in capital.......................................................... 65
Accumulated deficit...................................................... (1,089)
-------
Total stockholder's deficit.......................................... (1,024)
-------
Net capitalization................................................. $ 331
-------
-------
</TABLE>
- - ------------
(1) See Notes 11 and 14 to the Company's Consolidated Financial Statements for
the 53 weeks ended February 3, 1996 included elsewhere in this Prospectus
for further information with respect to the indebtedness and capital leases
of the Company.
(2) Excludes $74.1 million of standby letters of credit.
17
<PAGE>
PATHMARK STORES, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The consolidated statements of operations data and balance sheet data
presented below of the Company for each of the five fiscal years in the period
ended February 3, 1996 were derived from audited consolidated financial
statements of the Company, certain periods of which, together with the report of
Deloitte & Touche LLP, independent auditors, are included elsewhere herein. On
March 1, 1996, the Company reacquired all of the outstanding capital stock of
Plainbridge by means of a capital contribution from PTK. Since the acquisition
is a transfer of interest among entities under common control, it is being
accounted for at historical cost in a manner similar to pooling-of-interests
accounting. Accordingly, the consolidated financial statements presented herein
reflect the assets and liabilities and related results of operations of the
combined entity for all periods. The Company sold its home centers segment in
November 1994 and the accompanying consolidated statements of operations include
the operating results of the Company's home centers segment as discontinued
operations. The data that follows should be read in conjunction with
"Capitalization", "Pathmark--The Recapitalization" and the Consolidated
Financial Statements of the Company and notes thereto included in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS(A)
------------------------------------------------------
1995 1994 1993 1992 1991
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
STATEMENTS OF OPERATIONS DATA:
Sales.............................................. $ 4,182 $4,189 $4,239 $4,311 $4,354
Cost of sales (exclusive of depreciation and
amortization shown separately below).............. 2,966 3,003 3,081 3,155 3,239
------- -------- -------- -------- -------
Gross profit....................................... 1,216 1,186 1,158 1,156 1,115
Selling, general and administrative expenses....... 951 935 926 894 862
Depreciation and amortization...................... 80 75 70 69 73
Recapitalization expenses(b)....................... -- -- 17 -- --
Provision for store closings(c).................... -- -- 6 -- --
Amortization of goodwill........................... -- -- -- 18 17
Goodwill write-off................................. -- -- -- 601 --
Loss related to the disposal of Purity Supreme,
Inc................................................ -- -- -- -- 19
------- -------- -------- -------- -------
Operating earnings (loss).......................... 185 176 139 (426) 144
Gain on disposition of freestanding drug
stores(d).......................................... 16 -- -- -- --
Gain on sale of real estate(e)..................... 3 -- -- -- --
Interest expense, net(f)........................... (165) (148) (172) (183) (149)
Gain on sale of photofinishing plant(g)............ -- -- -- -- 4
------- -------- -------- -------- -------
Earnings (loss) from continuing operations before
income taxes, gain on disposal of home centers
segment, extraordinary items and cumulative effect
of accounting changes.............................. 39 28 (33) (609) (1)
Income tax benefit (provision)..................... (6) (4) 20 (8) (5)
------- -------- -------- -------- -------
Earnings (loss) from continuing operations before
gain on disposal of home centers segment,
extraordinary items and cumulative effect of
accounting changes................................. 33 24 (13) (617) (6)
Loss from discontinued operations.................. -- (2) -- (1) (191)(h)
------- -------- -------- -------- -------
Earnings (loss) before gain on disposal of home
centers segment, extraordinary items and
cumulative effect of accounting changes........... 33 22 (13) (618) (197)
Gain on disposal of home centers segment, net of
tax(i)............................................. -- 17 -- -- --
Extraordinary items, net........................... -- -- (97)(j) (5)(k) --
------- -------- -------- -------- -------
Earnings (loss) before cumulative effect of
accounting changes................................. 33 39 (110) (623) (197)
Cumulative effect of accounting changes, net of
tax(l)............................................. -- -- (38) -- --
------- -------- -------- -------- -------
Net earnings (loss)................................ $ 33 $ 39 $ (148) $ (623) $ (197)
------- -------- -------- -------- -------
------- -------- -------- -------- -------
Ratio of earnings to fixed charges(m).............. 1.21x 1.16x -- -- --
------- -------- -------- -------- -------
------- -------- -------- -------- -------
Deficiency in earnings available to cover fixed
charges(n)......................................... $ -- $ -- $ 33 $ 609 $ 1
------- -------- -------- -------- -------
------- -------- -------- -------- -------
<CAPTION>
AS OF
------------------------------------------------------
FEB. 3, JAN. 28, JAN. 29, JAN. 30, FEB. 1,
1996 1995 1994 1993 1992
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets....................................... $ 986 $1,018 $1,119 $1,101 $1,733
Working capital deficiency......................... 173 122 107 55 61
Obligations under capital leases, long-term........ 140 127 132 127 136
Other long-term debt, net of current maturities.... 1,215 1,273 1,286 1,278 1,248
Stockholder's deficit.............................. (1,024) (1,030) (1,001) (967) (333)
</TABLE>
(footnotes on following page)
18
<PAGE>
PATHMARK STORES, INC.
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
<TABLE>
<C> <S>
(a) The Company's fiscal year ends on the Saturday nearest to January 31 of the following
calendar year. Fiscal years consist of 52 weeks, except for 53 weeks in Fiscal 1995.
(b) In connection with the Recapitalization in Fiscal 1993, the Company recorded a pretax
charge of $17 million related to reorganization and restructuring costs. See Note 21 to
the Company's Consolidated Financial Statements included elsewhere in this Prospectus.
(c) During Fiscal 1993, the Company decided to close or dispose of five stores and recorded
a pretax charge of $6 million. See Note 22 to the Company's Consolidated Financial
Statements included elsewhere in this Prospectus.
(d) During the second quarter of Fiscal 1995, the Company decided to dispose of its 36
freestanding drug stores. On July 28, 1995, the Company completed the sale of 30 of its
drug stores to Rite Aid Corporation. Five of the remaining six drug stores were closed
during Fiscal 1995 and the sixth store is projected to be closed in Fiscal 1996. The
pretax gain on the disposition of drug stores includes the sale of the 30 drug stores,
net of the cost related to the disposal of the six drug stores. See Note 3 to the
Company's Consolidated Financial Statements included elsewhere in this Prospectus.
(e) During the fourth quarter of Fiscal 1995, the Company sold a former warehouse of Purity
Supreme, Inc., a previously divested company.
(f) Prior to Fiscal 1995, interest expense was net of interest charged to discontinued
operations. See Note 13 to the Company's Consolidated Financial Statements included
elsewhere in this Prospectus.
(g) During Fiscal 1991, the Company sold its Coastal Photo photofinishing plant to Quality
Photo Systems (East), Inc. (a subsidiary of Konica Corporation) which resulted in a
pretax gain on sale of $4 million.
(h) Includes a pretax loss of $24 million in connection with the disposition of certain
home centers segment stores and a charge of $170 million accelerating the remaining
amortization of the goodwill related to the home centers segment.
(i) During Fiscal 1994, the Company sold its home centers segment, which resulted in a gain
on sale of $17 million, net of $2.3 million of income taxes. See Note 19 to the
Company's Consolidated Financial Statements included elsewhere in this Prospectus.
(j) During Fiscal 1993, in connection with the Recapitalization, the Company recorded an
extraordinary charge of $97 million, net of an income tax benefit of $15 million,
related to the early extinguishment of debt. See Notes 21 and 24 to the Company's
Consolidated Financial Statements included elsewhere in this Prospectus.
(k) During Fiscal 1992, the Company recorded an extraordinary charge of $5 million, net of
an income tax benefit of $3 million, related to the early extinguishment of debt.
(l) The cumulative effect of accounting changes in Fiscal 1993 of $38 million, net of an
income tax benefit of $28 million, reflects the adoption of Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits other
than Pensions"; the adoption of Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits"; the change in the method utilized
to calculate last-in, first-out (LIFO) inventories; and the change in the determination
of the discount rate utilized to record the present value of certain noncurrent
liabilities. All of the accounting changes were made as of the beginning of Fiscal
1993. See Note 25 to the Company's Consolidated Financial Statements included elsewhere
in this Prospectus.
(m) For the purpose of this calculation, earnings before fixed charges consist of earnings
from continuing operations before income taxes plus fixed charges. Fixed charges
consist of interest expense on all indebtedness (including amortization of deferred
debt issuance costs) and the portion of operating lease rental expense that is
representative of the interest factor (deemed to be one-third of operating lease
rentals).
(n) For purposes of determining the deficiency in earnings available to cover fixed
charges, earnings are defined as earnings (loss) from continuing operations before
income taxes plus fixed charges. Fixed charges consist of interest expense on all
indebtedness (including amortization of deferred debt issuance costs) and the portion
of operating lease rental expense that is representative of the interest factor (deemed
to be one-third of operating lease rentals).
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is a discussion and analysis of the Company's financial
condition and results from continuing operations. On March 1, 1996, the Company
reacquired all of the outstanding capital stock of Plainbridge by means of a
capital contribution from PTK. Since the acquisition is a transfer of interest
among entities under common control, it is being accounted for at historical
cost in a manner similar to pooling-of-interests accounting. Accordingly, the
consolidated financial statements presented herein reflect the assets and
liabilities and related results of operations of the combined entity for all
periods. The Company sold its home centers segment in November 1994 and the
accompanying consolidated statements of operations include the operating results
of the Company's home centers segment as discontinued operations.
RESULTS OF OPERATIONS
Fiscal 1995 v. Fiscal 1994
Sales: Sales for Fiscal 1995 were $4.18 billion compared to $4.19 billion in
Fiscal 1994. The decrease in sales in Fiscal 1995 compared to Fiscal 1994 was
primarily due to the sale of the freestanding drug stores on July 28, 1995,
partially offset by sales for the 53rd week in Fiscal 1995. Sales from
supermarkets opened in both years, including replacement stores, decreased 0.3%.
During Fiscal 1995, the Company opened five supermarkets, of which three
replaced older, smaller stores and completed 18 renovations and enlargements.
One store was closed and not replaced during the year. At Fiscal 1995 year end,
the Company operated 144 supermarkets, including 44 Pathmark 2000 format stores
compared with the end of Fiscal 1994 when the Company operated 143 supermarkets,
including 29 Pathmark 2000 format stores. The Company operated one freestanding
drug store at Fiscal 1995 year end compared to 36 freestanding drug stores at
the end of Fiscal 1994 (see "Disposition of Freestanding Drug Stores"). In order
to improve sales while continuing to improve profitability, the Company is
continuing to focus on its supermarket enlargement and renovation program.
Gross Profit: Gross profit for Fiscal 1995 was $1.22 billion or 29.1% of
sales compared with $1.19 billion or 28.3% of sales for Fiscal 1994. The
improvement in gross profit as a percentage of sales for Fiscal 1995 compared to
Fiscal 1994 was primarily due to increased focus on merchandising programs as
well as to the Company's continuing emphasis on the Pathmark 2000 format stores
which allow expanded variety in all departments particularly high margin
perishables and lower inventory shrink. The cost of goods sold comparisons were
affected by a pretax LIFO charge of $1.1 million and a pretax LIFO credit of
$0.7 million for Fiscal 1995 and Fiscal 1994, respectively.
Selling, General and Administrative Expenses ("SG&A"): SG&A increased $15.5
million or 1.7% for Fiscal 1995 compared with Fiscal 1994. SG&A, on a proforma
basis eliminating the SG&A impact of the freestanding drug stores in the third
and fourth quarters of Fiscal 1994, increased 3.7% for Fiscal 1995 compared to
Fiscal 1994. As a percentage of sales, SG&A were 22.7% for Fiscal 1995 up from
22.3% for Fiscal 1994, due to higher claims expenses, occupancy costs and
supplies, partially offset by lower promotional costs and labor and labor
related expenses along with weather related expenses that adversely affected the
first quarter of Fiscal 1994.
Depreciation and Amortization: Depreciation and amortization of $80.4
million for Fiscal 1995 was $4.9 million higher than the $75.5 million in Fiscal
1994. The increase for Fiscal 1995 was primarily due to capital expenditures.
Depreciation and amortization excludes video tape amortization, which is
recorded in cost of goods sold, of $2.8 million and $2.6 million in Fiscal 1995
and Fiscal 1994, respectively.
20
<PAGE>
Operating Earnings: Operating earnings for Fiscal 1995 were $184.5 million
compared with the $175.7 million in Fiscal 1994. The increase in operating
earnings in Fiscal 1995 compared to Fiscal 1994 was due to higher gross profit,
partially offset by higher SG&A and depreciation and amortization expenses.
Disposition of Freestanding Drug Stores: During the second quarter of Fiscal
1995, the Company made a decision to dispose of its 36 freestanding drug stores.
On July 28, 1995, the Company completed the sale of 30 of its freestanding drug
stores, including merchandise inventory, to Rite Aid Corporation for $59.9
million. The Company recorded a pretax gain on the disposition of its
freestanding drug stores of $15.5 million, net of a $19.0 million charge related
to the estimated exit costs of the remaining six freestanding drug stores. Five
of the remaining six freestanding drug stores were closed during Fiscal 1995 and
the sixth store is projected to be closed in Fiscal 1996.
Sale of Real Estate: During Fiscal 1995, the Company sold a former warehouse
of Purity Supreme, Inc. ("Purity"), a previously divested company, which
resulted in a pretax gain of $3.4 million.
Interest Expense: Interest expense was $164.7 million for Fiscal 1995
compared to $158.5 million in Fiscal 1994 due to the higher interest rates on
the Company's floating rate bank debt and higher average borrowings under its
Working Capital Facilities. During Fiscal 1994, the Company allocated $11.0
million of interest expense to discontinued operations.
Income Taxes: The income tax provision of $5.9 million for Fiscal 1995 is
net of reversals through July 29, 1995 of the deferred income tax valuation
allowance totalling $9.1 million related to the Company's deferred income tax
assets. The reversals were recorded in conjunction with the Company's continuing
evaluation of its deferred income tax assets. In the opinion of management,
sufficient evidence exists, such as the positive trend in earnings which
indicates that it is more likely than not that the Company will be able to
realize its deferred income tax assets. The income tax provision was $4.1
million in Fiscal 1994.
During Fiscal 1995, the Company made income tax payments of $21.9 million
and received income tax refunds of $10.3 million. During Fiscal 1994, the
Company made income tax payments of $6.3 million and received income tax refunds
of $25.9 million.
Summary of Continuing Operations: Earnings from continuing operations were
$32.7 million for Fiscal 1995 compared to $24.1 million for Fiscal 1994. The
increase in earnings from continuing operations for Fiscal 1995 was primarily
due to the gain on disposition of freestanding drug stores, higher operating
earnings and the gain on sale of real estate, partially offset by higher
interest expense.
Net Earnings: Net earnings were $32.7 million in Fiscal 1995 compared to
$39.1 million in Fiscal 1994. Fiscal 1994 included the gain on disposal of home
centers segment of $17.0 million and a loss from discontinued operations of $2.1
million. Refer to Note 19 of the Notes to Consolidated Financial Statements
included elsewhere in this prospectus.
Fiscal 1994 v. Fiscal 1993
Sales: Sales for Fiscal 1994 were $4.19 billion compared to $4.24 billion in
Fiscal 1993. Sales for stores opened in both years, including replacement
stores, decreased 0.4%. During Fiscal 1994, the Company opened four supermarkets
and completed 25 renovations and enlargements. At Fiscal 1994 year end, the
Company operated 143 supermarkets, including 137 Pathmark Super Centers compared
with the end of Fiscal 1993 when the Company operated 143 supermarkets,
including 136 Pathmark Super Centers. The Company also operated 30 freestanding
Pathmark drug stores and six "deep discount" drug stores at Fiscal 1994 year end
compared with the end of Fiscal 1993 when the Company
21
<PAGE>
operated 31 freestanding Pathmark drug stores and two "deep discount" drug
stores. In order to improve sales while continuing to improve profitability, the
Company is continuing its focus on its store enlargement and renovation program.
Gross Profit: Gross profit for Fiscal 1994 was $1.19 billion or 28.3% of
sales compared with $1.16 billion or 27.3% of sales in Fiscal 1993. This
improvement in gross profit as a percentage of sales for Fiscal 1994 was
primarily due to the Company's increased focus on merchandising programs as well
as continuing emphasis on large super stores allowing expanded variety in all
departments, particularly higher margin perishables. The cost of goods
comparisons were affected by a pretax LIFO credit of $0.7 million and $2.4
million for Fiscal 1994 and Fiscal 1993, respectively.
Selling, General and Administrative Expenses: SG&A for Fiscal 1994 increased
$9.2 million or 1.0% compared to Fiscal 1993. As a percentage of sales, SG&A
were 22.3% for Fiscal 1994, up from 21.8% for Fiscal 1993. The increase as a
percentage of sales during Fiscal 1994 was due to higher computer development
costs, labor and labor related expenses, occupancy expenses and weather-related
expenses, partially offset by lower promotional costs in Fiscal 1994 compared to
the additional promotional programs implemented in Fiscal 1993 to regain sales
level subsequent to the strike and lockouts and lower claims expense related to
customer accidents, medical and workers compensation.
Depreciation and Amortization: Depreciation and amortization expense of
$75.5 million for Fiscal 1994 was $5.6 million more than the $69.9 million in
Fiscal 1993. The increase for Fiscal 1994 was primarily due to capital
expenditures. Depreciation and amortization excludes video tape amortization,
which is recorded in cost of goods sold, of $2.6 million in each of Fiscal 1994
and Fiscal 1993.
Operating Earnings: Operating earnings for Fiscal 1994 were $175.7 million
compared to $139.8 million in Fiscal 1993. The increase in operating earnings
during Fiscal 1994 compared to Fiscal 1993 was due to improved gross profit in
Fiscal 1994, the impact of the strike and lockouts in Fiscal 1993, the
recapitalization expenses of $16.6 million in Fiscal 1993 and the provision for
store closings of $6.0 million in Fiscal 1993 partially offset by higher SG&A
and depreciation and amortization expense in Fiscal 1994.
Interest Expense: Total interest expense for Fiscal 1994 was $158.5 million,
a decrease of $27.5 million from the $186.0 million in Fiscal 1993. Interest
charged to discontinued operations in Fiscal 1994 was $11.0 million compared to
$13.1 million in Fiscal 1993. The lower interest expense, net of interest
charged to discontinued operations, was primarily due to the benefit of lower
interest rates on the debt incurred in connection with the Recapitalization.
Income Taxes: The income tax provision was $4.1 million in Fiscal 1994
compared to an income tax benefit of $20.3 million in Fiscal 1993. At January
28, 1995, the Company has a net deferred income tax asset of approximately $11.5
million. Although the Company had generated pretax earnings in Fiscal 1994, the
Company was unable to conclude that realization of such deferred income tax
assets was more likely than not due to pretax losses experienced in prior years.
Accordingly, the Company provided a valuation allowance of $9.1 million at
January 28, 1995 to fully reserve its net deferred income tax assets, except for
its alternative minimum tax credit carryforwards which do not expire.
Summary of Continuing Operations: Earnings from continuing operations before
extraordinary item and cumulative effect of accounting changes were $24.1
million in Fiscal 1994 compared to a $12.8 million loss in Fiscal 1993. The
increase in earnings for Fiscal 1994 was primarily due to higher operating
earnings and lower interest expense partially offset by an income tax benefit of
$20.3 million in Fiscal 1993 compared to an income tax provision of $4.1 million
in Fiscal 1994.
22
<PAGE>
Net Earnings (Loss): Net earnings were $39.1 million in Fiscal 1994 compared
to a net loss of $148.2 million in Fiscal 1993. During Fiscal 1994, the Company
completed the sale of its home centers segment, recognizing a gain of $17.0
million. Fiscal 1993 included an extraordinary item related to the net loss on
early extinguishment of debt of $96.7 million and the cumulative effect of
accounting changes of $38.1 million. Fiscal 1994 and Fiscal 1993 included losses
from discontinued operations of the home centers segment of $2.1 million and
$0.6 million, respectively. Refer to notes 19, 24, and 25 of the Notes to
Consolidated Financial Statements included elsewhere in this prospectus.
FINANCIAL CONDITION
Debt Service: During Fiscal 1995, total debt decreased $66.2 million from
Fiscal 1994 year end primarily due to the scheduled Term Loan repayments, a
required Term Loan repayment in conjunction with the disposition of the
freestanding drug stores and a net decrease in borrowings under the Working
Capital Facilities partially offset by debt accretion on the Deferred Coupon
Notes. Borrowings under the Working Capital Facilities were $46.0 million at
February 3, 1996.
In conjunction with the reacquisition of the Plainbridge capital stock, the
outstanding obligations of Plainbridge under its Credit Agreement were satisfied
by the Company and the Credit Agreement was terminated. The Company
simultaneously entered into an amendment to its Credit Agreement with its
existing lenders increasing the Company's Working Capital Facility from $175
million to $200 million (of which the maximum of $125.0 million can be in
letters of credit) to satisfy any additional liquidity needs and prospectively
modifying certain of its financial covenants to take into account the operations
of Plainbridge. The Working Capital Facility is subject to an annual cleandown
provision. Under the terms of the cleandown provision, in each fiscal year loans
cannot exceed $60.0 million (formerly $50.0 million) under the Working Capital
Facility for a period of 30 consecutive days. The Company satisfied the terms of
the cleandown provision through Fiscal 1996. Borrowings under the Working
Capital Facility was $36.0 million at April 30, 1996.
The Company is required to repay a portion of its borrowings under the Term
Loan each year, so as to retire such indebtedness in its entirety by Fiscal
1999. The Company is also required to make sinking fund payments on the
Subordinated Notes in the amount of 25% of the original aggregate principal
amount of the Subordinated Notes on each of June 15, 2000 and June 15, 2001. The
Subordinated Debentures and the remaining Subordinated Notes mature on June 15,
2002. The Senior Subordinated Notes and the Deferred Coupon Notes mature in
Fiscal 2003. The Company has no payment obligations, through intercompany notes
or otherwise, with respect to its parents' indebtedness.
The indebtedness under the Working Capital Facility and Term Loan bear
interest at floating rates and cash interest payments on such indebtedness may
vary in future years. The Company does not currently maintain any interest rate
hedging arrangements due to the reasonable risk that the 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.
The majority of the cash interest payments are scheduled in the second and
fourth quarters.
23
<PAGE>
The amounts of principal payments required each year on outstanding
long-term debt (excluding the original issue discount with respect to the
Deferred Coupon Notes) are as follows (dollars in thousands):
<TABLE>
<CAPTION>
PRINCIPAL
FISCAL YEARS PAYMENTS
- - ------------ --------
<S> <C>
1996......................................................... $ 51,753
1997......................................................... 53,645
1998......................................................... 147,240
1999......................................................... 128,058
2000......................................................... 50,210
2001......................................................... 50,000
2002......................................................... 194,767
2003......................................................... 590,725
</TABLE>
Liquidity: The consolidated financial statements of the Company indicate
that, at February 3, 1996, current liabilities exceeded current assets by $173.1
million and stockholder's deficit was $1.02 billion. Management believes that
cash flows generated from operations, supplemented by the unused borrowing
capacity under the Working Capital Facility (refer to Note 11 of the Notes to
the Consolidated Financial Statements at Item 8, Part II of this Form 10-K) 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 meet its seasonal cash requirements. Further, the Company believes it will
continue to be in compliance with its various debt covenants, which includes
certain levels of operating cash flow (as defined), minimum interest coverage
and a maximum leverage ratio.
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 Working Capital
Facility and certain mortgages in Fiscal 1998, the amortization and subsequent
maturity of the Term Loan in Fiscal 1999 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 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's ability to make scheduled payments or to refinance 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 or that
future borrowing facilities will be available. While it is the Company's
intention to enter into 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 Fiscal 1995, including
property acquired under capital leases, were approximately $110.6 million
compared to approximately $105.2 million for Fiscal 1994 and $96.4 million for
Fiscal 1993. During Fiscal 1995, the Company opened five Pathmark 2000 format
stores, three of which replaced smaller stores, and completed 18 major
renovations and enlargements.
24
<PAGE>
Cash Flows. Cash provided by operating activities amounted to $118.3 million
in Fiscal 1995 compared to $110.1 million in Fiscal 1994. The increase in net
cash provided by operating activities was primarily due to an improvement in
cash provided by operating assets and liabilities. Cash used for investing
activities in Fiscal 1995 was $0.7 million primarily due to property and
equipment expenditures of $69.5 million, partially offset by the net proceeds
from the disposition of the freestanding drug stores of $59.9 million, the
proceeds from the sale of real estate of $3.4 million and the proceeds from the
disposal of the home centers segment of $4.7 million, compared to cash used for
investing activities of $1.5 million in Fiscal 1994, primarily reflecting the
expenditures for property and equipment of $83.9 million, net of the proceeds of
the home centers segment of $81.1 million. Cash used for financing activities in
Fiscal 1995 was $128.0 million compared to $92.3 million in Fiscal 1994. The
increase in cash used for financing activities is primarily due to a decrease in
borrowings under the Working Capital Facilities and a paydown of $25.0 million
on the Term Loan, partially offset by a decrease in dividends to PTK. During
Fiscal 1995, the Company paid a dividend to PTK of $26.5 million from the net
proceeds related to the disposition of the freestanding drug stores and the sale
of the home centers segment. During Fiscal 1994, the Company paid a dividend of
$66.6 million to PTK from the net proceeds related to the disposal of the home
centers segment.
Net cash provided by operating activities amounted to $110.1 million in
Fiscal 1994 compared to $67.5 million in Fiscal 1993. The increase in net cash
provided by operating activities in Fiscal 1994 compared to Fiscal 1993 is
primarily due to the increased earnings in Fiscal 1994. Cash used for investing
activities in Fiscal 1994 was $1.5 million, primarily due to expenditures of
property and equipment of $83.9 million, net of the proceeds from the disposal
of the home centers segment of $81.1 million, compared to $69.3 million in
Fiscal 1993, primarily reflecting the expenditures for property and equipment of
$70.7 million. Cash used for financing activities in Fiscal 1994 was $92.3
million, primarily due to a dividend to PTK, as mentioned above, and the
reduction in obligations under capital leases, compared to $3.3 million cash
provided by financing activities in Fiscal 1993, primarily due to the net impact
of the Recapitalization.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121").
SFAS No. 121 establishes accounting standards for the measurement of the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used for long-lived assets and certain
identifiable intangibles to be disposed of. SFAS No. 121 requires that (i)
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable and (ii)
long-lived assets and certain identifiable intangibles, to be disposed of
generally be reported at the lower of carrying amounts or fair value less cost
to sell. SFAS No. 121 is effective for financial statements for fiscal years
beginning after December 15, 1995. The adoption of the SFAS No. 121 measurement
standards is not expected to materially effect the financial position or results
of operations of the Company.
25
<PAGE>
BUSINESS
Pathmark is the leading supermarket retailer, based on volume, operating
under a single trade name, in the Middle Atlantic States and the fifteenth
largest in the nation. At February 3, 1996, Pathmark operated 144 supermarkets
(including 137 in-store pharmacy departments) primarily in the New York - New
Jersey and Philadelphia metropolitan areas. These metropolitan areas contain
over 10% of the population and grocery sales in the United States.
The following table presents the market area, number of stores and selling
and total square footage for Pathmark's supermarkets.
<TABLE>
<CAPTION>
SELLING
MARKET NUMBER OF SQ. FT. TOTAL SQ. FT.
AREA STORES (000'S) (000'S)
- - ------------ --------- ------- -------------
<S> <C> <C> <C>
NJ, NY, PA,
CT, DE 144 5,392 7,373
</TABLE>
BUSINESS STRATEGY
Pathmark's business strategy is to increase profitability and market
penetration in its existing markets (i) by providing superior value to its
customers through its marketing and merchandising programs, (ii) through store
openings, enlargements and renovations and (iii) through increased operating
efficiencies. In implementing this strategy, Pathmark has used and will continue
to use a large-store format to increase operating efficiencies and to expand its
offering of higher margin merchandise and services, most notably, perishable
products.
Marketing and Merchandising
. Super Center Format. The average Pathmark Super Center is approximately 50%
larger than the average size supermarket in the United States and offers
greater convenience by providing one-stop shopping and a wider assortment of
foods and general merchandise than is offered by conventional supermarkets.
Pathmark expects that its new stores opened during the current and next two
fiscal years will average approximately 60,000 square feet.
. Pathmark 2000. Pathmark 2000 is a new, larger Super Center format designed to
provide Pathmark customers with a substantially greater selection of
perishable products, particularly produce. Pathmark 2000 stores are also
designed to be more "customer friendly", with wider aisles, more accessible
customer service and information departments, improved signs and graphics, and
increased availability of Pathmark associates. Implementation of elements of
this format in certain stores has significantly enhanced sales and operating
margins in these stores. All of Pathmark's new supermarkets and enlargements
completed in Fiscal 1995 employed the Pathmark 2000 concept, and Pathmark
expects that virtually all new stores and enlargements thereafter will employ
the same concept. At February 3, 1996, 44 of Pathmark's supermarkets were
Pathmark 2000s.
. Flexible Merchandising. Pathmark believes that its large-store format gives it
considerable flexibility to respond to changing consumer demands and
competition by varying and enhancing its merchandise selection. Pathmark's
"Big Deals" program, currently consisting of over 500 merchandise items offers
large-sized merchandise at prices which Pathmark believes are competitive with
those available in "warehouse" and "club" stores. Pathmark emphasizes
competitive pricing plus weekly sales and promotions supported by extensive
advertising, primarily in print media. Merchandising flexibility and
effectiveness is enhanced through the increased utilization of a category
management approach.
. Pathmark Label. Pathmark believes that it is one of the leading supermarket
retailers of private label merchandise in the United States offering for sale
over 3,300 items through its private label program.
26
<PAGE>
Pathmark's private label brands are called Pathmark, No Frills and its newest
brand, Pathmark Preferred.
. Pharmacy. Pathmark provides full pharmacy services in virtually all of its
stores. Pathmark's broad market coverage within its marketing area has enabled
it to become a leading filler of third-party prescriptions in this area.
Pathmark believes that its well-established pharmacy operations provide a
competitive advantage in attracting and retaining customers.
Store Expansion and Renovation Program
. New Stores, Enlargements and Renovations. During Fiscal 1995, Pathmark opened
five new Pathmark 2000s, closed four smaller stores, and completed 18 major
renovations and enlargements. During the fiscal year ending February 1, 1997
("Fiscal 1996"), Pathmark plans to open an aggregate of up to six new Pathmark
2000s, two of which will replace smaller Pathmark stores, and to complete up
to an aggregate of 18 major renovations and enlargements.
Pathmark recognizes the importance of keeping its stores looking fresh and
up-to-date; thus, each store typically receives a major renovation or
enlargement every five years. At the end of Fiscal 1995, Pathmark derived
approximately 80% of its supermarket sales from stores that were opened or
enlarged or underwent major renovations during the last five years.
. Core Market Focus. Pathmark has identified approximately 65 potential
locations for new supermarkets within its current marketing areas and expects
that all new stores opened during the current and next two fiscal years will
be located in these areas. Pathmark believes that, by opening stores in its
current marketing areas, it can achieve additional operating economies and
other benefits from its store expansion program without the risks and costs
associated with opening stores in new marketing areas.
Operating Efficiencies
. Technology. Pathmark has made a significant and continuing investment in
information technology and believes it is a leader in the supermarket industry
in this area. All Pathmark supermarket checkout terminals have
third-generation "state of the art" IBM 4680 scanner systems supported by a
RISC 6000 application processor in each store. These systems allow consumer
credit and electronic fund transfer ("EFT") transactions, greatly facilitate
system-wide promotion and merchandising programs, and improve the speed and
control of customer transactions. In addition, all Pathmark supermarkets
utilize radio frequency technology for direct vendor receivings and shelf
labels.
. Geographic Concentration. All Pathmark supermarkets are located within 100
miles of the Pathmark headquarters and principal warehousing facilities that
service them. This allows for more efficient management supervision, increased
speed of delivery and reduced transportation costs. All of the stores which
Pathmark expects to open in the current fiscal year will be within this 100
mile radius.
27
<PAGE>
PATHMARK SUPERMARKETS
Pathmark operated 144 supermarkets at February 3, 1996. Supermarkets
accounted for approximately 97% of Pathmark's sales for Fiscal 1995. The
following table presents selected data respecting supermarket sales and stores
for the last five fiscal years.
<TABLE>
<CAPTION>
FISCAL YEARS
----------------------------------------------
1995(A) 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Supermarket sales................................. $4,063 $4,006 $4,057 $4,143 $4,137
Average sales per Supermarket..................... 28.5(b) 28.7 28.7 29.0 28.6
Number of Supermarkets:
Major Renovations(c)............................ 14 14 12 8 13
Enlargements(d)................................. 4 11 5 10 15
Opened.......................................... 5 4 4 3 1
Closed.......................................... 4 6 5 3 1
Type of Supermarket(e):
Pathmark 2000................................... 44 29 10 2 --
Super Center.................................... 95 108 126 137 139
Conventional Supermarket........................ 5 6 7 7 7
Total Supermarkets Open at Year End......... 144 143 143 146 146
</TABLE>
- - ------------
(a) Fiscal 1995 was a 53-week year.
(b) Computed on the basis of aggregate sales of stores open for the full year,
based on a 52-week period.
(c) Major renovations involve an investment of $350,000 or more and average
nearly $1.8 million per store.
(d) Enlargements involve the addition of selling space and average an investment
in excess of $2.5 million.
(e) Includes two stores not wholly owned. The sales figures for these stores are
not included above.
By industry standards, Pathmark stores are large and productive, averaging
approximately 51,200 square feet in size and generating high average sales
volume of approximately $28.5 million per store ($765 per selling square foot)
for stores open for all of Fiscal 1995 based on a 52-week period. Pathmark's 144
supermarkets at February 3, 1996 ranged from 26,000 to 66,000 square feet in
size and included 133 supermarkets that are 40,000 square feet or larger in
size. All Pathmark stores carry a broad variety of food and drug store products,
including an extensive variety of the Pathmark, No Frills and Pathmark Preferred
brands.
Pathmark pioneered the development of the large "superstore" in the Middle
Atlantic States, opening the first "Pathmark Super Center" in 1977, and
currently operates 139 such stores, including 44 "Pathmark 2000" stores. The
average weekly sales for Pathmark 2000 stores in Fiscal 1995 was $634,000
compared to $509,000 for the balance of the chain. The majority of Super Centers
were created through the enlargement or renovation of existing stores. Super
Centers average approximately 52,000 square feet in size. In addition to the
broad variety of food and non-food items carried in conventional Pathmark
stores, a typical Super Center includes a customer service center, pharmacy,
additional food selections (including expanded perishables departments, cheese
shops, bakeries, fresh fish-on-ice and service delicatessen departments),
videotape rentals, book departments and expanded health and beauty care
departments. All Super Centers have EFT and credit transaction capability at
their checkout terminals and 127 supermarkets also featured in-store automated
teller machines.
Pathmark has developed a new, larger Super Center format called "Pathmark
2000" designed to provide Pathmark customers with a substantially greater
selection of perishable products, particularly produce. Pathmark 2000 stores are
also designed to be more "customer friendly", with wider aisles,
28
<PAGE>
more accessible customer service and information departments, improved signs and
graphics, and increased availability of Pathmark associates. Implementation of
elements of this format in certain stores has significantly enhanced sales and
operating margins in these stores. All of Pathmark's new supermarkets and a
majority of supermarket enlargements completed in Fiscal 1995 employed the
Pathmark 2000 concept and Pathmark expects that virtually all new stores and
enlargements will employ the same concept.
Pathmark's supermarket business is generally not seasonal, although sales in
the second and fourth quarters tend to be slightly higher than those in the
first and third quarters.
STORE EXPANSION AND RENOVATION PROGRAM
A key feature of Pathmark's business strategy has been and will continue to
be the expansion of the total selling square footage of its operations. Pathmark
believes that by adding new stores and increasing the selling area of existing
stores, it can improve its competitive position and widen operating margins by
achieving economies of scale in merchandising, advertising, distribution and
supervision. During the five years ending with Fiscal 1995, Pathmark completed
106 major renovations and enlargements and opened 17 new supermarkets. At the
close of Fiscal 1995, sales in these stores accounted for approximately 80% of
its total supermarket sales.
In Fiscal 1995, Pathmark opened five new Pathmark 2000 super centers and
completed 14 major renovations and four enlargements of its existing
supermarkets. Pathmark currently expects to open up to six new Pathmark "2000"
Super Centers during Fiscal 1996, two of which will replace smaller stores, and
to complete up to 18 major renovations and enlargements.
ADVERTISING AND PROMOTION
As part of its marketing strategy, Pathmark emphasizes its competitive
pricing through weekly sales and promotions supported by extensive advertising.
Additional savings are offered each week through Pathmark "super coupons" in
newspapers and circulars. Pathmark's advertising expenditures are concentrated
on print advertising, including advertisements and circulars in local and area
newspapers and advertising flyers distributed by shopping malls. Most of the
remaining advertising expenses are for radio advertisements. During the year
ended January 28, 1995 ("Fiscal 1994"), Pathmark introduced "Smart Coupons" in
its advertisements. With "Smart Coupons", customers no longer are required to
actually cut out Pathmark coupons from its advertisement and physically present
them at the cash registers. Rather, when a coupon item is scanned during the
check-out process, the coupon savings is automatically deducted from the price.
Pathmark believes that its "Smart Coupons" greatly convenience its customers and
improve customer service at the checkout.
CONSUMER RESEARCH
Pathmark conducts numerous ongoing and special consumer research projects.
These typically involve customer surveys (both in-store and by telephone) as
well as focus groups. The information derived from these projects is used to
evaluate consumers' attitudes and purchasing patterns and helps shape Pathmark's
marketing programs.
TECHNOLOGY
Pathmark has made a significant and continuing investment in information
technology and believes it is a leader in the supermarket industry in this area.
All Pathmark supermarket checkout terminals have third-generation "state of the
art" IBM 4680 scanner systems supported by a RlSC 6000 application processor in
each store. These systems allow consumer credit and EFT transactions, greatly
facilitate system-wide promotion and merchandising programs, and improve the
speed and control of customer transactions. This technology and the data
generated by scanning not only have led to lower labor costs, improved price
control and shelf allocation and quicker customer check-out, but also have
29
<PAGE>
assisted in the analysis of product movement, profit contribution and
demographic merchandising. Pathmark also has a computer-assisted ordering system
which enables it to replenish inventory to avoid "out of stocks" at store level
while maintaining optimum overall inventory levels. In addition, all Pathmark
supermarkets utilize radio frequency technology for direct vendor receivings and
shelf labels.
All of the pharmacies are equipped with pharmacy computers. In addition to
improving customer service, these computers aid pharmacists in detecting drug
interactions, improve the collection of third-party receivables and help to
attract third-party businesses such as health maintenance organizations and
union welfare plans.
In August 1991, Pathmark entered into a long-term facilities management and
systems integration agreement with Integrated Systems Solutions Corporation
("ISSC"), a subsidiary of IBM. Under the agreement, ISSC has taken over
Pathmark's data center operations and mainframe processing and information
system functions (formerly performed by approximately 150 employees) and is
providing business applications and "state of the art" systems designed to
enhance Pathmark's customer service and efficiency. Additionally, over the next
several years, ISSC has contracted to develop an integrated purchasing
application, a new financial system, and electronic data interchange
capabilities that will streamline communications between Pathmark and its
primary suppliers.
SUPPLY AND DISTRIBUTION
Most of the merchandise sold in Pathmark's supermarkets is supplied through
its distribution facilities located in New Jersey. In addition, pursuant to a
supply agreement between Chefmark and Pathmark (the "Chefmark Supply
Agreement"), Chefmark supplies Pathmark with merchandise from its banana
ripening and deli food preparation operations. The Chefmark Supply Agreement
provides that, for a period of seven years, such services are to be performed by
Chefmark in substantially the same manner as they have been performed by
Pathmark's banana ripening and deli food preparation operations prior to the
Chefmark Spin-Off.
All of Pathmark's stores are located within 100 miles of the principal
Pathmark and Chefmark distribution centers. The following table presents
information concerning the distribution and processing facilities through which
Pathmark is supplied, and the product lines relevant to each.
DISTRIBUTION FACILITIES
<TABLE>
<CAPTION>
SQUARE YEAR
LOCATION PRODUCT LINE FOOTAGE OPENED
-------- ------------ ------- ------
<S> <C> <C> <C>
Woodbridge, NJ(1)............ Dry Grocery 475,000 1968
Edison, NJ(2)................ General Merchandise, Health and Beauty Care 266,000 1980
Products, Pharmaceuticals, Tobacco
Woodbridge, NJ(1)............ Meat, Dairy, Deli, Produce 255,000 1970
Dayton, NJ(2)................ Frozen Food Distribution Center 112,000 1994
North Brunswick, NJ(2)....... Dry Grocery 425,000 1996
</TABLE>
PROCESSING FACILITIES
<TABLE>
<CAPTION>
SQUARE YEAR
LOCATION PRODUCTS PROCESSED FOOTAGE OPENED
-------- ------------------ ------- ------
<S> <C> <C> <C>
Somerset, NJ(3).............. Delicatessen Products 16,000 1976
Avenel, NJ(4)................ Banana Ripening 30,000 1984
</TABLE>
- - ------------
(1) Owned by Pathmark.
(2) Leased by Pathmark.
(3) Owned by Chefmark.
(4) Leased by Chefmark.
30
<PAGE>
COMPETITION
The supermarket business is highly competitive and is characterized by high
asset turnover and narrow profit margins. Pathmark's earnings are primarily
dependent on the maintenance of relatively high sales volume per supermarket,
efficient product purchasing and distribution and cost-effective store operating
techniques. Pathmark's main competitors are national and regional supermarkets,
drug stores, convenience stores, discount merchandisers, "warehouse" and "club"
stores and other local retailers in the areas served. Principal competitive
factors include price, store location, advertising and promotion, product mix,
quality and service.
TRADE NAMES, SERVICE MARKS AND TRADEMARKS
Pathmark has registered a variety of trade names, service marks and
trademarks with the United States Patent and Trademark Office, each for an
initial period of 20 years, renewable for as long as the use thereof continues.
Pathmark considers its Pathmark service marks to be of material importance to
its business and actively defends and enforces such service marks.
REGULATION
Pathmark's food and drug business requires it to hold various licenses and
to register certain of its facilities with state and federal health, drug and
alcoholic beverage regulatory agencies. By virtue of these licenses and
registration requirements, Pathmark is obligated to observe certain rules and
regulations, and a violation of such rules and regulations could result in a
suspension or revocation of the licenses or registrations. In addition, most of
Pathmark's licenses require periodic renewals. Pathmark has experienced no
material difficulties with respect to obtaining, effecting or retaining its
licenses and registrations.
EMPLOYEES
At February 3, 1996, Pathmark employed approximately 31,000 people, of whom
approximately 20,000 were employed on a part-time basis.
Approximately 83% of Pathmark's employees are covered by 29 collective
bargaining agreements (typically having three or four year terms) negotiated
with approximately 18 different local unions. During Fiscal 1996, one contract
covering approximately 1,100 Pathmark associates in 36 stores will expire. The
Company does not anticipate any difficulty in renegotiating this contract.
Pathmark believes that its relationship with its employees is generally
satisfactory.
PROPERTIES
Reference is made to the answer to Item 1, "Business" of this report for
information concerning the states in which the Company's supermarkets and
distribution facilities are located. See "Business of Pathmark--Supply and
Distribution" in Item 1 of this Report for Information concerning the Company's
distribution facilities.
Pathmark's 144 supermarkets have an aggregate selling area of approximately
5.4 million square feet. Twenty-three of the supermarkets are owned by Pathmark
and the remaining 121 are leased. These supermarkets either are freestanding
stores or are located in shopping centers. Twenty-five leases expire during the
current and next four calendar years and Pathmark has options to renew all of
them.
Pathmark owns its corporate headquarters in Woodbridge, NJ and maintains
administrative and accounting offices in Carteret, New Jersey in leased premises
totalling approximately 150,000 square feet in size.
Most of the facilities owned by Pathmark are owned subject to mortgages.
Pathmark plans to acquire leasehold or fee interests in any property on which
new stores or other facilities are opened and
31
<PAGE>
will consider entering into sale/leaseback or mortgage transactions with respect
to owned properties if Pathmark believes such transactions are financially
advantageous.
LEGAL PROCEEDINGS
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 or business of the Company.
CERTAIN TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During Fiscal 1995, the Company retained ML & Co. to advise it in connection
with its sale of its drug stores. The Company believes that the terms of the
transactions referred to under this paragraph are no less favorable than those
obtainable in transactions with unrelated persons. See "Principal Stockholders".
In connection with the sale of its drug store business, PTK, the Company's
parent, used approximately $21.8 million of the sale proceeds to partially
prepay certain indebtedness, including accrued interest and debt premium, held
by certain affiliates of the Equitable Life Assurance Society of the United
States. Mr. Gummeson, a director of the Company, is an executive officer of a
subsidiary of the Equitable Life Assurance Society of the United States. See
"Principal Stockholders".
The holders of SMG-II Preferred Stock are a party with the holders of SMG-II
Common Stock to a stockholders agreement (the "SMG-II Stockholders Agreement"),
which, among other things, restricts the transferability of SMG-II capital stock
and relates to the corporate governance of SMG-II and Holdings. Among other
provisions, the SMG-II Stockholders Agreement requires a vote of at least 80% of
the members of the Board of Directors to cause the Company to conduct any
business other than that engaged in by the Company in February of 1991 and the
approval of stockholders representing 66 2/3% of the number of shares of SMG-II
voting capital stock voting together as a single class for SMG-II to enter into
any Significant Transaction (as defined), including certain mergers, sales of
assets, acquisitions, sales or redemptions of stock, the amendment of the
certificate of incorporation or by-laws or the liquidation of SMG-II. The SMG-II
Stockholders Agreement also provides that SMG-II must obtain the prior written
consent of the Equitable Investors with respect to certain of these transactions
and that the Equitable Investors have certain preemptive rights with respect to
the sale of capital stock of Holdings or the Company.
The SMG-II Stockholders Agreement also contains an agreement of the
stockholders of SMG-II with respect to the composition of SMG-II's and Holdings'
Boards of Directors. Under this agreement, the Merrill Lynch Investors will be
entitled to designate up to seven directors, the Management Investors will be
entitled to designate up to three directors and the Equitable Investors will be
entitled to designate one director to both of SMG-II's and Holdings' Boards of
Directors. Such agreement furthermore entitles the Merrill Lynch Investors to
designate a majority of Holdings' Board of Directors at all times. Since
Holdings (through PTK) owns all of the outstanding shares of the Company's
Common Stock, by having the ability to designate a majority of Holdings' Board
of Directors, the Merrill Lynch Investors will have the ability to control the
Company. The Merrill Lynch Investors are controlled by ML&Co.
In addition to the foregoing, the SMG-II Stockholders Agreement contains
terms restricting the transfer of SMG-II Common Stock and SMG-II Preferred Stock
(collectively, the "SMG-II Stock") by the stockholders of SMG-II, and providing
to the stockholders of SMG-II rights of first offer with respect to resales of
SMG-II Stock, rights of first refusal with respect to certain issuances of
shares of
32
<PAGE>
SMG-II Stock, certain rights to demand or participate in registrations of shares
of SMG-II Stock under the Securities Act and certain "tag-along" rights.
The Company retained John W. Boyle, a Director of the Company, to act as its
interim Chairman and Chief Executive Officer until a successor is chosen. Under
the terms of the consulting arrangement between the Company and Mr. Boyle, the
Company shall pay Mr. Boyle a consulting fee of $41,667 per month plus living
and travel expenses. In addition, Mr. Boyle will be entitled to a completion
bonus of $100,000 if he is still serving in the above capacities when a new
Chief Executive Officer is hired.
In March 1990, Jerry G. Rubenstein, a Director, borrowed from Holdings
$100,000 in order to help finance his purchase of Holdings' Class A Common
Stock. Subsequently, such shares of Holdings' Class A Common Stock were
exchanged for shares of SMG-II Class A Common Stock. The foregoing indebtedness
to Holdings is evidenced by a full recourse promissory note (the "Recourse
Note"). The Recourse Note is for a term of ten years and bears interest at the
rate of 8.02% per annum, payable annually. Except as otherwise provided in the
Recourse Note, no principal on such recourse loan shall be due and payable until
the tenth anniversary of the date of issue of such Recourse Note. Under the
terms of the agreement pursuant to which the shares of Holdings' Class A Common
Stock were exchanged for shares of SMG-II Class A Common Stock, the Company is
obligated to pay to each Management Investor who pays interest on his Recourse
Note (except under certain circumstances) an amount equal to such interest, plus
an amount sufficient to pay any income taxes resulting from the above described
payment after taking into account the value of any deduction available to him as
a result of the payment of such interest or taxes. As of April 1, 1996, Mr.
Rubenstein remained indebted to Holdings in the amount of $100,000.
33
<PAGE>
MANAGEMENT
DIRECTORS OF THE COMPANY
The following table sets forth the name, age, principal occupation or
employment at the present time and during the last five years, and the name and
principal business of any corporation or other organization in which such
occupation or employment is or was conducted, of the directors of the Company,
all of whom are citizens of the United States unless otherwise indicated. Each
individual named below is a director of both the Company and Holdings.
<TABLE>
<CAPTION>
DIRECTOR OF THE
COMPANY
NAME, AGE, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS SINCE
------------------------------------------------------- ---------------
<S> <C>
JOHN W. BOYLE, 67, Chairman and Chief Executive Officer of the Company. Vice 1995
Chairman (retired), Eckerd Corporation, a drug store chain, between 1983 and
1995. Mr. Boyle is also a Director of Eckerd Corporation.(1)
JAMES J. BURKE, JR., 44, Partner and a Director of Stonington Partners, Inc. 1988
("SPI"), a private investment firm, since 1993, and a Director of Merrill
Lynch Capital Partners, Inc. ("MLCP") since 1987; Partner of MLCP from 1993
to 1994; President and Chief Executive Officer of MLCP from 1987 to 1993.
Mr. Burke was also a Managing Director of Merrill Lynch & Co. ("ML & Co.")
until 1994. Mr. Burke is also a Director of Ann Taylor Stores Corp.,
Borg-Warner Security Corp., Education Management Corp., United Artists
Theatre Circuit, Inc. and Wherehouse Entertainment, Inc.
ANTHONY J. CUTI, 50, Chairman and Chief Executive Officer of Duane Reade, 1993
Inc., a drug store chain (since April 1996); President of the Company from
August 1993 to April 1996, and Chief Financial Officer from October 1990 to
September 1994; Executive Vice President from October 1990 to August 1993.
U. PETER C. GUMMESON, 39, Managing Director of Alliance Corporate Finance 1996
Group, Incorporated, an investment firm affiliated with the Equitable Life
Assurance Society of the United States (the "Equitable") and an investment
officer of the Equitable. Mr. Gummeson is also a director of U.S.
Foodservice, Inc., RI Holdings Corp., and Sports Holdings Corp.
SUNIL C. KHANNA, 39, Principal of SPI since 1993; Principal of MLCP from 1993 1987
to 1994; Vice President of MLCP from 1989 to 1993; a Director of the
Investment Banking Division of ML & Co. from 1993 to 1994, and a Vice
President thereof prior thereto. Mr. Khanna is also a Director of Ithaca
Holdings, Inc.
STEPHEN M. McLEAN, 38, Partner and a Director of SPI since 1993; Partner of 1987
MLCP from 1993 to 1994; Senior Vice President of MLCP from 1987 to 1993;
Director of MLCP since 1987; Managing Director of the Investment Banking
Division of ML & Co. until 1994. Mr. McLean is also a Director of CMI
Industries, Inc., Dictaphone Corporation and Ithaca Holdings, Inc.
ALEXIS P. MICHAS, 38, Partner and a Director of SPI since 1993, and a Director 1994
of MLCP since 1989; Partner of MLCP from 1993 to 1994; Senior Vice President
of MLCP from 1989 to 1993; Managing Director of Investment Banking Division
of ML & Co. from 1991 to 1994; Director in the Investment Banking Division
of ML & Co. from 1990 to 1991. Mr. Michas is also a Director of Blue Bird
Corporation, Borg-Warner Automotive, Inc., Borg-Warner Security Corp.,
Dictaphone Corporation and Eckerd Corporation.
JERRY G. RUBENSTEIN, 66, Managing Partner, Omni Management Associates; 1996
Consultant to MLCP since 1988.
</TABLE>
- - ------------
(1) Mr. Boyle was retained on March 20, 1996 to act as the Company's interim
Chairman and Chief Executive Officer until a successor is chosen. He
replaces Jack Futterman who retired on March 20, 1996.
34
<PAGE>
Pursuant to the SMG-II Stockholders Agreement, the Merrill Lynch Investors
(as defined under "Principal Stockholders") are entitled to designate seven
directors, the Management Investors are entitled to designate three directors
and The Equitable Investors are entitled to designate one director to Holdings'
Board of Directors. By having the ability to designate a majority of Holdings'
Board of Directors, the Merrill Lynch Investors will have the ability to control
the Company. Currently, seven of the persons serving as directors were
designated by the Merrill Lynch Investors (Messrs. Boyle, Burke, Cuti, Khanna,
Michas, McLean and Rubenstein), none was designated by the Management Investors
and one was designated by the Equitable Investors (Mr. Gummeson). No family
relationship exists between any director and any other director or executive
officer of the Company.
EXECUTIVE OFFICERS
The following table sets forth the name, age, principal occupation or
employment at the present time and during the last five years, and the name of
any corporation or other organization in which such occupation or employment is
or was conducted, of the executive officers of the Company, all of whom are
citizens of the United States unless otherwise indicated and serve at the
discretion of the Board of Directors of the Company. The executive officers of
the Company listed below were elected to office for an indefinite period of
time. No family relationship exists between any executive officer and any other
executive officer or director of the Company.
<TABLE>
<CAPTION>
OFFICER OF THE
COMPANY
NAME AGE POSITIONS AND OFFICE SINCE(1)
---- --- -------------------- --------------
<S> <C> <C> <C>
<CAPTION>
JOHN W. BOYLE 67 Chairman and Chief Executive Officer (since 1996
March 1996).(2)
<S> <C> <C> <C>
NEILL CROWLEY 53 Executive Vice President--Distribution since 1994
May 1995; Executive Vice President--
Marketing from May 1994 to May 1995;
Executive Vice President--Marketing and
Store Support, The Vons Companies, Inc. (a
supermarket chain) prior thereto.
RON MARSHALL 42 Executive Vice President and Chief Financial 1994
Officer since October 1994. Senior Vice
President and Chief Financial Officer of
Dart Group Corporation (a diversified
retailer) from 1991 to September 1994. Vice
President and Chief Financial Officer of
Barnes and Noble Bookstores, Inc., prior
thereto.
ROBERT JOYCE 50 Executive Vice President--Operations (since 1989
January 1996; Senior Vice President--
Operations--from March 1995 to January 1996;
March 1995); Senior Vice President--
Administration prior thereto. Mr. Joyce
joined the Company in 1963.
RONALD RALLO 58 Executive Vice President--Merchandising 1993
(since May 1995; Senior Vice President--
Merchandising from July 1993 to May 1995);
Senior Vice President--Merchandising
Pathmark division (from September 1992 to
July 1993); Senior Vice
President--Perishable Merchandising,
Pathmark division prior thereto. Mr. Rallo
joined the Company in 1962.
JOSEPH W. ADELHARDT 50 Senior Vice President and Controller since 1987
January 1996; Vice President and Controller
prior thereto. Mr. Adelhardt joined the
Company in 1976.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
OFFICER OF THE
COMPANY
NAME AGE POSITIONS AND OFFICE SINCE(1)
---- --- -------------------- --------------
<S> <C> <C> <C>
HARVEY M. GUTMAN 50 Senior Vice President--Retail Development of 1990
the Company (since December 1991); Vice
President--Retail Development of the Company
(from October 1990 to December 1991); Vice
President--Grocery/Frozen Sales &
Merchandising, Pathmark division (from
January 1990 to September 1990); Vice
President--Non-Foods/Pharmacy Sales &
Merchandising, Pathmark division prior
thereto. Mr. Gutman joined the Company in
1976.
MAUREEN MCGURL 48 Vice President--Human Resources. Ms. McGurl 1984
joined the Company in 1973.
MARC A. STRASSLER 48 Vice President, Secretary and General Counsel 1987
(since December 1991); Secretary and General
Counsel prior thereto. Mr. Strassler joined
the Company in 1974.
MYRON D. WAXBERG 62 Vice President and General Counsel--Real 1991
Estate (since December 1991); General
Counsel--Real Estate prior thereto. Mr.
Waxberg joined the Company in 1976.
</TABLE>
- - ------------
(1) Includes service with Pathmark's predecessor.
(2) Member of the Company's Board of Directors.
36
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
----------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION FY SALARY ($) BONUS ($) ($)(1) SARS (2) ($)(3)
--------------------------- -- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jack Futterman(4).................... 1995 526,442 332,658 -- -- 5,250
Chairman and Chief Executive 1994 491,346 92,127 -- -- 5,250
Officer 1993 462,539 138,762 -- -- 8,254
Anthony J. Cuti(5)................... 1995 325,500 205,396 -- -- 5,250
President 1994 306,750 57,516 -- -- 5,250
1993 280,250 76,260 -- 3,000 8,254
Neill Crowley........................ 1995 247,212 112,241 -- -- 4,341
Executive Vice President--Logistics 1994 168,712 21,089 -- 1,000 --
Ron Marshall......................... 1995 280,289 168,173 -- -- --
Executive Vice President and Chief 1994 89,904 53,942 -- 2,000 --
Financial Officer
Ronald Rallo......................... 1995 227,500 113,585 4,399 -- 5,250
Executive Vice President-- 1994 200,385 21,141 4,265 -- 5,250
Merchandising 1993 177,500 42,600 4,311 750 8,098
</TABLE>
- - ------------
(1) Represents payments as reimbursement for interest paid to Holdings for a
loan of less than $60,000 from Holdings in connection with the purchase of
SMG-II Class A Common Stock and includes an amount sufficient to pay any
income taxes resulting therefrom after taking into account the value of any
deduction available as a result of the payment of such interest and taxes.
(2) Stock options shown were granted pursuant to the Management Investors 1987
Stock Option Plan of SMG-II (the "Plan") and relate to shares of Class A
Common Stock of SMG-II.
(3) Represents Pathmark's matching contribution to the SGC Savings Plan (the
"Savings Plan").
(4) Mr. Futterman, 62, retired on March 20, 1996.
(5) Mr. Cuti resigned as President on April 10, 1996.
None of the executive officers named in the above Compensation table (the
"Named Executive Officers") were granted stock options in the fiscal year ended
February 3, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS AT
FY-END (#)
EXERCISABLE/
NAME UNEXERCISABLE
---- -------------
<S> <C>
Jack Futterman............................................................... 13,000/0
Anthony J. Cuti.............................................................. 5,800/0
Neill Crowley................................................................ 666/334
Ron Marshall................................................................. 1,350/650
Ronald Rallo................................................................. 2,850/0
</TABLE>
- - ------------
(1) Options shown were granted pursuant to the Plan and relate to shares of
Class A Common Stock of SMG-II. No options were exercised in Fiscal 1995 by
any of the Named Executive Officers.
37
<PAGE>
PENSION PLAN TABLE(1)
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------------------------
FINAL AVERAGE PAY 10 15 20 25 30 35
- - ----------------------------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$150,000..................... $20,000 $ 30,000 $ 40,000 $ 50,000 $ 60,000 $ 60,000
200,000..................... 26,667 40,000 53,333 66,667 80,000 80,000
225,000..................... 30,000 45,000 60,000 75,000 90,000 90,000
250,000..................... 33,333 50,000 66,667 83,333 100,000 100,000
300,000..................... 40,000 60,000 80,000 100,000 120,000 120,000
350,000..................... 46,667 70,000 93,333 116,667 140,000 140,000
400,000..................... 53,333 80,000 106,667 133,333 160,000 160,000
450,000..................... 60,000 90,000 120,000 150,000 180,000 180,000
500,000..................... 66,667 100,000 133,333 166,667 200,000 200,000
550,000..................... 73,333 110,000 146,667 183,333 220,000 220,000
600,000..................... 80,000 120,000 160,000 200,000 240,000 240,000
650,000..................... 86,667 130,000 173,333 216,667 260,000 260,000
700,000..................... 93,333 140,000 186,667 233,333 280,000 280,000
750,000..................... 100,000 150,000 200,000 250,000 300,000 300,000
</TABLE>
- - ------------
(1) The table above illustrates the aggregate annual pension benefits payable
under the SGC Pension Plan and Excess Benefit Plan (collectively, the
"Pension Plans"). The retirement benefit for individuals with 30 years of
credited service is 40% of the individual's average compensation during his
or her highest five compensation years in the last ten years before
retirement, less one-half of the social security benefit received. The
retirement benefit is reduced by 3.33% for every year of credited service
less than 30. Covered compensation under the Pension Plans includes all cash
compensation subject to withholding plus amounts deferred under the Savings
Plan pursuant to Section 401(k) of the Internal Revenue Code of 1986, as
amended, and as to individuals identified in the Summary Compensation Table,
would be the amount set forth in that table under the headings "Salary" and
"Bonus". The table shows the estimated annual benefits an individual would
be entitled to receive if normal retirement at age 65 occurred in January
1996 after the indicated number of years of covered employment and if the
average of the participant's covered compensation for the five years out of
the last ten years of such employment yielding the highest such average
equalled the amounts indicated. The estimated annual benefits are based on
the assumption that the individual will receive retirement benefits in the
form of a single life annuity (married participants may elect a joint
survivorship option) and are before applicable deductions for social
security benefits in effect as of January 1996. As of December 31, 1995, the
following individuals had the number of years of credited service indicated
after their names: Mr. Futterman, 22.6; Mr. Cuti, 4.0; Mr. Crowley, 0.5; Mr.
Rallo, 30 and Mr. Marshall, 0.0. As described below in "Compensation Plans
and Arrangements--Supplemental Retirement Agreements", each of the named
executives is party to a Supplemental Retirement Agreement with Pathmark.
COMPENSATION PLANS AND ARRANGEMENTS
Supplemental Retirement Agreements. The Company has entered into
supplemental retirement agreements with certain key executives, including the
Named Executive Officers, which provide that the executive will be paid upon
termination of employment after attainment of age 60 a supplemental pension
benefit in such an amount as to assure him or her an annual amount of pension
benefits payable under the supplemental retirement agreement, the Company's
qualified pension plans and certain other plans of the Company, including
Savings Plan balances as of March 31, 1983, (a) in the case of Mr. Futterman,
equal to $525,000, (b) in the case of Mr. Cuti equal to 30% of his final average
Compensation (as hereinafter defined) based on ten years of service with the
Company and increasing 1% per year for each year of service thereafter to a
maximum of 40% of his final average Compensation based on 20 years of service,
(c) in the case of Mr. Rallo equal to (i) 30% of his final average Compensation
based on ten years of service with the Company and increasing 1% per year for
each year of service thereafter, to a maximum of 40% of his final average
Compensation based on 20 years of service, or (ii) $150,000, whichever is less,
and (d) in the case of Messrs. Crowley and Marshall, equal
38
<PAGE>
to 12.5% of his final average Compensation based on five years of service with
the Company and increasing 2.5% per year for each year of service thereafter to
a maximum of 35% of his final average Compensation based on 14 years of service.
"Compensation" includes base salary and payments under the Executive Incentive
Plan, but excludes Company matching contributions under the Savings Plan and
cash awards under Old Supermarkets' former Long-Term Incentive Plan. If the
executive leaves the Company prior to completing 20 years of service (other than
for disability), the supplemental benefit would be reduced proportionately.
Should the executive die, the surviving spouse then receiving or, if he or she
was not then receiving a supplemental pension benefit, the spouse would be
entitled to a benefit equal to two-thirds of the benefit to which the executive
would have been entitled, provided the executive has attained at least ten years
of service with the Company. Pursuant to the Resignation Agreement (as
hereinafter defined), Mr. Cuti shall be credited with 20 years of Vesting
Service for purposes of his Supplemental Retirement Agreement.
Employment Agreements: As of May 23, 1994, the Company entered into an
employment agreement with Mr. Crowley. As of September 9, 1994, the Company
entered into an employment agreement with Mr. Marshall. As of June 1, 1995, the
Company entered into an employment agreement with Mr. Rallo. The three above
mentioned employment agreements are hereinafter referred to collectively as the
"Employment Agreements". Each of the Employment Agreements is for an initial
term of 26 months, 28 months and two years for Messrs. Crowley, Marshall and
Rallo, respectively. The term of each Employment Agreement is automatically
extended for an additional year on (a) August 1, 1996 for Mr. Crowley and on
each successive August 1st thereafter; (b) February 1, 1997 for Mr. Marshall and
on each successive February 1st thereafter, and (c) June 1, 1996 for Mr. Rallo
and on each successive June 1st thereafter. Under the terms of his respective
Employment Agreement, each executive is entitled to a minimum annual base salary
of (a) $245,000 for Mr. Crowley; (b) $300,000 for Mr. Marshall, and (c) $245,000
for Mr. Rallo, which salary is subject to upward adjustment by the Company. The
Employment Agreements also provide that each executive shall be entitled to
receive an annual bonus of up to 60% of his annual base salary and shall be
provided the opportunity to participate in pension and welfare plans, programs
and arrangements that are generally made available to executives of Pathmark or
as may be deemed appropriate by the Compensation Committee of the Board of
Directors of SMG-II.
In the event one of the three above named executives' employment is
terminated by the Company without Cause (as defined in the Employment
Agreements), or by the executive for Good Reason (as defined in the Employment
Agreements) prior to the termination of the applicable Employment Agreement,
such executive will be entitled to continue to receive his base salary and
continued coverage under health and insurance plans for the period commencing on
the date of such termination or resignation through the date the applicable
Employment Agreement would have expired had it not been automatically renewed
but for said termination or resignation, reduced by any compensation or benefits
which the executive is entitled to receive in connection with his employment by
another employer during said period.
Under the Employment Agreements, the executives agree not to compete with
the Company as long as they are receiving payments thereunder and not to
disclose confidential information.
On March 20, 1996 (the "Effective Date"), Mr. Futterman retired as Chairman
and Chief Executive Officer of the Company. Pursuant to an agreement entered
into as of said date (the "Retirement Agreement"), Mr. Futterman will be
entitled to receive his base salary at the annual rate of $525,000 per year
during the period, commencing on the day following the Effective Date and ending
on July 31, 1998, or the date of his death, if earlier (the "Benefit Period"),
plus the bonus or bonuses attributable to the financial targets set forth for
the Company under its Executive Incentive Plan ("EIP") that he would have earned
(a maximum of 75% of base salary) had his employment continued through the
Benefit Period, subject to the Company reaching the applicable financial targets
set under the EIP or any other bonus plan; provided however, that the minimum
bonus paid for each fiscal year of
39
<PAGE>
the Company ending during the Benefit Period shall not be less than 25% of the
75% target amount. Additionally, Mr. Futterman will be entitled to receive
continued health coverage through the Benefit Period under the Company's health
and insurance plans applicable to him immediately prior to the Effective Date.
Each of the above described payments and benefits will be reduced by any
compensation or benefits he is entitled to receive in connection with any
employment by another employer during the Benefit Period; provided, however,
that such reduction will not apply to the first $100,000 of compensation and
benefits earned by Mr. Futterman for any calendar year during the Benefit
Period. The Retirement Agreement also provides that Mr. Futterman will be
entitled to be reimbursed by the Company for secretarial and office expenses
incurred by him during the two year period beginning September 1, 1996, up to
$30,000 per year (or an aggregate reimbursement of $60,000). Additionally,
pursuant to the terms of the Retirement Agreement, the Company made a cash lump
sum payment to Mr. Futterman of $1.5 million on April 1, 1996. Mr. Futterman has
agreed to be available to consult with the Company through December 31, 1996 and
not to compete with the Company during the period commencing with the Effective
Date and ending December 31, 1996.
On April 10, 1996 (the "Termination Date"), Mr. Cuti resigned as President
of the Company. Pursuant to an agreement entered into as of said date (the
"Resignation Agreement"), Mr. Cuti will be entitled to receive his base salary
at the annual rate of $325,000 per year during the period commencing on the day
following the Termination Date and ending on the second anniversary of the
Termination Date, or the date of his death, if earlier (the "Severance Period"),
plus the bonus or bonuses attributable to the financial targets set forth for
the Company under the EIP that he would have earned (a maximum of 75% of base
salary) had his employment continued through the Severance Period, subject to
the Company reaching the applicable financial targets set under the EIP or any
other bonus plan; provided, however, that the minimum bonus paid for each fiscal
year of the Company ending during the Severance Period shall not be less than
25% of the 75% target amount. Additionally, Mr. Cuti will be entitled to receive
continued health coverage through the Severance Period under the Company's
health and insurance plans applicable to him immediately prior to the
Termination Date. Each of the above described payments will be reduced by any
compensation or benefits he is entitled to receive in connection with any
employment by another employer during the Severance Period; provided, however,
that such reduction will not apply to the first $100,000 of compensation earned
by Mr. Cuti during the twelve-month period following the Termination Date and
the first $100,000 of compensation earned during the twelve-month period
following the first anniversary of the Termination Date. Additionally, pursuant
to the terms of the Resignation Agreement, the Company made a cash lump sum
payment to Mr. Cuti of $0.5 million on April 30, 1996 and shall credit him with
20 years of Vesting Service for purposes of determining his benefit under his
Supplemental Retirement Agreement. Mr. Cuti has agreed not to compete with the
Company during the period commencing with the Termination Date and ending
December 31, 1996, except for his employment with Duane Reade, Inc.
COMPENSATION OF DIRECTORS
Each director who is not employed by the Company or one of its subsidiaries,
SPI or the Equitable Investors or its affiliates receives an annual retainer of
$20,000 per year, plus travel expenses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Burke, Khanna and McLean comprise the compensation committee of the
Board of Directors of SMG-II, and were responsible for decisions concerning
compensation of the executive officers of the Company. Messrs. Burke and McLean
are directors of MLCP and they, along with Mr. Khanna, have been retained by
MLCP as consultants. MLCP is an indirect wholly-owned subsidiary of ML & Co. See
"Principal Stockholders."
40
<PAGE>
PRINCIPAL STOCKHOLDERS
As of April 15, 1996, all shares of the Company's capital stock is held by
PTK. All of PTK's capital stock is held by Holdings. Since February 4, 1991, all
shares of the Holdings Common Stock are held by SMG-II. As of April 15, 1996,
the number of shares of SMG-II (i) Class A Common Stock, (ii) Class B Common
Stock, (iii) Series A Preferred Stock, and (iv) Series B Preferred Stock
beneficially owned by the persons known by management of the Company to be the
beneficial owners of more than 5% of the outstanding shares of any class as
"beneficial ownership" has been defined under Rule 13d-3, as amended, under the
Securities Exchange Act of 1934, are set forth in the following table:
<TABLE>
<CAPTION>
NUMBER % OF
NAME OF SHARES CLASS
---- --------- --------
<S> <C> <C>
SMG-II Class A Common Stock
Merrill Lynch Capital Appreciation Partnership No. IX, L.P.(2)..... 488,704.8 67.3
ML Offshore LBO Partnership No. IX(2).............................. 12,424.7 1.7
Barfield House
St. Julians Avenue
St. Peter Port
Guernsey
Channel Islands
ML Employees LBO Partnership No. I, L.P.(2)........................ 12,148.6 1.7
ML IBK Positions, Inc.(3).......................................... 21,258.9 2.9
Merchant Banking L.P. No. 1(3)..................................... 8,119 1.1
Merrill Lynch KECALP L.P. 1987(3).................................. 7,344 1.0
CBC Capital Partners, Inc.(4)...................................... 30,000 4.1
270 Park Avenue
New York, NY 10017
Management and other employees (including former employees of
Pathmark)............................................................ 146,884 (1) 20.2
301 Blair Road
Woodbridge, NJ 07095
SMG-II Class B Common Stock
The Equitable Life Assurance Society of the United States(5)....... 114,000 35.6
c/o Alliance Corporate Finance Group Incorporated
1345 Avenue of the Americas, 39th Floor
New York, NY 10005
Equitable Deal Flow Fund, L.P.(5).................................. 150,000 46.9
c/o Alliance Corporate Finance Group Incorporated
1345 Avenue of the Americas, 39th Floor
New York, NY 10005
Equitable Variable Life Insurance Company(5)....................... 36,000 11.3
c/o Alliance Corporate Finance Group Incorporated
1345 Avenue of the Americas, 39th Floor
New York, NY 10005
CBC Capital Partners, Inc.(4)...................................... 20,000 6.2
SMG-II Series A Preferred Stock(6)
Merrill Lynch Capital Appreciation Partnership No. B-X, L.P.(2).... 133,043 56.2
ML Offshore LBO Partnership No. B-X(2)............................. 40,950 17.3
MLCP Associates, L.P. No. II(2).................................... 1,740 .7
ML IBK Positions, Inc.(3).......................................... 46,344.5 19.6
Merchant Banking L.P. No. IV(3).................................... 3,779 1.6
Merrill Lynch KECALP L.P. 1989(3).................................. 7,000 3.0
Merrill Lynch KECALP L.P. 1991(3).................................. 3,874.5 1.6
SMG-II Series B Preferred Stock(6)
CBC Capital Partners, Inc.(4)...................................... 12,500 6.9
Equitable Variable Life Insurance Company(5)....................... 20,192 11.2
The Equitable Life Assurance Society of the United States(5)....... 63,942 35.4
Equitable Deal Flow Fund, L.P.(5).................................. 84,135 46.5
</TABLE>
(footnotes on following page)
41
<PAGE>
(footnotes for preceding page)
- - ------------
(1) Includes presently exercisable options granted under the Plan for 73,759
shares of SMG-II Class A Common Stock held by Management Investors and 250
shares of SMG-II Class A Common Stock that SMG-II has agreed to sell to a
former employee of the Company and 250 shares to Mr. Cuti. Does not include
39,187 options to purchase shares of SMG-II Class A Common Stock granted to
non-management employees of the Company, which options are not exercisable
until a public offering of SMG-II Common Stock occurs.
(2) MLCP and its affiliates are the direct or indirect managing partners of ML
Offshore LBO Partnership No. IX, Merrill Lynch Capital Appreciation
Partnership No. IX, L.P., ML Employees LBO Partnership No. 1, L.P., Merrill
Lynch Capital Appreciation Partnership No. B-X, L.P., ML Offshore LBO
Partnership No. B-X and MLCP Associates, L.P. No. II. Such entities and
those disclosed in footnote (3) below, are referred to herein as the
"Merrill Lynch Investors" or ML Investors. The address of such entities is
c/o Merrill Lynch Capital Partners, Inc., in care of Stonington Partners,
Inc., 767 Fifth Avenue, New York, New York 10153. MLCP is an indirect wholly
owned subsidiary of ML&Co. The partners and principals of SPI (including
Messrs. Burke, Michas, McLean and Khanna) are consultants to MLCP.
(3) Merchant Banking L.P. No. 1, Merchant Banking L.P. No. IV, Merrill Lynch
KECALP L.P. 1987, Merrill Lynch KECALP L.P. 1989, Merrill Lynch KECALP L.P.
1991 and ML IBK Positions, Inc. are indirectly controlled by ML&Co. The
address of such entities is c/o James Caruso, Merrill Lynch & Co., Inc.,
World Financial Center, South Tower, New York, New York 10080-6123.
(4) CBC Capital Partners, Inc. is an affiliate of Chase Manhattan Corp.
(5) The Equitable Investors are separate purchasers who are affiliates of each
other.
(6) SMG-II Preferred stock may be converted into an equivalent number of shares
of common stock of SMG-II in accordance with its terms.
No officer or director claims beneficial ownership of any share of the
Company's Common Stock, Holdings Common Stock, or of SMG-II stock other than
SMG-II Class A Common Stock. As of April 15, 1996 the number of shares of SMG-II
Class A Common Stock beneficially owned by each director, by each of the
executive officers named in the Compensation Table and by all directors and
executive officers as a group is as follows:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES % OF CLASS
---- ---------------- ----------
<S> <C> <C>
James J. Burke, Jr.(1) ....................... -- --
Anthony J. Cuti(2)............................ 6,050 *
Jack Futterman(2)............................. 23,000 3.1
Neill Crowley(2).............................. 666 *
U. Peter C. Gummeson.......................... -- --
Ron Marshall(2)............................... 1,350 *
Sunil C. Khanna............................... 700 *
Stephen M. McLean(1).......................... -- --
Alexis P. Michas(1)........................... -- --
John W. Boyle ................................ -- --
Ronald Rallo(2)............................... 3,250 *
Jerry G. Rubenstein........................... 2,500 *
Directors and Executive Officers as a
group(1)(2)................................... 50,751 6.9
</TABLE>
- - ------------
* Less than 1%
(1) Does not include 550,000 shares of SMG-II Class A Common Stock or 236,731.5
shares of SMG-II Series A Preferred Stock owned beneficially by a group of
which MLCP is a part. Messrs. Burke, McLean and Michas, directors of MLCP,
disclaim beneficial ownership in all such shares.
(2) Includes 250 shares of SMG-II Class A Common Stock that SMG-II has agreed to
sell to Mr. Cuti and presently exercisable options granted under the Plan to
purchase shares of SMG-II Class A Common Stock, as follows: Mr. Cuti, 5,800;
Mr. Futterman, 13,000; Mr. Crowley, 666; Mr. Marshall, 1,350; and Mr. Rallo,
2,850, Mr. Rubenstein, 1,000 and all directors and executive officers as a
group, 33,951.
42
<PAGE>
DESCRIPTION OF THE SECURITIES
The Senior Subordinated Notes were issued under an Indenture dated as of
October 26, 1993 (the "Senior Subordinated Notes Indenture") between the Company
and the United States Trust Company of New York, trustee (the "Senior
Subordinated Trustee"). The Subordinated Notes were issued under an Indenture
dated as of October 26, 1993 (the "Subordinated Notes Indenture") between the
Company and Wilmington Trust Company, trustee (the "Subordinated Notes
Trustee"). The Subordinated Debentures were issued under an Indenture dated as
of October 26, 1993 (the "Subordinated Debentures Indenture" and together with
the Subordinated Notes Indenture, the "Subordinated Securities Indentures")
between the Company and Wilmington Trust Company, trustee (the "Subordinated
Debentures Trustee"). The Deferred Coupon Notes were issued under an Indenture
dated as of October 26, 1993 (the "Deferred Coupon Notes Indenture" and
collectively with the Senior Subordinated Notes Indenture, the Subordinated
Notes Indenture and the Subordinated Debentures Indenture, the "Indentures")
between the Company and NationsBank of Georgia, National Association, trustee
(the "Deferred Coupon Trustee" and collectively with the Senior Subordinated
Trustee, the Subordinated Notes Trustee and the Subordinated Debentures Trustee,
the "Trustees"). The Subordinated Notes and the Subordinated Debentures are
collectively referred to as the "Subordinated Securities", and together with the
Senior Subordinated Notes and the Deferred Coupon Notes are collectively
referred to as the "Securities". Copies of the Indentures are filed as exhibits
to the Registration Statement of which this Prospectus is a part. The Indentures
are subject to and are governed by the Trust Indenture Act of 1939, as amended.
The following summaries of the material provisions of the Indentures do not
purport to be complete, and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Indentures, including the
definitions of certain terms therein and those terms made a part of the
Indentures by the Trust Indenture Act of 1939, as amended. References to
Indenture provisions include all the Indentures unless otherwise indicated.
GENERAL
The Senior Subordinated Notes. The Senior Subordinated Notes will mature on
May 1, 2003, are limited to $440.0 million aggregate principal amount, and are
unsecured obligations of the Company. Each Senior Subordinated Note bears
interest at the rate of 9 5/8% payable in cash semiannually on May 1 and
November 1 of each year to the Person in whose name the Senior Subordinated Note
(or any predecessor Senior Subordinated Note) is registered at the close of
business on the April 15 or October 15 next preceding such interest payment
date. (Sections 202, 301 and 307)
The Subordinated Notes. The Subordinated Notes will mature on June 15, 2002,
are limited to $200.0 million aggregate principal amount, of which $199.0
million was issued in conjunction with the Recapitalization, and are unsecured
obligations of the Company. Each Subordinated Note bears interest at the rate of
11 5/8% payable in cash semiannually on June 15 and December 15 each year, to
the Person in whose name the Subordinated Note (or any predecessor Note) is
registered at the close of business on the June 1 or December 1 next preceding
such interest payment date. (Sections 202, 301 and 307)
The Subordinated Debentures. The Subordinated Debentures will mature on June
15, 2002, are limited to $95.8 million aggregate principal amount and are
unsecured obligations of the Company. Each Subordinated Debenture bears interest
at the rate of 12 5/8% payable in cash semiannually on June 15 and December 15
each year, to the Person in whose name the Subordinated Debenture (or any
predecessor Subordinated Debenture) is registered at the close of business on
the June 1 or December, 1 next preceding such interest payment date. (Sections
202, 301 and 307)
The Deferred Coupon Notes. The Deferred Coupon Notes will mature on November
1, 2003, are limited to $225.3 million aggregate principal amount at maturity,
and are unsecured obligations of the Company. The Deferred Coupon Notes were
offered at a substantial discount from their principal amount at maturity. Cash
interest will not accrue on the Deferred Coupon Notes prior to November 1,
43
<PAGE>
1999. Thereafter, cash interest on the Deferred Coupon Notes will be payable, at
a rate of 10 3/4% per annum, semiannually on each May 1 and November 1,
commencing May 1, 2000, to the Person in whose name the Deferred Coupon Note (or
any predecessor Deferred Coupon Note) is registered at the close of business on
the April 15 or October 15 next preceding such interest payment date. Cash
interest will accrue from the most recent interest payment date to which
interest has been paid or duly provided for or, if no interest has been paid or
duly provided for, from November 1, 1999. (Sections 202, 301 and 307)
Principal of, premium, if any, and interest on the Securities are payable,
and the Securities are exchangeable and transferable, at the office or agency of
the Company in The City of New York maintained for such purposes; provided,
however, that payment of interest may be made at the option of the Company by
check mailed to the Person entitled thereto as shown on the security register.
(Sections 301, 305 and 1002) The Securities will be issued only in fully
registered form without coupons, in denominations of $1,000 and any integral
multiple thereof. (Section 302) No service charge will be made for any
registration of transfer, exchange or redemption of Securities, except in
certain circumstances for any tax or other governmental charge that may be
imposed in connection therewith. (Section 305)
Only the Subordinated Notes will be entitled to the benefit of a sinking
fund.
OPTIONAL REDEMPTION
The Senior Subordinated Notes. The Senior Subordinated Notes will be subject
to redemption at any time on or after November 1, 1998, at the option of the
Company, in whole or in part, on not less than 21 nor more than 60 days' prior
notice in amounts of $1,000 or an integral multiple of $1,000 at the following
redemption prices (expressed as percentages of the principal amount), if
redeemed during the 12-month period beginning November 1 of the years indicated
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- - ---- ----------
<S> <C>
1998............................................................ 104.82%
1999............................................................ 102.41%
</TABLE>
and thereafter at 100% of the principal amount, in each case together with
accrued interest to the redemption date (subject to the right of Holders of
record on relevant record dates to receive interest due on an interest payment
date).
Notwithstanding the foregoing, on or prior to November 1, 1996, the Company
may redeem, on not less than 21 nor more than 60 days' prior notice in amounts
of $1,000 or an integral multiple of $1,000, in the aggregate up to 35% of the
initial principal amount of the Senior Subordinated Notes with the net proceeds
of any issuance of Qualified Capital Stock of the Company or PTK at a redemption
price of 109% of the principal amount thereof, together with accrued and unpaid
interest to the redemption date.
In addition, the Senior Subordinated Notes will be subject to redemption, at
the option of the Company, prior to November 1, 1998, in whole or in part, at
any time within 180 days after a Change in Control on not less than 21 nor more
than 60 days' prior notice to each Holder of Senior Subordinated Notes to be
redeemed in amounts of $1,000 or an integral multiple of $1,000, at a redemption
price equal to the sum of (i) the principal amount thereof plus (ii) accrued and
unpaid interest, if any, to the redemption date (subject to the right of Holders
of record on relevant record dates to receive interest due on an interest
payment date) plus (iii) the Applicable Premium.
If less than all of the Senior Subordinated Notes are to be redeemed, the
Senior Subordinated Notes Trustee shall select the respective Senior
Subordinated Notes, or portions thereof, to be redeemed pro rata, by lot or by
any other method the Senior Subordinated Notes Trustee shall deem fair and
reasonable.
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<PAGE>
The Subordinated Notes. The Subordinated Notes will be subject to redemption
otherwise than through the operation of the sinking fund (as described below) at
any time on or after June 15, 1997, at the option of the Company, in whole or in
part, on not less than 21 nor more than 60 days' prior notice in amounts of
$1,000 or an integral multiple of $1,000 at the following redemption prices
(expressed as percentages of the principal amount), if redeemed during the
12-month period beginning June 15 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- - ---- ----------
<S> <C>
1997............................................................ 105.8125%
1998............................................................ 103.8750%
1999............................................................ 101.9375%
</TABLE>
and thereafter at 100% of the principal amount, in each case together with
accrued interest to the redemption date (subject to the right of Holders of
record on relevant record dates to receive interest due on an interest payment
date).
If less than all of the Subordinated Notes are to be redeemed, the Trustee
shall select the Subordinated Notes or portions thereof to be redeemed pro rata,
by lot or by any other method the Subordinated Notes Trustee shall deem fair and
reasonable.
The Subordinated Debentures. The Subordinated Debentures will be subject to
redemption at any time on or after June 15, 1994, at the option of the Company,
in whole or in part, on not less than 21 nor more than 60 days' prior notice in
amounts of $1,000 or an integral multiple of $1,000 at the following redemption
prices (expressed as percentages of the principal amount), if redeemed during
the 12-month period beginning June 15 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- - ---- ----------
<S> <C>
1996............................................................ 112.625%
1997............................................................ 103.600%
1998............................................................ 102.700%
1999............................................................ 101.800%
2000............................................................ 100.900%
</TABLE>
and thereafter at 100% of the principal amount, in each case together with
accrued interest to the redemption date (subject to the right of Holders of
record on relevant record dates to receive interest due on an interest payment
date).
If less than all of the Subordinated Debentures are to be redeemed, the
Trustee shall select the Subordinated Debentures or portions thereof to be
redeemed pro rata, by lot or by any other method the Trustee shall deem fair and
reasonable.
The Deferred Coupon Notes. The Deferred Coupon Notes will be subject to
redemption during the 12-month period beginning November 1, 1999, at the option
of the Company, in whole or in part, on not less than 21 nor more than 60 days'
prior notice in amounts of $1,000 or an integral multiple of $1,000 at a
redemption price (expressed as a percentage of the Accreted Amount) of 105% and
thereafter at 100% of the principal amount at final Maturity, in each case
together with accrued interest, if applicable, to the redemption date (subject
to the right of Holders of record on relevant record dates to receive interest
due on an interest payment date).
Notwithstanding the foregoing, on or prior to November 1, 1996, the Company
may redeem, on not less than 21 nor more than 60 days' prior notice in amounts
of $1,000 or an integral multiple of $1,000, Deferred Coupon Notes which
represent an aggregate principal amount at final Maturity which shall not exceed
35% of the original aggregate principal amount at final Maturity of the Deferred
Coupon
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<PAGE>
Notes with the net proceeds of any issuance of Qualified Capital Stock of the
Company or PTK at a redemption price of 110% of the Accreted Amount thereof.
In addition, the Deferred Coupon Notes will be subject to redemption, at the
option of the Company, prior to November 1, 1999, in whole or in part, at any
time within 180 days after a Change in Control on not less than 21 nor more than
60 days' prior notice to each holder of Deferred Coupon Notes to be redeemed in
amounts of $1,000 or an integral multiple of $1,000, at a redemption price equal
to the sum of (i) the Accreted Amount as of the date of redemption plus (ii)
accrued and unpaid interest, if any, to the redemption date (subject to the
right of Holders of record on relevant record dates to receive interest due on
an interest payment date) plus (iii) the Applicable Premium.
If less than all of the Deferred Coupon Notes are to be redeemed, the
Deferred Coupon Notes Trustee shall select the respective Deferred Coupon Notes,
or portions thereof, to be redeemed pro rata, by lot or by any other method the
respective Trustees shall deem fair and reasonable.
THE SUBORDINATED NOTES SINKING FUND
The sinking fund for the Subordinated Notes provides for the mandatory
redemption of 25% of the original aggregate principal amount of the Subordinated
Notes on each of June 15, 2000 and June 15, 2001, at a redemption price equal to
100% of the principal amount, plus accrued and unpaid interest to the redemption
date, providing for the redemption of 50% of the original aggregate principal
amount of the Subordinated Notes prior to maturity. (Sections 203 and 1201) If
less than all of the Subordinated Notes are to be redeemed, the Subordinated
Notes Trustee shall select the Subordinated Notes or portions thereof to be
redeemed pro rata, by lot or by any other method the Subordinated Notes Trustee
shall deem fair and reasonable. The Company may, at its option, receive a credit
against sinking fund obligations equal to the aggregate principal amount of
Subordinated Notes acquired by the Company and surrendered to the Subordinated
Notes Trustee for cancellation and of Subordinated Notes redeemed or called for
redemption otherwise than through operation of the sinking fund that have not
previously been so credited for such purpose by the Subordinated Notes Trustee.
(Section 1202)
SUBORDINATION
The Securities are subordinated in right of payment to the prior payment in
full of all Senior Indebtedness (as defined below); provided, however, that the
Senior Subordinated Notes shall rank pari passu with, or prior to, all existing
and future Indebtedness of the Company that is subordinated to any Senior
Indebtedness and the Subordinated Securities shall rank pari passu with, or
prior to, all existing and future Indebtedness of the Company (other than
Permitted Senior Subordinated Indebtedness) that is subordinated to any Senior
Indebtedness of the Company. (Section 1301) In the event of: (a) any insolvency
or bankruptcy case or proceeding, or any receivership, liquidation,
reorganization or other similar case or proceeding in connection therewith,
relative to the Company or to its creditors, as such, or to its assets, or (b)
any liquidation, dissolution or other winding up of the Company, whether
voluntary or involuntary and whether or not involving insolvency or bankruptcy,
or (c) any assignment for the benefit of creditors or any other marshalling of
assets and liabilities of the Company (except a distribution in connection with
a consolidation of the Company with, or the merger of the Company into, another
corporation or the liquidation or dissolution of the Company following
conveyance, transfer or lease of its properties and assets substantially as an
entirety to another corporation upon the terms and conditions of the provisions
of "Merger and Sale of Assets, etc."), the holders of all Senior Indebtedness
will be entitled to receive payment in full, in cash or cash equivalents, of all
amounts due or to become due on or in respect of all Senior Indebtedness, or
provision has been made for such payment in cash or cash equivalents, before the
Holders of the Securities are entitled to receive any payment on account of
principal of (or premium, if any) or interest on the Securities; and any payment
or distribution of assets of the Company of any kind or character, whether in
cash, property or securities, by set-off or otherwise, to which the Holders of
the Securities or the Trustees would be entitled but for the provisions of the
Indentures relating to subordination (except, so long as the effect of
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<PAGE>
this parenthetical clause is not to cause the Securities to be treated in any
case or proceeding or similar event described above as part of the same class of
claims as the Senior Indebtedness or any class of claims on a parity with or
senior to the Senior Indebtedness, for any such payment or distribution (x)
authorized by an order or decree giving effect, and stating in such order or
decree that effect is given, to the subordination of the Securities to the
Senior Indebtedness, and made by a court of competent jurisdiction in a
reorganization proceeding under any applicable bankruptcy law, or (y) of
securities that (A) are unsecured (except to the extent the Securities are
secured), (B) have an Average Life to Stated Maturity and final Maturity which
are no shorter than the Average Life to Stated Maturity of the Securities or any
securities issued to the holders of Senior Indebtedness under the Bank Credit
Agreement pursuant to a plan of reorganization or readjustment, (C) are
subordinated, to at least the same extent as the Securities, to the payment of
all Senior Indebtedness then outstanding and (D) are not guaranteed by any
Subsidiary of the Company (except to the extent the Securities are so
guaranteed)) shall be paid by the liquidating trustee or agent or other person
making such payment or distribution directly to the holders of Senior
Indebtedness ratably according to the aggregate amounts remaining unpaid on
account of the Senior Indebtedness to the extent necessary to make payment in
full, in cash or cash equivalents, of all Senior Indebtedness remaining unpaid,
after giving effect to any concurrent payment or distribution to holders of such
Senior Indebtedness. In the event that, notwithstanding the foregoing, any
Trustee or any Holder of the Securities shall have received any such payment or
distribution of assets of the Company of any kind or character before all Senior
Indebtedness is paid in full, in cash or cash equivalents, then such payment or
distribution will be paid over or delivered to the trustee in bankruptcy,
receiver, liquidating trustee, custodian, assignee, agent or other person making
payment or distribution of assets of the Company for application to the payment
of all Senior Indebtedness remaining unpaid to the extent necessary to pay all
Senior Indebtedness in full, in cash or cash equivalents, after giving effect to
any concurrent payment or distribution to or for the holders of Senior
Indebtedness. (Section 1302)
The Company is also prohibited from making payments on account of principal
of (or premium, if any) or interest on the Securities or on account of the
purchase or redemption or other acquisition of the Securities if there shall
have occurred and be continuing: (a) a default in any payment with respect to
any Specified Senior Indebtedness (as defined below) beyond any applicable grace
period, (b) any other event of default with respect to any Specified Senior
Indebtedness resulting in the acceleration of the maturity thereof or (c) any
other event of default with respect to any Specified Senior Indebtedness
permitting the holders or the trustee thereof to accelerate the maturity thereof
(until, in the case of an event of default described in clause (a) or (b) above,
such event of default described in clause (a) above shall have been cured or
waived or ceased to exist or such acceleration described in clause (b) above
shall have been rescinded or annulled or the holders of such Specified Senior
Indebtedness have waived the benefits of the provision described herein or, in
the case of an event of default described in clause (c) above, until the earlier
of (1) 179 days after the date on which written notice of such event of default
(which notice requests that no such payment be made) is received by the Company
or the relevant Trustee from the agent with respect to any such event of default
under the Bank Credit Agreement or any other representative of a holder of
Specified Senior Indebtedness with respect to any such event of default under
such Specified Senior Indebtedness and (2) the date, if any, on which such event
of default is cured or waived or the related Specified Senior Indebtedness is
discharged or the holders of such Specified Senior Indebtedness (and, if any
Indebtedness under the Bank Credit Agreement is outstanding, lenders under the
Bank Credit Agreement) have waived the benefits of the provisions described
herein; provided that further written notice relating to the same or any other
event of default specified in clause (c) with respect to any Specified Senior
Indebtedness received by the Company or the relevant Trustee within 12 months
after such receipt shall not have such effect). In the event that the Company
makes any payment to the Trustees or any Holder of the Securities prohibited by
the foregoing, then such payment is required to be paid over to the Company.
(Section 1303) Subject to the payment in full, in cash or cash equivalents, of
all Senior Indebtedness, the Holders of the Securities shall be subrogated to
the rights of the holders of Senior Indebtedness to receive payments and
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<PAGE>
distributions of assets of the Company applicable to the Senior Indebtedness
until the Securities are paid in full. (Section 1305)
By reason of such subordination, in the event of a distribution of assets
upon insolvency, (i) the holders of Senior Indebtedness may recover more,
ratably, than Holders of the Securities, (ii) the Holders of the Senior
Subordinated Notes, which constitute Senior Indebtedness with respect to the
Subordinated Securities and the Deferred Coupon Notes, may recover more than the
Holders of such Securities, and the (iii) Holders of the Subordinated
Securities, which constitute Senior Indebtedness with respect to the Deferred
Coupon Notes, may recover more than the Holders of the Deferred Coupon Notes.
With respect to the Senior Subordinated Notes, on February 3, 1996 the Company
had outstanding $616.3 million of Senior Indebtedness, $446.6 million of
Subordinated Indebtedness and no Indebtedness pari passu with the Senior
Subordinated Notes. With respect to the Subordinated Securities, on February 3,
1996 the Company had outstanding $1,053.7 million of Senior Indebtedness, $151.9
million of Subordinated Indebtedness, and no Indebtedness pari passu in right of
payment except that the Subordinated Securities are pari passu to each other.
With respect to the Deferred Coupon Notes, on February 3, 1996 the Company had
outstanding $1,348.5 million of Senior Indebtedness and no Subordinated
Indebtedness or Indebtedness pari passu in right of payment to the Deferred
Coupon Notes.
"Specified Senior Indebtedness" means (i) all Senior Indebtedness under the
Bank Credit Agreement, (ii) with respect to the Subordinated Securities, Senior
Indebtedness under the Senior Subordinated Notes, (iii) with respect to the
Deferred Coupon Notes, Senior Indebtedness under the Senior Subordinated Notes
and (iv) any other issue of Senior Indebtedness or refinancings thereof
permitted by said definition having a principal amount of at least $100.0
million and is specifically designated in the instrument evidencing such Senior
Indebtedness as "Specified Senior Indebtedness" by the Company. For purposes of
this definition: (a) the amount of the Indebtedness of the Company with respect
to any Interest Rate Hedge Arrangement shall be deemed to be the lesser of (x)
25% of the notional amount of such Interest Rate Hedge Arrangement, or (y) the
maximum amount the Company could be required to pay under such Interest Rate
Hedge Arrangement; and (b) a refinancing of any such Indebtedness shall be
treated as such only if it ranks or would rank pari passu with the Indebtedness
refinanced. "Interest Rate Hedge Arrangement" means any rate swap transaction
under a rate swap agreement to which the Company is a party or beneficiary, or
becomes a party or beneficiary, and any interest rate protection agreement,
interest rate future, interest rate option or other interest rate hedge
arrangement to or under which the Company is a party or a beneficiary, or
becomes a party or a beneficiary, or to or under which any Subsidiary of the
Company is or becomes such a party or beneficiary if the obligations of such
Subsidiary thereunder are guaranteed by the Company.
"Senior Indebtedness" means the principal of, premium, if any, and interest
on (such interest on Senior Indebtedness, wherever referred to in the
Indentures, being deemed to include interest accruing after the filing of a
petition initiating any proceeding pursuant to any bankruptcy law in accordance
with and at the rate (including any rate applicable upon any default or event of
default, to the extent lawful) specified in any document evidencing the Senior
Indebtedness, whether or not the claim for such interest is allowed as a claim
after such filing in any proceeding under such bankruptcy law) any Indebtedness
of the Company (other than as otherwise provided in this definition), whether
outstanding on the date of the Indentures or thereafter created, incurred or
assumed in accordance with the provisions of the Indentures, unless, in the case
of any particular Indebtedness, the instrument creating or evidencing the same
or pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the respective
Securities. Without limiting the generality of the foregoing, "Senior
Indebtedness" shall include the principal of, premium, if any, and interest on
(including interest accruing after the occurrence of an event of default) all
obligations of every nature of the Company from time to time owed under the Bank
Credit Agreement, including, without limitation, principal of and interest on,
and all fees, expenses, indemnities, payments for early termination of Interest
Rate Hedge Arrangements and reimbursement obligations under letters of
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<PAGE>
credit payable under the Bank Credit Agreement, with respect to the Subordinated
Securities, Senior Indebtedness shall include Permitted Senior Subordinated
Indebtedness, and, with respect to the Deferred Coupon Notes, Senior
Indebtedness shall include Indebtedness evidenced by the Senior Subordinated
Notes and the Subordinated Securities. Notwithstanding the foregoing, "Senior
Indebtedness" shall not include (i) with respect to the Senior Subordinated
Notes, Indebtedness evidenced by the Senior Subordinated Notes, the Subordinated
Securities and the Deferred Coupon Notes, (ii) with respect to the Subordinated
Securities, Indebtedness evidenced by the Subordinated Securities and the
Deferred Coupon Notes, (iii) Indebtedness that is subordinate or junior in right
of payment to any Indebtedness of the Company (other than Permitted Senior
Subordinated Indebtedness with respect to the Subordinated Securities), except
for subordination as a result of intercreditor arrangements with respect to
collateral, (iv) Indebtedness that when incurred, and without respect to any
election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company, (v) Indebtedness that is represented by Redeemable
Capital Stock, (vi) Indebtedness of the Company to a Subsidiary of the Company
or any other Affiliate of the Company or any of such Affiliate's subsidiaries,
including the Holdings Intercompany Notes, (vii) that portion of any
Indebtedness (other than any Indebtedness provided by any lender pursuant to the
Bank Credit Agreement, except to the extent such Indebtedness is provided with
actual knowledge on the part of any such lender that the incurrence thereof by
the Company is a violation of the Indentures) which at the time of issuance is
issued in violation of the Indentures.
CERTAIN COVENANTS
The Indentures contain, among others, the following covenants:
Limitation on Indebtedness. The Company will not, and will not permit any of
its Subsidiaries to, create, incur, assume, or directly or indirectly guarantee
or in any other manner become directly or indirectly liable for the payment of,
any Indebtedness (including any Acquired Indebtedness, but excluding Permitted
Indebtedness) unless, at the time of such event and after giving effect thereto
on a pro forma basis, the Company's Consolidated Fixed Charge Coverage Ratio for
the four full fiscal quarters immediately preceding such event, taken as one
period and calculated on the assumption that such Indebtedness had been incurred
on the first day of such four-quarter period and on the assumption that, in
connection with the incurrence of any such Indebtedness, any related acquisition
(whether by means of purchase, merger or otherwise) and any related repayment of
Indebtedness also had occurred on such date with the appropriate adjustments
with respect to such acquisition and repayment being included in such pro forma
calculation, would have been at least equal to 1.75 to 1.0. (Section 1007)
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly,
(i) declare or pay any dividend on, or make any distribution to holders
of, any shares of the Company's Capital Stock (other than dividends or
distributions payable in shares of its Qualified Capital Stock or in
options, warrants or other rights to purchase such Qualified Capital Stock),
(ii) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any Affiliate thereof (other than Capital
Stock of (x) any Subsidiary held by the Company or any of its Majority-owned
Subsidiaries and (y) any Majority-owned Subsidiary of the Company) or any
options, warrants or other rights to acquire such Capital Stock,
(iii) make any principal payment on or redeem, repurchase, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, scheduled sinking fund payment or maturity, any Indebtedness of the
Company which is pari passu with or expressly subordinate in right of
payment to the Senior Subordinated Notes, the Subordinated Securities or the
Deferred Coupon Notes, as the case may be,
(iv) declare or pay any dividend or distribution on any Capital Stock of
any Subsidiary to any Person (other than the Company or any of its
Majority-owned Subsidiaries) or purchase, redeem or
49
<PAGE>
otherwise acquire or retire for value, any Capital Stock of any Subsidiary
held by any Person (other than the Company or any of its Majority-owned
Subsidiaries), or
(v) incur, create or assume any guarantee of Indebtedness of any
Affiliate of the Company (other than a Majority-owned Subsidiary of the
Company) or make any Investment (other than any Permitted Investment) in any
Person, including any Unrestricted Subsidiary
(such payments or other actions described in the foregoing clauses (i) through
(v), other than any such action that is a Permitted Payment, are collectively
referred to as "Restricted Payments"), unless at the time of and after giving
effect to the proposed Restricted Payment (the amount of any such Restricted
Payment, if other than cash, as determined by the Board of Directors of the
Company, whose determination shall be conclusive and evidenced by a board
resolution), (1) no Default or Event of Default shall have occurred and be
continuing and (2) the aggregate amount of all Restricted Payments (plus
Permitted Payments set forth in clauses (b)(vi), (b)(xi) and (b)(xii) below)
declared or made after the date of the Indentures (including Investments in
Unrestricted Subsidiaries pursuant to the "Limitation on Unrestricted
Subsidiaries" covenant) shall not exceed the sum of
(A) 50% of the aggregate cumulative Consolidated Adjusted Net Income of
the Company accrued on a cumulative basis during the period beginning on
October 31, 1993 and ending on the last day of the Company's last fiscal
quarter ending prior to the date of such proposed Restricted Payment (or, if
such aggregate cumulative Consolidated Adjusted Net Income shall be a loss,
minus 100% of such loss), plus
(B) the aggregate net proceeds, including the Fair Market Value of
property other than cash (as determined by the Company's Board of Directors,
whose determination shall be conclusive), received after the date of the
Indentures by the Company as capital contributions to the Company, plus
(C) the aggregate net proceeds, including the Fair Market Value of
property other than cash (as determined by the Company's Board of Directors,
whose determination shall be conclusive), received after the date of the
Indentures by the Company from the issuance or sale (other than to any of
its Subsidiaries) of shares of Qualified Capital Stock of the Company or
warrants, options or rights to purchase shares (other than issuances
permitted by clause (v) of the definition of Permitted Payments set forth
below) of Qualified Capital Stock of the Company, plus
(D) the aggregate net proceeds, including the Fair Market Value of
property other than cash (as determined by the Company's Board of Directors,
whose determination shall be conclusive), received by the Company (other
than from any of its Subsidiaries) upon the exercise of options, warrants or
rights to purchase shares of Qualified Capital Stock of the Company, plus
(E) the aggregate net proceeds, including the Fair Market Value of
property other than cash (as determined by the Company's Board of Directors,
whose determination shall be conclusive), received after the date of the
Indentures by the Company from the issue or sale of debt securities that
have been converted into or exchanged for Qualified Capital Stock of the
Company, together with the aggregate cash received by the Company at the
time of such conversion or exchange. (Section 1008)
(b) Notwithstanding paragraph (a) above, the Company and its Subsidiaries
may take the following actions (clauses (i) through (xiii) being referred to as
"Permitted Payments") so long as, in the case of clauses (vi), (ix), (xi), (xii)
and (xiii), no Default or Event of Default has occurred and is continuing:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such declaration date such declaration complied
with the provisions of the previous paragraph (in which event such dividend
shall be deemed to have been paid on such date of declaration thereof for
purposes of the previous paragraph);
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<PAGE>
(ii) the repurchase, redemption or other acquisition or retirement of
any shares of any class of Capital Stock of the Company or any Affiliate of
the Company, in exchange for (including any such exchange pursuant to the
exercise of a conversion right or privilege in connection with which cash is
paid in lieu of the issuance of fractional shares or scrip) or out of the
net cash proceeds of a substantially concurrent issue and sale (other than
to a Subsidiary) of shares of Qualified Capital Stock of the Company;
(iii) payments by the Company to SMG-II pursuant to the Tax Sharing
Agreement;
(iv) dividends or distributions in an aggregate amount not to exceed the
amount of dividends or distributions paid to the Company or its Subsidiaries
by Unrestricted Subsidiaries since the date of the Indentures;
(v) the redemption, defeasance, repurchase or acquisition or retirement
for value (each, for purposes of this clause, a "refinancing") of any
Indebtedness of the Company (other than Redeemable Capital Stock) which is
pari passu with or expressly subordinate in right of payment to the Senior
Subordinated Notes, the Subordinated Securities or the Deferred Coupon
Notes, as the case may be, through the issuance of (A) new Indebtedness of
the Company or (B) shares of Qualified Capital Stock of the Company or PTK;
provided that, with respect to clause (A), any such new Indebtedness (1) has
a principal amount that does not exceed the principal amount so refinanced
plus the amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of the Indebtedness refinanced or the
amount of any premium reasonably determined by the Company as necessary to
accomplish such refinancing, plus the amount of expenses of the Company
incurred in connection with such refinancing; provided that for purposes of
this clause, the principal amount of any Indebtedness shall be deemed to
mean the principal amount thereof or, if such Indebtedness provides for an
amount less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, such lesser amount as of the date of
determination, (2) has an Average Life to Stated Maturity that is equal to
or greater than the remaining Average Life to Stated Maturity of the Senior
Subordinated Notes, the Subordinated Notes, Subordinated Debentures or the
Deferred Coupon Notes, as the case may be, (3) has a final Stated Maturity
that exceeds the final Stated Maturity of principal of the Senior
Subordinated Notes, the Subordinated Notes, Subordinated Debentures or the
Deferred Coupon Notes, as the case may be, and (4) is pari passu with or
expressly subordinated in right of payment to the Senior Subordinated Notes,
the Subordinated Securities or the Deferred Coupon Notes, as the case may
be, at least to the same extent as the Indebtedness refinanced;
(vi) dividends, loans or advances by the Company to Holdings or PTK to
enable Holdings to pay cash dividends on the Holdings' $3.52 Cumulative
Exchangeable Redeemable Preferred Stock (the "Exchangeable Preferred Stock"
or the "Holdings Preferred Stock"); provided that on the date of payment of
such dividend, the Company, after giving pro forma effect to such dividend,
loan or advance, would be able to incur $1.00 of additional Indebtedness
under the provisions of the "Limitation on Indebtedness" covenant (other
than Permitted Indebtedness), assuming a market rate of interest on such
Indebtedness;
(vii) the redemption, repurchase, defeasance or acquisition or
retirement for value of any Pari Passu Indebtedness; provided that the
Company shall redeem, pursuant to the optional redemption provisions of the
respective Indentures, the principal amount of Senior Subordinated Notes,
Subordinated Notes, Subordinated Debentures or Deferred Coupon Notes, as the
case may be (except that with respect to the Subordinated Notes, the
Subordinated Debentures are not considered Pari Passu Indebtedness for the
purposes of this clause), bearing the same proportion to the aggregate
amount of such Pari Passu Indebtedness being redeemed, repurchased, defeased
or acquired or retired for value that the aggregate outstanding principal
amount of such Securities bears to the aggregate outstanding principal
amount of such Pari Passu Indebtedness (without giving effect to such
redemption, repurchase, defeasance, acquisition or retirement);
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(viii) the declaration or payment of any dividend or distribution on any
Capital Stock of any Subsidiary, or the purchase, redemption, acquisition or
retirement for value of any Capital Stock of any Subsidiary; provided that
such declaration, payment, purchase, redemption, acquisition or retirement
is made pro rata among all holders of such Capital Stock of such Subsidiary;
(ix) payments or other actions described in clauses (i) through (v) in
paragraph (a) above that would otherwise be Restricted Payments in an
aggregate amount not to exceed $35.0 million;
(x) the dividend or distribution of the Capital Stock of Plainbridge to
PTK;
(xi) the repurchase of any Indebtedness of the Company which is pari
passu with or expressly subordinate in right of payment to the Senior
Subordinated Notes, the Subordinated Securities or the Deferred Coupon
Notes, as the case may be, at a purchase price not greater than 101% of the
principal amount of such Indebtedness in the event of a Change in Control
(as defined below) pursuant to a provision similar to the "Purchase of
Securities upon Change in Control" covenant; provided that prior to such
repurchase the Company has made the Change in Control Offer as provided in
such covenant and has repurchased all Senior Subordinated Notes,
Subordinated Securities or Deferred Coupon Notes, as the case may be,
validly tendered for payment in connection with such Change in Control
Offer;
(xii) the redemption, repurchase, defeasance or acquisition or
retirement for value of the Holdings Intercompany Notes remaining
outstanding following the Recapitalization (other than a scheduled principal
payment, scheduled sinking fund payment or at maturity); and
(xiii) with respect to the Subordinated Notes, the redemption,
repurchase, defeasance or acquisition or retirement for value of the
Subordinated Debentures; provided that, in the case of a redemption,
repurchase, defeasance or acquisition or retirement for value with the
proceeds of other Indebtedness, the applicable provisions of clause (v)
above are complied with.
Except as provided in this paragraph (b) and clause (a)(2) above, nothing in
this covenant limits or restricts the making of any Permitted Payment and a
Permitted Payment will not be treated as a Restricted Payment.
(c) In computing Consolidated Adjusted Net Income of the Company under
clause (A) of paragraph (a) above, (1) the Company shall use audited financial
statements for the portions of the relevant period for which audited financial
statements are available on the date of determination and unaudited financial
statements and other current financial data based on the books and records of
the Company for the remaining portion of such period and (2) the Company shall
be permitted to rely in good faith on the financial statements and other
financial data derived from the books and records of the Company that are
available on the date of determination. If the Company makes a Restricted
Payment which, at the time of the making of such Restricted Payment, would in
the good faith determination of the Company be permitted under the requirements
of the respective Indentures, such Restricted Payment shall be deemed to have
been made in compliance with the respective Indentures notwithstanding any
subsequent adjustments made in good faith to the Company's financial statements
affecting Consolidated Adjusted Net Income of the Company for any period.
(Section 1008)
Limitation on Transactions with Affiliates. (a) The Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly, enter into
any transaction or series of related transactions (including, without
limitation, the sale, purchase, exchange or lease of assets, property or
services) with any Affiliate of the Company (other than a wholly owned
Subsidiary thereof) unless (i) such transaction or series of transactions is or
are on terms that are no less favorable to the Company or such Subsidiary, as
the case may be, than those which could have been obtained at the time of such
transaction or transactions in a comparable transaction in arm's-length dealings
with an unaffiliated third party and (ii) (A) with respect to any transaction or
series of transactions involving aggregate payments in excess of $1.0 million,
but less than $10.0 million, the Company delivers an officers' certificate to
the Trustees certifying that such transaction or transactions complies with
clause (i) above and (B) with respect to a
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transaction or series of transactions, involving aggregate payments equal to or
greater than $10.0 million, (1) such transaction or transactions shall have
received the approval of a majority of the disinterested directors of the Board
of Directors of the Company if Plainbridge is a party to such transaction or
series of transactions or (2) if Plainbridge is not a party to such transaction
or series of transactions, such transactions or series of transactions shall
have received either the approval of a majority of the disinterested directors
of the Board of Directors of the Company or the Company shall deliver to the
Trustees a written opinion of a nationally recognized investment banking firm
stating that such transaction is fair to the Company from a financial point of
view; provided, however, that the foregoing restriction shall not apply to (1)
the payment of fees to MLCP or Merrill Lynch, Pierce, Fenner & Smith
Incorporated or any of their Affiliates for consulting, investment banking or
financial advisory services rendered by such Person to the Company or any
Subsidiary of the Company, (2) the payment of reasonable and customary regular
fees to directors of the Company, PTK, SMG-II, Holdings or any of their
respective subsidiaries or parents who are not employees of any of such Persons,
(3) the Logistical Services Agreement and transactions pursuant thereto and (4)
the Spin-Off Agreements and transactions pursuant thereto. For purposes of this
paragraph (a), any transaction or series of related transactions between the
Company or any Subsidiary and any Affiliate of the Company that is approved as
being on the terms required by clause (i) in the prior sentence by a majority of
the disinterested directors of the Board of Directors of the Company shall be
deemed to be on terms as favorable as those that might be obtained at the time
of such transaction or series of transactions in a comparable transaction in
arm's-length dealings with an unaffiliated third party, and thus shall be
permitted under this paragraph (a).
(b) The Company will not, and will not permit any of its Subsidiaries to,
amend, modify, or in any way alter the terms of the Intercompany Agreement, the
Logistical Services Agreement or the Spin-Off Agreements in a manner materially
adverse to the Company other than (i) by adding new Subsidiaries and (ii) in the
case of the Logistical Services Agreement and Spin-Off Agreements, any
amendments or modifications that are approved by a majority of the disinterested
directors of the Board of Directors of the Company. (Section 1009)
Limitation on Liens. The Company will not, and will not permit any
Subsidiary to, create, incur, affirm or suffer to exist any Lien of any kind
securing any Pari Passu Indebtedness or Subordinated Indebtedness (including any
assumption, guarantee or other liability with respect thereto by any Subsidiary)
upon any property or assets (including any intercompany notes) of the Company or
any Subsidiary owned on the date of the Indentures or acquired after the date of
the Indentures, or any income or profits therefrom, unless the Senior
Subordinated Notes, the Subordinated Securities or the Deferred Coupon Notes, as
the case may be, are directly secured equally and ratably with (or prior to in
the case of Subordinated Indebtedness) the obligation or liability secured by
such Lien, and except for any Lien securing Acquired Indebtedness created prior
to the incurrence of such Indebtedness by the Company or any Subsidiary,
provided that any such Lien only extends to the assets that were subject to such
Lien securing such Acquired Indebtedness prior to the related acquisition by the
Company or its Subsidiaries. (Section 1010)
Limitation on other Senior Subordinated Indebtedness under the Subordinated
Securities Indentures. The Company will not create, incur, assume, guarantee or
in any other manner become liable with respect to any Indebtedness (other than
Permitted Senior Subordinated Indebtedness) that is subordinate in right of
payment to any Senior Indebtedness unless such indebtedness is also pari passu
with, or subordinate in right of payment to, the Subordinated Securities,
pursuant to subordination provisions substantially similar to those contained in
the Indentures. (Section 1011)
Purchase of Securities upon Change in Control. If there shall have occurred
a Change in Control, Securities shall be purchased by the Company, at the option
of the Holder thereof in whole or in part in integral multiples of $1,000 at
final Maturity, at a purchase price in cash in an amount equal to 101% of the
principal amount of the Securities (other than the Deferred Coupon Notes), or
101% of the Accreted Amount of the Deferred Coupon Notes, as of the date of
purchase, as the case may be, plus, if
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applicable, accrued and unpaid interest (including any defaulted interest), if
any, to the date of purchase, pursuant to the offer described below (the "Change
in Control Offer") and the other procedures set forth in this covenant. If there
is a Change in Control, there can be no assurance that the Company will have
available funds sufficient to pay such purchase price for all of the Securities
that Holders thereof may elect to require the Company to purchase.
Within 30 days following a Change in Control and prior to the mailing of the
notice to Holders of the Securities provided for in the next paragraph, the
Company covenants to either (1) repay in full all Indebtedness under the Bank
Credit Agreement and permanently reduce the commitment by the lenders thereunder
or offer to repay in full all such Indebtedness and permanently reduce such
commitment and repay the Indebtedness and permanently reduce the commitment of
each lender who has accepted such offer or (2) obtain the requisite consent
under the Bank Credit Agreement to permit the repurchase of the Securities as
provided for in this "Purchase of Securities upon Change in Control" covenant.
In addition to the Senior Subordinated Notes, the Subordinated Securities are
also senior to the Deferred Coupon Notes and require the Company to offer to
purchase such Securities upon a Change in Control. The Company is required to
purchase Senior Subordinated Notes from any holder who tenders in a Change in
Control Offer for the Senior Subordinated Notes prior to purchasing any
Subordinated Securities in a Change in Control Offer. The Company is required to
purchase Senior Subordinated Notes and Subordinated Securities from any holder
who tenders in a Change in Control Offer for such notes prior to purchasing any
Deferred Coupon Notes in a Change in Control Offer. The Company shall first
comply with the provisions of this paragraph before it shall be required to
repurchase any Securities pursuant to this "Purchase of Securities upon Change
in Control" covenant, and any failure to comply with this paragraph shall
constitute a default of a covenant for purposes of clause (c) of the first
paragraph under "Events of Default".
Within 30 days after the occurrence of a Change in Control, the Company
shall notify the Trustees and give written notice of such Change in Control to
each Holder, by first-class mail, postage prepaid, at his address appearing in
the security register, stating, among other things, the purchase price and the
purchase date, which shall be a Business Day no earlier than 45 days nor later
than 60 days from the date such notice is mailed, or such later date as is
necessary to comply with requirements under the Exchange Act; that any Security
not tendered will continue to accrete in value or accrue interest, as the case
may be; that, unless the Company defaults in the payment of the purchase price,
any Securities accepted for payment pursuant to the Change in Control Offer
shall cease to accrete in value or accrue interest, as the case may be, after
the Change in Control Purchase Date (as defined in the Indentures); and certain
other procedures that a Holder must follow to accept a Change in Control Offer
or to withdraw such acceptance. (Section 1011 (Section 1012 of the Subordinated
Securities Indentures))
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, in connection with a Change in Control Offer.
Restrictions on Preferred Stock of Subsidiaries. The Company will not permit
any of its Subsidiaries to issue any Preferred Stock (other than to the Company
or a Majority-owned Subsidiary of the Company), or permit any Person (other than
the Company or a Majority-owned Subsidiary of the Company) to own or hold an
interest in any Preferred Stock of any such Subsidiary previously held by the
Company or a Majority-owned Subsidiary of the Company unless such Subsidiary
would be entitled to incur Indebtedness pursuant to the provisions of the
"Limitation on Indebtedness" covenant in the aggregate principal amount equal to
the aggregate liquidation value of such Preferred Stock assuming a market rate
of interest (as determined by the Company) for such Preferred Stock as of the
date of issuance or transfer. (Section 1012 (Section 1013 of the Subordinated
Securities Indentures))
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Limitations on Issuances of Guarantees of Indebtedness. The Company will not
permit any Subsidiary, directly or indirectly, to guarantee, assume or in any
other manner become liable with respect to any Pari Passu Indebtedness or
Subordinated Indebtedness, unless such Subsidiary simultaneously executes and
delivers a supplemental indenture to the Senior Subordinated Notes Indenture,
the Subordinated Notes Indenture, the Subordinated Debentures Indenture or the
Deferred Coupon Notes Indenture, as the case may be, providing for a guarantee
of the Senior Subordinated Notes, the Subordinated Notes, the Subordinated
Debentures or the Deferred Coupon Notes, as the case may be; provided that, in
the case of a Subsidiary's guarantee, assumption or other liability with respect
to Subordinated Indebtedness, such guarantee, assumption or other liability
shall be subordinated to such Subsidiary's guarantee of the Senior Subordinated
Notes, the Subordinated Notes, the Subordinated Debentures or the Deferred
Coupon Notes, as the case may be, to the same extent as such Subordinated
Indebtedness is subordinated to the Senior Subordinated Notes, the Subordinated
Notes, the Subordinated Debentures or the Deferred Coupon Notes, as the case may
be; and provided further that this provision shall not be applicable to any
guarantee, assumption or other liability of any Subsidiary of the Company that
(i) existed at the time such Person became a Subsidiary of the Company and (ii)
was not incurred in connection with, or in contemplation of, such Person
becoming a Subsidiary of the Company. Any such guarantee of the Senior
Subordinated Notes, the Subordinated Notes, the Subordinated Debentures or the
Deferred Coupon Notes, as the case may be, by a Subsidiary shall provide by its
terms that it shall be automatically and unconditionally released and discharged
upon either (A) the release or discharge of such guarantee of such Pari Passu
Indebtedness or Subordinated Indebtedness, as the case may be, except a
discharge by or as a result of payment under such guarantee or (B) any sale,
exchange or transfer, to any Person not an Affiliate of the Company, of all the
Company's stock in, or all or substantially all the assets of, such Subsidiary,
which sale, exchange or transfer is made in compliance with the applicable
provisions of the Senior Subordinated Notes Indenture, the Subordinated Notes
Indenture, the Subordinated Debentures Indenture or the Deferred Coupon Notes
Indenture, as the case may be. (Section 1013 (Section 1014 of the Subordinated
Securities Indentures))
Restriction on Transfer of Assets. The Company will not sell, convey,
transfer or otherwise dispose of its assets or property to any of its
Subsidiaries, except for (i) sales, conveyances, transfers or other dispositions
of assets or property acquired by the Company after the date of the Indentures;
(ii) sales, conveyances, transfers or other dispositions of Existing Assets (a)
made in the ordinary course of business; (b) made outside the ordinary course of
business with a net book value that, when aggregated with all other such
transfers by the Company since the date of the Indentures, less the net book
value of Existing Assets transferred to the Company from its Subsidiaries, would
not exceed 10% of the Consolidated Assets of the Company; or (c) to any
Subsidiary if such Subsidiary simultaneously with such transfer executes and
delivers a supplemental indenture to the Indentures, providing for the guarantee
of payment of the Securities, by such Subsidiary, which guarantee shall be
subordinated to any guarantee of such Subsidiary of Senior Indebtedness of the
Company and shall be subordinated to any other Indebtedness of such Subsidiary
(which is not subordinated to any other Indebtedness of such Subsidiary or, in
the case of the Subordinated Securities or the Deferred Coupon Notes, as the
case may be, which is designated by such Subsidiary as being senior in right of
payment to such guarantee), in each case to the same extent as the Senior
Subordinated Notes, the Subordinated Notes, the Subordinated Debentures or the
Deferred Coupon Notes, as the case may be, are subordinated to Senior
Indebtedness of the Company under the Senior Subordinated Notes Indenture, the
Subordinated Notes Indenture, the Subordinated Debentures Indenture or the
Deferred Coupon Notes Indenture, as the case may be, and (iii) sales,
conveyances, transfers or other dispositions of Existing Assets made pursuant to
the Spin-Off. Notwithstanding the foregoing, any such guarantee of a Subsidiary
of the Securities, shall provide by its terms that it shall be automatically and
unconditionally released and discharged (i) on the date that the net book value
of the Existing Assets held by the Company is greater than 90% of Consolidated
Assets or (ii) upon any sale, exchange or transfer to any Person not an
Affiliate of the Company of all of the Company's stock in, or all or
substantially all the assets of, such
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Subsidiary, which sale, exchange or transfer is made in compliance with the
terms of the Senior Subordinated Notes Indenture, the Subordinated Notes
Indenture, the Subordinated Debentures Indenture or the Deferred Coupon Notes
Indenture, as the case may be. (Section 1014 (Section 1015 of the Subordinated
Securities Indentures))
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind, on the ability of any Subsidiary to (a)
pay dividends or make any other distribution on its Capital Stock, (b) pay any
Indebtedness owed to the Company or any Subsidiary, (c) make loans or advances
to the Company or any Subsidiary, or (d) transfer any of its property or assets
to the Company or any Subsidiary, except (i) any encumbrance or restriction
pursuant to an agreement in effect at or entered into on the date of the
Indentures; (ii) any encumbrance or restriction, with respect to a Subsidiary
that is not a Subsidiary of the Company on the date of the Indentures, in
existence at the time such Person becomes a Subsidiary of the Company or created
on the date it becomes a Subsidiary; (iii) any encumbrance or restriction on the
ability of any Subsidiary whose assets consist substantially only of fee or
leasehold interests in real property and improvements thereon to transfer any
such interests which are acquired after the date of the Indentures or any
unimproved real property acquired on or prior to the date of the Indentures to
the Company or any Subsidiary, which encumbrance or restriction is required by a
lender to, or purchaser of any indebtedness of, such Subsidiary in connection
with a financing or refinancing permitted under the Indentures; and (iv) any
encumbrance or restriction pursuant to any agreement that extends, refinances,
renews or replaces any agreement containing any of the restrictions described in
the foregoing clauses (i)-(iii); provided that the terms and conditions of any
such restrictions are not materially less favorable to the Holders of the
Securities than those under or pursuant to the agreement extended, refinanced,
renewed or replaced. (Section 1015 (Section 1016 of the Subordinated Securities
Indentures))
Limitation on Unrestricted Subsidiaries. The Company will not make, and will
not permit any of its Subsidiaries to make, any Investments in Unrestricted
Subsidiaries if, at the time thereof, the aggregate amount of such Investments
would exceed the amount of Restricted Payments then permitted to be made
pursuant to the "Limitation on Restricted Payments" covenant. Any Investments in
Unrestricted Subsidiaries permitted to be made pursuant to this covenant (i)
will be treated as the payment of a Restricted Payment in calculating the amount
of Restricted Payments made by the Company and (ii) may be made in cash or
property. (Section 1016 (Section 1017 of the Subordinated Securities
Indentures))
Limitation on Other Senior Subordinated Indebtedness Under the Senior
Subordinated Indenture. In the case of the Senior Subordinated Notes, the
Company will not create, incur, assume, guarantee or in any other manner become
liable with respect to any Indebtedness (other than the Senior Subordinated
Notes) that is subordinate in right of payment to any Senior Indebtedness unless
such Indebtedness is also pari passu with, or subordinate in right of payment
to, the Senior Subordinated Notes, pursuant to subordination provisions
substantially similar to those contained in the Senior Subordinated Indenture.
(Section 1017 of the Senior Subordinated Notes Indenture)
MERGER AND SALE OF ASSETS, ETC.
The Company shall not consolidate with or merge with or into any other
Person, or sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its properties and assets (as an entirety or substantially
as an entirety in one transaction or series of related transactions) to any
Person or permit any of its Subsidiaries to enter into any such transaction or
transactions if such transaction or transactions, in the aggregate, would result
in a transfer of all or substantially all of the assets of the Company and its
Subsidiaries on a consolidated basis to any Person unless at the time and after
giving effect thereto: (i) either (a) the Company shall be the continuing
corporation, or (b) the Person (if other
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than the Company) formed by such consolidation or into which the Company is
merged or the Person which acquires by sale, assignment, conveyance, transfer,
lease or disposition the properties and assets of the Company substantially as
an entirety (the "Surviving Entity") shall be a corporation duly organized and
validly existing under the laws of the United States of America, any state
thereof or the District of Columbia and the Surviving Entity shall, in either
case, expressly assume, by an indenture supplemental to all of the Indentures,
executed and delivered to the respective Trustees in form satisfactory to such
Trustees, all the obligations of the Company under the Securities and the
respective Indentures and the respective Indentures shall remain in full force
and effect; (ii) immediately after giving effect to such transaction on a pro
forma basis, no Default or Event of Default shall have occurred and be
continuing; and (iii) immediately after giving effect to such transaction on a
pro forma basis, the Consolidated Fixed Charge Coverage Ratio of the Company (or
the Surviving Entity if the Company is not the continuing obligor under the
respective Indentures), for the Company's four most recently completed full
fiscal quarters is at least 1.75 to 1.0.
In connection with any consolidation, merger, transfer or lease contemplated
hereby, the Company shall deliver, or cause to be delivered, to the Trustees, in
the form and substance reasonably satisfactory to the Trustees, an officers'
certificate and an opinion of counsel, each stating that such consolidation,
merger, transfer or lease and the supplemental indenture, if one is required
under the Indentures, comply with the provisions described herein and that all
conditions precedent herein provided for relating to such transaction have been
complied with. (Section 801)
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such a consolidation or into which the Company is merged
or to which such transfer is made, shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under the Indentures with the
same effect as if such successor corporation had been named as the Company
therein.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraphs in
which the Company is not the continuing corporation, the successor Person formed
or remaining shall succeed to, and be substituted for, and may exercise every
right and power of, the Company and the Company would be discharged from all
obligations and covenants under the Indentures and the Securities, as the case
may be. (Section 802)
EVENTS OF DEFAULT
An Event of Default will occur under the Senior Subordinated Notes
Indenture, the Subordinated Notes Indenture, the Subordinated Debentures
Indenture or the Deferred Coupon Notes Indenture, as the case may be, if any one
of the following events occurs:
(a) default in the payment of any interest on any of the Senior
Subordinated Notes, the Subordinated Notes, the Subordinated Debentures or
the Deferred Coupon Notes, as the case may be, when such interest becomes
due and payable and continuance of such default for a period of 30 days; or
(b) default in the payment of the principal of (or premium, if any, on)
any of the Senior Subordinated Notes, the Subordinated Notes, the
Subordinated Debentures or the Deferred Coupon Notes, as the case may be, at
its Maturity; or
(c) with respect to the Subordinated Notes, default in the deposit of
any sinking fund payment, when and as due by the terms of the Subordinated
Notes Indenture; or
(d) default in the performance, or breach, of any covenant or agreement
of the Company under the Senior Subordinated Notes Indenture, the
Subordinated Notes Indenture, the Subordinated Debentures Indenture or the
Deferred Coupon Notes Indenture, as the case may be (other than a default in
the performance, or breach, of a covenant or agreement that is specifically
dealt
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with elsewhere herein), and continuance of such default or breach for a
period of 60 days after there has been given, by registered or certified
mail, to the Company by the applicable Trustee or to the Company and the
applicable Trustee by the Holders of at least 25% in aggregate principal
amount of the outstanding Senior Subordinated Notes, Subordinated Notes or
Subordinated Debentures, as the case may be, or at least 25% in aggregate
principal amount at final Maturity of the outstanding Deferred Coupon Notes,
as the case may be, a written notice specifying such default or breach and
stating that such notice is a "Notice of Default" under the Senior
Subordinated Notes Indenture, the Subordinated Notes Indenture, the
Subordinated Debentures Indenture or the Deferred Coupon Notes Indenture, as
the case may be; or
(e) (i) an event of default shall have occurred under any mortgage,
bond, indenture, loan agreement or other document evidencing any issue of
Indebtedness of the Company or any Material Subsidiary for money borrowed,
which issue has an aggregate outstanding principal amount of not less than
$50.0 million, and such default shall result in such Indebtedness becoming,
whether by declaration or otherwise, due and payable prior to the date on
which it would otherwise become due and payable or (ii) a default in any
payment when due at final maturity of any such Indebtedness; or
(f) final judgments or orders not covered by insurance or a bond
rendered against the Company or any Material Subsidiary which require the
payment in money, either individually or in an aggregate amount, that is
more than $30.0 million and such judgment or order shall remain unsatisfied
or unstayed for 60 days; or
(g) the entry of a decree or order by a court having jurisdiction in the
premises (A) for relief in respect of the Company or any Material Subsidiary
in an involuntary case or proceeding under the Federal Bankruptcy Code or
any other federal or state bankruptcy, insolvency, reorganization or similar
law or (B) adjudging the Company or any Material Subsidiary a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment or composition
of or in respect of the Company or any Material Subsidiary under the Federal
Bankruptcy Code or any other applicable federal or state law, or appointing
a custodian, receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Company or any Material Subsidiary or of any
substantial part of any of their properties, or ordering the winding up or
liquidation of any of their affairs, and the continuance of any such decree
or order unstayed and in effect for a period of 60 consecutive days; or
(h) the institution by the Company or any Material Subsidiary of a
voluntary case or proceeding under the Federal Bankruptcy Code or any other
applicable federal or state law or any other case or proceedings to be
adjudicated a bankrupt or insolvent, or the consent by the Company or any
Material Subsidiary to the entry of a decree or order for relief in respect
of the Company or any Material Subsidiary in any involuntary case or
proceeding under the Federal Bankruptcy Code or any other applicable federal
or state law or to the institution of bankruptcy or insolvency proceedings
against the Company or any Material Subsidiary, or the filing by the Company
or any Material Subsidiary of a petition or answer or consent seeking
reorganization or relief under the Federal Bankruptcy Code or any other
applicable federal or state law, or the consent by it to the filing of any
such petition or to the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of any of the Company or any Material Subsidiary or of any
substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the admission by it in writing of its inability
to pay its debts generally as they become due or taking of corporate action
by the Company or any Material Subsidiary in furtherance of any such action;
or
(i) default in the performance or breach of any of the provisions of
"Merger and Sales of Assets, etc." (Section 501)
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If an Event of Default (other than as specified in clause (g) or (h) above)
occurs and is continuing with respect to the Senior Subordinated Notes
Indenture, the Subordinated Notes Indenture, the Subordinated Debentures
Indenture or the Deferred Coupon Notes Indenture, as the case may be, the
applicable Trustee or the Holders of not less than 25% of the principal amount
of the Senior Subordinated Notes, the Subordinated Notes, or the Subordinated
Debentures then outstanding or not less than 25% of the principal amount at
final Maturity of the Deferred Coupon Notes then outstanding, as the case may
be, may, and the Trustee at the request of such Holders shall, declare all
unpaid principal or, with respect to the Deferred Coupon Notes, the Accreted
Amount, of, premium, if any, and accrued interest on all the Senior Subordinated
Notes, the Subordinated Notes, the Subordinated Debentures or the Deferred
Coupon Notes, as the case may be, to be due and payable immediately, by a notice
in writing to the Company (and to the applicable Trustee if given by Holders of
the Securities); provided that so long as the Bank Credit Agreement shall be in
force and effect, if any such Event of Default shall have occurred and be
continuing, any such acceleration shall not be effective until the earlier of
(a) five Business Days following a notice of acceleration given to the Company
and the agent bank under the Bank Credit Agreement and only if upon such fifth
Business Day such Event of Default shall be continuing or (b) the acceleration
of any Indebtedness under the Bank Credit Agreement. If an Event of Default
specified in clause (g) or (h) above occurs and is continuing, then all unpaid
principal or, with respect to the Deferred Coupon Notes, the Accreted Amount,
of, premium, if any, and accrued interest on all Senior Subordinated Notes, the
Subordinated Notes, the Subordinated Debentures or the Deferred Coupon Notes, as
the case may be, shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the respective Trustees or
any Holder thereof. (Section 502)
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the applicable Trustee the Holders
of at least a majority in aggregate principal amount of the Senior Subordinated
Notes, the Subordinated Notes, or the Subordinated Debentures outstanding or at
least a majority in aggregate principal amount at final Maturity of the Deferred
Coupon Notes outstanding, as the case may be, by written notice to the Company
and the applicable Trustee, may annul such declaration if (a) the Company has
paid or deposited with the applicable Trustee a sum sufficient to pay (i) all
sums paid or advanced by the applicable Trustee and the reasonable compensation,
expenses, disbursements and advances of the applicable Trustee, its agents and
counsel, (ii) all overdue interest on all Senior Subordinated Notes,
Subordinated Notes, Subordinated Debentures or Deferred Coupon Notes, as the
case may be, (iii) the principal of and premium, if any, on any Senior
Subordinated Notes, Subordinated Notes or Subordinated Debentures or the
Accreted Amount of and premium, if any, on any Deferred Coupon Notes, as the
case may be, which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the respective
Securities, and (iv) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the Senior Subordinated
Notes, the Subordinated Notes, the Subordinated Debentures or the Deferred
Coupon Notes, as the case may be; and (b) all Events of Default, other than the
non-payment of principal which have become due solely by the declaration of
acceleration, have been waived as provided in the respective Indentures or
cured. No such rescission shall affect any subsequent default or impair any
right consequent thereon.
Notwithstanding the preceding paragraph, in the event of a declaration of
acceleration in respect of the Securities, because an Event of Default specified
in clause (e) of the first paragraph under "Events of Default" shall have
occurred and be continuing, such declaration of acceleration shall be
automatically annulled if the Indebtedness that is the subject of such Event of
Default has been discharged or the holders thereof have rescinded their
declaration of acceleration in respect of such Indebtedness, and, if such
Indebtedness is not Senior Indebtedness, such rescission has been made without
any payment or other transfer or grant, or any promise or other undertaking to
pay or otherwise transfer or grant, any tangible or intangible property or right
to such holders in connection with such rescission, and written notice of such
discharge or rescission, as the case may be, shall have been given to the
Trustees by the Company and by the holders of such Indebtedness or a trustee,
fiduciary or agent for such holders,
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within 60 days after such declaration of acceleration in respect of the
Securities, and (x) no other Event of Default has occurred during such 60-day
period, and (y) no Default arising from such discharge has occurred during such
60-day period, which, in either case, has not been cured or waived during such
period. (Section 502)
The Holders of not less than a majority in principal amount of the
outstanding Senior Subordinated Notes, Subordinated Notes or Subordinated
Debentures or not less than a majority in aggregate principal amount at final
Maturity of the outstanding Deferred Coupon Notes, as the case may be, may on
behalf of the Holders of all outstanding Senior Subordinated Notes, Subordinated
Notes, Subordinated Debentures or Deferred Coupon Notes, as the case may be,
waive any past Default or Event of Default under the respective Indentures and
its consequences, except a default or Event of Default in the payment of the
principal of, premium, if any, or interest on any Security, or in respect of a
covenant or provision which under the respective Indentures cannot be modified
or amended without the consent of the Holder of each such Security outstanding.
(Section 513)
The Company is also required to notify the respective Trustees within five
Business Days of the occurrence of any Default. (Section 1018)
The Trust Indenture Act of 1939 contains limitations on the rights of each
Trustee, should it become a creditor of the Company or any Subsidiary, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. Each Trustee is
permitted to engage in other transactions, provided that if it acquires any
conflicting interest it must eliminate such conflict upon the occurrence of an
Event of Default or else resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company discharged with respect to the outstanding Securities
("defeasance"). (Section 1401) Such defeasance means that the Company shall be
deemed to have paid and discharged the entire indebtedness represented by the
outstanding Senior Subordinated Notes, Subordinated Notes, Subordinated
Debentures or Deferred Coupon Notes, as the case may be, except for (i) the
rights of Holders of such outstanding Securities to receive payments in respect
of the principal of, premium, if any, and interest on such Securities when such
payments are due, (ii) the Company's obligations with respect to the Securities
concerning issuing temporary Securities, registration of Securities, mutilated,
destroyed, lost or stolen Securities and the maintenance of an office or agency
for payment and money for security payments held in trust, (iii) the rights,
powers, trusts, duties and immunities of the Trustees and the Company's
obligations in connection therewith, and (iv) the defeasance provisions of the
respective Indentures. (Section 1402) In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company released
with respect to certain covenants that are described in the respective
Indentures ("covenant defeasance") and any omission to comply with such
obligations shall not constitute a Default or an Event of Default with respect
to the Senior Subordinated Notes, the Subordinated Notes, the Subordinated
Debentures or the Deferred Coupon Notes, as the case may be. In the event
covenant defeasance occurs, certain events (not including non-payment,
bankruptcy and insolvency events) described under "Events of Default" will no
longer constitute an Event of Default with respect to such Securities. (Section
1403)
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the applicable Trustee, in trust, for the
benefit of the Holders of the Senior Subordinated Notes, the Subordinated Notes,
the Subordinated Debentures or the Deferred Coupon Notes, as the case may be,
cash in U.S. dollars, U.S. Government Obligations (as defined in the
Indentures), or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on such outstanding
Securities on the Stated Maturity of such principal or installment of principal
or interest; (ii) in the case of defeasance, the Company shall have delivered to
the applicable Trustee an opinion of
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counsel in the United States stating that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B) since
the date of the Indentures, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders of such outstanding
Securities will not recognize income, gain or loss for federal income tax
purposes as a result of such defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as would have
been the case if such defeasance had not occurred; (iii) in the case of covenant
defeasance, the Company shall have delivered to the applicable Trustee an
opinion of counsel in the United States to the effect that the Holders of such
outstanding Securities will not recognize income, gain or loss for federal
income tax purposes as a result of such covenant defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such covenant defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit or insofar as clauses (g) and (h) under the first paragraph
under "Events of Default" are concerned, at any time during the period ending
the 91st day after the date of deposit; (v) such defeasance or covenant
defeasance shall not result in a breach or violation of, or constitute a default
under the applicable Indenture or any other material agreement or instrument to
which the Company is a party or by which it is bound; (vi) the Company shall
have delivered to the applicable Trustee an officers' certificate stating that
the deposit was not made by the Company with the intent of preferring the
Holders of such Securities over the other creditors of the Company with the
intent of defeating, hindering, delaying or defrauding creditors of the Company
or others; and (vii) the Company shall have delivered to the applicable Trustee
an officers' certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to either the defeasance or the
covenant defeasance, as the case may be, have been complied with. (Section 1404)
SATISFACTION AND DISCHARGE
The Senior Subordinated Notes Indenture, the Subordinated Notes Indenture,
the Subordinated Debentures Indenture or the Deferred Coupon Notes Indenture, as
the case may be, will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Senior Subordinated Notes,
the Subordinated Notes, the Subordinated Debentures or the Deferred Coupon
Notes, as the case may be, as expressly provided for in the applicable
Indenture) as to all outstanding Securities under the applicable Indenture when
(i) either (a) all such Securities theretofore authenticated and delivered
(except lost, stolen or destroyed Securities which have been replaced or paid)
have been delivered to the applicable Trustee for cancellation or (b) all such
Securities not theretofore delivered to the applicable Trustee for cancellation
have become due and payable or will become due and payable at their Maturity
within one year or are to be called for redemption within one year and, in each
case, the Company has irrevocably deposited or caused to be deposited with the
applicable Trustee funds in an amount sufficient to pay and discharge the entire
indebtedness on the Securities not theretofore delivered to the applicable
Trustee for cancellation; (ii) the Company has paid all other sums payable under
the applicable Indenture by the Company; and (iii) the Company has delivered to
the applicable Trustee an officers' certificate and an opinion of counsel each
stating that (A) all conditions precedent under the applicable Indenture
relating to the satisfaction and discharge of such Indenture have been complied
with and (B) such satisfaction and discharge will not result in a breach or
violation of, or constitute a default under, the applicable Indenture or any
other material agreement or instrument to which the Company is a party or by
which it is bound. (Section 401)
MODIFICATIONS AND AMENDMENTS
Modifications and amendments to the Senior Subordinated Notes Indenture, the
Subordinated Notes Indenture, the Subordinated Debentures Indenture or the
Deferred Coupon Notes Indenture, as the case may be, may be made by the Company
and the applicable Trustee with the consent of the
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Holders of not less than a majority in aggregate principal amount of the
outstanding Senior Subordinated Notes, Subordinated Notes, or Subordinated
Debentures, as the case may be, or not less than a majority in aggregate
principal amount at final Maturity of the outstanding Deferred Coupon Notes, as
the case may be; provided, however, that no such modification or amendment may,
without the consent of the Holder of each such outstanding Security affected
thereby: (i) change the Stated Maturity of the principal of, or any installment
of interest on, any such Security or reduce the principal amount thereof or the
rate of interest thereon or any premium payable upon the redemption thereof, or
change the coin or currency in which the principal of any such Security or any
premium or the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment after the Stated Maturity thereof
(or, in the case of redemption, on or after the redemption date) or modify the
obligation of the Company to make and consummate a Change in Control Offer or
modify any of the provisions or definitions with respect thereto; or (ii) reduce
the percentage in principal amount of such outstanding Securities, the consent
of whose Holders is required for any such supplemental indenture or the consent
of whose Holders is required for any waiver; or (iii) modify any of the
provisions relating to supplemental indentures requiring the consent of Holders
or relating to the waiver of past defaults or relating to the waiver of certain
covenants, except to increase the percentage of such outstanding Security
required for such actions or to provide that certain other provisions of the
respective Indentures cannot be modified or waived without the consent of the
Holder of each such Security affected thereby; or (iv) modify any of the
provisions of the Indentures relating to the subordination of the Securities in
a manner adverse to the Holders thereof; or (v) except as otherwise permitted
under "Merger and Sale of Assets, etc.," consent to the assignment or transfer
by the Company of any of its rights and obligations under the respective
Indentures. (Section 902) No amendment or modification of the respective
Indentures shall adversely affect the rights of any holders of Senior
Indebtedness under the subordination provisions of such Indentures unless the
requisite holders of each issue of Senior Indebtedness affected thereby shall
have consented to such amendment or modification. (Section 907).
The Holders of a majority in aggregate principal amount of the outstanding
Senior Subordinated Notes, Subordinated Notes or Subordinated Debentures or a
majority in aggregate principal amount at final Maturity of the Deferred Coupon
Notes outstanding, as the case may be, may waive compliance with certain
restrictive covenants and provisions of the respective Indentures. (Section 1020
(Section 1019 of the Subordinated Securities Indentures))
CERTAIN DEFINITIONS
"Accreted Amount" means (i) as of any date of determination prior to
November 1, 1999, the sum of (a) the initial offering price of each Deferred
Coupon Note and (b) the portion of the excess of the principal amount of each
Deferred Coupon Note over such initial offering price which shall have been
amortized through such date, such amount to be so amortized on a daily basis and
compounded semiannually on each May 1 and November 1 at the rate of 10 3/4% per
annum from the date of issuance of the Deferred Coupon Notes through the date of
determination computed on the basis of a 360-day year of twelve 30-day months
and an amortization period ending on November 1, 1999 and (ii) as of any date of
determination on or after November 1, 1999, the principal amount at final
Maturity of such Deferred Coupon Note.
"Acquired Indebtedness" means Indebtedness of a Person (including an
Unrestricted Subsidiary) (i) existing at the time such Person becomes a
Subsidiary or (ii) assumed in connection with the acquisition of assets from
such Person, other than Indebtedness incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary or such acquisition, as the
case may be.
"Acquisition" means the acquisition of the Company by Holdings completed in
October 1987, pursuant to the Agreement and Plan of Merger dated as of April 22,
1987 among the Company, SMG Acquisition Corporation and Holdings, as amended.
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"Affiliate" means, with respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (ii) for purposes of the
provisions under the "Limitation on Transactions with Affiliates" covenant only,
any other Person that owns, directly or indirectly, 10% or more of such Person's
Capital Stock or any officer or director of any such Person or other Person or
with respect to any natural Person, any person having a relationship with such
Person by blood, marriage or adoption not more remote than first cousin. For the
purposes of this definition, "control" when used with respect to any specified
Person means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of Voting Stock, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Applicable Premium" means, with respect to any Senior Subordinated Note to
be redeemed, the greater of (i) 1.0% of the then outstanding principal amount of
such Senior Subordinated Note and (ii) (a) the sum of the present values,
discounted for all full semiannual periods at a discount rate equal to one-half
multiplied by the Treasury Rate plus 125 basis points (provided, however, that
the discount rate for the period from the redemption date to the next interest
payment date shall equal the result of multiplying the Treasury Rate plus 125
basis points by the Day Count Fraction), of (I) the remaining payments of
interest on such Senior Subordinated Note and (II) the payment of the principal
amount that, but for such redemption, would have been payable on such Senior
Subordinated Note at Stated Maturity, minus (b) the then outstanding principal
amount of such Senior Subordinated Note, minus (c) accrued and unpaid interest
paid on the redemption date; and, with respect to any Deferred Coupon Note to be
redeemed, the greater of (i) 1.0% of the then outstanding Accreted Amount of
such Deferred Coupon Note and (ii) (a) the sum of the present values, discounted
for all full semiannual periods at a discount rate equal to one-half multiplied
by the Treasury Rate plus 125 basis points (provided, however, that the discount
rate for the period from the redemption date to the next interest payment date
shall equal the result of multiplying the Treasury Rate plus 125 basis points by
the Day Count Fraction), of (I) the remaining payments of cash interest on such
Deferred Coupon Note and (II) the payment of the principal amount that, but for
such redemption, would have been payable on such Deferred Coupon Note at final
Maturity, minus (b) the then outstanding Accreted Amount of such Deferred Coupon
Note, minus (c) accrued and unpaid interest paid on the redemption date.
"Average Life to Stated Maturity" means, as of the date of determination,
with respect to any Indebtedness, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from the date of determination to the
date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment by (ii)
the sum of all such principal payments.
"Bank Credit Agreement" means the Credit Agreement dated as of the date of
the Indentures among the Company and the lenders thereunder and Bankers Trust
Company, as agent, as in effect on the date of the Indentures, and as such
agreement may be amended, renewed, extended, supplemented or otherwise modified
from time to time, and any agreement or successive agreements governing
Indebtedness incurred to refund, refinance, restructure or replace the
Indebtedness and commitments then outstanding or permitted to be outstanding
under such Credit Agreement or other agreement.
"Capital Lease Obligation" of any Person means any obligations of such
Person and its Subsidiaries on a consolidated basis under any capital lease of
real or personal property which, in accordance with GAAP, has been recorded as a
capitalized lease obligation.
"Capital Stock" of any Person means any and all shares, interests,
participations, or other equivalents (however designated) of such Person's
capital stock whether now outstanding or issued after the date of the
Indentures.
"Change in Control" means an event as a result of which: (i) any "person"
(as such term is used in Sections 13(d) and 14(d) of the Exchange Act) other
than Permitted Holders is or becomes the
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"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have "beneficial ownership" of all
shares that any such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total Voting Stock of the Company, and (ii)
such person succeeds in having its nominees constitute a majority of the
Company's Board of Directors.
"Chefmark" means Chefmark, Inc., a corporation incorporated under the laws
of the State of Delaware, and any successor thereto.
"Company" means Pathmark Stores, Inc., a corporation incorporated under the
laws of the State of Delaware, until a successor Person shall have become such
pursuant to the applicable provisions of the Indenture, and thereafter "Company"
shall mean such successor Person.
"Consolidated Adjusted Net Income (Loss)" of the Company means, for any
period, the consolidated net income (loss) of the Company and its consolidated
Subsidiaries for such period as determined in accordance with GAAP, adjusted by
excluding (i) net after-tax extraordinary gains or losses (less all fees and
expenses relating thereto), as the case may be, (ii) net after-tax gains or
losses (less all fees and expenses relating thereto) attributable to asset
sales, (iii) any depreciation and amortization expense incurred by the Company
and its consolidated Subsidiaries from the date of the Acquisition to the date
of determination resulting from (a) any write-up in the book value of any assets
due to the Acquisition and (b) any goodwill due to the Acquisition (including
any write-off or accelerated amortization of goodwill), (iv) any expenses
incurred in connection with the Acquisition and the financing thereof and the
Recapitalization, (v) any expenses relating to the incurrence or refinancing of
Indebtedness, (vi) the net income (or loss) of any Person (including any
Unrestricted Subsidiary and excluding the Company or a Subsidiary) in which the
Company or any of its Subsidiaries has an ownership interest, except to the
extent of the amount of dividends or other distributions actually paid to the
Company or its Subsidiaries by such other Person during such period, (vii) net
income (or net loss) of any Person combined with the Company or any of its
Subsidiaries in a "pooling of interests" basis attributable to any period prior
to the date of combination and (viii) non-cash charges of the Company and its
Subsidiaries resulting from the application of Statement of Financial Accounting
Standards No. 106 ("SFAS 106") to the extent such charges exceed the cash
payments for benefits covered by SFAS 106 for the relevant period.
"Consolidated Assets" means the net book value of the Existing Assets shown
on the balance sheet of the Company, as determined in accordance with GAAP
consistently applied, as of the last day of the Company's last fiscal quarter
prior to the date of the Indentures.
"Consolidated Capital Expenditures" means cash capital expenditures
reflected in the consolidated statement of cash flows of the Company and Capital
Lease Obligations that are on the consolidated balance sheet of the Company and
its Subsidiaries, in each case in conformity with GAAP.
"Consolidated Fixed Charge Coverage Ratio" of the Company means, for any
period, the ratio of (i) the sum of Consolidated Adjusted Net Income,
Consolidated Interest Expense, Consolidated Tax Expense and Consolidated
Non-cash Charges deducted in computing Consolidated Adjusted Net Income, in each
case, for such period, of the Company and its Subsidiaries on a consolidated
basis, all determined in accordance with GAAP, to (ii) the sum of such
Consolidated Interest Expense for such period; provided that, in making such
computation, the Consolidated Interest Expense attributable to interest on any
Indebtedness computed on a pro forma basis and bearing a floating interest rate
shall be computed as if the rate in effect on the date of computation had been
the applicable rate for the entire period; provided further that in making any
calculation prior to the first anniversary date of the Recapitalization, the
Recapitalization shall be deemed to have taken place on the first day of such
period.
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"Consolidated Interest Expense" means, for any period, the amount which, in
conformity with GAAP, would be set forth opposite the caption "interest expense"
(or any like caption) on a consolidated statement of earnings of the Company and
its Subsidiaries for such period minus the aggregate amount for such period of
interest imputed on future liabilities of the Company and its Subsidiaries,
other than Indebtedness, recorded at present value. Consolidated Interest
Expense shall include accruals in respect of Interest Rate Hedge Arrangements
(but shall exclude any such accruals in the nature of amortization of front-end
fees or other similar payments).
"Consolidated Non-cash Charges" of the Company means, for any period, the
aggregate depreciation, amortization and other non-cash charges of the Company
and its consolidated Subsidiaries for such period, as determined in accordance
with GAAP (excluding any such non-cash charge which requires an accrual of or
reserve for cash charges for any future period).
"Consolidated Tax Expense" of the Company means, for any period, as applied
to the Company, the provision for federal, state, local and foreign income taxes
of the Company and its consolidated Subsidiaries for such period as determined
in accordance with GAAP.
"Day Count Fraction" means the number of days from the redemption date to
(but excluding) the next scheduled interest payment date divided by 360 (which
assumes a 360-day year composed of twelve 30-day months).
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Deferred Coupon Notes" means the Junior Subordinated Deferred Coupon Notes
due 2003 of the Company in aggregate principal amount at final Maturity of
$225.3 million.
"Equitable Investors" means The Equitable Life Assurance Society of the
United States and any of its Affiliates that beneficially own, directly or
indirectly, shares of Capital Stock of SMG-II, Holdings, PTK or the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Assets" means the assets and other property held by the Company
(and not its subsidiaries) as of the last day of the Company's last fiscal
quarter prior to the date of the Indentures, adjusted by excluding any assets
and other property transferred to Newco in the Spin-Off, plus any assets held by
the Company (and not its subsidiaries) irrevocably designated from time to time
by the Company as Existing Assets.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing
buyer.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, that
are in effect from time to time; provided, however, that with respect to the
obligations of any Person under "Mergers and Sale of Assets, etc." and "Certain
Covenants" and the definitions applicable thereto, "GAAP" means generally
accepted accounting principles in the United States as in effect on the date of
the Indentures.
"Guaranteed Debt" of any Person means, without duplication, all Indebtedness
of any other Person referred to in the definition of Indebtedness guaranteed
directly or indirectly in any manner by such Person, or in effect guaranteed
directly or indirectly by such Person through an agreement (i) to pay or
purchase such Indebtedness or to advance or supply funds for the payment or
purchase of such Indebtedness, (ii) other than with respect to the Logistical
Services Agreement or any Spin-Off Agreement, to purchase, sell or lease (as
lessee or lessor) property, or to purchase or sell services,
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primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss, (iii)
other than with respect to the Logistical Services Agreement or any Spin-Off
Agreement, to supply funds to, or in any other manner invest in, the debtor
(including any agreement to pay for property or services to be acquired by such
debtor irrespective of whether such property is received or such services are
rendered), (iv) to maintain working capital or equity capital of the debtor, or
otherwise to maintain the net worth, solvency or other financial condition of
the debtor or (v) otherwise to assure a creditor against loss; provided that the
term "guarantee" shall not include endorsements for collection or deposit, in
either case in the ordinary course of business, or any obligation or liability
of such Person in respect of leasehold interests assigned by such Person to any
other Person.
"Holdings" means Supermarkets General Holdings Corporation, a Delaware
corporation, and any successor thereto.
"Holdings Intercompany Notes" means the 11 5/8% subordinated note and the 12
5/8% subordinated debenture each issued by the Company to Holdings in the forms
attached to the Indentures and in aggregate principal amounts not in excess of
the principal amounts outstanding on the date of the Indentures.
"Holdings Majority-owned Subsidiary" means a Holdings Subsidiary at least
80% of the equity ownership or the Voting Stock of which is at the time owned,
directly or indirectly, by Holdings or by one or more of any other Holdings
Majority-owned Subsidiaries, or Holdings and one or more of any other Holdings
Majority-owned Subsidiaries.
"Holdings Preferred Stock" means Holdings' Cumulative Exchangeable
Redeemable Preferred Stock, par value $.01 per share, having a liquidation
preference of $25 per share and maturing on December 31, 2007, that is
outstanding on the date of the Indentures.
"Holdings Subsidiary" means any Person a majority of the equity ownership or
the Voting Stock of which is at the time owned, directly or indirectly, by
Holdings or by one or more other Holdings Subsidiaries, or by Holdings and one
or more other Holdings Subsidiaries.
"Indebtedness" means with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money (including overdrafts) or for
the deferred purchase price of property or services, excluding any trade
payables, import letters of credit and other accrued current liabilities
incurred in the ordinary course of business, but including, without limitation,
all obligations, contingent or otherwise, of such Person in connection with any
standby letters of credit and acceptances issued under letter of credit
facilities, acceptance facilities or other similar facilities, (ii) all
obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, (iii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even if the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession or sale
of such property), but excluding trade accounts payable arising in the ordinary
course of business, (iv) all Capital Lease Obligations of such Person, (v) all
Indebtedness referred to in (but not excluded from) clause (i), (ii), (iii) or
(iv) above of other Persons and all dividends of other Persons, the payment of
which is secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien, upon or in
property (including, without limitation, accounts and contract rights) owned by
such Person, even though such Person has not assumed or become liable for the
payment of such Indebtedness, (vi) all Guaranteed Debt of such Person, (vii) all
Redeemable Capital Stock issued by such Person valued at the greater of its
voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid
dividends and (viii) all obligations under interest rate hedge contracts of such
Person. For purposes hereof, the "maximum fixed repurchase price" of any
Redeemable Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Redeemable Capital Stock as if
such Redeemable Capital Stock were purchased on any date on which Indebtedness
shall be
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required to be determined pursuant to the Indentures, and if such price is based
upon, or measured by, the fair market value of such Redeemable Capital Stock,
such fair market value to be determined in good faith by the board of directors
of the issuer of such Redeemable Capital Stock.
"Intercompany Agreement" means the agreement in the form of Appendix A to
the Indentures, as amended or modified in accordance with the terms of the
Indentures.
"Investments" of any Person means, directly or indirectly, any advance, loan
or other extension of credit or capital contribution by such Person to (by means
of any transfer of cash or other property to others or any payment for property
or services for the account or use of others) any other Person, or any purchase
or acquisition by such Person of any stock, bonds, notes, debentures or other
securities issued or owned by any other Person. For the purpose of making any
calculations under the Indentures, (i) Investment shall include the Fair Market
Value of the net assets of any Subsidiary at the time that such Subsidiary is
designated an Unrestricted Subsidiary and shall exclude the Fair Market Value of
the net assets of any Unrestricted Subsidiary that is designated a Subsidiary
and (ii) any property transferred to or from an Unrestricted Subsidiary shall be
valued at Fair Market Value at the time of such transfer; provided that in each
case, the Fair Market Value of an asset or property shall be as determined by
the Board of Directors of the Company in good faith.
"Lien" means any mortgage, charge, pledge, lien, privilege, security
interest or encumbrance of any kind.
"Logistical Services Agreement" means the Logistical Services Agreement
dated as of the date of the Plainbridge Spin-Off between Plainbridge and the
Company, as amended or modified in accordance with the provisions of the
Indentures.
"Majority-owned Subsidiary" means a Subsidiary at least 50% of the equity
ownership or the Voting Stock of which is at the time owned, directly or
indirectly, by the Company or by one or more of the Subsidiaries, or the Company
and one or more of the Subsidiaries, provided that Majority-owned Subsidiary
shall not include any such Subsidiary if the equity ownership or the Voting
Stock of such Subsidiary not owned by the Company and/or one or more of the
Subsidiaries is owned by Holdings and/or one or more Affiliates of Holdings
other than the Company and its Subsidiaries.
"Management Investors" means the officers and other members of the
management of the Company who at any particular date shall beneficially own,
directly or indirectly, Voting Stock of the Company.
"Material Subsidiary" means, at any particular time, any Subsidiary of the
Company that, together with the Subsidiaries of such Subsidiary, (a) accounted
for more than 10% of the consolidated revenues of the Company and its
Subsidiaries for the most recently completed fiscal year of the Company or (b)
was the owner of more than 10% of the consolidated assets of the Company and its
Subsidiaries as at the end of such fiscal year, all as shown on the consolidated
financial statements of the Company and its Subsidiaries for such fiscal year.
"Maturity" when used with respect to the Securities means the date on which
the principal of any Security becomes due and payable as therein provided or as
provided in the respective Indentures, whether at Stated Maturity, Change in
Control Purchase Date or redemption date, and whether by declaration of
acceleration, Change in Control, call for redemption or otherwise.
"ML Funds" means Merrill Lynch Capital Appreciation Partnership No. IX,
L.P., a Delaware partnership, ML Offshore LBO Partnership No. IX, a Cayman
Islands partnership, ML Employees LBO Partnership No. I, L.P., a Delaware
partnership, Merrill Lynch Interfunding Inc., a Delaware corporation, Merchant
Banking L.P. No. I, a Delaware partnership, Merrill Lynch KECALP L.P., a
Delaware partnership, Merrill Lynch Capital Appreciation Partnership No. B-X,
L.P., a Delaware
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partnership, ML Offshore LBO Partnership No. B-X, a Cayman Islands partnership,
MLCP Associates, L.P. No. II, a Delaware partnership, Merrill Lynch Venture
Capital, Inc., a Delaware corporation, and any Affiliates of the foregoing that
beneficially own, directly or indirectly, shares of Capital Stock of SMG-II.
"Pari Passu Indebtedness" means any Indebtedness of the Company that is pari
passu in right of payment to the Senior Subordinated Notes, the Subordinated
Notes, the Subordinated Debentures or the Deferred Coupon Notes, as the case may
be.
"Permitted Holders" means ML Funds, the Management Investors and the
Equitable Investors, provided that the Equitable Investors shall not be a
Permitted Holder if they are a member of a "group" (as such term is used in
Section 13(d) of the Exchange Act) in respect of the Company which does not
include the Management Investors and the ML Funds.
"Permitted Indebtedness" means any of the following Indebtedness of the
Company or any Subsidiary, as the case may be:
(i) Indebtedness under the Bank Credit Agreement in an aggregate
principal amount at any one time outstanding not to exceed $575.0 million;
(ii) Indebtedness under the Senior Subordinated Notes;
(iii) Indebtedness outstanding on the date of the Indentures listed on
schedules attached thereto;
(iv) Indebtedness under the Subordinated Notes, the Subordinated
Debentures and the Deferred Coupon Notes;
(v) obligations pursuant to interest rate hedge contracts;
(vi) (A) Indebtedness under Capital Lease Obligations and (B) Purchase
Money Mortgages;
(vii) Indebtedness in respect of trade letters of credit and standby
letters of credit incurred in the ordinary course of business;
(viii) Indebtedness of the Company or any Subsidiary to any one or the
other of them, provided that the obligation of the obligor of such
Indebtedness is subject to the Intercompany Agreement;
(ix) Indebtedness of any Subsidiary made in accordance with the
applicable provisions of the "Limitations on Issuances of Guarantees of
Indebtedness" covenant or the "Restriction on Transfer of Assets" covenant;
(x) Indebtedness consisting of guarantees, indemnities or obligations in
respect of purchase price adjustments in connection with the acquisition or
disposition of assets;
(xi) any obligation or liability in respect of leasehold interests
assigned by the Company or such Subsidiary to any other Person;
(xii) Indebtedness under the Holdings Intercompany Notes;
(xiii) Indebtedness represented by letters of credit not exceeding an
aggregate amount of $45.0 million at any one time outstanding (other than
those permitted by clause (vii) above);
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(xiv) Indebtedness incurred to finance Consolidated Capital Expenditures
(including Acquired Indebtedness to the extent that, in conformity with
GAAP, assets acquired in conjunction with such Acquired Indebtedness are
included in the property, plant or equipment reflected on the consolidated
balance sheet of the Company and its Subsidiaries);
(xv) Indebtedness, in addition to that described in clauses (i) through
(xiv) of this definition of "Permitted Indebtedness", and any renewals,
extensions, substitutions, refinancings or replacements of such
Indebtedness, not to exceed $75.0 million outstanding at any one time in the
aggregate; and
(xvi) any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") of any
Indebtedness described in clauses (ii), (iii), (iv) and (xiv), including any
successive refinancings so long as the aggregate amount of Indebtedness
represented thereby is in a principal amount that does not exceed the
principal amount so refinanced plus the amount of any premium required to be
paid in connection with such refinancing pursuant to the terms of the
Indebtedness refinanced or the amount of any premium reasonably determined
by the Company as necessary to accomplish such refinancing, plus the amount
of expenses of the Company incurred in connection with such refinancing;
provided that for purposes of this clause, the principal amount of any
Indebtedness shall be deemed to mean the principal amount thereof or, if
such Indebtedness provides for an amount less than the principal amount
thereof to be due and payable upon a declaration of acceleration thereof,
such lesser amount as of the date of determination and such refinancing does
not reduce the Average Life to Stated Maturity or the final Stated Maturity
of such Indebtedness.
"Permitted Investment" means any of the following: (i) any Investment in any
Majority-owned Subsidiary by the Company or any other Majority-owned Subsidiary,
any Investment in any Person by the Company or any Majority-owned Subsidiary as
a result of which such Person becomes a Majority-owned Subsidiary or any
Investment in the Company by any Majority-owned Subsidiary; (ii) any Temporary
Cash Investment; (iii) intercompany Indebtedness to the extent permitted under
clause (viii) of the definition of "Permitted Indebtedness"; (iv) Investments in
existence on the date of the Indentures and any Investment with respect to which
the Company or any Subsidiary is legally committed to make, but only if such
commitment was in existence on the date of the Indentures (in each case, other
than any Investment in any Unrestricted Subsidiary); (v) sales of goods on trade
credit terms consistent with the Company's past practices or as otherwise
consistent with trade credit terms in common use in the industry; (vi)
Investments pursuant to the Logistical Services Agreement or Spin-Off
Agreements; (vii) any Investment in any Person acquired or retained in
connection with any asset sale or other disposition of assets; (viii) loans or
advances to employees made in the ordinary course of business; and (ix) in
addition to Permitted Investments described in the foregoing clauses (i) through
(viii), Investments in the aggregate amount of $45.0 million at any one time
outstanding.
"Permitted Senior Subordinated Indebtedness" means (i) the Senior
Subordinated Notes, (ii) in addition to (i), other Indebtedness of the Company
in the aggregate principal amount not to exceed $200.0 million at any one time
outstanding and (iii) any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this definition, a "refinancing") of any
Indebtedness described in the foregoing clause (i), including any successive
refinancings, so long as the aggregate amount of Indebtedness represented
thereby is in a principal amount that does not exceed the principal amount so
refinanced plus the amount of any premium required to be paid in connection with
such refinancing pursuant to the terms of the Indebtedness refinanced or the
amount of any premium reasonably determined by the Company as necessary to
accomplish such refinancing, plus the amount of expenses of the Company incurred
in connection with such refinancing, provided that for purposes of this clause,
the principal amount of any Indebtedness shall be deemed to mean the principal
amount thereof or, if such Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount as of the date of determination.
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"Person" means any individual, corporation, limited or general partnership,
joint venture, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Plainbridge" means Plainbridge, Inc., a corporation incorporated under the
laws of the State of Delaware, and any successor thereto.
"PTK" means PTK Holdings, Inc., a corporation incorporated under the laws of
the State of Delaware, and any successor thereto.
"Purchase Money Mortgages" means Indebtedness of the Company or any
Subsidiary (i) issued to finance or refinance the purchase or construction of
any assets of the Company or any Subsidiary or (ii) secured by a Lien on any
assets of the Company or any Subsidiary where the lender's sole recourse is to
the assets so encumbered, in either case (a) to the extent the purchase or
construction prices for such assets are or should be included in "addition to
property, plant or equipment" in accordance with GAAP and (b) if the purchase or
construction of such assets is not part of any acquisition of a Person or
business unit.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by its
terms, by the terms of any security into which it is convertible or exchangeable
or otherwise, is or upon the happening of an event or passage of time would be
required to be redeemed prior to the final Stated Maturity of the Senior
Subordinated Notes, the Subordinated Notes, the Subordinated Debentures or the
Deferred Coupon Notes, as the case may be, or is redeemable at the option of the
holder thereof at any time prior to such final Stated Maturity, or is
convertible into or exchangeable for debt securities at any time prior to such
final Stated Maturity.
"Senior Subordinated Notes" means the Company's 9 5/8% Senior Subordinated
Notes due 2003 in an aggregate principal amount not in excess of $440.0 million.
"SMG-II" means SMG-II Holdings Corporation, a Delaware corporation, and any
successor thereto.
"Spin-Off Agreements" means (i) the Distribution and Transfer Agreement
dated as of May 3, 1993 among the Company, Holdings and Chefmark; (ii) the
Distribution and Transfer Agreement dated as of the date of the Plainbridge
Spin-Off among the Company, PTK and Plainbridge; (iii) the Blair Services
Agreement dated as of the date of the Plainbridge Spin-Off between the Company
and Plainbridge; (iv) the Chefmark Services Agreement dated as of May 3, 1993
between the Company and Chefmark; (v) the Tax Sharing Agreement; (vi) leases
between the Company as lessee and Plainbridge as lessor entered into on the date
of the Indentures; and (vii) the Chefmark Supply Agreement dated as of May 3,
1993 between Chefmark and the Company, in each case as amended or modified in
accordance with the provisions of the Indentures.
"Spin-Off" means the contribution by the Company to Plainbridge of the Home
Centers Segment, the warehouse, distribution and transportation operations and
the inventory therein that service the Pathmark supermarkets and drug stores and
certain other assets and the distribution of the shares of Plainbridge to PTK.
"Stated Maturity", when used with respect to any Indebtedness or any
installment of interest thereon, means the dates specified in such Indebtedness
as the fixed date on which the principal of such Indebtedness or such
installment of interest is due and payable.
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"Subordinated Debentures" means the Company's 12 5/8% Subordinated
Debentures due 2002 in aggregate principal amount not in excess of the aggregate
principal amount outstanding on the date of the Indentures.
"Subordinated Indebtedness" means Indebtedness of the Company subordinated
in right of payment to the Senior Subordinated Notes, the Subordinated Notes,
the Subordinated Debentures or the Deferred Coupon Notes, as the case may be.
"Subordinated Notes" means the Company's 11 5/8% Subordinated Notes due 2002
in aggregate principal amount not in excess of the aggregate principal amount
outstanding on the date of the Indentures.
"Subsidiary" means any Person a majority of the equity ownership or the
Voting Stock of which is at the time owned, directly or indirectly, by the
Company or by one or more other Subsidiaries, or by the Company and one or more
other Subsidiaries; provided that an Unrestricted Subsidiary shall not be deemed
to be a Subsidiary for purposes of the Indentures.
"Tax Sharing Agreement" means the Tax Sharing Agreement dated as of the date
of the Plainbridge Spin-Off by and between SMG-II and the Company, as amended or
modified in accordance with the provisions of the Indentures.
"Temporary Cash Investment" means (A) any evidence of Indebtedness, maturing
not more than 180 days after the date of acquisition, issued by the United
States, or an instrumentality or agency thereof, and guaranteed fully as to
principal, premium, if any, and interest by the United States, (B) any
certificate of deposit, maturing not more than 180 days after the date of
acquisition, issued by, or time deposit of, a commercial banking institution
that has combined capital and surplus of not less than $300.0 million, whose
debt is rated at the time as of which any investment therein is made, of "A" (or
higher) according to Moody's Investors Service, Inc. ("Moody's"), or "A" (or
higher) according to Standard & Poor's Corporation ("S&P"), (C) commercial
paper, maturing not more than 90 days after the date of acquisition, issued by a
corporation (other than an Affiliate or Subsidiary of the Company) organized and
existing under the laws of the United States, with a rating, at the time as of
which any investment therein is made, of "P-2" (or higher) according to Moody's
or "A-2" (or higher) according to S&P, (D) any short-term, tax-exempt investment
in indebtedness issued by a municipality existing under the laws of the United
States with a rating, at the time as of which any investment therein is made, of
"A" (or higher) according to Moody's or "A" (or higher) according to S&P and (E)
any money market deposit accounts issued or offered by any domestic commercial
bank having capital and surplus in excess of $300.0 million.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled by, and
published in, the most recent Federal Reserve Statistical Release H.15 (5-19)
which has become publicly available at least two business days prior to the date
fixed for redemption of the Securities following a Change in Control (or, if
such Statistical Release is no longer published, any publicly available source
of similar market data)) most nearly equal to the then remaining Average Life to
Stated Maturity of the Securities; provided, however, that if the Average Life
to Stated Maturity of the Securities is not equal to the constant maturity of a
United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (rounded, if necessary,
to four decimal places) from the weekly average yields of United States Treasury
securities for which such yields are given, except that if the Average Life to
Stated Maturity of the Securities is less than one year, the weekly average
yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
"Unrestricted Subsidiary" means (i) any subsidiary of the Company that at
the time of determination shall be an Unrestricted Subsidiary (as designated by
the Board of Directors of the Company, as provided below) and (ii) any
subsidiary of an Unrestricted Subsidiary. The Board of Directors of the
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Company may designate any subsidiary of the Company (including any newly
acquired or newly formed subsidiary) to be an Unrestricted Subsidiary if all of
the following conditions apply: (a) such subsidiary is not liable, directly or
indirectly, with respect to any Indebtedness other than Unrestricted Subsidiary
Indebtedness and (b) any Investment in such subsidiary made as a result of
designating such subsidiary an Unrestricted Subsidiary shall not violate the
provisions of the "Limitation on Unrestricted Subsidiaries" covenant. Any such
designation by the Board of Directors of the Company shall be evidenced to the
Trustee by filing with the Trustee a board resolution giving effect to such
designation and an officers' certificate certifying that such designation
complies with the foregoing conditions. The Board of Directors of the Company
may designate any Unrestricted Subsidiary as a Subsidiary; provided that
immediately after giving effect to such designation, the Company could incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to
the restrictions under the "Limitation on Indebtedness" covenant.
"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary means
Indebtedness of such Unrestricted Subsidiary (i) as to which neither the Company
nor any Subsidiary is directly or indirectly liable (by virtue of the Company or
any such Subsidiary being the primary obligor on, guarantor of, or otherwise
liable in any respect to, such Indebtedness), except Guaranteed Debt of the
Company or any Subsidiary, to any Affiliate, in which case (unless the
incurrence of such Guaranteed Debt resulted in a Restricted Payment at the time
of incurrence) the Company shall be deemed to have made a Restricted Payment
equal to the principal amount of any such Indebtedness to the extent guaranteed
at the time such Affiliate is designated an Unrestricted Subsidiary and (ii)
which, upon the occurrence of a default with respect thereto, does not result
in, or permit any holder of any Indebtedness of the Company or any Subsidiary to
declare, a default on such Indebtedness of the Company or any Subsidiary or
cause the payment thereof to be accelerated or payable prior to its Stated
Maturity.
"Voting Stock" means stock of the class or classes pursuant to which the
holders thereof have the general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or trustees of a
corporation (irrespective of whether or not at the time stock of any other class
or classes shall have or might have voting power by reason of the happening of
any contingency).
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CERTAIN INDEBTEDNESS OF THE COMPANY
EXISTING INDEBTEDNESS
The summaries of the indebtedness contained herein do not purport to be
complete and are qualified in their entirety by reference to the provisions of
the various agreements and indentures related thereto, copies of which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
BANK CREDIT AGREEMENT
In connection with the Recapitalization, the Company entered into a Bank
Credit Agreement. The Bank Credit Agreement provides for a senior credit
facility consisting of a $400.0 million Term Loan and the $175.0 million Working
Capital Facility for a total of $575.0 million. Borrowings under the Bank Credit
Agreement are secured by first priority liens on certain assets of the Company
and its subsidiaries, including certain real property, equipment, inventory and
receivables. In conjunction with the reacquisition of the capital stock of
Plainbridge through a capital contribution by PTK subsequent to February 3,
1996, the outstanding obligations of Plainbridge under its Bank Credit Agreement
were satisfied by the Company and the Plainbridge Credit Agreement was
terminated. The Company simultaneously entered into an amendment to its Bank
Credit Agreement with its existing lenders increasing the Company's working
Capital Facility from $175 million to $200 million to satisfy any additional
liquidity needs and prospectively modifying certain of its financial covenants
to take into account the operations of Plainbridge.
Term Loan. The Term Loan consists of a tranche A term loan (the "Term A
Loan") of $225.0 million and a tranche B term loan (the "Term B Loan") of $175.0
million and the proceeds from the Term Loan were used to provide a portion of
the funds necesssary to implement the Recapitalization. The Term A Loan is
subject to quarterly principal payment requirements which commenced on January
15, 1994 with payment in full on July 31, 1998. The Term B Loan is subject to
minimal yearly principal payment requirements which commenced on January 15,
1995 and quarterly principal payment requirements which commence on October 15,
1998, with payment in full on October 31, 1999. In addition to the scheduled
payments, the Company is also required to prepay the Term Loan with excess cash
flow and net cash proceeds of certain asset sales and debt and equity issuances.
Working Capital Facility. Borrowing, under the Working Capital Facility, of
up to $200.0 million, was used initially to provide a portion of the funds
necessary to implement the Recapitalization and thereafter is used to finance
the working capital requirements of the Company in the ordinary course of
business. Up to $125.0 million of the Working Capital Facility may be used to
issue trade and standby letters of credit. The Working Capital Facility will
mature on July 31, 1998.
Interest Rate and Fees. Borrowings under the Bank Credit Agreement bear
interest at fluctuating rates, as selected by the Company, as follows: (i) with
respect to the Term A Loan and the Working Capital Facility, (x) 1.50% per annum
over the Base Rate (as defined) or (y) 2.50% per annum over the Adjusted
Eurodollar Rate (as defined) and (ii) with respect to the Term B Loan, (x) 2.00%
per annum over the Base Rate or (y) 3.00% per annum over the Adjusted Eurodollar
Rate. The Company is required to pay annual fees to the Bank in its capacity as
agent.
Certain Covenants. The Bank Credit Agreement contains customary affirmative
and restrictive covenants, as well as financial covenants, under which the
Company and its subsidiaries must operate. Failure to comply with any of such
covenants will permit the Bank to accelerate, subject to the terms of the Bank
Credit Agreement, the maturity of all amounts outstanding under the Bank Credit
Agreement.
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The Bank Credit Agreement restricts or limits the Company's and its
subsidiaries' ability to, among other things: (i) incur additional indebtedness,
subject to certain specified exceptions; (ii) create additional liens, subject
to certain specified exceptions; (iii) make or own investments in any person,
including any joint venture, subject to certain exceptions; (iv) create or
become or remain liable with respect to certain contingent liabilities, subject
to certain exceptions; (v) make any Restricted Junior Payment (as defined in the
Bank Credit Agreement), with certain exceptions; (vi) enter into any transaction
of merger or consolidation, or liquidate, wind-up or dissolve itself, or convey,
sell, lease, sub-lease, transfer or otherwise dispose of all or any part of its
business, property or fixed assets, with certain exceptions; (vii) make or incur
Consolidated Capital Expenditures (as defined in the Bank Credit Agreement),
which exceed during any specified period the specified amount for such period;
(viii) become liable under any lease during a fiscal year, unless immediately
after giving effect to the incurrence of such liability, the Consolidated Rental
Payments (as defined in the Bank Credit Agreement) shall not exceed the
specified amount for such fiscal year; (ix) sell with recourse, or discount, any
notes or accounts receivable; (x) permit to exist any transaction with any
holder of 5% or more of any class of equity securities of the Company or any
affiliate of the Company or of any such holder, that is not an arm's-length
transaction, with certain exceptions; (xi) sell, assign, pledge or otherwise
dispose of any shares of capital stock or other equity securities of any of its
subsidiaries, with certain specified exceptions; and (xii) engage in any
business other than the businesses engaged in by the Company and its
subsidiaries at the closing date or such other lines of business as may be
consented to by the requisite lenders.
The Bank Credit Agreement requires that the ratio of (i) Consolidated
Adjusted EBITDA (as defined in the Bank Credit Agreement) to (ii) Consolidated
Interest Expense (as defined in the Bank Credit Agreement) for any four-fiscal
quarter period ending as of the last day of any fiscal quarter of the Company be
less than certain specified levels. In addition, the ratio of (i) Consolidated
Total Debt (as defined in the Bank Credit Agreement) as of the last day of any
fiscal quarter of the Company occurring during a specified period to (ii)
Consolidated Adjusted EBITDA for the four-fiscal quarter period ending as of the
last day of such period shall not be allowed to exceed certain specified levels.
Lastly, Consolidated Adjusted EBITDA for any four-fiscal quarter period of the
Company shall not be allowed to be less than certain specified levels.
Events of Default. The Bank Credit Agreement contains customary events of
default, including, without limitation: (i) the nonpayment of principal and
amounts in reimbursement in respect of letters of credit when due or the
nonpayment of interest, fees or other amounts within five days after the date
due; (ii) the nonpayment of principal or interest on, or defaults of the Company
or its subsidiaries with respect to certain material indebtedness or contingent
obligations and certain other cross-defaults and cross-accelerations to material
terms of other agreements; (iii) the failure to perform or observe any covenant
under the Bank Credit Agreement (subject in certain circumstances to grace
periods); (iv) the material incorrectness of a representation, warranty,
certification or other statement made by the Company or its subsidiaries when
made; (v) the occurrence of certain events of bankruptcy or insolvency; (vi) the
occurrence of certain judgments, writs of attachment or similar process against
the Company or any of its subsidiaries; (vii) any order, judgment or decree
entered against the Company or its subsidiaries decreeing dissolution, if not
discharged or stayed within 30 days; (viii) the occurrence of certain ERISA
events; (ix) the occurrence of certain transactions resulting in a change in
control of the Company; (x) the invalidity of certain guarantees or security
interests granted to the lenders; (xi) the failure to consummate the
Recapitalization; (xii) the termination of or a breach under the Logistical
Services Agreement; (xiii) the incurrence of tax liability relating to the
Spin-Off for which Plainbridge agreed to indemnify the Company; or (xiv) a
material amendment of the terms of the PTK DIBs Indenture or the PTK DIBs, which
would be adverse to Holdings, PTK, the Company or the lenders under the Bank
Credit Agreement.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the principal United States federal income
tax consequences of ownership and disposition of Senior Subordinated Notes,
Subordinated Notes, Subordinated Debentures and/or the Deferred Coupon Notes by
a United States Holder (as defined below). It does not discuss all of the tax
consequences that may be relevant to a holder in light of his particular
circumstances or to holders subject to special rules. Persons considering the
purchase of the Securities should consult with their own tax advisors with
regard to the application of the United States federal income tax laws to their
particular situations as well as any tax consequences arising under the laws of
any state, local or foreign tax jurisdiction.
As used herein, the term "United States Holder" means a beneficial owner of
a Security that is for United States federal income tax purposes (i) a citizen
or resident of the United States, (ii) a corporation, partnership or other
entity created or organized in or under the laws of the United States or of any
political subdivision thereof, or (iii) an estate or trust the income of which
is subject to United States federal income taxation regardless of its source.
PAYMENTS OF INTEREST ON THE SENIOR SUBORDINATED NOTES
The Senior Subordinated Notes, the Subordinated Notes and the Subordinated
Debentures do not bear original issue discount ("OID") within the meaning of
section 1273(a)(1) of the Internal Revenue Code of 1986, as amended (the
"Code"). Interest paid on a Senior Subordinated Note will generally be taxable
to a United States Holder as ordinary interest income at the time it accrues or
is received, in accordance with the United States Holder's method of accounting
for federal income tax purposes.
ACCRUAL OF OID ON THE DEFERRED COUPON NOTES
The Deferred Coupon Notes bear OID. OID will be included on an accrual basis
in the gross income of a holder of Deferred Coupon Notes in advance of the
receipt of cash payments on the Deferred Coupon Notes. The amount of OID
required to be included in a holder's gross income in any taxable year will be
computed in accordance with sections 1272 through 1275 of the Code, described
below. Final regulations under these sections were issued on February 2, 1994
(the "Regulations"). The discussion set forth below is based on, among other
things, the foregoing Code sections and the Proposed Regulations. While the
Regulations, generally by their terms, are to be effective for debt instruments
issued on or after April 4, 1994, the Regulations are currently the best
indication of the views of the Internal Revenue Service with respect to the
United States federal income tax treatment of the Deferred Coupon Notes. In any
case, holders may generally rely on the Regulations.
The total amount of OID with respect to Deferred Coupon Notes is equal to
the excess of its "stated redemption price at maturity" over its "issue price".
The Regulations provide that all payments of principal and interest required to
be made on the Deferred Coupon Notes are considered components of the stated
redemption price at maturity of the Deferred Coupon Notes. As a result, each
Deferred Coupon Note bears OID in an amount equal to the excess of (i) all
amounts payable under the Deferred Coupon Note, however designated, including
amounts representing or attributable to interest, over (ii) its issue price. The
issue price of a Deferred Coupon Note will be the initial offering price to the
public at which price a substantial amount of Deferred Coupon Notes is sold.
Such issue price does not change even if part of the issue is subsequently sold
at a different price.
A holder of a Deferred Coupon Note will be required to include in income, as
interest, OID on the Deferred Coupon Note, but (except as discussed below with
respect to market discount) will not be required to include in income any cash
payments received by such holder on the Deferred Coupon Note, even if
denominated as interest. The amount required to be included in a holder's income
as OID in a taxable year will be determined by allocating to each day during
such taxable year on which the holder
75
<PAGE>
holds the Deferred Coupon Notes a pro rata portion of the OID on the Deferred
Coupon Notes attributable to the "accrual period" (i.e., generally, the period
that ends on May 1 and November 1 of each calendar year) in which such day is
included. The amount of OID attributable to an accrual period will be the
product of (i) the "adjusted issue price" at the beginning of such accrual
period (i.e., the issue price plus OID attributable to prior accrual periods,
disregarding any reduction on account of acquisition premium, as defined below,
less any cash payments on the Deferred Coupon Notes during such prior accrual
periods) multiplied by (ii) the yield to maturity of the Deferred Coupon Notes
(determined by semiannual compounding). Under the foregoing rules, United States
Holders of Deferred Coupon Notes will generally be required to include in income
increasingly greater amounts of OID in successive accrual periods. Special rules
will apply for calculating OID for initial short or final accrual periods.
Any holder who pays an "acquisition premium" for a Deferred Coupon Note will
reduce the daily portions of OID includible in gross income with respect to that
Deferred Coupon Note. Acquisition premium is any amount paid for such Deferred
Coupon Note in excess of the adjusted issue price on the date of acquisition.
The amount of the reduction in the daily portion of OID includible in income by
a holder of a Deferred Coupon Note will be equal to the amount that would
otherwise be the daily portion of OID for that day multiplied by a fraction
whose numerator is equal to the excess of the purchase price for the Deferred
Coupon Note over its adjusted issue price on the purchase date and whose
denominator is the excess of the stated redemption price at maturity, reduced by
any cash payments made on the Deferred Coupon Note prior to the purchase date,
over the adjusted issue price on the purchase date.
The Company will provide annual information statements to certain holders of
Deferred Coupon Notes and to the IRS stating the amount of OID (disregarding any
reduction on account of acquisition premium) attributable to the Deferred Coupon
Notes for that year. A holder that acquires a Deferred Coupon Note at an
acquisition premium or that holds a Deferred Coupon Note for less than the full
year, must independently determine the amount of OID includible in income with
respect to such Deferred Coupon Note.
SALE, EXCHANGE OR RETIREMENT OF SECURITIES
Upon the sale, exchange or retirement of a Security, a United States Holder
will recognize taxable gain or loss equal to the difference between the amount
realized on the sale, exchange or retirement (reduced, in the case of a cash
basis taxpayer holding Senior Subordinated Notes, Subordinated Notes or
Subordinated Debentures, by any amount attributable to accrued interest, which
is taxable as such) and such holder's adjusted tax basis in the Security. A
United States Holder's adjusted tax basis in a Security generally will equal the
cost of the Security to such holder, increased by the amounts of any market
discount or OID previously included in income by the holder with respect to such
Security and reduced by any amortized bond premium and, in the case of a
Deferred Coupon Note, by the amounts of any cash payments of interest or
principal. If a United States Holder holds a Security as a capital asset, gain
or loss recognized on the sale, exchange or retirement of a Security will be
capital gain or loss (except to the extent of market discount in the case of
subsequent purchasers who acquire a Security at a market discount) and will be
long-term capital gain or loss if at the time of sale, exchange or retirement
the Security has been held for more than one year.
Any gain realized on the sale, exchange or retirement of a Deferred Coupon
Note will be treated as ordinary income, to the extent of any unaccrued OID, if
at the time of such Note's original issuance there was an intention to call the
Note before maturity. Under the Regulations, an intention to call exists only if
there is an agreement not provided for in the debt instrument that the issuer
will redeem the instrument prior to maturity. The Company has no intention to
call the Deferred Coupon Notes before maturity, except that the Company
anticipates that it may redeem up to 35% of the principal amount of the Notes
with the net proceeds of any issuance of the Qualified Capital Stock of the
76
<PAGE>
Company or PTK. Due to a dearth of authority, counsel is unable to opine as to
whether this amounts to an intention to call before maturity. The Regulations
also provide exemptions from the above rules for publicly offered debt
instruments, such as the Deferred Coupon Notes. As previously stated, the
Regulations are effective for debt instruments issued on or after April 4, 1994.
MARKET DISCOUNT
If a United States Holder purchases a Security at a price that is less than,
in the case of a Senior Subordinated Note, the stated redemption price of the
Note at maturity, or in the case of a Deferred Coupon Note, the "revised issue
price" of the Note, the amount of the difference will be treated as "market
discount" and subject to the provisions of sections 1276 through 1278 of the
Code. The "revised issue price" of a Deferred Coupon Note generally equals its
issue price, plus the aggregate amount of OID includible (without regard to any
reduction for amortized premium, as discussed above) in the gross income of all
previous holders of the Note, less any cash payments made to all previous
holders on such Note.
Market discount will be considered to be zero if such market discount is
less than 0.25% of the stated redemption price at maturity of the Security times
the number of complete years to maturity (that remain after the holder's
acquisition of the Security). In the absence of guidance from the Internal
Revenue Service, the years to maturity would likely be determined based on the
weighted average maturity of the Security remaining after the date of purchase.
If a United States Holder realizes a gain upon disposition of a Security,
the lesser of (i) the excess of the amount received on such disposition over the
holder's tax basis in the Security or (ii) the portion of the market discount
that accrued while the Security was held by such holder and that was not
previously included in income generally will be treated as ordinary interest
income at the time of disposition. A United States Holder will be required to
include in income as ordinary interest income any payment received on a Deferred
Coupon Note to the extent of the market discount that accrued while the Note was
held by such holder and that was not previously included in income. If a holder
disposes of a Security in any transaction other than a sale, exchange or
involuntary conversion (e.g., as a gift), that holder generally will be treated
as having realized an amount equal to the fair market value of the Security and
will be required to recognize as ordinary income any gain on disposition to the
extent of the accrued market discount. As a result, a holder may be required to
recognize ordinary interest income, even though the disposition would not
otherwise be taxable. Market discount will be considered to accrue ratably
during the period from the date of acquisition to the maturity date of the
Security, unless the United States Holder elects to accrue on the basis of
semiannual compounding. A different rule may apply to Deferred Coupon Notes
under forthcoming regulations.
A United States Holder will generally be required to defer the deduction of
all or a portion of the interest paid or accrued on any indebtedness incurred or
maintained to purchase or carry such Security until the maturity of the Security
or its earlier disposition in a taxable transaction.
A United States Holder may elect to include market discount in income
currently as it accrues (on either a ratable or a semiannual compounding basis),
in which case the rules described above regarding the treatment as ordinary
income of gain upon the disposition of the Security and regarding the deferral
of interest deductions will not apply.
AMORTIZABLE BOND PREMIUM
If a United States Holder's tax basis in a Security immediately after such
holder acquires it exceeds the amount payable at maturity, such holder should
consult a tax advisor to determine the availability of an election to deduct the
excess as amortizable bond premium pursuant to section 171 of the Code.
77
<PAGE>
BACKUP WITHHOLDING
The 31% "backup" withholding and information reporting requirements apply to
certain payments of principal, premium, if any, and interest on an obligation,
and to proceeds of the sale or redemption of an obligation before maturity. The
Company, its agent, a broker, the Trustee or any paying agent, as the case may
be, will be required to withhold from any payment that is subject to backup
withholding a tax equal to 31% of such payment if the United States Holder fails
to furnish his taxpayer identification number (social security number or
employer identification number), to certify that such holder is not subject to
backup withholding, or to otherwise comply with the applicable requirements of
the backup withholding rules. Certain holders (including, among others,
corporations and persons who are not United States Holders) are not subject to
the backup withholding and reporting requirements.
MARKET-MAKING ACTIVITIES OF MERRILL LYNCH
This Prospectus is to be used by Merrill Lynch in connection with offers and
sales of the Securities in market-making transactions at negotiated prices
relating to prevailing market prices at the time of sale. Merrill Lynch may act
as principal or agent in such transactions.
Merrill Lynch has no obligation to make a market in the Securities, and may
discontinue its market-making activities at any time without notice, at its sole
discretion. Furthermore, Merrill Lynch may be required to discontinue its
market-making activities during periods when the Company is seeking to sell
certain of its securities or when Merrill Lynch, such as by means of its
affiliate's ownership interest in the Company, learns of material non-public
information relating to the Company. Merrill Lynch would not be able to
recommence its market-making activities until such sale has been completed or
such information has become publicly available. It is not possible to forecast
the impact, if any, that any such discontinuance may have on the market for the
Securities. While other broker/dealers may make a market in the Securities from
time to time, there can be no assurance that any other broker/dealer will do so
at any time when Merrill Lynch discontinues its market-making activities. In
addition, any such broker/dealer that is engaged in market-making activities may
thereafter discontinue such activities at any time at its sole option.
The Deferred Coupon Notes are listed on the NYSE. Merrill Lynch currently is
making offers and sales of the Deferred Coupon Notes in market-making
transactions as permitted by the rules applicable to members of the NYSE and the
Securities Act, although it is not obligated to do so, and any such market
making may be discontinued at any time without notice, at the sole discretion of
Merrill Lynch.
Holdings beneficially owns 100% of the outstanding shares of capital stock
of the Company through its 100% ownership of the capital stock of PTK and ML&Co.
beneficially owns 88.6% of the outstanding shares of voting stock of Holdings.
ML&Co. controls Holdings and, through Holdings, controls the Company. See
"Principal Stockholders". Merrill Lynch is a wholly owned subsidiary of ML&Co.
ML&Co. beneficially owns approximately 88.6% of the outstanding shares of
voting stock of Holdings and, accordingly, controls Holdings and PTK and
indirectly controls the Company through PTK. Merrill Lynch is a wholly owned
subsidiary of ML&Co. Under the Holdings Stockholders Agreement, affiliates of
Merrill Lynch are entitled to designate seven directors to the Board of
Directors of both Holdings and the Company. Four directors have been so
designated, who are Messrs. Burke, McLean, Khanna and Ms. Penny. Messrs. Burke,
McLean and Khanna are officers of affiliates of Merrill Lynch. See
"Management--Directors".
78
<PAGE>
EXPERTS
The consolidated balance sheets of the Company and its subsidiaries as of
February 3, 1996 and January 28, 1995 and the related consolidated statements of
operations, stockholder's deficit, and cash flows for the years ended February
3, 1996, January 28, 1995 and January 29, 1994 included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and is included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
79
<PAGE>
PATHMARK STORES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS 1995, 1994 AND 1993
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
Consolidated Statements of Operations....................................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Stockholder's Deficit............................ F-4
Consolidated Statements of Cash Flows....................................... F-5
Notes to Consolidated Financial Statements.................................. F-6 to F-24
Independent Auditors' Report................................................ F-25
</TABLE>
F-1
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
53 WEEKS
ENDED 52 WEEKS ENDED
--------------------------
FEBRUARY 3, JANUARY 28, JANUARY 29,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Sales.................................................. $ 4,181,622 $ 4,188,872 $ 4,239,443
Cost of sales (exclusive of depreciation and
amortization shown separately below)................. 2,965,894 3,002,421 3,081,040
----------- ----------- -----------
Gross profit........................................... 1,215,728 1,186,451 1,158,403
Selling, general and administrative expenses........... 950,816 935,319 926,164
Depreciation and amortization.......................... 80,408 75,468 69,894
Recapitalization expenses.............................. -- -- 16,612
Provision for store closings........................... -- -- 5,975
----------- ----------- -----------
Operating earnings..................................... 184,504 175,664 139,758
Gain on disposition of freestanding drug stores........ 15,535 --
Gain on sale of real estate............................ 3,371 -- --
Interest expense....................................... (164,749) (158,503) (185,968)
Interest charged to discontinued operations............ -- 11,035 13,136
----------- ----------- -----------
Earnings (loss) from continuing operations before
income taxes, gain on disposal of home centers
segment, extraordinary item and cumulative effect of
accounting changes................................... 38,661 28,196 (33,074)
Income tax (provision) benefit......................... (5,914) (4,083) 20,278
----------- ----------- -----------
Earnings (loss) from continuing operations before gain
on disposal of home centers segment, extraordinary
item and cumulative effect of accounting changes..... 32,747 24,113 (12,796)
Loss from discontinued operations...................... -- (2,099) (647)
----------- ----------- -----------
Earnings (loss) before gain on disposal of home centers
segment, extraordinary item and cumulative effect of
accounting changes..................................... 32,747 22,014 (13,443)
Gain on disposal of home centers segment, net of an
income tax provision of $2,324......................... -- 17,044 --
Extraordinary item, net of an income tax benefit
of $15,015........................................... -- -- (96,727)
----------- ----------- -----------
Earnings (loss) before cumulative effect of accounting
changes................................................ 32,747 39,058 (110,170)
Cumulative effect of accounting changes
Postretirement benefits other than pensions, net of
an income tax benefit of $11,289....................... -- -- (15,636)
Postemployment benefits, net of an income tax benefit
of $1,813.......................................... -- -- (2,488)
Change in the determination of the discount rate
utilized to record the present value of certain
noncurrent liabilities, net of an income tax
benefit of $6,754...................................... -- -- (9,270)
Change in the method utilized to calculate last-in,
first-out (LIFO) inventories, net of an income tax
benefit of $7,770.................................. -- -- (10,664)
----------- ----------- -----------
Net earnings (loss).................................... $ 32,747 $ 39,058 $ (148,228)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................................ $ 11,648 $ 22,012
Accounts receivable, net......................................... 10,553 12,933
Merchandise inventories.......................................... 225,448 255,281
Income taxes receivable.......................................... -- 4,875
Deferred income taxes............................................ 4,156 --
Prepaid expenses................................................. 25,189 26,557
Due from suppliers............................................... 13,178 18,257
Other current assets............................................. 5,854 16,937
----------- -----------
Total Current Assets......................................... 296,026 356,852
Property and Equipment, Net........................................ 602,888 584,184
Deferred Financing Costs, Net...................................... 33,685 40,445
Deferred Income Taxes.............................................. 13,243 2,386
Other Assets....................................................... 39,915 33,864
----------- -----------
$ 985,757 $ 1,017,731
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Accounts payable................................................. $ 184,082 $ 193,196
Book overdrafts.................................................. 43,720 44,982
Current maturities of long-term debt............................. 51,753 59,310
Income taxes payable............................................. 4,057 --
Accrued payroll and payroll taxes................................ 54,322 53,542
Current portion of obligations under capital leases.............. 20,680 18,298
Accrued interest payable......................................... 19,309 19,672
Accrued expenses and other current liabilities................... 91,223 89,790
----------- -----------
Total Current Liabilities.................................... 469,146 478,790
----------- -----------
Long-Term Debt..................................................... 1,214,645 1,273,314
----------- -----------
Obligations Under Capital Leases, Long-Term........................ 140,161 127,123
----------- -----------
Other Noncurrent Liabilities....................................... 186,036 168,976
----------- -----------
Commitments and Contingencies (Notes 14 and 20)
Stockholder's Deficit
Common Stock, $.10 par value..................................... -- --
Authorized, issued and outstanding: 100 shares
Paid-In Capital.................................................. 65,303 91,809
Accumulated Deficit.............................................. (1,089,534) (1,122,281)
----------- -----------
Total Stockholder's Deficit.................................. (1,024,231) (1,030,472)
----------- -----------
$ 985,757 $ 1,017,731
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT DEFICIT
------ --------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, January 30, 1993.................... $ -- $ 45,967 $(1,013,111) $ (967,144)
Net loss................................... -- -- (148,228) (148,228)
Dividend of a demand note to Holdings...... -- (24,000) -- (24,000)
Capital contribution from PTK Holdings,
Inc. ........................................ -- 130,000 -- 130,000
Return of capital to Holdings.............. -- (824) -- (824)
Capital contribution from Holdings in
connection with the demand note
forgiveness.................................. -- 16,885 -- 16,885
Distribution of Chefmark, Inc., a wholly
owned subsidiary, to Holdings............ -- 95 -- 95
Capital contribution to Holdings,
representing a liability assumed in
conjunction with a recapitalization...... -- (8,078) -- (8,078)
------ --------- ----------- -------------
Balance, January 29, 1994.................... -- 160,045 (1,161,339) (1,001,294)
Net earnings............................... -- -- 39,058 39,058
Capital contribution to PTK Holdings,
Inc.......................................... -- (1,657) -- (1,657)
Dividend to PTK Holdings, Inc., in
conjunction with the disposal of the home
centers segment.............................. -- (66,579) -- (66,579)
------ --------- ----------- -------------
Balance, January 28, 1995.................... -- 91,809 (1,122,281) (1,030,472)
Net earnings............................... -- -- 32,747 32,747
Dividend to PTK Holdings, Inc. in
conjunction with the disposition of
freestanding drug stores..................... -- (21,800) -- (21,800)
Dividend to PTK Holdings, Inc.,
in conjunction with the disposal
of the home centers segment.............. -- (4,706) -- (4,706)
------ --------- ----------- -------------
Balance, February 3, 1996.................... $ -- $ 65,303 $(1,089,534) $ (1,024,231)
------ --------- ----------- -------------
------ --------- ----------- -------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
53 WEEKS
ENDED] 52 WEEKS ENDED
--------------------------
FEBRUARY 3, JANUARY 28, JANUARY 29,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities
Net earnings (loss)........................................... $ 32,747 $ 39,058 $ (148,228)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 83,263 78,056 72,489
Deferred income tax expense (benefit)..................... 6,417 (661) (29,541)
Interest accruable but not payable........................ 15,028 13,541 3,312
Amortization of original issue discount................... 354 354 1,044
Amortization of debt issuance costs....................... 7,140 7,028 4,870
(Gain) loss on disposal of property and equipment......... 200 (252) (93)
Gain on disposition of freestanding drug stores........... (15,535) -- --
Gain on sale of real estate............................... (3,371) -- --
Gain on sale of home centers segment...................... -- (17,044) --
Loss from discontinued operations......................... -- 2,099 647
Extraordinary loss on early extinguishment of debt........ -- -- 96,727
Cumulative effect of accounting changes................... -- -- 38,058
Cash provided by (used for) operating assets and
liabilities:
Accounts receivable, net................................. 2,380 1,206 (2,806)
Merchandise inventories.................................. 15,653 2,497 14,759
Income taxes............................................. 8,932 15,779 (20,049)
Prepaid expenses......................................... (1,631) (10,707) 2,083
Due from suppliers....................................... 5,079 481 4,702
Other current assets..................................... 2,221 (9,778) (207)
Other assets............................................. (23,419) 6,647 (6,706)
Accounts payable......................................... (9,114) (21,704) 22,283
Accrued payroll and payroll taxes........................ 780 (929) (274)
Accrued interest payable................................. (363) 3,039 (24,041)
Accrued expenses and other current liabilities........... (6,997) 4,999 10,743
Other noncurrent liabilities............................. (1,462) (3,589) 27,686
----------- ----------- -----------
Cash provided by operating activities.................. 118,302 110,120 67,458
----------- ----------- -----------
Investing Activities
Property and equipment expenditures........................... (69,544) (83,866) (70,746)
Proceeds from disposition of property and equipment........... 896 1,262 1,486
Net proceeds from disposition of freestanding drug stores..... 59,876 -- --
Net proceeds from sale of real estate......................... 3,371 -- --
Net proceeds from disposal of home centers segment............ 4,706 81,147 --
----------- ----------- -----------
Cash used for investing activities..................... (695) (1,457) (69,260)
----------- ----------- -----------
Financing Activities
Increase (decrease) in Working Capital Facilities
borrowings..................................................... (17,000) 25,500 (16,000)
Decrease in Term Loan......................................... (60,295) (36,750) (15,000)
Increase (decrease) in book overdrafts........................ (1,262) 5,660 (4,310)
Increase in other borrowings.................................. 895 3,676 2,581
Repayment of other long-term borrowings....................... (5,208) (5,527) (9,768)
Reduction in obligations under capital leases................. (18,221) (17,275) (15,031)
Dividend to PTK Holdings, Inc................................. (26,506) (66,579) --
Deferred financing fees....................................... (374) (977) (47,538)
Borrowings under Term Loan.................................... -- -- 400,000
Proceeds from issuance of Senior Subordinated Notes........... -- -- 436,625
Proceeds from issuance of Deferred Coupon Notes............... -- -- 120,000
Proceeds from Working Capital Facilities borrowings in
connection with the Recapitalization........................ -- -- 53,500
Reduction in debt payable to Holdings in connection with the
Recapitalization............................................... -- -- (766,073)
Premiums and other fees in connection with the
Recapitalization............................................... -- -- (94,875)
Repayment of Old Working Capital Facilities in connection with
the Recapitalization........................................ -- -- (80,000)
Increase in Old Working Capital Facility borrowings prior to
the Recapitalization........................................ -- -- 40,000
Return of capital to Holdings................................. -- -- (824)
----------- ----------- -----------
Cash provided by (used for) financing activities....... (127,971) (92,272) 3,287
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents............... (10,364) 16,391 1,485
Cash and cash equivalents at beginning of period............... 22,012 5,621 4,136
----------- ----------- -----------
Cash and cash equivalents at end of period..................... $ 11,648 $ 22,012 $ 5,621
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
Pathmark (the "Company", formerly Supermarkets General Corporation) operates
144 supermarkets in the Middle Atlantic States, primarily in the New York-New
Jersey and Philadelphia metropolitan areas and is an indirect wholly owned
subsidiary of Supermarkets General Holdings Corporation ("Holdings"). Holdings
was formed by Merrill Lynch Capital Partners, Inc., a wholly owned subsidiary of
Merrill Lynch & Co., Inc. ("ML & Co."), to effect the acquisition (the
"Acquisition") of the Company. On June 15, 1987, Holdings completed the first
step in the Acquisition when it acquired 32,800,000 shares (approximately 85%)
of the Company's common stock through a tender offer. The remaining outstanding
common stock of the Company was acquired by Holdings on October 5, 1987 pursuant
to a Merger Agreement dated April 22, 1987, as amended. The acquisition was
accounted for as a purchase, and accordingly, Holdings recorded the assets and
liabilities of the Company at their fair values at the date of the Acquisition.
The accompanying consolidated financial statements of the Company reflect
Holdings' basis. Such basis includes the initial capitalization of the Company,
which consisted of approximately $1,585.0 million in debt and $182.0 million in
equity. The tax basis for the assets and liabilities acquired was retained.
During Fiscal 1993, the Board of Directors of Holdings authorized management
of the Company and Holdings to proceed with a recapitalization plan (the
"Recapitalization"), which included a refinancing of Holdings' debt and the
distribution to Holdings of certain of the Company's assets and liabilities. In
conjunction with the Recapitalization, the assets, liabilities and related
operations of the Company's home centers segment as well as certain assets and
liabilities of the warehouse, distribution and processing facilities which
service the Company's supermarkets and drug stores and certain inventories and
real property, were contributed to Plainbridge, Inc. ("Plainbridge"), a newly
formed wholly owned subsidiary of the Company and the shares of Plainbridge were
then distributed to PTK Holdings, Inc. ("PTK"), a newly formed wholly owned
subsidiary of Holdings (the "Plainbridge Spin-Off"). Following the Plainbridge
Spin-Off, PTK held 100% of the capital stock of both Plainbridge and the
Company. On May 3, 1993, the Company contributed total assets of $1.7 million
and total liabilities of $1.8 million, which represented the Chefmark deli food
preparation operations and the related warehouse and a leased banana ripening
warehouse to Chefmark, Inc., a newly formed Delaware corporation ("Chefmark"),
and distributed the shares of Chefmark to Holdings. The results of Chefmark's
operations are included in the Company's consolidated statements of operations
through the date it was distributed to Holdings.
On March 1, 1996, the Company reacquired all of the outstanding capital
stock of Plainbridge by means of a capital contribution from PTK. As a result,
Plainbridge is a wholly-owned subsidiary of the Company. Since the acquisition
of the capital stock of Plainbridge is a transfer of interest among entities
under common control, it is being accounted for at historical cost in a manner
similar to pooling-of-interests accounting. Accordingly, the consolidated
financial statements presented herein reflect the assets and liabilities and
related results of operations of the combined entity for all periods. Further,
in conjunction with the aforementioned acquisition of the Plainbridge capital
stock the company renegotiated its bank credit agreements and debt covenants
(see Note 11).
The accompanying consolidated financial statements of the Company indicate
that, at February 3, 1996, current liabilities exceed current assets by $173.1
million and stockholder's deficit was $1.02 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 meet its seasonal cash
requirements. Further, the Company believes it will be in compliance throughout
the upcoming fiscal year with its various debt covenants (see Note 11).
F-6
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of whom are wholly owned. All intercompany
transactions have been eliminated in consolidation. The accompanying
consolidated statements of operations for all periods presented include the
operating results of the Company's home centers segment as discontinued
operations through the date of disposal.
Use of Estimates:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The accompanying consolidated balance sheets include reserves for self
insured claims relating to customer, employee and vehicle accidents and covered
employee medical benefits. The liabilities for customer and employee accident
claims are recorded at present value, utilizing a risk free discount rate, due
to the long-term payout of these claims (see Note 10). While the Company
believes that the amounts provided are adequate to cover its self-insured
liabilities, it is reasonably possible that the final resolution of these claims
may differ from the amounts provided.
Fiscal Year:
The Company's fiscal year ends on the Saturday nearest to January 31 of the
following calendar year. Normally each fiscal year consists of 52 weeks, but
every five or six years the fiscal year consists of 53 weeks. Fiscal 1995
consists of 53 weeks.
Statements of Cash Flows:
All investments and marketable securities with a maturity of three months or
less are considered to be cash equivalents. The Company had no cash equivalent
investments as of February 3, 1996 and $14.8 million of cash equivalent
investments as of January 28, 1995.
Merchandise Inventories:
Merchandise inventories are valued at the lower of cost or market. Cost for
substantially all merchandise inventories is determined on a last-in, first-out
("LIFO") basis.
Rental Video Tapes:
Video tapes purchased for rental purposes are capitalized and amortized as
part of cost of goods sold. The amortization of video tapes included in cost of
goods sold approximate $2.8 million, $2.6 million and $2.6 million in Fiscal
1995, Fiscal 1994 and Fiscal 1993, respectively.
Software:
Externally purchased software is capitalized and amortized as part of
selling, general and administrative expenses over a three year period.
Internally developed software, including software
F-7
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
developed by Integrated Systems Solutions Corporation ("ISSC") (see Note 20), is
expensed as incurred.
Property and Equipment:
Property and equipment are stated at cost. Depreciation and amortization
expense on owned property and equipment is computed on the straight-line method
over their estimated useful lives. Capital leases are recorded at the present
value of minimum lease payments or fair market value of the related property,
whichever is less. Amortization of property under capital leases is computed on
the straight-line method over the term of the lease or the leased property's
estimated useful life, whichever is shorter.
Depreciable lives of owned property and equipment are as follows:
<TABLE>
<S> <C>
Buildings.................................... 40 years
Building/leasehold improvements:
Structural................................. Remaining life of building or lease term,
whichever is shorter
Other improvements......................... 8 to 15 years
Fixtures and equipment....................... 3 to 10 years
Transportation equipment..................... 3 to 8 years
</TABLE>
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121").
SFAS No. 121 establishes accounting standards for the measurement of the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. SFAS No. 121 requires that
(i) long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable and (ii) long-lived assets and certain identifiable intangibles, to
be disposed of generally be reported at the lower of carrying amounts or fair
value less cost to sell. SFAS No. 121 is effective for financial statements for
fiscal years beginning after December 15, 1995. The adoption of the SFAS No. 121
measurement standards is not expected to materially effect the financial
position or results of operations of the Company.
Deferred Financing Costs:
Deferred financing costs are amortized on the interest method over the life
of the related indebtedness.
Book Overdraft:
Under the Company's cash management system, checks issued but not presented
to banks result in overdraft balances for accounting purposes and are classified
as book overdrafts.
Earnings (Loss) Per Common Share:
Since the Company is a wholly owned subsidiary, earnings (loss) per share
information is not presented.
F-8
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Store Preopening and Closing Costs:
Store preopening costs are expensed as incurred. Store closing costs, such
as future rent and real estate taxes subsequent to the actual store closing, net
of expected sublease recovery, are recorded at present value, utilizing a risk
free discount rate, when management makes a decision to close a store.
Income Taxes:
The Company's income taxes are computed based on a tax sharing agreement
with its ultimate parent, SMG-II Holdings Corporation ("SMG-II"), in which the
Company computes a hypothetical tax return as if the Company was not joined in a
consolidated or combined return with SMG-II. The Company must pay SMG-II the
positive amount of any such hypothetical tax. If the hypothetical tax return
shows entitlement to a refund, including any refund attributable to a carryback,
then SMG-II will pay to the Company the amount of such refund.
Reclassifications:
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the Fiscal 1995 presentation.
NOTE 3--DISPOSITION OF FREESTANDING DRUG STORES
During the second quarter of Fiscal 1995, the Company made a decision to
dispose of its 36 freestanding drug stores. On July 28, 1995, the Company
completed the sale of 30 of its freestanding drug stores, including merchandise
inventory, to Rite Aid Corporation for $59.9 million. The Company used $25.0
million of the proceeds to repay a portion of its existing Term Loan and paid a
dividend of $21.8 million to PTK. The Company paid $13.1 million to Holdings in
accordance with the tax sharing agreement, representing income taxes currently
due, related to the gain on the sale.
The Company recorded a pretax gain on the disposition of its freestanding
drug stores of $15.5 million, net of a $19.0 million charge related to the
estimated exit costs of the remaining six freestanding drug stores. During
Fiscal 1995, the Company closed five freestanding drug stores and the sixth is
projected to be closed in Fiscal 1996.
NOTE 4--GAIN ON SALE OF REAL ESTATE
During Fiscal 1995, the Company sold a former warehouse of Purity Supreme,
Inc. ("Purity"), a previously divested company, which resulted in a pretax gain
of $3.4 million.
F-9
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
Prescription plans..................................................... $ 9,250 $11,623
Other.................................................................. 2,240 2,222
----------- -----------
Accounts receivable.................................................... 11,490 13,845
Less: allowance for doubtful accounts (a).............................. 937 912
----------- -----------
Accounts receivable, net............................................... $10,553 $12,933
----------- -----------
----------- -----------
</TABLE>
- - ------------
(a) The allowance for doubtful accounts reflects a provision of $1.3 million and
$2.2 million, as well as a write off of $1.3 million and $3.1 million in
Fiscal 1995 and Fiscal 1994, respectively.
NOTE 6--MERCHANDISE INVENTORIES
Merchandise inventories are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
Merchandise inventories at FIFO cost................................... $ 268,212 $ 298,462
Less: LIFO reserve..................................................... 42,764 43,181
----------- -----------
Merchandise inventories at LIFO cost................................... $ 225,448 $ 255,281
----------- -----------
----------- -----------
</TABLE>
Liquidation of LIFO layers in the periods reported did not have a
significant effect on the results of continuing operations. The decrease in the
LIFO reserve was primarily due to the disposition of the freestanding drug
stores (see Note 3).
NOTE 7--OTHER CURRENT ASSETS
Other current assets decreased to $5.9 million at February 3, 1996 from
$16.9 million at January 28, 1995 primarily due to a decrease in assets held for
sale and the collection of a receivable related to the sale of the home centers
segment.
NOTE 8--PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
Land................................................................... $ 62,606 $ 62,454
Buildings and building improvements.................................... 199,690 187,078
Fixtures and equipment................................................. 202,019 199,022
Leasehold costs and improvements....................................... 279,400 268,090
Transportation equipment............................................... 18,448 19,828
----------- -----------
Property and equipment, owned.......................................... 762,163 736,472
Property and equipment under capital leases............................ 188,585 173,175
----------- -----------
Property and equipment, at cost........................................ 950,748 909,647
Less: accumulated depreciation and amortization........................ 347,860 325,463
----------- -----------
Property and equipment, net............................................ $ 602,888 $ 584,184
----------- -----------
----------- -----------
</TABLE>
F-10
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--DEFERRED FINANCING COSTS, NET
Deferred financing costs, primarily related to the Recapitalization, are
comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
Deferred financing costs.............................................. $50,377 $50,062
Less: accumulated amortization........................................ 16,692 9,617
----------- -----------
Deferred financing costs, net......................................... $33,685 $40,445
----------- -----------
----------- -----------
</TABLE>
NOTE 10--OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
Self-insured liabilities.............................................. $ 65,183 $ 70,736
Pension and deferred compensation..................................... 17,003 15,001
Other postretirement and postemployment benefits...................... 41,001 40,577
Reserve for closed stores............................................. 23,871 6,021
Other................................................................. 38,978 36,641
----------- -----------
Other noncurrent liabilities.......................................... $ 186,036 $ 168,976
----------- -----------
----------- -----------
</TABLE>
Certain noncurrent liabilities, such as self-insured liabilities for
incurred but unpaid claims relating to customer, employee and vehicle accidents
and closed store liabilities, are recorded at present value, utilizing a 4%
discount rate based on the projected payout of these claims.
NOTE 11--LONG-TERM DEBT
Long-term debt is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
Term Loan ("Term Loan")............................................ $ 287,955 $ 348,250
Working Capital Facilities ("Working Capital Facilities").......... 46,000 63,000
9.625% Senior Subordinated Notes due 2003 ("Senior Subordinated
Notes")............................................................ 437,426 437,072
10.75% Deferred Coupon Notes due 2003 ("Deferred Coupon Notes").... 151,881 136,853
12.625% Subordinated Debentures due 2002 ("Subordinated
Debentures")....................................................... 95,750 95,750
11.625% Subordinated Notes due 2002 ("Subordinated Notes")......... 199,017 199,017
Debt payable to Holdings........................................... 983 2,503
Industrial revenue bonds........................................... 6,375 6,375
Other debt (primarily mortgages)................................... 41,011 43,804
----------- -----------
Total debt......................................................... 1,266,398 1,332,624
Less: current maturities........................................... 51,753 59,310
----------- -----------
Long-term portion.................................................. $ 1,214,645 $ 1,273,314
----------- -----------
----------- -----------
</TABLE>
F-11
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--LONG-TERM DEBT--(CONTINUED)
Scheduled Maturities of Debt:
Long-term debt principal payments are as follows (dollars in thousands):
<TABLE>
<CAPTION>
PRINCIPAL
FISCAL YEARS PAYMENTS
- - ------------ ----------
<S> <C>
1996................................................. $ 51,753
1997................................................. 53,645
1998................................................. 147,240
1999................................................. 128,058
2000................................................. 50,210
Thereafter........................................... 835,492
----------
$1,266,398
----------
----------
</TABLE>
Bank Credit Agreement:
Under the bank credit agreement ("Bank Credit Agreement"), the Term Loan and
the Working Capital Facilities bear interest at floating rates. At February 3,
1996, the interest rates for the Term Loan and Working Capital Facilities were
8.4% and 9.2%, respectively. At January 28, 1995, the interest rates for the
Term Loan and Working Capital Facilities were 8.9% and 9.5%, respectively. The
Company is required to repay a portion of its borrowings under the Term Loan
each year, so as to retire such indebtedness in its entirety by October 31,
1999. In conjunction with the reacquisition of the Plainbridge capital stock by
the Company, the outstanding obligations of Plainbridge under its credit
agreement were satisfied by the Company and the credit agreement, which allowed
for $40.0 million of availability, was terminated. The Company simultaneously
entered into an amendment to its Bank Credit Agreement with its existing lenders
increasing the Company's Working Capital Facility ("Working Capital Facility")
from $175 million to $200 million (of which the maximum of $125.0 million can be
in letters of credit) to satisfy any additional liquidity needs and
prospectively modifying certain of its financial covenants to take into account
the operations of Plainbridge. The Working Capital Facility is subject to an
annual cleandown provision. Under the terms of the cleandown provision, in each
fiscal year loans cannot exceed $60.0 million (formerly $50.0 million) under the
Working Capital Facility for a period of 30 consecutive days. The Company
satisfied the terms of the cleandown provision through Fiscal 1996. The Company
believes it has sufficient unused borrowing capacity under the Working Capital
Facility, which can be utilized for unforeseen or for seasonal cash
requirements. At February 3, 1996, the Company had approximately $74.1 million
in outstanding letters of credit and approximately $94.9 million in unused
borrowing capacity under its Working Capital Facilities.
At February 3, 1996, the Company was in compliance with all of its debt
covenants, as amended. Based upon projected results for the upcoming fiscal
year, the Company believes it will be in compliance with its debt covenants,
which includes certain levels of operating cash flow (as defined), minimum
interest coverage and a maximum leverage ratio, throughout the upcoming fiscal
year. The Bank Credit Agreement and the indentures for certain debt also contain
other restrictive covenants, including, but not limited to, covenants with
respect to the following matters: (i) limitation on indebtedness; (ii)
limitation on restricted payments; (iii) limitation on transactions with
affiliates; (iv) limitation on liens; (v) limitation on the issuance of
preferred stock by subsidiaries; (vi) limitation on issuances of guarantees of
indebtedness by subsidiaries; (vii) limitation on transfer of assets to
subsidiaries; (viii) limitation on dividends and other payment restrictions
affecting subsidiaries; and (ix) restriction on mergers and transfers of assets.
F-12
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--LONG-TERM DEBT--(CONTINUED)
Senior Subordinated Notes:
The Senior Subordinated Notes accrete to a maturity value of $440.0 million
in Fiscal 2003. These notes pay cash interest on a semiannual basis and have no
sinking fund requirements.
Deferred Coupon Notes:
The Deferred Coupon Notes accrete to a maturity value of $225.3 million in
Fiscal 2003. These notes begin paying cash interest on a semiannual basis on May
1, 2000 and have no sinking fund requirements.
Subordinated Debentures:
The Subordinated Debentures mature in Fiscal 2002. These debentures pay cash
interest on a semiannual basis and have no sinking fund requirements.
Subordinated Notes:
The Subordinated Notes mature in Fiscal 2002 and pay cash interest on a
semiannual basis. These notes contain a sinking fund provision that requires the
Company to deposit $49.8 million (25% of the original aggregate principal
amount) with the trustee of the Subordinated Notes on June 15 in each of Fiscal
2000 and Fiscal 2001 for the redemption of the Subordinated Notes, at a
redemption price equal to 100% of the principal amount thereof, plus accrued
interest to the redemption date and providing for the redemption of 50% of the
original aggregate principal amount of such notes prior to maturity.
Industrial Revenue Bonds:
Interest rates for the industrial revenue bonds range from 10.5%-10.9%. The
industrial revenue bonds are payable in Fiscal 2003.
Other Debt:
Other debt includes mortgage notes which are secured by property and
equipment having a net book value of $65.4 million at February 3, 1996 and $64.5
million at January 28, 1995. These borrowings, whose interest rates averaged
10.5%, are payable in installments ending in Fiscal 2000.
F-13
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, 1996 JANUARY 28, 1995
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Debt:
Term Loan.................................. $ 287,955 $ 287,955 $ 348,250 $ 348,250
Working Capital Facilities................. 46,000 46,000 63,000 63,000
Senior Subordinated Notes.................. 437,426 419,929 437,072 393,103
Deferred Coupon Notes...................... 151,881 135,578 136,853 123,077
Subordinated Debentures.................... 95,750 100,959 95,750 97,119
Subordinated Notes......................... 199,017 206,220 199,017 195,335
Debt payable to Holdings................... 983 1,017 2,503 2,483
Industrial revenue bonds................... 6,375 6,375 6,375 6,375
Other debt (primarily mortgages)........... 41,011 41,011 43,804 43,804
---------- ---------- ---------- ----------
Total debt................................. $1,266,398 $1,245,044 $1,332,624 $1,272,546
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The fair value of the Term Loan and Working Capital Facilities at February
3, 1996 and January 28, 1995 approximated their carrying value due to their
floating interest rates. The fair value of the notes and debentures are based on
the quoted market prices at February 3, 1996 and January 28, 1995, since such
instruments are publicly traded. The Company has evaluated its other debt,
primarily mortgages and industrial revenue bonds, and believes that based on
interest rates, related terms and maturities that the fair value of such
instruments approximates their respective carrying amounts. As of February 3,
1996 and January 28, 1995, the carrying values of cash and cash equivalents,
accounts receivable and accounts payable approximated fair values due to the
short-term maturities of these instruments.
NOTE 13--INTEREST EXPENSE
Interest expense is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Term Loan................................................... $ 29,067 $ 27,281 $ 6,471
Working Capital Facilities.................................. 5,601 4,996 1,096
Senior Subordinated Notes
Amortization of original issue discount................... 354 354 93
Currently payable......................................... 42,350 42,350 11,176
Deferred Coupon Notes, accruable but not payable............ 15,028 13,541 3,312
Subordinated Debentures..................................... 12,088 12,088 3,156
Subordinated Notes.......................................... 23,136 23,136 6,068
Amortization of debt issuance costs......................... 7,140 7,028 4,870
Obligations under capital leases............................ 16,646 15,694 14,957
Mortgages payable........................................... 4,210 4,398 4,579
Debt payable to Holdings.................................... 114 149 118,331
Other, net.................................................. 9,015 7,488 6,571
Old bank credit agreement................................... -- -- 4,337
Amortization of original issue discount..................... -- -- 951
-------- -------- --------
Interest expense............................................ $164,749 $158,503 $185,968
-------- -------- --------
-------- -------- --------
</TABLE>
F-14
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--INTEREST EXPENSE--(CONTINUED)
The Company made cash interest payments of $135.1 million in Fiscal 1995,
$129.4 million in Fiscal 1994 and $196.7 million in Fiscal 1993.
NOTE 14--LEASES
At February 3, 1996, the Company was liable under terms of noncancellable
leases for the following minimum lease commitments (dollars in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEARS LEASES LEASES
- - ------------ -------- ---------
<S> <C> <C>
1996................................................................... $ 36,662 $ 23,281
1997................................................................... 33,995 23,459
1998................................................................... 31,676 21,844
1999................................................................... 24,880 21,221
2000................................................................... 23,957 20,880
Later years............................................................ 161,904 238,696
-------- ---------
Total minimum lease payments(a)........................................ 313,074 $ 349,381
---------
---------
Less: executory costs (such as taxes, maintenance and insurance)....... (2,429)
--------
Net minimum lease payments............................................. 310,645
Less: amounts representing interest.................................... (149,804)
--------
Present value of net minimum lease payments (including current
installments of $20,680)............................................... $160,841
--------
--------
</TABLE>
- - ------------
(a) Net of sublease income of $10,961 and $171,524 for capital and operating
leases, respectively.
During Fiscal 1995, Fiscal 1994 and Fiscal 1993, the Company incurred
capital lease obligations of $41.1 million, $21.3 million and $25.7 million,
respectively, in connection with property and equipment lease agreements. These
capital lease amounts are non-cash and, accordingly, have been excluded from the
consolidated statements of cash flows.
Rent expense included in continuing operations under all operating leases
having noncancellable terms of more than one year is summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Minimum rentals.............................................. $ 47,461 $ 49,564 $45,470
Contingent rentals(b)........................................ -- 318 193
Less: rentals from subleases................................. (15,802) (13,092) (5,725)
-------- -------- -------
Rent expense................................................. $ 31,659 $ 36,790 $39,938
-------- -------- -------
-------- -------- -------
</TABLE>
- - ------------
(b) Primarily based on sales.
NOTE 15--RELATED PARTY TRANSACTIONS
The Company is a party to an agreement pursuant to which the Company
provides certain administrative services to Chefmark. Such services include,
among other things, legal, human resources, data processing, insurance,
accounting, tax, treasury and property management services. The agreement has an
initial term of seven years which expires in Fiscal 2000, with renewal options.
The cost of the services charged to Chefmark under this agreement was
approximately $1.4 million for each of Fiscal 1995, Fiscal 1994 and Fiscal 1993.
F-15
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--RELATED PARTY TRANSACTIONS--(CONTINUED)
During Fiscal 1995, the Company paid ML & Co. fees of approximately $0.6
million related to the sale of the freestanding drug stores. During Fiscal 1994,
the Company paid ML & Co. fees of approximately $1.0 million related to the
disposal of the home centers segment. During Fiscal 1993, the Company paid ML &
Co. fees of approximately $12.8 million in conjunction with the
Recapitalization.
NOTE 16--RETIREMENT AND BENEFIT PLANS
The Company has several noncontributory defined benefit pension plans, the
most significant of which is the SGC Pension Plan, which covers substantially
all nonunion and certain union associates. Pension benefits to retired and to
terminated vested associates are primarily based upon their length of service
and upon a percentage of qualifying compensation. The Company's funding policy,
which is consistent with federal funding requirements, is intended to provide
not only for benefits attributed to service to date but also for those benefits
expected to be earned in the future. Due to the overfunding status of the SGC
Pension Plan, no contributions were required during the last three fiscal years.
The following table sets forth the funded status of the pension plans and
the amounts recognized in the Company's financial statements (dollars in
thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, 1996 JANUARY 28, 1995
-------------------------- --------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated
benefit obligation:
Vested.................................. $ (94,648) $ (17,929) $(80,224) $ (16,131)
Unvested................................ (5,749) (250) (4,039) (349)
----------- ----------- ----------- -----------
Total................................... (100,397) (18,179) (84,263) (16,480)
Plan assets at fair value................... 164,306 265 130,261 251
----------- ----------- ----------- -----------
Plan assets higher (lower) than accumulated
benefit obligation.......................... $ 63,909 $ (17,914) $ 45,998 $ (16,229)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Actuarial present value of projected
benefit obligation........................ $(118,859) $ (20,894) $ (96,838) $ (17,991)
Plan assets at fair value................... 164,306 265 130,261 251
----------- ----------- ----------- -----------
Plan assets higher (lower) than projected
benefit obligation.......................... 45,447 (20,629) 33,423 (17,740)
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions...................... (33,156) (90) (22,278) (883)
Unrecognized prior service cost............. 1,209 1,671 (83) 2,051
----------- ----------- ----------- -----------
Prepaid (accrued) pension cost.............. $ 13,500 $ (19,048) $ 11,062 $ (16,572)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Assets of the Company's pension plans are invested in marketable securities,
comprised primarily of equities of domestic corporations, U.S. Government
instruments and money market investments.
The following table provides the assumptions used in determining the
actuarial present value of the projected benefit obligation at February 3, 1996
and January 28, 1995:
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
Weighted average discount rate........................................ 7.25% 8.5%
Rate of increase in future compensation levels........................ 4.25 5.5
Expected long-term rate of return on plan assets...................... 9.5 9.5
</TABLE>
F-16
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--RETIREMENT AND BENEFIT PLANS--(CONTINUED)
The change in the weighted average discount rate, which is used in
determining the actuarial present value of the projected benefit obligation,
will not have a material impact on the Company's net pension cost for Fiscal
1996.
The net periodic pension cost (income) included in continuing operations is
comprised of the following components (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Service cost of benefits earned during the year.............. $ 3,402 $ 4,402 $ 3,903
Interest cost on projected benefit obligation................ 9,533 9,085 8,514
Actual gain on plans' assets................................. (40,531) (71) (10,330)
Net amortization and deferral................................ 27,747 (10,848) 55
-------- -------- --------
Net periodic pension cost.................................... $ 151 $ 2,568 $ 2,142
-------- -------- --------
-------- -------- --------
</TABLE>
The Company also contributes to many multi-employer plans which provide
defined benefits to certain union associates. The Company's contributions to
these multi-employer plans were $17.7 million in Fiscal 1995, $16.8 million in
Fiscal 1994 and $16.6 million in Fiscal 1993.
The Company sponsors a savings plan for eligible nonunion associates.
Contributions under the plan are based on specified percentages of associate
contributions. The Company's contributions to the savings plan were $3.7 million
in Fiscal 1995, $3.5 million in Fiscal 1994 and $3.3 million in Fiscal 1993.
NOTE 17--OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company provides its associates other postretirement benefits,
principally health care and life insurance benefits. The accumulated
postretirement benefit obligation was determined utilizing an assumed discount
rate of 7.25% at February 3, 1996 and 8.5% at January 28, 1995 and by applying
the provisions of the Company's medical plans, the established maximums and
sharing of costs, the relevant actuarial assumptions and the health-care cost
trend rates which are projected at 10.0% and which grade down to 5.75% in Fiscal
1999. The effect of a 1% change in the assumed cost trend rate would change the
accumulated postretirement benefit obligation by approximately $2.5 million as
of February 3, 1996 and would change the net periodic postretirement benefit
cost by $0.2 million for Fiscal 1995.
The net postretirement benefit costs related to continuing operations
consisted of the following components (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Service cost of benefits earned during the year................... $ 613 $ 699 $ 995
Interest cost on accumulated postretirement benefit obligation.... 1,807 1,869 2,241
------ ------ ------
Net postretirement benefit cost................................... $2,420 $2,568 $3,236
------ ------ ------
------ ------ ------
</TABLE>
F-17
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17--OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS--(CONTINUED)
The following table provides information on the status of the postretirement
plans (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................................ $14,276 $13,610
Other active plan participants...................................... 13,855 12,575
----------- -----------
Total............................................................... 28,131 26,185
Unrecognized net gain from past experience different from that assumed
and effects of changes in assumptions............................... 4,669 6,135
----------- -----------
Accrued postretirement cost........................................... $32,800 $32,320
----------- -----------
----------- -----------
</TABLE>
The Company also provides its associates postemployment benefits, primarily
long-term disability and salary continuation. The obligation for these benefits
was determined by application of the provisions of the Company's long-term
disability plan and includes the age of active claimants at disability and at
valuation, the length of time on disability and the probability of the claimant
remaining on disability to maximum duration. These liabilities are recorded at
their present value utilizing a discount rate of 4%.
The accumulated postemployment benefit obligation as of February 3, 1996 and
January 28, 1995 was $8.3 million. The net postemployment benefit cost related
to continuing operations consisted of the following components (dollars in
thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Service cost of benefits earned during the year................... $ 997 $1,644 $1,292
Interest cost on accumulated postemployment obligation............ 296 304 295
------ ------ ------
Net postemployment benefit cost................................... $1,293 $1,948 $1,587
------ ------ ------
------ ------ ------
</TABLE>
NOTE 18--INCOME TAXES
The income tax (provision) benefit from continuing operations is comprised
of the following (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Current
Federal....................................................... $(1,669) $ -- $(1,736)
State......................................................... 2,172 (4,744) (7,527)
Deferred
Federal....................................................... (9,233) (4,449) 14,242
State......................................................... (6,254) (2,871) 5,284
Change in valuation allowance................................... 9,070 7,981 10,015
------- ------- -------
Income tax (provision) benefit.................................. $(5,914) $(4,083) $20,278
------- ------- -------
------- ------- -------
</TABLE>
F-18
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--INCOME TAXES--(CONTINUED)
The effective tax rate applicable to continuing operations for the income
tax (provision) benefit differs from the federal statutory tax rate as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
------------------------
1995 1994 1993
----- ----- ----
<S> <C> <C> <C>
Federal statutory tax rate.......................................... (35.0)% (35.0)% 35.0%
State income taxes.................................................. (6.9) (17.6) (6.8)
Tax credits......................................................... 1.5 3.7 2.6
Change in valuation allowance....................................... 23.5 28.3 30.3
Other............................................................... 1.6 6.1 1.3
Effect of loss carryback at 34% rate................................ -- -- (1.0)
----- ----- ----
Effective tax rate.................................................. (15.3)% (14.5)% 61.4%
----- ----- ----
----- ----- ----
</TABLE>
Deferred income tax assets and liabilities consist of the following (dollars
in thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, 1996 JANUARY 28, 1995
----------------------- -----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Depreciation and amortization.................... $ -- $ 71,629 $ -- $ 80,126
Merchandise inventory and gross profit........... -- 19,576 -- 19,065
Prepaid expenses................................. -- 5,975 -- 6,899
Self-insured liabilities......................... 42,127 -- 46,010 --
Benefit plans.................................... 9,100 -- 8,998 --
Lease capitalization............................. 16,990 -- 17,284 --
Alternative minimum taxes........................ 6,063 -- 2,386 --
General business credits......................... 8,821 -- 10,600 --
Net operating loss carryforwards................. 5,245 -- 8,087 --
Other postretirement and postemployment
benefits......................................... 18,470 -- 17,349 --
Closed stores reserves and accrued expenses...... 15,361 -- 15,287 --
Other............................................ 1,873 9,471 1,215 9,670
-------- ----------- -------- -----------
Subtotal......................................... 124,050 106,651 127,216 115,760
Less: valuation allowance........................ -- -- 9,070 --
-------- ----------- -------- -----------
Total............................................ $124,050 $ 106,651 $118,146 $ 115,760
-------- ----------- -------- -----------
-------- ----------- -------- -----------
</TABLE>
The balance sheet classification of the deferred income tax assets and
liabilities is as follows (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, 1996 JANUARY 28, 1995
--------------------- ----------------------
<S> <C> <C> <C> <C>
CURRENT NONCURRENT CURRENT NONCURRENT
------- ---------- -------- ----------
Assets............................................. $31,122 $ 92,928 $ 33,510 $ 93,706
Liabilities........................................ (26,966) (79,685) (30,109) (85,651)
------- ---------- -------- ----------
Subtotal........................................... 4,156 13,243 3,401 8,055
Less: valuation allowance.......................... -- -- 3,401 5,669
------- ---------- -------- ----------
Total.............................................. $ 4,156 $ 13,243 $ -- $ 2,386
------- ---------- -------- ----------
------- ---------- -------- ----------
</TABLE>
The Company had a net deferred income tax asset of $17.4 million and $11.5
million at February 3, 1996 and January 28, 1995, respectively. At January 28,
1995, although the Company generated pretax earnings in Fiscal 1994, the Company
was unable to conclude that realization of such deferred income tax assets was
more likely than not due to pretax losses experienced in prior years.
F-19
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--INCOME TAXES--(CONTINUED)
Accordingly, the Company provided a valuation allowance of $9.1 million at
January 28, 1995, to fully reserve its net deferred income tax assets, except
for alternative minimum tax credit carryforwards which do not expire. At July
29, 1995, the Company reversed the valuation allowance related to its net
deferred income tax assets. Reversals of the valuation allowance totalled $9.1
million for Fiscal 1995 and have been included as a component of the income tax
provision. The reversals were recorded in conjunction with the Company's
continuing evaluation of its deferred income tax assets. In the opinion of
management, sufficient evidence exists, such as the positive trend in earnings
which indicates that it is more likely than not that the Company will be able to
realize its deferred income tax assets.
The Fiscal 1994 state income tax provision includes the recording of state
taxes for certain issues related to prior years. The Fiscal 1993 state income
tax provision resulted primarily from taxable income generated in New Jersey due
to the nondeductibility of a significant portion of intercompany interest
expense.
In Fiscal 1995, Fiscal 1994 and Fiscal 1993, the Company made income tax
payments of $21.9 million, $6.3 million and $3.1 million, respectively, and
received income tax refunds of $10.3 million, $25.9 million and $10.1 million,
respectively.
The net operating loss carryforwards, including state net operating loss
carryforwards, expire from Fiscal 1998 to Fiscal 2009.
NOTE 19--GAIN ON DISPOSAL OF HOME CENTERS SEGMENT AND DISCONTINUED OPERATIONS
On November 4, 1994, the Company's Plainbridge subsidiary completed the sale
of its home centers segment to Rickel Home Centers, Inc. ("Rickel") for
approximately $88.7 million in cash, plus the assumption of certain
indebtedness. During Fiscal 1994, the Company recognized a gain of $17.0 million
on the sale of the home centers segment, net of an income tax provision of $2.3
million. Such gain included a pension plan curtailment gain of $6.2 million and
a reduction in the deferred tax valuation allowance of $5.1 million, resulting
from the utilization of tax loss carryforwards for which reserves had previously
been provided. The Company used net cash proceeds of $66.6 million in Fiscal
1994 and $4.7 million in Fiscal 1995 to pay a dividend to PTK.
Through the date of the sale, the Company reported the home centers segment
as discontinued operations. Operating results of such discontinued operations
were as follows (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------
<S> <C> <C>
1994(A) 1993
-------- --------
Sales.................................................................. $271,989 $343,643
-------- --------
-------- --------
Loss before income taxes(b)............................................ $ (2,383) $ (1,169)
Income tax benefit..................................................... 284 522
-------- --------
Loss from discontinued operations...................................... $ (2,099) $ (647)
-------- --------
-------- --------
</TABLE>
- - ------------
<TABLE>
<C> <S>
(a) Represents the results of operations related to the home centers segment from January
30, 1994 through November 3, 1994.
(b) The Company charged the home centers segment interest expense, which related to a
proportionate share of certain borrowings. These charges amounted to $11.0 million and
$13.1 million in Fiscal 1994 and Fiscal 1993 respectively, and are included in the
results of the discontinued operations.
</TABLE>
F-20
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 20--COMMITMENTS AND CONTINGENCIES
In connection with the sale of its home centers segment, the Company has, as
lessor, entered into leases for certain real property with Rickel, as tenant
(the "Leases"), pursuant to which the Company is entitled to receive annual
aggregate rentals of approximately $7.2 million. In addition, as part of the
sale, the Company assigned to Rickel, and Rickel assumed, various liabilities of
the home centers segment, primarily third party leases (the "Assumed
Liabilities"). As of February 3, 1996, the estimated present value of
obligations under the Assumed Liabilities is approximately $33 million. In
January 1996, Rickel filed for bankruptcy protection under Chapter 11 of the
United States Bankruptcy Code. The bankruptcy is in its early stages and it is
too early to determine whether Rickel will reject any of the Leases or the
extent to which the Company may become liable with respect to the Assumed
Liabilities in the event of Rickel's nonpayment thereof.
In August 1991, the Company entered into a long-term agreement with ISSC, a
subsidiary of IBM, to provide a wide range of information systems services.
Under the agreement, ISSC 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 amounts expensed under this agreement in the accompanying consolidated
statements of operations, were $21.0 million, $16.0 million and $12.6 million
during Fiscal 1995, Fiscal 1994 and Fiscal 1993, respectively. Further, in
Fiscal 1993, the Company expensed an additional $8.1 million of technical
information costs in connection with the Plainbridge Spin-Off which is included
in Recapitalization Expenses (see Note 21).
The Company is also a party to a number of legal proceedings in the ordinary
course of business. Management believes that the ultimate resolution of these
proceedings will not, in the aggregate, have a material adverse impact on the
financial condition, results of operations or business of the Company.
NOTE 21--RECAPITALIZATION EXPENSES
In connection with the Plainbridge Spin-Off and the Recapitalization (see
Note 1), the Company recorded a pretax charge of approximately $23.7 million in
the third quarter of Fiscal 1993 to record estimated reorganization and
restructuring costs, including an early retirement program offered to certain
Company associates. During the fourth quarter of Fiscal 1993, the Company
determined that the estimated costs related to the reorganization and
restructuring were less than originally estimated and recorded a pretax credit
of approximately $7.1 million. Of the total net pretax charge of $16.6 million
for Fiscal 1993, $6.4 million related to the early retirement program and to the
severance costs incurred to reduce the Company's workforce, $8.1 million related
to the additional technical information systems costs incurred in order to
accomplish the Plainbridge Spin-Off (see Note 20) and $2.1 million related to
the warehouse and consulting costs associated therewith.
NOTE 22--PROVISION FOR STORE CLOSINGS
In the second quarter of Fiscal 1993, the Company made a decision to close
or to dispose of five stores which the Company believed would continue to be
unprofitable. As a result, the Company recorded a pretax charge in the second
quarter of Fiscal 1993 of approximately $6.0 million. The Company decided on
December 31, 1994 that two of the five stores would continue to be operated and,
therefore, the operating results for these two stores have been included in the
consolidated statements of
F-21
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 22--PROVISION FOR STORE CLOSINGS--(CONTINUED)
operations. The remaining three stores were closed during the fourth quarter of
Fiscal 1994 and the related leases have been assigned or sublet.
NOTE 23--LABOR DISPUTE
The Company's pretax earnings in the second quarter of Fiscal 1993 were
adversely impacted by a labor dispute and by the related promotional programs
implemented subsequent to such labor dispute. The related promotional programs
were implemented in order to regain sales levels. The Company, with three other
major supermarket companies (ShopRite, Foodtown and Grand Union), conducted
separate but simultaneous negotiations with respect to an expired labor
contract. The major issues of the contract concerned health care and related
benefits. On May 7, 1993, the union began selective strikes against one of the
Company's competitors. Over the course of the next three weeks, the labor
dispute expanded until, on May 28, 1993, union members at over 250 supermarkets,
including 53 Pathmark supermarkets, were either on strike or locked out. On May
29, 1993, the labor dispute was settled and, in June, the union membership
ratified a four-year contract and the membership returned to work.
NOTE 24--EXTRAORDINARY ITEM
During Fiscal 1993, in connection with the Recapitalization, the Company
repaid or exchanged $1.3 billion of indebtedness through the issuance of new
indebtedness. This repayment of outstanding indebtedness and this origination of
new indebtedness included premiums and other expenses and included the write off
of existing deferred financing fees associated with indebtedness which was
extinguished. Such early extinguishment of debt in Fiscal 1993 resulted in a
loss of approximately $96.7 million, net of an income tax benefit of $15.0
million.
NOTE 25--CUMULATIVE EFFECT OF FISCAL 1993 ACCOUNTING CHANGES
The Company made the following accounting changes in Fiscal 1993:
Inventory:
Effective January 31, 1993, the Company changed its method utilized to
calculate LIFO inventories. Prior to Fiscal 1993, the Company utilized a retail
approach to determine current cost and a general warehouse purchase index to
measure inflation in the cost of its merchandise inventories in its stores. The
Company's change arose from the development and utilization in Fiscal 1993 of
internal cost indices based on the specific identification of merchandise in its
stores to measure inflation in the prices, thereby eliminating the averaging and
estimation inherent in the retail and general warehouse purchase index methods.
The Company believes the use of such specific costs and internal indices results
in a more accurate measurement of the impact of inflation in the costs of its
store merchandise. The effect of this change resulted in a charge to income of
$10.7 million, net of an income tax benefit of $7.8 million, and has been
presented as a cumulative effect of a change in accounting method in the
accompanying Fiscal 1993 consolidated statement of operations.
Postretirement Benefits other than Pensions:
Effective January 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
other than Pensions" which resulted in a charge to income of $15.6 million, net
of an income tax benefit of $11.3 million, immediately upon adoption.
F-22
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 25--CUMULATIVE EFFECT OF FISCAL 1993 ACCOUNTING CHANGES--(CONTINUED)
Postemployment Benefits:
Effective January 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" which resulted in a charge to income of $2.5 million, net of an income
tax benefit of $1.8 million, immediately upon adoption.
Income Taxes:
Effective January 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which had no effect
on the consolidated statements of operations, but resulted in a reclassification
of the current and noncurrent deferred taxes.
Present Value Discount Rate Determination:
Effective January 31, 1993, the Company made a change in the determination
of the discount rate utilized to record the present value of certain noncurrent
liabilities (self-insured liabilities and closed store liabilities) and reduced
such rate from 12%, representing the Company's effective interest rate, to a
risk free rate, estimated at 4%. The cumulative effect of this accounting change
as of January 31, 1993 totalled $9.3 million, net of an income tax benefit of
$6.8 million.
F-23
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 26--QUARTERLY FINANCIAL DATA (UNAUDITED)
Financial data for the interim periods of Fiscal 1995 and Fiscal 1994 is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
13 WEEKS ENDED 14 WEEKS
------------------------------------- ENDED
APRIL 29, JULY 29, OCTOBER 28, FEBRUARY 3, FISCAL
1995 1995 1995 1996 1995
---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
53 WEEKS ENDED FEBRUARY 3, 1996
Sales....................................... $1,033,037 $1,020,672 $ 991,923 $ 1,135,990 $4,181,622
Gross profit(a)............................. 297,175 294,466 282,423 341,664 1,215,728
Selling, general and administrative
expenses.................................... 233,475 233,210 229,401 254,730 950,816
Depreciation and amortization............... 19,945 20,083 20,100 20,280 80,408
Operating earnings.......................... 43,755 41,173 32,922 66,654 184,504
Gain on disposition of freestanding drug
stores...................................... -- 15,535 -- -- 15,535
Gain on sale of real estate................. -- -- -- 3,371 3,371
Interest expense............................ (41,105) (41,883) (40,318) (41,443) (164,749)
Earnings (loss) before income taxes......... 2,650 14,825 (7,396) 28,582 38,661
Income tax benefit (provision).............. (328) 1,676 3,673 (10,935) (5,914)
Net earnings (loss)......................... $ 2,322 $ 16,501 $ (3,723) $ 17,647 $ 32,747
</TABLE>
<TABLE>
<CAPTION>
13 WEEKS ENDED
---------------------------------------------------
APRIL 30, JULY 30, OCTOBER 29, JANUARY 28, FISCAL
1994 1994 1994 1995 1994
---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
52 WEEKS ENDED JANUARY 28, 1995
Sales....................................... $1,030,189 $1,035,972 $ 1,030,463 $ 1,092,248 $4,188,872
Gross profit(b)............................. 287,686 291,975 287,709 319,081 1,186,451
Selling, general and administrative
expenses.................................... 235,391 228,683 228,597 242,648 935,319
Depreciation and amortization............... 18,258 18,455 18,670 20,085 75,468
Operating earnings.......................... 34,037 44,837 40,442 56,348 175,664
Interest expense, net....................... (34,283) (35,917) (35,951) (41,317) (147,468)
Earnings (loss) from continuing operations
before income taxes and gain on disposal of
home centers segment....................... (246) 8,920 4,491 15,031 28,196
Income tax benefit (provision).............. 29 (1,248) (432) (2,432) (4,083)
Earnings (loss) from continuing operations
before gain on disposal of home centers
segment..................................... (217) 7,672 4,059 12,599 24,113
Earnings (loss) from discontinued
operations.................................. (4,140) 2,466 (425) -- (2,099)
Earnings (loss) before gain on disposal of
home centers segment....................... (4,357) 10,138 3,634 12,599 22,014
Gain on disposal of home centers segment,
net of an income tax provision............. -- -- -- 17,044 17,044
Net earnings (loss)......................... $ (4,357) $ 10,138 $ 3,634 $ 29,643 $ 39,058
</TABLE>
- - ------------
(a) The pretax LIFO provision for Fiscal 1995 was $0.8 million in the first
quarter, $0.5 million in the second quarter and $0.8 million in the third
quarter. The annual provision was $1.1 million, resulting in a $1.0 million
credit in the fourth quarter.
(b) The pretax LIFO inventory provision for Fiscal 1994 was estimated to be a
$0.825 million provision in each of the first three fiscal quarters. The
annual credit was $0.7 million, resulting in a $3.2 million credit in the
fourth quarter.
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
PATHMARK STORES, INC.
Woodbridge, New Jersey
We have audited the accompanying consolidated balance sheets of Pathmark
Stores, Inc. and its subsidiaries ("Pathmark") as of February 3, 1996 and
January 28, 1995, and the related consolidated statements of operations,
stockholder's deficit and cash flows for each of the three years in the period
ended February 3, 1996. These financial statements are the responsibility of
Pathmark's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Pathmark as of February 3, 1996
and January 28, 1995, and the results of their operations and their cash flows
for each of the three years in the period ended February 3, 1996 in conformity
with generally accepted accounting principles.
As discussed in Note 25 to the consolidated financial statements, Pathmark
changed its method of accounting for postretirement benefits other than
pensions, postemployment benefits, income taxes, LIFO inventories and the
determination of the discount rate utilized to record certain noncurrent
liabilities as of January 31, 1993.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
April 12, 1996
F-25
<PAGE>
========================================= =====================================
- - ----------------------------------------- -------------------------------------
NO DEALER, SALESPERSON OR OTHER
INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT
IN CONNECTION WITH ANY OFFERING MADE OR
CONTEMPLATED HEREBY. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE
UNDERWRITER. THIS PROSPECTUS AND ANY
PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF PATHMARK STORES, INC.
AN OFFER TO BUY, THE SENIOR SUBORDINATED
NOTES OR THE JUNIOR SUBORDINATED DEFERRED
COUPON NOTES IN ANY JURISDICTION WHERE,
OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS
OR ANY PROSPECTUS SUPPLEMENT NOR ANY SALE
MADE HEREUNDER OR THEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION 9 5/8% SENIOR SUBORDINATED
THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
NOTES DUE 2003
11 5/8% SUBORDINATED NOTES
-------------------
DUE 2002
12 5/8% SUBORDINATED
TABLE OF CONTENTS
DEBENTURES DUE 2002
PAGE
----
Available Information............ 2
Prospectus Summary............... 3 AND
Investment Considerations........ 11
Pathmark......................... 15
JUNIOR SUBORDINATED
Use of Proceeds.................. 16
DEFERRED COUPON
Recent Developments.............. 16
Capitalization................... 17
NOTES DUE 2003
Selected Historical Consolidated
Financial Data................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.................. 20
-------------------
Business......................... 26
PROSPECTUS
Certain Transactions............. 32
-------------------
Management....................... 34
Principal Stockholders........... 41
Description of the Securities.... 43
Certain Indebtedness of the Company 73
Certain Federal Income Tax
Considerations..................... 75
Market-Making Activities of Merrill
Lynch.............................. 78
Experts............................ 79
Index to Consolidated Financial JUNE , 1996
Statements......................... F-1
- - ----------------------------------------- -------------------------------------
========================================= =====================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Not Applicable
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware ("GCL")
provides that a corporation has the power to indemnify any person who is an
officer or director of the corporation against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with any action, suit or proceeding (other than an
action by or in the right of the corporation) by reason of being or having been
a director or officer of the corporation, if such person shall have acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no such indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Court of Chancery of the State of Delaware or the court in which such action
or suit was brought, shall determine upon application that despite the
adjudication of liability but in view of all of the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery of the State of Delaware or such other court shall
deem proper.
The Restated Certificate of Incorporation and By-Laws of the Registrant
provide indemnification of its directors and officers to the fullest extent
permitted by the GCL, and the By-Laws allow the Registrant to advance or
reimburse litigation expenses upon submission by the director, officer or
employee of an undertaking to repay such advances or reimbursements if it is
ultimately determined that indemnification is not available to such director or
officer and allow the Registrant to purchase and maintain insurance for its
directors and officers against liability asserted against them in such capacity
whether or not the Registrant would have the power to indemnify them against
such liability.
As permitted by Section 102 of the GCL, the Restated Certificate of
Incorporation of the Registrant provides that no director shall be liable to the
Registrant or its stockholders for monetary damages for breach of fiduciary duty
as a director other than (i) for breaches of the director's duty of loyalty to
the Registrant and its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) for the unlawful payment of dividends or unlawful stock purchases or
redemptions under Section 174 of the GCL and (iv) for any transaction from which
the director derived an improper personal benefit.
The Agreement and Plan of Merger, dated as of April 22, 1987, as amended
(the "Merger Agreement") by and among SMG Acquisition Corporation ("SMG
Acquisition"), Supermarkets General Corporation ("Old Supermarkets") and
Supermarkets General Holdings Corporation ("Holdings") provides that after the
effective time of the merger (the "Merger") of SMG Acquisition into Old
Supermarkets (the "Effective Time"), Old Supermarkets will be the surviving
corporation (the "Surviving Corporation") and shall maintain in effect, without
amendment, repeal or other modification, for a period of seven years those
provisions in the Surviving Corporation's By-Laws relating to indemnification of
directors, officers, employees and agents of the Surviving Corporation, other
than modifications required by law. The Registrant is the successor to Old
Supermarkets and the successor to the obligations of Old Supermarkets under the
Merger Agreement.
The Merger Agreement provides that the Registrant shall, to the fullest
extent permitted under applicable law or under the Registrant Restated
Certificate of Incorporation or By-Laws, indemnify and hold harmless, each
present and former director, officer, employee, fiduciary and agent of the
Registrant or any of its Subsidiaries (collectively, the "Indemnified Parties")
against any costs or expenses (including attorneys' fees), judgments, fines,
losses, claims, damages, liabilities and amounts
II-1
<PAGE>
paid in settlement in connection with any pending, threatened or completed
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of or pertaining to any action or
omission occurring prior to the Effective Time (including, without limitation,
any claim, action, suit, proceeding or investigation arising out of or
pertaining to the transactions contemplated by the Merger Agreement) for a
period of seven years and in the event of any such claim, action, suit,
proceeding or investigation (whether arising before or after the Effective
Time), (i) the Registrant shall pay the reasonable fees and expenses of counsel
selected by the Indemnified Parties, which counsel shall be reasonably
satisfactory to the Registrant, promptly after statements therefor are received,
and (ii) any determination required to be made with respect to whether an
Indemnified Party's conduct complies with the standards set forth under Delaware
Law and the Registrant's Restated Certificate of Incorporation or By-Laws shall
be made by independent counsel mutually acceptable to the Registrant and the
Indemnified Party; provided, however, that the Registrant shall not be liable
for any settlement effected without its written consent (which consent shall not
be unreasonably withheld) and provided further that, in the event any claim or
claims for indemnification are asserted or made within such seven-year period,
all rights to indemnification in respect of any such claim or claims shall
continue until the disposition of any and all such claims.
The Merger Agreement also provides that the Registrant shall, to the fullest
extent permitted under applicable law, indemnify and hold harmless (i) Merrill
Lynch & Co., Inc., a Delaware corporation ("ML&Co."), Holdings and SMG
Acquisition, (ii) any bank, financial institution or other person or entity
committing to fund a part of the Financing (as defined), (iii) any subsidiary or
affiliate of any entity named in clauses (i) and (ii), and (iv) each present and
former director, officer, employee, fiduciary and agent of any of them
(collectively, the "ML Parties") against any fees, costs or expenses (including
attorneys' fees), judgments, fines, losses, claims, damages, liabilities and
amounts paid in settlement, in connection with any pending, threatened or
completed claim, action, suit, proceeding or investigation arising out of or
pertaining to any of the transactions contemplated by the Merger Agreement,
including, without limitation, the Financing, for a period of seven years, and,
in the event of any such claim, action, suit, proceeding or investigation
(whether arising before or after the Effective Time), (i) the Registrant shall
pay the reasonable fees and expenses of counsel selected by the ML Parties,
which counsel shall be reasonably satisfactory to the Registrant, promptly after
statements therefor are received and (ii) the Registrant will cooperate in the
defense of any such matter; provided, however, that the Registrant shall not be
liable for any settlement effected without its written consent (which consent
shall not be unreasonably withheld).
II-2
<PAGE>
ITEM 16. EXHIBITS.
(a) Exhibits*
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - -------- -----------
<C> <S>
2.2 --Distribution and Transfer Agreement dated as of May 3, 1993 among
the Registrant, Holdings and Chefmark.
3.1 --Restated Certificate of Incorporation of the Registrant, as
amended.
3.2 --Amendment to the Restated Certificate of Incorporation of the
Registrant, as amended (incorporated by reference from Exhibit 3.2
to the 1993 10-K).
3.3 --By-Laws of the Registrant.
4.1 --Indenture between the Registrant and United States Trust Company of
New York, Trustee, relating to the Senior Subordinated Notes due
2003 of the Registrant (incorporated by reference from Exhibit 4.1
to the 1993 10-K).
4.1A --Senior Subordinated Note due 2003 of the Registrant (contained in
the form of the Indenture filed as Exhibit 4.1).
4.2 --Indenture between the Registrant and NationsBank of Georgia,
National Association, Trustee, relating to the Junior Subordinated
Deferred Coupon Notes due 2003 of the Registrant (incorporated by
reference from Exhibit 4.2 to the 1993 10-K).
4.2A --Junior Subordinated Deferred Coupon Note due 2003 to the Registrant
(contained in the form of the Indenture filed as Exhibit 4.2).
4.2B --Indenture between the Registrant and Wilmington Trust Company,
Trustee, relating to the 11 5/8% Subordinated Notes due 2002 of the
Registrant (incorporated by reference from Exhibit 4.3 to the 1993
10-K).
4.3 --Indenture between the Company and Wilmington Trust Company,
Trustee, relating to the 12 5/8% Subordinated Debentures due 2002
of the Registrant (incorporated by refernce from Exhibit 4.3 to the
1993 10-K).
4.4 --Credit Agreement among the Registrant, the Lenders listed therein,
and Bankers Trust Company as Agent (incorporated by reference from
Exhibit 4.4 to the 1993 10-K).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - -------- -----------
<C> <S>
4.4A --First Amendment to the Credit Agreement (incorporated by reference
from the registrant's Form 8-K dated March 15, 1996 (the "March
1996 8-K")).
4.4B --Second Amendment to the Credit Agreement (incorporated by reference
from the March 1996 8-K).
4.4C --Third Amendment to the Credit Agreement (incorporated by reference
from the March 1996 8-K).
4.4D --Fourth Amendment to the Credit Agreement (incorporated by reference
from the March 1996 8-K).
4.4E --Fifth Amendment to the Credit Agreement (incorporated by reference
from the March 1996 8-K).
5.1 --Opinion of Shearman & Sterling as to the validity of the Senior
Subordinated Notes due 2003 and the Junior Subordinated Deferred
Coupon Notes due 2003 of the Registrant.
5.2 --Opinion of Shearman & Sterling as to the validity of the
Subordinated Notes.
5.3 --Opinion of Shearman & Sterling as to the validity of the
Subordinated Debentures.
10.4 --Services Agreement dated as of May 3, 1993 between the Registrant
and Chefmark.
10.5 --Chefmark Supply Agreement, dated May 3, 1993, between the
Registrant and Chefmark.
10.6 --Tax Sharing Agreement between the Registrant and SMG-II
(incorporated by reference from Exhibit 10.6 to the 1993 10-K).
10.7 --Tax Indemnity Agreement between the Registrant and Plainbridge
(incorporated by reference from Exhibit 10.7 to the 1993 10-K).
10.8 --Supermarkets General Corporation Pension Plan (as Amended and
Restated effective January 1, 1979) as amended through May 29, 1987
(incorporated by reference from Exhibit 10.21 to the Registration
Statement on Form S-1 of Holdings, File No. 33-16963).
10.9 --Supermarkets General Corporation Savings Plan (as Amended and
Restated effective April 1, 1983) as amended through January 1,
1987 (incorporated by reference from Exhibit 10.22 to the
Registration Statement on Form S-1 of Holdings, File No. 33-16963).
10.10 --Supermarkets General Corporation Management Incentive Plan
effective June 17, 1971 (incorporated by reference from Exhibit
10.23 to the Registration Statement on Form S-1 of Holdings, File
No. 33-16963).
10.11 --Supplemental Retirement Agreements dated as of March 9, 1987
between Old Supermarkets and Jack Futterman, Jeffrey C. Girard,
Jules Borshadel and Isadore Lemmerman (incorporated by reference
from Exhibit 10.25 to the Registration Statement on Form S-1 of
Holdings, File No. 33-16963).
10.12 --Excess Benefit Plan of Supermarkets General Corporation, effective
as of March 9, 1987.
10.13 --Recourse Secured Promissory Note, dated October 5, 1987, given to
Holdings from each Management Investor listed therein (incorporated
by reference from Exhibit 10.43 to Post-Effective Amendment No. 1
to the Registration Statement on Form S-1 of Holdings, File No.
33-16963).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - -------- -----------
<C> <S>
10.14 --Stock Pledge Agreement dated October 5, 1987, between Holdings and
each Management Investor listed therein (incorporated by reference
from Exhibit 10.44 to Post-Effective Amendment No. 1 to the
Registration Statement on Form S-1 of Holdings, File No. 33-16963).
10.15 --SMG-II Holdings Corporation Management Investors Stock Option Plan,
as amended and restated May 17, 1991 (the "Option Plan").
10.16 --Form of Stock Option Agreement under the Option Plan.
10.17 --SMG-II Holdings Corporation Employees 1987 Stock Option Plan, as
amended and restated May 17, 1991.
10.18 --Agreement dated as of March 20, 1996 among Registrant, Jack
Futterman, Holdings and SMG-II (incorporated by reference from the
1995 10-K).
10.20 --Agreement dated as of April 10, 1996 between the Registrant,
Anthony Cuti and SMG-II (incorporated by reference from the 1995
10-K).
10.21 --Management Investors Exchange Agreement dated as of February 4,
1991 among SMG-II Holdings Corporation, Holdings and each of the
Management Investors party thereto (incorporated by reference from
Exhibit 10.53 to the Registration Statement on Form S-1 of
Holdings, No. 33-16963).
10.22 --Supplemental Retirement Agreement dated as of March 12, 1993
betweeen the Registrant and Anthony Cuti (incorporated by reference
from Exhibit 10.24 to the Registration Statement on Form S-1 of the
Registrant and Holdings, File No. 33-59616).
10.23 --Supplemental Registration Agreement dated June 1, 1994 between the
Registrant and Ronald Rallo (incorporated by reference from the
Registrant's Annual Report on Form 10-K for the year ended January
28, 1995).
10.24 --Supplemental Retirement Agreement dated June 1, 1994 between the
Registrant and Neill Crowley (incorporated by reference from the
1995 10-K).
10.25 --Supplemental Retirement Agreement dated October 3, 1994 between the
Registrant and Ron Marshall (incorporated by reference from the
1995 10-K).
10.26 --Interim Agreement dated March 20, 1996 between the Registrant and
John W. Boyle (incorporated by reference from the 1995 10-K).
10.27 --Employment Agreement dated as of May 23, 1994 between Registrant
and Neill Crowley (incorporated by reference from the 1995 10-K).
10.28 --Employment Agreement dated as of September 9, 1994 between
Registrant and Ron Marshall (incorporated by reference from the
1995 10-K).
10.29 --Employment Agreement dated as of June 1, 1995 between Registrant
and Ron Rallo (incorporated by reference from the 1995 10-K).
12.1 --Statements Regarding Computation to Ratio of Earnings to Fixed
Charges (incorporated herein by reference to Exhibit 12.1 to the
1994 Form 10-K).
21.1 --List of Subsidiaries of the Registrant (incorporated by reference
from Exhibit 21.1 to the 1995 10-K).
23.1** --Consent of Deloitte & Touche LLP.
23.2 --Consents of Shearman & Sterling (contained in their opinions filed
as Exhibits 5.1, 5.2).
24.1 --Power of Attorney of U. Peter C. Gummeson.
24.2 --Power of Attorney of Jerry G. Rubenstein
25.1 --Statement of Eligibility on Form T-1 of United States Trust Company
of New York, Trustee, under the Senior Subordinated Notes
Indenture.
25.2 --Statement of Eligibility on Form T-1 of NationsBank of Georgia,
National Association, Trustee, under the Indenture relating to the
Deferred Coupon Notes Indenture.
25.3 --Statement of Eligibility on Form T-1 of Wilmington Trust Company,
Trustee, under the Subordinated Notes Indenture.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - -------- -----------
<C> <S>
25.4 --Statement of Eligibility on Form T-1 of Wilmington Trust Company,
Trustee, under the Subordinated Debentures Indenture.
</TABLE>
- - ------------
* All exhibits not filed herewith and not otherwise incorporated by reference
were previously filed as exhibits to this Registration Statement or to
Registration Statement Nos. 33-59612, 33-59616 and 33-50053 previously filed
on Form S-1 and are incorporated by reference herein.
** Filed herewith.
(b) Financial Statement Schedules
All Schedules are omitted as the required information is inapplicable or is
presented in the financial statements or related notes.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule
II-6
<PAGE>
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes:
(1) To file during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement:
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York, on the 5th day of June, 1996.
Dated: June 5, 1996 PATHMARK STORES, INC.
By /s/ RON MARSHALL
...................................
Ron Marshall*
Executive Vice President
Pursuant to the requirements of the Securities Exchange Act of 1933, this
amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN W. BOYLE Director, Chairman and Chief Executive June 5, 1996
...................................... Officer*
(John W. Boyle) (Principal Executive Officer)
/s/ RON MARSHALL Executive Vice President and Chief June 5, 1996
...................................... Financial Officer* (Principal
(Ron Marshall) Financial Officer)
/s/ JOSEPH ADELHARDT Senior Vice President and Controller June 5, 1996
...................................... (Principal Accounting Officer)
(Joseph Adelhardt)
/s/ JAMES J. BURKE, JR. Director* June 5, 1996
......................................
(James J. Burke, Jr.)
/s/ ANTHONY CUTI Director June 5, 1996
......................................
(Anthony Cuti)
/s/ SUNIL C. KHANNA Director* June 5, 1996
......................................
(Sunil C. Khanna)
/s/ STEPHEN M. MCLEAN Director* June 5, 1996
......................................
(Stephen M. McLean)
/s/ U. PETER C. GUMMESON Director* June 5, 1996
......................................
(U. Peter C. Gummeson)
/s/ ALEXIS P. MICHAS Director* June 5, 1996
......................................
(Alexis P. Michas)
/s/ JERRY G. RUBENSTEIN Director* June 5, 1996
......................................
(Jerry G. Rubenstein)
*By: /s/ MARC A. STRASSLER
.................................
Marc A. Strassler
Attorney-in-Fact
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- - ------- ----------- -----
<C> <S> <C>
2.2 --Distribution and Transfer Agreement dated as of May 3, 1993 among the
Registrant, Holdings and Chefmark.
3.1 --Restated Certificate of Incorporation of the Registrant, as amended.
3.2 --Amendment to the Restated Certificate of Incorporation of the Registrant,
as amended (incorporated by reference from Exhibit 3.2 to the 1993 10-K).
3.3 --By-Laws of the Registrant.
4.1 --Indenture between the Registrant and United States Trust Company of New
York, Trustee, relating to the Senior Subordinated Notes due 2003 of the
Registrant (incorporated by reference from Exhibit 4.1 to the 1993 10-K).
4.1A --Senior Subordinated Note due 2003 of the Registrant (contained in the form
of the Indenture filed as Exhibit 4.1).
4.2 --Indenture between the Registrant and NationsBank of Georgia, National
Association, Trustee, relating to the Junior Subordinated Deferred Coupon
Notes due 2003 of the Registrant (incorporated by reference from Exhibit
4.2 to the 1993 10-K).
4.2A --Junior Subordinated Deferred Coupon Note due 2003 to the Registrant
(contained in the form of the Indenture filed as Exhibit 4.2).
4.2B --Indenture between the Registrant and Wilmington Trust Company, Trustee,
relating to the 11 5/8% Subordinated Notes due 2002 of the Registrant
(incorporated by reference from Exhibit 4.3 to the 1993 10-K).
4.3 --Indenture between the Company and Wilmington Trust Company, Trustee,
relating to the 12 5/8% Subordinated Debentures due 2002 of the Registrant
(incorporated by refernce from Exhibit 4.3 to the 1993 10-K).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- - ------- ----------- -----
<C> <S> <C>
4.4 --Credit Agreement among the Registrant, the Lenders listed therein, and
Bankers Trust Company as Agent (incorporated by reference from Exhibit 4.4
to the 1993 10-K).
4.4A --First Amendment to the Credit Agreement (incorporated by reference from
the registrant's Form 8-K dated March 15, 1996 (the "March 1996 8-K")).
4.4B --Second Amendment to the Credit Agreement (incorporated by reference from
the March 1996 8-K).
4.4C --Third Amendment to the Credit Agreement (incorporated by reference from
the March 1996 8-K).
4.4D --Fourth Amendment to the Credit Agreement (incorporated by reference from
the March 1996 8-K).
4.4E --Fifth Amendment to the Credit Agreement (incorporated by reference from
the March 1996 8-K).
5.1 --Opinion of Shearman & Sterling as to the validity of the Senior
Subordinated Notes due 2003 and the Junior Subordinated Deferred Coupon
Notes due 2003 of the Registrant.
5.2 --Opinion of Shearman & Sterling as to the validity of the Subordinated
Notes.
5.3 --Opinion of Shearman & Sterling as to the validity of the Subordinated
Debentures.
10.4 --Services Agreement dated as of May 3, 1993 between the Registrant and
Chefmark.
10.5 --Chefmark Supply Agreement, dated May 3, 1993, between the Registrant and
Chefmark.
10.6 --Tax Sharing Agreement between the Registrant and SMG-II (incorporated by
reference from Exhibit 10.6 to the 1993 10-K).
10.7 --Tax Indemnity Agreement between the Registrant and Plainbridge
(incorporated by reference from Exhibit 10.7 to the 1993 10-K).
10.8 --Supermarkets General Corporation Pension Plan (as Amended and Restated
effective January 1, 1979) as amended through May 29, 1987 (incorporated
by reference from Exhibit 10.21 to the Registration Statement on Form S-1
of Holdings, File No. 33-16963).
10.9 --Supermarkets General Corporation Savings Plan (as Amended and Restated
effective April 1, 1983) as amended through January 1, 1987 (incorporated
by reference from Exhibit 10.22 to the Registration Statement on Form S-1
of Holdings, File No. 33-16963).
10.10 --Supermarkets General Corporation Management Incentive Plan effective June
17, 1971 (incorporated by reference from Exhibit 10.23 to the Registration
Statement on Form S-1 of Holdings, File No. 33-16963).
10.11 --Supplemental Retirement Agreements dated as of March 9, 1987 between Old
Supermarkets and Jack Futterman, Jeffrey C. Girard, Jules Borshadel and
Isadore Lemmerman (incorporated by reference from Exhibit 10.25 to the
Registration Statement on Form S-1 of Holdings, File No. 33-16963).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- - ------- ----------- ----
<C> <S> <C>
10.12 --Excess Benefit Plan of Supermarkets General Corporation, effective as of
March 9, 1987.
10.13 --Recourse Secured Promissory Note, dated October 5, 1987, given to Holdings
from each Management Investor listed therein (incorporated by reference
from Exhibit 10.43 to Post-Effective Amendment No. 1 to the Registration
Statement on Form S-1 of Holdings, File No. 33-16963).
10.14 --Stock Pledge Agreement dated October 5, 1987, between Holdings and each
Management Investor listed therein (incorporated by reference from Exhibit
10.44 to Post-Effective Amendment No. 1 to the Registration Statement on
Form S-1 of Holdings, File No. 33-16963).
10.15 --SMG-II Holdings Corporation Management Investors Stock Option Plan, as
amended and restated May 17, 1991 (the "Option Plan").
10.16 --Form of Stock Option Agreement under the Option Plan.
10.17 --SMG-II Holdings Corporation Employees 1987 Stock Option Plan, as amended
and restated May 17, 1991.
10.18 --Agreement dated as of March 20, 1996 among Registrant, Jack Futterman,
Holdings and SMG-II (incorporated by reference from Registrants Annual
Report on Form 10-K for the year ended February 3, 1996 (the "1995
10-K")).
10.20 --Agreement dated as of April 10, 1996 between the Registrant, Anthony Cuti
and SMG-II (incorporated by reference from the 1995 10-K).
10.21 --Management Investors Exchange Agreement dated as of February 4, 1991 among
SMG-II Holdings Corporation, Holdings and each of the Management Investors
party thereto (incorporated by reference from Exhibit 10.53 to the
Registration Statement on Form S-1 of Holdings, No. 33-16963).
10.22 --Supplemental Retirement Agreement dated as of March 12, 1993 betweeen the
Registrant and Anthony Cuti (incorporated by reference from Exhibit 10.24
to the Registration Statement on Form S-1 of the Registrant and Holdings,
File No. 33-59616).
10.23 --Supplemental Registration Agreement dated June 1, 1994 between the
Registrant and Ronald Rallo (incorporated by reference from the
Registrant's Annual Report on Form 10-K for the year ended January 28,
1995).
10.24 --Supplemental Retirement Agreement dated June 1, 1994 between the
Registrant and Neill Crowley (incorporated by reference from the 1995
10-K).
10.25 --Supplemental Retirement Agreement dated October 3, 1994 between the
Registrant and Ron Marshall (incorporated by reference from the 1995
10-K).
10.26 --Interim Agreement dated March 20, 1996 between the Registrant and John W.
Boyle (incorporated by reference from the 1995 10-K).
10.27 --Employment Agreement dated as of May 23, 1994 between Registrant and Neill
Crowley (incorporated by reference from the 1995 10-K).
10.28 --Employment Agreement dated as of September 9, 1994 between Registrant and
Ron Marshall (incorporated by reference from the 1995 10-K).
10.29 --Employment Agreement dated as of June 1, 1995 between Registrant and Ron
Rallo (incorporated by reference from the 1995 10-K).
12.1 --Statements Regarding Computation to Ratio of Earnings to Fixed Charges
(incorporated herein by reference to Exhibit 12.1 to the 1994 Form 10-K).
21.1 --List of Subsidiaries of the Registrant (incorporated by reference from
Exhibit 21.1 to the 1995 10-K).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- - ------- ----------- -----
<C> <S> <C>
23.1** --Consent of Deloitte & Touche LLP.
23.2 --Consents of Shearman & Sterling (contained in their opinions filed as
Exhibits 5.1, 5.2, 5.3).
24.1 --Power of Attorney of U. Peter C. Gummeson
24.2 --Power of Attorney of Jerry G. Rubenstein
25.1 --Statement of Eligibility on Form T-1 of United States Trust Company of New
York, Trustee, under the Senior Subordinated Notes Indenture.
25.2 --Statement of Eligibility on Form T-1 of NationsBank of Georgia, National
Association, Trustee, under the Indenture relating to the Deferred Coupon
Notes Indenture.
25.3 --Statement of Eligibility on Form T-1 of Wilmington Trust Company, Trustee,
under the Subordinated Notes Indenture.
25.4 --Statement of Eligibility on Form T-1 of Wilmington Trust Company, Trustee,
under the Subordinated Debentures Indenture.
</TABLE>
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* All exhibits not filed herewith and not otherwise incorporated by reference
were previously filed as exhibits to this Registration Statement or to
Registration Statement Nos. 33-59612, 33-59616 and 33-50053 previously filed
on Form S-1 and are incorporated by reference herein.
** Filed herewith.
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
Pathmark Stores, Inc.
Woodbridge, New Jersey
We consent to the use in this Post-Effective Amendment No. 3 to Registration
Statement No. 33-59612 of Pathmark Stores, Inc. on Form S-1 of our report dated
April 12, 1996 appearing in the Prospectus, which is a part of such Registration
Statement, and to the reference to us under the headings "Selected Historical
Consolidated Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
June 5, 1996
EXHIBIT 24.1
PATHMARK STORES, INC.
POWER OF ATTORNEY
The undersigned, a director of Pathmark Stores, Inc. (the "Company"), hereby
nominates, constitutes and appoints MARC A. STRASSLER and SUNIL C. KHANNA, or
either of them, severally, to be my true and lawful attorney and on my behalf
and in my name to sign one or more Registration Statements on Form S-1, and all
amendments thereto (including, without limitation, all post-effective
amendments), relating to Registration Nos. 33-59616 and 33-50053 and 33-59612,
previously filed by the Company on Form S-1, and to file the same under the
Securities Act of 1933, as amended (the "Securities Act"), in such form as such
attorney shall approve, such approval to be conclusively evidenced by his
signing thereof; and the undersigned agrees to ratify and confirm all that the
attorneys or either of them shall do in the exercise or purported exercise of
the powers hereby granted.
IN WITNESS WHEREOF, this Power of Attorney has been executed by the
undersigned this 29th day of May, 1996.
/s/ U. Peter C. Gummeson
......................................
U. PETER C. GUMMESON
EXHIBIT 24.2
PATHMARK STORES, INC.
POWER OF ATTORNEY
The undersigned, a director of Pathmark Stores, Inc. (the "Company"), hereby
nominates, constitutes and appoints MARC A. STRASSLER and SUNIL C. KHANNA, or
either of them, severally, to be my true and lawful attorney and on my behalf
and in my name to sign one or more Registration Statements on Form S-1, and all
amendments thereto (including, without limitation, all post-effective
amendments), relating to Registration Nos. 33-59616 and 33-50053 and 33-59612,
previously filed by the Company on Form S-1, and to file the same under the
Securities Act of 1933, as amended (the "Securities Act"), in such form as such
attorney shall approve, such approval to be conclusively evidenced by his
signing thereof; and the undersigned agrees to ratify and confirm all that the
attorneys or either of them shall do in the exercise or purported exercise of
the powers hereby granted.
IN WITNESS WHEREOF, this Power of Attorney has been executed by the
undersigned this 29th day of May, 1996.
/s/ Jerry G. Rubenstein
......................................
JERRY G. RUBENSTEIN
