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Registration No. 33-59612
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Pathmark Stores, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 5411 22-2879612
(State of other (Primary Standard Industrial (I.R.S. Employer
jurisdiction 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
(732) 499-3000
(Address, including zip code, and telephone number, including
area code, of Joint Registrars' principal executive offices)
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MARC STRASSLER, Esq.
Vice President, Secretary and General Counsel
Pathmark Stores, Inc.
301 Blair Road
P.O. Box 5301
Woodbridge, New Jersey 07095-0915
(732) 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
effective 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. 4 constitutes Post-Effective Amendment
No. 4 to Registration Statement no. 33-50053 and Post Effective Amendment No.
5 to Registration Statement no. 33-59616.
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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. / /
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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 Statement
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; Independent Auditors
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
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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
the 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.
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), 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 (as defined) 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 May 3, 1997 was $648.0 million with respect
to the Senior Subordinated Notes, $1,085.9 million with respect to the
Subordinated Securities, and $1,380.7 million with respect to the Deferred
Coupon Notes, in each case including $70.2 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.
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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 PRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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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 , 1997
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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.
The Company files its reports, proxy statements and other information with the
Commission electronically. The Commission maintains a Web site that contains
reports, proxy and information statements and other information statements and
other information regarding registrants that file electronically with the
Commission at http://www.sec.gov. 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.
2
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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" MEANS 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 1996" REFERS TO THE COMPANY'S FISCAL YEAR ENDED FEBRUARY 1, 1997. ALL
FISCAL YEARS FOR WHICH INFORMATION IS INCLUDED IN THIS PROSPECTUS HAD 52
WEEKS, EXCEPT FOR FISCAL 1995 WHICH HAD 53 WEEKS.
PATHMARK
GENERAL
Pathmark is a leading supermarket retailer in the Middle Atlantic
States and is the 15th largest supermarket retailer in the nation. At May 3,
1997, Pathmark operated 144 supermarkets 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.
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,
average approximately 51,900 total square feet in size and generating high
average sales volume of approximately $26.1 million per store ($690 per
selling square foot) for stores open for all of Fiscal 1996. 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 sales, profitability and
market penetration in its existing markets by focusing on the following five
operating priorities: concentrate on core business, Pathmark "smart" service,
lower operating costs, spend capital wisely and have the right management
team. By concentrating on and implementing these five priorities, the Company
expects to accomplish its strategic goals (i) by providing superior
perishable and non-perishable merchandise, value and service to its customers
through its marketing, merchandising and customer service programs; (ii)
through efficient use of capital to renovate and enlarge its existing store
base; and (iii) through increased operating efficiencies.
MARKETING AND MERCHANDISING
- - SUPER CENTER FORMAT. The average Pathmark Super Center is approximately
39% 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 2000. Pathmark 2000 is a new, larger Super Center format
designed to provide Pathmark customers with a substantially greater
selection of quality perishable products. 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,
particularly in the perishable departments. All of Pathmark's new
supermarkets and enlargements completed in Fiscal 1996 employed the
Pathmark 2000 concept, and Pathmark expects that all new stores and
enlargements thereafter will employ the same concept. At May 3, 1997, 55
of Pathmark's supermarkets were Pathmark 2000s.
3
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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, both in print and
electronic media. Merchandising flexibility and effectiveness is enhanced
through the increased utilization of a category management approach. In
addition, Pathmark offers for sale over 3,000 items through its private
label program.
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 1996, Pathmark
opened four new Pathmark 2000s (two of which replaced smaller stores),
closed two other smaller stores, and completed 16 renovations and five
enlargements. During the fiscal year ending January 31, 1998 ("Fiscal
1997"), Pathmark plans to open up to three new Pathmark 2000s (two of
which have already opened), and to complete up to an aggregate of ten
renovations and enlargements.
Pathmark recognizes the importance of keeping its stores looking fresh
and up-to-date; thus, each store typically receives a renovation or
enlargement every five years. At the end of Fiscal 1996, Pathmark derived
approximately 76% of its supermarket sales from stores that were opened,
enlarged or renovated during the last five years.
CORE MARKET FOCUS. Pathmark has identified over 50 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. All Pathmark supermarket checkout terminals have
third-generation 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 consumer 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.
COST REDUCTION. During the fourth quarter of Fiscal 1996, Pathmark, in
an effort to reduce its costs, effectuated a 25% reduction in
administrative headcount and held for divestiture 12 supermarkets,
principally in its southern region. Currently, seven of the 12 stores
held for divestiture have been either sold or closed.
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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
semi-annually 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 115/8% Subordinated Notes due 2002 (the
"Holdings Subordinated Notes") pursuant to a prospectus
dated September 22, 1993. See "Pathmark--The
Recapitalization" 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.
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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 amount outstanding
of Holdings' 125/8% 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
payment 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.
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
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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 Accreted Amount
thereof, as the case maybe, together with accrued
interest, (including any defaulted interest 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 May 3, 1997 was $648.0 million with
respect to the Senior Subordinated Notes, $1,085.9
million with respect to the Subordinated Securities, and
$1,380.7 million with respect to the Deferred Coupon
Notes, in each case including $70.2 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. 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 1993 and owns
100% of the capital stock of Pathmark.
In connection with the Recapitalization, Pathmark contributed
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 Capital Stock 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"). 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. During the fiscal year ended February 1, 1997 ("Fiscal
1996"), PTK contributed 100% of the capital stock of Plainbridge to
Pathmark, making Plainbridge a wholly owned subsidiary of Pathmark.
During Fiscal 1996, Pathmark twice amended its existing bank credit
agreement dated as of October 26, 1993, as amended, (the "Bank Credit
Agreement") by prospectively modifying certain of its financial covenants
(interest coverage, leverage and consolidated adjusted earnings before
interest, taxes, depreciation and amortization) and, in connection with the
contribution of Plainbridge shares to the Company, by increasing its
working capital facility (the "Working Capital Facility") under the Bank
Credit Agreement by $25 million to $200 million. Also, Pathmark and
Plainbridge terminated the Logistical Services Agreement. As used herein,
"Pathmark" or the "Company" means Pathmark and its wholly-owned
subsidiaries.
On May 27, 1997, The Chase Manhattan Bank committed, subject to
the execution of a definitive credit agreement, to provide to the Company
senior secured facilities in an aggregate principal amount of $500 million
pursuant to which the Company will repay in full all amounts outstanding
under its existing Bank Credit Agreement. The senior secured facilities
include two term facilities in an aggregate principal amount of $300
million and a revolving credit facility in the aggregate principal amount
of $200 million. The Company believes it will successfully refinance its
existing Bank Credit Agreement, however, there can be no assurances that
the refinancing will occur.
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 marketing 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 represents summary historical consolidated financial
data of the Company for each of the five fiscal years in the period ended
February 1, 1997. The following table also sets forth summary historical
consolidated financial data of the Company for the 13 weeks ended May 3,
1997 ("First Quarter Fiscal 1997") and May 4, 1996 ("First Quarter Fiscal
1996"). Such interim financial data was derived from the unaudited
consolidated financial statements of the Company, which, in the opinion of
management, reflect all adjustments, consisting of only normal, recurring
adjustments, necessary for a fair presentation of such data and which have
been prepared in accordance with the same accounting principles followed in
the presentation of the Company's audited financial statements for the year
ended February 1, 1997. The statement of operations data for the First
Quarter Fiscal 1997 is not necessarily indicative of the results that may be
expected for the fiscal year. 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>
FIRST FISCAL YEARS(A)
QUARTERS(A)
--------------- -------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Sales(b)........................ $ 922 $ 913 $3,710 $3,972 $3,968 $4,021 $4,110
Gross profit(b)................. 259 266 1,091 1,134 1,102 1,069 1,079
Selling, general and
administrative 212 214 857 866 851 837 817
expenses(b)...................
Depreciation and amortization(c) 20 20 89 80 75 70 69
Restructuring charge(d)......... -- -- 9 -- -- -- --
Lease commitment charge(e)...... -- -- 9 -- -- -- --
Recapitalization expenses(f).... -- -- -- -- -- 17 --
Provision for store closings(g). -- -- -- -- -- 6 --
Amortization of goodwill........ -- -- -- -- -- -- 18
Goodwill write-off.............. -- -- -- -- -- -- 601
Operating earnings (loss)....... 27 32 127 188 176 139 (426)
Interest expense, net(h)........ (42) (40) (161) (165) (148) (172) (183)
Earnings (loss) from continuing
operations before income
taxes, gain on disposal of home
centers segment, extraordinary
items and cumulative effect of
accounting changes............ (15) (8) (34) 39(i) 28 (33) (609)
Earnings (loss) from continuing
operations before gain on
disposal of home centers
segment, extraordinary items
and cumulative effective of
accounting changes........... (9) (5) (20) 33 24 (13) (617)
Loss from discontinued
operations...................... -- -- -- -- (2) -- (1)
Net earnings (loss)............. (9) (6)(j) (21)(j) 33 39(k) (148)(l)(m) (623)(n)
Ratio of earnings to fixed
charges(o)...................... -- -- -- 1.21x 1.16x -- --
Deficiency in earnings available
to cover fixed charges(p)..... 15 8 $ 34 $ -- $ -- $ 33 $ 609
OTHER OPERATING DATA:
Interest expense(q)............. $ (41) $ (40) $ (161) $ (165) $ (159) $ (186) $ (196)
EBITDA-FIFO(r).................. 48 54 236 269 253 232 267
EBITDA-FIFO coverage(r)(s)...... 1.2x 1.4x 1.5x 1.6x 1.6x 1.2x 1.4x
Capital expenditures and
capital $ 12 $ 15 $ 94 $ 111 $ 105 $ 96 $ 74
leases........................
Net debt (repayments) borrowings 20 7 (23) (82) (13) 166 (48)
(FOOTNOTES ON FOLLOWING PAGE)
</TABLE>
9
<PAGE>
PATHMARK STORES, INC.
NOTES TO SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(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. The first quarters of Fiscal 1997
and Fiscal 1996 are each comprised of 13 weeks.
(b) Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to the Fiscal 1996
presentation, the most significant of which was the Company's change
in reporting of Pathmark coupon expenses (excluding manufacturers'
coupons). Prior to this change, Pathmark coupon expenses, net of any
vendor reimbursements, were recorded in selling, general and
administrative expenses. As a result of this change, Pathmark gross
coupon expenses have now been recorded as a reduction of sales with
any vendor reimbursements being recorded as a reduction of cost of
goods sold.
(c) In Fiscal 1996, depreciation and amortization includes a $5 million
pretax charge to write down certain fixed assets held for sale to
their estimated net realizable values. See Note 7 of the Notes to
Consolidated Financial Statements included elsewhere in this
Prospectus.
(d) During Fiscal 1996, the Company recorded a pretax charge of $9
million for reorganization and restructuring costs related to its
administrative operations. See Note 3 of the Notes to Consolidated
Financial Statements included elsewhere in this Prospectus.
(e) During Fiscal 1996, the Company recorded a pretax charge of $9
million related to unfavorable lease commitments of certain
unprofitable stores in the Company's southern region. See Note 4 of
the Notes to Consolidated Financial Statements included elsewhere in
this Prospectus.
(f) In connection with the Recapitalization, in Fiscal 1993, the Company
recorded a pretax charge of $17 million related to reorganization and
restructuring costs.
(g) During Fiscal 1993, the Company decided to close or dispose of the
five stores and recorded a pretax charge of $6 million.
(h) Prior to Fiscal 1995, interest expense was net of interest charged to
discontinued operations.
(i) During Fiscal 1995, the Company recognized a pretax net gain of
$16 million in connection with the disposition of its 36 freestanding
drug stores.
(j) During Fiscal 1996, the Company recorded an extraordinary charge of
$1 million, net of an income tax benefit, related to the early
extinguishment of debt. See Note 18 of the Notes to the Company's
Consolidated Financial Statements included elsewhere in this
Prospectus.
(k) Includes a gain of $17 million, net of $2 million of income taxes,
relating to the disposal of the Company's home centers segment. See
Note 20 of the Notes to the Company's Consolidated Financial
Statements included elsewhere in this Prospectus.
(l) Includes an extraordinary charge of $97 million, net of an income tax
benefit of $15 million, relating to the early extinguishment of debt
in connection with the Recapitalization.
(m) 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.
(n) During Fiscal 1992, the Company recorded an extraordinary charge of
$5 million, net of income tax benefit of $3 million, relating to the
early extinguishment of debt.
(o) 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).
(p) 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).
(q) Represents interest expense before the charge to discontinued operations.
(r) EBITDA-FIFO represents earnings from continuing operations before
income taxes, net interest expense, depreciation, amortization,
(including amortization of video tapes), the LIFO charge (credit)
and unusual transactions. The Company's LIFO credit during Fiscal 1996
was $1 million, Fiscal 1995 was a $1 million LIFO charge, Fiscal
1994 and Fiscal 1993 were a $1 million and $2 million LIFO
credit, respectively and the Company's LIFO charge in Fiscal 1992
was $2 million. EBITDA-FIFO excludes in Fiscal 1996, a restructuring
charge of $9 million, a lease commitment charge of $9 million, a $6
million charge representing termination costs for two former
executives of the Company and a gain of $6 million recognized on the
sale of certain real estate and 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. EBITDA-FIFO
is a widely accepted financial indicator of a company's ability to
service and/or incur debt. EBITDA-FIFO should not be construed as an
alternative to or a better indicator of operating income or to cash
flows from operating activities, as determined in accordance with
generally accepted accounting principles. For a discussion of the
Company's operating performance and liquidity, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations".
(s) Calculated by dividing EBITDA-FIFO by interest expense, excluding
interest charged to discontinued operations.
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 May 3, 1997 the Company's long-term debt, including obligations
under capital leases, was $1,348.0 million and its stockholder's deficit was
$1,050.5 million. This long-term debt consists of $172.6 million of borrowings
under the term loan facility (the "Term Loan"), $60.0 million of borrowings
under the Pathmark working capital facility (the "Working Capital Facility" and,
together with the Term Loan, the "Bank Credit Agreement"), $437.9 million of
Senior Subordinated Notes, $199.0 million of Subordinated Notes, $95.8 million
of Subordinated Debentures, $173.0 million of Deferred Coupon Notes and $209.7
million of other long-term debt primarily consisting of capital leases. In
addition, the Company as of May 3, 1997 has current debt of $136.5 million,
which included $57.9 million of borrowings under the Term Loan, $46.5 million of
borrowings under the Working Capital Facility and $23.4 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 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, 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 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 Term Loan, 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 Bank Credit Agreement includes an annual cleandown provision
requiring borrowings under the Company's Working Capital Facility not to exceed
$60.0 million for a period of 30 consecutive days. The Company was in compliance
with its various debt covenants at May 3, 1997 and, based on management's
operating projections for Fiscal 1997, the Company believes that it will be able
to satisfy this cleandown provision and continue to be in compliance with its
other debt covenants. 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,
11
<PAGE>
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 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.
On May 27, 1997, The Chase Manhattan Bank committed, subject to the
execution of a definitive credit agreement, to provide to the Company senior
secured facilities in an aggregate principal amount of $500 million pursuant
to which the Company will repay in full all amounts outstanding under its
existing Bank Credit Agreement. The senior secured facilities include two
term facilities in an aggregate principal amount of $300 million and a
revolving credit facility in the aggregate principal amount of $200 million.
The Company believes it will successfully refinance its existing Bank Credit
Agreement, however, there can be no assurances that the refinancing will
occur.
While it is the Company's intention to enter into other refinancings
that it considers advantageous, there can be no assurances that the
prevailing market conditions will be favorable to the Company. In the event
the Company obtains any future refinancing on less than favorable terms, the
holders of outstanding indebtedness could experience increased credit risk
and could experience a decrease in the market value of their investment,
because the Company might be forced to operate under terms that would
restrict its operations and might find its cash flow reduced.
LOSSES AND STOCKHOLDER'S DEFICIT
During the period from the Acquisition in October 1987 through May 3,
1997, the Company had aggregate net losses of $1,119.2 million, of which
approximately $890.7 million represents the amortization and write-off of
goodwill associated with the Acquisition. At May 3, 1997, the Company had a
stockholder's deficit of $1,050.5 million.
SUBORDINATION
The right to payment of principal 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 May 3, 1997 was
approximately $648.0 million with respect to the Senior Subordinated Notes,
$1,085.9 million with respect to the Subordinated Securities, and $1,380.7
million with respect to the Deferred Coupon Notes, in each case including
$70.2 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 85.7% of the
outstanding shares of voting stock of Holdings. As a results, ML&Co. controls
Holdings and, through Holdings and PTK, controls the Company. See "Principal
Stockholders".
12
<PAGE>
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.
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 will not accrue on the Deferred
Coupon Notes prior to November 1, 1999, and there will 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 Notes will be
required to include in income, as interest, original issue discount on the
Deferred Coupon Notes, 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 Stated 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".
INTEREST 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 to 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 May 3, 1997,
only one Service Agreement with Chefmark remains. This agreement governs the
position 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 "Marketing Making
Activities of Merrill Lynch".
14
<PAGE>
PATHMARK
Pathmark is a leading supermarket retailer in the Middle Atlantic
States and is the 15th largest supermarket retailer in the nation. At May 3,
1997, Pathmark operated 144 supermarkets 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.
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 51,900 total square feet in size and generating high
average sales volume of approximately $26.1 million per store ($690 per
selling square foot) for stores open for all of Fiscal 1996. 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 (732) 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 1993 and owns 100%
of the capital stock of Pathmark.
In connection with the Recapitalization, Pathmark contributed
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 Capital Stock 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"). 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. During the fiscal year ended February 1, 1997 ("Fiscal 1996"),
PTK contributed 100% of the capital stock of Plainbridge to Pathmark, making
Plainbridge a wholly owned subsidiary of Pathmark.
15
<PAGE>
During Fiscal 1996, Pathmark twice amended its existing bank credit
agreement dated as of October 26, 1993, as amended, (the "Bank Credit
Agreement") by prospectively modifying certain of its financial covenants
(interest coverage, leverage and consolidated adjusted earnings before
interest, taxes, depreciation and amortization) and, in connection with the
contribution of Plainbridge shares to the Company, by increasing its working
capital facility (the "Working Capital Facility") under the Bank Credit
Agreement by $25 million to $200 million. Also, Pathmark and Plainbridge
terminated the Logistical Services Agreement. As used herein, "Pathmark" or
the "Company" means Pathmark and its wholly-owned subsidiaries.
On May 27, 1997, The Chase Manhattan Bank committed, subject to the
execution of a definitive credit agreement, to provide to the Company senior
secured facilities in an aggregate principal amount of $500 million pursuant
to which the Company will repay in full all amounts outstanding under its
existing Bank Credit Agreement. The senior secured facilities include two
term facilities in an aggregate principal amount of $300 million and a
revolving credit facility in the aggregate principal amount of $200 million.
The Company believes it will successfully refinance its existing Bank Credit
Agreement, however, there can be no assurances that the refinancing will
occur.
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.
16
<PAGE>
PATHMARK STORES, INC.
CAPITALIZATION
The following table sets forth the historical consolidated current debt
and capitalization of the Company at May 3, 1997. This table should be read in
conjunction with "The Recapitalization," "Certain Indebtedness of the Company"
and "Selected Historical Consolidated Financial Data."
May 3, 1997
(in millions)
Current Debt(1):
Current portion of obligations under capital leases.... $ 23
Current portion of Term Loan........................... 58
Current portion of Working Capital Facility............ 47
Current portion of other long-term debt................ 8
-------
Total current debt................................ $ 136
=======
1
Long-term Debt(1):
Bank Credit Agreement:
Term Loan............................................ $ 173
Working Capital Facility(2).......................... 60
Senior Subordinated Notes due 2003..................... 438
Intercompany Note in respect of Holdings Subordinated N 1
Subordinated Notes due 2002............................ 199
Subordinated Debentures due 2002....................... 96
Deferred Coupon Notes due 2003......................... 173
Mortgages and notes payable............................ 32
Obligations under capital leases....................... 176
-------
Total long-term debt.............................. 1,348
-------
Stockholder's Deficit:
Common stock, 100 shares authorized, 100 shares issued. --
Paid-in capital........................................ 69
Accumulated deficit.................................... (1,120)
-------
Total stockholder's deficit....................... (1,051)
-------
Net capitalization................................ $ 297
=======
- -----------
(1) See Note 2 to the Company's Unaudited Consolidated Financial Statements
for the First Quarter Fiscal 1997 included elsewhere in this Prospectus
for further information with respect to the indebtedness of the Company.
(2) Excludes $70.2 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 1, 1997 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. The
selected historical consolidated financial data of the Company for the First
Quarter Fiscal 1997 and First Quarter Fiscal 1996 presented below was derived
from the unaudited consolidated financial statements of the Company, which, in
the opinion of management, reflect all adjustments, consisting of only normal,
recurring adjustments, necessary for a fair presentation of such data and which
have been prepared in accordance with the same accounting principles followed in
the presentation of the Company's audited financial statements for the year
ended February 1, 1997. The statement of operations data for the First Quarter
Fiscal 1997 is not necessarily indicative of the results that may be expected
for the fiscal year. 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>
First Fiscal Years(a)
Quarters(a)
---------------- ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Sales(b)................................... $ 922 $ 913 $ 3,710 $ 3,972 $ 3,968 $ 4,021 $ 4,110
Cost of sales(b) (exclusive of depreciation
and 663 647 2,619 2,838 2,866 2,952 3,031
amortization shown separately below).....
----- ----- ----- ------ ---- ----- -----
Gross profit(b)............................ 259 266 1,091 1,134 1,102 1,069 1,079
Selling, general and administrative 212 214 857 866 851 837 817
expenses(b)................................
Depreciation and amortization(c)........... 20 20 89 80 75 70 69
Restructuring charge(d).................... -- -- 9 -- -- -- --
Lease commitment charge(e)................. -- -- 9 -- -- -- --
Recapitalization expenses(f)............... -- -- -- -- -- 17 --
Provision for store closings(g)............ -- -- -- -- -- 6 --
Amortization of goodwill................... -- -- -- -- -- -- 18
Goodwill write-off......................... -- -- -- -- -- -- 601
----- ----- ----- ------ ---- ----- -----
Operating earnings (loss).................. 27 32 127 188 176 139 (426)
Interest expense, net(h)................... (42) (40) (161) (165) (148) (172) (183)
Gain on disposition of freestanding drug
store(i)................................... -- -- -- 16 -- -- --
----- ----- ----- ------ ---- ----- -----
Earnings (loss) from continuing operations
before income taxes, gain on disposal of
home centers segment, extraordinary items
and cumulative effect of accounting
changes.................................. (15) (8) (34) 39 28 (33) (609)
Income tax benefit (provision)............. 6 3 14 (6) (4) 20 (8)
----- ----- ----- ------ ---- ----- -----
Earnings (loss) from continuing operations
before gain on disposal of home centers
segment, extraordinary items and
cumulative effect of accounting changes. (9) (5) (20) 33 24 (13) (617)
Loss from discontinued operations.......... -- -- -- -- (2) -- (1)
Gain on disposal of home centers segment,
net of tax(j)............................ -- -- -- -- 17 -- --
----- ----- ----- ------ ---- ----- -----
Earnings (loss) from before extraordinary
items and cumulative effect of accounting
changes.................................. (9) (5) (20) 33 39 (13) (618)
Extraordinary items, net of tax(k)......... -- (1) (1) -- -- (97) (5)
----- ----- ----- ------ ---- ----- -----
Earnings (loss) before cumulative effect of
accounting changes....................... (9) (6) (21) 33 39 (110) (623)
Cumulative effect of accounting changes, net -- -- -- -- -- (38) --
of tax(l)................................. ----- ----- ----- ------ ---- ----- -----
Net earnings (loss)........................ $ (9) $ (6) $ (21) $ 33 $ 39 $ (148) $ (623)
===== ===== ===== ====== ==== ===== =====
Ratio of earnings to fixed charges(m)...... -- -- -- 1.21x 1.16x -- --
===== ===== ===== ====== ==== ===== =====
Deficiency in earnings available to cover
fixed charges(n)......................... $ 15 $ 8 $ 34 $ -- $ -- $ 33 $ 609
===== ===== ===== ====== ==== ===== =====
BALANCE SHEET DATA
Total assets............................... $ 987 $ 975 $ 990 $ 986 $ 1,018 $ 1,119 $ 1,101
Working capital deficiency................. 207 164 182 173 122 107 55
Obligations under capital leases, long-term 177 139 175 140 127 132 127
Other long-term debt, net of current
maturities.............................. 1,171 1,220 1,186 1,215 1,273 1,286 1,278
Stockholder's deficit...................... (1,051) (1,030) (1,042) (1,024) (1,030) (1,001) (967)
(FOOTNOTE ON FOLLOWING PAGE)
</TABLE>
18
<PAGE>
PATHMARK STORES, INC.
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(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. The first quarters of Fiscal 1997 and Fiscal
1996 are each comprised of 13 weeks.
(b) Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the Fiscal 1996 presentation, the most
significant of which was the Company's change in reporting of Pathmark
coupon expenses (excluding manufacturers' coupons). Prior to this change,
Pathmark coupon expenses, net of any vendor reimbursements, were recorded
in selling, general and administrative expenses. As a result of this
change, Pathmark gross coupon expenses have now been recorded as a
reduction of sales with any vendor reimbursements being recorded as a
reduction of cost of goods sold.
(c) In Fiscal 1996, depreciation and amortization includes a $5 million
pretax charge to write down certain fixed assets held for sale to their
estimated net realizable values. See Note 7 of the Notes to Consolidated
Financial Statements included elsewhere in the Prospectus.
(d) During Fiscal 1996, the Company recorded a pretax charge of $9 million
for reorganization and restructuring costs related to its administrative
operations. See Note 3 of the Notes to Consolidated Financial Statements
included elsewhere in the Prospectus.
(e) During Fiscal 1996, the Company recorded a pretax charge of $9 million
related to unfavorable lease commitments of certain unprofitable stores
in the Company's southern region. See Note 4 of the Notes to Consolidated
Financial Statements included elsewhere in the Prospectus.
(f) In connection with the Recapitalization in Fiscal 1993, the
Company recorded a pretax charge of $17 million related to reorganization
and restructuring costs.
(g) During Fiscal 1993, the Company decided to close or dispose of five
stores and recorded a pretax charge of $6 million.
(h) Prior to Fiscal 1995, interest expense was net of interest charged to
discontinued operations.
(i) During Fiscal 1995, the Company recognized a pretax net gain of $16
million in connection with the disposition of its 36 freestanding drug
stores. See Note 19 of the Notes to Consolidated Financial Statements
included elsewhere in the Prospectus.
(j) During Fiscal 1994, the Company sold its home centers segment,
which resulted in a gain on sale of $17 million, net of $2 million
of income taxes. See Note 20 of the Notes to Consolidated Financial
Statements included elsewhere in the Prospectus.
(k) During Fiscal 1996, the Company recorded an extraordinary charge of $1
million, net of an income tax benefit, related to the early
extinguishment of debt. See Note 18 of the Notes to Consolidated
Financial Statements included elsewhere in the Prospectus. 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. 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.
(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).
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The matters discussed herein, with the exception of historical
information, are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Potential risks and uncertainties
include, but are not limited to, the competitive environment in which the
Company operates and the general economic conditions in the Company's trading
areas.
RESULTS OF OPERATIONS
RECLASSIFICATIONS: Certain reclassifications have been made to the
prior years' consolidated financial statements to conform to the Fiscal 1996
presentation, the most significant of which was the Company's change in
reporting of Pathmark coupon expenses (excluding manufacturers' coupons).
Prior to this change, Pathmark coupon expenses, net of any vendor
reimbursements, were recorded in selling, general and administrative
expenses. As a result of this change, Pathmark gross coupon expenses have now
been recorded as a reduction of sales, with any vendor reimbursements being
recorded as a reduction of cost of goods sold.
FIRST QUARTER FISCAL 1997 V. FIRST QUARTER FISCAL 1996
SALES: Sales in the first quarter of Fiscal 1997 were $922.3 million
compared to $912.8 million in the prior year, an increase of 1% with same store
sales from supermarkets increasing 0.6%. The increase in sales resulted from the
Company's new store openings and remodels over the past year and the Company's
promotional pricing program which commenced in the first quarter of Fiscal 1997.
The Company operated 144 supermarkets at both the end of the first quarters of
Fiscal 1997 and Fiscal 1996, including 55 and 46 Pathmark 2000 format stores,
respectively.
GROSS PROFIT: Gross profit in the first quarter of Fiscal 1997 was
$259.3 million or 28.1% of sales compared with $266.0 million or 29.1% of
sales for the prior year. The decrease in gross profit in both dollars and as
a percentage of sales for the first quarter Fiscal 1997 compared to the prior
year was primarily due to the promotional pricing program introduced during
the first quarter of Fiscal 1997. The cost of goods sold comparisons were
affected by a pretax LIFO charge of $0.4 million and $0.9 million in the
first quarters of Fiscal 1997 and Fiscal 1996, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"): SG&A in the
first quarter of Fiscal 1997 decreased $1.3 million or 0.6% compared to the
prior year. As a percentage of sales, SG&A were 23.0% in the first quarter of
Fiscal 1997, down from 23.4% in the prior year. The decrease in SG&A as a
percentage of sales in the first quarter of Fiscal 1997 compared to the prior
year was primarily due to lower advertising and administrative expenses,
partially offset by higher labor and labor related expenses.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization of $20.2
million in the first quarter of Fiscal 1997 was $0.4 million lower than the
prior year of $20.6 million. The decrease in depreciation and amortization
expense in the first quarter of Fiscal 1997 compared to the prior year was
primarily due to the write down in the fourth quarter of Fiscal 1996 of certain
fixed assets held for sale, principally in the Company's southern region,
partially offset by capital expenditures in Fiscal 1997. Depreciation and
amortization excludes video tape amortization, which is recorded in cost of
goods sold, of $0.8 million and $0.75 million in the first quarters of Fiscal
1997 and Fiscal 1996, respectively.
OPERATING EARNINGS: Operating earnings in the first quarter of Fiscal
1997 were $26.7 million compared with the prior year of $31.7 million. The
decrease in operating earnings in the first quarter of Fiscal 1997 compared
to the prior year was due to lower gross profit, partially offset by lower
SG&A and depreciation and amortization expense.
20
<PAGE>
INTEREST EXPENSE: Interest expense was $41.3 million in the first quarter
of Fiscal 1997 compared to $39.9 million in the prior year primarily due to an
increase in the Working Capital Facility along with higher interest rates,
partially offset by reductions in the Term Loan.
INCOME TAXES: Income taxes for the interim period are based on the
estimated effective tax rate expected to be applicable for the full fiscal year.
The income tax benefit in the first quarters of Fiscal 1997 and Fiscal 1996 were
$5.7 million and $3.3 million, respectively.
During the first quarter of Fiscal 1997, the Company made income tax
payments of $1.7 million and received income tax refunds of $0.5 million. During
the first quarter of Fiscal 1996, the Company made income tax payments of $1.4
million and received income tax refunds of $0.3 million.
EXTRAORDINARY ITEM: During the first quarter of Fiscal 1996, in
connection with the termination of the Plainbridge credit agreement due to
the reacquisition of Plainbridge by Pathmark, the Company wrote off deferred
financing fees resulting in a net loss on early extinguishment of debt of
$0.7 million.
SUMMARY OF OPERATIONS: For the first quarter of Fiscal 1997, the
Company's net loss was $8.8 million compared to a net loss of $5.5 million
for the prior year. The increase in net loss in the first quarter of Fiscal
1997 compared to the prior year was primarily due to lower operating earnings
and higher interest expense, partially offset by a higher income tax benefit.
EBITDA-FIFO: EBITDA-FIFO was $48.3 million and $54.2 million in the
first quarters of Fiscal 1997 and Fiscal 1996, respectively. EBITDA-FIFO
represents net earnings before interest expense, income taxes, depreciation,
amortization, the LIFO charge (credit) and unusual transactions. EBITDA-FIFO
is a widely accepted financial indicator of a company's ability to service
and/or incur debt. EBITDA-FIFO should not be construed as an alternative to,
or a better indicator of operating income or to cash flows from operating
activities, as determined in accordance with generally accepted accounting
principles.
FISCAL 1996 (52-WEEK YEAR) V. FISCAL 1995 (53-WEEK YEAR)
SALES: Sales in Fiscal 1996 were $3.71 billion compared to $3.97
billion in Fiscal 1995. Sales comparisons were impacted by the extra week in
the prior year and the disposition of the freestanding drug stores during
Fiscal 1995. Sales generated by the freestanding drug stores were $110.8
million in Fiscal 1995. Same store sales from supermarkets decreased 2.8% for
the year primarily due to a significant increase in competitive new store
openings and remodels, particularly in the Company's southern region. During
Fiscal 1996, the Company opened four new Pathmark 2000 format stores, two of
which replaced smaller stores, and completed 21 major renovations and
enlargements to existing supermarkets. Two stores were closed and not
replaced during the year. At Fiscal 1996 year end, the Company operated 144
supermarkets, including 53 Pathmark 2000 format stores, compared with the end
of Fiscal 1995 when the Company operated 144 supermarkets, including 44
Pathmark 2000 format stores.
GROSS PROFIT: Gross profit in Fiscal 1996 was $1.09 billion or 29.4% of
sales compared with $1.13 billion or 28.6% of sales in Fiscal 1995. Excluding
the impact of the disposition of the freestanding drug stores, gross profit
as a percentage of sales was 28.8% in Fiscal 1995. The improvement in gross
profit, as a percentage of sales in Fiscal 1996 compared to Fiscal 1995, was
primarily due to increased focus on merchandising programs, the impact of the
disposition of the freestanding drug stores, as well as the Company's
continuing emphasis on the Pathmark 2000 format stores which allow expanded
variety in all departments particularly high margin perishables. The decrease
in gross profit was primarily attributable to the lower sales. The cost of
goods sold comparisons were affected by a pretax LIFO credit of $1.3 million
and a pretax LIFO charge of $1.1 million in Fiscal 1996 and Fiscal 1995,
respectively.
21
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"): SG&A decreased $8.4
million or 1.0% in Fiscal 1996 compared with Fiscal 1995. SG&A, on a proforma
basis eliminating the SG&A impact of the freestanding drug stores, increased
2.0% in Fiscal 1996 compared to Fiscal 1995. As a percentage of sales, SG&A were
23.1% in Fiscal 1996, up from 21.8% in Fiscal 1995 due to the impact of lower
sales, higher labor and labor related expenses, claims expenses and occupancy
costs, partially offset by lower advertising expenses and the impact of the
disposition of the freestanding drug stores in Fiscal 1995. SG&A for Fiscal 1996
also included a first quarter provision of $5.8 million representing the
termination costs for two former executives of the Company, a first quarter gain
of $5.6 million recognized on the sale of certain real estate and a second
quarter curtailment gain of $2.0 million due to the elimination of
postretirement medical coverage for active non-union associates. SG&A for Fiscal
1995 also included a fourth quarter gain of $3.4 million recognized on the sale
of a former warehouse of Purity Supreme, Inc. ("Purity"), a previously divested
company.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization of $89.0
million in Fiscal 1996 was $8.6 million higher than $80.4 million in Fiscal
1995. The increase for Fiscal 1996 was primarily due to a pretax charge of
$5.4 million to write down certain fixed assets held for sale, principally in
the Company's southern region, to their estimated net realizable values and
capital expenditures. Depreciation and amortization excludes video tape
amortization, which is recorded in cost of goods sold, of $3.1 million and
$2.8 million in Fiscal 1996 and Fiscal 1995, respectively.
RESTRUCTURING CHARGE: During the fourth quarter of Fiscal 1996, the
Company recorded a pretax charge of $9.1 million for reorganization and
restructuring costs related to its administrative operations. The
restructuring charge included $4.2 million for the costs of a voluntary early
retirement program and $1.2 million for severance and termination benefits.
The remaining charge of $3.7 million primarily relates to consulting fees
incurred in connection with the restructuring and exit costs for facility
consolidation.
LEASE COMMITMENT CHARGE: During the fourth quarter of Fiscal 1996, the
Company decided to divest a group of its southern region stores, certain of
which have experienced unprofitable operating results. The Company concluded
that the operating losses being experienced by these stores were other than
temporary and that the projected operating results of such stores would not
be sufficient to recover their long-lived assets and their contractual lease
commitments. Further, the Company believes that these lease costs will not be
significantly recoverable through any future sublease. Therefore, the Company
recorded a $8.8 million pretax charge related to these unfavorable lease
commitments, in addition to writing down the long-lived assets of these
stores (see "Depreciation and Amortization" above).
OPERATING EARNINGS: Operating earnings for Fiscal 1996 were $127.1
million compared with $187.9 million for Fiscal 1995. The decrease in
operating earnings during Fiscal 1996 compared to Fiscal 1995 was due to
lower sales, higher depreciation and amortization expense, the restructuring
charge and the lease commitment charge, partially offset by lower SG&A.
INTEREST EXPENSE: Interest expense was $161.5 million for Fiscal
1996 compared to $164.7 million in Fiscal 1995 primarily due to reductions
in the Term Loan along with lower interest rates.
INCOME TAXES: The income tax benefit for Fiscal 1996 was $14.4 million.
The income tax provision for Fiscal 1995 was $5.9 million reflecting the
reversal of the valuation allowance of $9.1 million related to the Company's
deferred income tax assets. The reversal was recorded in conjunction with the
Company's continuing evaluation of its deferred income tax assets. In the
opinion of management, sufficient evidence continues to exist, which
indicates that it is more likely than not, that the Company will be able to
realize its deferred income tax assets.
During Fiscal 1996, the Company made income tax payments of $4.6
million and received income tax refunds of $5.5 million. During Fiscal 1995,
the Company made income tax payments of $21.9 million and received income tax
refunds of $10.3 million.
22
<PAGE>
EXTRAORDINARY ITEMS: During the first quarter of Fiscal 1996, in
connection with the termination of the Plainbridge credit agreement due to
the reacquisition of Plainbridge by Pathmark, the Company wrote off deferred
financing fees resulting in a net loss on early extinguishment of debt of
$0.7 million. During the second quarter of Fiscal 1996, in connection with
the proceeds from the sale of certain mortgaged property, the Company made a
mortgage paydown of $5.3 million, including accrued interest and debt
premiums, resulting in a net loss on early extinguishment of debt of $0.2
million.
NET EARNINGS: The Company's net loss in Fiscal 1996 was $20.8 million
compared to net earnings of $32.7 million in Fiscal 1995. The decrease in net
earnings for Fiscal 1996 compared to Fiscal 1995 was due to lower operating
earnings in Fiscal 1996, the gain on disposition of the freestanding drug
stores in Fiscal 1995, partially offset by lower interest expense and an
income tax benefit in Fiscal 1996 compared to an income tax provision in
Fiscal 1995.
EBITDA-FIFO: EBITDA-FIFO was $236.4 million and $268.9 million in
Fiscal 1996 and Fiscal 1995, respectively.
FISCAL 1995 (53-WEEK YEAR) V. FISCAL 1994 (52-WEEK YEAR)
SALES: Sales were $3.97 billion in both Fiscal 1995 and Fiscal 1994.
The decrease in sales, due to the sale of the freestanding drug stores on
July 28, 1995, was offset by sales for the extra week in Fiscal 1995. Same
store sales from supermarkets decreased 0.3% for the year. 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" below).
GROSS PROFIT: Gross profit in Fiscal 1995 was $1.13 billion or 28.6% of
sales compared with $1.10 billion or 27.8% of sales in 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
$14.7 million or 1.7% in 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 4.0% in Fiscal 1995
compared to Fiscal 1994. As a percentage of sales, SG&A were 21.8% in Fiscal
1995 up from 21.4% in Fiscal 1994 due to higher claims expenses, occupancy
costs and supplies, partially offset by lower promotional costs and labor
related expenses, along with weather related expenses that adversely affected
the first quarter of Fiscal 1994. SG&A for Fiscal 1995 also included a fourth
quarter gain of $3.4 million recognized on the sale of a former warehouse of
Purity, a previously divested company.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization of $80.4
million in 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 in Fiscal
1995 and Fiscal 1994, respectively.
OPERATING EARNINGS: Operating earnings for Fiscal 1995 were $187.9
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.
23
<PAGE>
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.
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 and, on July 28, 1995, 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 closed during the second
quarter of Fiscal 1996.
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 totaling $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 of disposition of freestanding drug stores and
higher operating earnings, 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.
EBITDA-FIFO: EBITDA-FIFO was $268.9 million and $253.1 million in
Fiscal 1995 and Fiscal 1994, respectively.
FINANCIAL CONDITION
DEBT SERVICE: During the first quarter of Fiscal 1997, total debt
increased $24.5 million from Fiscal 1996 year end primarily due to borrowings
under the Working Capital Facility and debt accretion on the Deferred Coupon
Notes, partially offset by Term Loan repayments. Borrowings under the Working
Capital Facility were $106.5 million at May 3, 1997 and have decreased to
$70.5 million at June 12, 1997.
During the second quarter of Fiscal 1997, the Company sold four of
its 12 stores that it announced for divestiture at the end of Fiscal 1996
for $14.9 million. The proceeds were used to paydown a portion of the
Working Capital Facility.
During Fiscal 1996, total debt decreased $6.3 million from Fiscal 1995
year end primarily due to Term Loan repayments of $44.8 million, offset by
borrowings under the Working Capital Facility and debt accretion on the
Deferred Coupon Notes. Borrowings under the Working Capital Facility were
$73.5 million at February 1, 1997. During the third quarter of Fiscal 1996,
the Company sold three of its supermarket properties for $19.3 million, net
of fees of $1.4 million and income taxes of $0.7 million and simultaneously
leased back the properties. The net proceeds were used to paydown debt,
primarily the Working Capital Facility.
24
<PAGE>
During Fiscal 1996, Pathmark twice amended its existing Bank Credit
Agreement. In conjunction with the reacquisition of the Plainbridge capital
stock, the outstanding obligations of Plainbridge under its bank credit
agreement were satisfied by the Company and the Plainbridge bank 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 (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. In
December 1996, the Company amended its Bank Credit Agreement with existing
lenders modifying certain of its covenants, including those concerning the
generation of minimum levels of cash flow (as defined), minimum interest
coverage and maximum leverage rates.
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 parent's
indebtedness.
The indebtedness under the Working Capital Facility and the Term Loan
bear interest at floating rates and cash interest payments on that
indebtedness may vary in future years. The Company does not currently
maintain any interest rate hedging arrangements due to the reasonable risk
that near term interest rates will not rise significantly. The Company is
continuously evaluating this risk and will implement interest rate hedging
arrangements if deemed appropriate.
The majority of the cash interest payments are scheduled in the second
and fourth quarters.
The amount of principal payments required each year on outstanding
long-term debt (excluding the original issue discount with respect to the
Deferred Coupon Notes) are as follows (dollars in millions):
Principal
Fiscal Years Payments
------------ --------
1997(a).................................... $ 94.4
1998....................................... 155.7
1999....................................... 127.2
2000....................................... 50.6
2001....................................... 50.0
2002....................................... 195.8
2003....................................... 610.9
- ----------
(a) Subsequent to May 3, 1997.
LIQUIDITY:
The consolidated financial statements of the Company indicate that, at
May 3, 1997, current liabilities exceeded current assets by $207.5 million
and stockholder's deficit was $1.05 billion. Management believes that cash
flows generated from operations, supplemented by the unused borrowing
capacity under the Working Capital Facility and the availability of capital
lease financing will be sufficient to pay the Company's debts as they come
due, provide for its capital expenditure program and meets its other cash
requirements.
The Company believes that it will be able to make the scheduled
payments or refinance its obligations with respect to its indebtedness
through a combination of operating funds and borrowing facilities. Future
refinancing will be necessary if the Company's cash flow from operations is
not sufficient to meet its debt service requirements related to the maturity
of a portion of the Term Loan, Working Capital Facility and certain mortgages
in Fiscal 1998, the amortization and subsequent maturity of the Term Loan in
Fiscal 1999
25
<PAGE>
and the maturity of the Subordinated Notes and Subordinated Debentures in
Fiscal 2002. The Company expects that it will be necessary to refinance all
or a portion of the Senior Subordinated Notes and the Deferred Coupon Notes
due in Fiscal 2003. The Company may undertake a refinancing of some or all of
such indebtedness sometime prior to its maturity. The Bank Credit Agreement
includes an annual cleandown provision requiring borrowings under the
Company's Working Capital Facility not to exceed $60.0 million for a period
of 30 consecutive days. The Company was in compliance with its various debt
covenants at May 3, 1997, and, based on management's operating projections
for Fiscal 1997, the Company believes that it will be able to satisfy this
cleandown provision and continue to be in compliance with its other debt
covenants. The Company's ability to make scheduled payments, to refinance or
otherwise meet its obligations with respect to its indebtedness depends on
its financial and operating performance, which in turn, is subject to
prevailing economic conditions and to financial, business and other factors
beyond its control. Although the Company's cash flow from its operations and
borrowings has been sufficient to meet its debt service obligations, there
can be no assurance that the Company's operating results will continue to be
sufficient or that future borrowing facilities will be available for payment
or refinancing of the Company's indebtedness.
On May 27, 1997, The Chase Manhattan Bank committed, subject to the
execution of a definitive credit agreement, to provide to the Company senior
secured facilities in an aggregate principal amount of $500 million pursuant
to which the Company will repay in full all amounts outstanding under its
existing Bank Credit Agreement. The senior secured facilities include two
term facilities in an aggregate principal amount of $300 million and a
revolving credit facility in the aggregate principal amount of $200 million.
The Company believes it will successfully refinance its existing Bank Credit
Agreement, however, there can be no assurances that the refinancing will
occur.
While it is the Company's intention to enter into other refinancings
that it considers advantageous, there can be no assurances that the
prevailing market conditions will be favorable to the Company. In the event
the Company obtains any future refinancing on less than favorable terms, the
holders of outstanding indebtedness could experience increased credit risk
and could experience a decrease in the market value of their investment,
because the Company might be forced to operate under terms that would
restrict its operations and might find its cash flow reduced.
CAPITAL EXPENDITURES: Capital expenditures for the first quarter of
Fiscal 1997, including property acquired under capital leases, were $11.8
million compared to $15.2 million for the prior year. During the first
quarter of Fiscal 1997, the Company opened one new Pathmark 2000 format
store, completed one enlargement to an existing supermarket and closed one of
the 12 stores announced for divestiture at the end of Fiscal 1996. Subsequent
to the first quarter of Fiscal 1997, the Company opened one new Pathmark 2000
format store and sold or closed six of the 12 stores announced for
divestiture. During the remainder of Fiscal 1997, the Company plans to open
one new Pathmark 2000 format store and to complete up to an aggregate of nine
major renovations and enlargements.
Capital expenditures for Fiscal 1996, including property acquired under
capital leases, were $94.1 million compared to $110.6 million for Fiscal 1995
and $105.2 for Fiscal 1994. During Fiscal 1996, the Company opened four new
Pathmark 2000 format stores, two of which replaced smaller stores, and
completed 21 major renovations and enlargements.
CASH FLOWS: Cash provided by operating activities amounted to $5.1
million in the first quarter of Fiscal 1997 compared to $11.8 million in the
prior year. The decrease in net cash provided by operating activities is
primarily due to a decline in cash provided by operating assets and
liabilities and an increase in the net loss. Cash used for investing
activities was $3.8 million in the first quarter of Fiscal 1997 compared to
$4.1 million in the prior year, primarily due to expenditures of property and
equipment, partially offset by proceeds from property dispositions. Cash
provided by financing activities was $2.7 million in the first quarter of
Fiscal 1997 compared to cash used for financing activities of $8.2 million in
the prior year. The increase in cash provided by financing activities is
primarily due to an increase in borrowings under the Working Capital Facility.
26
<PAGE>
Cash provided by operating activities amounted to $73.6 million in
Fiscal 1996 compared to $118.3 million in Fiscal 1995. The decrease in net
cash provided by operating activities was primarily due to a decline in cash
provided by operating assets and liabilities and a decrease in net earnings.
Cash used for investing activities in Fiscal 1996 was $46.8 million due to
expenditures of property and equipment of $55.0 million, offset by proceeds
from property dispositions of $8.2 million. 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 home centers segment of $4.7 million. Cash used for financing
activities in Fiscal 1996 was $28.6 million compared to $128.0 million in
Fiscal 1995. The decrease in cash used for financing activities is primarily
due to an increase in borrowings under the Working Capital Facility, the
proceeds from the lease financing of three supermarket locations, a decrease
in dividends to PTK and a paydown of $25.0 million on the Term Loan in Fiscal
1995 in conjunction with the disposition of the freestanding drug stores.
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.
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.
27
<PAGE>
BUSINESS
Pathmark is a leading supermarket retailer in the Middle Atlantic States
and is the 15th largest supermarket retailer in the nation. At May 3, 1997,
Pathmark operated 144 supermarkets 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, selling
and total square footage for Pathmark's supermarkets.
Selling
Market Number of Sq. Ft Total Sq. Ft
Area Stores (000's) (000's)
---- ------ ------- -------
NJ, NY, PA, DE, CT 144 5,475 7,467
BUSINESS STRATEGY
Pathmark's business strategy is to increase sales, profitability and
market penetration in its existing markets by focusing on the following five
operating priorities: concentrate on core business, Pathmark "smart" service,
lower operating costs, spend capital wisely and have the right management team.
By concentrating on and implementing these five priorities, the Company expects
to accomplish its strategic goals (i) by providing superior perishable and
non-perishable merchandise, value and service to its customers through its
marketing, merchandising and customer service programs; (ii) through efficient
use of capital to renovate and enlarge its existing store base; and (iii)
through increased operating efficiencies.
MARKETING AND MERCHANDISING
SUPER CENTER FORMAT. The average Pathmark Super Center is approximately
39% 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 2000. Pathmark 2000 is a new, larger Super Center format designed
to provide Pathmark customers with a substantially greater selection of
quality perishable products. 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, particularly in the
perishable departments. All of Pathmark's new supermarkets and enlargements
completed in Fiscal 1996 employed the Pathmark 2000 concept, and Pathmark
expects that all new stores and enlargements thereafter will employ the
same concept. At May 3, 1997, 55 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, both in print and electronic
media. Merchandising flexibility and effectiveness is enhanced through the
increased utilization of a category management approach. In addition,
Pathmark offers for sale over 3,000 items through its private label
program.
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.
28
<PAGE>
STORE EXPANSION AND RENOVATION PROGRAM
NEW STORES, ENLARGEMENTS AND RENOVATIONS. During Fiscal 1996, Pathmark
opened four new Pathmark 2000s (two of which replaced smaller stores),
closed two other smaller stores, and completed 16 renovations and five
enlargements. During the fiscal year ending January 31, 1998 ("Fiscal
1997"), Pathmark plans to open up to three new Pathmark 2000s (two of which
have already opened), and to complete up to an aggregate of ten renovations
and enlargements.
Pathmark recognizes the importance of keeping its stores looking fresh and
up-to-date; thus, each store typically receives a renovation or enlargement
every five years. At the end of Fiscal 1996, Pathmark derived approximately
76% of its supermarket sales from stores that were opened, enlarged or
renovated during the last five years.
CORE MARKET FOCUS. Pathmark has identified over 50 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. All Pathmark supermarket checkout terminals have
third-generation 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 consumer 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.
COST REDUCTION. During the fourth quarter of Fiscal 1996, Pathmark, in an
effort to reduce its costs, effectuated a 25% reduction in administrative
headcount and held for divestiture 12 supermarkets, principally in its
southern region. Currently, seven of the 12 stores held for divestiture
have been either sold or closed.
29
<PAGE>
PATHMARK SUPERMARKETS
Pathmark operated 144 supermarkets at May 3, 1997. Super Centers
accounted for approximately 97% of Pathmark's supermarket sales for Fiscal
1996. The following table presents selected data respecting supermarket sales
and stores for the last five fiscal years.
<TABLE>
<CAPTION>
Fiscal Years
-----------------------------------------------------------
1996 1995(a) 1994 1993 1992
---- ------- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Supermarket sales................................ $3,701 $3,853 $3,785 $3,839 $3,942
Average sales per Supermarket.................... 26.1 26.4(b) 25.9 25.4 24.7
Number of Supermarkets:
Renovations(c)............................... 16 14 14 12 8
Enlargements(d).............................. 5 4 11 5 10
Opened....................................... 4 5 4 4 3
Closed....................................... 4 4 6 5 3
Type of Supermarket(e):
Pathmark 2000................................ 53 44 29 10 2
Super Center................................. 86 95 108 128 137
Conventional................................. 5 5 6 7 7
Total Supermarkets Open at Year End.......... 144 144 143 145 146
- ------------
</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) Renovations involve an investment of $350,000 or more and in Fiscal 1996
averaged nearly $1.5 million per store.
(d) Enlargements involve the addition of selling space and in Fiscal 1996
averaged an investment in excess of $3.7 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 51,900 square feet in size and generating high
average sales volume of approximately $26.1 million per store ($690 per
selling square foot) for stores open for all of Fiscal 1996. Pathmark's 144
supermarkets at May 3, 1997 ranged from 26,000 to 66,500 square feet in size
and included 132 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. All but seven supermarkets contained in-store pharmacy
departments at year end.
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 55 "Pathmark 2000" stores.
The majority of Super Centers were created through the enlargement or
renovation of existing stores. 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, videotape rental, a pharmacy,
expanded produce department, meat department, cheese shop, bakery, seafood,
service delicatessen department, expanded health and beauty care department
and book department. All Super Centers have EFT and credit transaction
capability at their checkout terminals, and 130 supermarkets also feature
in-store automated teller machines. During 1996, the Company entered into
master licensing agreements with two regional banking institutions to place
up to 114 in-store banks in Pathmark supermarkets over the next three years.
Each bank, which occupies approximately 400 square feet, offers a full array
of financial services and is open seven days a week. The license agreements
have an initial term of five years with optional renewal periods. At May 3,
1997, 24 stores had in-store banks within them and Pathmark expects to have
45 additional in-store banks by the end of Fiscal 1997.
30
<PAGE>
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. The average
sales for Pathmark 2000 stores in Fiscal 1996 was $28.5 million compared to
$25.2 million for the balance of the chain. 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. For example, Pathmark has
recently introduced "GREAT" service, a customer service program emphasizing
proactive inter-personal communication between store associates and
customers. All of Pathmark's new supermarkets and a majority of supermarket
enlargements completed in Fiscal 1996 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 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 operating
margins by achieving economies of scale in merchandising, advertising,
distribution and supervision. During the five years ending with Fiscal 1996,
Pathmark completed 99 renovations and enlargements and opened 20 new
supermarkets. At the close of Fiscal 1996, sales in these stores accounted
for approximately 76% of its total supermarket sales. Pathmark currently
expects to open up to three new Pathmark "2000" Super Centers during Fiscal
1997 (two of which have already opened), none of which will replace smaller
stores, and to complete up to ten renovations and enlargements.
ADVERTISING AND PROMOTION
As part of its marketing strategy, Pathmark emphasizes value through
its competitive pricing and 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
in stores, radio and television. Several years ago, Pathmark introduced
"Smart Coupons" in its advertisements. With "Smart Coupons", customers no
longer are required to 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. All Pathmark supermarket checkout terminals have
third-generation 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 have not only led to lower
labor costs, improved price control, shelf allocation and quicker customer
check-out, but have also assisted in the
31
<PAGE>
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 IBM Company. Under the agreement, IBM
has taken over Pathmark's data center operations, mainframe processing and
information system functions, (formerly performed by approximately 150
employees) and is providing business applications and systems designed to
enhance Pathmark's customer service and efficiency.
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.
<TABLE>
<CAPTION>
DISTRIBUTION FACILITIES
SQUARE YEAR
LOCATION PRODUCT LINE FOOTAGE OPENED
-------- ------------ ------- ------
<S> <C> <C> <C>
Woodbridge, NJ(1)......... Dry Grocery 475,000 1968
Edison, NJ(2)............. General Merchandise, 266,000 1980
Health and Beauty Care
Products,
Pharmaceuticals, Tobacco
Woodbridge, NJ(1)......... Meat, Dairy, Deli, Produce 255,000 1970
Dayton, NJ(2)............. Frozen Food Distribution Center 112,000 1994
No. Brunswick, NJ(2)...... Dry Grocery 425,000 1996
PROCESSING FACILITIES
SQUARE YEAR
LOCATION PRODUCTS PROCESSED FOOTAGE OPENED
-------- ------------ ------- ------
Somerset, NJ(3)........... Delicatessen Products 16,000 1976
Avenel, NJ(4)............. Banana Ripening 30,000 1984
- -----------
(1) Owned by Pathmark.
(2) Leased by Pathmark.
(3) Owned by Chefmark.
(4) Leased by Chefmark.
</TABLE>
32
<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 and distribution 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 May 3, 1997, the Company employed approximately 31,000 people, of whom
approximately 20,000 were employed on a part-time basis.
Approximately 89% of the Company's employees are covered by 28
collective bargaining agreements (typically having three or four year terms)
negotiated with approximately 17 different local unions. During Fiscal 1997,
eight contracts, covering approximately 13,000 Pathmark associates in 92
stores, will expire. The Company does not anticipate any difficulty in
renegotiating these contracts.
The Company 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 5.5 million square feet. Twenty of the supermarkets are owned
by Pathmark and the remaining 124 are leased. These supermarkets either are
freestanding stores or are located in shopping centers. Twenty-nine 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, NJ in leased
premises totaling approximately 150,000 square feet in size.
33
<PAGE>
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 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
The holders of SMG-II Preferred Stock are a party with the holders of
SMG-II Common Stock to the 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
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 662/3% 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
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 Stockholders Agreement also contains an agreement of the stockholders
of SMG-II with respect to the composition of SMG-II's and Holdings' Board 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' Board 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 have the ability to control
the Company. The Merrill Lynch Investors are controlled by ML&Co.
In addition to the foregoing, the 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 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.
In October 1996, pursuant to the Donald Agreement, James L. Donald, an
Officer and Director, was provided by Pathmark with a four-year loan of $4.5
million. The foregoing indebtedness to Pathmark is evidenced by 16 full
recourse promissory notes for $281,250 each bearing interest at the
short-term or intermediate-term federal rate in effect as of the date of each
note (effective rate of 6%) and secured by the Equity Strip and the Option.
Under the Donald Agreement, one promissory note will be forgiven at the end
of each quarter of a year during which Mr. Donald remains employed by
Pathmark. In the event that Mr. Donald resigns his employment without Good
Reason or is terminated for Cause or in the event of his death, the
outstanding portion of the loan will become immediately due and payable. As
of May 3, 1997, Mr. Donald remained indebted to the Company in the amount of
$3,937,500.
34
<PAGE>
The Company retained John W. Boyle, a Director of the Company, to act as
its interim Chairman and Chief Executive Officer for the Transition Period.
Under the terms of the consulting arrangement between the Company and Mr.
Boyle, the Company paid Mr. Boyle a consulting fee of $41,667 per month
($288,980 in the aggregate) plus living and travel expenses during the
Transition Period. In addition, Mr. Boyle received a completion bonus of
$100,000 when Mr. Donald commenced employment with the Company.
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 prescribed 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 May 3, 1997, Mr. Rubenstein remained
indebted to Holdings in the amount of $100,000.
MANAGEMENT
DIRECTORS OF THE COMPANY
The following table sets forth the name, 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 (1)
------------------------------------------------------- ------------
<S> <C>
MATTHIAS BOWMAN, 48, Chief Executive Officer of Merrill Lynch Capital Partners, Inc., 1997
("MLCP"), an investment firm affiliated with Merrill Lynch & Co., ("ML& Co."), the
financial services concern, since 1994; Vice Chairman of Investment Banking with
ML&Co. since 1993; Managing Director of Merrill Lynch, Pierce, Fenner & Smith
Incorporated since at least 1992. Mr. Bowman is also a Director of Rykoff-Sexton, Inc.
JOHN W. BOYLE, 68, Chairman and Chief Executive Officer of the Company from March 1996 to 1995
October 1996 (Retired); Vice Chairman (retired), Eckerd Corporation, a drug store
chain, between 1983 and 1995. Mr. Boyle is also a Director of United Artists Theater
Circuit, Inc.(2)
JAMES J. BURKE, JR., 45, Managing Partner and a Director of Stonington Partners, Inc. 1988
("SPI"), a private investment firm, since 1993, and a Director of 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 ML&Co. until 1994. Mr. Burke
is also a Director of Ann Taylor Stores Corp., Borg-Warner Security Corp., Education
Management Corp. and United Artists Theater Circuit, Inc.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR OF THE
COMPANY
NAME, AGE, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS SINCE (1)
------------------------------------------------------- -----------
<S> <C>
JAMES DONALD, 43, Chairman, President and Chief Executive Officer of the Company (since 1996
October 1996); Senior Vice President and General Manager, Safeway, Inc., Eastern
Division from February 1994 until October 1996; Vice President-Marketing, Wal-mart
Corp. prior thereto(3).
U. PETER C. GUMMESON, 38, Managing Director of Alliance Corporate Finance Group, 1996
Incorporated, an investment firm affiliated with the Equitable Life Assurance Society
of the United States (the "Equitable") and an investment officer of the Equitable.
SUNIL C. KHANNA, 40, Principal of SPI since 1993; Principal of MLCP from 1993 to 1994; 1987
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 Rykoff-Sexton, Inc.
STEPHEN M. McLEAN, 39, Partner and a Director of SPI since 1993; Partner of MLCP from 1993 1987
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. and Dictaphone Corporation.
ROBERT G. MILLER, 53, Chairman & Chief Executive Officer of Fred Meyer, Inc., a 1997
diversified retailer. Mr. Miller is also a Director of PacifiCorp.
JERRY G. RUBENSTEIN, 67, Managing Partner, Omni Management Associates; Consultant to MLCP 1996
since 1988.
</TABLE>
- ------------------
(1) Includes service with Pathmark's predecessor.
(2) Mr. Boyle was retained on March 20, 1996 to act as the Company's interim
Chairman and Chief Executive Officer. He resigned said position on
October 7, 1996.
(3) Mr. Donald was elected as Chairman, President and Chief Executive Officer
of the Company effective October 8, 1996.
Pursuant to the Stockholders Agreement, the ML Investors 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 have
the ability to control the Company. Currently, six of the persons serving as
directors were designated by the Merrill Lynch Investors (Messrs. Bowman,
Boyle, Burke, Khanna, McLean and Rubenstein), one was designated by the
Management Investors (Mr. Donald) and one was designated by the Equitable
Investors (Mr. Gummeson). Mr. Miller was designated by the three investor
groups. No family relationship exists between any director and any other
director or executive officer of the Company.
36
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth the name, 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>
JAMES DONALD 43 Chairman, President and Chief Executive Officer since 1996
October 1996(2)
NEILL CROWLEY 54 Executive Vice President--Retail Services since October 1994
1996; Executive Vice President--Distribution since 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 43 Executive Vice President and Chief Financial Officer 1994
since October 1994. Senior Vice President and Chief
Financial Officer of Dart Group Corporation (a
diversified retailer) prior thereto.
JOSEPH W. ADELHARDT 50 Senior Vice President and Controller since January 1996; 1987
Vice President and Controller prior thereto. Mr.
Adelhardt joined the Company in 1976.
HARVEY M. GUTMAN 51 Senior Vice President--Retail Development. Mr. Gutman 1990
joined the Company in 1976.
ROBERT JOYCE 51 Senior Vice President (since October 1996); Executive 1989
Vice President--Operations (from January 1996 to October
1996; Senior Vice President--Operations--from March 1995
to January 1996; Senior Vice President--Administration
prior thereto. Mr. Joyce joined the Company in 1963.
RONALD RALLO 59 Senior Vice President--Merchandising (since October 1993
1996); Executive Vice President--Merchandising (from May
1995 to October 1996); 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.
JOHN SHEEHAN 39 Senior Vice President--Operations (since October 1996); 1996
Director of Operations, Albertsons, Inc. prior thereto.
MARC A. STRASSLER 48 Vice President, Secretary and General Counsel. Mr. 1987
Strassler joined the Company in 1974.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
OFFICER OF THE
COMPANY
NAME AGE POSITIONS AND OFFICE SINCE(1)
------ ----- ---------------------- ---------------
<S> <C> <C> <C>
FRANK VITRANO 41 Vice President and Treasurer since December 1996; 1996
Treasurer from July 1995 to December 1996; Director-Risk
management prior thereto. Mr. Vitrano joined the
Company in 1972.
MYRON D. WAXBERG 63 Vice President and General Counsel--Real Estate Mr. 1991
Waxberg joined the Company in 1976.
</TABLE>
-----------
(1) Includes service with Pathmark's predecessor.
(2) Member of the Company's Board of Directors.
EXECUTIVE COMPENSATION.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- -------------------------
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPENSATION STOCK AWARDS OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) (1) ($) (2) (#) (3) ($) (4)
--------------------------- ---- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
James L. Donald(5)................. 1996 193,846 1,175,000 340,021 3,400,000 100,000 16,821
Chairman, President and Chief
Executive Officer
Jack Futterman(6).................. 1996 70,673 -- -- -- -- 2,545,000
Retired Chairman, President 1995 526,442 332,658 -- -- -- 5,250
and CEO 1994 491,346 92,127 -- -- -- 5,250
John W. Boyle(5)................... 1996 -- -- -- -- 3,000 388,980
Retired Interim Chairman,
President and CEO
Ron Marshall....................... 1996 300,000 36,000 49,177 -- -- 5,250
Executive Vice President 1995 280,289 168,173 -- -- -- --
and Chief Financial Officer 1994 89,904 53,942 -- -- 2,000 --
Neill Crowley...................... 1996 253,750 30,450 -- -- -- 5,250
Executive Vice President- 1995 247,212 112,241 -- -- -- 4,341
Retail Services 1994 168,712 21,089 -- -- 1,000 --
Ronald Rallo....................... 1996 245,000 29,400 4,389 -- -- 5,250
Senior Vice President- 1995 227,500 113,585 4,399 -- -- 5,250
Merchandising 1994 200,385 21,141 4,265 -- -- 5,250
Robert Joyce....................... 1996 223,846 26,862 2,195 -- -- 5,250
Senior Vice President 1995 205,437 97,334 2,200 -- 250 5,250
1994 169,125 21,141 2,133 -- -- 5,250
</TABLE>
-----------
(1) Represents (i) with respect to Mr. Donald, payment of $58,771 to Mr. Donald
as reimbursement of legal expenses in connection with the negotiation of
his employment agreement and forgiveness of a loan payment due to the
Company of $281,250; (ii) with respect to Mr. Marshall, reimbursement of
relocation expenses; and (iii) with respect to Messrs. Rallo and Joyce,
payments as reimbursement for interest paid to Holdings for loans each 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
deductions available as a result of the payment of such interest and taxes.
(2) Includes accumulated dividends of $1,039,440 with respect to an award of
8,520 restricted shares of SMG-II Series C Preferred Stock.
38
<PAGE>
(3) Stock options shown were granted (i) to Mr. Donald pursuant to the
Employment Agreement dated October 8, 1996 among the Company, SMG-II and
Mr. Donald (the "Donald Agreement"); and (ii) to Messrs. Boyle, Marshall,
Crowley and Joyce pursuant to the Management Investors 1987 Stock Option
Plan of SMG-II (the "Plan"). All options relate to shares of SMG-II Class A
Common Stock.
(4) Represents (i) with respect to Mr. Donald, payments of $11,756 on behalf of
Mr. Donald for temporary housing and $5,065 for a term life insurance
premium on Mr. Donald's life; (ii) with respect to Mr. Futterman, payments
of $4,594 representing the Company's matching contribution to the SGC
Savings Plan, $2,128,150 paid to Mr. Futterman pursuant to a Retirement
Agreement dated March 20, 1996 among Mr. Futterman, the Company and SMG-II
(the "Retirement Agreement"), and $412,256 paid pursuant to Mr. Futterman's
Supplemental Retirement Agreement; (iii) with respect to Mr. Boyle,
payments of $288,980 representing a consulting fee for acting as the
Company's interim Chief Executive Officer payable pursuant to a Consulting
Agreement dated March 20, 1996 between the Company and Mr. Boyle, and a
completion bonus of $100,000 in connection with the identification and
hiring of Mr. Donald as Chief Executive Officer; and (iv) with respect to
the other four named executive officers, the Company's matching
contribution under the SGC Savings Plan.
(5) Mr. Donald was employed by the Company on October 8, 1996 as Chairman,
President and CEO replacing Mr. Boyle who acted as interim Chairman and
CEO from March 20, 1996 to October 7, 1996.
(6) Mr. Futterman retired on March 20, 1996.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
INDIVIDUAL GRANTS STOCK PRICE APPRECIATION
FOR OPTION TERM
---------------------------------------------------------------------------- ----------------------------
% of Total
Options/
SARs
Options/ Granted to Exercise
SARs Granted Employees or Base Expiration
Name (#) in Fiscal Price Date 5% ($) 10% ($)
Year ($/Sh)
---- ------------- --------- -------- ----------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
James L. Donald..... 100,000 95.7 (1) (2) 6,288,946 15,937,425
John W. Boyle....... 3,000 (3) 2.9 100 5/02/06 188,668 478,123
</TABLE>
(1) The stock option to purchase an aggregate of 100,000 shares of SMG-II Class
A Common Stock granted to Mr. Donald by SMG-II consists of component A
("Option Component A") covering 50,000 shares of SMG-II Class A Common
Stock and component B ("Option Component B") covering the remaining 50,000
shares of Common Stock. Subject to the vesting terms described below,
Option Component A has an initial per share exercise price of $100 per
share. The per share exercise price of Option Component A will increase to
$125 per share on the first day of the Fiscal Year beginning in calendar
year 2000 ("Fiscal Year 2000") and to $150 per share on the first day of
the Fiscal Year beginning in calendar year 2001 ("Fiscal Year 2001").
Subject to the vesting terms described below, Option Component B has an
initial per share exercise price of $100 per share. The per share exercise
price of Option Component B will increase to $150 per share on the first
day of the Fiscal Year beginning in calendar year 1999; to $250 per share
on the first day of Fiscal Year 2000; and to $350 per share on the first
day of Fiscal Year 2001. Mr. Donald will vest in 25% of the Option
Component A and in 25% of the Option Component B on the Effective Date and
on each of the first through third anniversaries of the Effective Date,
provided that the Optionee is in the employ of the Company on each such
date. Upon the occurrence of a Minimum IPO (as defined below) while the
Optionee is in the employ of the Company, the entire Option shall
immediately and fully vest. In addition, the Option will immediately and
fully vest upon the occurrence of a Change in Control occurring prior to a
Termination Event. Except for purposes of tag-along rights and piggyback
rights under the Stockholders Agreement, the Option shall not be
exercisable (even though the Option or a portion thereof is vested) unless
and until it becomes exercisable in accordance with the following
provisions:
39
<PAGE>
(i) The Exercisable Percentage as defined below) of each component of the
Option will become exercisable if the ML Investors (as defined in the
Stockholders Agreement) have a Realization Event (as defined below) in
respect of the SMG-II Class A Common Stock at a per share price in
excess of the amounts (the "Target Prices") set forth below :
PERIOD OF TIME TARGET PRICE PER TARGET PRICE PER
SHARE/OPTION SHARE/OPTION COMPONENT
COMPONENT A B
-------------------- ----------------------- ------------------------
Prior to 2/1/00 $ 100 $ 150
2/1/00 to 1/31/01 $ 125 $ 250
2/1/01 and after $ 150 $ 350
(ii)Notwithstanding the above, if the ML Investors have a Realization Event
for more than 15% of the shares of SMG-II Class A Common Stock
beneficially owned by them on the date Mr. Donald is granted an Option
at a per share price in excess of the Target Price described above
applicable to the date when such Realization Event occurs, then the
components of the Option for which such Target Prices have been
achieved shall become immediately vested and exercisable and the
exercise price shall not thereafter increase.
(2) The Option will expire on October 8, 2001 to the extent not previously
exercised (the "Expiration Date"); provided, however, that the Expiration
Date for the portion of Option Component A and Option Component B which is
vested prior to such Expiration Date will be extended until October 8, 2003
if such vested portion of Option Component A and Option Component B, as the
case may be, has not become exercisable by such initial Expiration Date.
During the period of such extension, the per share exercise price of Option
Component A and Option Component B, as the case may be (to the extent not
previously exercised), will increase at the end of each month during such
extension period at an annual rate of 10%.
(3) Options shown were granted pursuant to the Plan and relate to shares of
Class A Common Stock of SMG-II. Options are fully vested and exercisable at
the time of grant, provided that no exercise may occur unless a
registration statement has been filed under the Securities Act of 1933 with
respect to the shares subject to the option or the Compensation Committee
of the Board of Directors of SMG-II determines that an exemption from
registration is available.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES(1)
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS/SARS
AT FY-END (#)
EXERCISABLE/
NAME UNEXERCISABLE
---- -------------
John W. Boyle................................ 3,000/0
Jack Futterman............................... 13,000/0
James Donald................................. 0/100,000
Neill Crowley................................ 1,000/0
Ron Marshall................................. 2,000/0
Ronald Rallo................................. 2,850/0
Robert Joyce................................. 2,500/0
--------
(1) Options shown were granted pursuant to the Plan (except with respect to
Mr. Donald) and relate to shares of Class A Common Stock of SMG-II. No
options were exercised in Fiscal 1996 by any of the above named executives.
40
<PAGE>
<TABLE>
<CAPTION>
PENSION PLAN TABLE(1)
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 1.33% 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 1997 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 equaled 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 1997. As of December 31, 1996, the following individuals had the
number of years of credited service indicated after their names: Mr.
Futterman, 22.8; Mr. Crowley, 1.5; Mr. Rallo, 30, Mr. Joyce, 26.7 and Mr.
Marshall, 1.0. Neither Mr. Donald nor Mr. Boyle had any credited service.
As described below in "Compensation Plans and Arrangements--Supplemental
Retirement Agreements", certain 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
certain of the executive officers named in the Summary Compensation Table, and
set forth below, which provide that said executive officers 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 Messrs. Joyce and 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 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
41
<PAGE>
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. 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.
EMPLOYMENT AGREEMENTS:
EMPLOYMENT AGREEMENT AMONG PATHMARK, SMG-II AND JAMES L. DONALD. On
October 8, 1996 (the "Effective Date"), the Company entered into the Donald
Agreement with Mr. James L. Donald pursuant to which Mr. Donald was elected
Chairman, President and Chief Executive Officer for a term of five years. The
Donald Agreement provides Mr. Donald with an initial annual base salary of
$600,000 and provides that he shall participate in the Pathmark Executive
Incentive Plan, under which Mr. Donald may earn an annual bonus of up to 125%
of his annual salary based on performance targets that are set by the Board.
For the partial fiscal year commencing on the Effective Date and ending on
February 1, 1997, the Donald Agreement guaranties Mr. Donald a minimum bonus
of $175,000 and, for the first full fiscal year during the term of the Donald
Agreement, Mr. Donald shall receive a minimum annual bonus of $425,000.
Furthermore, under the Donald Agreement, Mr. Donald is guaranteed an annual
bonus for each of the second, third and fourth full fiscal years of the term
of at least 25% of his base salary. The Donald Agreement provides Mr. Donald
with the right to defer up to 50% of his annual bonus and salary, which shall
be held in a grantor trust established by the Company. During the term of the
Donald Agreement, in addition to the base salary, bonus eligibility and other
customary annual benefits and perquisites that the Company generally provides
to its executive officers, the Company will provide Mr. Donald with a company
car and term life insurance in the amount of $4.5 million during the first
year and $3.2 million thereafter. The Company also reimbursed Mr. Donald for
the legal expenses incurred by him in the negotiation of the Donald
Agreement. Mr. Donald also received a one-time signing bonus of $1 million,
which is being amortized over the term of the Donald Agreement.
Furthermore, Mr. Donald received an equity package (the "Equity
Strip"), consisting of 8,520 restricted shares of a new series of SMG-II
Preferred Stock with a stated value of $200 per share and 19,851 restricted
shares of SMG-II Class A Common Stock, the terms of which are set forth in
the stock award agreement (the "Stock Award Agreement"). The Equity Strip,
which as of the Effective Date was valued by the Company at $3.4 million,
based upon an independent appraisal, will vest in its entirety upon the
occurrence of an Employment-Related Event, as defined in the Stock Award
Agreement, and will be forfeited in its entirety upon the occurrence of a
Termination Event, as defined in the Donald Agreement. The valuation of $3.4
million is being amortized by the Company over the term of the Donald
Agreement. The Preferred Stock ranks pari passu with the existing SMG-II
convertible preferred stock and will accrue dividends at a rate of 10% per
annum. The Preferred Stock will be convertible into Common Stock on a
one-for-one basis. As of the Effective Date, the Preferred Stock had
accumulated dividends of approximately $122 per share.
In addition, Mr. Donald received a stock option (the "Option") to
purchase an aggregate of 100,000 shares of SMG-II Class A Common Stock. The
Option consists of component A ("Option Component A") covering 50,000 shares
of SMG-II Class A Common Stock and component B ("Option Component B")
covering the remaining 50,000 shares of SMG-II Class A Common Stock. Any
terms used herein not otherwise defined shall have the meanings assigned to
them in the Donald Agreement. Option Component A shall have an initial per
share exercise price of $100 per share. The per share exercise price of
Option Component A will increase to $125 per share on the first day of the
Fiscal Year beginning in calendar year 2000 ("Fiscal Year 2000") and to $150
per share on the
42
<PAGE>
first day of the Fiscal Year beginning in calendar year 2001 ("Fiscal Year
2001"). Option Component B will have an initial per share exercise price of
$100 per share. The per share exercise price of Option Component B will
increase to $150 per share on the first
<PAGE>
day of the Fiscal Year beginning in calendar year 1999; to $250 per share on
the first day of Fiscal Year 2000; and to $350 per share on the first day of
Fiscal 2001. The Option will expire on the fifth anniversary of the Effective
Date to the extent not previously exercised (the "Expiration Date");
provided, however, that the Expiration Date for the portion of Option
Component A and Option Component B which is vested (as explained below)
immediately prior to such Expiration Date will be extended until the seventh
anniversary of the Effective Date if such vested portion of Option Component
A and Option Component B, as the case may be, has not become exercisable by
such initial Expiration Date. During the period of such extension, the per
share exercise price of Option Component A and Option Component B, as the
case may be (to the extent not previously exercised), will increase at the
end of each month during such extension period at an annual rate of 10%. Mr.
Donald will vest in 25% of Option Component A and in 25% of Option Component
B on the Effective Date and on each of the first through third anniversaries
of the Effective Date, provided that the Optionee is in the employ of
Pathmark on each such date. Upon the occurrence of a Minimum IPO (as defined
below) while the Optionee is in the employ of the Company, the entire Option
shall immediately and fully vest. In addition, the Option will immediately
and fully vest upon the occurrence of a Change in Control (as defined below)
occurring prior to the Termination Event (as defined below). If Mr. Donald's
employment with the Company should end as a result of a Termination Event,
then, as of the applicable date of termination, the entire Option (whether or
not then vested) will be immediately and irrevocably forfeited.
Except for purposes of tag-along rights under Article V of the
Stockholders Agreement and the piggyback rights under Article VI of the
Stockholders Agreement, the Option shall not be exercisable (even though the
Option or a portion thereof is vested) unless and until it becomes
exercisable in accordance with the following provisions:
(i) The Exercisable Percentage (as defined below) of each component of the
Option will become exercisable if the ML Investors (as defined in the
Stockholders Agreement) have a Realization Event (as defined below) in
respect of the Common Stock at a per share price in excess of the
amounts (the "Target Prices") set forth below :
PERIOD OF TIME TARGET PRICE PER TARGET PRICE PER
SHARE/OPTION SHARE/OPTION COMPONENT
COMPONENT A B
------------------ ----------------------- ------------------------
Prior to 2/1/00 $ 100 $ 150
2/1/00 to 1/31/01 $ 125 $ 250
2/1/01 and after $ 150 $ 350
(ii)Notwithstanding the above, if the ML Investors have a Realization Event
for more than 15% of the shares of Common Stock beneficially owned by
them on the date of grant and Option at a per share price in excess of
the Target Price described above applicable to the date when such
Realization Event occurs, then the components of the Option for which
such Target Prices have been achieved shall become immediately vested
and exercisable and the exercise price shall not thereafter increase.
In the event that Mr. Donald becomes entitled to any tag-along rights
under Section 5.6 or registration rights under Section 6.2 of the
Stockholders Agreement, he will be permitted to exercise his sale or transfer
rights with respect to the portion of the Option for which the Target Price
has been met. For purposes of Section 5.6(b) of the Stockholders Agreement,
100% of the portion of the Option for which the Target Amount has been
realized will be considered exercisable in order to determine the number of
shares to be included under Section 5.6(b) of the Stockholders Agreement. If,
prior to the Expiration Date, the Board determines that it is necessary or
desirable to list, register or qualify the shares of Common Stock subject to
the Option, and if such listing, registration or qualification is delayed
beyond the Expiration Date, the vested and exercisable portion of the Option
will remain exercisable until 30 days after such listing, registration, or
qualification is accomplished.
43
<PAGE>
Pursuant to the Donald Agreement, the Company lent Mr. Donald $4.5
million (the "Loan") evidenced by 16 separate promissory notes. Under the
terms of each note, if Mr. Donald is in full employment of the Company on a
quarterly anniversary of the Effective Date, Mr. Donald's obligation to pay
such note maturing on such date will be forgiven as to principal, but not any
then accrued and unpaid interest. In the event his employment ends at any
time during the term of the Donald Agreement prior to a Change in Control as
a result of a Termination Event, each note will become immediately due and
payable as to all outstanding principal and all accrued and unpaid interest.
These notes bear interest at an effective rate of 6%. The Loan is on a full
recourse basis and secured by the Equity Strip, the Option and any shares
acquired upon exercise of the Option.
In the event of Mr. Donald's Involuntary Termination, Pathmark will pay
him (w) the full amount of any accrued but unpaid base salary, plus a cash
payment (calculated on the basis of the base salary then in effect) for all
unused vacation time which Mr. Donald may have accrued as of the date of
Involuntary Termination; (x) the amount of any earned but unpaid Annual Bonus
for any Fiscal Year of Pathmark ended on or prior to the date of Involuntary
Termination; (y) any unpaid reimbursement for business expenses; and (z) a
severance amount equal to four times Mr. Donald's annual rate of salary,
based upon the annual rate then in effect immediately prior to the date of
termination, payable in monthly installments over 24 months. In addition, in
the event of an Involuntary Termination, Mr. Donald and his eligible
dependents shall continue to be eligible to participate in the medical,
dental, health and life insurance plans applicable to Mr. Donald immediately
prior to the Involuntary Termination on the same terms and conditions in
effect immediately prior to such Involuntary Termination until the earliest
to occur of (i) the end of the 24-month period after the date of termination,
the date Mr. Donald becomes eligible to be covered under the benefit plans of
a subsequent employer and (iii) the date Mr. Donald breaches any of the
protective covenants described below. Furthermore, in the event of an
Involuntary Termination, the Equity Strip will automatically and without the
need for further action or consent by Pathmark become fully vested in the
manner provided by the Stock Award Agreement, and the Option will continue to
remain outstanding to the extent provided by the Option Agreement. All notes
not previously delivered to Mr. Donald will automatically and without the
need for further action or consent by Pathmark be delivered by the escrow
agent to Mr. Donald marked "Paid in Full" upon payment by Mr. Donald of any
then accrued but unpaid interest on the Loan. During the 30-day period
beginning 6 months after a Change in Control, Mr. Donald shall be eligible to
resign from the Company for no stated reason and receive all the amounts
listed in clauses (w), (x), (y) and (z) above. Any such resignation in such
30-day period following a Change in Control shall be treated as an
Involuntary Termination for all purposes of this Agreement.
In the event Mr. Donald's employment ends at any time during the term
as a result of a Termination Event, the Company shall pay him only the
amounts decried in clauses (w), (x) and (y) above, and Mr. Donald will
immediately forfeit the Equity Strip and the Option. In addition, each note
will become immediately due and payable as to all outstanding principal and
all accrued and unpaid interest if Mr. Donald's employment ends prior to a
Change in Control as a result of a Termination Event.
Although, in the event of an Involuntary Termination, Mr. Donald has no
duty to mitigate the severance amount by seeking new employment, any
severance amount payable during the second year of the severance period shall
be reduced by any compensation or benefits Mr. Donald earns in connection
with any employment by another employer.
The Donald Agreement includes protective covenants that prohibit Mr.
Donald from engaging (i) in any activity in competition with Pathmark, or any
parent or subsidiary thereof or (ii) in soliciting employees or customers of
Pathmark, or any parent or subsidiary thereof, during his term of employment
and up to two years thereafter. The Donald Agreement also includes a
confidentiality clause which prohibits Mr. Donald from disclosing any
confidential information regarding Pathmark.
44
<PAGE>
The following definitions apply to the terms of the Donald Agreement:
"CAUSE" means the termination of Mr. Donald's employment with Pathmark
because of (i) his willful and repeated failure (other than by reason of
incapacity due to physical or mental illness) to perform the material duties
of his employment after notice from Pathmark of such failure and his
inability or unwillingness to correct such failure within 30 days of such
notice, (ii) his conviction of a felony or plea of no contest to a felony or
(iii) perpetration by Mr. Donald of a material dishonest act or fraud against
Pathmark or any parent or subsidiary thereof; provided however, that, before
Pathmark may terminate Mr. Donald for Cause, the Board shall deliver to him a
written notice of Pathmark's intent to terminate him for Cause, including the
reasons for such termination, and Pathmark must provide him an opportunity to
meet once with the Board prior to such termination.
"CHANGE IN CONTROL" means the acquisition by a person (other than a person or
group of persons that beneficially owns an equity interest in SMG-II or
Pathmark on the Effective Date or any person controlled thereby) of more than
50% control of the voting securities of SMG-II as a result of a sale of
voting securities after the Effective Date by the persons who, on the
Effective Date, have a beneficial interest in such voting securities, but
shall not include any change in the ownership of Pathmark or SMG-II resulting
from a public offering.
"COMMON STOCK" means SMG-II Class A Common Stock, par value $0.01 per share.
"EXERCISABLE PERCENTAGE" means (i) in connection with a Third Party Sale, the
percentage of the shares of Common Stock subject to the Option that Mr.
Donald is entitled to sell pursuant to the exercise of his "tag-along" rights
under the Stockholders Agreement and (ii) in connection with a Public
Offering, the percentage of the shares of Common Stock then beneficially
owned by the ML Investors (as defined in the Stockholders Agreement) which
are sold in the Public Offering.
"GOOD REASON" means Mr. Donald's resignation because of (i) the failure of
Pathmark to pay any material amount of compensation to Mr. Donald when due,
(ii) a material adverse reduction or material adverse diminution in Mr.
Donald's titles, duties, positions or responsibilities with Pathmark,
including, but not limited to, failure by Pathmark to elect Mr. Donald to the
office of Chief Executive Officer, or (iii) any other material breach by
Pathmark of the Donald Agreement. In order to assert Good Reason, Mr. Donald
must provide written notification of his intention to resign within 30
business days after he knows or has reason to know the occurrence of any such
event. After Mr. Donald provides such written notice to Pathmark, Pathmark
shall have 15 days from the date of receipt of such notice to effect a cure
of the condition constituting Good Reason.
"INVOLUNTARY TERMINATION" means (i) the termination of Mr. Donald's
employment by Pathmark other than for Cause or disability or (ii) Mr.
Donald's resignation of employment with Pathmark for Good Reason.
"MINIMUM IPO" means a Public Offering of the Common Stock after the Date of
Grant at the conclusion of which the aggregate price for all the shares of
Common Stock having been sold to the public in such Public Offering, plus the
aggregate offering price for all shares of Common Stock sold in all prior
Public Offerings of Common Stock occurring after the date that Mr. Donald is
granted any Option, exceeds $50 million.
"PREFERRED STOCK" shall mean a new series of convertible preferred stock
that will be issued for purposes of the Donald Agreement.
"PUBLIC OFFERING" means a public offering of the Common Stock pursuant to an
effective registration statement under the Securities Act.
45
<PAGE>
"REALIZATION EVENT" means the receipt by the ML Investors (as defined in
the Stockholders Agreement) of cash or property from an unrelated third
party as consideration for the sale of shares of Common Stock then
beneficially owned by the ML Investors. For purposes of the Donald
Agreement, any property other than cash received by the ML Investors in
the Realization Event shall have the value ascribed to such property by
the parties to such sale.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"STOCKHOLDERS AGREEMENT" shall mean the Stockholders Agreement, dated as
of February 4, 1991, as amended, among SMG-II and its stockholders.
"TERMINATION EVENT" shall mean Mr. Donald's resignation without Good
Reason or a termination by Pathmark for Cause.
"Third Party Sale" means a sale of Common Stock subject to Section 5.6 of
the Stockholders Agreement.
OTHER EXECUTIVE 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 and Mr. Joyce,
respectively. The four above mentioned employment agreements are hereinafter
referred to collectively as the "Employment Agreements". Each of the
Employment Agreements is for an initial term of two years. The term of each
Employment Agreement is automatically extended for an additional year on (a)
August 1, 1997 for Mr. Crowley and on each successive August 1st thereafter;
(b) February 1, 1998 for Mr. Marshall and on each successive February 1st
thereafter, and (c) June 1, 1997 for Mr. Rallo and Mr. Joyce 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)
$280,000 for Mr. Crowley; (b) $300,000 for Mr. Marshall, (c) $245,000 for Mr.
Rallo, and (d) $225,000 for Mr. Joyce, 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 66% of his
annual base salary with respect to Messrs. Crowley and Marshall and upto 55%
of his annual base salary with respect to Messrs. Joyce and Rallo, 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 four 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 of
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.
The Employment Agreements contain agreements by the executives not to
compete with the Company as long as they are receiving payments under an
employment agreement and an agreement by the executives not to disclose
confidential information.
On March 20, 1996 (the "Retirement Date"), Mr. Futterman retired as
Chairman and Chief Executive Officer of the Company. Pursuant to 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 Retirement Date and ending on July 31, 1998, or the
date of his death, if earlier (the "Benefit Period"),
46
<PAGE>
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 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 Retirement Date. Each of the
above described payments and benefits shall 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 shall 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 shall 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.
The Company retained John W. Boyle, a Director of the Company, to act
as its interim Chairman and Chief Executive Officer for the period of March
20, 1996 through October 7, 1996 (the "Transition Period"). Under the terms
of the consulting arrangement between the Company and Mr. Boyle, the Company
paid Mr. Boyle a consulting fee of $41,667 per month plus living and travel
expenses during the Transition Period. In addition, Mr. Boyle received a
completion bonus of $100,000 when Mr. Donald commenced employment with the
Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to January 10, 1997, Messrs. Burke, Khanna and McLean comprised
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 "Security Ownership of Certain
Beneficial Ownership and Management." On January 10, 1997, Mr. Boyle became a
member of the Compensation Committee.
COMPENSATION OF DIRECTORS
Each director who is not employed by the Company or one of its
subsidiaries, SPI, MLCP or the Equitable Investors or its affiliates receives
an annual retainer of $20,000 per year, plus travel expenses.
PRINCIPAL STOCKHOLDERS
As of April 15, 1997, 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, 1997, the number of shares of SMG-II (i) Class A Common Stock, (ii) Class
B Common Stock, (iii) Series A Preferred Stock, (iv) Series B Preferred Stock
and (v) Series C 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:
47
<PAGE>
<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 65.2
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 1.6
ML IBK Positions, Inc.(3)........................................................ 21,258.9 2.8
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 4.0
270 Park Avenue
New York, NY 10017
Management and other employees (including former employees of Pathmark).......... 169,419 (1) 22.6
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 7.0
The Equitable Life Assurance Society of the United States(5)..................... 84,134 46.5
Equitable Deal Flow Fund, L.P.(5)................................................ 84,135 46.5
SMG-II Series C Preferred Stock(6)................................................... 8,520 100.0
James Donald
301 Blair Road
Woodbridge, NJ 07095
</TABLE>
- ---------
(1) Includes presently exercisable options granted under the Plan for
76,943 shares of SMG-II Class A Common Stock held by Management Investors.
(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 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
48
<PAGE>
York, New York 10153. MLCP is an indirect wholly owned subsidiary of
ML&Co. The partners and principals of SPI (including Messrs. Burke,
McLean and Khanna) are consultants to MLCP. Mr. Bowman is Chief
Executive Officer of 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, except Mr. Donald who claims beneficial
ownership of 8,520 (100%) shares of SMG-II Series C Preferred Stock. As of
April 15, 1997 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 Summary 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>
Matthias Bowman(1)........................................ -- --
James J. Burke, Jr.(1).................................... -- --
James Donald.............................................. 19,851 2.6
Jack Futterman(2)......................................... 23,000 3.1
Neill Crowley(2).......................................... 1,000 *
U. Peter C. Gummeson...................................... -- --
Ron Marshall(2)........................................... 2,000 *
Sunil C. Khanna........................................... 700 *
Stephen M. McLean(1)...................................... -- --
John W. Boyle(2).......................................... 3,000 *
Ronald Rallo(2)........................................... 3,250 *
Jerry G. Rubenstein(2).................................... 2,500 *
Robert Joyce(2)........................................... 3,200 *
Directors and named executive officers as a group(1)(2) 66,011 8.8
</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 Bowman, directors of MLCP,
disclaim beneficial ownership in all such shares.
(2) Includes presently exercisable options granted under the Plan to purchase
shares of SMG-II Class A Common Stock, as follows: Mr. Futterman, 13,000;
Mr. Crowley, 1,000; Mr. Marshall, 2,000; Mr. Joyce, 2,500; Mr. Rallo,
2,850, Mr. Rubenstein, 1,000; and Mr. Boyle, 3,000 and all directors and
executive officers as a group, 31,110.
49
<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 Notes Coupon Trustee" and
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, 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 95/8% 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 115/8% payable in cash semiannually on June 15 and December 15
each year, to the Person on 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 Debentures bears
interest at the rate of 125/8% payable in cash semiannually on June 15 and
December 15 each year, to the Person in whose name the Subordinated
Debentures (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, 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 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)
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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 203) 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:
YEAR REDEMPTION
PRICE
----------------
1998......................... 104.82%
1999......................... 102.41%
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.
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:
YEAR REDEMPTION
PRICE
----------------
1997........................... 105.8125%
1998........................... 103.8750%
1999........................... 101.9375%
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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 may 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:
Redemption
Year Price
---- -----------
1997................... 103.600%
1998................... 102.700%
1999................... 101.800%
2000................... 100.900%
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 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 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.
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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 marshaling 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
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 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
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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 in Senior Indebtedness to receive payments and distribution 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 May 3, 1997, the Company
had outstanding $648.0 million of Senior Indebtedness, $467.8 million of
Subordinated Indebtedness and no Indebtedness pari passu with the Senior
Subordinated Notes. With respect to the Subordinated Securities, on May 3,
1997, the Company had outstanding $1,085.9 million of Senior Indebtedness,
$173.0 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 May 3, 1997 the
Company had outstanding $1,380.7 million of Senior Indebtedness and no
Subordinated Indebtedness or Indebtedness pari passu in right of payment to
the Deferred Coupon Notes.
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"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 less 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 pari
passu with the Indebtedness refinanced. "Interest Rate Hedge Arrangement"
means that 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
beneficial 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, 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 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.
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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 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
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(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 from
any of its Subsidiaries) upon the exercise of options, warrants or rights
to purchase shares 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);
(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;
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(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 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 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 principal
of the Senior 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, 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, 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);
(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;
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(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 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 of
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
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 transactions or (2) if Plainbridge is not a party to 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, investing banking or financial
advisory services rendered by such
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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)
LIMITATIONS 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 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 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 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 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
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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 given 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))
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 Subordinated 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, assumption or other liability with respect to
Subordinated Indebtedness, such 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; 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
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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 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 terms of 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))
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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 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.
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In the event of any transaction (other than a lease) described in and
complying whit 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 ever 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 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 to final maturity of 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
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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 of 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)
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 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 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 by 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
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Notes or Subordinated Debentures or the Accreted Amount of and premium, if
any, on any Deferred Coupon Notes, as the case may be, which has 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 Coupon Notes, as the
case may be; and (b) all Event of Default, other than the non-payment of
principal which has 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 "Event 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, 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
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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 14020 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 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 counsel
in the United States stating (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
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
of 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
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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 of 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 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
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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.
"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" having 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 basic 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 basic 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 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 basic 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 basic 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.
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"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 "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, until a successor Person shall have become
such pursuant to the applicable provisions of the Indenture, and thereafter
"Company" shall mean such successor Person.
"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
interest" 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 No. 106") to the extent such charges exceed the cash payments for
benefits covered by SFAS No. 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.
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"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.
"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.
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"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principle 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 lessees or lessor) property, or to purchase or
sell services, 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, any successor thereto.
"Holdings Intercompany Notes" means the 115/8% subordinated note and the
125/8% 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
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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 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.
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"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. 1, a Delaware partnership, Merrill Lynch KECALP
L.P., a Delaware partnership, Merrill Lynch Capital Appreciation Partnership
No. B-X, L.P., a Delaware 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 to purchase price adjustments in connection with the
acquisition or disposition of assets;
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(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);
(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 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 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 item 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
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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.
"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, plan 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 95/8% 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.
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"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.
"Subordinated Debentures" means the Company's 125/8% 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 115/8% Subordinated Notes
due 2002 in aggregate principal amount not in excess of the aggregate
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 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 Services, 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-s" (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 complied
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
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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 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. During Fiscal 1996, Pathmark twice amended its existing Bank Credit
Agreement. In conjunction with the reacquisition of the Plainbridge capital
stock, the outstanding obligations of Plainbridge under its bank credit
agreement were satisfied by the Company and the Plainbridge bank 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 (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. In December 1996, the
Company amended its Bank Credit Agreement with existing lenders modifying
certain of its covenants, including those concerning the generation of minimum
levels of cash flow (as defined), minimum interest coverage and maximum leverage
rates.
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 necessary to implement the Recapitalization. The Term A Loan is
subject to quarterly 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 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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NEW BANK CREDIT AGREEMENT COMMITMENT
On May 27, 1997, The Chase Manhattan Bank committed to provide to the
Company senior secured facilities in an aggregate principal amount of $500
million pursuant to which the Company will repay in full all amounts
outstanding under the Bank Credit Agreement. The senior secured facilities
include two term facilities in an aggregate principal amount of $300 million
and a revolving credit facility in the aggregate principal amount of $200
million. While management believes it will successfully refinance its Bank
Credit Agreement in the second quarter of Fiscal 1997, there can be no
assurances that the refinancings will occur.
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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 holds the
Deferred Coupon Notes a pro rata portion of the OID on the Deferred Coupon
Notes attributable to the
82
<PAGE>
"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 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 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.
83
<PAGE>
MARKET DISCOUNT
If a United States Holder purchases a Security at a price that is less
than, in the case of 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 of 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 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 theory 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.
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
84
<PAGE>
security number or employer identification number), to certify that such hold
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 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, as
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 has
become publicly available. It is not possible to forecast the impact, if any,
that any such discontinuance may have on the 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 85.7% 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 85.7% 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".
INDEPENDENT AUDITORS
The consolidated balance sheets of the Company and its subsidiaries as
of February 1, 1997 and February 3, 1996 and the related consolidated
statements of operations, stockholder's deficit, and cash flow for the years
ended February 1, 1997, February 3, 1996 and January 28, 1995 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.
85
<PAGE>
PATHMARK STORES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS 1996, 1995 AND 1994
PAGE
----
Independent Auditors' Report.......................... F-2
Consolidated Statements of Operations................. F-3
Consolidated Balance Sheets........................... F-4
Consolidated Statements of Stockholder's Deficit...... F-5
Consolidated Statements of Cash Flows................. F-6
Notes to Consolidated Financial Statements............ F-7 to F-25
F-1
<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 (the "Company") as of February 1, 1997 and
February 3, 1996, and the related consolidated statements of operations,
stockholder's deficit and cash flows for each of the three years in the period
ended February 1, 1997. These financial statements are the responsibility of the
Company'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 the Company as of February 1,
1997 and February 3, 1996, and the results of their operations and their cash
flows for each of the three years in the period ended February 1, 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
April 23, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Sales...................................................... $3,710,523 $3,971,593 $3,968,184
Cost of sales (exclusive of depreciation and
amortization shown separately below)..................... 2,619,277 2,837,631 2,866,091
----------- ----------- ------------
Gross profit............................................... 1,091,246 1,133,962 1,102,093
Selling, general and administrative expenses............... 857,290 865,679 850,961
Depreciation and amortization.............................. 88,956 80,408 75,468
Restructuring charge....................................... 9,137 -- --
Lease commitment charge.................................... 8,763 -- --
----------- ----------- ------------
Operating earnings......................................... 127,100 187,875 175,664
Interest expense........................................... (161,469) (164,749) (158,503)
Interest charged to discontinued operations................ -- -- 11,035
Gain on disposition of freestanding drug stores............ -- 15,535 --
----------- ----------- ------------
Earnings (loss) from continuing operations before income
taxes, gain on disposal of home centers segment and
extraordinary items...................................... (34,369) 38,661 28,196
Income tax benefit (provision)............................. 14,411 (5,914) (4,083)
----------- ----------- ------------
Earnings (loss) from continuing operations before
gain on disposal of home centers segment and
extraordinary items...................................... (19,958) 32,747 24,113
Loss from discontinued operations.......................... -- -- (2,099)
Gain on disposal of home centers segment, net of an
income tax provision of $2,324........................... -- -- 17,044
----------- ----------- ------------
Earnings (loss) before extraordinary items................. (19,958) 32,747 39,058
Extraordinary items, net of an income tax benefit
of $613.................................................. (877) -- --
----------- ----------- ------------
Net earnings (loss)........................................ $ (20,835) $ 32,747 $ 39,058
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................ $ 9,880 $ 11,648
Accounts receivable, net............................. 12,492 10,553
Merchandise inventories.............................. 216,931 225,448
Deferred income taxes................................ 7,111 4,156
Prepaid expenses..................................... 24,951 25,189
Due from suppliers................................... 13,923 13,178
Other current assets................................. 5,908 5,854
---------- ----------
Total Current Assets............................. 291,196 296,026
Property and Equipment, Net............................. 603,577 602,888
Deferred Financing Costs, Net........................... 28,743 33,685
Deferred Income Taxes................................... 22,846 13,243
Other Assets............................................ 43,534 39,915
---------- ----------
$ 989,896 $ 985,757
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Accounts payable..................................... $ 166,199 $ 184,082
Book overdrafts...................................... 41,085 43,720
Current maturities of long-term debt................. 74,431 51,753
Income taxes payable................................. 860 4,057
Accrued payroll and payroll taxes.................... 56,335 54,322
Current portion of lease obligations................. 23,133 20,680
Accrued interest payable............................. 20,712 19,309
Accrued expenses and other current liabilities....... 90,589 91,223
---------- ----------
Total Current Liabilities........................ 473,344 469,146
---------- ----------
Long-Term Debt.......................................... 1,185,639 1,214,645
---------- ----------
Lease Obligations, Long-Term............................ 175,353 140,161
---------- ----------
Other Noncurrent Liabilities............................ 197,226 186,036
---------- ----------
Commitments and Contingencies (Notes 13 and 22)
Stockholder's Deficit
Common Stock $.10 par value............................. -- --
Authorized, issued and outstanding: 100 shares
Paid-in Capital......................................... 68,703 65,303
Accumulated Deficit..................................... (1,110,369) (1,089,534)
---------- ----------
Total Stockholder's Deficit...................... (1,041,666) (1,024,231)
---------- ----------
$ 989,896 $ 985,757
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
(in thousands)
<TABLE>
<CAPTION>
COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT DEFICIT
------ --------- ----------- -----------
<S> <C> <C> <C> <C>
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 home centers segment....... -- (4,706) -- (4,706)
----- --------- ----------- -----------
Balance, February 3, 1996............................ -- 65,303 (1,089,534) (1,024,231)
Net loss.......................................... -- -- (20,835) (20,835)
Capital contribution from SMG-II Holdings
Corporation..................................... -- 3,400 -- 3,400
----- --------- ----------- -----------
Balance, February 1, 1997............................ $ -- $ 68,703 $(1,110,369) $(1,041,666)
===== ========= =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Operating Activities
Net earnings (loss)....................................................... $(20,835) $ 32,747 $ 39,058
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization........................................... 92,485 83,263 78,056
Deferred income tax (benefit) expense................................... (12,558) 6,417 (661)
Interest accruable but not payable...................................... 16,678 15,028 13,541
Amortization of original issue discount................................. 354 354 354
Amortization of debt issuance costs..................................... 7,426 7,140 7,028
(Gain) loss on disposal of property and equipment....................... (5,347) 200 (252)
Extraordinary loss on early extinguishment of debt...................... 877 -- --
Gain on disposition of freestanding drug stores......................... -- (15,535) --
Gain on sale of real estate............................................. -- (3,371) --
Gain on disposal of home centers segment................................ -- -- (17,044)
Loss from discontinued operations....................................... -- -- 2,099
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net.............................................. (1,939) 2,380 1,206
Merchandise inventories............................................... 8,517 15,653 2,497
Income taxes.......................................................... (2,584) 8,932 15,779
Prepaid expenses...................................................... (2,889) (1,631) (10,707)
Due from suppliers.................................................... (745) 5,079 481
Other current assets.................................................. (3,009) 2,221 (9,778)
Other assets.......................................................... 2,309 (23,419) 6,647
Accounts payable...................................................... (17,883) (9,114) (21,704)
Accrued payroll and payroll taxes..................................... 2,013 780 (929)
Accrued interest payable.............................................. 1,403 (363) 3,039
Accrued expenses and other current liabilities........................ (1,867) (6,997) 4,999
Other noncurrent liabilities.......................................... 11,191 (1,462) (3,589)
-------- --------- --------
Cash provided by operating activities............................... 73,597 118,302 110,120
-------- --------- --------
Investing Activities
Property and equipment expenditures....................................... (54,963) (69,544) (83,866)
Proceeds from disposition of property and equipment....................... 8,170 896 1,262
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.................................. (46,793) (695) (1,457)
-------- --------- --------
Financing Activities
Increase (decrease) in Working Capital Facility borrowings................ 27,500 (17,000) 25,500
Decrease in Term Loan..................................................... (44,828) (60,295) (36,750)
Increase (decrease) in book overdrafts.................................... (2,635) (1,262) 5,660
Increase in other borrowings.............................................. 2,052 895 3,676
Repayment of other long-term borrowings................................... (8,085) (5,208) (5,527)
Reduction in lease obligations............................................ (20,032) (18,221) (17,275)
Proceeds from lease financing............................................. 21,405 -- --
Premiums incurred in early extinguishment of debt......................... (352) -- --
Deferred financing fees................................................... (3,597) (374) (977)
Dividend to PTK Holdings, Inc............................................. -- (26,506) (66,579)
-------- --------- --------
Cash used for financing activities.................................. (28,572) (127,971) (92,272)
-------- --------- --------
Increase (decrease) in cash and cash equivalents............................. (1,768) (10,364) 16,391
Cash and cash equivalents at beginning of period............................. 11,648 22,012 5,621
-------- --------- --------
Cash and cash equivalents at end of period................................... $ 9,880 $ 11,648 $ 22,012
======== ========= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BUSINESS
ORGANIZATION AND BASIS OF PRESENTATION:
Pathmark Stores, Inc. (the "Company") operates 144 supermarkets as of
February 1, 1997, 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 32.8 million 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 of the Company by Holdings 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. 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 then newly formed wholly owned
subsidiary of the Company and the shares of Plainbridge were then distributed
to PTK Holdings, Inc. ("PTK"), a then 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. ("Chefmark"), a then newly formed Delaware
corporation, and distributed the shares of Chefmark 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.
MANAGEMENT'S PLAN:
The consolidated financial statements of the Company indicated that, at
February 1, 1997, current liabilities exceeded current assets by $182.1
million and the stockholder's deficit was $1.04 billion. Management believes
that cash flows generated from operations, supplemented by the unused
borrowing capacity under its working capital facility (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 other cash requirements.
F-7
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 1--BUSINESS--(CONTINUED)
The Company was in compliance with its various debt covenants at
February 1, 1997. In December 1996, the Company amended its bank credit
agreement (the "Bank Credit Agreement") with existing lenders modifying
certain of its covenants, including those concerning the generation of
minimum levels of cash flow (as defined), minimum interest coverage and
maximum leverage rates. Such covenants also include an annual cleandown
provision requiring borrowings under the Company's Working Capital Facility
not to exceed $60.0 million for a period of 30 consecutive days. Based on
management's operating projections for Fiscal 1997, the Company believes that
it will be able to satisfy this cleandown provision and continue to be in
compliance with its other debt covenants.
The Company is currently holding discussions with its lenders with
respect to refinancing its Bank Credit Agreement. The Working Capital
Facility expires in July 1998 and the term loan (the "Term Loan") matures in
Fiscal 1999 (see Note 10). Management believes it will successfully refinance
its debt, however, there can be no assurances that the refinancing will occur
or that the terms associated with any such new agreement will be more
favorable to the Company.
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 statement of operations for Fiscal 1994 includes 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, due to the long-term payout of
these claims (see Note 9). 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.
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to the Fiscal 1996 presentation,
the most significant of which was the Company's change in reporting of
Pathmark coupon expenses (excluding manufacturers' coupons). Prior to this
change, Pathmark coupon expenses, net of any vendor reimbursements, were
recorded in selling, general and administrative expenses. As a result of this
change, Pathmark gross coupon expenses have now been recorded as a reduction
of sales, with any vendor reimbursements being recorded as a reduction of
cost of goods sold.
F-8
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 month
or less are considered to be cash equivalents. The Company had no cash
equivalent investments as of February 1, 1997 and February 3, 1996.
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
over their estimated useful lives. The amortization of video tapes, included in
cost of goods sold, approximate $3.1 million, $2.8 million and $2.6 million in
Fiscal 1996, Fiscal 1995 and Fiscal 1994, 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 developed by IBM (see Note
22), 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 the following useful lives: buildings, 40 years; fixtures and equipment,
3-10 years; and leasehold improvements, 8-15 years or lease term, whichever is
shorter. 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.
LONG-LIVED ASSETS:
Effective February 4, 1996, the Company adopted 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 intangibles and goodwill related to those assets.
SFAS No. 121 requires that an asset 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. The carrying value of
long-lived assets, which are being used in the Company's operations, are
assessed for recoverability based upon groups of assets and the related cash
flow generated by such assets. Assets held for sale are reviewed for impairment
based upon the estimated net realizable value of such assets. The adoption of
SFAS No. 121 had no effect on the Company's financial condition or results of
operations.
F-9
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
DEFERRED FINANCING COSTS:
Deferred financing costs are amortized utilizing 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.
REVENUE RECOGNITION:
Revenue is recognized at the point of sale to the customer.
ADVERTISING COSTS:
Advertising costs, net of vendor reimbursements, are expensed as
incurred and were $23.7 million, $30.6 million and $32.4 million in
Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively.
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, when management
makes a decision to close a store (see Note 9).
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.
EARNINGS (LOSS) PER COMMON SHARE:
Since the Company is a wholly owned subsidiary, earnings (loss) per share
is not presented.
NOTE 3--RESTRUCTURING CHARGE
During the fourth quarter of Fiscal 1996, the Company recorded a pretax
charge of $9.1 million for reorganization and restructuring costs related to
its administrative operations. The restructuring charge included $4.2 million
for the costs of a voluntary early retirement program which was accepted by
142 employees and $1.2 million for severance and termination benefits for 80
employees. The remaining charge of $3.7 million primarily relates to
consulting fees incurred in connection with the restructuring and exit costs
for facility consolidation. As of February 1, 1997, $3.2 million has been
expended, of which $1.6 million relates to the early retirement program and
severance benefits and $1.6 million relates to consulting costs and the
facility consolidation. The Company estimates that it will expend $4.7
million in Fiscal 1997. The remaining $1.2 million relates to early
retirement benefits which will be expended over time.
F-10
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--LEASE COMMITMENT CHARGE
During the fourth quarter of Fiscal 1996, the Company decided to divest
a group of its southern region stores, certain of which have experienced
unprofitable operating results. The Company concluded that the operating
losses being experienced by these stores were other than temporary and that
the projected operating results of such stores would not be sufficient to
recover their long-lived assets and their contractual lease commitments.
Further, the Company believes that these lease costs will not be
significantly recoverable through any future sublease. Therefore, the Company
recorded a $8.8 million pretax charge related to these unfavorable lease
commitments, in addition to writing down the long-lived assets of these
stores (see Note 7).
NOTE 5--ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following (dollars in thousands):
FEBRUARY 1, FEBRUARY 3,
1997 1996
--------- ---------
Prescription plans............................. $ 10,397 $ 9,250
Other.......................................... 3,366 2,240
--------- ---------
Accounts receivable............................ 13,763 11,490
Less: allowance for doubtful accounts(a)....... 1,271 937
--------- ---------
Accounts receivable, net....................... $ 12,492 $10,553
========= =========
------------
(a) Fiscal 1996 includes a provision of $0.1 million and a recovery of
$0.3 million. Fiscal 1995 includes a provision of $1.3 million and a
write off of $1.3 million.
NOTE 6--MERCHANDISE INVENTORIES
Merchandise inventories are comprised of the following (dollars in
thousands):
FEBRUARY 1, FEBRUARY 3,
1997 1996
---------- ----------
Merchandise inventories at FIFO cost............ $258,417 $268,212
Less: LIFO reserve.............................. 41,486 42,764
---------- ----------
Merchandise inventories at LIFO cost............ $216,931 $225,448
========== ==========
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 a decrease in the inventory levels of
the distribution centers.
Note 7--Property and Equipment
Property and equipment are comprised of the following (dollars in
thousands):
FEBRUARY 1, FEBRUARY 3,
1997 1996
---------- ----------
Land............................................. $ 61,258 $ 62,606
Buildings and building improvements.............. 201,364 199,690
Fixtures and equipment........................... 202,952 202,019
Leasehold costs and improvements................. 293,626 279,400
Transportation equipment......................... 19,706 18,448
---------- ----------
Property and equipment, owned.................... 778,906 762,163
Property and equipment under capital leases...... 206,819 188,585
---------- ----------
Property and equipment, at cost.................. 985,725 950,748
Less: accumulated depreciation and amortization.. 382,148 347,860
---------- ----------
Property and equipment, net...................... $603,577 $602,888
========== ==========
F-11
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--PROPERTY AND EQUIPMENT--(CONTINUED)
During the fourth quarter of Fiscal 1996, the Company recorded a pretax
charge of $5.4 million to write down fixed assets held for sale, principally
in its southern region, to their estimated net realizable values. This charge
is included in depreciation and amortization expense in the accompanying
consolidated statement of operations for Fiscal 1996.
NOTE 8--DEFERRED FINANCING COSTS, NET
Deferred financing costs, primarily related to the Recapitalization,
are comprised of the following (dollars in thousands):
FEBRUARY 1, FEBRUARY 3,
1997 1996
---------- ---------
Deferred financing costs............. $51,378 $50,377
Less: accumulated amortization....... 22,635 16,692
-------- --------
Deferred financing costs, net........ $28,743 $33,685
======== ========
NOTE 9--OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities are comprised of the following (dollars in
thousands):
FEBRUARY 1, FEBRUARY 3,
1997 1996
--------- ---------
Self-insured liabilities........................... $ 62,485 $ 65,183
Pension and deferred compensation.................. 20,227 17,003
Other postretirement and postemployment benefits... 41,399 41,001
Closed stores...................................... 20,117 23,871
Lease commitments.................................. 7,107 --
Other.............................................. 45,891 38,978
--------- ---------
Other noncurrent liabilities....................... $197,226 $186,036
========= =========
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.
F-12
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--LONG-TERM DEBT
Long-term debt is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
<S> <C> <C>
Term Loan................................................................ $ 243,127 $ 287,955
Working Capital Facility................................................. 73,500 46,000
9.625% Senior Subordinated Notes due 2003 ("Senior Subordinated
Notes")................................................................ 437,780 437,426
10.75% Deferred Coupon Notes due 2003 ("Deferred Coupon
Notes")................................................................ 168,559 151,881
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................................................. 983 983
Industrial revenue bonds................................................. 6,375 6,375
Other debt (primarily mortgages)......................................... 34,979 41,011
----------- -----------
Total debt............................................................... 1,260,070 1,266,398
Less: current maturities................................................. 74,431 51,753
----------- -----------
Long-term portion........................................................ $1,185,639 $1,214,645
=========== ===========
</TABLE>
SCHEDULED MATURITIES OF DEBT:
Long-term debt principal payments are as follows (dollars in thousands):
PRINCIPAL
FISCAL YEARS PAYMENTS
------------ --------
1997........................... $ 74,431
1998........................... 155,688
1999........................... 127,219
2000........................... 50,643
2001........................... 50,000
Thereafter..................... 802,089
-----------
$1,260,070
===========
BANK CREDIT AGREEMENT:
Under the Bank Credit Agreement, the Term Loan and the Working Capital
Facility bear interest at floating rates. At February 1, 1997, the interest
rates for the Term Loan and Working Capital Facility were 8.4% and 8.9%,
respectively. At February 3, 1996, the interest rates for the Term Loan and
Working Capital Facility were 8.4% and 9.2% 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 bank credit
agreement were satisfied by the Company and the Plainbridge bank 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, 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
F-13
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--LONG-TERM DEBT--(CONTINUED)
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 1, 1997, the Company had approximately $70.2 million in outstanding
letters of credit and approximately $56.3 million in unused borrowing
capacity under its Working Capital Facility.
In December 1996, the Company amended its Bank Credit Agreement with
its existing lenders modifying certain of its covenants, including those
financial covenants concerning levels of operating cash flow (as defined),
minimum interest coverage and maximum leverage ratio. At February 1, 1997,
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, as well as
satisfying its cleandown provision (see above). 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.
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.
F-14
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--LONG-TERM DEBT--(CONTINUED)
OTHER DEBT:
Other debt includes mortgage notes, which are secured by property and
equipment, having a net book value of $54.5 million at February 1, 1997 and
$65.4 million at February 3, 1996. These borrowings, whose interest rates
averaged 10.5%, are payable in installments ending in Fiscal 2000, including
a scheduled payment of $30.1 million in Fiscal 1998.
NOTE 11--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and fair values of the Company's financial
instruments are as follows (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, 1997 FEBRUARY 3, 1996
----------------------------- ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Term Loan............................... $ 243,127 $ 243,127 $ 287,955 $ 287,955
Working Capital Facility................ 73,500 73,500 46,000 46,000
Senior Subordinated Notes............... 437,780 415,015 437,426 419,929
Deferred Coupon Notes................... 168,559 142,471 151,881 135,578
Subordinated Debentures................. 95,750 96,353 95,750 100,959
Subordinated Notes...................... 199,017 202,340 199,017 206,220
Holdings Subordinated Notes............. 983 999 983 1,017
Industrial revenue bonds................ 6,375 6,375 6,375 6,375
Other debt (primarily mortgages)........ 34,979 34,979 41,011 41,011
---------- ----------- ----------- ------------
Total debt......................... $1,260,070 $1,215,159 $1,266,398 $1,245,044
========== =========== =========== ===========
</TABLE>
The fair value of the Term Loan and Working Capital Facility at
February 1, 1997 and February 3, 1996 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 1, 1997 and February 3,
1996, 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 1, 1997 and February 3, 1996, the carrying values of
cash and cash equivalents, accounts receivable and accounts payable
approximate fair values due to the short-term maturities of these instruments.
F-15
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 12--INTEREST EXPENSE
Interest expense is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Term Loan..................................................... $ 22,616 $ 29,067 $ 27,281
Working Capital Facility...................................... 5,444 5,601 4,996
Senior Subordinated Notes
Amortization of original issue discount.................. 354 354 354
Currently payable........................................ 42,350 42,350 42,350
Deferred Coupon Notes, accruable but not payable.............. 16,678 15,028 13,541
Subordinated Debentures....................................... 12,088 12,088 12,088
Subordinated Notes............................................ 23,136 23,136 23,136
Amortization of debt issuance costs........................... 7,426 7,140 7,028
Obligations under capital leases.............................. 17,992 16,646 15,694
Mortgages payable............................................. 3,736 4,210 4,398
Debt payable to Holdings...................................... 114 114 149
Other, net.................................................... 9,535 9,015 7,488
-------- --------- --------
Interest expense.............................................. $161,469 $164,749 $158,503
======== ========= ========
</TABLE>
The Company made cash interest payments of $130.6 million, $135.1
million and $129.4 in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively.
NOTE 13--LEASES
At February 1, 1997, 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>
1997....................................................................... $ 42,549 $ 30,604
1998....................................................................... 40,878 30,172
1999....................................................................... 34,191 29,659
2000....................................................................... 32,166 29,430
2001....................................................................... 22,989 27,727
Later years................................................................ 245,108 311,106
--------- ---------
Total minimum lease payments(a)............................................ 417,881 $458,698
=========
Less: executory costs (such as taxes, maintenance and insurance)........... 2,221
---------
Net minimum lease payments................................................. 415,660
Less: amounts representing interest........................................ 217,174
---------
Present value of net minimum lease payments (including current
installments of $23,133).................................................. $198,486
=========
</TABLE>
-------------
(a) Net of sublease income of $1,147 and $134,010 for capital and operating
leases, respectively.
During Fiscal 1996, Fiscal 1995 and Fiscal 1994, the Company incurred
capital lease obligations of $39.2 million, $41.1 million and $21.3 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.
F-16
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13--LEASES--(CONTINUED)
During the third quarter of Fiscal 1996, the Company sold three of its
supermarket properties for $19.3 million, net of fees of $1.4 million and
income taxes of $0.7 million, and simultaneously leased back such properties.
The net proceeds were used to paydown debt, primarily the Working Capital
Facility. Due to the Company's continuing involvement in such properties, no
gain has been recorded and the transaction has been accounted for as a
financing, with the associated liability of $21.4 million included in lease
obligations in the consolidated balance sheet.
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
--------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Minimum rentals........................................... $ 47,366 $ 47,461 $ 49,564
Contingent rentals(b)..................................... -- -- 318
Less: rentals from subleases.............................. (14,576) (15,802) (13,092)
---------- ---------- ---------
Rent expense.............................................. $ 32,790 $ 31,659 $ 36,790
========== ========== =========
</TABLE>
----------
(b) Primarily based on sales.
NOTE 14--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 in each of Fiscal 1996, Fiscal 1995 and Fiscal
1994.
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.
NOTE 15--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 non-union 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.
F-17
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15--Retirement and Benefit Plans--(Continued)
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 1, 1997 FEBRUARY 3, 1996
--------------------------------- --------------------------------
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.............................. $ (84,092) $ (20,922) $ (94,648) $ (17,929)
Unvested............................ (5,988) (215) (5,749) (250)
----------- ---------- ---------- ----------
Total............................... (90,080) (21,137) (100,397) (18,179)
Plan assets at fair value................ 171,270 447 164,306 265
----------- ---------- ---------- ----------
Plan assets higher (lower) than
accumulated benefit obligation......... $ 81,190 $ (20,690) $ 63,909 $ (17,914)
=========== ========== ========== ==========
Actuarial present value of projected
benefit obligation..................... $(114,776) $ (23,200) $(118,859) $ (20,894)
Plan assets at fair value................ 171,270 447 164,306 265
----------- ---------- ---------- ----------
Plan assets higher (lower) than
projected benefit obligation........... 56,494 (22,753) 45,447 (20,629)
Unrecognized net gain from past
experience different from that
assumed and effects of changes
in assumptions......................... (43,296) (90) (33,156) (90)
Unrecognized prior service cost.......... 1,111 955 1,209 1,671
----------- ---------- ---------- ----------
Prepaid (accrued) pension cost........... $ 14,309 $ (21,888) $ 13,500 $ (19,048)
=========== ========== ========== ==========
</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.
During the fourth quarter of Fiscal 1996, the Company recorded a
restructuring charge (see Note 3) which included $2.1 million for the costs
of a voluntary early retirement program. The liability related to this charge
is included as part of the net accrued pension cost.
The decrease in the vested benefit obligation in Fiscal 1996 compared
to Fiscal 1995 was primarily due to the recognition of the lump sum payment
option in the voluntary early retirement program, which also resulted in a
corresponding offset in the plan assets.
The following table provides the assumptions used in determining the
actuarial present value of the projected benefit obligation at February 1,
1997 and February 3, 1996:
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
--------- --------
<S> <C> <C>
Weighted average discount rate............................ 7.5% 7.25%
Rate of increase in future compensation levels............ 4.5 4.25
Expected long-term rate of return on plan assets.......... 9.5 9.5
</TABLE>
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 in Fiscal
1997.
F-18
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15--RETIREMENT AND BENEFIT PLANS--(CONTINUED)
The net periodic pension cost (income) included in continuing
operations is comprised of the following components (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost of benefits earned during the year.............. $ 3,771 $ 3,402 $ 4,402
Interest cost on projected benefit obligation................ 10,182 9,533 9,085
Actual gain on plans' assets................................. (28,109) (40,531) (71)
Net amortization and deferral................................ 15,988 27,747 (10,848)
--------- -------- --------
Net periodic pension cost.................................... $ 1,832 $ 151 $ 2,568
========= ======== ========
</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 $18.7 million, $17.7 million and $16.8
million in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively.
The Company sponsors a savings plan for eligible non-union associates.
Contributions under the plan are based on specified percentages of associate
contributions. The Company's contributions to the savings plan were $3.6
million, $3.7 million and $3.5 million in Fiscal 1996, Fiscal 1995 and Fiscal
1994, respectively.
NOTE 16--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 7.5% at February 1, 1997 and 7.25% at February 3, 1996 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 6.75% and grade down to
4.5% in Fiscal 2000. The effect of a 1% change in the assumed cost trend rate
would change the accumulated postretirement benefit obligation by
approximately $1.2 million as of February 1, 1997 and would change the net
periodic postretirement benefit income by $0.2 million for Fiscal 1996.
The net postretirement benefit cost (income) included in continuing
operations is comprised of the following components (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Years
------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost of benefits earned during the year.................... $ 545 $ 613 $ 699
Interest cost on accumulated postretirement benefit obligation..... 1,640 2,267 2,051
Net amortization and deferral...................................... (931) (460) (182)
Curtailment gain................................................... (2,000) -- --
------- ------- -------
Net postretirement benefit cost (income)........................... $ (746) $2,420 $2,568
======= ======= =======
</TABLE>
During the second quarter of Fiscal 1996, the Company eliminated
postretirement medical coverage for active non-union associates who retire
after December 31, 1997. This change resulted in a pretax curtailment gain of
$2.0 million.
F-19
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16--OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS--(CONTINUED)
The following table provides information on the status of the
postretirement plans (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
-------- --------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................................... $ 9,678 $14,276
Other active plan participants......................................... 10,180 13,855
-------- --------
Total.................................................................. 19,858 28,131
Unrecognized prior service cost............................................ 7,026 --
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions............................. 6,798 4,669
-------- --------
Accrued postretirement cost................................................ $33,682 $32,800
======== ========
</TABLE>
During the fourth quarter of Fiscal 1996, the Company recorded a
restructuring charge (see Note 3) which included $2.1 million for the
estimated costs of a voluntary early retirement program. The liability
related to this charge is included as part of the accrued postretirement cost.
The decrease in the accumulated postretirement benefit obligation and
the recording of an unrecognized prior service cost are due to the
elimination of postretirement medical coverage for active non-union
associates.
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 1,
1997 and February 3, 1996 was $8.5 million and $8.3 million, respectively.
The net postemployment benefit cost included in continuing operations
consisted of the following components (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost of benefits earned during the year.................... $1,314 $ 997 $1,644
Interest cost on accumulated postemployment obligation............. 316 296 304
------- ------- ------
Net postemployment benefit cost.................................... $1,630 $1,293 $1,948
======= ======= ======
</TABLE>
NOTE 17--INCOME TAXES
The income tax benefit (provision) included in continuing operations is
comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current
Federal...................................................... $ 1,084 $(1,669) $ --
State........................................................ 769 2,172 (4,744)
Deferred
Federal...................................................... 9,626 (9,233) (4,449)
State........................................................ 2,932 (6,254) (2,871)
Change in valuation allowance.................................... -- 9,070 7,981
-------- -------- -------
Income tax benefit (provision)................................... $14,411 $(5,914) $(4,083)
======== ======== =======
</TABLE>
F-20
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 17--INCOME TAXES--(CONTINUED)
The effective tax rate applicable to continuing operations for the income
tax benefit (provision) differs from the federal statutory tax rate as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate.................................... 35.0% (35.0)% (35.0)%
State income taxes............................................ 7.0 (6.9) (17.6)
Tax credits................................................... -- 1.5 3.7
Change in valuation allowance................................. -- 23.5 28.3
Other......................................................... (0.1) 1.6 6.1
---- --- ----
Effective tax rate............................................ 41.9% (15.3)% (14.5)%
==== === =====
</TABLE>
Deferred income tax assets and liabilities consist of the following
(dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, 1997 FEBRUARY 3, 1996
-------------------------- --------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Depreciation and amortization............... $ -- $ 65,449 $ -- $ 71,629
Merchandise inventory and gross profit...... -- 20,449 -- 19,576
Prepaid expenses............................ -- 6,969 -- 5,975
Self-insured liabilities.................... 38,906 -- 42,127 --
Benefit plans............................... 10,011 -- 9,100 --
Lease capitalization........................ 17,927 -- 16,990 --
Alternative minimum taxes................... 8,316 -- 6,063 --
General business credits.................... 9,019 -- 8,821 --
Net operating loss carryforwards............ 9,631 -- 5,245 --
Other postretirement and
postemployment benefits................... 17,791 -- 18,470 --
Closed stores reserves and accrued
expenses.................................. 18,281 -- 15,361 --
Capital loss carryforward................... 45,850 -- -- --
Other....................................... 721 7,779 1,873 9,471
-------- -------- --------- --------
Subtotal.................................... 176,453 100,646 124,050 106,651
Less: valuation allowance................... 45,850 -- -- --
-------- -------- --------- --------
Total....................................... $130,603 $100,646 $124,050 $106,651
======== ======== ========= ========
</TABLE>
The balance sheet classification of the deferred income tax assets and
liabilities is as follows (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, 1997 FEBRUARY 3, 1996
------------------------------- ---------------------------------
CURRENT NONCURRENT CURRENT NONCURRENT
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Assets................................ $ 36,884 $139,569 $ 31,122 $ 92,928
Liabilities........................... (29,773) (70,873) (26,966) (79,685)
--------- --------- --------- --------
Subtotal.............................. 7,111 68,696 4,156 13,243
Less: valuation allowance............. -- 45,850 -- --
--------- --------- --------- --------
Total................................. $ 7,111 $ 22,846 $ 4,156 $ 13,243
========= ========= ========= ========
</TABLE>
F-21
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 17--INCOME TAXES--(CONTINUED)
The Company's net deferred income tax assets were $30.0 million and
$17.4 million at February 1, 1997 and February 3, 1996, respectively. At
February 1, 1997, management believes that sufficient evidence exists which
indicates that it is more likely than not that the Company will be able to
realize these net deferred income tax assets. In addition, during Fiscal
1996, as a result of a sale of a minority interest in a special purpose
subsidiary of the Company to an unrelated party, the Company recorded a tax
capital loss of $131.0 million (a $45.9 million tax benefit) due to a basis
differential in such stock. A related valuation allowance was recorded to
fully reserve the deferred income tax capital loss carryforward, which
expires in Fiscal 2001. Reversal of the valuation allowance will occur when
and if the Company is able to generate capital gains. Federal and state net
operating loss carryforwards expire from Fiscal 1998 to Fiscal 2012. General
business credits consist of federal jobs credits and expire from Fiscal 2001
to Fiscal 2011.
During Fiscal 1995, in conjunction with the Company's continuing
evaluation of its deferred income tax assets, the Company reversed the
valuation allowance related to its net deferred income tax assets. Such
reversals of the valuation allowance totaled $9.1 million and have been
included as a component of the Fiscal 1995 income tax provision. The Fiscal
1994 state income tax provision includes the recording of state income taxes
for certain issues related to prior years.
In Fiscal 1996, Fiscal 1995 and Fiscal 1994, the Company made income
tax payments of $4.6 million, $21.9 million and $6.3 million, respectively,
and received income tax refunds of $5.5 million, $10.3 million and $25.9
million, respectively.
NOTE 18--EXTRAORDINARY ITEMS
The extraordinary items, representing the loss on extinguishment of
indebtedness, consist of the following (dollars in thousands):
Fiscal
1996
-------
Loss before income taxes................................... $(1,490)
Income tax benefit......................................... 613
---------
Extraordinary items, net of a tax benefit.................. $ (877)
=========
During the first quarter of Fiscal 1996, in connection with the
termination of the Plainbridge credit agreement due to the reacquisition of
Plainbridge by Pathmark, the Company wrote off deferred financing fees,
resulting in a net loss on early extinguishment of debt of $0.7 million, net
of an income tax benefit of $0.5 million. During the second quarter of Fiscal
1996, in connection with the proceeds from the sale of certain mortgaged
property, the Company made a mortgage paydown of $5.3 million, including
accrued interest and debt premium, resulting in a net loss on early
extinguishment of debt of $0.2 million, net of an income tax benefit of $0.1
million.
NOTE 19--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 and, on July 28, 1995,
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.
F-22
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 19--DISPOSITION OF FREESTANDING DRUG STORES--(CONTINUED)
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 closed during
Fiscal 1995 and the sixth store closed during the second quarter of Fiscal
1996.
NOTE 20--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):
Fiscal
1994(a)
---------
Sales ....................................................... $271,989
=========
Loss before income taxes(b).................................. $ (2,383)
Income tax benefit........................................... 284
---------
Loss from discontinued operations............................ $ (2,099)
=========
- --------
(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. This charge
amounted to $11.0 million Fiscal 1994 and is included in the results of
the discontinued operations.
NOTE 21--NEW CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
On October 8, 1996, the Company hired a new Chief Executive Officer
(the "CEO") pursuant to a five-year employment agreement (the "Employment
Agreement"). In conjunction with his employment, SMG-II granted to the CEO an
equity package (the "Equity Strip") consisting of 8,520 restricted shares of
a new series of SMG-II Preferred Stock and 19,851 restricted shares of SMG-II
Common Stock and options to purchase 100,000 shares of SMG-II Common Stock at
an initial exercise price of $100 per share (the "Options") with the said
exercise price increasing over time. The Equity Strip was valued at $3.4
million at the date of issuance, based upon an independent appraisal, and
will vest over the term of the Employment Agreement or earlier with the
occurrence of an employment-related event, as defined, and will be forfeited
in its entirety upon the occurrence of a termination event, as defined. The
Equity Strip is being amortized as compensation expense in the Company's
statement of operations over the term of the Employment Agreement. The
Options were accounted for by SMG-II using the methods prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and as a result, no compensation expense was recorded. The Options
will vest over four years and expire one year after being fully vested,
except for the portion of the Options that vest on the day before the fifth
year and has not yet become exercisable, the expiration of which will be
extended to year seven. If employment with the Company should end as a result
of a termination event, the Options (whether or not then vested) will be
immediately and irrevocably forfeited, except in certain circumstances.
Vested Options do not become
F-23
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 21--NEW CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT--(CONTINUED)
exercisable until the occurrence of certain events related generally to the
realization of a third-party sale of SMG-II Common Stock. The CEO also
received (a) a one-time signing bonus of $1 million, which is being amortized
as compensation expense over the term of the Employment Agreement, and (b) a
$4.5 million loan evidenced by sixteen separate promissory notes. Under the
terms of each note, if he is in full employment of the Company on a quarterly
anniversary of his hiring date, his obligation to pay such note maturing on
such date will be forgiven as to principal, but not any then accrued and
unpaid interest. The Company will record compensation expense upon the
forgiveness of each note. In the event his employment ends, as a result of a
termination event, prior to a change in control, as defined, each note will
become immediately due and payable as to all outstanding principal and all
accrued and unpaid interest. These notes, which bear interest at a blended
rate of approximately 6%, are on a full-recourse basis and secured by the
Equity Strip, the Options and any shares acquired upon exercise of such
Options.
NOTE 22--COMMITMENTS AND CONTINGENCIES
RICKEL:
In connection with the sale of its home centers segment in Fiscal 1994,
the Company, as lessor, entered into leases for certain real estate
properties with Rickel, as tenant (the "Leases"), pursuant to which the
Company is entitled to receive annual aggregate rentals of approximately $4.5
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 1,
1997, the estimated present value of obligations under the Assumed
Liabilities approximated $29.0 million.
In January 1996, Rickel filed for bankruptcy protection under Chapter
11 of the United States Bankruptcy Code. In April 1996, the Company filed its
proofs of claim in connection with the bankruptcy proceedings. In August
1996, Rickel filed an order with the Bankruptcy Court to reject a third party
lease. The estimated present value of this lease obligation is approximately
$4.5 million. In November 1996, Rickel filed an order with the Bankruptcy
Court to reject four Leases related to property owned by the Company, with
aggregate annual rentals of approximately $2.4 million. The Company is
actively marketing these properties to other prospective tenants. In February
1997, Rickel filed an order with the Bankruptcy Court to reject one
additional third party lease which the Company has settled with the landlord.
Management has evaluated its exposure with respect to these rejected Leases
and has concluded that the Company has sufficient reserves to cover any
resulting liability which may occur with respect to these rejected Leases.
Since the bankruptcy is not concluded, the Company cannot determine whether
Rickel will reject any additional 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.
OUTSOURCING:
In August 1991, the Company entered into a long-term agreement with
IBM, to provide a wide range of information systems services. Under the
agreement, IBM has taken over the Company's data center operations and
mainframe processing and information system functions and is providing
business applications and systems designed to enhance the Company's customer
service and efficiency. The charges under this agreement are based upon the
services requested at predetermined rates. The Company may terminate the
agreement upon 90 days notice with payment of a specified termination charge.
The amounts expensed under this agreement in the accompanying consolidated
statements of operations were $22.1 million, $21.0 million and $16.0 million
during Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively.
OTHER:
The Company is also a party to a number of legal proceedings in the
ordinary course of business. Management believes that the ultimate resolution
of these proceedings will not, in the aggregate, have a material adverse
impact on the financial condition, results of operations or business of the
Company.
F-24
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 23--QUARTERLY FINANCIAL DATA (UNAUDITED)
Financial data for the interim periods of Fiscal 1996 and Fiscal 1995
is as follows (dollars in thousands):
<TABLE>
<CAPTION>
13 WEEKS ENDED
--------------------------------------------------------
MAY 4, AUGUST 3, NOVEMBER 2, FEBRUARY 1, FISCAL
1996 1996 1996 1997 1996
--------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
52 WEEKS ENDED FEBRUARY 1, 1997
Sales............................... $912,837 $931,237 $911,099 $955,350 $3,710,523
Gross profit(a)..................... 266,024 274,697 266,747 283,778 1,091,246
Selling, general and administrative
expenses(b)....................... 213,680 214,957 211,820 216,833 857,290
Depreciation and amortization....... 20,639 21,410 20,488 26,419 88,956
Restructuring charge................ -- -- -- 9,137 9,137
-- -- -- 8,763 8,763
Operating earnings.................. 31,705 38,330 34,439 22,626 127,100
Interest expense.................... (39,889) (40,470) (40,304) (40,806) (161,469)
Loss before income taxes and
extraordinary items............... (8,184) (2,140) (5,865) (18,180) (34,369)
Income tax benefit.................. 3,321 699 2,314 8,077 14,411
Loss before extraordinary items..... (4,863) (1,441) (3,551) (10,103) (19,958)
Extraordinary items, net of an income
tax benefit........................ (673) (204) -- -- (877)
Net loss............................ $ (5,536) $ (1,645) $ (3,551) $ (10,103) $ (20,835)
<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............................... $981,866 $972,247 $939,748 $1,077,732 $3,971,593
Gross profit(c)..................... 277,489 276,598 261,127 318,748 1,133,962
Selling, general and administrative
expenses(b)....................... 213,789 215,342 208,105 228,443 865,679
Depreciation and amortization....... 19,945 20,083 20,100 20,280 80,408
Operating earnings.................. 43,755 41,173 32,922 70,025 187,875
Interest expense.................... (41,105) (41,883) (40,318) (41,443) (164,749)
Gain on disposition of freestanding
drug stores....................... -- 15,535 -- -- 15,535
Earnings (loss) before income taxes. 2,650 14,825 (7,396) 28,582 38,661
Income tax (provision) benefit...... (328) 1,676 3,673 (10,935) (5,914)
Net earnings (loss)................. $ 2,322 $ 16,501 $ (3,723) $ 17,647 $ 32,747
</TABLE>
- --------------
(a) The pretax LIFO provision for Fiscal 1996 was $0.85 million in the first
and second quarter with no provision in the third quarter. The annual
credit was $1.3 million, resulting in a $3.0 million credit in the fourth
quarter.
(b) Selling, general and administrative expenses ("SG&A") for Fiscal 1996
included a first quarter provision of $5.8 million representing the
termination costs of two former executives of the Company, a first quarter
gain of $5.6 million recognized on the sale of certain real estate and a
second quarter curtailment gain of $2.0 million due to the elimination of
postretirement medical coverage for active non-union associates. SG&A for
Fiscal 1995 also included a fourth quarter gain of $3.4 million recognized
on the sale of a former warehouse of Purity Supreme, Inc., a previously
divested company.
(c) 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.
F-25
<PAGE>
PATHMARK STORES, INC.
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FIRST QUARTERS 1997 AND 1996
Page
----
Consolidated Statements of Operations (Unaudited)................. F-27
Consolidated Balance Sheets (Unaudited)........................... F-28
Consolidated Statements of Stockholder's Deficit (Unaudited)...... F-29
Consolidated Statements of Cash Flows (Unaudited)................. F-30
Notes to Consolidated Financial Statements (Unaudited)............ F-31 to F-32
F-26
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
13 WEEKS ENDED
-------------------------------
MAY 3, MAY 4,
1997 1996
--------- ---------
<S> <C> <C>
Sales............................................................... $922,319 $912,837
Cost of sales (exclusive of depreciation and amortization
shown separately below).......................................... 663,057 646,813
--------- ---------
Gross profit........................................................ 259,262 266,024
Selling, general and administrative expenses........................ 212,341 213,680
Depreciation and amortization....................................... 20,174 20,639
--------- ---------
Operating earnings.................................................. 26,747 31,705
Interest expense.................................................... (41,290) (39,889)
--------- ---------
Loss before income tax benefit and extraordinary item............... (14,543) (8,184)
Income tax benefit.................................................. 5,701 3,321
--------- ---------
Loss before extraordinary item...................................... (8,842) (4,863)
Extraordinary item, net of an income tax benefit.................... -- (673)
--------- ---------
Net loss............................................................ $ (8,842) $ (5,536)
========= =========
</TABLE>
See notes to consolidated financial statements (unaudited).
F-27
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands except share amounts)
<TABLE>
<CAPTION>
MAY 3, FEBRUARY 1,
1997 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.................................... $ 13,938 $ 9,880
Accounts receivable, net..................................... 12,331 12,492
Merchandise inventories...................................... 215,715 216,931
Income taxes receivable...................................... 789 --
Deferred income taxes........................................ 7,070 7,111
Prepaid expenses............................................. 25,305 24,951
Due from suppliers........................................... 12,376 13,923
Other current assets......................................... 5,656 5,908
------------ ------------
Total Current Assets...................................... 293,180 291,196
Property and Equipment, Net....................................... 593,711 603,577
Deferred Financing Costs, Net..................................... 27,113 28,743
Deferred Income Taxes............................................. 28,132 22,846
Other Assets...................................................... 45,164 43,534
------------ ------------
$ 987,300 $ 989,896
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Accounts payable............................................. $ 171,824 $ 166,199
Book overdrafts.............................................. 29,287 41,085
Current maturities of long-term debt......................... 113,100 74,431
Income taxes payable......................................... -- 860
Accrued payroll and payroll taxes............................ 56,189 56,335
Current portion of lease obligations......................... 23,360 23,133
Accrued interest payable..................................... 18,914 20,712
Accrued expenses and other current liabilities............... 87,981 90,589
------------ ------------
Total Current Liabilities................................. 500,655 473,344
------------ ------------
Long-Term Debt.................................................... 1,171,452 1,185,639
------------ ------------
Lease Obligations, Long-Term...................................... 176,555 175,353
------------ ------------
Other Noncurrent Liabilities...................................... 189,146 197,226
------------ ------------
Commitments and Contingencies (Note 4)
Stockholder's Deficit
Common Stock, $.10 par value................................. -- --
Authorized, issued and outstanding: 100 shares
Paid-in Capital.............................................. 68,703 68,703
Accumulated Deficit.......................................... (1,119,211) (1,110,369)
------------ ------------
Total Stockholder's Deficit............................... (1,050,508) (1,041,666)
------------ ------------
$ 987,300 $ 989,896
============ ============
</TABLE>
See notes to consolidated financial statements (unaudited).
F-28
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Total
Common Paid-in Accumulated Stockholder's
Stock Capital Deficit Deficit
------- ------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, February 1, 1997................. $ -- $68,703 $(1,110,369) $(1,041,666)
Net loss.................................. -- -- (8,842) (8,842)
------- ------ ----------- ------------
Balance, May 3, 1997...................... $ -- $68,703 $(1,119,211) $(1,050,508)
======= ====== =========== ============
Balance, February 3, 1996................. $ -- $65,303 $(1,089,534) $(1,024,231)
Net loss.................................. -- -- (5,536) (5,536)
------- ------ ----------- ------------
Balance, May 4, 1996...................... $ -- $65,303 $(1,095,070) $(1,029,767)
======= ====== =========== ============
</TABLE>
See notes to consolidated financial statements (unaudited).
F-29
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
13 WEEKS ENDED
--------------------------
MAY 3, MAY 4,
1997 1996
--------- --------
<S> <C> <C>
Operating Activities
Net loss.......................................................................... $ (8,842) $ (5,536)
Adjustments to reconcile net loss to net cash provided by operating activities:
Extraordinary loss on early extinguishment of debt.............................. -- 673
Depreciation and amortization................................................... 21,130 21,481
Deferred income tax benefit..................................................... (5,246) (1,545)
Interest accruable but not payable.............................................. 4,448 4,008
Amortization of original issue discount......................................... 88 88
Amortization of debt issuance costs............................................. 1,901 1,816
(Gain) loss on disposal of property and equipment............................... 33 (5,542)
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net...................................................... 161 (295)
Merchandise inventories....................................................... 1,216 1,644
Income taxes.................................................................. (1,649) (3,374)
Other current assets.......................................................... 665 1,923
Other assets.................................................................. (1,808) (162)
Accounts payable.............................................................. 5,625 (1,254)
Accrued interest payable...................................................... (1,798) (1,395)
Accrued expenses and other current liabilities................................ (2,706) (4,890)
Other noncurrent liabilities.................................................. (8,079) 4,175
--------- --------
Cash provided by operating activities....................................... 5,139 11,815
--------- --------
Investing Activities
Property and equipment expenditures............................................... (5,035) (10,654)
Proceeds from disposition of property and equipment............................... 1,243 6,589
--------- --------
Cash used for investing activities.......................................... (3,792) (4,065)
--------- --------
Financing Activities
Increase in Working Capital Facility borrowings................................... 33,000 18,500
Decrease in Term Loan............................................................. (12,627) (10,400)
Decrease in book overdrafts....................................................... (11,798) (8,730)
Increase in other borrowings...................................................... 214 --
Repayment of other long-term borrowings........................................... (642) (1,220)
Reduction in lease obligations.................................................... (5,168) (4,892)
Deferred financing fees........................................................... (268) (1,503)
--------- --------
Cash provided by (used for) financing activities............................ 2,711 (8,245)
--------- --------
Increase (decrease) in cash and cash equivalents...................................... 4,058 (495)
Cash and cash equivalents at beginning of period...................................... 9,880 11,648
--------- --------
Cash and cash equivalents at end of period............................................ $ 13,938 $ 11,153
========= ========
Supplemental Disclosures of Cash Flow Information
Interest paid..................................................................... $ 35,148 $ 33,800
========= ========
Income taxes paid................................................................. $ 1,650 $ 1,401
========= ========
Noncash Investing and Financing Activities
Capital lease obligations......................................................... $ 6,807 $ 4,507
========= ========
</TABLE>
See notes to consolidated financial statements (unaudited).
F-30
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINACIAL STATEMENTS (Unaudited)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
Pathmark Stores, Inc. (the "Company") operated 144 supermarkets as of
May 3, 1997, primarily in the New York-New Jersey and Philadelphia
metropolitan areas and is a wholly owned subsidiary of PTK Holdings, Inc.
("PTK") and an indirect wholly owned subsidiary of Supermarkets General
Holdings Corporation ("Holdings").
The unaudited consolidated financial statements included herein have been
prepared by the Company in accordance with the same accounting principles
followed in the presentation of the Company's annual financial statements for
the year ended February 1, 1997, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
consolidated financial statements included herein reflect all adjustments
which are of a normal and recurring nature and are necessary to present
fairly the results of operations and financial position of the Company. This
report should be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K Annual Report for the year ended
February 1, 1997.
Income taxes for the interim period are based on the estimated effective
tax rate expected to be applicable for the full fiscal year.
NOTE 2--LONG-TERM DEBT
Long-term debt is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
May 3, February 1,
1997 1997
---------- -----------
<S> <C> <C>
Term Loan............................................................................ $ 230,500 $ 243,127
Working Capital Facility............................................................. 106,500 73,500
9.625% Senior Subordinated Notes due 2003 ("Senior Subordinated Notes").............. 437,869 437,780
10.75% Deferred Coupon Notes due 2003 ("Deferred Coupon Notes")...................... 173,007 168,559
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............................................................. 983 983
Industrial revenue bonds............................................................. 6,375 6,375
Other debt (primarily mortgages)..................................................... 34,551 34,979
---------- -----------
Total debt........................................................................... 1,284,552 1,260,070
Less: current maturities............................................................. 113,100 74,431
---------- -----------
Long-term portion.................................................................... $1,171,452 $1,185,639
========== ===========
</TABLE>
On May 27, 1997, The Chase Manhattan Bank committed, subject to the
execution of a definitive credit agreement, to provide to the Company senior
secured facilities in an aggregate principal amount of $500 million pursuant
to which the Company will repay in full all amounts outstanding under its
existing Bank Credit Agreement. The senior secured facilities include two
term facilities in an aggregate principal amount of $300 million and a
revolving credit facility in the aggregate principal amount of $200 million.
The Company believes it will successfully refinance its existing Bank Credit
Agreement, however, there can be no assurances that the refinancing will
occur.
F-31
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
NOTE 3--INTEREST EXPENSE
Interest expense is comprised of the following (dollars in thousands):
13 WEEKS ENDED
-------------------------
MAY 3, MAY 4,
1997 1996
------- --------
Term Loan........................................ $ 5,130 $ 5,901
Working Capital Facility......................... 1,767 1,210
Senior Subordinated Notes
Amortization of original issue discount...... 88 88
Currently payable............................ 10,588 10,588
Deferred Coupon Notes
Accrued but not payable...................... 4,448 4,008
Subordinated Debentures.......................... 3,022 3,022
Subordinated Notes............................... 5,813 5,813
Amortization of debt issuance costs.............. 1,901 1,816
Obligations under capital leases................. 4,790 4,338
Other, net....................................... 3,743 3,105
------- --------
Interest expense................................. $41,290 $39,889
======= ========
The majority of the cash interest payments are scheduled in the second
and fourth quarters. However, the May 1 semi-annual interest payment of $21.2
million on the Senior Subordinated Notes was paid in the first quarters of
Fiscal 1997 and Fiscal 1996 due to the timing of the quarter end dates.
NOTE 4--CONTINGENCIES
RICKEL:
In connection with the sale of its home centers segment in Fiscal 1994,
the Company, as lessor, entered into leases for certain real estate
properties with Rickel, as tenant (the "Leases"), pursuant to which the
Company is entitled to receive annual aggregate rentals of approximately $4.2
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 May 3, 1997,
the estimated present value of obligations under the Assumed Liabilities
approximated $28.5 million.
In January 1996, Rickel filed for bankruptcy protection under Chapter
11 of the United States Bankruptcy Code. In April 1996, the Company filed its
proofs of claim in connection with the bankruptcy proceedings. In August
1996, Rickel filed an order with the Bankruptcy Court to reject a third party
lease. The estimated present value of this lease obligation is approximately
$4.5 million. In November 1996, Rickel filed an order with the Bankruptcy
Court to reject four Leases related to property owned by the Company, with
aggregate annual rentals of approximately $2.4 million. The Company is
actively marketing these properties to other prospective tenants. In February
1997, Rickel filed an order with the Bankruptcy Court to reject one
additional third party lease, which the Company has settled with the
landlord. In May 1997, Rickel filed an order with the Bankruptcy Court to
reject a lease related to property owned by the Company, with aggregate
annual rentals of approximately $0.3 million. Management has evaluated its
exposure with respect to these rejected Leases and has concluded that the
Company has sufficient reserves to cover any resulting liability which may
occur with respect to these rejected Leases. Since the bankruptcy is not
concluded, the Company cannot determine whether Rickel will reject any
additional Leases or the extent to which the Company has become liable with
respect to the Assumed Liabilities in the event of Rickel's nonpayment
thereof.
OTHER:
The Company is also a party to a number of legal proceedings in the
ordinary course of business. Management believes that the ultimate resolution
of these proceedings will not, in the aggregate, have a material adverse
impact on the financial condition, results of operations or business of the
Company.
F-32
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
======================================================== ====================================================
- -------------------------------------------------------- ----------------------------------------------------
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 Pathmark
Stores, Inc. Supplement do not constitute an offer Pathmark Stores, Inc.
to sell, or a solicitation of an offer to buy, the
Senior Subordinated Notes or the Junior Subordinated
Deferred Coupon Notes in any jurisdiction where, or
to any person 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
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.
9 5/8% SENIOR SUBORDINATED
NOTES DUE 2003
---------------------
11 5/8% SUBORDINATED NOTE
DUE 2002
TABLE OF CONTENTS 12 5/8% SUBORDINATED DEBENTURES DUE 2002
AND
Available Information........................ 2 JUNIOR SUBORDINATED
Prospectus Summary........................... 3 DEFERRED COUPON
Risk Factors................................. 11 NOTES DUE 2003
Pathmark..................................... 15
Use of Proceeds.............................. 16
Capitalization............................... 17
Selected Historical Consolidated
Financial Data............................ 18
Management's Discussion and Analysis
of Financial Condition and Results ------------------
of Operations............................. 20
Business..................................... 28 PROSPECTUS
Certain Transactions......................... 34
Management................................... 35 ------------------
Principal Stockholders....................... 47
Description of the Securities................ 50
Certain Indebtedness of the Company.......... 79
Certain Federal Income Tax
Considerations............................ 82
Market-Making Activities of Merrill
Lynch..................................... 85 JUNE , 1997
Independent Auditors......................... 85
Index to Consolidated Financial
Statements................................ F-1
Index to Unaudited Consolidated
Financial Statements...................... F-26
- -------------------------------------------------------- ------------------------------------------------
======================================================== ================================================
</TABLE>
<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 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.
II-1
<PAGE>
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, 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 paid in settlement in connection
with any pending, threatened or completed claim, action, suit, proceeding or
investigation, whether civil, administrative or investigative, arising out of
or pertaining to any action or omission 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 to 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, 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*
Exhibit
No. Exhibit
----- -------
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 115/8% 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 125/8% Subordinated Debentures due
2002 of the Registrant (incorporated by reference 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).
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).
4.4F --Sixth Amendment to the Credit Agreement (incorporated by
reference from the 10-Q, as amended, for the
period ended November 2, 1996.
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).
II-3
<PAGE>
Exhibit
No. Exhibit
----- -------
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).
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
between 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 Retirement 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).
10.30* --Employment Agreement dated as of October 8, 1996 among Registrant,
SMG-II and James Donald (incorporated by reference from the
1996 10-K).
II-4
<PAGE>
Exhibit
No. Exhibit
----- -------
12.1 --Statements Regarding Computation to Ratio of Earnings to
Fixed Charges (incorporated herein by reference to Exhibit 12.1
to the 1996 Form 10-K).
21.1 --List of Subsidiaries of the Registrant (incorporated by reference
from Exhibit 22.1 to the 1996 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).
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 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.
- ------------
* 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 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.
II-5
<PAGE>
(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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange 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 25th day of June, 1997.
Dated: June 25, 1997 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
<S> <C> <C>
/s/ JAMES DONALD Director, Chairman, President and Chief June 25, 1997
---------------- Executive Officer*
(James Donald) (Principal Executive Officer)
/s/ RON MARSHALL Executive Vice President and Chief
----------------- Financial Officer* (Principal Financial June 25, 1997
(Ron Marshall) Officer)
/s/ JOSEPH ADELHARDT Senior Vice President and Controller June 25, 1997
-------------------- (Principal Accounting Officer)
(Joseph Adelhardt)
______________ Director June 25, 1997
(Matthias Bowman)
JOHN W. BOYLE Director* June 25, 1997
-------------
(John W. Boyle)
JAMES J. BURKE, JR. Director* June 25, 1997
-------------------
(James J. Burke, Jr.)
SUNIL C. KHANNA Director* June 25, 1997
---------------
(Sunil C. Khanna)
STEPHEN M. McLEAN Director* June 25, 1997
-----------------
(Stephen M. McLean)
______________ Director June 25, 1997
(Robert G. Miller)
U. PETER C. GUMMESON Director* June 25, 1997
--------------------
(U. Peter C. Gummeson)
JERRY G. RUBENSTEIN Director* June 25, 1997
-------------------
(Jerry G. Rubenstein)
*By: /s/ MARC A. STRASSLER
----------------------
Marc A. Strassler
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
Exhibit
No. Exhibit Page
----- ------- ----
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 115/8% 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 125/8% Subordinated Debentures due
2002 of the Registrant (incorporated by reference 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).
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).
4.4F --Sixth Amendment to the Credit Agreement (incorporated by
reference from the 10-Q, as amended, for the
period ended November 2, 1996).
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).
<PAGE>
Exhibit
No. Exhibit Page
----- ------- ----
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).
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
between 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 Retirement 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).
10.30* --Employment Agreement dated as of October 8, 1996 among Registrant,
SMG-II and James Donald (incorporated by reference from the
1996 10-K).
<PAGE>
Exhibit
No. Exhibit Page
----- ------- ----
12.1 --Statements Regarding Computation to Ratio of Earnings to
Fixed Charges (incorporated herein by reference to
Exhibit 12.1 to the 1996 Form 10-K).
21.1 --List of Subsidiaries of the Registrant (incorporated by
refer from Exhibit 22.1 to the 1996 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).
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 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.
- ------------
* 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.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
Pathmark Stores, Inc.
Woodbridge, New Jersey
We consent to the use in this Post-Effective Amendment No. 4 to
Registration Statement No. 33-59612 of Pathmark Stores, Inc. on Form S-1 of
our report dated April 23, 1997 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
"Independent Auditors" in such Prospectus.
Deloitte & Touche LLP
Parsippany, New Jersey
June 25, 1997
