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As filed with the Securities and Exchange Commission on June 2, 1998
Registration No. 33-59612
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 5
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)
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<S> <C> <C>
Delaware 5411 22-2879612
(State of other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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200 Milik Street
Carteret, New Jersey 07008
(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.
200 Milik Street
Carteret, New Jersey 07008
(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. 5
constitutes Post-Effective Amendment No. 5 to Registration Statement No.
33-50053 and Post Effective Amendment No. 6 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 check
the following box. /X/
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PATHMARK STORES, INC.
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
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Form S-1 Caption or Location
Item Number and Heading In Prospectus
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1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.......... Cross Reference Sheet; Outside Front Cover
Page
2. Inside Front and Outside Back Cover Pages
of Prospectus................................... Inside Front Cover Page; Outside Back Cover
Page
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.............. Prospectus Summary; Pathmark; Investment
Considerations; Selected Historical
Consolidated Financial Data; Consolidated
Financial 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
</TABLE>
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PROSPECTUS
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Pathmark Stores, Inc.
95/8% Senior Subordinated Notes due 2003
115/8% Subordinated Notes due 2002
125/8% Subordinated Debentures due 2002
Junior Subordinated Deferred Coupon Notes due 2003
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Interest on the 95/8% Senior Subordinated Notes due 2003 (the "Senior
Subordinated Notes") is payable semiannually on May 1 and November 1. Interest
on the 115/8% Subordinated Notes due 2002 (the "Subordinated Notes") is payable
semiannually on June 15 and December 15. Interest on the 125/8% 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.
("Pathmark" or the "Company"), in whole or in part, at any time on or after
November 1, 1998 in the case of the Senior 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. Each of
the Subordinated Notes and the Subordinated Debentures currently is 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), as the case may be, plus accrued and unpaid interest, if
any, to the date of redemption, plus the Applicable Premium (as defined). In
addition, upon a Change in Control and the satisfaction of certain conditions
regarding Senior Indebtedness, 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 January 31, 1998 was $587.9 million with
respect to the Senior Subordinated Notes, $1,026.0 million with respect to the
Subordinated Securities, and $1,320.8 million with respect to the Deferred
Coupon Notes, in each case including $92.8 million of standby letters of credit.
------------------
See "Risk Factors" beginning on page 12 for a discussion of certain
factors that should be considered by prospective investors in evaluating an
investment in the Securities.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCRUACY OR ADEQUACY OF THIS
PROSPECTUS. ANY PRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
This Prospectus, accompanied when appropriate by a prospectus supplement,
is to be used by Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") in connection with offers and sales of the Securities in market-making
transactions at negotiated prices related to prevailing market prices at the
time of sale. Merrill Lynch may act as principal or as agent in such
transaction.
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The date of this Prospectus is
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<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith is required to file periodic reports and other information with the
Securities and Exchange Commission (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 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 herein
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" mean Pathmark Stores, Inc.,
a Delaware corporation, and its subsidiaries. Unless otherwise indicated,
references herein to fiscal years and quarters are to the Company's 52-week
fiscal year (which ends on the Saturday nearest to January 31 in the following
calendar year) and related fiscal quarters. For example, "Fiscal 1997" refers
to the Company's fiscal year ended January 31, 1998. All fiscal years for
which information is included in this Prospectus had 52 weeks, except for
Fiscal 1995 which had 53 weeks.
Pathmark
General
At January 31, 1998, Pathmark operated 135 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 52,500 total square feet in size and generating high average
sales volume of approximately $27.5 million per store ($712 per selling square
foot) for stores open for all of Fiscal 1997. 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, deliver Pathmark "GREAT" 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 increased
operating efficiencies; and (iii) through efficient use of capital to renovate
and enlarge its existing store base.
Marketing and Merchandising
o Super Center Format. Of Pathmark's 135 stores, 132 are Super Centers. 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. The Pathmark
Super Center format is designed to provide Pathmark customers with a
substantially greater selection of quality perishable products and 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 1997 were Super Centers and Pathmark expects that all
new stores and enlargements thereafter will employ the same concept.
o Flexible Merchandising. Pathmark believes that its large-store format gives
it considerable flexibility to respond to changing consumer demands and
competition by varying and enhancing its merchandise selection. Pathmark's
"Big Deals" program, currently consisting of over 500 merchandise items,
offers large-sized merchandise at prices that Pathmark believes are
competitive with those available in
3
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"warehouse" and "club" stores. Pathmark emphasizes competitive pricing plus
weekly sales and promotions supported by extensive advertising, primarily
in print media. Merchandising flexibility and effectiveness is enhanced
through the increased utilization of a category management approach. In
addition, Pathmark offers for sale over 3,000 items through its private
label program.
o 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.
Pathmark believes that its well-established pharmacy operations provide a
competitive advantage in attracting and retaining customers.
Store Expansion and Renovation Program
o New Stores, Enlargements and Renovations. During Fiscal 1997, Pathmark
opened two new Pathmark Super Centers, closed 11 other stores, and
completed five renovations and eight enlargements. During the fiscal year
ending January 30, 1999 ("Fiscal 1998"), Pathmark plans to open up to two
new Super Centers and to complete up to an aggregate of 19 renovations and
enlargements.
o 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 1997, Pathmark derived approximately
77% of its supermarket sales from stores that were opened, enlarged or
renovated during the last five years.
o 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
o 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.
o Cost Reduction. The Company is continuously evaluating its operations in an
effort to reduce operating costs consistent with its overall objective of
providing a high level of customer service. During Fiscal 1997, the Company
took several steps to accomplish this goal. The Company closed or sold 11
stores, which had experienced unprofitable operating results. The Company
reevaluated its merchandise distribution methods, resulting in decisions to
outsource its trucking business and hire a trucking company to meet its
transportation needs, to outsource its pharmacy merchandise requirements to
a drug wholesaler, and to sell its grocery, frozen and perishable
distribution centers to and enter into a 15-year supply arrangement with
C&S Wholesale Grocers, Inc. ("C&S"), thereby lowering the Company's
distribution cost.
o Demographic and Geographic Concentration. The Company's stores serve
densely populated communities. In addition, all Pathmark supermarkets are
located within 100 miles of its corporate headquarters in Carteret, New
Jersey and the principal warehousing facilities that serve them. The high
population density, as well as the geographic concentration of stores,
provide substantial economy of scale opportunities.
4
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The Securities
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Senior Subordinated Notes:
Aggregate Principal Amount........ $440.0 million
Maturity Date..................... May 1, 2003
Interest Payment Dates............ Interest on the Senior Subordinated Notes is payable in cash semi-
annually on May 1 and November 1 of each year.
Market............................ The Senior Subordinated Notes are not listed on any securities exchange.
However, the Senior Subordinated Notes are traded in the
over-the-counter market. Merrill Lynch currently makes a market in the
Senior Subordinated Notes, although it is not obligated to do so, and
such market-making may be discontinued at any time without notice, at
the sole discretion of Merrill Lynch. 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, at the sole discretion of
Merrill Lynch. The Subordinated Notes were offered by the Company in
exchange for the Supermarkets General Holdings Corporation 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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5
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Market............................. The Subordinated Debentures are not listed on any securities exchange.
However, the Subordinated Debentures are traded in the
over-in-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, at
the sole discretion of Merrill Lynch. 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
Supermarkets General Holdings Corporation 12 5/8% Subordinated Debentures
due 2002 (the "Holdings Subordinated Debentures") pursuant to a
prospectus dated September 22, 1993. See "Pathmark--The
Recapitalization" and "Risk Factors--Trading Market is Not Assured".
Deferred Coupon Notes:
Maturity Date...................... November 1, 2003
Issue Price........................ $532.74 per $1,000 principal amount at final maturity.
Yield and Interest................. 10 3/4% per annum (computed on a semi-annual 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
Original Redemption of
Securities...................... The Securities are redeemable at the option of the Company, in whole or in
part, at any time on or after November 1, 1998, in the case of the
Senior 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. Each of the
Subordinated Notes and the Subordinated Debentures currently are
redeemable.
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6
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Change in Control.................. Prior to November 1, 1998, in the case of the Senior Subordinated Notes
and prior to November 1, 1999, in the case of the Deferred Coupon Notes,
upon a Change in Control, the Company will have the option to redeem the
Senior Subordinated Notes and the Deferred Coupon Notes, respectively,
in whole or in part, at a redemption price equal to the principal amount
or the Accreted Amount, as the case may be, plus accrued and unpaid
interest, if any, to the date of redemption, plus the Applicable
Premium. In addition, upon a Change in Control and the satisfaction of
certain conditions regarding Senior Indebtedness, each holder of the
Securities will have the right to require the Company to repurchase such
holder's Securities at 101% of the principal amount or 101% of the
Accreted Amount thereof, as the case maybe, 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.
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
January 31, 1998 was $587.9 million with respect to the Senior
Subordinated Notes, $1,026.0 million with respect to the Subordinated
Securities, and $1,320.8 million with respect to the Deferred Coupon
Notes, in each case including $92.8 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 unrestricted
subsidiaries; (ix) restriction on mergers and transfers of assets; and
(x) with respect to the Senior Subordinated Notes, a limitation on other
senior subordinated indebtedness.
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7
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The Recapitalization
The predecessor of the Company 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 (the "Acquisition")
Supermarkets General Corporation ("SGC"). In 1990, SGC was merged into the
Company and the Company retained the name SGC. In connection with the
recapitalization referred to below, the Company changed its name from SGC to
Pathmark Stores, Inc.
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, the "Spin-Offs"). In connection with the Plainbridge
Spin-Off, Pathmark entered into a logistical services agreement with Plainbridge
(the "Logistical Services Agreement") that provided for the continuing supply of
merchandise to the Pathmark supermarkets and drug stores and for the provision
of warehousing, distribution and logistical services relating to the supply of
such merchandise. 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.
On June 30, 1997, the Company entered into a new $500 million bank credit
agreement (the "Credit Agreement") with a group of lenders led by The Chase
Manhattan Bank. The Credit Agreement includes a $300 million term loan (the
"Term Loan") and a $200 million working capital facility (the "Working Capital
Facility"). The Company repaid in full the former term loan and former working
capital facility with the borrowings obtained under the Credit Agreement.
Under the Credit Agreement, the Term Loan and Working Capital Facility bear
interest at floating rates, ranging from LIBOR plus 2.25% to LIBOR plus 2.50%.
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 December 15,
2001. Under the Working Capital Facility, which expires on June 15, 2001, the
Company can borrow or obtain letters of credit in an aggregate amount not to
exceed $200 million, of which a maximum of $125 million can be in letters of
credit. In addition, pursuant to a Permitted Subordinated Debt Refinancing (as
defined in the Credit Agreement), the Working Capital Facility and a portion of
the Term Loan can be extended up to an additional two and one-half years and the
remainder of the Term Loan can be extended up to an additional three and
one-half years from the original expiration dates.
The Credit Agreement contains certain covenants, including financial
covenants concerning levels of operating cash flow, minimum interest and rent
expense coverage, maximum leverage ratio, maximum senior debt leverage ratio,
maximum consolidated rental payments and maximum capital expenditures. The
Credit Agreement also contains other covenants including, but not limited to,
covenants with respect to the following matters: (i) limitation on indebtedness;
(ii) limitation on liens; (iii) restriction on mergers (iv) restriction on
investments, loans, advances, guarantees and acquisitions; (v) restriction on
assets sales and sale/leaseback transactions; (vi) restriction on certain
payments of indebtedness and incurrence of certain agreements, and (vii)
restriction on transactions with affiliates.
8
<PAGE>
Risk Factors
See "Risk Factors" beginning on page 12 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.
9
<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
January 31, 1998. 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 of Plainbridge was a transfer of interest among
entities under common control, it is being accounted for at historical cost in a
manner similar to pooling-of-interests accounting. Accordingly, the consolidated
financial statements presented herein reflect the assets and liabilities and
related results of operations of the combined entity for all periods. The
Company sold its home centers segment in November 1994 and the accompanying
consolidated statements of operations include the operating results of the
Company's home centers segment as discontinued operations. The data that follows
should be read in conjunction with "Capitalization", "Selected Historical
Consolidated Financial Data", "Pathmark--The Recapitalization" and the
Consolidated Financial Statements of the Company and notes thereto included in
this Prospectus.
<TABLE>
<CAPTION>
Fiscal Years(a)
------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Sales....................................... $ 3,696 $ 3,710 $ 3,972 $ 3,968 $ 4,021
Gross profit................................ 1,044 1,091 1,134 1,102 1,069
Selling, general and administrative
expenses................................. 841 857 866 851 837
Depreciation and amortization(b)............ 84 89 80 75 70
Restructuring charge(c)..................... -- 9 -- -- --
Lease commitment charge(d).................. -- 9 -- -- --
Gain on disposition of freestanding drug
stores(e)................................ -- -- 16 -- --
Recapitalization expenses(f)................ -- -- -- -- 17
Provision for store closings(g)............. -- -- -- -- 6
Operating earnings.......................... 119 127 204 176 139
Interest expense, net(h).................... (164) (161) (165) (148) (172)
Earnings (loss) from continuing operations
before income taxes, gain on disposal of
home centers segment, extraordinary
items and cumulative effect of
accounting changes....................... (45) (34) 39 28 (33)
Earnings (loss) from continuing
operations before gain on disposal of
home centers segment, extraordinary
items and cumulative effect of
accounting changes....................... (28) (20) 33 24 (13)
Loss from discontinued operations........... -- -- -- (2) --
Net earnings (loss)......................... (36)(i) (21)(i) 33 39(j) (148)(i)(k)
Ratio of earnings to fixed charges(l)....... -- -- 1.22x 1.17x --
Deficiency in earnings available to cover
fixed charges(m)......................... $ 45 $ 34 $ -- $ -- $ 33
Other Operating Data:
Interest expense(n)......................... $ (164) $ (161) $ (165) $ (159) $ (186)
EBITDA-FIFO(o).............................. 201 236 269 253 232
EBITDA-FIFO coverage(o)(p).................. 1.2x 1.5x 1.6x 1.6x 1.2x
Capital expenditures and capital leases..... $ 58 $ 94 $ 111 $ 105 $ 96
Net debt (repayments) borrowings............ (58) (23) (82) (13) 166
</TABLE>
(footnotes on following page)
10
<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.
(b) 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 6 of the Notes to Consolidated Financial
Statements included elsewhere in this Prospectus.
(c) During Fiscal 1996, the Company recorded a pretax charge of $9 million for
reorganization and restructuring costs related to its administrative
operations. See Note 18 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
related to unfavorable lease commitments of certain unprofitable stores in
the Company's southern region. See Note 19 of the Notes to Consolidated
Financial Statements included elsewhere in this Prospectus.
(e) During Fiscal 1995, the Company recorded a pretax gain of $16 million
related to the disposition of its freestanding drug stores. See Note 20 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 closed or disposed 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 1997, the Company recorded an extraordinary charge of $8
million, net of an income tax benefit of $5 million and during Fiscal 1996,
the Company recorded an extraordinary charge of $1 million, net of an
income tax benefit, both related to the early extinguishment of debt. See
Note 17 of the Notes to Consolidated Financial Statements included
elsewhere in this 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.
(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.
(k) Includes the cumulative effect of accounting changes in Fiscal 1993 of $38
million, net of an income tax benefit of $28 million, reflecting the
adoption of Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits other than Pensions";
the adoption of Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits"; the change in the
method utilized to calculate last-in, first-out (LIFO) inventories; and the
change in the determination of the discount rate utilized to record the
present value of certain noncurrent liabilities. All of the accounting
changes were made as of the beginning of Fiscal 1993.
(l) 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).
(m) 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).
(n) Represents interest expense before the charge to discontinued operations.
(o) 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 1997 and
Fiscal 1996 was $5 million and $1 million, respectively; Fiscal 1995
was a $1 million LIFO charge; and Fiscal 1994 and Fiscal 1993 were a $1
million and $2 million LIFO credit, respectively. 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 recognized on the sale of certain real estate, exludes, in
Fiscal 1995 a gain on the disposition of freestanding drug stores of $16
million and a gain on the sale of certain real estate of $3 million 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".
(p) Calculated by dividing EBITDA-FIFO by interest expense, excluding interest
charged to discontinued operations.
11
<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 January 31, 1998, the Company's long-term debt, including obligations
under capital leases, was $1,348.2 million and its stockholder's deficiency was
$1,077.3 million. This long-term debt consists of $255.7 million of borrowings
under the Term Loan, no borrowings under the Working Capital Facility, $438.1
million of Senior Subordinated Notes, $199.0 million of Subordinated Notes,
$95.8 million of Subordinated Debentures, $187.1 million of Deferred Coupon
Notes and $172.5 million of other long-term debt primarily consisting of capital
leases. In addition, the Company as of January 31, 1998 has current debt of
$67.8 million, which includes $7.6 million of borrowings under the Term Loan, no
borrowings under the Working Capital Facility, $24.3 million of obligations
under capital leases and $35.9 million of other current debt primarily
consisting of mortgage notes. 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 Credit
Agreement, the Senior Subordinated Notes, the Subordinated Debentures and the
Deferred Coupon Notes, see "Prospects Summary--The Securities", "Prospectus
Summary--The Recapitalization", "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".
On June 30, 1997, the Company entered into the Credit Agreement with a group
of lenders led by The Chase Manhattan Bank. The Credit Agreement includes a $300
million Term Loan and a $200 million Working Capital Facility. In connection
with this refinancing, the Company repaid in full the former term loan ($230.5
million) and the former working capital facility ($57.5 million) with the
borrowings obtained under the Credit Agreement.
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 December
15, 2001. The Company also will be required to make sinking fund payments 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 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 and Working
Capital Facility in Fiscal 2001 and the maturity of the Subordinated Notes and
Subordinated Debentures in Fiscal 2002. The Company expects that it will be
necessary to refinance all or a portion of the Senior Subordinated Notes and
Deferred Coupon Notes due in Fiscal 2003. The Company may undertake a
refinancing of some or all of such indebtedness sometime prior to its maturity.
The Company was in compliance with its various debt covenants at January 31,
1998, and, based on management's operating
12
<PAGE>
projections for Fiscal 1998, the Company believes that it will be in compliance
with its various debt covenants. The Company's ability to make scheduled
payments or to refinance or otherwise meet its obligations with respect to its
indebtedness depends on its financial and operating performance, which, in turn,
is subject to prevailing economic conditions and to financial, business and
other factors beyond its control. Although the Company's cash flow from its
operations and borrowings have been sufficient to meet its debt service
obligations, there can be no assurance that the Company's operating results will
continue to be sufficient or that future borrowing facilities will be available
for payment or refinancing of the Company's indebtedness.
While it is the Company's intention to enter into other refinancings that it
considers advantageous, there can be no assurance 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 January 31,
1998, the Company had aggregate net losses of $1,146.0 million, of which
approximately $890.7 million represents the amortization and write-off of
goodwill associated with the Acquisition. At January 31, 1998, the Company had a
stockholder's deficiency of $1,077.3 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 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. The Subordinated
Securities are subordinated to the Senior Subordinated Notes. The amount of
Senior Indebtedness outstanding at January 31, 1998 was approximately $587.9
million with respect to the Senior Subordinated Notes, $1,026.0 million with
respect to the Subordinated Securities, and $1,320.8 million with respect to the
Deferred Coupon Notes, in each case including $92.8 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
Investment partnerships indirectly controlled by Merrill Lynch & Co.,
Inc. ("ML&Co.") beneficially own 85.7% of the outstanding shares of voting
stock of SMG-II Holdings Corporation ("SMG-II"). SMG-II owns 100% of the
outstanding common stock of Holdings, Holdings owns 100% of the outstanding
capital stock of PTK and PTK owns 100% of the outstanding capital stock of
the Company. As a result, ML&Co. indirectly controls the Company. See
"Principal Stockholders".
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S" or "Merrill
Lynch"), a wholly owned subsidiary of ML&Co., has 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.
13
<PAGE>
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 Note will be required to include in
income, as interest, original issue discount on the Deferred Coupon Note, but
generally will not be required to include in income any cash payments received
by such holder on the Deferred Coupon Note, even if denominated as interest. See
"Certain Federal Income Tax Considerations" for a more detailed discussion of
the federal income tax consequences to the holders of the Deferred Coupon Notes
regarding the purchase, ownership and disposition of the Deferred Coupon Notes.
If a bankruptcy case is commenced by or against the Company under the United
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 a services agreement with Chefmark. This
agreement governs the provision of services and payment of fees between the
Company and Chefmark. See "Certain Transactions--The Spin-Offs and Related
Agreements". In addition, Merrill Lynch has 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".
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 discretion.
14
<PAGE>
The Deferred Coupon Notes are listed on the NYSE. Merrill Lynch is currently
making offers and sales of the Deferred Coupon Notes in market-making
transactions as permitted by the rules applicable to members of the NYSE and the
Securities Act, although it is not obligated to do so, and any such market
making may be discontinued at any time without notice, at the sole discretion of
Merrill Lynch.
There can be no assurance as to the liquidity of the trading market for the
Securities or that an active public market for the Securities will develop. If
an active public market does not develop, the market price and liquidity of the
Securities may be adversely affected. See "Market-Making Activities of Merrill
Lynch".
PATHMARK
At January 31, 1998, Pathmark operated 135 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 52,500 total square feet in size and generating high average sales
volume of approximately $27.5 million per store ($712 per selling square foot)
for stores open for all of Fiscal 1997. 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 200 Milik
Street, Carteret, New Jersey 07008 and its telephone number is (732) 499-3000.
THE RECAPITALIZATION
The predecessor of the Company was incorporated in the state of Delaware in
June 1987 as a wholly owned subsidiary of Holdings. In October 1987, Holdings
acquired SGC. In 1990, SGC was merged into the Company and the Company retained
the name SGC. In connection with the recapitalization referred to below, the
Company changed its name from SGC to Pathmark.
Pathmark consummated 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, 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 and distributed the Capital Stock of Plainbridge to PTK. In
addition, Pathmark contributed to 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. In connection with the
Plainbridge Spin-Off, Pathmark entered into 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
Fiscal 1996, PTK contributed 100% of the capital stock of Plainbridge to
Pathmark, making Plainbridge a wholly owned subsidiary of Pathmark.
15
<PAGE>
1997 REFINANCING
On June 30, 1997, the Company entered into the Credit Agreement with a group
of lenders led by The Chase Manhattan Bank. The Credit Agreement includes a $300
million Term Loan and a $200 million Working Capital Facility. The Company
repaid in full the former term loan and former working capital facility with the
borrowings obtained under the Credit Agreement.
Under the Credit Agreement, the Term Loan and Working Capital Facility bear
interest at floating rates, ranging from LIBOR plus 2.25% to LIBOR plus 2.50%.
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 December 15,
2001. Under the Working Capital Facility, which expires on June 15, 2001, the
Company can borrow or obtain letters of credit in an aggregate amount not to
exceed $200 million, of which a maximum of $125 million can be in letters of
credit. In addition, pursuant to a Permitted Subordinated Debt Refinancing (as
defined in the Credit Agreement), the Working Capital Facility and a portion of
the Term Loan can be extended up to an additional two and one-half years and the
remainder of the Term Loan can be extended up to an additional three and
one-half years from the original expiration dates.
The Credit Agreement contains certain covenants, including financial
covenants concerning levels of operating cash flow, minimum interest and rent
expense coverage, maximum leverage ratio, maximum senior debt leverage ratio,
maximum consolidated rental payments and maximum capital expenditures. The
Credit Agreement also contains other covenants including, but not limited to,
covenants with respect to the following matters: (i) limitation on indebtedness;
(ii) limitation on liens; (iii) restriction on mergers; (iv) restriction on
investments, loans, advances, guarantees and acquisitions; (v) restriction on
assets sales and sale/leaseback transactions; (vi) restriction on certain
payments of indebtedness and incurrence of certain agreements; and (vii)
restriction on transactions with affiliates.
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 January 31, 1998. This table should be read in
conjunction with "The Recapitalization," "Certain Indebtedness of the Company"
and "Selected Historical Consolidated Financial Data."
<TABLE>
<CAPTION>
January 31, 1998
----------------
(in millions)
<S> <C>
Current Debt(1):
Current portion of Term Loan......................................................... $ 8
Current portion of other long-term debt (primarily mortgages)........................ 36
Current portion of lease obligations................................................. 24
--------
Total current debt.............................................................. $ 68
--------
--------
Long-term Debt(1):
Bank Credit Agreement:
Term Loan.......................................................................... $ 256
Working Capital Facility(2)........................................................ --
Senior Subordinated Notes due 2003................................................... 438
Intercompany Note in respect of Holdings Subordinated Notes.......................... 1
Subordinated Notes due 2002.......................................................... 199
Subordinated Debentures due 2002..................................................... 96
Deferred Coupon Notes due 2003....................................................... 187
Mortgages and notes payable.......................................................... 1
Lease obligations.................................................................... 170
--------
Total long-term debt and lease obligations...................................... 1,348
--------
Stockholder's Deficiency:
Common stock, 100 shares authorized, 100 shares issued............................... --
Paid-in capital...................................................................... 69
Accumulated deficit.................................................................. (1,146)
--------
Total stockholder's deficiency.................................................. (1,077)
--------
Net capitalization.............................................................. $ 271
--------
--------
</TABLE>
- -----------
(1) See Notes 9 and 12 to the Company's Consolidated Financial Statements for
the 52 weeks ended January 31, 1998 included elsewhere in this Prospectus
for further information with respect to the indebtedness of the Company.
(2) Excludes $92.8 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 January 31, 1998 were derived from audited consolidated
financial statements of the Company, of which each of the three fiscal years
ended January 31, 1998, together with the report of Deloitte & Touche LLP,
independent auditors, are included elsewhere herein. On March 1, 1996, the
Company reacquired all of the outstanding capital stock of Plainbridge by
means of a capital contribution from PTK. Since the acquisition of
Plainbridge was a transfer of interest among entities under common control,
it is being accounted for at historical cost in a manner similar to
pooling-of-interests accounting. Accordingly, the consolidated financial
statements presented herein reflect the assets and liabilities and related
results of operations of the combined entity for all periods. The Company
sold its home centers segment in November 1994 and the accompanying
consolidated statements of operations include the operating results of the
Company's home centers segment as discontinued operations. The data that
follows should be read in conjunction with "Capitalization", "Pathmark--The
Recapitalization" and the Consolidated Financial Statements of the Company
and notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
Fiscal Years(a)
------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Sales..................................................... $3,696 $3,710 $3,972 $3,968 $4,021
Cost of sales (exclusive of depreciation and amortization
shown separately below)................................ 2,652 2,619 2,838 2,866 2,952
------- -------- -------- -------- -------
Gross profit.............................................. 1,044 1,091 1,134 1,102 1,069
Selling, general and administrative expenses.............. 841 857 866 851 837
Depreciation and amortization(b).......................... 84 89 80 75 70
Restructuring charge(c)................................... -- 9 -- -- --
Lease commitment charge(d)................................ -- 9 -- -- --
Gain on disposition of freestanding drug stores(e)........ -- -- 16 -- --
Recapitalization expense(f)............................... -- -- -- -- 17
Provision for store closings(g)........................... -- -- -- -- 6
------- -------- -------- -------- -------
Operating earnings........................................ 119 127 204 176 139
Interest expense, net(h).................................. (164) (161) (165) (148) (172)
------- -------- -------- -------- -------
Earnings (loss) from continuing operations before income
taxes, gain on disposal of home centers segment,
extraordinary items and cumulative effect of accounting
changes................................................. (45) (34) 39 28 (33)
Income tax benefit (provision)............................ 17 14 (6) (4) 20
------- -------- -------- -------- -------
Earnings (loss) from continuing operations before gain on
disposal of home centers segment, extraordinary items
and cumulative effect of accounting changes............. (28) (20) 33 24 (13)
Loss from discontinued operations......................... -- -- -- (2) --
Gain on disposal of home centers segment, net of tax(i)... -- -- -- 17 --
------- -------- -------- -------- -------
Earnings (loss) before extraordinary items and cumulative
effect of accounting changes............................. (28) (20) 33 39 (13)
Extraordinary items, net of tax(j)........................ (8) (1) -- -- (97)
------- -------- -------- -------- -------
Earnings (loss) before cumulative effect of accounting
changes................................................ (36) (21) 33 39 (110)
Cumulative effect of accounting changes, net of tax(k).... -- -- -- -- (38)
------- -------- -------- -------- -------
Net earnings (loss)....................................... $ (36) $ (21) $ 33 $ 39 $ (148)
------- -------- -------- -------- -------
------- -------- -------- -------- -------
Ratio of earnings to fixed charges(l)..................... -- -- 1.22x 1.17x --
------- -------- -------- -------- -------
------- -------- -------- -------- -------
Deficiency in earnings available to cover fixed charges(m) $ 45 $ 34 $ -- $ -- $ 33
------- -------- -------- -------- -------
------- -------- -------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
As of
-----------------------------------------------------------
Jan. 31, Feb. 1, Feb. 3, Jan. 28, Jan. 29,
1998 1997 1996 1995 1994
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets.............................................. $ 900 $ 990 $ 986 $1,018 $1,119
Working capital deficiency................................ 109 182 173 122 107
Lease obligations, long-term.............................. 170 175 140 127 132
Long-term debt, net of current maturities................. 1,178 1,186 1,215 1,273 1,286
Stockholder's deficiency.................................. 1,077 1,042 1,024 1,030 1,001
</TABLE>
(footnotes on following page)
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.
(b) 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 6 of the Notes to Consolidated
Financial Statements included elsewhere in this Prospectus.
(c) During Fiscal 1996, the Company recorded a pretax charge of $9 million
for reorganization and restructuring costs related to its administrative
operations. See Note 18 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
related to unfavorable lease commitments of certain unprofitable stores
in the Company's southern region. See Note 19 of the Notes to
Consolidated Financial Statements included elsewhere in this Prospectus.
(e) During Fiscal 1995, the Company recorded a pretax gain of $16 million
related to the disposition of its freestanding drug stores. See Note 20
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 closed or disposed 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 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.
(j) During Fiscal 1997, the Company recorded an extraordinary charge of $8
million, net of an income tax benefit of $5 million and during Fiscal
1996, the Company recorded an extraordinary charge of $1 million, net of
an income tax benefit, both related to the early extinguishment of debt.
See Note 17 of the Notes to Consolidated Financial Statements included
elsewhere in this 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.
(k) 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.
(l) 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).
(m) 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
Fiscal 1997 v. Fiscal 1996
Sales: Sales in Fiscal 1997 were $3.70 billion compared to $3.71 billion
in the prior year, a decrease of 0.4%. Same store sales increased 0.8% for the
year. Sales in Fiscal 1997 compared to Fiscal 1996 were also impacted by new
store openings and remodels, offset by sold and closed stores. During Fiscal
1997, the Company opened two new Pathmark stores, completed 13 major renovations
and enlargements to existing supermarkets, and sold four and closed seven
stores. The Company operated 135 and 144 supermarkets at the end of Fiscal 1997
and Fiscal 1996, respectively.
Gross Profit: Gross profit in Fiscal 1997 was $1.04 billion or 28.2% of
sales compared to $1.09 billion or 29.4% of sales for the prior year. The
decrease in gross profit in both dollars and as a percentage of sales for Fiscal
1997 compared to the prior year was due to the promotional pricing program
introduced during the first quarter of Fiscal 1997, as well as the
pre-Thanksgiving holiday promotions during the third quarter of Fiscal 1997. The
cost of goods sold comparisons were impacted by a pretax LIFO credit of $5.4
million and $1.3 million in Fiscal 1997 and Fiscal 1996, respectively. The
pretax LIFO credit for Fiscal 1997 includes a $2.0 million gain on a LIFO
liquidation related to the sale of the Company's pharmaceutical warehouse
inventory and a $0.8 million gain on a LIFO liquidation related to the sale of
the Company's grocery, frozen and perishable merchandise in connection with the
C&S Supply Agreement (see Note 3 of the Notes to the Consolidated Financial
Statements at Item 8, Part II of this Form 10-K).
Selling, General and Administrative Expenses ("SG&A"): SG&A in Fiscal 1997
decreased $16.4 million or 1.9% compared to the prior year. As a percentage of
sales, SG&A was 22.8% in Fiscal 1997, down from 23.1% in the prior year. The
decrease in SG&A as a percentage of sales in Fiscal 1997 compared to the prior
year was primarily due to lower administrative, advertising, claims and
utilities expenses, partially offset by higher store labor expenses.
Depreciation and Amortization: Depreciation and amortization of $83.4
million in Fiscal 1997 was $5.6 million lower than the prior year of $89.0
million. The decrease in depreciation and amortization expense in Fiscal 1997
compared to the prior year was primarily due to a pretax charge of $5.4 million
in Fiscal 1996 to write down 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 $3.4 million and $3.1 million in Fiscal 1997
and Fiscal 1996, respectively.
Operating Earnings: Operating earnings in Fiscal 1997 were $119.3 million
compared to the prior year of $127.1 million. The decrease in operating earnings
in Fiscal 1997 compared to the prior year was primarily due to lower gross
profit, partially offset by lower SG&A and depreciation expense in Fiscal 1997
and the restructuring charge and the lease commitment charge in Fiscal 1996.
Interest Expense: Interest expense was $164.2 million in Fiscal 1997
compared to $161.5 million in the prior year. The increase in interest expense
in Fiscal 1997 compared to the prior year was primarily due to increases in
lease obligations and the debt accretion on the Deferred Coupon Notes, partially
offset by lower amortization of debt issuance costs.
20
<PAGE>
Income Taxes: The income tax benefit was $16.7 million and $14.4 million
in Fiscal 1997 and Fiscal 1996, respectively. The 1997 benefit is net of a $1.9
million increase in the valuation allowance related to the Company's deferred
income tax assets. The Company believes that it is more likely than not that the
net deferred income tax assets of $54.0 million at January 31, 1998 will be
realized through the implementation of tax strategies which could generate
taxable income.
During Fiscal 1997, the Company made income tax payments of $4.8 million
and received income tax refunds of $4.3 million. During Fiscal 1996, the Company
made income tax payments of $4.6 million and received income tax refunds of $5.5
million.
Extraordinary Items: During the second quarter of Fiscal 1997, in
connection with the Credit Agreement, the Company wrote off deferred financing
fees of $12.8 million related to the former bank credit agreement, resulting in
a net loss on early extinguishment of debt of $7.4 million. In addition, during
the second quarter of Fiscal 1997, in connection with the sale of certain
mortgaged property, the Company made a mortgage pay down of $2.9 million,
including accrued interest and debt premiums, resulting in a net loss on early
extinguishment of debt of $0.1 million.
During the second quarter of Fiscal 1996, in connection with the sale of
certain mortgaged property, the Company made a mortgage pay down of $5.3
million, including accrued interest and debt premiums, resulting in a net loss
on early extinguishment of debt of $0.2 million. During the first quarter of
Fiscal 1996, in connection with the termination of the Plainbridge, Inc. credit
agreement due to the reacquisition of Plainbridge, Inc. 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 Fiscal 1997, the Company's net loss was $35.7
million compared to a net loss of $20.8 million for the prior year. The increase
in net loss in Fiscal 1997 compared to the prior year was primarily due to lower
operating earnings, the extraordinary loss on early extinguishment of debt and
higher interest expense, partially offset by a higher income tax benefit.
EBITDA-FIFO: EBITDA-FIFO was $201.2 million and $236.4 million in 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 and should not be
construed as an alternative to, or a better indicator of, operating income or
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 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. The Company operated 144
supermarkets at the end of both Fiscal 1996 and Fiscal 1995.
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
21
<PAGE>
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.
Selling, General and Administrative Expenses: 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., 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 $203.4 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 in Fiscal 1996 and the gain on disposition of freestanding
drug stores in Fiscal 1995, 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 in effect at such time, 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.
22
<PAGE>
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.
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 pay down of $5.3 million, including accrued interest and debt premiums,
resulting in a net loss on early extinguishment of debt of $0.2 million.
Summary of Operations: 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, 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 in Fiscal 1996 and $268.9
million in Fiscal 1995, respectively.
Financial Condition
Debt Service: During Fiscal 1997, total long-term debt decreased $38.7
million from Fiscal 1996 year end primarily due to a net decrease in borrowings
under the Credit Agreement compared to the former credit agreement and a
decrease in certain mortgages, partially offset by debt accretion on the
Deferred Coupon Notes. In addition, during Fiscal 1997, total lease obligations
decreased $3.9 million from Fiscal 1996.
On January 29, 1998, the Company sold its fee and leasehold interests in the
Facilities to C&S for approximately $104 million (approximately $60 million,
excluding inventory) in connection with the C&S Purchase Agreement.
Simultaneously, Pathmark and C&S commenced the 15-year Supply Agreement,
pursuant to which C&S will supply Pathmark with substantially all of its
grocery, frozen and perishable merchandise requirements. In conjunction with the
C&S Purchase Agreement, the Company used $32.5 million of the net proceeds to
pay down a portion of the Term Loan. The remainder of the net proceeds were used
to pay down the Working Capital Facility and invest in marketable securities of
$52.0 million at January 31, 1998. As a result, there were no borrowings under
the Working Capital Facility at January 31, 1998. However, subsequent to Fiscal
1997, the Company utilized its marketable securities and borrowings under the
Working Capital Facility, which have increased to $15.0 million at April 21,
1998, primarily to pay down trade accounts payable related to the inventory sold
in connection with the C&S Purchase Agreement and other liabilities.
During the second quarter of Fiscal 1997, the Company sold four supermarkets
that it announced for divestiture at the end of Fiscal 1996 for $14.9 million
and sold two former drug stores for $11.1 million. There was no gain or loss
recognized on these transactions. The proceeds were used to pay down a portion
of the former working capital facility and related mortgages.
On June 30, 1997, the Company entered into the Credit Agreement with a group
of lenders led by The Chase Manhattan Bank. The Credit Agreement includes a $300
million Term Loan and a $200 million Working Capital Facility. In connection
with this refinancing, the Company repaid in full the former term loan ($230.5
million) and the former working capital facility ($57.5 million) with the
borrowings obtained under the Credit Agreement.
23
<PAGE>
Under the Credit Agreement, the Term Loan and Working Capital Facility bear
interest at floating rates, ranging from LIBOR plus 2.25% to LIBOR plus 2.50%.
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 December 15,
2001. Under the Working Capital Facility, which expires on June 15, 2001, the
Company can borrow or obtain letters of credit in an aggregate amount not to
exceed $200 million, of which a maximum of $125 million can be in letters of
credit. In addition, pursuant to a Permitted Subordinated Debt Refinancing (as
defined in the Credit Agreement), the Working Capital Facility and a portion of
the Term Loan can be extended up to an additional two and one-half years and the
remainder of the Term Loan can be extended up to an additional three and
one-half years from the original expiration dates.
The Company is 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 majority of the cash interest payments are scheduled in the second and
fourth quarters.
The amounts of principal payments required each year on outstanding
long-term debt (excluding the original issue discount with respect to the
Deferred Coupon Notes) are as follows (dollars in millions):
<TABLE>
<CAPTION>
Principal
Fiscal Years Payments
------------ --------
<S> <C>
1998........................................................... $ 43.5
1999........................................................... 14.9
2000........................................................... 78.2
2001........................................................... 263.8
2002........................................................... 195.8
2003........................................................... 625.2
</TABLE>
Liquidity: The consolidated financial statements of the Company indicate
that, at January 31, 1998, current liabilities exceeded current assets by $109.3
million and stockholder's deficiency was $1.08 billion. Management believes that
cash flows generated from operations, supplemented by the unused borrowing
capacity under the Working Capital Facility and the availability of capital
lease financing will be sufficient to pay the Company's debts as they come due,
provide for its capital expenditure program and meet its 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 and Working Capital Facility in Fiscal 2001, and the maturity of the
Subordinated Notes and Subordinated Debentures in Fiscal 2002. The Company
expects that it will be necessary to refinance all or a portion of the Senior
Subordinated Notes and the Deferred Coupon Notes due in Fiscal 2003. The Company
may undertake a refinancing of some or all of such indebtedness sometime prior
to its maturity. The Company was in compliance with its various debt covenants
at January 31, 1998 and, based on management's operating projections for Fiscal
1998, the Company believes that it will continue to be in compliance with its
various debt covenants. The Company's ability to make scheduled payments or to
refinance or otherwise meet its obligations with respect to its indebtedness
depends on its financial and operating performance, which in turn, is subject to
prevailing economic conditions and to financial, business and other factors
beyond its control. Although the Company's cash flow from its operations and
borrowings has been sufficient to meet its debt service obligations, there can
be no assurance that the Company's operating results will continue to be
sufficient or that future borrowing facilities will be available for payment or
refinancing of the Company's indebtedness.
24
<PAGE>
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 Fiscal 1997, including
property acquired under capital leases, were $57.9 million compared to $94.1
million for Fiscal 1996 and $110.6 million for Fiscal 1995. During Fiscal 1997,
the Company opened two new Pathmark stores, completed 13 major renovations and
enlargements to existing supermarkets, and sold four and closed seven stores.
During Fiscal 1998, the Company plans to open up two new Pathmark stores, close
one store and complete up to an aggregate of 19 major renovations and
enlargements. Capital expenditures for Fiscal 1998, including property to be
acquired under capital leases, are estimated to be $70.0 million. Management
believes that cash flows generated from operations, supplemented by the unused
borrowing capacity under the Working Capital Facility and the availability of
capital lease financing will be sufficient to provide for the Company's capital
expenditure program.
Cash Flows: Cash provided by operating activities amounted to $56.5 million
in Fiscal 1997 compared to $73.6 million in the prior year. The decrease in net
cash provided by operating activities was primarily due to an increase in the
net loss and an increase in cash used for operating assets and liabilities. Cash
provided by investing activities was $95.5 million in Fiscal 1997 compared to
cash used for investing activities of $46.8 million in the prior year. The
increase in cash provided by investing activities was primarily due to an
increase in proceeds related to the C&S Purchase Agreement, property
dispositions and a decrease in expenditures of property and equipment. Cash used
for financing activities was $101.8 million in Fiscal 1997 compared to $28.6
million in the prior year. The increase in cash used for financing activities
was primarily due to a decrease in borrowings in conjunction with the Credit
Agreement, net of repaying in full the former term loan and former working
capital facility in Fiscal 1997, the proceeds from the lease financing of three
supermarket locations in Fiscal 1996, a decrease in book overdrafts and an
increase in deferred financing fees related to the Credit Agreement in Fiscal
1997.
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 the 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 former working capital facility, the proceeds from the lease financing
of three supermarket locations, a decrease in dividends to PTK and a pay down 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.
Year 2000 Compliance: The Company has initiated a program to prepare the
Company's computer systems and applications for the year 2000. This is necessary
because computer programs have been written using two digits rather than four to
define the applicable year. Any of the Company's computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculation
causing disruptions of operations, including, among other things, a temporary
inability to process normal business transactions.
25
<PAGE>
The Company expects that the principal costs will be those associated with
the remediation and testing of its computer applications. Through IBM, this
effort is under way across the Company, and is following a process of inventory,
scoping and analysis, modification, testing and certification, and
implementation. A major portion of these costs will be met under the existing
agreement with IBM through a reprioritization of technology development
initiatives, with the remainder representing incremental costs. The Company does
not believe that the total cost of such compliance will be material.
Additionally, the Company believes, based on available information, that it will
be able to manage its total year 2000 transition without any material adverse
effect on its operations.
In addition, the Company is communicating with major vendors to determine
the extent to which the Company is vulnerable to third-party year 2000
compliance issues.
New Accounting Standards Not Yet Adopted
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is not expected
to have an effect on the Company's financial statements currently being
presented because the Company, at this time, has no items of comprehensive
income other than net income.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS No. 131"), which will be effective for financial statements beginning
after December 15, 1997. SFAS No. 131 redefines how operating segments are
determined and requires expanded quantitative disclosures relating to a
company's operating statements. SFAS No. 131, which the Company is evaluating,
will impact the financial statements to the extent that it is necessary to
provide additional disclosure about the Company's segments.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits ("SFAS No. 132"), which will be effective for financial
statements beginning after December 15, 1997. SFAS No. 132 revises employers'
disclosure about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. The Company will adopt
SFAS No. 132 in Fiscal 1998 and believes it will impact the financial statements
to the extent that it is necessary to provide additional disclosure about the
Company's pensions and other postretirement benefits.
Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company due to
adverse changes in financial rates. The Company is exposed to market risk in the
area of interest rates. This exposure is directly related to its Term Loan and
borrowing activities under the Working Capital Facility. The Company does not
currently maintain any interest rate hedging arrangements due to the reasonable
risk that near-term interest rates will not rise significantly. The Company is
continuously evaluating this risk and will implement interest rate hedging
arrangements when deemed appropriate.
BUSINESS
At January 31, 1998, Pathmark operated 135 supermarkets primarily in the
densely populated New York-New Jersey and Philadelphia metropolitan areas. These
metropolitan areas contain over 10% of the population and grocery sales in the
United States. These supermarkets are located in New Jersey, New York,
Pennsylvania, Delaware and Connecticut and consist of 5.2 million selling square
footage and 7.1 million total square footage.
26
<PAGE>
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, deliver Pathmark "GREAT" 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
increased operating efficiencies; and (iii) through efficient use of capital to
renovate and enlarge its existing store base.
Marketing and Merchandising
- Super Center Format. Of Pathmark's 135 stores, 132 are Super Centers. 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. The Pathmark
Super Center format is designed to provide Pathmark customers with a
substantially greater selection of quality perishable products and 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 1997 were Super Centers and Pathmark expects that all
new stores and enlargements thereafter will employ the same concept.
- Flexible Merchandising. Pathmark believes that its large-store format gives
it considerable flexibility to respond to changing consumer demands and
competition by varying and enhancing its merchandise selection. Pathmark's
"Big Deals" program, currently consisting of over 500 merchandise items,
offers large-sized merchandise at prices that Pathmark believes are
competitive with those available in "warehouse" and "club" stores. Pathmark
emphasizes competitive pricing plus weekly sales and promotions supported
by extensive advertising, primarily in print media. Merchandising
flexibility and effectiveness is enhanced through the increased utilization
of a category management approach. 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.
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 1997, Pathmark
opened two new Pathmark Super Centers, closed 11 other stores, and
completed five renovations and eight enlargements. During the fiscal year
ending January 30, 1999 ("Fiscal 1998"), Pathmark plans to open up to two
new Super Centers and to complete up to an aggregate of 19 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 1997, Pathmark derived approximately
77% 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.
27
<PAGE>
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.
- Cost Reduction. The Company is continuously evaluating its operations in an
effort to reduce operating costs consistent with its overall objective of
providing a high level of customer service. During Fiscal 1997, the Company
took several steps to accomplish this goal. The Company closed or sold 11
stores, which had experienced unprofitable operating results. The Company
reevaluated its merchandise distribution methods, resulting in decisions to
outsource its trucking business and hire a trucking company to meet its
transportation needs, to outsource its pharmacy merchandise requirements to
a drug wholesaler, and to sell its grocery, frozen and perishable
distribution centers to and enter into a 15-year supply arrangement with
C&S, thereby lowering the Company's distribution costs (see Item 1 -
Business - Supply and Distribution).
- Demographic and Geographic Concentration. The Company's stores serve
densely populated communities. In addition, all Pathmark supermarkets are
located within 100 miles of its corporate headquarters in Carteret, New
Jersey and the principal warehousing facilities that serve them. The high
population density, as well as the geographic concentration of stores,
provide substantial economy of scale opportunities.
Pathmark Supermarkets
Pathmark operated 135 supermarkets at January 31, 1998. Super Centers
accounted for approximately 98% of Pathmark's supermarket sales for Fiscal 1997.
The following table presents selected data reflecting supermarket sales and
stores for the last five fiscal years.
<TABLE>
<CAPTION>
Fiscal Years
-------------------------------------------------------
1997 1996 1995(a) 1994 1993
---- ---- ------- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Supermarket sales................................. $ 3,692 $ 3,701 $ 3,853 $ 3,785 $ 3,839
Average sales per Supermarket(b).................. 27.5 26.1 26.4 25.9 25.4
Number of Supermarkets:
Renovations(c).............................. 5 16 14 14 12
Enlargements(d)............................. 8 5 4 11 5
Opened...................................... 2 4 5 4 4
Closed...................................... 11 4 4 6 5
Type of Supermarket(e):
Super Center................................ 132 139 139 137 138
Conventional................................ 3 5 5 6 7
Total Supermarkets Open at Year End......... 135 144 144 143 145
</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 $400,000 or
more per store and in Fiscal 1997 averaged over $1.0 million per store.
(d) Enlargements involve the addition of selling space and in Fiscal 1997
averaged an investment in excess of $3.5 million.
(e) Includes two stores not wholly owned. The sales figures for these stores are
not included above.
By industry standards, Pathmark stores are large and productive, averaging
approximately 52,500 square feet in size and generating high average sales
volume of approximately $27.5 million per store ($712 per selling square foot)
for stores open for all of Fiscal 1997. Pathmark's 135 supermarkets at January
31, 1998 ranged from 26,008 to 66,463 square feet in size and included 126
supermarkets that are 40,000
28
<PAGE>
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 five supermarkets contained
in-store pharmacy departments at the end of Fiscal 1997.
Pathmark pioneered the development of the large "superstore" in the Middle
Atlantic States, opening the first "Pathmark Super Center" in 1977, and
currently operates 132 such 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 and expanded health and beauty
care department. All Super Centers have EFT and credit transaction capability at
their checkout terminals, and 77 supermarkets also feature in-store automated
teller machines. During Fiscal 1996, the Company entered into master licensing
agreements with two regional banking institutions to place up to 98 in-store
banks in Pathmark supermarkets over the next two 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 the close of Fiscal 1997,
58 stores had in-store banks and Pathmark expects to have 36 additional in-store
banks by the end of Fiscal 1998.
Over the past several years, Pathmark stores have been 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 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 1997 were Super Centers
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 to 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 1997, Pathmark completed
94 renovations and enlargements and opened 19 new supermarkets. At the close of
Fiscal 1997, sales in these stores accounted for approximately 77% of its total
supermarket sales. Pathmark currently expects to open up to two non-replacement
Pathmark Super Centers and to complete up to 19 renovations and enlargements
during Fiscal 1998.
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 from 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, and
radio. 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.
29
<PAGE>
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 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 and
shelf allocation, and quicker customer check-out, but have also assisted in
the analysis of product movement, profit contribution and demographic
merchandising. Pathmark also has a computer-assisted ordering system that
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 ten-year facilities management
and systems integration agreement with International Business Machines Corp.
("IBM"). Under the agreement, IBM has taken over Pathmark's data center
operations, mainframe processing and information system functions and is
providing business applications and systems designed to enhance Pathmark's
customer service and efficiency.
Supply and Distribution
During the third quarter of Fiscal 1997, the Company decided to outsource
its trucking operations and retained a local trucking company to provide the
requisite trucking services. Management believes that the outsourcing
arrangement will result in lower transportation costs to the Company.
On January 29, 1998, the Company sold its Woodbridge, New Jersey
distribution center and office complex and its leasehold interests in its two
distribution centers and its banana ripening facility in North Brunswick, New
Jersey, Dayton, New Jersey and Avenel, New Jersey, respectively (all of the
foregoing buildings are hereinafter referred to as, collectively, the
"Facilities"), to C&S, including the fixtures, equipment and inventory in
each of those Facilities, for approximately $104 million (approximately $60
million, excluding inventory) ("the C&S Purchase Agreement"). The Company
used a portion of the net proceeds to partially reduce the borrowings under
the Credit Agreement. At the same time, the term of the Company's 15-year
supply agreement with C&S (the "Supply Agreement") commenced, pursuant to
which C&S will supply substantially all of the Company's grocery, frozen and
perishable merchandise requirements, formerly owned and warehoused by the
Company.
Beginning in January 1998, the Supply Agreement with C&S commenced. Under
the Supply Agreement, C&S supplies to the Company and distributes from the
Facilities substantially all of the grocery, frozen and perishable (includes
meat, produce, seafood and delicatessen items) merchandise formerly owned and
warehoused by the Company. Management believes that the Supply Agreement with
C&S enhances the Company's ability to offer consistently fresh and high
quality products to its customers at a reduced
30
<PAGE>
distribution cost to the Company. Prior to the Supply Agreement, products
purchased for resale by the Company were purchased directly from a large
group of unaffiliated suppliers, including large consumer products companies.
The Company continues to operate a 266,000 square foot leased general
merchandise, health and beauty care products and tobacco distribution center
in Edison, New Jersey (the "GMDC"), which opened in 1980. During Fiscal 1997,
the Company outsourced its pharmacy merchandise distribution requirements to
a pharmaceutical wholesaler. In addition, Chefmark, an affiliate of the
Company, owns and operates a 16,000 square foot commissary in Somerset, New
Jersey (the "Chefmark Facility") in which high quality cooked meat products
and salads are prepared for sale and supplied to the Company for sale in the
Company's delicatessen departments. The Chefmark Facility opened in 1976.
Prior to the Supply Agreement with C&S, the Company operated, in addition
to the GMDC and Chefmark Facility, four distribution centers and a banana
ripening facility, aggregating approximately 1.3 million square feet.
In addition to reducing the Company's distribution and transportation
costs, management believes that the logistics outsourcing will enhance its
ability to better concentrate on the core business of the Company.
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, regional and local 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 January 31, 1998, the Company employed approximately 28,000
people, of whom approximately 20,500 were employed on a part-time basis.
Approximately 88% of the Company's employees are covered by 18 collective
bargaining agreements (typically having three or four year terms) negotiated
with approximately 15 different local unions. During Fiscal 1998, eight
contracts, covering approximately 13,000 Pathmark associates in approximately
90% of the stores and approximately 130 associates in GMDC, will expire. The
Company does not anticipate any difficulty in renegotiating these contracts.
31
<PAGE>
The Company believes that its relationship with its employees is
generally satisfactory.
Properties
Reference is made to the answer to Item 1, "Business" of the Company's
annual report as Form 10-K for Fiscal 1997 (the "1997 10-K") 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 the 1997 10-K for information concerning the Company's distribution
facilities.
Pathmark's 135 supermarkets have an aggregate selling area of
approximately 5.2 million square feet. Eighteen of the supermarkets are owned
by Pathmark and the remaining 117 are leased. These supermarkets are either
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 leases its corporate headquarters in Carteret, NJ in premises
totaling approximately 150,000 square feet in size.
Most of the facilities owned by Pathmark are owned subject to mortgages.
Pathmark plans to acquire leasehold or fee interests in any property on which
new stores or other facilities are opened and 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.
32
<PAGE>
CERTAIN TRANSACTIONS
Certain Relationships and Related Transactions
The authorized capital stock of SMG-II consists of (i) 3,000,000 shares
of SMG-II Class A Common Stock, par value $.01 per share ("SMG-II Class A
Common Stock"), (ii) 3,000,000 shares of SMG-II Class B Common Stock, par
value $.01 per share ("SMG-II Class B Common Stock"), of which 672,476 and
320,000 shares, respectively, were issued and outstanding at May 29, 1998,
and (iii) 4,000,000 shares of SMG-II Preferred Stock, par value $.01 per
share, of which 1,500,000 shares are designated SMG-II Series A Preferred
Stock, 1,500,000 shares are designated SMG-II Series B Preferred Stock and
33,520 shares are designated SMG-II Series C Preferred Stock (the three
series of Preferred Stock being hereinafter collectively referred to as the
"SMG-II Preferred Stock").
At May 29, 1998, there were issued and outstanding 236,731 shares of
SMG-II Series A Preferred Stock, 180,769 shares of SMG-II Series B Preferred
Stock and 8,520 shares of SMG-II Series C Preferred Stock.
SMG-II's capital stock is held beneficially as follows: (i) SMG-II Class
A Common Stock by approximately 55 holders, including six affiliates of
ML&Co. (the "ML Common Investors"), Chemical Investments, Inc. ("CII"), an
affiliate of Chase Manhattan Corp., and 48 current and former members of the
Company's management or their heirs (the "Management Investors"); (ii) SMG-II
Series A Preferred Stock by five affiliates of ML&Co. (the "ML Preferred
Investors", the ML Common Investors and ML Preferred Investors being
hereinafter collectively referred to as the "ML Investors"); (iii) SMG-II
Class B Common Stock by three holders, including CII, The Equitable Life
Assurance Society of the United States ("Equitable") and an affiliate of
Equitable (collectively, the "Equitable Investors"); (iv) SMG-II Series B
Preferred Stock by three holders, including CII and the Equitable Investors;
and (v) SMG-II Series C Preferred Stock held by one Management Investor.
Holders of shares of SMG-II Class A Common Stock are entitled to one vote per
share on all matters to be voted on by stockholders. Holders of shares of
SMG-II Class B Common Stock are not entitled to any voting rights, except as
required by law or as otherwise provided in the Restated Certificate of
Incorporation of SMG-II. Subject to compliance with certain procedures,
holders of shares of SMG-II Class B Common Stock may exchange their shares
for shares of SMG-II Class A Common Stock and holders of shares of SMG-II
Class A Common Stock may exchange their shares for shares of SMG-II Class B
Common Stock, in each case on a one-for-one basis. All current holders of
SMG-II capital stock are parties to a Stockholders Agreement, dated as of
February 4, 1991, as amended, with SMG-II (the "Stockholders Agreement").
See "--Employment Agreements".
Holders of shares of SMG-II Series A Preferred Stock and SMG-II Series C
Preferred Stock are entitled to one vote per share of SMG-II Class A Common
Stock, into which such SMG-II Series A Preferred Stock and SMG-II Series C
Preferred Stock are convertible, on all matters to be voted on by SMG-II
stockholders, subject to increase to 1.11 votes per share upon the occurrence
of certain events. Holders of shares of SMG-II Series B Preferred Stock are
entitled to one vote per share of SMG-II Class B Common Stock into which such
SMG-II Series B Preferred Stock is convertible for the purpose of voting on
any consolidation or merger, sale, lease or exchange of substantially all of
the assets or any liquidation, dissolution or winding up, of SMG-II.
Additionally, holders of SMG-II Preferred Stock have separate voting rights
with respect to alteration in the voting powers, rights and preferences and
certain other terms affecting the SMG-II Preferred Stock. Subject to
compliance with certain procedures, holders of SMG-II Series B Preferred
Stock may exchange their shares for shares of SMG-II Series A Preferred Stock
and holders of SMG-II Series A Preferred Stock may exchange their shares for
shares of SMG-II Series B Preferred Stock, on a one-for-one basis. Each
series of SMG-II Preferred Stock ranks pari passu with each other series.
At the option of the holder, SMG-II Preferred Stock is convertible into
SMG-II Common Stock at any time, on or prior to the occurrence of certain
events, including an initial public offering of in excess of 25% of the
number of outstanding shares of common stock of SMG-II, at a conversion ratio
of one share of the corresponding class of SMG-II Common Stock for each share
of SMG-II Preferred Stock, subject to adjustment upon the occurrence of
certain events.
33
<PAGE>
Holders of SMG-II Preferred Stock are party with the holders of SMG-II
Common Stock to a Stockholders Agreement dated as February 4, 1991 (the
"Stockholders Agreement") which, among other things, restricts the
transferability of SMG-II capital stock and relates to the corporate
governance of SMG-II. None of SMG-II's capital stock is publicly traded on
any market.
In October 1996, pursuant to the Donald Agreement (as defined below),
James L. Donald, an Officer and Director of the Company and Holdings, 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 (as defined below) and the Option (as defined
below). 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 (as defined in the Donald Agreement) or is terminated for Cause (as
defined in the Donald Agreement) or in the event of his death, the
outstanding portion of the loan will become immediately due and payable. As
of May 26, 1998, Mr. Donald remained indebted to the Company in the amount of
$2,812,500.
In March 1990, Jerry G. Rubenstein, a Director of the Company and
Holdings, 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 April 1, 1998,
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
-------------------------------------------------- ------------
<S> <C>
MATTHIAS BOWMAN, 49, Director of Merrill Lynch Capital Partners, Inc., ("MLCP"), 1997
an investment firm affiliated with ML&Co., since 1998; Chief Executive
Officer of MLCP from 1994 to 1998; Vice Chairman of Investment Banking with
ML&Co. since 1993; Managing Director of MLPFS since 1992. Mr. Bowman is also
a Director of U.S. Foodservice Corp.
JOHN W. BOYLE, 69, 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, from 1983 to 1995. Mr. Boyle is also Chairman of United Artists Theater Circuit,
Inc.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Director of the
Company
Name, Age, Principal Occupation and Other Directorships Since
-------------------------------------------------- ------------
<S> <C>
JAMES J. BURKE, JR., 46, Partner and a Director of Stonington Partners, Inc. ("SPI"), a 1988 (1)
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.
JAMES DONALD, 44, Chairman, President and Chief Executive Officer of the Company 1966
since 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.
U. PETER C. GUMMESON, 39, Senior Vice President, Albion Alliance LLC, an asset 1996
manager specializing in private debt and equity securities, since 1996.
Mr. Gummeson has also been Managing Director of Alliance Corporate Finance
Group Incorporated, an asset manager specializing in private debt and equity
securities, since 1984. Both firms are affiliated with The Equitable
Investors.
STEPHEN M. McLEAN, 40, Partner and a Director of SPI since 1993; Partner of MLCP from 1993 1987 (1)
to 1994; Senior Vice President of MLCP from 1987 to 1993; Director of MLCP since 1987;
Managing Director of the Investment Banking Division of ML&Co. until 1994. Mr. McLean
is also a Director of CMI Industries, Inc., Dictaphone Corporation, Merisel, Inc. and
Packard Bio Science Company.
ROBERT G. MILLER, 54, Chief Executive Officer of Fred Meyer, Inc., a diversified retailer 1997
since 1991. Mr. Miller is also a Director of PacifiCorp.
ROBERT J. MYLOD, JR., 31, Principal of SPI since 1996; Associate of SPI from November 1993 1998
to December 1995; Associate of MLCP prior thereto. Mr. Mylod was also an Associate of
the Investment Banking Division of MLPFS from 1993 to 1994. Mr. Mylod is also a
Director of Goss Graphic Systems, Inc.
JERRY G. RUBENSTEIN, 68, Managing Partner, Omni Management Associates; Consultant to MLCP 1996
since 1988.
</TABLE>
- ------------------
(1) Includes service with Pathmark's predecessor.
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, McLean, Mylod 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.
35
<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
---- ---- ---------------- ----------
<S> <C> <C> <C>
JAMES DONALD 44 Chairman, President and Chief Executive Officer (since 1996 (1)
October 1996).
RON MARSHALL 44 Executive Vice President and Chief Financial Officer 1994 (2)
(since October 1994). Senior Vice President and Chief
Financial Officer of Dart Group Corporation (a diversified
retailer) prior thereto.
EILEEN SCOTT 45 Executive Vice President, Marketing and Distribution 1998
(since January 1998); Vice President, Non-Foods
Merchandising and Pharmacy (November 1995--December 1997);
Vice President, Sales & Advertising (August 1994--November
1995); Director of Grocery Sales prior thereto. Ms. Scott
joined the Company in 1969.
JOHN SHEEHAN 40 Executive Vice President--Operations (since January 1998); 1996
Senior Vice President--Operations (October 1996--December
1997); Director of Operations, Albertsons, Inc., prior
thereto.
JOSEPH W. ADELHARDT 51 Senior Vice President and Controller (since January 1987 (3)
1996); Vice President and Controller prior
thereto. Mr. Adelhardt joined the Company in
1976.
HARVEY M. GUTMAN 52 Senior Vice President--Retail Development. 1990 (3)
Mr. Gutman joined the Company in 1976.
ROBERT JOYCE 52 Senior Vice President--Administration (since October 1996); 1989 (3)
Executive Vice President--Operations (January 1996--October
1996); Senior Vice President--Operations (March
1995--January 1996); Senior Vice President--Administration
prior thereto. Mr. Joyce joined the Company in 1963.
MARC A. STRASSLER 49 Vice President, Secretary and General Counsel. Mr. 1987 (3)
Strassler joined the Company in 1974.
FRANK VITRANO 42 Vice President and Treasurer since December 1996; 1996
Treasurer (July 1995--December 1996); Director --Risk
Management prior thereto. Mr. Vitrano joined the Company
in 1972.
MYRON D. WAXBERG 64 Vice President and General Counsel--Real Estate. Mr. 1991 (3)
Waxberg joined the Company in 1976.
</TABLE>
-----------
(1) Member of the Company's Board of Directors.
(2) Mr. Marshall announced his resignation effective June 1, 1998.
(3) Includes service with Pathmark's predecessor.
36
<PAGE>
Executive Compensation
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
---------------------------------------- -----------------------
Other Restricted Securities
Annual Stock Underlying All Other
Bonus Compensation Awards Options/SARs Compensation
Name and Principal Position Year Salary ($) ($)(1) ($) (2) ($) (#) ($) (3)
---- --------- -------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
James L. Donald.................... 1997 600,000 425,000 1,179,390 -- -- 3,632
Chairman, President and Chief 1996 193,846 1,175,000 340,021 3,400,000 100,000 16,821
Executive Officer
Ron Marshall....................... 1997 306,750 202,455 -- -- -- 4,750
Executive Vice President 1996 300,000 36,000 49,177 -- -- 5,250
and Chief Financial Officer 1995 280,289 168,173 -- -- -- --
John Sheehan....................... 1997 186,312 52,537 80,793 -- -- --
Executive Vice President - 1996 51,923 81,231 9,733 -- -- --
Operations
Robert Joyce....................... 1997 230,062 63,267 2,195 -- -- 5,600
Senior Vice President - 1996 223,846 26,862 2,195 -- -- 5,250
Administration 1995 205,437 97,334 2,200 -- 250 5,250
Marc A. Strassler.................. 1997 163,600 81,800 3,841 -- -- 5,600
Vice President, Secretary and 1996 143,950 10,796 3,841 -- -- 5,250
General Counsel 1995 135,850 42,793 3,849 -- -- 5,250
Neill Crowley(4)................... 1997 219,746 -- -- -- -- 242,043
Executive Vice President- 1996 253,750 30,450 -- -- -- 5,250
Retail Services 1995 247,212 112,241 15,000 -- -- 4,341
Ronald Rallo(4).................... 1997 197,131 -- 4,023 -- -- 183,215
Senior Vice President- 1996 245,000 29,400 4,389 -- -- 5,250
Merchandising 1995 227,500 113,585 4,399 -- -- 5,250
</TABLE>
-----------
(1) The amounts with respect to Fiscal 1997 paid to Mr. Donald represented the
minimum amount payable pursuant to the Donald Agreement. The amounts with
respect to Fiscal 1997 in this column represent bonuses awarded to the
other named executives in recognition of their efforts in connection with
the Company's distribution outsourcing with C&S and refinancing of its
outstanding bank indebtedness.
(2) Represents in Fiscal 1997 (i) with respect to Mr. Donald, payment of
$54,390 as reimbursement for relocation expenses and forgiveness of loan
payments due to the Company of $1,125,000; (ii) with respect to Mr.
Sheehan, reimbursement of relocation expenses; and (iii) with respect to
Messrs. Rallo, Joyce and Strassler, payments as reimbursement for interest
paid to Holdings for loans, each of less than $60,000, 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.
(3) Represents in Fiscal 1997 (i) with respect to Mr. Donald, payments of
$3,632 for a term life insurance premium on Mr. Donald's life; (ii) with
respect to Mr. Rallo, payments of $5,600 representing the Company's
matching contribution to the SGC Savings Plan and $177,615 paid to Mr.
Rallo pursuant to a Resignation Agreement dated November 4, 1997 among Mr.
Rallo, the Company and SMG-II (the "Rallo Agreement"); (iii) with respect
to Mr. Crowley, payments of $5,600, representing the Company's matching
contribution to the SGC Savings Plan and $236,443 pursuant to a Resignation
Agreement dated November 4, 1997 among Mr. Crowley, SMG-II and the Company
(the "Crowley Agreement"); and (iv) with respect to the other named
executive officers, the Company's matching contribution under the SGC
Savings Plan.
(4) Messrs. Rallo and Crowley each retired on November 4, 1997.
37
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values(1)
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised
Options/SARs at FY-End (#)
Name (Exercisable/Unexercisable)
---- ---------------------------
<S> <C>
Neill Crowley............................................................................. 1,000/0
James Donald.............................................................................. 0/100,000
Robert Joyce.............................................................................. 2,420/0
Ron Marshall.............................................................................. 2,000/0
Ronald Rallo.............................................................................. 2,850/0
John Sheehan.............................................................................. 0/0
Marc Strassler............................................................................ 1,080/0
</TABLE>
- -----------
(1) Options shown were granted pursuant to the SMG-II 1987 Management Investors
Stock Option Plan (except with respect to Mr. Donald) and relate to shares
of Class A Common Stock of SMG-II. No options were either granted to or
exercised by any of the above named executives in Fiscal 1997.
<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 3.33% for every year of credited service
less than 30. Covered compensation under the Pension Plans includes all
cash compensation subject to withholding plus amounts deferred under the
Savings Plan pursuant to Section 401(k) of the Internal Revenue Code of
1986, as amended, and as to individuals identified in the Summary
Compensation Table, would be the amount set forth in that table under the
headings "Salary" and "Bonus". The table shows the estimated annual
benefits an individual would be entitled to receive if normal retirement at
age 65 occurred in January 1998 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 1998. As of December 31, 1997, the following individuals had the
number of years of credited service indicated after their names: Mr.
Donald, 1.2; Mr. Crowley, 3.6; Mr. Rallo, 30; Mr. Joyce, 27.7; Mr.
Marshall, 3.2; Mr. Sheehan, 1.2; and Mr. Strassler, 23.8. As described
below in "Compensation Plans and Arrangements", certain of the named
executives is party to a Supplemental Retirement Agreement with Pathmark.
38
<PAGE>
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, 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 Messrs. Joyce, Strassler 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 ($100,000 for Mr. Strassler), whichever is less, and (c) 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 thereafter to a maximum of 35% of his final average
Compensation based on 14 years of service. "Compensation" includes base salary
and bonus 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 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 and SMG-II entered into an
employment agreement with Mr. James L. Donald (the "Donald Agreement") 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 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 SMG-II Preferred Stock
awarded to Mr. Donald ranks pari passu with the existing SMG-II convertible
preferred stock, will accrue dividends at a rate of 10% per annum and will be
convertible into SMG-II Common Stock on a one-for-one basis. As of the Effective
Date, the Preferred Stock had accumulated dividends of approximately $122 per
share.
39
<PAGE>
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 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 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 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 :
<TABLE>
<CAPTION>
Target Price per Target Price per
Share/Option Share/Option
Period of Time Component A Component B
-------------- ---------------- ----------------
<S> <C> <C>
Prior to 2/1/00 $ 100 $ 150
2/1/00 to 1/31/01 $ 125 $ 250
2/1/01 and after $ 150 $ 350
</TABLE>
(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.
40
<PAGE>
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.
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, (ii) 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
described 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.
41
<PAGE>
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.
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 of or has reason to know of 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.
42
<PAGE>
"Public Offering" means a public offering of the Common Stock pursuant to an
effective registration statement under the Securities Act.
"Realization Event" means the receipt by the ML Investors 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.
"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 April 1, 1997, the Company entered into an employment agreement with
Mr. Sheehan. 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. Strassler 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) April 1, 1999 for Mr.
Sheehan and on each successive April 1st thereafter; (b) February 1, 1999 for
Mr. Marshall and on each successive February 1st thereafter, and (c) June 1,
1998 for Mr. Strassler 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) $205,000 for Mr. Sheehan, (b)
$309,000 for Mr. Marshall, (c) $164,800 for Mr. Strassler, and (d) $231,750 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. Sheehan and Marshall, up to 55% and 50% of his annual base salary with
respect to Messrs. Joyce and Strassler, respectively, 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 the applicable
Employment Agreement would have expired had it not been automatically renewed
but for said termination or resignation, reduced by any compensation or benefits
which the executive is entitled to receive in connection with his employment by
another employer during said period.
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.
43
<PAGE>
On November 4, 1997 (the "Retirement Date"), Messrs. Crowley and Rallo each
retired as executive officers of the Company. Pursuant to the Rallo Agreement,
Mr. Rallo will be entitled to receive his base salary at the annual rate of
$252,350 per year during the period commencing November 5, 1997 and ending
May 31, 1999, or the date of his death, if earlier (the "Rallo Benefit Period").
Additionally, Mr. Rallo will be entitled to receive continued health coverage
through the Rallo 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 and
benefits earned by Mr. Rallo for any calendar year during the Rallo Benefit
Period. Additionally, pursuant to the terms of the Rallo Agreement, the Company
made a cash lump sum payment to Mr. Rallo of $138,792 on December 15, 1997.
Pursuant to the Crowley Agreement, Mr. Crowley will be entitled to receive his
base salary at the annual rate of $288,399 per year during the period commencing
November 5, 1997 and ending July 31, 1999, or the date of his death, if earlier
(the "Crowley Benefit Period"). Additionally, Mr. Crowley will be entitled to
receive continued health coverage through the Crowley 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 and benefits earned by Mr. Crowley for any calendar
year during the Crowley Benefit Period. Additionally, pursuant to the terms of
the Crowley Agreement, the Company made a cash lump sum payment to Mr. Crowley
of $192,074 on April 15, 1998.
Compensation Committee Interlocks and Insider Participation
Messrs. Burke, Boyle and McLean comprise the compensation committee of the
Board of Directors of SMG-II and are responsible for decisions concerning
compensation of the executive officers of the Company. Messrs. Burke and McLean
are directors of MLCP and 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" and "Certain Transactions--Certain
Relationships and Related Transactions".
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 aggregate
annual retainer of $20,000 per year, plus travel expenses, for service as a
director on the Board of Directors of SMG-II and its subsidiaries, including the
Company.
PRINCIPAL STOCKHOLDERS
As of April 15, 1998, 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, 1998,
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, as amended, are set forth
in the following table:
<TABLE>
<CAPTION>
Number % of
Name of Shares Class
---- --------- ------
<S> <C> <C>
SMG-II Class A Common Stock
Merrill Lynch Capital Appreciation Partnership No. IX, L.P.(2)................... 488,704.8 66.6
ML Offshore LBO Partnership No. IX(2)............................................ 12,424.7 1.7
Barfield House
St. Julians Avenue
St. Peter Port
Guernsey
Channel Islands
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Number % of
Name of Shares Class
---- --------- -----
<S> <C> <C>
ML Employees LBO Partnership No. I, L.P.(2)...................................... 12,148.6 1.6
ML IBK Positions, Inc.(3)........................................................ 21,258.9 2.9
Merchant Banking L.P. No. 1(3)................................................... 8,119 1.1
Merrill Lynch KECALP L.P. 1987(3)................................................ 7,344 1.0
Chemical Investments, Inc.(4).................................................... 30,000 4.1
270 Park Avenue
New York, NY 10017
Management and other employees (including former employees of Pathmark).......... 153,894 (1) 21.0
200 Milik Street
Carteret, NJ 07008
SMG-II Class B Common Stock
The Equitable Life Assurance Society of the United States(5)..................... 150,000 46.9
c/o Albion Alliance LLC
1345 Avenue of the Americas, 39th Floor
New York, NY 10005
Equitable Deal Flow Fund, L.P.(5)................................................ 150,000 46.9
c/o Albion Alliance LLC
1345 Avenue of the Americas, 39th Floor
New York, NY 10005
Chemical Investments, 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)
Chemical Investments, 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
200 Milik Street
Carteret, NJ 07008
</TABLE>
- ---------
(1) Includes presently exercisable options granted under the Plan for
61,418 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
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
Mylod) are consultants to MLCP.
(3) Merchant Banking L.P. No. 1, Merchant Banking L.P. No. IV, Merrill Lynch
KECALP L.P. 1987, Merrill Lynch KECALP L.P. 1989, Merrill Lynch KECALP L.P.
1991 and ML IBK Positions, Inc. are indirectly controlled by ML&Co. The
address of such entities is c/o James Caruso, Merrill Lynch & Co., Inc.,
World Financial Center, South Tower, New York, New York, 10080-6123.
(4) Chemical Investments, 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.
45
<PAGE>
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, 1998,
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
Robert Miller............................................. -- --
Neill Crowley(2).......................................... 1,000 *
U. Peter C. Gummeson...................................... -- --
Ron Marshall(2)........................................... 2,000 *
Robert J. Mylod, Jr.(1)................................... -- --
Stephen M. McLean(1)...................................... -- --
John W. Boyle(2).......................................... 3,000 *
Ronald Rallo(2)........................................... 3,250 *
Jerry G. Rubenstein(2).................................... 2,500 *
Robert Joyce(2)........................................... 3,120 *
Marc Strassler(2)......................................... 1,430 *
John Sheehan.............................................. -- --
Directors and named executive officers as a group(1)(2) 36,151 4.9
</TABLE>
- ----------------
* Less than 1%
(1) Does not include 550,000 shares of SMG-II Class A Common Stock or 236,731.5
shares of SMG-II Series A Preferred Stock owned beneficially by a group of
which MLCP is a part. Messrs. Burke, McLean and 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. Crowley, 1,000; Mr.
Marshall, 2,000; Mr. Joyce, 2,420; Mr. Rallo, 2,850; Mr. Rubenstein, 1,000;
Mr. Strassler, 1,080 and Mr. Boyle, 3,000 and all directors and executive
officers as a group, 42,461.
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 ("TIA"). The following summarizes
the material provisions of the Indentures, including the definitions of certain
terms therein and those terms made a part of the Indentures by the TIA.
References to Indenture provisions include all the Indentures unless otherwise
indicated.
46
<PAGE>
General
The Senior Subordinated Notes. The Senior Subordinated Notes will mature on
May 1, 2003, are limited to $440.0 million aggregate principal amount, and are
unsecured obligations of the Company. Each Senior Subordinated Note bears
interest at the rate of 9 5/8% payable in cash semiannually on May 1 and
November 1 of each year to the Person in whose name the Senior Subordinated
Note (or any predecessor Senior Subordinated Note) is registered at the close
of business on the April 15 or October 15 preceding such interest payment
date. (Sections 202, 301 and 307)
The Subordinated Notes. The Subordinated Notes will mature on June 15, 2002,
are limited to $200.0 million aggregate principal amount, of which $199.0
million was issued in conjunction with the Recapitalization, and are unsecured
obligations of the Company. Each Subordinated Note bears interest at the rate of
11 5/8% payable in cash semiannually on June 15 and December 15 of each year, to
the Person in whose name the Subordinated Note (or any predecessor Note) is
registered at the close of business on the June 1 or December 1 preceding such
interest payment date. (Sections 202, 301 and 307)
The Subordinated Debentures. The Subordinated Debentures will mature on
June 15, 2002, are limited to $95.8 million aggregate principal amount and
are unsecured obligations of the Company. Each Subordinated Debenture bears
interest at the rate of 12 5/8% payable in cash semiannually on June 15 and
December 15 of each year, to the Person in whose name the Subordinated
Debenture (or any predecessor Subordinated Debenture) is registered at the
close of business on the June 1 or December 1 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 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)
Principal or 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:
47
<PAGE>
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
1998.................................................... 104.82%
1999.................................................... 102.41%
</TABLE>
and thereafter at 100% of the principal amount, in each case together with
accrued interest to the redemption date (subject to the right of Holders of
record on relevant record dates to receive interest due on an interest payment
date).
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:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
1998.................................................... 103.8750%
1999.................................................... 101.9375%
</TABLE>
and thereafter at 100% of the principal amount, in each case together with
accrued interest to the redemption date (subject to the right of Holders of
record on relevant record dates to receive interest due on an interest payment
date).
If less than all of the Subordinated Notes are to be redeemed, the Trustee
shall select the Subordinated Notes or portions thereof to be redeemed pro rata,
by lot or by any other method the Subordinated Notes Trustee 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:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
1998................................................. 102.700%
1999................................................. 101.800%
2000................................................. 100.900%
</TABLE>
and thereafter at 100% of the principal amount, in each case together with
accrued interest to the redemption date (subject to the right of Holders of
record on relevant record dates to receive interest due on an interest payment
date).
48
<PAGE>
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).
In addition, the Deferred Coupon Notes will be subject to redemption, at the
option of the Company, prior to November 1, 1999, in whole or in part, at any
time within 180 days after a Change in Control on not less than 21 nor more than
60 days' prior notice to each holder of Deferred Coupon Notes to be redeemed in
amounts of $1,000 or an integral multiple of $1,000, at a redemption price equal
to the sum of (i) the Accreted Amount as of the date of redemption plus (ii)
accrued and unpaid interest, if any, to the redemption date (subject to the
right of Holders of record on relevant record dates to receive interest due on
an interest payment date) plus (iii) the Applicable Premium.
If less than all of the Deferred Coupon Notes are to be redeemed, the
Deferred Coupon Notes Trustee shall select the respective Deferred Coupon Notes,
or portions thereof, to be redeemed pro rata, by lot or by any other method the
respective Trustees shall deem fair and reasonable.
The Subordinated Notes Sinking Fund
The sinking fund for the Subordinated Notes provides for the mandatory
redemption of 25% of the original aggregate principal amount of the Subordinated
Notes on each of June 15, 2000 and June 15, 2001, at a redemption price equal to
100% of the principal amount, plus accrued and unpaid interest to the redemption
date, providing for the redemption of 50% of the original aggregate principal
amount of the Subordinated Notes prior to maturity. (Sections 203 and 1201) If
less than all of the Subordinated Notes are to be redeemed, the Subordinated
Notes Trustee shall select the Subordinated Notes or portions thereof to be
redeemed pro rata, by lot or by any other method the Subordinated Notes Trustee
shall deem fair and reasonable. The Company may, at its option, receive a credit
against sinking fund obligations equal to the aggregate principal amount of
Subordinated Notes acquired by the Company and surrendered to the Subordinated
Notes Trustee for cancellation and of Subordinated Notes redeemed or called for
redemption otherwise than through operation of the sinking fund that have not
previously been so credited for such purpose by the Subordinated Notes Trustee.
(Section 1202)
Subordination
The Securities are subordinated in right of payment to the prior payment in
full of all Senior Indebtedness (as defined below); provided, however, that the
Senior Subordinated Notes shall rank pari passu with, or prior to, all existing
and future Indebtedness of the Company that is subordinated to any Senior
Indebtedness and the Subordinated Securities shall rank pari passu with, or
prior to, all existing and future Indebtedness of the Company (other than
Permitted Senior Subordinated Indebtedness) that is subordinated to any Senior
Indebtedness of the Company. (Section 1301) In the event of: (a) any insolvency
or bankruptcy case or proceeding, or any receivership, liquidation,
reorganization or other similar case or proceeding in connection therewith,
relative to the Company or to its creditors, as such, or to its assets, or (b)
any liquidation, dissolution or other winding up of the Company, whether
voluntary or involuntary and whether or not involving insolvency or bankruptcy,
or (c) any assignment for the benefit of creditors or any other 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
49
<PAGE>
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 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,
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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 (iii) the 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 January 31, 1998, the Company
had outstanding $587.9 million of Senior Indebtedness, $481.8 million of
Subordinated Indebtedness and no Indebtedness pari passu with the Senior
Subordinated Notes. With respect to the Subordinated Securities, on January 31,
1998, the Company had outstanding $1,026.0 million of Senior Indebtedness,
$187.1 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 January 31, 1998 the
Company had outstanding $1,320.8 million of Senior Indebtedness and no
Subordinated Indebtedness or Indebtedness pari passu in right of payment to the
Deferred Coupon Notes.
"Specified Senior Indebtedness" means (i) all Senior Indebtedness under the
Bank Credit Agreement, (ii) with respect to the Subordinated Securities, Senior
Indebtedness under the Senior Subordinated Notes, (iii) with respect to the
Deferred Coupon Notes, Senior Indebtedness under the Senior Subordinated Notes
and (iv) any other issue of Senior Indebtedness or refinancings thereof
permitted by said definition having a principal amount of at least $100.0
million and is specifically designated in the instrument evidencing such Senior
Indebtedness as "Specified Senior Indebtedness" by the Company. For purposes of
this definition: (a) the amount of the Indebtedness of the Company with respect
to any Interest Rate Hedge Arrangement shall be deemed to be the 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 beneficiary if the obligations of such
Subsidiary thereunder are guaranteed by the Company.
"Senior Indebtedness" means the principal of, premium, if any, and interest
on (such interest on Senior Indebtedness, wherever referred to in the
Indentures, being deemed to include interest accruing after the filing of a
petition initiating any proceeding pursuant to any bankruptcy law in accordance
with and at the rate (including any rate applicable upon any default or event of
default, to the extent lawful) specified in any document evidencing the Senior
Indebtedness, whether or not the claim for such interest is allowed as a claim
after such filing in any proceeding under such bankruptcy law) any Indebtedness
of the Company (other than as otherwise provided in this definition), whether
outstanding on the date of the Indentures, 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
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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, or (vii)
that portion of any Indebtedness (other than any Indebtedness provided by any
lender pursuant to the Bank Credit Agreement, except to the extent such
Indebtedness is provided with actual knowledge on the part of any such lender
that the incurrence thereof by the Company is a violation of the Indentures)
which at the time of issuance is issued in violation of the Indentures.
Certain Covenants
The Indentures contain, among others, the following covenants:
Limitation on Indebtedness. The Company will not, and will not permit any
of its Subsidiaries to, create, incur, assume, or directly or indirectly
guarantee or in any other manner become directly or indirectly liable for the
payment of, any Indebtedness (including any Acquired Indebtedness, but excluding
Permitted Indebtedness) unless, at the time of such event and after giving
effect thereto on a pro forma basis, the Company's Consolidated Fixed Charge
Coverage Ratio for the four full fiscal quarters immediately preceding such
event, taken as one period and calculated on the assumption that such
Indebtedness had been incurred on the first day of such four-quarter period and
on the assumption that, in connection with the incurrence of any such
Indebtedness, any related acquisition (whether by means of purchase, merger or
otherwise) and any related repayment of Indebtedness also had occurred on such
date with the appropriate adjustments with respect to such acquisition and
repayment being included in such pro forma calculation, would have been at least
equal to 1.75 to 1.0. (Section 1007)
Limitation on Restricted Payments. (a) The Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly,
(i) declare or pay any dividend on, or make any distribution to
holders of, any shares of the Company's Capital Stock (other than dividends
or distributions payable in shares of its Qualified Capital Stock or in
options, warrants or other rights to purchase such Qualified Capital
Stock),
(ii) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any Affiliate thereof (other than Capital
Stock of (x) any Subsidiary held by the Company or any of its
Majority-owned Subsidiaries and (y) any Majority-owned Subsidiary of the
Company) or any options, warrants or other rights to acquire such Capital
Stock,
(iii) make any principal payment on or redeem, repurchase, defease
or otherwise acquire or retire for value, prior to any scheduled principal
payment, scheduled sinking fund payment or maturity, any Indebtedness of
the Company which is pari passu with or expressly subordinate in right of
payment to the Senior Subordinated Notes, the Subordinated Securities or
the Deferred Coupon Notes, as the case may be,
(iv) declare or pay any dividend or distribution on any Capital
Stock of any Subsidiary to any Person (other than the Company or any of its
Majority-owned Subsidiaries) or purchase, redeem or 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
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(v) incur, create or assume any guarantee of Indebtedness of any
Affiliate of the Company (other than a Majority-owned Subsidiary of the
Company) or make any Investment (other than any Permitted Investment) in
any Person, including any Unrestricted Subsidiary
(such payments or other actions described in the foregoing clauses (i)
through (v), other than any such action that is a Permitted Payment, are
collectively referred to as "Restricted Payments"), unless at the time of
and after giving effect to the proposed Restricted Payment (the amount of
any such Restricted Payment, if other than cash, as determined by the Board
of Directors of the Company, whose determination shall be conclusive and
evidenced by a board resolution), (1) no Default or Event of Default shall
have occurred and be continuing and (2) the aggregate amount of all
Restricted Payments (plus Permitted Payments set forth in clauses (b)(vi),
(b)(xi) and (b)(xii) below) declared or made after the date of the
Indentures (including Investments in Unrestricted Subsidiaries pursuant to
the "Limitation on Unrestricted Subsidiaries" covenant) shall not exceed
the sum of
(A) 50% of the aggregate cumulative Consolidated Adjusted Net Income
of the Company accrued on a cumulative basis during the period beginning on
October 31, 1993 and ending on the last day of the Company's last fiscal
quarter ending prior to the date of such proposed Restricted Payment (or,
if such aggregate cumulative Consolidated Adjusted Net Income shall be a
loss, minus 100% of such loss), plus
(B) the aggregate net proceeds, including the Fair Market Value of
property other than cash (as determined by the Company's Board of
Directors, whose determination shall be conclusive), received after the
date of the Indentures by the Company as capital contributions to the
Company, plus
(C) the aggregate net proceeds, including the Fair Market Value of
property other than cash (as determined by the Company's Board of
Directors, whose determination shall be conclusive), received after the
date of the Indentures by the Company from the issuance or sale (other than
to any of its Subsidiaries) of shares of Qualified Capital Stock of the
Company or warrants, options or rights to purchase shares (other than 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
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paid in lieu of the issuance of fractional shares or scrip) or out of the
net cash proceeds of a substantially concurrent issue and sale (other
than to a Subsidiary) of shares of Qualified Capital Stock of the Company;
(iii) payments by the Company to SMG-II pursuant to the Tax Sharing
Agreement;
(iv) dividends or distributions in an aggregate amount not to exceed
the amount of dividends or distributions paid to the Company or its
Subsidiaries by Unrestricted Subsidiaries since the date of the Indentures;
(v) the redemption, defeasance, repurchase or acquisition or
retirement for value (each, for purposes of this clause, a "refinancing")
of any Indebtedness of the Company (other than Redeemable Capital Stock)
which is pari passu with or expressly subordinate in right of payment to
the Senior Subordinated Notes, the Subordinated Securities or the Deferred
Coupon Notes, as the case may be, through the issuance of (A) new
Indebtedness of the Company or (B) shares of Qualified Capital Stock of the
Company or PTK; provided that, with respect to clause (A), any such new
Indebtedness (1) has a principal amount that does not exceed the principal
amount 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;
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(ix) payments or other actions described in clauses (i) through (v)
in paragraph (a) above that would otherwise be Restricted Payments in an
aggregate amount not to exceed $35.0 million;
(x) the dividend or distribution of the Capital Stock of
Plainbridge to PTK;
(xi) the repurchase of any Indebtedness of the Company which is pari
passu with or expressly subordinate in right of payment to the Senior
Subordinated Notes, the Subordinated Securities or the Deferred Coupon
Notes, as the case may be, at a purchase price not greater than 101% of the
principal amount of such Indebtedness in the event of a Change in Control
(as defined below) pursuant to a provision similar to the "Purchase of
Securities upon Change in Control" covenant; provided that prior to such
repurchase the Company has made the Change in Control Offer as provided in
such covenant and has repurchased all Senior Subordinated Notes,
Subordinated Securities or Deferred Coupon Notes, as the case may be,
validly tendered for payment in connection with such Change in Control
offer;
(xii) the redemption, repurchase, defeasance or acquisition or
retirement for value of the Holdings Intercompany Notes remaining
outstanding following the Recapitalization (other than a scheduled
principal payment, scheduled sinking fund payment or at maturity); and
(xiii)with respect to the Subordinated Notes, the redemption,
repurchase, defeasance or acquisition or retirement for value of the
Subordinated Debentures; provided that, in the case of redemption,
repurchase, defeasance or acquisition or retirement for value with the
proceeds of other Indebtedness, the applicable provisions of clause (v)
above are complied with.
Except as provided in this paragraph (b) and clause (a)(2) above, nothing in
this covenant limits or restricts the making of any Permitted Payment and a
Permitted Payment will not be treated as a Restricted Payment.
(c) In computing Consolidated Adjusted Net Income of the Company under
clause (A) of paragraph (a) above, (1) the Company shall use audited financial
statements for the portions of the relevant period for which audited financial
statements are available on the date of determination and unaudited financial
statements and other current financial data based on the books and records of
the Company for the remaining portion of such period and (2) the Company shall
be permitted to rely in good faith on the financial statements and other
financial data derived from the books and records of the Company that are
available on the date of determination. If the Company makes a Restricted
Payment which, at the time of the making of such Restricted Payment, would in
the good faith determination of the Company be permitted under the requirements
of the respective Indentures, such Restricted Payment shall be deemed to have
been made in compliance with the respective Indentures notwithstanding any
subsequent adjustments made in good faith to the Company's financial statements
affecting Consolidated Adjusted Net Income of the Company for any period.
(Section 1008)
Limitation on Transactions with Affiliates. (a) The Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly, enter into
any transaction or series of related transactions (including, without
limitation, the sale, purchase, exchange or lease of assets, property or
services) with any Affiliate of the Company (other than a wholly owned
Subsidiary thereof) unless (i) such transaction or series of transactions is 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
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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 MLPFS or any of their Affiliates for consulting,
investing banking or financial advisory services rendered by such Person to the
Company or any Subsidiary of the Company, (2) the payment of reasonable and
customary regular fees to directors of the Company, PTK, SMG-II, Holdings or any
of their respective subsidiaries or parents who are not employees of any of such
Persons, (3) the Logistical Services Agreement and transactions pursuant thereto
and (4) the Spin-Off Agreements and transactions pursuant thereto. For purposes
of this paragraph (a), any transaction or series of related transactions between
the Company or any Subsidiary and any Affiliate of the Company that is approved
as being on the terms required by clause (i) in the prior sentence by a majority
of the disinterested directors of the Board of Directors of the Company shall be
deemed to be on terms as favorable as those that might be obtained at the time
of such transaction or series of transactions in a comparable transaction in
arm's length dealings with an unaffiliated third party, and thus shall be
permitted under this paragraph (a).
(b) The Company will not, and will not permit any of its Subsidiaries to,
amend, modify, or in any way alter the terms of the Intercompany Agreement, the
Logistical Services Agreement or the Spin-Off Agreements in a manner materially
adverse to the Company other than (i) by adding new Subsidiaries and (ii) in the
case of the Logistical Services Agreement and Spin-Off Agreements, any
amendments or modifications that are approved by a majority of the disinterested
directors of the Board of Directors of the Company. (Section 1009)
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
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lender who has accepted such offer or (2) obtain the requisite consent under the
Bank Credit Agreement to permit the repurchase of the Securities as provided for
in this "Purchase of Securities upon Change in Control" covenant. In addition to
the Senior Subordinated Notes, the Subordinated Securities are also senior to
the Deferred Coupon Notes and require the Company to offer to purchase such
Securities upon a Change in Control. The Company is required to purchase Senior
Subordinated Notes from any holder who tenders in a Change in Control Offer for
the Senior Subordinated Notes prior to purchasing any Subordinated Securities in
a Change in Control Offer. The Company is required to purchase Senior
Subordinated Notes and Subordinated Securities from any holder who tenders in a
Change in Control Offer for such notes prior to purchasing any Deferred Coupon
Notes in a Change in Control Offer. The Company shall first comply with the
provisions of this paragraph before it shall be required to repurchase any
Securities pursuant to this "Purchase of Securities upon Change in Control"
covenant, and any failure to comply with this paragraph shall constitute a
default of a covenant for purposes of clause (c) of the first paragraph under
"Events of Default".
Within 30 days after the occurrence of a Change in Control, the Company
shall notify the Trustees and give written notice of such Change in Control to
each Holder, by first-class mail, postage prepaid, at his address appearing in
the security register, stating, among other things, the purchase price and the
purchase date, which shall be a Business Day no earlier than 45 days nor later
than 60 days from the date such notice is mailed, or such later date as is
necessary to comply with requirements under the Exchange Act; that any Security
not tendered will continue to accrete in value or accrue interest, as the case
may be that, unless the Company defaults in the payment of the purchase price,
any Securities accepted for payment pursuant to the Change in Control Offer
shall cease to accrete in value or accrue interest, as the case may be, after
the Change in Control Purchase Date (as defined in the Indentures); and certain
other procedures that a Holder must follow to accept a Change in Control Offer
or to withdraw such acceptance. (Section 1011 (Section 1012 of the Subordinated
Securities Indentures))
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, in connection with a Change in Control Offer.
Restrictions on Preferred Stock of Subsidiaries. The Company will not
permit any of its Subsidiaries to issue any Preferred Stock (other than to the
Company or a Majority-owned Subsidiary of the Company), or permit any Person
(other than the Company or a Majority-owned Subsidiary of the Company) to own or
hold an interest in any Preferred Stock of any such Subsidiary previously held
by the Company or a Majority-owned Subsidiary of the Company unless such
Subsidiary would be entitled to incur Indebtedness pursuant to the provisions of
the "Limitation on Indebtedness" covenant in the aggregate principal amount
equal to the aggregate liquidation value of such Preferred Stock assuming a
market rate of interest (as determined by the Company) for such Preferred Stock
as of the date of issuance or transfer. (Section 1012 (Section 1013 of the
Subordinated Securities Indentures))
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, and 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; provided, however, 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
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(A) the release or discharge of such guarantee of such Pari Passu Indebtedness
or Subordinated Indebtedness, as the case may be, except a discharge by or as a
result of payment under such guarantee or (B) any sale, exchange or transfer, to
any Person not an Affiliate of the Company, of all the Company's stock in, or
all or substantially all the assets of, such Subsidiary, which sale, exchange or
transfer is made in compliance with the applicable provisions of the Senior
Subordinated Notes Indenture, the Subordinated Notes Indenture, the Subordinated
Debentures Indenture or the Deferred Coupon Notes Indenture, as the case may be.
(Section 1013 (Section 1014 of the Subordinated Securities Indentures))
Restriction on Transfer of Assets. The Company will not sell, convey,
transfer or otherwise dispose of its assets or property to any of its
Subsidiaries, except for (i) sales, conveyances, transfers or other dispositions
of assets or property acquired by the Company after the date of the Indentures;
(ii) sales, conveyances, transfers or other dispositions of Existing Assets (a)
made in the ordinary course of business; (b) made outside the ordinary course of
business with a net book value that, when aggregated with all other such
transfers by the Company since the date of the Indentures, less the net book
value of Existing Assets transferred to the Company from its Subsidiaries, would
not exceed 10% of the Consolidated Assets of the Company; or (c) to any
Subsidiary if such Subsidiary simultaneously with such transfer executes and
delivers a supplemental indenture to the Indentures, providing for the guarantee
of payment of the Securities, by such Subsidiary, which guarantee shall be
subordinated to any guarantee of such Subsidiary of Senior Indebtedness of the
Company and shall be subordinated to any other Indebtedness of such Subsidiary
(which is not subordinated to any other Indebtedness of such Subsidiary or, in
the case of the Subordinated Securities or the Deferred Coupon Notes, as the
case may be, which is designated by such Subsidiary as being senior in right of
payment to such guarantee, in each case to the same extent as the Senior
Subordinated Notes, the Subordinated Notes, the Subordinated Debentures or the
Deferred Coupon Notes, as the case may be, are subordinated to Senior
Indebtedness of the Company under the Senior Subordinated Notes Indenture, the
Subordinated Notes Indenture, the Subordinated Debentures Indenture or the
Deferred Coupon Notes Indenture, as the case may be and (iii) sales,
conveyances, transfers or other dispositions of Existing Assets made pursuant to
the Spin-Off. Notwithstanding the foregoing, any such guarantee of a Subsidiary
of the Securities, shall provide by its terms that it shall be automatically and
unconditionally released and discharged (i) on the date that the net book value
of the Existing Assets held by the Company is greater than 90% of Consolidated
Assets or (ii) upon any sale, exchange or transfer to any Person not an
Affiliate of the Company of all 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 the Senior Subordinated Notes Indenture, the
Subordinated Notes Indenture, the Subordinated Debentures Indenture or the
Deferred Coupon Notes Indenture, as the case may be (Section 1014 (Section 1015
of the Subordinated Securities Indentures)).
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Subsidiary to (a)
pay dividends or make any other distribution on its Capital Stock, (b) pay any
Indebtedness owed to the Company or any Subsidiary, (c) make loans or advances
to the Company or any Subsidiary, or (d) transfer any of its property or assets
to the Company or any Subsidiary, except (i) any encumbrance or restriction
pursuant to an agreement in effect at or entered into on the date of the
Indentures; (ii) any encumbrance or restriction, with respect to a Subsidiary
that is not a Subsidiary of the Company on the date of the Indentures, in
existence at the time such Person becomes a Subsidiary of the Company or created
on the date it becomes a Subsidiary; (iii) any encumbrance or restriction on the
ability of any Subsidiary whose assets consist substantially only of fee or
leasehold interests in real property and improvements thereon to transfer any
such interests which are acquired after the date of the Indentures or any
unimproved real property acquired on or prior to the date of the Indentures to
the Company or any Subsidiary, which encumbrance or restriction is required by a
lender to, or purchaser of any indebtedness of, such Subsidiary in connection
with a financing or refinancing permitted under the Indentures; and (iv) any
encumbrance or restriction pursuant to any agreement that extends, refinances,
renews or replaces any agreement containing any of the restrictions described in
the foregoing clauses (i)-(iii); provided that the terms and conditions of any
such
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restrictions are not materially less favorable to the Holders of the Securities
than those under or pursuant to the agreement extended, refinanced, renewed or
replaced. (Section 1015 (Section 1016 of the Subordinated Securities
Indentures)).
Limitation on Unrestricted Subsidiaries. The Company will not make, and
will not permit any of its Subsidiaries to make, any Investments in Unrestricted
Subsidiaries if, at the time thereof, the aggregate amount of such Investments
would exceed the amount of Restricted Payments then permitted to be made
pursuant to the "Limitation on Restricted Payments" covenant. Any Investments in
Unrestricted Subsidiaries permitted to be made pursuant to this covenant (i)
will be treated as the payment of a Restricted Payment in calculating the amount
of Restricted Payments made by the Company and (ii) may be made in cash or
property. (Section 1016 (Section 1017 of the Subordinated Securities
Indentures)).
Limitation on Other Senior Subordinated Indebtedness Under the Senior
Subordinated Indenture. In the case of the Senior Subordinated Notes, the
Company will not create, incur, assume, guarantee or in any other manner become
liable with respect to any Indebtedness (other than the Senior Subordinated
Notes) that is subordinate in right of payment to any Senior Indebtedness unless
such Indebtedness is also pari passu with, or subordinate in right of payment
to, the Senior Subordinated Notes, pursuant to subordination provisions
substantially similar to those contained in the Senior Subordinated Indenture.
(Section 1017 of the Senior Subordinated Notes Indenture)
Merger and Sale of Assets, etc.
The Company shall not consolidate with or merge with or into any other
Person, or sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its properties and assets (as an entirety or substantially
as an entirety in one transaction or series of related transactions) to any
Person or permit any of its Subsidiaries to enter into any such transaction or
transactions if such transaction or transactions, in the aggregate, would result
in a transfer of all or substantially all of the assets of the Company and its
Subsidiaries on a consolidated basis to any Person unless at the time and after
giving effect thereto: (i) either (a) the Company shall be the continuing
corporation, or (b) the Person (if other 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, complies 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 with the conditions listed in the immediately preceding paragraphs in
which the Company is not the continuing corporation, the successor Person formed
or remaining shall succeed to, and be substituted for, and may exercise 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 by it of an
assignment for the benefit of creditors, or the admission by it in writing
of its inability to pay its debts generally as they become due or taking of
corporate action by the Company or any Material Subsidiary in furtherance
of any such action; or
(i) default in the performance or breach of any of the provisions of
"Merger and Sales of Assets, etc." (Section 501)
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
(a) 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 TIA contains limitations on the rights of each Trustee, should it
become a creditor of the Company or any Subsidiary, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. Each Trustee is
permitted to engage in other transactions, provided that if it acquires any
conflicting interest it must eliminate such conflict upon the occurrence of
an Event of Default or else resign.
Defeasance or Covenant Defeasance of Indenture
The Company may, at its option and at any time, elect to have the
obligations of the Company discharged with respect to the outstanding
Securities ("defeasance"). (Section 1401) Such defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Senior Subordinated Notes, Subordinated Notes,
Subordinated Debentures or Deferred Coupon Notes, as the case may be, except
for (i) the rights of Holders of such outstanding Securities to receive
payments in respect of the principal of, premium, if any, and interest on
such Securities when such payments are due, (ii) the Company's obligations
with respect to the Securities concerning issuing temporary Securities,
registration of Securities, mutilated, destroyed, lost or stolen Securities
and the maintenance of an office or agency for payment and money for security
payments held in trust, (iii) the
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rights, powers, trusts, duties and immunities of the Trustees and the
Company's obligations in connection therewith, and (iv) the defeasance
provisions of the respective Indentures. (Section 1402) In addition, the
Company may, at its option and at any time, elect to have the obligations of
the Company released with respect to certain covenants that are described in
the respective Indentures ("covenant defeasance") and any omission to comply
with such obligations shall not constitute a Default or an Event of Default
with respect to the Senior Subordinated Notes, the Subordinated 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
irrevocably deposited or caused to be deposited with the applicable Trustee
funds in an amount sufficient to
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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 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.
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"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.
"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.
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"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.
"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
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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.
"Existing Assets" means the assets and other property held by the
Company (and not its subsidiaries) as of the last day of the Company's last
fiscal quarter prior to the date of the Indentures, adjusted by excluding any
assets and other property transferred to Newco in the Spin-Off, plus any
assets held by the Company (and not its subsidiaries) irrevocably designated
from time to time by the Company as Existing Assets.
"Fair Market Value" means, with respect to any asset or property, the
sale value that would be obtained in an arm's length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied,
that are in effect from time to time; provided, however, that with respect to
the obligations of any Person under "Mergers and Sale of Assets, etc." and
"Certain Covenants" and the definitions applicable thereto, "GAAP" means
generally accepted accounting principles in the United States as in effect on
the date of the Indentures.
"Guaranteed Debt" of any Person means, without duplication, all
Indebtedness of any other Person referred to in the definition of
Indebtedness guaranteed directly or indirectly in any manner by such Person,
or in effect guaranteed directly or indirectly by such Person through an
agreement (i) to pay or purchase
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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 11 5/8% subordinated note and the
12 5/8% subordinated debenture each issued by the Company to Holdings in the
forms attached to the Indentures and in aggregate principal amounts not in
excess of the principal amounts outstanding on the date of the Indentures.
"Holdings Majority-owned Subsidiary" means a Holdings Subsidiary at
least 80% of the equity ownership or the Voting Stock of which is at the time
owned, directly or indirectly, by Holdings or by one or more of any other
Holdings Majority-owned Subsidiaries, or Holdings and one or more of any
other Holdings Majority-owned Subsidiaries.
"Holdings Preferred Stock" means Holdings' Cumulative Exchangeable
Redeemable Preferred Stock, par value $.01 per share, having a liquidation
preference of $25 per share and maturing on December 31, 2007, that is
outstanding on the date of the Indentures.
"Holdings Subsidiary" means any Person a majority of the equity
ownership or the Voting Stock of which is at the time owned, directly or
indirectly, by Holdings or by one or more other Holdings Subsidiaries, or by
Holdings and one or more other Holdings Subsidiaries.
"Indebtedness" means with respect to any Person, without duplication,
(i) all indebtedness of such Person for borrowed money (including overdrafts)
or for the deferred purchase price of property or services, excluding any
trade payables, import letters of credit and other accrued current
liabilities incurred in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of such Person
in connection with any standby letters of credit and acceptances issued under
letter of credit facilities, acceptance facilities or other similar
facilities, (ii) all obligations of such Person evidenced by bonds, notes
debentures or other similar instruments, (iii) all indebtedness created or
arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person (even if the rights and remedies
of the seller or lender under such agreement in the event of default are
limited to repossession or sale of such property), but excluding trade
accounts payable arising in the ordinary course of business, (iv) all Capital
Lease Obligations of such Person, (v) all Indebtedness referred to in (but
not excluded from) clause (i), (ii), (iii) or (iv) above of other Persons and
all dividends of other Persons, the payment of which is secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien, upon or in property (including,
without limitation, accounts and contract rights) owned by such Person, even
though such Person has not assumed or become liable for the payment of such
Indebtedness, (vi) all Guaranteed Debt of such Person, (vii) all Redeemable
Capital Stock issued by such Person valued at the greater of its voluntary or
involuntary maximum fixed repurchase price plus accrued and unpaid dividends
and (viii) all obligations under interest rate hedge contracts of such
Person. For purposes hereof, the "maximum fixed repurchase price" of any
Redeemable Capital Stock which does not have a fixed repurchase price shall
be calculated in accordance with the terms of such Redeemable Capital Stock
as if such Redeemable Capital Stock were purchased on
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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.
"Majority-owned Subsidiary" means a Subsidiary at least 50% of the
equity ownership or the Voting Stock of which is at the time owned, directly
or indirectly, by the Company or by one or more of the Subsidiaries, or the
Company and one or more of the Subsidiaries, provided that Majority-owned
Subsidiary shall not include any such Subsidiary if the equity ownership or
the Voting Stock of such Subsidiary not owned by the Company and/or one or
more of the Subsidiaries is owned by Holdings and/or one or more Affiliates
of Holdings other than the Company and its Subsidiaries.
"Management Investors" means the officers and other members of the
management of the Company who at any particular date shall beneficially own,
directly or indirectly, Voting Stock of the Company.
"Material Subsidiary" means, at any particular time, any Subsidiary of
the Company that, together with the Subsidiaries of such Subsidiary, (a)
accounted for more than 10% of the consolidated revenues of the Company and
its Subsidiaries for the most recently completed fiscal year of the Company
or (b) was the owner of more than 10% of the consolidated assets of the
Company and its Subsidiaries as at the end of such fiscal year, all as shown
on the consolidated financial statements of the Company and its Subsidiaries
for such fiscal year.
"Maturity" when used with respect to the Securities means the date on
which the principal of any Security becomes due and payable as therein
provided or as provided in the respective Indentures, whether at Stated
Maturity, Change in Control Purchase Date or redemption date, and whether by
declaration of acceleration, Change in Control, call for redemption or
otherwise.
"ML Funds" means Merrill Lynch Capital Appreciation Partnership No.
IX, L.P., a Delaware partnership, ML Offshore LBO Partnership No. IX, a
Cayman Islands partnership, ML Employees LBO Partnership No. I, L.P., a
Delaware partnership, Merrill Lynch Interfunding Inc., a Delaware
corporation, Merchant Banking L.P. No. 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
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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;
(xi) any obligation or liability in respect of leasehold interests
assigned by the Company or such Subsidiary to any other Person;
(xii) Indebtedness under the Holdings Intercompany Notes;
(xiii)Indebtedness represented by letters of credit not exceeding an
aggregate amount of $45.0 million at any one time outstanding (other than
those permitted by clause (vii) above);
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(xiv) Indebtedness incurred to finance Consolidated Capital
Expenditures (including Acquired Indebtedness to the extent that, in
conformity with GAAP, assets acquired in conjunction with such Acquired
Indebtedness are included in the property, plant or equipment reflected on
the consolidated balance sheet of the Company and its Subsidiaries);
(xv) Indebtedness, in addition to that described in clauses (i)
through (xiv) of this definition of "Permitted Indebtedness", and any
renewals, extensions, substitutions, refinancings or replacements of such
Indebtedness, not to exceed $75.0 million outstanding at any one time in
the aggregate; and
(xvi) any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") of any
Indebtedness described in clauses (ii), (iii), (iv) and (xiv), including
any successive refinancings so long as the aggregate amount of Indebtedness
represented thereby is in a principal amount that does not exceed the
principal amount so refinanced plus the amount of any premium required to
be paid in connection with such refinancing pursuant to the terms of the
Indebtedness refinanced or the amount of any premium reasonably determined
by the Company as necessary to accomplish such refinancing, plus the amount
of expenses of the Company incurred in connection with such refinancing;
provided that for purposes of this clause, the principal amount of any
Indebtedness shall be deemed to mean the principal amount thereof 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 aggregate amount of
Indebtedness represented thereby is in a principal amount that does not
exceed the principal amount so refinanced plus the amount of any premium
required to be paid in connection with such refinancing pursuant to the terms
of the Indebtedness refinanced or the amount of any premium reasonably
determined by the Company as necessary to accomplish such refinancing, plus
the amount of expenses of the Company incurred in connection with such
refinancing, provided that for purposes of this clause, the principal amount
of any Indebtedness shall be deemed to mean the principal amount thereof or,
if such Indebtedness provides for an amount less than the principal amount
thereof to be due and payable upon a declaration of acceleration thereof,
such lesser amount as of the date of determination.
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"Person" means any individual, corporation, limited or general
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Plainbridge" means Plainbridge, Inc., a corporation incorporated under
the laws of the State of Delaware, and any successor thereto.
"PTK" means PTK Holdings, Inc., a corporation incorporated under the
laws of the State of Delaware, and any successor thereto.
"Purchase Money Mortgages" means Indebtedness of the Company or any
Subsidiary (i) issued to finance or refinance the purchase or construction of
any assets of the Company or any Subsidiary or (ii) secured by a Lien on any
assets of the Company or any Subsidiary where the lender's sole recourse is
to the assets so encumbered, in either case (a) to the extent the purchase or
construction prices for such assets are or should be included in "addition to
property, 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 9 5/8% Senior
Subordinated Notes due 2003 in an aggregate principal amount not in excess of
$440.0 million.
"SMG-II" means SMG-II Holdings Corporation, a Delaware corporation, and
any successor thereto.
"Spin-Off" 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.
"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.
"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 12 5/8% Subordinated
Debentures due 2002 in aggregate principal amount not in excess of the
aggregate principal amount outstanding on the date of the Indentures.
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"Subordinated Indebtedness" means Indebtedness of the Company
subordinated in right of payment to the Senior Subordinated Notes, the
Subordinated Notes, the Subordinated Debentures or the Deferred Coupon Notes,
as the case may be.
"Subordinated Notes" means the Company's 11 5/8% Subordinated Notes due
2002 in aggregate principal amount not in excess of the aggregate amount
outstanding on the date of the Indentures.
"Subsidiary" means any Person a majority of the equity ownership or the
Voting Stock of which is at the time owned, directly or indirectly, by the
Company or by one or more other Subsidiaries, or by the Company and one or
more other Subsidiaries; provided that an Unrestricted Subsidiary shall not
be deemed to be a Subsidiary for purposes of the Indentures.
"Tax Sharing Agreement" means the Tax Sharing Agreement dated as of the
date of the Plainbridge Spin-Off by and between SMG-II and the Company, as
amended or modified in accordance with the provisions of the Indentures.
"Temporary Cash Investment" means (A) any evidence of Indebtedness,
maturing not more than 180 days after the date of acquisition, issued by the
United States, or an instrumentality or agency thereof, and guaranteed fully
as to principal, premium, if any, and interest by the United States, (B) any
certificate of deposit, maturing not more than 180 days after the date of
acquisition, issued by, or time deposit of, a commercial banking institution
that has combined capital and surplus of not less than $300.0 million, whose
debt is rated at the time as of which any investment therein is made, of "A"
(or higher) according to Moody's Investors Services, Inc. ("Moody's"), or "A"
(or higher) according to Standard & Poor's Ratings Group, a division of the
McGraw-Hill Companies, ("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 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
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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.
Credit Agreement
On June 30, 1997, the Company entered into a Credit Agreement. The Credit
Agreement provides for a senior credit facility consisting of a $300.0
million Term Loan and the $200.0 million Working Capital Facility for a total
of $500.0 million. Borrowings under the 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.
Term Loan. The Term Loan consists of a tranche A term loan (the "Term A
Loan") of $75.0 million and a tranche B term loan (the "Term B Loan") of
$225.0 million and the proceeds from the Term Loan were used to repay in full
the former term loan and former working capital facility. The Term A Loan is
subject to quarterly principal payment requirements which commenced on
October 25, 1997, with payment in full on July 15, 2001. The Term B Loan is
subject to quarterly principal payment requirements of $222,527 each of which
commenced on October 15, 1997 through January 15, 2001, with the balance
payable in four quarterly installments, which commence on April 15, 2001,
with payment in full on December 15, 2001. The Term A Loan can be extended up
to an additional two and one-half years and the Term B Loan can be extended
up to an additional three and one-half years from their respective original
expiration dates, subject to certain circumstances, as set forth in the
Credit Agreement. 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. Borrowings under the Working Capital Facility
of up to $200.0 million were used initially to repay in full the former term
loan and former working capital facility 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 June 15, 2001. The Working Capital Facility can be extended up to
an additional two and one-half years from the original expiration date,
subject to certain circumstances, as set forth in the Credit Agreement.
Interest Rate and Fees. Borrowings under the Credit Agreement bear
interest at floating rates as follows: (i) LIBOR plus 2.25% with respect to
the Term A Loan and the Working Capital Facility and (ii) LIBOR plus 2.5%
with respect to the Term B Loan.
Certain Covenants. The 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
Credit Agreement, the maturity of all amounts outstanding under the Credit
Agreement.
The 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 Payment
(as defined in the 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 Capital
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Expenditures (as defined in the 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 Credit Agreement) shall not exceed the specified amount for
such fiscal year; (ix) sell with recourse, or discount, any notes or accounts
receivable, with certain exceptions; (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 the Company or any of its subsidiaries, with certain specified
exceptions; and (xii) engage to any material extent 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 Credit Agreement requires, among other things, that the ratio of (i)
Consolidated Adjusted EBITDAR (as defined in the Credit Agreement) to (ii)
Consolidated Interest Expense and Consolidated Rental Payments (as defined in
the 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) Total Debt (as defined in the Credit
Agreement) as of the last day of any fiscal quarter of the Company occurring
during a specified period to (ii) Consolidated 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 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 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 three business 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 or certain other cross-defaults and
cross-accelerations to material terms of other agreements; (iii) the failure
to perform or observe any covenant under the 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
60 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; or (xi) 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 Credit Agreement.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the principal United States federal
income tax consequences of ownership and disposition of Senior Subordinated
Notes, Subordinated Notes, Subordinated Debentures and/or the Deferred Coupon
Notes by a United States Holder (as defined below). It does not discuss all
of the tax consequences that may be relevant to a holder in light of his
particular circumstances or to holders subject to special rules. Persons
considering the purchase of the Securities should consult with their own tax
advisors with regard to the application of the United States federal income
tax laws to their particular situations as well as any tax consequences
arising under the laws of any state, local or foreign tax jurisdiction.
As used herein, the term "United States Holder" means a beneficial owner
of a Security that is for United States federal income tax purposes (i) a
citizen or resident of the United States, (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, (iii) an estate the
income of which is subject to United States federal income taxation
regardless of its source, or (iv) a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States persons have the authority
to control all substantial decisions of the trust.
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 is the
initial offering price to the public at which price a substantial amount of
Deferred Coupon Notes were sold. Such issue price does not change even if part
of the issue was 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
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"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. Long-term capital gains of individuals are, under certain
circumstances, taxed at lower rates than items of ordinary income (generally,
with a maximum rate of 28% for capital assets held for more than one year and
a maximum rate of 20% for capital assets held for more than 18 months).
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. At the time of original issuance, the Company had no intention to
call the Deferred Coupon Notes before maturity, except that the Company
anticipated that it may redeemed 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 was unable to opine
as to whether this amounted 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.
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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" (as defiend in the Code) 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.
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.
Under the market discount rules of the Code, a United States Holder
will be required to treat any partial principal payment (or, in the case of a
Deferred Coupon Note, any payment that does not constitute fixed periodic
interest) on, or any gain realized on the sale, exchange or retirement of, a
Security as ordinary income to the extent of the market discount which has
not previously been included in income and is treated as having accrued on
such Security at the time of such payment or disposition. If a holder
disposes of a Security in any transaction other than a sale, exchange or
involuntary conversion (e.g., as a gift), that holder generally will be
treated as having realized an amount equal to the fair market value of the
Security and will be required to recognize as ordinary income any gain on
disposition to the extent of the accrued market discount. As a result, a
holder may be required to recognize ordinary interest income, even though the
disposition would not otherwise be taxable. Market discount will be
considered to accrue ratably during the period from the date of acquisition
to the maturity date of the Security, unless the United States Holder elects
to accrue on the basis of semiannual compounding.
A 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 a constant interest 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
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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, provided certain conditions are met) are not subject to the backup
withholding and reporting requirements.
MARKET-MAKING ACTIVITIES OF MERRILL LYNCH
This Prospectus is to be used by Merrill Lynch in connection with offers
and sales of the Securities in market-making transactions at negotiated
prices relating to prevailing market prices at the time of sale. Merrill
Lynch may act as principal or agent in such transactions.
Merrill Lynch has no obligation to make a market in the Securities, and
may discontinue its market-making activities at any time without notice, 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 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.
Investment partnerships indirectly controlled by ML & Co. beneficially own
85.7% of the outstanding shares of voting stock of SMG-II. SMG-II owns 100% of
the outstanding common stock of Holdings, Holdings owns 100% of the
outstanding capital stock of PTK and PTK owns 100% of the outstanding capital
stock of the Company. As a result, ML&Co. indirectly controls the Company.
See "Principal Stockholders".Merrill Lynch is a wholly owned subsidiary of
ML&Co. Under the SMG-II Stockholders Agreement, affiliates of Merrill Lynch
are entitled to designate seven directors to the Board of Directors of each
of SMG-II, Holdings and the Company.
EXPERTS
The consolidated balance sheets of the Company and its subsidiaries as
of January 31, 1998 and February 1, 1997 and the related consolidated
statements of operations, stockholder's deficiency, and cash flow for the
years ended January 31, 1998, February 1, 1997 and February 3, 1996 included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
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PATHMARK STORES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years 1997, 1996 and 1995
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report......................................................... F-2
Consolidated Statements of Operations................................................ F-3
Consolidated Balance Sheets.......................................................... F-4
Consolidated Statements of Stockholder's Deficiency.................................. F-5
Consolidated Statements of Cash Flows................................................ F-6
Notes to Consolidated Financial Statements........................................... F-7 to F-26
</TABLE>
F-1
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INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
Pathmark Stores, Inc.
Carteret, New Jersey
We have audited the accompanying consolidated balance sheets of Pathmark
Stores, Inc. and its subsidiaries (the "Company") as of January 31, 1998 and
February 1, 1997, and the related consolidated statements of operations,
stockholder's deficiency and cash flows for each of the three years in the
period ended January 31, 1998. 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 January
31, 1998 and February 1, 1997, and the results of their operations and their
cash flows for each of the three years in the period ended January 31, 1998
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
April 16, 1998
(May 12, 1998 as to Note 24)
F-2
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
January 31, February 1, February 3,
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
Sales...................................................... $ 3,695,865 $ 3,710,523 $ 3,971,593
Cost of sales (exclusive of depreciation and
amortization shown separately below)....................... 2,652,289 2,619,277 2,837,631
------------ ----------- ------------
Gross profit............................................... 1,043,576 1,091,246 1,133,962
Selling, general and administrative expenses............... 840,886 857,290 865,679
Depreciation and amortization.............................. 83,413 88,956 80,408
Restructuring charge....................................... -- 9,137 --
Lease commitment charge.................................... -- 8,763 --
Gain on disposition of freestanding drug stores............ -- -- 15,535
------------ ----------- ------------
Operating earnings......................................... 119,277 127,100 203,410
Interest expense........................................... (164,168) (161,469) (164,749)
------------ ----------- ------------
Earnings (loss) before income taxes and
extraordinary items..................................... (44,891) (34,369) 38,661
Income tax benefit (provision)............................. 16,705 14,411 (5,914)
------------ ----------- ------------
Earnings (loss) before extraordinary items................. (28,186) (19,958) 32,747
Extraordinary items, net of an income tax benefit of
$5,456 in Fiscal 1997 and $613 in Fiscal 1996.......... (7,488) (877) --
------------ ----------- ------------
Net earnings (loss)........................................ $ (35,674) $ (20,835) $ 32,747
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.................................................. $ 60,076 $ 9,880
Accounts receivable, net................................................... 10,928 12,492
Merchandise inventories.................................................... 148,775 216,931
Deferred income taxes, net................................................. 10,621 7,111
Prepaid expenses........................................................... 21,449 24,951
Due from suppliers......................................................... 13,027 13,923
Other current assets....................................................... 11,331 5,908
----------- ------------
Total Current Assets..................................................... 276,207 291,196
Property and Equipment, Net................................................... 529,542 603,577
Deferred Financing Costs, Net................................................. 18,547 28,743
Deferred Income Taxes, Net.................................................... 43,389 22,846
Other Assets.................................................................. 32,687 43,534
----------- ------------
$ 900,372 $ 989,896
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current Liabilities
Accounts payable........................................................... $ 128,484 $ 166,199
Book overdrafts............................................................ 26,330 41,085
Current maturities of long-term debt....................................... 43,478 74,431
Income taxes payable....................................................... 1,771 860
Accrued payroll and payroll taxes.......................................... 49,533 56,335
Current portion of lease obligations....................................... 24,337 23,133
Accrued interest payable................................................... 18,300 20,712
Accrued expenses and other current liabilities............................. 93,297 90,589
----------- ------------
Total Current Liabilities................................................ 385,530 473,344
----------- ------------
Long-Term Debt................................................................ 1,177,898 1,185,639
----------- ------------
Lease Obligations, Long-Term.................................................. 170,273 175,353
----------- ------------
Other Noncurrent Liabilities.................................................. 244,011 197,226
----------- ------------
Commitments and Contingencies (Notes 3, 12 and 22)
Stockholder's Deficiency
Common Stock $.10 par value................................................... -- --
Authorized, issued and outstanding: 100 shares
Paid-in Capital............................................................... 68,703 68,703
Accumulated Deficit........................................................... (1,146,043) (1,110,369)
----------- ------------
Total Stockholder's Deficiency........................................... (1,077,340) (1,041,666)
----------- ------------
$ 900,372 $ 989,896
----------- ------------
----------- ------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY
(in thousands)
<TABLE>
<CAPTION>
Total
Common Paid-in Accumulated Stockholder's
Stock Capital Deficit Deficiency
------ --------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, January 28, 1995.................................... $ -- $ 91,809 $ (1,122,281) $ (1,030,472)
Net earnings.............................................. -- -- 32,747 32,747
Dividend to PTK Holdings, Inc. in conjunction
with the disposition of freestanding drug stores........ -- (21,800) -- (21,800)
Dividend to PTK Holdings, Inc. in conjunction
with the disposal of the home centers segment........... -- (4,706) -- (4,706)
------ --------- ------------ -----------
Balance, February 3, 1996.................................... -- 65,303 (1,089,534) (1,024,231)
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)
Net loss.................................................. -- -- (35,674) (35,674)
------ --------- ------------ -----------
Balance, January 31, 1998.................................... $ -- $ 68,703 $ (1,146,043) $ (1,077,340)
------ --------- ------------ -----------
------ --------- ------------ -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks
Ended January Ended Ended
31, 1998 February 1, February 3,
1997 1996
------- --------- --------
Operating Activities
<S> <C> <C> <C>
Net earnings (loss)....................................................... $ (35,674) $ (20,835) $ 32,747
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Extraordinary loss on early extinguishment of debt...................... 7,488 877 --
Depreciation and amortization........................................... 87,341 92,485 83,263
Deferred income tax (benefit) expense................................... (24,053) (12,558) 6,417
Interest accruable but not payable...................................... 18,509 16,678 15,028
Amortization of original issue discount................................. 354 354 354
Amortization of debt issuance costs..................................... 5,542 7,426 7,140
(Gain) loss on disposal of property and equipment....................... 127 (5,347) 200
Gain on disposition of freestanding drug stores......................... -- -- (15,535)
Gain on sale of real estate............................................. -- -- (3,371)
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net.............................................. 1,564 (1,939) 2,380
Merchandise inventories............................................... 22,170 8,517 15,653
Income taxes.......................................................... 6,367 (2,584) 8,932
Prepaid expenses...................................................... (861) (2,889) (1,631)
Due from suppliers.................................................... 896 (745) 5,079
Other current assets.................................................. (4,749) (3,009) 2,221
Other assets.......................................................... 9,700 2,309 (23,419)
Accounts payable...................................................... (37,715) (17,883) (9,114)
Accrued payroll and payroll taxes..................................... (6,802) 2,013 780
Accrued interest payable.............................................. (2,289) 1,403 (363)
Accrued expenses and other current liabilities........................ 2,708 (1,867) (6,997)
Other noncurrent liabilities.......................................... 5,860 11,191 (1,462)
------- --------- --------
Cash provided by operating activities............................... 56,483 73,597 118,302
------- --------- --------
Investing Activities
Property and equipment expenditures....................................... (34,322) (54,963) (69,544)
Proceeds from disposition of property and equipment....................... 26,132 8,170 896
Net proceeds in connection with the C&S Purchase Agreement................ 103,728 -- --
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
------- --------- --------
Cash provided by (used for) investing activities.................... 95,538 (46,793) (695)
------- --------- --------
Financing Activities
Borrowings under Term Loan in connection with new Credit Agreement........ 300,000 -- --
Repayments of term loans.................................................. (279,877) (44,828) (60,295)
Increase (decrease) in working capital facilities borrowings.............. (73,500) 27,500 (17,000)
Decrease in book overdrafts............................................... (14,755) (2,635) (1,262)
Increase in other borrowings.............................................. 1,956 2,052 895
Repayment of other long-term borrowings................................... (6,136) (8,085) (5,208)
Reduction in lease obligations............................................ (21,337) (20,032) (18,221)
Premiums incurred in early extinguishment of debt......................... (132) (352) --
Deferred financing fees................................................... (8,044) (3,597) (374)
Proceeds from lease financing............................................. -- 21,405 --
Dividend to PTK Holdings, Inc............................................. -- -- (26,506)
------- --------- --------
Cash used for financing activities.................................. (101,825) (28,572) (127,971)
------- --------- --------
Increase (decrease) in cash and cash equivalents............................. 50,196 (1,768) (10,364)
Cash and cash equivalents at beginning of period............................. 9,880 11,648 22,012
------- --------- --------
Cash and cash equivalents at end of period................................... $ 60,076 $ 9,880 $ 11,648
------- --------- --------
------- --------- --------
</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") operated 135 supermarkets as of
January 31, 1998, primarily in the New York-New Jersey and Philadelphia
metropolitan areas and is a wholly owned subsidiary of PTK Holdings, Inc.
("PTK") and an indirect wholly owned subsidiary of Supermarkets General
Holdings Corporation ("Holdings").
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, 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
January 31, 1998, current liabilities exceeded current assets by $109.3
million and the stockholder's deficiency was $1.08 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)
On June 30, 1997, the Company entered into a new $500 million bank
credit agreement (the "Credit Agreement") with a group of lenders led by The
Chase Manhattan Bank. The Credit Agreement includes a $300 million term loan
(the "Term Loan") and a $200 million Working Capital Facility. The Company
repaid in full the former term loan and former working capital facility with
the borrowings obtained under the Credit Agreement (see Note 9).
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 which are wholly owned. All intercompany
transactions have been eliminated in consolidation.
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 8). While the Company believes that the amounts
provided are adequate to cover its self-insured liabilities, it is reasonably
possible that the final resolution of these claims may differ from the
amounts provided.
Fiscal Year:
The Company's fiscal year ends on the Saturday nearest to January 31 of
the following calendar year. Normally, each fiscal year consists of 52 weeks,
but every five or six years the fiscal year consists of 53 weeks. Fiscal 1995
consists of 53 weeks.
Statements of Cash Flows:
All investments and marketable securities with a maturity of three
months or less are considered to be cash equivalents. The Company had $52.0
million of cash equivalent investments as of January 31, 1998 and had no cash
equivalent investments as of February 1, 1997.
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, approximated $3.4 million, $3.1 million and $2.8
million in Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively.
F-8
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Summary of Significant Accounting Policies--(Continued)
Software:
Externally purchased software is capitalized and amortized over a three
year period. The amortization of capitalized software included in selling,
general and administrative expenses approximated $0.5 million, $0.4 million
and $0.1 million in Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively.
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, February 4, 1996, had no effect on the Company's
financial condition or results of operations.
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 $18.9 million, $23.7 million and $30.6 million in Fiscal
1997, Fiscal 1996 and Fiscal 1995, respectively.
F-9
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Summary of Significant Accounting Policies--(Continued)
Store Preopening and Closing Costs:
Store preopening costs are expensed as incurred. Store closing costs,
such as future rent and real estate taxes subsequent to the actual store
closing, net of expected sublease recovery, are recorded at present value
when management makes a decision to close a store (see Note 8).
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.
Reclassifications:
Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to the Fiscal 1997 presentation.
New Accounting Standards Not Yet Adopted:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No.
130 is not expected to have an effect on the Company's financial statements
currently being presented because the Company, at this time, has no items of
comprehensive income other than net income.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS No. 131"), which will be effective for financial statements beginning
after December 15, 1997. SFAS No. 131 redefines how operating segments are
determined and requires expanded quantitative disclosures relating to a
company's operating statements. SFAS No. 131, which the Company is
evaluating, will impact the financial statements to the extent that it is
necessary to provide additional disclosure about the Company's segments.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits ("SFAS No. 132"), which will be effective for
financial statements beginning after December 15, 1997. SFAS No. 132 revises
employers' disclosure about pension and other postretirement benefit plans.
It does not change the measurement or recognition of those plans. The Company
will adopt SFAS No. 132 in Fiscal 1998 and believes it will impact the
financial statements to the extent that it is necessary to provide additional
disclosure about the Company's pensions and other postretirement benefits.
F-10
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Supply and Distribution Agreements
On January 29, 1998, the Company sold its Woodbridge, New Jersey
distribution center and office complex and its leasehold interests in its two
distribution centers and its banana ripening facility in North Brunswick, New
Jersey, Dayton, New Jersey and Avenel, New Jersey, respectively (all of the
foregoing buildings are hereinafter referred to as, collectively the
"Facilities"), to C&S Wholesale Grocers, Inc. ("C&S"), including the
fixtures, equipment and inventory in each of those Facilities, for $104.4
million (the "C&S Purchase Agreement"). The Company used $32.5 million of the
net proceeds to pay down a portion of the Term Loan. A portion of the net
proceeds were used to pay down the Working Capital Facility at the end of
Fiscal 1997. The remainder of the proceeds were invested in marketable
securities and, subsequent to year end, were utilized to pay down accounts
payable related to the inventory sold in connection with the C&S Purchase
Agreement and other liabilities. Simultaneously, the Company and C&S entered
into a 15 year supply agreement (the "Supply Agreement"), pursuant to which
C&S will supply substantially all of the Company's grocery, frozen and
perishable merchandise requirements, formerly owned and warehoused by the
Company. As a result of these agreements, the Company recorded deferred
income of $60.8 million. Such deferred income consists of (i) $25.0 million
received by the Company for future trade discounts and rebates, which will be
amortized to operations by the Company as it is earned, and (ii) $35.8
million in net proceeds received in excess of the fair value of the assets
sold; such excess has been deferred and will be amortized to operations over
the life of the Supply Agreement. In addition, current year results include a
$0.8 million gain on a LIFO liquidation related to the sale of such inventory.
In addition, the Company outsourced its trucking operations to a third
party trucking company, pursuant to a ten year trucking services agreement
effective October 5, 1997, in which the trucking company will deliver
merchandise to all of the Company's stores.
Note 4--Accounts Receivable
Accounts receivable are comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
--------- ---------
<S> <C> <C>
Prescription plans............................................................... $ 10,074 $ 10,397
Other............................................................................ 2,048 3,366
--------- ---------
Accounts receivable.............................................................. 12,122 13,763
Less: allowance for doubtful accounts(a)......................................... 1,194 1,271
--------- ---------
Accounts receivable, net......................................................... $ 10,928 $ 12,492
--------- ---------
--------- ---------
</TABLE>
---------
(a) Fiscal 1997 includes a credit of $0.2 million and a recovery of $0.1
million. Fiscal 1996 includes a provision of $0.1 million and a recovery
of $0.3 million.
Note 5--Merchandise Inventories
Merchandise inventories are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
--------- ---------
<S> <C> <C>
Merchandise inventories at FIFO cost............................................ $ 184,862 $ 258,417
Less: LIFO reserve.............................................................. 36,087 41,486
--------- ---------
Merchandise inventories at LIFO cost............................................ $ 148,775 $ 216,931
--------- ---------
--------- ---------
</TABLE>
F-11
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--Merchandise Inventories--(Continued)
The decrease in the merchandise inventories and the LIFO reserve was
primarily due to the sale of the Company's warehouse inventory related to its
grocery, frozen and perishable merchandise (see Note 3). In addition, the
Company sold its warehouse pharmaceutical inventory to a pharmacecutical
wholesaler. For Fiscal 1997, the liquidation of LIFO layers resulted in a $2.8
million gain related to such inventory. Liquidation of LIFO layers in Fiscal
1996 and Fiscal 1995 did not have a significant effect on the results of
operations.
Note 6--Property and Equipment
Property and equipment are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
--------- ---------
<S> <C> <C>
Land............................................................................ $ 54,065 $ 61,258
Buildings and building improvements............................................. 169,490 201,364
Fixtures and equipment.......................................................... 176,443 202,952
Leasehold costs and improvements................................................ 279,386 293,626
Transportation equipment........................................................ 19,820 19,706
--------- ---------
Property and equipment, owned................................................... 699,204 778,906
Property and equipment under capital leases..................................... 213,094 206,819
--------- ---------
Property and equipment, at cost................................................. 912,298 985,725
Less: accumulated depreciation and amortization................................. 382,756 382,148
--------- ---------
Property and equipment, net..................................................... $ 529,542 $ 603,577
--------- ---------
--------- ---------
</TABLE>
The decrease in the owned property and equipment was primarily due to the
sale of the distribution facilities (see Note 3). 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 7--Deferred Financing Costs, Net
Deferred financing costs are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
--------- ---------
<S> <C> <C>
Deferred financing costs........................................................ $ 28,599 $ 51,378
Less: accumulated amortization.................................................. 10,052 22,635
--------- ---------
Deferred financing costs, net................................................... $ 18,547 $ 28,743
--------- ---------
--------- ---------
</TABLE>
In connection with the Credit Agreement, the Company incurred deferred
financing costs of $8.0 million. Also, in connection therewith, the Company
wrote off, as part of the extraordinary items, $12.8 million of net deferred
financing costs associated with debt which was extinguished (see Note 17).
F-12
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8--Other Noncurrent Liabilities
Other noncurrent liabilities are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
--------- ---------
<S> <C> <C>
Deferred income related to the C&S transaction (see Note 3)..................... $ 60,837 $ --
Self-insured liabilities........................................................ 58,567 62,485
Pension and deferred compensation............................................... 20,296 20,227
Other postretirement and postemployment benefits................................ 39,942 41,399
Closed stores................................................................... 13,798 20,117
Lease commitments............................................................... 6,810 7,107
Other........................................................................... 43,761 45,891
--------- ---------
Other noncurrent liabilities.................................................... $ 244,011 $ 197,226
--------- ---------
--------- ---------
</TABLE>
Certain noncurrent liabilities, such as self-insured liabilities for
incurred but unpaid claims relating to customer, employee and vehicle accidents
and closed store liabilities, are recorded at present value utilizing a 4%
discount rate based on the projected payout of these claims.
Note 9--Long-Term Debt
Long-term debt is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
----------- -----------
<S> <C> <C>
Term loans.......................................................................... $ 263,250 $ 243,127
Working capital facilities.......................................................... -- 73,500
9.625% Senior Subordinated Notes due 2003 ("Senior Subordinated Notes")............. 438,134 437,780
11.625% Subordinated Notes due 2002 ("Subordinated Notes").......................... 199,017 199,017
12.625% Subordinated Debentures due 2002 ("Subordinated Debentures")................ 95,750 95,750
10.75% Deferred Coupon Notes due 2003 ("Deferred Coupon Notes")..................... 187,068 168,559
Debt payable to Holdings............................................................ 983 983
Industrial revenue bonds............................................................ 6,375 6,375
Other debt (primarily mortgages).................................................... 30,799 34,979
----------- -----------
Total debt.......................................................................... 1,221,376 1,260,070
Less: current maturities............................................................ 43,478 74,431
----------- -----------
Long-term portion................................................................... $ 1,177,898 $ 1,185,639
----------- -----------
----------- -----------
</TABLE>
Scheduled Maturities of Debt:
Long-term debt principal payments are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Principal
Fiscal Years Payments
------------ --------
<S> <C>
1998.......................................................................... $ 43,478
1999.......................................................................... 14,858
2000.......................................................................... 78,238
2001.......................................................................... 263,849
2002.......................................................................... 195,750
2003.......................................................................... 625,203
-----------
$ 1,221,376
-----------
-----------
</TABLE>
F-13
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--Long-Term Debt--(Continued)
Bank Credit Agreement:
On June 30, 1997, the Company entered into the Credit Agreement with a
group of lenders led by The Chase Manhattan Bank. The Credit Agreement
includes a $300 million Term Loan and a $200 million Working Capital
Facility. The Company repaid in full the former term loan and former working
capital facility with the borrowings obtained under the Credit Agreement.
Under the Credit Agreement, the Term Loan and Working Capital Facility
bear interest at floating rates, ranging from LIBOR plus 2.25% to LIBOR plus
2.50%. 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
December 15, 2001. Under the Working Capital Facility, which expires on June
15, 2001, the Company can borrow or obtain letters of credit in an aggregate
amount not to exceed $200 million, of which the maximum of $125 million can
be in letters of credit. In addition, pursuant to a Permitted Subordinated
Debt Refinancing (as defined in the Credit Agreement), the Working Capital
Facility and a portion of the Term Loan can be extended up to an additional
two and one-half years and the remainder of the Term Loan can be extended up
to an additional three and one-half years from the original expiration dates.
At January 31, 1998, the Company was in compliance with all of its debt
covenants. Based upon projected results for the upcoming fiscal year, the
Company believes it will be in compliance with its debt covenants which
include financial covenants concerning levels of operating cash flow, minimum
interest and rent expense coverage, maximum leverage ratio, maximum senior
debt leverage ratio, maximum consolidated rental payments and maximum capital
expenditures. The Credit Agreement also contains other covenants including,
but not limited to, covenants with respect to the following matters: (i)
limitation on indebtedness; (ii) limitation on liens; (iii) restriction on
mergers; (iv) restriction on investments, loans, advances, guarantees and
acquisitions; (v) restriction on assets sales and sale/leaseback
transactions; (vi) restriction on certain payments of indebtedness and
incurrence of certain agreements and (vii) restriction on transactions with
affiliates.
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 January 31, 1998, the Company had $92.8
million in outstanding letters of credit and $107.2 million in unused
borrowing capacity under its Working Capital Facility.
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.
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.
F-14
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--Long-Term Debt--(Continued)
Subordinated Debentures:
The Subordinated Debentures mature in Fiscal 2002. These debentures 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.
Industrial Revenue Bonds:
Interest rates for the industrial revenue bonds range from 10.5% to
10.9%. The industrial revenue bonds are payable in Fiscal 2003.
Other Debt:
Other debt includes mortgage notes, which are secured by property and
equipment, having a net book value of $51.7 million at January 31, 1998 and
$54.5 million at February 1, 1997. These borrowings, whose interest rates
averaged 10.5%, are payable in installments ending in Fiscal 2000, including
a scheduled payment of $27.4 million in Fiscal 1998.
Note 10--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>
January 31, 1998 February 1, 1997
---------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Term loans................................... $ 263,250 $ 263,250 $ 243,127 $ 243,127
Working capital facilities................... -- -- 73,500 73,500
Senior Subordinated Notes.................... 438,134 421,344 437,780 415,015
Subordinated Notes........................... 199,017 181,782 199,017 202,340
Subordinated Debentures...................... 95,750 88,846 95,750 96,353
Deferred Coupon Notes........................ 187,068 133,596 168,559 142,471
Debt payable to Holdings..................... 983 898 983 999
Industrial revenue bonds..................... 6,375 6,375 6,375 6,375
Other debt (primarily mortgages)............. 30,799 30,799 34,979 34,979
----------- ----------- ----------- ----------
Total debt.............................. $ 1,221,376 $ 1,126,890 $ 1,260,070 $ 1,215,159
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
The fair value of the term loans and working capital facilities at January
31, 1998 and February 1, 1997 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 January 31, 1998 and February 1, 1997 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 January 31,
1998 and February 1, 1997, the carrying values of cash and cash equivalents,
accounts receivable and accounts payable approximated their fair values due to
the short-term maturities of these instruments.
F-15
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11--Interest Expense
Interest expense is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Years
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Term loans...................................................... $ 22,884 $ 22,616 $ 29,067
Working capital facilities...................................... 4,969 5,444 5,601
Senior Subordinated Notes
Amortization of original issue discount...................... 354 354 354
Currently payable............................................ 42,350 42,350 42,350
Subordinated Notes.............................................. 23,151 23,136 23,136
Subordinated Debentures......................................... 12,088 12,088 12,088
Deferred Coupon Notes, accruable but not payable................ 18,509 16,678 15,028
Debt payable to Holdings........................................ 114 114 114
Amortization of debt issuance costs............................. 5,542 7,426 7,140
Lease obligations............................................... 22,091 19,364 16,646
Mortgages payable............................................... 3,462 3,736 4,210
Other, net...................................................... 8,654 8,163 9,015
--------- --------- ---------
Interest expense................................................ $ 164,168 $ 161,469 $ 164,749
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company made cash interest payments of $142.0 million, $135.5 million
and $142.7 million in Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively.
Note 12--Leases
At January 31, 1998, 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>
1998............................................................................. $ 43,337 $ 28,865
1999............................................................................. 37,948 29,116
2000............................................................................. 35,391 29,164
2001............................................................................. 26,165 27,489
2002............................................................................. 22,312 26,131
Later years...................................................................... 249,473 297,742
--------- ---------
Total minimum lease payments(a).................................................. 414,626 $ 438,507
---------
---------
Less: executory costs (such as taxes, maintenance and insurance)................. 2,440
---------
Net minimum lease payments....................................................... 412,186
Less: amounts representing interest.............................................. 217,576
---------
Present value of net minimum lease payments (including current
installments of $24,337)...................................................... $ 194,610
---------
---------
</TABLE>
-------
(a) Net of sublease income of $0.8 million and $74.4 million for capital and
operating leases, respectively.
During Fiscal 1997, Fiscal 1996 and Fiscal 1995, the Company incurred
capital lease obligations of $23.6 million, $39.2 million and $41.1 million,
respectively, in connection with property and equipment lease agreements. These
capital lease amounts are noncash 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 12--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 former 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 $21.0 million and $21.1 million
included in lease obligations in the consolidated balance sheet at January 31,
1998 and February 1, 1997, respectively.
Rent expense, under all operating leases having noncancellable terms of more
than one year, is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Years
-------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Minimum rentals................................................. $ 44,396 $ 42,481 $ 42,576
Less: rentals from subleases.................................... (8,131) (9,691) (10,917)
-------- -------- --------
Rent expense.................................................... $ 36,265 $ 32,790 $ 31,659
-------- -------- --------
-------- -------- --------
</TABLE>
Note 13--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 1997, Fiscal 1996 and Fiscal
1995.
During Fiscal 1996, in conjunction with the hiring of a Chief Executive
Officer (the "CEO"), SMG-II granted the CEO an equity package (the "Equity
Strip") independently valued at $3.4 million and consisting of restricted
shares of SMG-II Preferred Stock and restricted shares and options of SMG-II
Common Stock. The Company recorded the Equity Strip as deferred compensation
by the means of a capital contribution from SMG-II (see Note 21).
In addition, the Company retained John W. Boyle, a Director of the
Company, to act as its interim Chairman & 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
($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 the CEO commenced employment with the Company.
During Fiscal 1995, the Company paid ML&Co. fees of approximately $0.6
million related to the sale of the freestanding drug stores.
In March 1990, Jerry G. Rubenstein, a Director of the Company, 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 for
such Recourse Note. Under the terms of the agreement, pursuant to which the
shares of Holdings' Class A Common Stock were exchanged for
F-17
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13--Related Party Transactions--(Continued)
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 April 1, 1998,
Mr. Rubenstein remained indebted to Holdings in the amount of $100,000.
Note 14--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.
The Company also maintains an unfunded supplemental retirement plan for
participants in the SGC Pension Plan to provide benefits in excess of amounts
permitted to be paid under the provisions of the tax law. Additionally, the
Company has entered into individual retirement agreements with certain
current and retired executives providing for unfunded supplemental pension
benefits upon their retirement after attainment of age 60.
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>
January 31, 1998 February 1, 1997
---------------------------- -----------------------------
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Exceed Accumulated Benefits Exceed
Benefits Assets Benefits Assets
----------- ----------- ----------- ----------
Actuarial present value of accumulated
benefit obligation:
<S> <C> <C> <C> <C>
Vested.................................... $ (100,353) $ (20,573) $ (84,092) $ (20,922)
Unvested.................................. (1,982) -- (5,988) (215)
----------- ----------- ----------- ----------
Total..................................... (102,335) (20,573) (90,080) (21,137)
Plan assets at fair value.................... 213,771 -- 171,270 447
----------- ----------- ----------- ----------
Plan assets higher (lower) than
accumulated benefit obligation............. $ 111,436 $ (20,573) $ 81,190 $ (20,690)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Actuarial present value of projected
benefit obligation......................... $ (124,303) $ (22,461) $ (114,776) $ (23,200)
Plan assets at fair value.................... 213,771 -- 171,270 447
----------- ----------- ----------- ----------
Plan assets higher (lower) than
projected benefit obligation............... 89,468 (22,461) 56,494 (22,753)
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions..................... (72,162) (274) (43,296) (90)
Unrecognized prior service cost.............. (13) 702 1,111 955
----------- ----------- ----------- ----------
Prepaid (accrued) pension cost............... $ 17,293 $ (22,033) $ 14,309 $ (21,888)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
F-18
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14--Retirement and Benefit Plans--(Continued)
Assets of the Company's pension plans are invested in marketable securities
comprised primarily of equities of domestic corporations, U.S. Government
instruments and money market investments.
The following table provides the assumptions used in determining the
actuarial present value of the projected benefit obligation at January 31, 1998
and February 1, 1997:
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
---------- ----------
<S> <C> <C>
Weighted average discount rate............................................ 7.0% 7.5%
Rate of increase in future compensation levels............................ 4.0 4.5
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
1998.
The net periodic pension cost (income) is comprised of the following
components (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Years
-----------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost of benefits earned during the year................. $ 3,208 $ 3,771 $ 3,402
Interest cost on projected benefit obligation................... 9,847 10,182 9,533
Actual return on plans' assets.................................. (49,357) (28,109) (40,531)
Net amortization and deferral................................... 35,105 15,988 27,747
-------- -------- --------
Net periodic pension (income) cost.............................. $ (1,197) $ 1,832 $ 151
-------- -------- --------
-------- -------- --------
</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 $19.0 million, $18.7 million and $17.7
million in Fiscal 1997, Fiscal 1996 and Fiscal 1995, 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 $3.0
million, $3.6 million and $3.7 million in Fiscal 1997, Fiscal 1996 and Fiscal
1995, respectively.
Note 15--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 7.0% at January 31, 1998 and 7.5% at February 1, 1997 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 6.25% and grade down to
4.0% in Fiscal 2002. The effect of a 1% increase in the assumed cost trend
rate would change the accumulated postretirement benefit obligation by
approximately $1.2 million as of January 31, 1998 and would increase the net
periodic postretirement benefit income by $0.1 million for Fiscal 1997.
F-19
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15--Other Postretirement and Postemployment Benefits--(Continued)
The net postretirement benefit cost (income) is comprised of the following
components (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Years
-------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost of benefits earned during the year................... $ 399 $ 545 $ 613
Interest cost on accumulated postretirement benefit
obligation..................................................... 1,139 1,640 2,267
Net amortization and deferral..................................... (1,866) (931) (460)
Curtailment gain.................................................. -- (2,000) --
------- ------- -------
Net postretirement benefit cost (income).......................... $ (328) $ (746) $ 2,420
------- ------- -------
------- ------- -------
</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.
The following table provides information on the status of the
postretirement plans (dollars in thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
-------- --------
Accumulated postretirement benefit obligation:
<S> <C> <C>
Retirees...................................................................... $ 7,231 $ 9,678
Other active plan participants................................................ 10,077 10,180
-------- --------
Total......................................................................... 17,308 19,858
Unrecognized prior service cost................................................... 5,748 7,026
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions.................................. 8,690 6,798
-------- --------
Accrued postretirement cost....................................................... $ 31,746 $ 33,682
-------- --------
-------- --------
</TABLE>
The decrease in the accumulated postretirement benefit obligation and the
unrecognized prior service cost was due to actual benefit payments made and
amortization gains recognized from the elimination of postretirement medical
coverage for active non-union associates in Fiscal 1996.
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 January 31, 1998
and February 1, 1997 was $8.9 million and $8.5 million, respectively. The net
postemployment benefit cost consisted of the following components (dollars in
thousands):
<TABLE>
<CAPTION>
Fiscal Years
-------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost of benefits earned during the year................. $ 1,412 $ 1,314 $ 997
Interest cost on accumulated postemployment obligation.......... 409 316 296
------- -------- -------
Net postemployment benefit cost................................. $ 1,821 $ 1,630 $ 1,293
------- -------- -------
------- -------- -------
</TABLE>
F-20
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 16--Income Taxes
The income tax benefit (provision) is comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
Fiscal Years
------------------------------------------
1997 1996 1995
---- ---- ----
Current
<S> <C> <C> <C>
Federal................................................... $ (4,629) $ 1,084 $ (1,669)
State..................................................... (2,719) 769 2,172
Deferred
Federal................................................... 18,755 9,626 (9,233)
State..................................................... 7,198 2,932 (6,254)
Change in valuation allowance............................. (1,900) -- 9,070
-------- -------- -------
Income tax benefit (provision)................................ $ 16,705 $ 14,411 $ (5,914)
-------- -------- -------
-------- -------- -------
</TABLE>
The effective tax rate for the income tax benefit (provision) differs from
the federal statutory tax rate as follows:
<TABLE>
<CAPTION>
Fiscal Years
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate..................................... 35.0% 35.0% (35.0)%
State income taxes............................................. 6.5 7.0 (6.9)
Change in valuation allowance.................................. (4.2) -- 23.5
Tax credits.................................................... -- -- 1.5
Other.......................................................... (0.1) (0.1) 1.6
------ ------ ------
Effective tax rate............................................. 37.2% 41.9% (15.3)%
------ ------ ------
------ ------ ------
</TABLE>
Deferred income tax assets and liabilities consist of the following
(dollars in thousands):
<TABLE>
<CAPTION>
January 31, 1998 February 1, 1997
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
<S> <C> <C> <C> <C>
Depreciation and amortization................ $ -- $ 50,216 $ -- $ 65,449
Merchandise inventory and gross profit....... -- 11,840 -- 20,449
Prepaid expenses............................. -- 6,108 -- 6,969
Self-insured liabilities..................... 36,230 -- 38,906 --
Benefit plans................................ 6,248 -- 10,011 --
Lease capitalization......................... 19,290 -- 17,927 --
Alternative minimum taxes.................... 8,752 -- 8,316 --
General business credits..................... 9,019 -- 9,019 --
Net operating loss carryforwards............. 9,223 -- 9,631 --
Other postretirement and
postemployment benefits.................... 17,306 -- 17,791 --
Deferred income.............................. 26,909 -- -- --
Closed stores reserves and accrued
expenses................................... 15,402 -- 18,281 --
Capital loss carryforward.................... 29,732 -- 45,850 --
Other........................................ 683 8,870 721 7,779
--------- --------- --------- --------
Subtotal..................................... 178,794 77,034 176,453 100,646
Less: valuation allowance.................... 47,750 -- 45,850 --
--------- --------- --------- --------
Total........................................ $ 131,044 $ 77,034 $ 130,603 $ 100,646
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>
F-21
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 16--Income Taxes--(Continued)
The balance sheet classification of the deferred income tax assets and
liabilities is as follows (dollars in thousands):
<TABLE>
<CAPTION>
January 31, 1998 February 1, 1997
--------------------------- ------------------------
Current Noncurrent Current Noncurrent
<S> <C> <C> <C> <C>
Assets....................................... $ 37,695 $ 141,099 $ 36,884 $ 139,569
Liabilities.................................. (17,685) (59,349) (29,773) (70,873)
---------- --------- ---------- ---------
Subtotal..................................... 20,010 81,750 7,111 68,696
Less: valuation allowance.................... (9,389) (38,361) -- (45,850)
---------- --------- ---------- ---------
Total........................................ $ 10,621 $ 43,389 $ 7,111 $ 22,846
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
The Company's net deferred income tax assets were $54.0 million and $30.0
million, net of a valuation allowance of $47.8 million and $45.9 million at
January 31, 1998 and February 1, 1997, respectively. The Company believes that
it is more likely than not that the net deferred tax assets will be realized
through the implementation of tax strategies which could generate taxable
income.
During Fiscal 1997, the net increase in the valuation allowance was $1.9
million. This change reflects an increase in the valuation allowance related to
those deferred tax assets which the Company has concluded are not likely to be
realized, partially offset by a decrease in the valuation allowance related to
the utilization of the Company's capital loss carryforwards due to generation of
capital gains from the C&S transaction.
The Company will continue to assess the recoverability of its deferred
income tax assets and further adjustments to the valuation allowance may be
necessary based on the evidence available at that time.
During Fiscal 1995, in conjunction with the Company's evaluation of its
deferred income tax assets, the Company reversed the valuation allowance related
to its net deferred income tax assets. Such reversal of the valuation allowance
totaled $9.1 million and has been included as a component of the Fiscal 1995
income tax provision.
In Fiscal 1997, Fiscal 1996 and Fiscal 1995, the Company made income tax
payments of $4.8 million, $4.6 million and $21.9 million, respectively, and
received income tax refunds of $4.3 million, $5.5 million and $10.3 million,
respectively.
Note 17--Extraordinary Items
The extraordinary items, representing losses on early extinguishment of
debt, consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Years
---------------------------
1997 1996
---- ----
<S> <C> <C>
Loss before income taxes........................................................ $ (12,944) $ (1,490)
Income tax benefit.............................................................. 5,456 613
---------- ---------
Extraordinary items, net of a tax benefit....................................... $ (7,488) $ (877)
---------- ---------
---------- ---------
</TABLE>
During the second quarter of Fiscal 1997, in connection with the Credit
Agreement, the Company wrote off deferred financing fees of $12.8 million
related to the former bank credit agreement, resulting in a net loss on early
extinguishment of debt of $7.4 million, net of an income tax benefit of $5.4
million. In addition, during the second quarter of Fiscal 1997, in connection
with the sale of certain mortgaged property, the Company made a mortgage paydown
of $2.9 million, including accrued interest and debt premiums, resulting in a
net loss on early extinguishment of debt of $0.1 million, net of an income tax
benefit of $0.1 million.
F-22
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 17--Extraordinary Items--(Continued)
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. 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.
Note 18--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 January 31, 1998, $7.7 million have been expended, of which $4.2
million related to the early retirement program and severance benefits and $3.5
million related to consulting costs and the facility consolidation. The Company
estimates it will expend $0.2 million in Fiscal 1998. The remaining balance of
$1.2 million relates to early retirement benefits which will be expended over
time; such balance is included in the respective pension and postretirement
liability accounts.
Note 19--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 6).
During Fiscal 1997, the Company sold four and closed seven stores that it
announced for divestiture at the end of Fiscal 1996. The results of operations
for these 11 stores were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Years
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales........................................................... $ 42,877 $ 152,599 $ 160,133
--------- --------- ---------
--------- --------- ---------
Operating loss.................................................. $ 10,590 $ 10,663 $ 8,364
--------- --------- ---------
--------- --------- ---------
</TABLE>
Note 20--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-23
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 20--Disposition of Freestanding Drug Stores--(Continued)
In Fiscal 1995, 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.
The following summarizes the activity related to the exit costs (dollars in
thousands):
<TABLE>
<CAPTION>
Amount
<S> <C>
Balance, January 28, 1995................................................................ $ --
To record estimated exit costs........................................................ 18,955
Activity.............................................................................. (804)
----------
Balance, February 3, 1996................................................................ 18,151
Activity.............................................................................. (2,306)
----------
Balance, February 1, 1997................................................................ 15,845
Activity.............................................................................. (3,007)
----------
Balance, January 31, 1998................................................................ $ 12,838
----------
----------
</TABLE>
During Fiscal 1997, two of the closed drug stores were sold and one lease
was terminated. The remaining balance of $12.8 million at January 31, 1998
reflects the future rent and real estate taxes, net of expected sublease
recoveries, related to the remaining three closed drug stores which have not
been subleased.
Note 21--Chief Executive Officer 1996 Employment Agreement
On October 8, 1996, the Company hired a CEO pursuant to a five-year
employment agreement (the "Employment Agreement"). In conjunction with his
employment, SMG-II granted to the CEO an 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 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
in the Company's statement of operations 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 has and will continue
to record compensation expense upon the forgiveness of each note. In the
event his employment ends, as a
F-24
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 21--Chief Executive Officer 1996 Employment Agreement--(Continued)
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 nine leases for certain of the Company's
owned real estate properties with Rickel, as tenant. In addition, the Company
assigned to Rickel twenty-six third party leases.
In January 1996, Rickel filed for bankruptcy protection under Chapter
11 of the United States Bankruptcy Code. Subsequent to the filing, Rickel
assigned two leases, terminated two leases and rejected nine leases,
returning these nine leases back to the Company. Of these nine rejected
leases, two have been settled with the landlord, one has been assigned to a
large retailer, one of the properties has been sold and the other five
properties are being actively marketed by the Company to other prospective
tenants.
In September 1997, Rickel announced that it was terminating its retail
operations and liquidating its retail inventory. In February 1998, Rickel
entered into an agreement to assign thirteen of the Company's leases to
Staples, Inc. and, additionally, allow Staples, Inc. until May 1, 1998 to
decide whether to lease an additional seven properties.
With respect to the remaining two locations, Rickel has not yet
determined whether they will reject or assign such leases.
Management has assessed its exposure with respect to this matter and
has concluded that it has sufficient reserves to cover any resulting
liability which may occur, including the future rent and real estate taxes,
net of expected sublease recoveries, of the five properties that have been
returned to the Company, as well as the nine other properties that could be
returned to the Company.
Information Services Outsourcing:
In August 1991, the Company entered into a ten year agreement with IBM
to provide a wide range of information systems services. Under the agreement,
IBM has taken over the Company's data center operations and mainframe
processing and information system functions and is providing business
applications and systems designed to enhance the Company's customer service
and efficiency. The charges under this agreement are based upon the services
requested at predetermined rates. The Company may terminate the agreement
upon 90 days notice with payment of a specified termination charge. The
amounts expensed under this agreement in the accompanying consolidated
statements of operations were $23.7 million, $22.1 million and $21.0 million
during Fiscal 1997, Fiscal 1996 and Fiscal 1995, 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-25
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 23--Quarterly Financial Data (Unaudited)
Financial data for the interim periods of Fiscal 1997 and Fiscal 1996 is
as follows (dollars in thousands):
<TABLE>
<CAPTION>
13 Weeks Ended
------------------------------------------------------
May 3, August 2, November 1, January 31, Fiscal
1997 1997 1997 1998 1997
------ ------ --------- -------- ----
<S> <C> <C> <C> <C> <C>
52 Weeks Ended January 31, 1998
Sales............................... $ 922,319 $ 931,833 $ 900,986 $ 940,727 $3,695,865
Gross profit(a)..................... 259,262 262,150 248,174 273,990 1,043,576
Selling, general and administrative
expenses.......................... 212,341 213,095 205,292 210,158 840,886
Depreciation and amortization....... 20,174 19,942 21,366 21,931 83,413
Operating earnings.................. 26,747 29,113 21,516 41,901 119,277
Interest expense.................... (41,290) (41,262) (40,368) (41,248) (164,168)
Earnings (loss) before income taxes
and (14,543) (12,149) (18,852) 653 (44,891)
extraordinary items...............
Income tax benefit (provision)...... 5,701 4,836 7,630 (1,462) 16,705
Loss before extraordinary items..... (8,842) (7,313) (11,222) (809) (28,186)
Extraordinary items, net of an income
tax benefit........................ -- (7,488) -- -- (7,488)
Net loss............................ $ (8,842) $ (14,801) $ (11,222) $ (809) $ (35,674)
</TABLE>
<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(b)..................... 266,024 274,697 266,747 283,778 1,091,246
Selling, general and administrative
expenses(c)....................... 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
Lease commitment charge............. -- -- -- 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)
</TABLE>
-----------
(a) The pretax LIFO credit for Fiscal 1997 was $5.4 million consisting of
provisions of $0.4 million and $0.5 million in the first and second
quarters, respectively, and credits of $1.7 million and $4.6 million in
the third and fourth quarters, respectively.
(b) The pretax LIFO credit for Fiscal 1996 was $1.3 million consisting of
provisions of $0.85 million in the first and second quarters, no provision
in the third quarter and a $3.0 million credit in the fourth quarter.
(c) Selling, general and administrative expenses 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.
Note 24--Subsequent Event
On May 12, 1998, in conjunction with the pay down of debt by PTK,
Pathmark loaned $26.5 million to PTK in the form of a 14 1/2% discount
note, due May 12, 2003, accreting to a maturity value of $53.3 million.
PTK is not required to pay cash interest.
F-26
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other individual has been authorized to
give any information or make any representations other than those contained
in this Prospectus or any Prospectus Supplement in connection with any
offering made or contemplated hereby. If given or made, such information or
representations must not be relied upon as having been authorized by the
Company or the Underwriter. This Prospectus and any Prospectus Supplement do
not constitute an offer to sell, or a solicitation of 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.
---------------------
TABLE OF CONTENTS
Available Information........................ 2
Prospectus Summary........................... 3
Risk Factors................................. 12
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..................................... 26
Certain Transactions......................... 33
Management................................... 34
Principal Stockholders....................... 44
Description of the Securities................ 46
Certain Indebtedness of the Company.......... 75
Certain Federal Income Tax
Considerations............................ 77
Market-Making Activities of Merrill
Lynch..................................... 80
Experts...................................... 80
Index to Consolidated Financial
Statements................................ F-1
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
and
Junior Subordinated
Deferred Coupon
Notes due 2003
----------------
PROSPECTUS
----------------
June , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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, 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).
Item 16. Exhibits
(a) Exhibits:
Incorporated herein by reference is a list of the Exhibits contained in
the Exhibit Index on pages II-5 through II-7 of this Report.
(b) Financial Statement Schedules:
All Schedules are omitted as the required information is inapplicable or
is presented in the financial statements or related notes.
II-2
<PAGE>
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.
(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 be 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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Borough of Carteret
and State of New Jersey, on the 2nd day of June, 1998.
Dated: June 2, 1998 PATHMARK STORES, INC.
By: /s/JOSEPH ADELHARDT
-------------------
Joseph Adelhardt
Senior Vice President
Pursuant to the requirements of the Securities 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 2, 1998
--------------- Executive Officer
(James Donald) (principal executive and principal officer)
/s/JOSEPH ADELHARDT Senior Vice President and Controller June 2, 1998
------------------- (principal accounting officer)
(Joseph Adelhardt)
MATTHIAS BOWMAN Director* June 2, 1998
----------------
(Matthias Bowman)
JOHN W. BOYLE Director* June 2, 1998
----------------
(John W. Boyle)
JAMES J. BURKE, JR. Director* June 2, 1998
---------------------
(James J. Burke, Jr.)
STEPHEN M. McLEAN Director* June 2, 1998
--------------------
(Stephen M. McLean)
ROBERT G. MILLER Director* June 2, 1998
--------------------
(Robert G. Miller)
ROBERT MYLOD, JR. Director* June 2, 1998
-------------------
(Robert Mylod, Jr.)
U. PETER C. GUMMESON Director* June 2, 1998
----------------------
(U. Peter C. Gummeson)
JERRY G. RUBENSTEIN Director* June 2, 1998
----------------------
(Jerry G. Rubenstein)
</TABLE>
*By: /s/ MARC A. STRASSLER
----------------------
Marc A. Strassler
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Page
----- ------ -----
<S> <C>
2.2 --Distribution and Transfer Agreement dated as of May 3, 1993 among the Registrant, Holdings
and Chefmark (incorporated by reference from Exhibit 2.2 to the Registration Statement
on Form S-1 of the Registrant and Holdings, File No. 33-59616 (the "1993 Registration
Statement"))............................................................................
3.1 --Restated Certificate of Incorporation of the Registrant (incorporated by reference from
the Annual Report on Form 10-K of the Registrant for the year ended January 31, 1998
(the "1997 10-K"))......................................................................
3.3 --By-Laws of the Registrant (incorporated by reference from Exhibit 3.3 to the Registration
Statement on Form S-1 of Registrant, File No. 33-59612, (the "October 1993 Registration
Statement"))............................................................................
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 the Annual Report on Form 10-K of this Registrant for the year ended
January 29, 1994 (the "1993 10-K")).....................................................
4.1A --Senior Subordinated Note due 2003 of the Registrant (contained in the Indenture filed as
Exhibit 4.1) (incorporated by reference from the 1993 10-K))............................
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 the 1993 10-K)...............................
4.2B --Indenture between the Registrant and Wilmington Trust Company, Trustee, relating to the
11 5/8% Subordinated Notes due 2002 of the Registrant (incorporated by reference from
the 1993 10-K)..........................................................................
4.3 --Indenture between the Registrant and Wilmington Trust Company, Trustee, relating to the
12 5/8% Subordinated Debentures due 2002 of the Registrant (incorporated by reference
from the 1993 10-K).....................................................................
4.4 --Credit Agreement dated as of June 30, 1997 (the "Credit Agreement") among the Registrant,
the Lenders listed therein, and Chase Manhattan Bank as Agent (incorporated by
reference from Registrant's Form 10-Q for the period ended August 2, 1997)..............
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...........
10.3 --First Amended and Restated Supply Agreement among Registrant, Plainbridge and C&S
Wholesale Grocers, Inc. dated as of January 29, 1998 (incorporated by reference from
Exhibit 10.3 of the 1997 10-K)..........................................................
10.4 --Services Agreement dated as of May 3, 1993 between the Registrant and Chefmark
(incorporated by reference from Exhibit 10.4 to the 1993 Registration Statement)........
10.5 --Chefmark Supply Agreement, dated May 3, 1993, between the Registrant and Chefmark
(incorporated by reference from Exhibit 10.5 to the 1993 Registrant Statement...........
10.6 --Tax Sharing Agreement between the Registrant and SMG-II (incorporated by reference from
the 1993 10-K)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Page
----- ------ -----
<S> <C>
10.7 --Tax Indemnity Agreement between the Registrant and Plainbridge (incorporated by reference
from the 1993 10-K).....................................................................
10.8 --Supermarkets General Corporation Pension Plan (as Amended and Restated effective January
1, 1979) as amended through May 29, 1987 (incorporated by reference from Exhibit 10.21
to the Registration Statement on Form S-1 of Holdings, File No. 33-16963)...............
10.9 --Supermarkets General Corporation Savings Plan (as Amended and 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, (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 (incorporated by reference from Exhibit 10.12 to the October 1993 Registration
Statement)..............................................................................
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") (incorporated by reference from Exhibit 10.15
to the October 1993 Registration Statement))............................................
10.16 --Form of Stock Option Agreement under the Option Plan (incorporated by reference from
Exhibit 10.16 to the October 1993 Registration Statement)...............................
10.17 --SMG-II Holdings Corporation Employees 1987 Stock Option Plan, as amended and restated May
17, 1991 (incorporated by reference from Exhibit 10.17 to the October 1993 Registration
Statement)..............................................................................
10.18 --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)...........................................................................
10.19 --Employment Agreement dated as of June 1, 1995 among the Registrant, Robert Joyce and
SMG-II (incorporated by reference from the 1997 10-K)...................................
10.20 --Employment Agreement dated as of June 1, 1995 among the Registrant, Marc Strassler and
SMG-II (incorporated by reference from the 1997 10-K)...................................
10.21 --Supplemental Retirement Agreement dated June 1, 1994, between the Registrant and Neill
Crowley (incorporated by reference from the Registrant's Annual Report on Form 10-K for
the year ended February 3, 1996 the "1995 10-K")).......................................
10.22 --Supplemental Retirement Agreement dated October 3, 1994 between the Registrant and Ron
Marshall (incorporated by reference from the 1995 10-K).................................
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Page
----- ------ -----
<S> <C>
10.23 --Employment Agreement dated April 1, 1997 among the Registrant, John Sheehan and SMG-II
(incorporated by reference from the 1997 10-K)..........................................
10.24 --Resignation Agreement dated as of November 4, 1997 among Registrant, Neill Crowley and
SMG-II (incorporated by reference from the 1997 10-K)...................................
10.25 --Employment Agreement dated as of September 9, 1994 between Registrant and Ron Marshall
(incorporated by reference from the 1995 10-K)..........................................
10.26 --Resignation Agreement dated as of November 4, 1997 among Registrant, Ron Rallo and SMG-II
(incorporated by reference from the 1997 10-K)..........................................
10.27 --Employment Agreement dated as of October 8, 1996 among Registrant, SMG-II and James Donald
(incorporated by reference from the Registrant's Annual Report on Form 10-K for the
year ended February 1, 1997)............................................................
12.1* --Statements Regarding Computation of Ratio of Earnings to Fixed Charges (incorporated by
reference from Exhibit 12.1 to the 1997 10-K)...........................................
22.1 --List of Subsidiaries of the Registrant (incorporated by reference from Exhibit 22.1 to the
1997 10-K)..............................................................................
23.1** --Consent of Deloitte & Touche LLP...........................................................
23.2 --Consents of Shearman & Sterling (contained in their opinions filed as Exhibits 5.1, 5.2)...
24.** --Power of Attorney of Robert Mylod, Jr......................................................
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.......................................................
</TABLE>
- -------------
* All exhibits not filed herewith and not otherwise incorporated by reference
were previously filed as exhibits to this Registration Statement or to
Registration Statement Nos. 33-59612, 33-59616 and 33-50053 previously filed
on Form S-1 and are incorporated by reference herein.
** Filed herewith.
II-7
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
Pathmark Stores, Inc.
Carteret, New Jersey
We consent to the use in this Post-Effective Amendment No. 5 to Registration
Statement No. 33-59612 of Pathmark Stores, Inc. on Form S-1 of our report dated
April 16, 1998 (May 12, 1998 as to Note 24) appearing in the Prospectus, which
is a part of such Registration Statement, and to the reference to us under the
headings "Selected Historical Consolidated Financial Data" and "Experts" in
such Prospectus.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
June 1, 1998
<PAGE>
EXHIBIT 24
PATHMARK STORES, INC.
POWER OF ATTORNEY
The undersigned, a director of Pathmark Stores, Inc. (the "Company"), a
Delaware corporation, which intends to file with the United States Securities
and Exchange Commission, under the provisions of the Securities Act of 1933
(the "Act"), as amended, a Registration Statement on Form S-1, or such other
form appropriate for the purpose, together with possible amendments
(including post-effective amendments thereto), constitutes and appoints
Joseph W. Adelhardt and Marc A. Strassler, and each of them, severally, as
true and lawful attorney or attorneys, with full power of substitution and
resubstitution, for him and in his name, place and stead, to sign in any and
all capacities and file or cause to be filed said Registration Statement on
Form S-1, and any and all amendments (including post-effective amendments
thereto), and all instruments necessary or incidental in connection
therewith, and hereby grants to the said attorneys, and each of them,
severally, full power and authority to do and perform in the name and on
behalf of the undersigned, and in any and all capacities, any and all acts
and things whatsoever necessary or appropriate to be done in the premises, as
fully and to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming the acts of said attorneys and each
of them.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
this 29th day of May, 1998.
/s/ Robert Mylod, Jr.
---------------------------
Robert Mylod, Jr.
