As filed with the Securities and Exchange Commission on January 8, 2001
Registration No. 333-46882
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
Post-Effective Amendment No. 1 To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
Pathmark Stores, Inc.
(Exact name of registrant as specified in its charter)
Delaware 5411 22-2879612
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Identification Number)
organization) Classification Code
Number)
------------
200 Milik Street
Carteret, New Jersey 07008
(732) 499-3000
(Address, including zip code, and telephone number,
including area code, of registrants' principal
executive offices)
------------
Marc A. Strassler, Esq.
Senior 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:
John D. Morrison, Esq.
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
(212) 848-4000
------------
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If any of the Securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional Securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective re gistration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
================================================================================
CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Proposed Proposed
Maximum Maximum
Title of Each Amount Offering Aggregate Amount of
Class of Securities to be Price Per Offering Registration
to be Registered Registered Unit (1) Price (1) Fee
--------------------------------------------------------------------------------
Common Stock, 14,764,958(2) $20.23 $298,695,100 $65,291(3)
par value $0.01 2,539,842 $11.33 $28,776,410(4) $7,597
per share Warrants
to purchase
Common Stock
--------------------------------------------------------------------------------
</TABLE>
(1) Estimated for the sole purpose of computing the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933. There is no established
trading market for Securities of these classes.
(2) Includes 2,539,842 shares issuable upon exercise of the Warrants.
(3) Pursuant to Rule 457(g), no additional registration fee is required for the
2,539,842 shares of Common Stock issuable upon exercise of the Warrants
being offered pursuant hereto.
(4) Based on the price at which the Warrants may be exercised pursuant to Rule
457(g).
------------
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said section 8(a), may determine.
================================================================================
<PAGE>
[LOGO]
PATHMARK STORES, INC.
14,764,958 SHARES OF COMMON STOCK
2,539,842 WARRANTS TO PURCHASE
COMMON STOCK
This prospectus relates to (1) 14,764,958 shares of our Common Stock
and (2) 2,539,842 Warrants to purchase shares of our Common Stock, in each case
which our principal shareholders, investment funds and investment trusts
affiliated with Fidelity Management and Research Company (collectively,
"Fidelity"), may offer and sell from time to time in one or more issuances. The
Common Stock and the Warrants are collectively referred to in this prospectus as
the "Securities."
Each Warrant will entitle its holder to purchase one share of Common
Stock at the exercise price of $22.31 per share, as adjusted in accordance with
the Warrant Agreement. Holders may exercise their Warrants at any time up to the
expiration date on September 19, 2010.
Fidelity may offer the Securities for sale from time to time, through
public or private transactions, in amounts and on terms to be determined by
market conditions at the time of the offering. Fidelity obtained its Securities
in connection with our plan of reorganization. Fidelity will receive all the net
proceeds from the sale of Securities. We will be responsible for paying all
expenses relating to the offer and sale of the Securities other than commissions
and discounts.
Our shares have been approved for quotation on the Nasdaq National
Market under the trading symbol "PTMK."
INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" ON PAGE 10 FOR VARIOUS RISKS THAT YOU SHOULD CAREFULLY CONSIDER
BEFORE YOU PURCHASE ANY SECURITIES.
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these Securities or passed upon the accuracy
or adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
------------
The date of this prospectus is January 8, 2001
2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY.....................................................5
THE OFFERING...........................................................7
RISK FACTORS..........................................................10
DIVIDENDS.............................................................11
USE OF PROCEEDS.......................................................11
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA.......................12
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION..........................14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................24
BUSINESS..............................................................32
MANAGEMENT............................................................38
PRINCIPAL SHAREHOLDER AND SELLING SECURITYHOLDER......................49
LEGAL MATTERS.........................................................49
EXPERTS...............................................................49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................49
PLAN OF DISTRIBUTION..................................................50
DESCRIPTION OF CAPITAL STOCK..........................................51
DESCRIPTION OF WARRANTS...............................................51
WHERE YOU CAN FIND MORE INFORMATION...................................52
3
<PAGE>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed
with the Securities and Exchange Commission using a "shelf" registration
process. Under this shelf registration process, Fidelity may, from time to time,
sell any combination of the offered Securities described in this prospectus in
one or more offerings up to 14,764,958 shares of Common Stock and up to
2,539,842 Warrants. Please carefully read both this prospectus and any
applicable prospectus supplement, together with additional information described
under the heading "Where You Can Find More Information."
4
<PAGE>
PROSPECTUS SUMMARY
This summary may not contain all of the information that may be
important to you. You should read the entire prospectus, including the financial
data and the related notes, before making an investment decision. The terms
"Pathmark," "the Company" and "we" as used in this prospectus mean Pathmark
Stores, Inc. and its predecessors and subsidiaries. Unless we indicate
otherwise, references to fiscal years are to Pathmark's fiscal years ending on
the Saturday nearest to January 31 of the following calendar year. For example,
"fiscal 1999" refers to our fiscal year ended January 29, 2000.
The Company
At July 29, 2000, Pathmark operated 137 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 and Delaware and consist of 5.2 million square feet of selling
space and 7.1 million square feet of total space. Total supermarket sales at
Pathmark's stores were approximately $3.7 billion in fiscal 1999.
By industry standards, Pathmark stores are large and productive,
averaging approximately 52,800 square feet in size and generating average sales
and volume of approximately $28.0 million per store ($723 per selling square
foot) for stores open for all of fiscal 1999. Pathmark's 137 supermarkets at
July 29, 2000 ranged from 26,008 to 66,463 square feet in size and included 125
supermarkets that are 40,000 square feet or larger in size. All Pathmark stores
carry a broad variety of food and drug store products, including an extensive
variety of the Pathmark brand. All but five supermarkets contained in-store
pharmacy departments at the end of July 2000.
Pathmark pioneered the development of the large "superstore" in the
Middle Atlantic States, opening the first "Pathmark Super Center" in 1977, and
currently operates 135 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, a pharmacy,
expanded produce department, meat department, cheese shop, bakery, seafood,
service delicatessen department and expanded health and beauty care department.
All supermarkets have Electronic Fund Transfer ("EFT") (including debit and
credit) capability at their checkout terminals, and approximately 50
supermarkets also feature in-store automated teller machines. The Company has
entered into master licensing agreements with two regional banking institutions
to place in-store banks in Pathmark supermarkets. 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 July 29, 2000, 96 stores had in-store
banks, and Pathmark expects to have three additional in-store banks by the end
of fiscal 2000.
Over the past several years, Pathmark stores have been designed to be
more "customer friendly," with wider aisles, a more accessible customer service
area, improved signs and graphics, and increased availability of Pathmark
associates. For example, Pathmark has introduced "GREAT" service, a customer
service program emphasizing proactive, interpersonal communication between store
associates and customers.
Pathmark and its three parent entities, PTK Holdings, Inc. ("PTK"),
Supermarkets General Holdings Corporation ("Holdings") and SMG-II Holdings
Corporation ("SMG-II") filed a prepackaged plan of reorganization (the "Plan of
Reorganization") on July 12, 2000 (the "Petition Date") in the U.S. Bankruptcy
Court in Delaware. As of the Plan Effective Date, as defined below, the Company
was in arrears with respect to interest on its senior subordinated notes in the
amount of $37.6 million, on its subordinated notes in the amount of $13.4
million, on its subordinated debentures in the amount of $6.9 million, and on
its junior subordinated notes in the amount of $16.9 million. During the
pendency of the bankruptcy case, the Company continued to manage its affairs and
operate its business as debtor-in-possession ("DIP"). On September 7, 2000, the
Court entered an order confirming the Plan of Reorganization, which has become
effective on September 19, 2000 (the "Plan Effective Date"), at which time the
Company formally exited Chapter 11. As part of the Plan of Reorganization, all
subordinated debt in the amount of approximately $1 billion has been cancelled
and the holders of such subordinated debt received 100% of the outstanding
Common Stock of the reorganized Company and Warrants to purchase an additional
15% of the Common Stock on a fully diluted basis.
5
<PAGE>
On September 19, 2000, the Company entered into a credit agreement with
a group of lenders led by The Chase Manhattan Bank (the "Exit Facility"). The
Exit Facility includes a $425.0 million term loan (the "New Term Loan") and a
$175.0 million working capital facility (the "New Working Capital Facility").
The Exit Facility bears interest at floating rates, ranging from LIBOR plus
3.00% to LIBOR plus 4.00%. The Company is required to repay a portion of its
borrowings under the New Term Loan each year, so as to retire such indebtedness
in its entirety by July 15, 2007. Under the New Working Capital Facility, which
expires on July 15, 2005, the Company can borrow an amount up to $175.0 million,
including a maximum of $125.0 million in letters of credit.
The Exit Facility was used to repay in full the former bank credit
agreement and the revolving credit agreement the Company had entered into in
support of the Plan of Reorganization (the "DIP Facility") and will be used to
provide liquidity for our operations.
Pathmark's business strategy is to increase sales, profitability and
market penetration in its existing markets by focusing on the following five
operating priorities: concentrate on core business, Pathmark "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.
------------
Our principal offices are located at 200 Milik Street, Carteret, New
Jersey 07008, and our telephone number at that address is (732) 499-3000.
6
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Issuer................................ Pathmark Stores, Inc.
Selling Shareholders.................. The Selling Shareholders are
investment funds and investment
trusts affiliated with Fidelity
Management and Research Company
herein also collectively referred
to as Fidelity, that received
shares of Common Stock and
Warrants under the Plan of
Reorganization.
Common Stock Offered
by the Selling Shareholders........... 14,764,958 shares, which includes
2,539,842 shares issuable upon
exercise of the Warrants
Common Stock to Be Outstanding After
the Offering.......................... 30,098,510 shares
Warrants offered by the Selling
Shareholders.......................... 2,539,842 Warrants
Use of Proceeds ...................... Pathmark will not receive any
proceeds from sales by the
Selling Shareholders of shares of
Common Stock.
Nasdaq National Market Symbol......... PTMK, PTMKW
</TABLE>
7
<PAGE>
Pathmark Stores, Inc.
Summary Historical Consolidated Financial Data
The following table sets forth a summary of our historical consolidated
financial data for each of the three fiscal years in the period ended January
29, 2000 and the 26 weeks ended July 29, 2000 and July 31, 1999. Pursuant to the
Plan of Reorganization, which became effective September 19, 2000, the Company's
direct and indirect parent companies merged with the Company, which became the
surviving entity. Such mergers are being accounted for in the historical
financial statements at historical cost in a manner similar to
pooling-of-interests accounting. Accordingly, the historical financial data
presented herein reflects the results of the combined entity. You should read
this data along with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes included elsewhere in this prospectus.
The financial information for the 26 weeks ended July 29, 2000 and July
31, 1999 is unaudited. However, we believe that this information contains all
adjustments, consisting only of normal recurring adjustments, which are
necessary to present fairly our consolidated financial position and results of
operations for those periods. Our results of operations for the 26 weeks ended
July 29, 2000 do not necessarily indicate what our results for the full fiscal
year would be.
The following table also sets forth the pro forma financial information
for the 52 weeks ended January 29, 2000 and the 26 weeks ended July 29, 2000.
The pro forma information gives effect to the Plan of Reorganization and assumes
the adoption of fresh-start reporting in accordance with the American Institute
of Certified Public Accountants Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" ("Fresh-Start
Reporting"). The adjustments related to Fresh-Start Reporting are preliminary
and the amounts reflected in the pro forma financial information may differ from
the amounts ultimately determined.
<TABLE>
<CAPTION>
26 Weeks(a) Fiscal Years(a)
--------------------------------------------------------------
($ in millions) Pro Forma Pro Forma
2000 2000 1999 1999 1999 1998 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of
Operations Data:
Sales............ $ 1,849 $1,849 $ 1,817 $ 3,698 $ 3,698 $ 3,655 $ 3,696
Gross profit..... 520 520 520 1,059 1,059 1,043 1,044
Selling, general
and administrative
expenses...... 428 428 419 851 851 833 841
Depreciation and
amortization... 39 39 37 75 75 77 84
Reorganization
expenses(b).... -- 10 -- -- -- -- --
Amortization of
excess
reorganization
value(c)....... 138 -- -- 276 -- -- --
------- ------ ------- ------- ------- ------ -------
Operating earnings
(loss).......... (85) 43 64 (143) 133 133 119
Interest expense.. (36) (88) (79) (67) (163) (161) (166)
------- ------ ------- ------- ------- ------ -------
Loss before income
taxes and
extraordinary
items.......... (121) (45) (15) (210) (30) (28) (47)
Income tax
provision...... (7) -- -- (27) (2) (2) (2)
------- ------ ------- ------- ------- ------- ------
Loss before
extraordinary
items.......... (128) (45) (15) (237) (32) (30) (49)
Extraordinary
items, net
of tax(d)...... -- -- -- -- -- -- (8)
------- ------ ------- ------- ------- ------- ------
Net loss........ (128) (45) (15) (237) (32) (30) (57)
Less: non-cash
preferred stock
accretion and
dividend
requirements... -- (5) (10) -- (38) (36) (34)
------- ------ ------- ------- ------- ------- ------
Net loss
attributable
to common
stockholders... $ (128) $ (50) $ (25) $ (237) $ (70) $ (66) $ (91)
======= ====== ======= ======= ======= ======= ======
Other Operating
Data:
EBITDA-FIFO(e).. $ 93 $ 93 $ 103 $ 211 $ 211 $ 212 $ 202
Capital
expenditures
and capital
leases......... $ 43 $ 43 $ 48 $ 87 $ 87 $ 54 $ 58
(Footnotes on following page)
</TABLE>
8
<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. The 26-week
period ends on the Saturday nearest to July 31.
(b) During fiscal 2000, the Company recorded a pretax charge of $10 million for
costs directly attributable to the Plan of Reorganization.
(c) The excess reorganization value is amortized over a period of three years.
(d) During fiscal 1997, the Company recorded extraordinary charges related to
the early extinguishment of debt of $8 million, net of an income tax
benefit.
(e) EBITDA-FIFO represents earnings before interest expense, income taxes,
depreciation, amortization (including amortization of video tapes),
reorganization expenses, the gain on sale of real estate, and the LIFO
charge or credit. 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. EBITDA-FIFO may not be comparable
to similarly titled measures reported by other companies. For a discussion
of the Company's operating performance and liquidity, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
9
<PAGE>
RISK FACTORS
INTRODUCTION
Your investment in the Securities involves a high degree of risk. You
should carefully consider the risk factors described below, together with the
other information included in this prospectus, before you decide to buy any
Securities described in this prospectus.
Risks Relating to the Company
Competition
The supermarket business is highly competitive and is characterized by
high inventory turnover and narrow profit margins. The Company's competitors are
national and regional supermarkets, "warehouse" and "club" stores, drug stores,
convenience stores, discount merchandisers and other local retailers in the
market areas served. Some of these competitors may have greater financial
resources and lower merchandise acquisition cost than Pathmark and there can be
no assurance that Pathmark will be able to compete successfully in the future.
Store Expansion
A key to the Company's business strategy has been, and will continue to
be, the expansion of total selling square footage of its operations. Although
the Company expects cash flows generated from operations, supplemented by the
unused borrowing capacity under its Exit Facility will be sufficient to fund its
capital expansion program, there can be no assurance that sufficient funds will
be available for the capital expansion program. In addition, the greater
financial resources of some of our competitors against whom we vie for real
estate sites could adversely affect our ability to open new stores. The
inability to add new stores and increase the selling area of existing stores
could adversely affect the Company's business and its ability to compete
successfully.
Our Business Depends on a Limited Number of Key Personnel, the Loss of Whom
Could Adversely Affect Us
Some of our senior executives are important to our success because they
have been instrumental in identifying business opportunities and operating our
business. If these members of our senior management team become unable or
unwilling to continue in their present positions, our business and financial
results could be materially adversely affected. Please refer to the section of
this prospectus titled "Management."
Adverse Effects of Legal Proceedings
The Company is involved in litigation arising out of a dispute between
two of its predecessor companies (SMG-II and Holdings) and certain holders of
Holdings' Cumulative Exchangeable Redeemable Preferred Stock ("Redeemable
Preferred Stock"). After the merger of the predecessor companies, the Company is
now vested with all the liabilities of all the companies that merged to form the
Company, in the Redeemable Preferred Stock litigation. If the Redeemable
Preferred Stock litigation is decided against us it could significantly affect
our financial condition.
Risks Related to Geographic Concentration
The Company is mainly concentrated in the metropolitan areas of New
York-New Jersey and Philadelphia. Competition from other grocery store chains,
"warehouse" and "club" stores, convenience stores, discount merchandisers and
other local retailers, changes in consumer preferences or a general economic
downturn in the region may adversely affect our sales which may lead to lower
earnings or losses. This may also adversely affect the Company's future growth
and expansion. Further, since the Company is concentrated in the densely
populated metropolitan areas, future store expansion may be limited which may
adversely affect our future earning.
Anti-Takeover Provisions
The Company is authorized to issue up to 5,000,000 shares of Preferred
Stock which it may use for any purpose. The Company has also established certain
advance notice procedures for nominating candidates for election as directors
and for stockholder proposals to be considered at stockholders' meetings. Such
an issuance of
10
<PAGE>
Preferred Stock and advance notice procedures could potentially make it more
difficult for a third party to acquire control of the Company, even if such
change in control would be beneficial to the Company.
Risks Related to Conflict of Interest
Fidelity is the majority shareholder of the Company and is in a
position to control and influence management decisions. The aims and interests
of Fidelity and the Company may not always be identical and may in cases lead to
a conflict of interest which may be detrimental to the Company's long term
interests, growth or earnings.
Factors Affecting the Value of the Securities
No Trading History
There has been no trading history for the Securities and we cannot
assure you that an active market will develop for any of these Securities, or,
if a market develops, that such market will be liquid. The liquidity of the
market for the Securities and the prices at which they trade will depend upon
the amount outstanding, the number of holders thereof, the interest of
securities dealers in maintaining a market in the Securities and other factors
beyond our control.
Dividend Policies
We do not anticipate that any dividends will be paid on our Common
Stock in the foreseeable future. In addition, the covenants in the Exit Facility
limit our ability to pay dividends. Certain institutional investors may only
invest in dividend-paying equity Securities or may operate under other
restrictions which may prohibit their ability to invest in our Common Stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "could," "expects," "plans,"
"intends," "anticipates," "believes," "estimates," "predicts," "forecasts,"
"potential" or "continue" or the negative of such terms or other comparable
terminology.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance, or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus, except as otherwise required by applicable
law.
DIVIDENDS
We do not anticipate that any dividends will be paid on our Common
Stock in the foreseeable future. In addition, the covenants in the Exit Facility
limit our ability to pay dividends. Certain institutional investors may only
invest in dividend-paying equity Securities or may operate under other
restrictions which may prohibit their ability to invest in our Common Stock. We
have not paid any dividends to date.
USE OF PROCEEDS
Fidelity will receive all of the proceeds from the sale of our
Securities. We will not receive any proceeds from the sale of these Securities.
The Company will receive the proceeds from the exercise price of the Warrants,
if any.
11
<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 29, 2000 were derived from our audited consolidated financial
statements, of which each of the three fiscal years in the period ended January
29, 2000, together with the report of Deloitte & Touche LLP, independent
auditors, are included elsewhere herein. The selected historical consolidated
financial data of the Company for the 26 weeks ended July 29, 2000 and July 31,
1999 presented below was derived from our unaudited consolidated financial
statements, which, in the opinion of the management, reflect all adjustments,
consisting of only normal, recurring adjustments, necessary for a fair
presentation of such data and which have been prepared in accordance with the
same accounting principles followed in the presentation of the Company's audited
financial statements for the fiscal year ended January 29, 2000. The statement
of operations data for the 26 weeks ended July 29, 2000 is not necessarily
indicative of the results that may be expected for the fiscal year. You should
read the selected historical consolidated financial data along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
elsewhere in this prospectus. Pursuant to the Plan of Reorganization, which
became effective September 19, 2000, the Company's direct and indirect parent
companies merged with the Company, which became the surviving entity. Such
mergers are being accounted for in the historical financial statements at
historical cost in a manner similar to pooling-of-interests accounting.
Accordingly, the historical financial information presented herein reflects the
financial position and results of operations of the combined entity.
<TABLE>
<CAPTION>
($ in millions
except per share
amounts) 26 Weeks(a) Fiscal Years(a)
------------ -----------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of
Operations Data:
Sales............. $1,849 $ 1,817 $ 3,698 $ 3,655 $3,696 $ 3,711 $3,972
Cost of sales..... 1,329 1,297 2,639 2,612 2,652 2,619 2,838
------- -------- ------- ------- ------ -------- -------
Gross profit...... 520 520 1,059 1,043 1,044 1,092 1,134
Selling, general
and administrative
expenses......... 428 419 851 833 841 858 866
Depreciation and
amortization(b).. 39 37 75 77 84 89 80
Reorganization
expenses(c)...... 10 -- -- -- -- 9 --
Lease commitment
charge(d)........ -- -- -- -- -- 9 --
Gain on disposals
(e)(f)........... -- -- -- -- -- -- 32
------- -------- -------- ------- ------ ------ ------
Operating
earnings......... 43 64 133 133 119 127 220
Interest expense.. (88) (79) (163) (161) (166) (164) (171)
------- -------- -------- ------- ------ ------ -------
Earnings (loss)
before income
taxes and
extraordinary
items............ (45) (15) (30) (28) (47) (37) 49
Income tax
(provision)
benefit.......... -- -- (2) (2) (2) 18 30
------- -------- -------- ------- ------ ------ -------
Earnings (loss)
before
extraordinary
items............ (45) (15) (32) (30) (49) (19) 79
Extraordinary
items, net
of tax(g)........ -- -- -- -- (8) (1) (2)
------- ------- -------- ------- ------- ------ ------
Net earnings
(loss)........... (45) (15) (32) (30) (57) (20) 77
Less: non-cash
preferred stock
accretion
and dividend
requirements..... (5) (10) (38) (36) (34) (33) (32)
------- ------- --------- ------- ------- ------ ------
Net earnings
(loss)
attributable
to common
stockholders..... $ (50) $ (25) $ (70) $ (66) $ (91) $ (53) $ 45
======= ======= ======= ======= ======= ======= ======
Net earnings
(loss) per
common share-
basic............ $ (47) $ (23) $ (65) $ (63) $ (92) $ (54) $ 47
======= ======= ======= ======= ====== ====== ======
Net earnings
(loss) per
common share-
diluted.......... $ (47) $ (23) $ (65) $ (63) $ (92) $ (54) $ 41
======= ======= ======= ======= ====== ====== ======
Balance Sheet Data:
Total assets...... $ 839 $ 841 $ 843 $ 826 $ 906 $1,015 $1,008
Long-term
debt............. -- 1,236 1,264 1,259 1,208 1,213 1,242
Lease obligations,
long-term........ 185 173 173 161 170 175 140
Redeemable
securities....... -- 111 111 109 107 105 104
Total debt,
including lease
obligations...... 591 1,505 1,542 1,457 1,447 1,486 1,455
Liabilities
subject to discharge
and exchange..... 1,314 -- -- -- -- -- --
Stockholders'
deficiency....... (1,484) (1,409) (1,434) (1,384) (1,335) (1,259)(1,224)
(footnotes on following page)
</TABLE>
12
<PAGE>
Pathmark Stores, Inc.
Notes to Selected Historical Consolidated Financial Data
(a) The Company's fiscal year ends on the Saturday nearest to January 31 of the
following calendar year. Fiscal years consist of 52 weeks, except for 53
weeks in fiscal 1995. The 26-week period ends on the Saturday nearest July
31.
(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.
(c) During fiscal 2000, the Company recorded a pretax charge of $10 million for
costs directly attributable to the Plan of Reorganization and, during
fiscal 1996, the Company recorded a pretax charge of $9 million for
reorganization and restructuring costs related to its administrative
operations.
(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.
(e) During fiscal 1995, the Company recorded a pretax gain of $16 million
related to the disposition of its freestanding drug stores.
(f) During fiscal 1995, the Company recorded a pretax gain of $16 million
related to the sale of its remaining investment in Purity Supreme, Inc., to
the Stop & Shop Companies, Inc.
(g) During fiscal 1997, fiscal 1996 and fiscal 1995, respectively, the Company
recorded extraordinary charges related to the early extinguishment of debt
of $8 million, $1 million and $2 million, net of an income tax benefit.
13
<PAGE>
Pathmark Stores, Inc.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following pro forma consolidated financial information of the
Company consists of a Pro Forma Consolidated Balance Sheet as of July 29, 2000
and Pro Forma Consolidated Statements of Operations for the 52 weeks ended
January 29, 2000 and the 26 weeks ended July 29, 2000 (collectively, the "Pro
Forma Statements").
Pursuant to the Plan of Reorganization, which became effective
September 19, 2000, the Company's direct and indirect parent companies merged
with the Company, which became the surviving entity. Such mergers are being
accounted for in the historical financial statements at historical cost in a
manner similar to pooling-of-interests accounting. Accordingly, the historical
financial information presented herein reflects the assets and liabilities and
related results of operations of the combined entity. The Pro Forma Statements
assume the adoption of Fresh-Start Reporting. The adjustments related to
Fresh-Start Reporting are preliminary and the amounts reflected in the Pro Forma
Statements may differ from the amounts ultimately determined. Fresh-Start
Reporting is adopted because holders of existing voting shares immediately
before filing and confirmation of the Plan of Reorganization received less than
50% of the voting shares of the emerging entity, thereby resulting in a new
control group, and the reorganization value of the emerging entity is less than
its prepetition liabilities and allowed claims.
The Pro Forma Consolidated Balance Sheet was prepared to give effect to
the Plan of Reorganization as if it occurred on July 29, 2000 and includes (a)
the exchange of Redeemable Preferred Stock of $112.1 million and applicable
accrued dividends of $129.1 million for $0.5 million in cash, (b) the exchange
of bond indebtedness of $959.8 million and accrued interest thereon of $74.8
million for Common Stock and Warrants of $635.6 million, (c) the cancellation of
16 rejected leases, net of estimated claims, of $27.6 million, (d) expenses of
$10.2 million related to the Plan of Reorganization; such expenses are in
addition to the $9.9 million recorded as of July 29, 2000, (e) the payment of
expenses of $3.7 million related to the Plan of Reorganization, (f) borrowings
of $425.0 million under the New Term Loan, (g) the repayment of borrowings of
$351.5 million under the former term loan, the former working capital facility
and the DIP Facility, (h) the write-off of deferred financing costs of $7.8
million and the DIP Facility deferred financing costs of $1.4 million, (i)
recording of additional deferred financing costs of $9.1 million related to the
New Term Loan; such costs are in addition to the $2.6 million deferred financing
costs recorded as of July 29, 2000, and (j) the recording of the current portion
of $7.3 million related to the New Term Loan and the long-term portion of $30.4
million related to the other debt.
The Pro Forma Consolidated Statements of Operations were prepared to
give effect to the Plan of Reorganization as if such plan had occurred at the
beginning of the earliest period presented. The Pro Forma Consolidated
Statements of Operations exclude the reorganization expenses and cancellation of
debt income since such items are of a nonrecurring nature.
You should read the Pro Forma Statements and accompanying notes along
with our consolidated financial statements and related notes included elsewhere
in this prospectus. The Pro Forma Statements are based upon currently available
information and upon certain assumptions that management of the Company believes
are reasonable under the circumstances. The Pro Forma Statements do not purport
to represent what the Company's financial position or results of operations
would actually have been if the aforementioned transaction in fact had occurred
on such date or at the beginning of the period indicated or to project the
Company's financial position or results of operations at any future date or for
any future period.
14
<PAGE>
<TABLE>
<CAPTION>
Pathmark Stores, Inc.
Pro Forma Consolidated Balance Sheet (Unaudited)
July 29, 2000
(in millions)
Preferred Stock Debt
Historical Exchange Exchange As Adjusted
---------- -------- -------- -----------
<S> <C> <C> <C> <C>
Assets
Current Assets
Cash.................................................. $ 15.6 $ (0.5) (a) $ (10.6) (c) $ 55.3
(9.9) (d)
(3.7) (e)
425.0 (f)
(351.5) (g)
(9.1) (i)
Accounts receivable, net.............................. 16.3 -- -- 16.3
Income taxes receivable............................... 0.5 -- -- 0.5
Merchandise inventories............................... 138.7 -- -- 138.7
Deferred taxes, net................................... 2.3 -- -- 2.3
Prepaid expenses...................................... 21.0 -- (0.3) (d) 20.7
Due from suppliers.................................... 46.3 -- -- 46.3
Other current assets.................................. 21.3 -- -- 21.3
------------ ---------- ------------ ----------
Total current assets............................... 262.0 (0.5) 39.9 301.4
Property and Equipment, Net............................... 461.6 -- -- 461.6
Deferred Financing Costs, Net............................. 13.0 -- (9.2) (h) 12.9
9.1 (i)
Deferred Income Taxes, Net................................ 45.5 -- -- 45.5
Other Assets.............................................. 57.0 -- -- 57.0
Excess Reorganization Value............................... -- -- -- --
----------- ---------- ------------ ----------
$ 839.1 $ (0.5) $ 39.8 $ 878.4
============ ========== ============ ==========
Liabilities and Stockholders' (Deficiency) Equity
Current Liabilities
Accounts payable and book overdrafts.................. $ 77.0 $ -- $ -- $ 77.0
Current maturities of long-term debt.................. 382.9 -- (351.5) (g) 8.3
7.3 (j)
(30.4) (j)
Accrued payroll and payroll taxes..................... 45.2 -- -- 45.2
Current portion of lease obligations.................. 22.9 -- -- 22.9
Accrued interest payable.............................. 6.1 -- -- 6.1
Accrued expenses and other current liabilities........ 89.2 -- (3.7) (e) 85.5
------------ ---------- ------------ ----------
Total Current Liabilities.......................... 623.3 -- (378.3) 245.0
Long-Term Debt............................................ -- -- 425.0 (f) 448.1
(7.3) (j)
30.4 (j)
Lease Obligations, Long-Term.............................. 185.1 -- -- 185.1
Other Noncurrent Liabilities.............................. 200.9 -- -- 200.9
Deferred Income Taxes, Net................................ -- -- -- --
Liabilities Subject to Discharge and Exchange............. 1,314.0 (241.2) (a) (1,034.6) (b) --
(38.2) (c)
Stockholders' (Deficiency) Equity......................... (1,484.2) 240.7 (a) 635.6 (b) (200.7)
399.0 (b)
27.6 (c)
(10.2) (d)
(9.2) (h)
------------ ---------- ------------ ----------
$ 839.1 $ (0.5) $ 39.8 $ 878.4
============ ========== ============ ==========
Fresh Start Pro Forma
----------- ---------
Assets
Current Assets
Cash.................................................. $ -- $ 55.3
Accounts receivable, net.............................. -- 16.3
Income taxes receivable............................... -- 0.5
Merchandise inventories............................... 30.0 (k) 168.7
Deferred taxes, net................................... (2.3) (k) --
Prepaid expenses...................................... -- 20.7
Due from suppliers.................................... -- 46.3
Other current assets.................................. -- 21.3
----------- -----------
Total current assets............................... 27.7 329.1
Property and Equipment, Net............................... -- 461.6
Deferred Financing Costs, Net............................. -- 12.9
Deferred Income Taxes, Net................................ (45.5) (k) --
Other Assets.............................................. 44.0 (k) 101.0
Excess Reorganization Value............................... 829.3 (k) 829.3
----------- -----------
$ 855.5 $ 1,733.9
=========== ===========
Liabilities and Stockholders' (Deficiency) Equity
Current Liabilities
Accounts payable and book overdrafts.................. $ -- $ 77.0
Current maturities of long-term debt.................. -- 8.3
Accrued payroll and payroll taxes..................... -- 45.2
Current portion of lease obligations.................. -- 22.9
Accrued interest payable.............................. -- 6.1
Accrued expenses and other current liabilities........ -- 85.5
----------- -----------
Total Current Liabilities.......................... -- 245.0
Long-Term Debt............................................ -- 448.1
Lease Obligations, Long-Term.............................. -- 185.1
Other Noncurrent Liabilities.............................. (13.0) (k) 187.9
Deferred Income Taxes, Net................................ 32.2 (k) 32.2
Liabilities Subject to Discharge and Exchange............. -- --
Stockholders' (Deficiency) Equity......................... 836.3 (k) 635.6
----------- -----------
$ 855.5 $ 1,733.9
=========== ===========
</TABLE>
See notes to pro forma consolidated balance sheet (unaudited)
15
<PAGE>
Pathmark Stores, Inc.
Notes to Pro Forma Consolidated Balance Sheet (Unaudited)
(a) To record the exchange of Redeemable Preferred Stock of $112.1 million and
applicable accrued dividends of $129.1 million for $0.5 million in cash.
(b) To record the exchange of bond indebtedness of $959.8 million and accrued
interest thereon of $74.8 million for Common Stock and Warrants of $635.6
million, resulting in cancellation of indebtedness income of $399.0
million.
(c) To record the cancellation of rejected leases of $38.2 million, net of
estimated claims of $10.6 million, resulting in cancellation of debt income
of $27.6 million.
(d) To record expenses of $10.2 million related to the Plan of Reorganization
as a charge to the cancellation of debt income; such expenses are in
addition to the $9.9 million recorded as of July 29, 2000.
(e) To pay expenses of $3.7 million related to the Plan of Reorganization which
were accrued but unpaid as of July 29, 2000.
(f) To record the receipt of net proceeds of $425.0 million related to the New
Term Loan.
(g) To record the use of the net proceeds from the New Term Loan of $351.5
million to repay drawings under the former working capital facility and the
DIP Facility of $105.0 million and $10.3 million, respectively, and to
retire the Company's former term loan indebtedness of $236.2 million.
(h) To write-off deferred financing costs of $9.2 million, including $1.4
million related to the DIP Facility.
(i) To record deferred financing costs of $9.1 million related to the New Term
Loan; such costs are in addition to the $2.6 million deferred financing
costs recorded as of July 29, 2000.
(j) To record the current portion of $7.3 million related to the New Term Loan
and the long-term portion of $30.4 million related to other debt.
(k) The Pro Forma Consolidated Balance Sheet is based on the adoption of
Fresh-Start Reporting. Fresh-Start Reporting is adopted because holders of
existing voting shares immediately before the filing and confirmation of
the Plan of Reorganization received less than 50% of the voting shares of
the emerging entity, thereby resulting in a new control group, and the
Company's reorganization value is less than its prepetition liabilities and
allowed claims. In accordance with Fresh-Start Reporting, the Company has
determined the reorganization value of the reorganized company. This value
has been allocated, based on estimated fair market value, to the Company's
assets and liabilities, resulting in an intangible asset equal to the
reorganization value in excess of amounts allocable to identifiable net
assets. The adjustments included in the Pro Forma Consolidated Balance
Sheet are preliminary and may differ from the amounts ultimately
determined.
It is estimated that the reorganization value related to the plan of
reorganization is as follows (dollars in millions):
Debt and capital leases............................... $ 664.4
Pro forma stockholders' equity........................ 635.6
----------
Reorganization value.................................. $ 1,300.0
==========
16
<PAGE>
Pathmark Stores, Inc.
Notes to Pro Forma Consolidated Balance Sheet (Unaudited)--(Continued)
The pro forma adjustments for the estimated preliminary allocation of the pro
forma stockholders' (deficiency) equity is a follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Stockholders' deficiency, as adjusted.................................... $ (200.7)
Adjustments to assets and liabilities to reflect estimated fair values:
Increase (decrease) in assets:
Inventories(a)....................................................... 30.0
Other assets(b)...................................................... 44.0
Deferred income taxes(c)............................................. (80.0)
Decrease in liabilities:
Other noncurrent liabilities(d)...................................... 13.0
Excess reorganization value............................................ 829.3
---------
Pro forma stockholders' equity........................................... $ 635.6
=========
</TABLE>
(a) To adjust inventories to fair market value since cost for substantially all
inventories is determined on a last-in, first-out basis.
(b) To record the excess pension plan assets over projected benefit
obligations.
(c) To record the tax effects of the pro forma adjustments.
(d) To adjust the liability for postretirement benefits.
17
<PAGE>
<TABLE>
<CAPTION>
Pathmark Stores, Inc.
Pro Forma Consolidated Statement of Operations (Unaudited)
26 Weeks Ended July 29, 2000
(in millions except per share amounts)
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Sales................................................ $ 1,848.8 $ -- $ 1,848.8
Cost of sales........................................ 1,328.8 -- 1,328.8
------------- -------- ----------
Gross profit......................................... 520.0 -- 520.0
Selling, general and administrative expenses......... 428.4 -- 428.4
Reorganization expenses.............................. 9.9 (9.9) (a) --
Depreciation and amortization........................ 38.6 -- 38.6
Amortization of excess reorganization value.......... -- 138.2 (b) 138.2
------------- -------- ----------
Operating earnings (loss)............................ 43.1 (128.3) (85.2)
Interest expense..................................... (87.8) 52.0 (c) (35.8)
------------- -------- ----------
Loss before income taxes............................. (44.7) (76.3) (121.0)
Income tax provision................................. (0.1) (7.0) (d) (7.1)
------------- -------- ----------
Net loss............................................. (44.8) (83.3) (128.1)
Less: non-cash preferred stock accretion
and dividend requirements.......................... (5.3) 5.3 (e) --
------------- -------- ----------
Net loss attributable to common stockholders......... $ (50.1) $ (78.0) $ (128.1)
============= ======== ==========
Weighted average common shares
outstanding-basic.................................. 1.1 30.1
============= ==========
Net loss per common share-basic...................... $ (46.91) $ (4.26)
============= ==========
Weighted average common shares
outstanding-diluted................................ 1.1 30.1
============= ==========
Net loss per common share-diluted.................... $ (46.91) $ (4.26)
============= ==========
</TABLE>
See notes to pro forma consolidated statement of operations (unaudited).
18
<PAGE>
Pathmark Stores, Inc.
Notes to Pro Forma Consolidated Statement of Operations (Unaudited)
26 Weeks Ended July 29, 2000
(a) To reverse reorganization expenses.
(b) To record amortization of the excess reorganization value over a period
of three years.
(c) To adjust interest expense, as follows:
o to eliminate interest expense and applicable amortization of
deferred financing costs related to the exchanged debt,
o to record additional interest expense related to the
incremental borrowing incurred to pay reorganization expenses,
o to record additional interest expense related to the
amortization of deferred financing costs incurred as part of
the Exit Facility, and
o to record additional interest expense due to the higher
interest rates under the Exit Facility compared to the former
bank agreement.
(d) To record the tax effect of the pro forma adjustments, excluding the
non-deductible amortization of excess reorganization value.
(e) To record the elimination of the preferred stock accretion and dividend
requirements related to the preferred stock subject to discharge and
exchange.
19
<PAGE>
<TABLE>
<CAPTION>
Pathmark Stores, Inc.
Pro Forma Consolidated Statement of Operations (Unaudited)
52 Weeks Ended January 29, 2000
(in millions except per share amounts)
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Sales................................................ $ 3,698.1 $ -- $ 3,698.1
Cost of sales........................................ 2,639.4 -- 2,639.4
----------- -------- -----------
Gross profit......................................... 1,058.7 -- 1,058.7
Selling, general and administrative expenses......... 850.7 -- 850.7
Depreciation and amortization........................ 74.7 -- 74.7
Amortization of excess reorganization value.......... -- 276.4 (a) 276.4
----------- -------- -----------
Operating earnings (loss)............................ 133.3 (276.4) (143.1)
Interest expense..................................... (163.1) 96.1 (b) (67.0)
----------- -------- -----------
Loss before income taxes............................. (29.8) (180.3) (210.1)
Income tax provision................................. (2.1) (25.1) (c) (27.2)
----------- -------- -----------
Net loss............................................. (31.9) (205.4) (237.3)
Less: non-cash preferred stock accretion and
dividend requirements......................... (37.9) 37.9 (d) --
----------- -------- -----------
Net loss attributable to common stockholders......... $ (69.8) $ (167.5) $ (237.3)
=========== ======== ===========
Weighted average common shares
outstanding-basic.................................. 1.1 30.1
=========== ===========
Net loss per common share-basic...................... $ (65.40) $ (7.88)
=========== ===========
Weighted average common shares
outstanding-diluted................................ 1.1 30.1
=========== ===========
Net loss per common share-diluted.................... $ (65.40) $ (7.88)
=========== ===========
</TABLE>
See notes to pro forma consolidated statement of operations (unaudited).
20
<PAGE>
Pathmark Stores, Inc.
Notes to Pro Forma Consolidated Statement of Operations (Unaudited)
52 Weeks Ended January 29, 2000
(a) To record amortization of the excess reorganization value over a period of
three years.
(b) To adjust interest expense, as follows:
o to eliminate interest expense and applicable amortization of deferred
financing costs related to the exchanged debt,
o to record additional interest expense related to the incremental
borrowing incurred to pay reorganization expenses,
o to record additional interest expense related to the amortization of
deferred financing costs incurred as part of the Exit Facility, and
o to record additional interest expense due to the higher interest rates
under the Exit Facility compared to the former bank agreement.
(c) To record the tax effect of the pro forma adjustments, excluding the
non-deductible amortization of excess reorganization value.
(d) To record the elimination of the preferred stock accretion and dividend
requirements related to the preferred stock subject to discharge and
exchange.
21
<PAGE>
Pathmark Stores, Inc.
Capitalization
The following table sets forth the historical and pro forma debt and
capitalization of the Company at July 29, 2000 as adjusted to give effect to the
Plan of Reorganization. Pursuant to the Plan of Reorganization, which became
effective September 19, 2000, the Company's direct and indirect parent companies
merged with the Company, which became the surviving entity. Such mergers are
being accounted for in the historical financial statements at historical cost in
a manner similar to pooling-of-interests accounting. Accordingly, the historical
financial information presented herein reflects the capitalization of the
combined entity. You should read this table along with the "Selected Historical
Consolidated Financial Data" and "Pro Forma Consolidated Financial Information."
<TABLE>
<CAPTION>
July 29, 2000
-------------
Historical Pro Forma
---------- ---------
($ millions)
<S> <C> <C>
Current debt, including lease obligations...........................................
Current portion of former term loan............................................ $ 236.2 $ --
Current portion of industrial revenue bonds.................................... 8.2 --
Current portion of former working capital facility (a)......................... 105.0 --
Current portion of DIP Facility................................................ 10.3 --
Current portion of New Term Loan............................................... -- 7.3
Current portion of other long-term debt........................................ 23.2 1.0
----------- -----------
Subtotal....................................................................... 382.9 8.3
Current portion of lease obligations........................................... 22.9 22.9
----------- -----------
Total current debt............................................................. 405.8 31.2
----------- -----------
Long-term debt, including lease obligations.........................................
New Term Loan.................................................................. -- 417.7
Other long-term debt........................................................... -- 30.4
----------- -----------
Subtotal....................................................................... -- 448.1
Long-term lease obligations.................................................... 185.1 185.1
----------- -----------
Total long-term debt........................................................... 185.1 633.2
----------- -----------
Bond indebtedness and preferred stock subject to discharge and exchange............. 1,275.8 --
----------- -----------
Stockholders' (deficiency) equity................................................... (1,484.2) 635.6
----------- -----------
Total capitalization................................................................ $ 382.5 $ 1,300.0
=========== ===========
</TABLE>
(a) Excludes outstanding letters of credit of $38.8 million.
22
<PAGE>
Pathmark Stores, Inc.
Summary Historical and Pro Forma Consolidated Financial Information
The following table presents summary historical and pro forma financial
information of the Company for the 52 weeks ended January 29, 2000 and the 26
weeks ended July 29, 2000. Pursuant to the Plan of Reorganization, which became
effective September 19, 2000, the Company's direct and indirect parent companies
merged with the Company, which became the surviving entity. Such mergers are
being accounted for in the historical financial statements at historical cost in
a manner similar to pooling-of-interests accounting. Accordingly, the historical
financial information presented herein reflect the capitalization of the
combined entity. The historical information was derived from our consolidated
financial statements and notes thereto. The pro forma information is derived
from the pro forma financial statements and notes thereto under "Pro Forma
Consolidated Financial Information" and reflects the Plan of Reorganization and
certain other adjustments. Reference should be made to the description of the
pro forma basis of presentation of the information summarized below, including
the footnotes, that appear under "Pro Forma Consolidated Financial Information."
<TABLE>
<CAPTION>
26 Weeks 52 Weeks
Ended Ended
July 29, 2000 January 29, 2000
------------- ----------------
Historical Pro Forma Historical Pro Forma
---------- --------- ---------- ---------
($ millions) ($ millions)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Sales...................................................... $ 1,849 $ 1,849 $ 3,698 $ 3,698
Gross profit............................................... 520 520 1,059 1,059
Selling, general and administrative expenses............... 428 428 851 851
Reorganization expenses.................................... 10 -- -- --
Depreciation and amortization.............................. 39 39 75 75
Amortization of excess reorganization value................ -- 138 -- 276
Operating earnings (loss).................................. 43 (85) 133 (143)
Interest expense........................................... 88 36 163 67
Net loss................................................... (45) (128) (32) (237)
July 29, 2000
-------------
Historical Pro Forma
---------- ---------
($ millions)
Summary Capitalization Data:
Current debt, including lease obligations.................. $ 406 $ 31
Long-term debt, including lease obligations................ 185 633
Bond indebtedness and preferred stock subject to
discharge and exchange................................... 1,276 --
Stockholders' (deficiency) equity.......................... (1,484) 636
---------- ----------
Total capitalization....................................... $ 383 $ 1,300
========== ==========
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the
"Selected Financial Data" section of this prospectus and our consolidated
financial statements and the related notes included elsewhere in this
prospectus.
Overview
At July 29, 2000, Pathmark operated 137 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 and Delaware and consist of approximately 5.2 million square feet
of selling space and 7.1 million square feet of total space.
Except as noted, the following discussion and analysis relates to our
historical financial results of operations and financial condition, without
giving effect to the reorganization and the recapitalization. As a result, we do
not believe that results of operations in future periods will be comparable to
prior periods. In addition to the audited and unaudited historical consolidated
financial data presented in this prospectus, we have also prepared an unaudited
pro forma consolidated balance sheet as of July 29, 2000 and unaudited pro forma
consolidated statements of operations for the 26 weeks ended July 29, 2000 and
for the 52 weeks ended January 29, 2000, which give effect to the
reorganization. This data appears elsewhere in this prospectus, and you should
consider such data along with this discussion and analysis. See "Unaudited Pro
Forma Consolidated Financial Data."
The Company has no items of comprehensive income other than net income
and, accordingly, the total comprehensive loss is the same as the reported net
loss for all periods presented.
Restructuring Proceedings Under Chapter 11 of the Bankruptcy Code
Historically, the cash flows that the Company generated from
operations, supplemented by the unused borrowing capacity under the Working
Capital Facility and the availability of capital lease financing, were
sufficient to pay the Company's debts as they came due, provide for its capital
expenditure program and meet its other cash requirements. Management evaluated
its fiscal 2000 cash flow projections and debt service requirements and, based
upon this evaluation, the Company elected not to make all of its scheduled debt
payments. The Company's fiscal 2000 debt requirements increased substantially
over the prior year due primarily to the semi-annual interest payments of $12.1
million on the 10.75% Junior Subordinated Deferred Coupon Notes (the "Junior
Subordinated Notes") which, for the first time, was required to be paid in cash
on May 1, 2000 and the sinking fund payment of $50.0 million on the 11.625%
Subordinated Notes due 2002 (the "Subordinated Notes") on June 15, 2000.
On May 1, 2000, the Company elected not to make interest payments of
$21.2 million on its $440.0 million of 9.625% Senior Subordinated Notes due 2003
(the "Senior Subordinated Notes") and $12.1 million on its Junior Subordinated
Notes. On June 15, 2000, the Company elected not to make interest payments of
$6.0 million on its $95.8 million of 12.625% Subordinated Debentures due 2002
(the "Subordinated Debentures") and $11.6 million on its Subordinated Notes.
Also, on June 15, 2000, the Company elected not to make a sinking fund payment
of $50 million on its Subordinated Notes. The grace period under each of the
indentures governing the various notes expired, constituting an Event of Default
under each such indenture.
On the Petition Date, the Company, along with its direct and indirect
parent companies and certain of its subsidiaries, filed a voluntary petition
under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code").
The Petition was filed in the United States Bankruptcy Court for the District of
Delaware (the "Court"). As of the Plan Effective Date, the Company was in
arrears with respect to interest on its Senior Subordinated Notes in the amount
of $37.6 million, on its Subordinated Notes in the amount of $13.4 million, on
its Subordinated Debentures in the amount of $6.9 million, and on its Junior
Subordinated Notes in the amount of $16.9 million. The Company continued to
manage its affairs and operate its business as a debtor-in-possession while the
bankruptcy case was pending. The bankruptcy case was commenced to implement the
Plan of Reorganization developed jointly with an ad hoc committee of the
Company's bondholders (the "Bondholders Committee"). Members of the
24
<PAGE>
Bondholders Committee held or controlled $445.7 million in principal amount, or
approximately 46%, of the Company's total bond indebtedness outstanding. Over
99% of the principal amount of bond indebtedness voted agreed to accept the Plan
of Reorganization.
The Plan of Reorganization provided that, upon consummation of the
reorganization, current holders of the Company's bond indebtedness will receive
100% of the opening Common Stock of the reorganized Company (the "Common
Stock"). In addition to Common Stock, holders of the subordinated notes, the
subordinated debentures and the junior subordinated notes will receive ten-year
Warrants to purchase 15% of the diluted Common Stock of the Company (the
"Warrants"). The Warrants will be exercisable at the opening reorganization
equity value established in connection with the Plan of Reorganization. Such
ownership is subject to dilution from (1) the exercise of the Warrants, (2) the
exercise of any options to purchase Common Stock issued pursuant to the
Company's long-term management incentive plan, and (3) the grant to the Chief
Executive Officer of restricted Common Stock.
Pursuant to the Plan of Reorganization and in full satisfaction of
their claims, (1) holders of the senior subordinated notes received 78.24% of
the Common Stock, (2) holders of the subordinated notes and the subordinated
debentures received their ratable share of 18.71% of the Common Stock and 75% of
the Warrants, (3) holders of the junior subordinated notes received 2.88% of the
Common Stock and 25% of the Warrants, and (4) holders of approximately $0.98
million of the 11.625% Holdings subordinated notes due 2002, received 0.17% of
the Common Stock, subject to dilution as described in the preceding paragraph.
The Plan of Reorganization provided that holders of the Redeemable
Preferred Stock receive their ratable portions of $0.5 million in cash payable
upon the effective date of the Plan of Reorganization.
In connection with its Plan of Reorganization, the Company entered into
the DIP Facility and the Exit Facility. The DIP Facility, which was approved by
the Court on July 28, 2000, enabled the Company to continue normal business
operations during the restructuring proceedings. The Exit Facility, which closed
on September 19, 2000, was used to repay in full the former credit agreement and
the DIP Facility, pay expenses of the Plan of Reorganization and will provide
approximately $200.0 million of liquidity for post-reorganization operations.
On July 13, 2000, the Court approved various "first day" requests
including, among other things, the payment of prepetition claims of employees,
utilities, critical trade vendors and other key constituents. The Court also
granted the Company's motion to reject 16 unexpired real estate leases, related
to closed stores. Under Bankruptcy Law, the Company's liability to the landlord
on claims resulting from such rejections is capped at the greater of 15% of the
remaining lease payments (limited to three years' lease payments) or one year's
lease payments. Rejection of these leases, however, does not limit the Company's
obligations with respect to damages arising from the rejection of any
corresponding subleases. Outstanding statutory claims related to these 16
rejected leases approximate $10.6 million.
On September 7, 2000, the Court entered an order confirming the Plan of
Reorganization, and on September 19, 2000, the Company emerged from Chapter 11
bankruptcy protection and the Company's direct and indirect parent companies
merged with the Company, which became the surviving entity. Such mergers are
being accounted for in the historical financial statements at historical cost in
a manner similar to pooling-of-interests accounting. Accordingly the historical
financial information presented herein reflect the assets and liabilities and
related results of operations of the combined entity.
Results of Operations
Fiscal 2000 Six-Month Period Compared to Fiscal 1999 Six-Month Period
This discussion and analysis compares our results for the first six
months of fiscal 2000 with the results of the first six months of the prior
fiscal year.
Sales: For the six-month period of fiscal 2000, sales were $1,848.8
million compared to $1,817.2 million in the prior year, an increase of 1.7%. The
sales increase was primarily due to new stores opened in fiscal 2000. In
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addition, same store sales increased 0.2% for the six-month period of fiscal
2000. The Company operated 137 and 134 supermarkets at the end of the second
quarters of fiscal 2000 and fiscal 1999, respectively.
Gross Profit: For the six-month period of fiscal 2000, gross profit was
$520.0 million or 28.1% of sales compared to $519.8 million or 28.6% for the
prior year. The increase in gross profit of $0.2 million for the six-month
period of fiscal 2000 compared to the prior year was primarily due to higher
sales, offset by higher shrink and promotional expenses. The cost of goods sold
comparisons were affected by a pretax LIFO charge of $0.8 million in each of the
six-month periods of fiscal 2000 and fiscal 1999.
Selling, General and Administrative Expenses ("SG&A"): The increase in
SG&A of $9.7 million for the six-month period of fiscal 2000 compared to the
prior year was primarily due to higher store labor and labor-related expenses.
Included in the six-month periods were gains on the sale of certain real estate
of $1.8 million and $0.4 million in fiscal 2000 and fiscal 1999, respectively.
As a percentage of sales, SG&A was 23.2% in the six-month period of fiscal 2000,
compared to 23.0% in the six-month period of fiscal 1999.
Reorganization Expenses: Reorganization expenses in the six-month
period of fiscal 2000 were $9.9 million. Such items, which are expensed as
incurred, primarily consist of employee retention bonuses and professional fees
related to legal, accounting and consulting services directly attributable to
the Plan of Reorganization.
Depreciation and Amortization: For the six-month period of fiscal 2000,
depreciation and amortization of $38.6 million was $2.0 million higher than the
$36.6 million in the prior year primarily due to property and equipment
additions. Depreciation and amortization excludes video tape amortization, which
is recorded in cost of goods sold, of $2.2 million and $1.6 million in the
six-month periods of fiscal 2000 and fiscal 1999, respectively.
Operating Earnings: For the six-month period of fiscal 2000, operating
earnings were $43.1 million compared with $64.4 million in the prior year. The
decrease in operating earnings in the six-month period of fiscal 2000 compared
to the prior year was due to higher SG&A, reorganization items and higher
depreciation and amortization expense, partially offset by higher gross profit.
Interest Expense: Interest expense was $87.8 million for the six-month
period of fiscal 2000 compared to $79.8 million in the prior year. The increase
in interest expense in the six-month period of fiscal 2000 compared to the prior
year was primarily due to higher rates on borrowings under the former term loan
and higher levels of borrowings and higher rates under the former working
capital facility. Interest expense on bond indebtedness, as of July 29, 2000,
has been accrued through the Petition Date, except for the Senior Subordinated
Notes, which has been accrued through the Plan Effective Date; such interest
accrual is in accordance with the allocations set forth in the Plan of
Reorganization.
Income Taxes: Income taxes for the interim period are based on the
estimated effective tax rate expected to be applicable for the full fiscal year.
The Company has recorded a valuation allowance related to the income tax benefit
for the first and second quarters of fiscal 2000 and fiscal 1999; therefore, no
income tax benefit has been recognized. The Company believes that it is more
likely than not that the net deferred income tax asset of $47.8 million at July
29, 2000 will be realized through the implementation of tax strategies which
could generate taxable income. During the six-month period of fiscal 2000, the
Company made income tax payments of $0.06 million and received income tax
refunds of $0.4 million. During the six-month period of fiscal 1999, the Company
made income tax payments of $0.4 million and received income tax refunds of
$0.03 million.
Summary of Operations: For the six-month period of fiscal 2000, the
Company's net loss was $44.8 million compared to a net loss of $15.5 million in
the prior year period. The increase in net loss in the six-month period of
fiscal 2000 compared to the prior year was primarily due to lower operating
earnings and higher interest expense.
EBITDA-FIFO: EBITDA-FIFO was $93.0 million and $103.2 million for the
six-month period of fiscal 2000 and fiscal 1999, respectively. EBITDA-FIFO
represents net earnings before interest expense, income taxes, depreciation and
amortization (including amortization of video tapes), reorganization items, the
gain on sale of real
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estate and the LIFO charge or credit. EBITDA-FIFO is a widely accepted financial
indicator of a company's ability to service and/or incur debt. EBITDA-FIFO
should not be construed as an alternative to, or a better indicator of,
operating earnings or to cash flows from operating activities, as determined in
accordance with generally accepted accounting principles. EBITDA-FIFO may not be
comparable to similarly titled measures reported by other companies.
Fiscal 1999 Compared to Fiscal 1998
Sales: Sales in fiscal 1999 were $3.70 billion compared to $3.66
billion in fiscal 1998, an increase of 1.2%. Same store sales increased 0.6% for
the year. Sales in fiscal 1999 compared to fiscal 1998 were also impacted by new
store openings in fiscal 1999, partially offset by stores which were closed or
divested in fiscal 1998. During fiscal 1999, the Company opened three new
stores, closed no stores and completed 29 renovations and enlargements to
existing supermarkets. The Company operated 135 and 132 supermarkets at the end
of fiscal 1999 and fiscal 1998, respectively.
Gross Profit: Gross profit in fiscal 1999 was $1.06 billion or 28.6% of
sales compared to $1.04 billion or 28.5% of sales for the prior year. The
increase in gross profit dollars of $15.5 million for fiscal 1999 compared to
the prior year was primarily due to higher sales and lower shrink. The cost of
goods sold comparisons were also impacted by a pretax LIFO credit of $0.03
million and a pretax LIFO charge of $3.4 million in fiscal 1999 and fiscal 1998,
respectively.
SG&A: SG&A in fiscal 1999 increased $17.8 million or 2.1% compared to
the prior year. The increase in SG&A for fiscal 1999 compared to the prior year
was primarily due to higher insurance and medical expenses, along with expenses
incurred related to the terminated acquisition of the Company by Koninklijke
Ahold N.V., a company organized under the laws of The Netherlands ("Ahold"),
partially offset by lower workers compensation expense. Fiscal 1998 SG&A is net
of a gain of $5.1 million on the sale of certain real estate. As a percentage of
sales, SG&A was 23.0% in fiscal 1999, up from 22.8% in the prior year. Excluding
the gain on the sale of real estate, SG&A as a percentage of sales was 22.9% for
fiscal 1998.
Depreciation and Amortization: Depreciation and amortization of $74.7
million in fiscal 1999 was $2.3 million lower than the prior year of $77.0
million. The decrease in depreciation and amortization expense in fiscal 1999
compared to the prior year was primarily due to property and equipment
dispositions during fiscal 1998, partially offset by capital expenditures.
Depreciation and amortization excludes video tape amortization, which is
recorded in cost of goods sold, of $3.3 million and $3.1 million in fiscal 1999
and fiscal 1998, respectively.
Operating Earnings: Operating earnings were $133.3 million for both
fiscal year 1999 and fiscal year 1998. Fiscal year 1999 had higher SG&A, offset
by higher gross profit and lower depreciation and amortization expense than
fiscal year 1998.
Interest Expense: Interest expense was $163.1 million in fiscal 1999
compared to $161.3 million in the prior year. The increase in interest expense
in fiscal 1999 compared to the prior year was primarily due to higher levels of
borrowing under the former working capital facility and the debt accretion on
the Junior Subordinated Notes, partially offset by reductions in the former term
loan and the paydown of certain mortgages and lease obligations.
Income Taxes: The income tax provision was $2.1 million and $1.7
million in fiscal 1999 and fiscal 1998, respectively. For both fiscal 1999 and
fiscal 1998, the Company recorded a valuation allowance primarily related to the
income tax benefit; therefore, no income tax benefit has been recognized. The
Company believes that it is more likely than not that the net deferred income
tax assets of $47.8 million at January 29, 2000 will be realized through the
implementation of tax strategies which could generate taxable income.
During fiscal 1999, the Company made income tax payments of $0.5
million and received income tax refunds of $1.9 million. During fiscal 1998, the
Company made income tax payments of $1.1 million and received income tax refunds
of $4.5 million.
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Summary of Operations: For fiscal 1999, the Company's net loss was
$31.9 million compared to a net loss of $29.8 million for the prior year. The
increase in net loss in fiscal 1999 compared to the prior year was primarily due
to higher interest expense.
EBITDA-FIFO: EBITDA-FIFO was $211.3 million and $212.2 million in
fiscal 1999 and fiscal 1998, respectively.
Fiscal 1998 Compared to Fiscal 1997
Sales: Sales in fiscal 1998 were $3.66 billion compared to $3.70
billion in fiscal 1997. Same store sales increased 0.7% for the year. Sales in
fiscal 1998 compared to fiscal 1997 were also impacted by closed and divested
stores, offset by new store openings in fiscal 1997. During fiscal 1998, the
Company opened no new stores, closed three stores and completed 14 renovations
and enlargements to existing supermarkets. The Company operated 132 and 135
supermarkets at the end of fiscal 1998 and fiscal 1997, respectively.
Gross Profit: Gross profit in fiscal 1998 was $1.04 billion or 28.5% of
sales compared to $1.04 billion or 28.2% of sales for the prior year. The
increase in gross profit as a percentage of sales for fiscal 1998 compared to
the prior year was due to the savings realized from the Company's outsourcing at
the end of fiscal 1997 of certain of its distribution center operations, lower
shrink and improvements in the perishable mix. The cost of goods sold
comparisons were impacted by a pretax LIFO charge of $3.4 million and a pretax
LIFO credit of $5.4 million in fiscal 1998 and fiscal 1997, respectively. The
pretax LIFO charge for fiscal 1998 is primarily due to inflation in dairy
related products and cigarettes. 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 outsourcing arrangement with C&S Wholesale Grocers, Inc.
("C&S").
SG&A: SG&A in fiscal 1998 decreased $8.0 million or 1.0% compared to
the prior year. As a percentage of sales, SG&A was 22.8% in each of fiscal 1998
and fiscal 1997. The decrease in SG&A for fiscal 1998 compared to the prior year
was primarily due to the gain recognized on the sale of certain real estate,
lower insurance and store labor expenses, along with lower operating costs which
resulted from sold and closed stores, partially offset by higher incentive
expense. Excluding the gain on the sale of real estate, SG&A as a percentage of
sales was 22.9% for fiscal 1998.
Depreciation and Amortization: Depreciation and amortization of $77.0
million in fiscal 1998 was $6.6 million lower than the prior year of $83.6
million. The decrease in depreciation and amortization expense in fiscal 1998
compared to the prior year was primarily due to the sale of certain of the
Company's distribution center facilities at the end of fiscal 1997, as part of
its transaction with C&S, partially offset by capital expenditures. Depreciation
and amortization excludes video tape amortization, which is recorded in cost of
goods sold, of $3.1 million and $3.4 million in fiscal 1998 and fiscal 1997,
respectively.
Operating Earnings: Operating earnings in fiscal 1998 were $133.3
million compared to the prior year of $119.5 million. The increase in operating
earnings in fiscal 1998 compared to the prior year was primarily due to lower
SG&A and lower depreciation and amortization expense.
Interest Expense: Interest expense was $161.3 million in fiscal 1998
compared to $166.8 million in the prior year. The decrease in interest expense
in fiscal 1998 compared to the prior year was primarily due to reductions in the
former term loan and lease obligations, lower amortization of debt issuance
costs and the paydown of certain mortgages, partially offset by the debt
accretion on the Junior Subordinated Notes.
Income Taxes: The income tax provision was $1.7 million and $2.2
million in fiscal 1998 and fiscal 1997, respectively. For fiscal 1998, the
Company recorded a valuation allowance primarily related to the income tax
benefit; therefore, no income tax benefit has been recognized.
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During fiscal 1998, the Company made income tax payments of $1.1
million and received income tax refunds of $4.5 million. During fiscal 1997, the
Company made income tax payments of $4.8 million and received income tax refunds
of $5.8 million.
Extraordinary Items: During the second quarter of fiscal 1997, in
connection with its 1997 credit agreement, the Company wrote off deferred
financing fees of $12.8 million related to its 1993 credit agreement, resulting
in a net loss on early extinguishment of debt of $7.5 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.
Summary of Operations: For fiscal 1998, the Company's net loss was
$29.8 million compared to a net loss of $57.0 million for the prior year. The
decrease in net loss in fiscal 1998 compared to the prior year was primarily due
to higher operating earnings and lower interest expense in fiscal 1998 and the
extraordinary loss in fiscal 1997.
EBITDA-FIFO: EBITDA-FIFO was $212.2 million and $201.6 million in
fiscal 1998 and fiscal 1997, respectively.
Financial Condition
Debt Service and Liquidity: During fiscal 1999, total long-term debt
increased $5.6 million from fiscal 1998 year end primarily due to debt accretion
on the Junior Subordinated Notes, partially offset by reductions in the former
term loan and a net decrease in certain mortgages. Borrowings under the former
working capital facility were $109.8 million at January 29, 2000. Outstanding
letters of credit under the former working capital facility were $43.0 million
at January 29, 2000. In addition, during fiscal 1999, total lease obligations
increased $15.9 million from fiscal 1998 year end.
During the second quarter of fiscal 2000, total debt, excluding bond
indebtedness subject to discharge and exchange, decreased $0.4 million from
fiscal 1999 year end due to reductions in the former term loan and the former
working capital facility, partially offset by the DIP Facility. In addition,
during the six-month period of fiscal 2000, total lease obligations increased
$9.5 million from fiscal 1999 year end.
In connection with its financial restructuring plan, the Company
received a commitment from The Chase Manhattan Bank for a $75.0 million DIP
Facility in support of the Plan of Reorganization and a $600.0 million Exit
Facility. The DIP Facility, which was approved by the Court on July 28, 2000,
enabled the Company to continue normal business operations during the
restructuring proceedings. The Exit Facility, which closed on September 19,
2000, was used to repay in full the former credit agreement and the DIP
Facility, pay expenses of the Plan of Reorganization and provide approximately
$200.0 million of liquidity for post-reorganization operations.
On September 19, 2000, the Company entered into the Exit Facility,
which includes a New Term Loan of $425.0 million and a New Working Capital
Facility of $175.0 million. The Exit Facility bears interest at floating rates,
ranging from LIBOR plus 3.00% to LIBOR plus 4.00%. The Company is required to
repay a portion of its borrowings under the New Term Loan each year, so as to
retire such indebtedness in its entirety by July 15, 2007. Under the New Working
Capital Facility, which expires on July 15, 2005, the Company can borrow an
amount up to $175.0 million, including a maximum of $125.0 million in letters of
credit. As of September 19, 2000, no borrowings were made under the New Working
Capital Facility.
The Exit Facility restricts, among other things, the payment of cash
dividends and the redemption of stock. Other provisions of the Exit Facility
limit the amount of obligations under leases and capital expenditures in excess
of specified amounts. The Company is also required to meet certain financial
tests including maximum leverage, minimum interest coverage and minimum cash
flow.
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The principal payments of the New Term Loan are as follows (dollars in
millions):
Fiscal Years Principal Payments
------------ ------------------
2000.................................................. $3.6
2001.................................................. 10.4
2002.................................................. 16.6
2003.................................................. 26.0
2004.................................................. 44.8
2005.................................................. 102.4
2006.................................................. 147.5
2007.................................................. 73.7
------
Total................................................. $425.0
======
The indebtedness under the Exit Facility bears interest at floating
rates, and, therefore, cash interest payments on that indebtedness may vary. The
Company does not currently maintain any interest rate hedging arrangements due
to the reasonable risk that near term interest rates will not rise
significantly. The Company is continuously evaluating this risk and will
implement interest rate hedging arrangements if deemed appropriate.
Capital Expenditures: Capital expenditures for fiscal 1999, including
property acquired under capital leases, were $87.0 million compared to $53.5
million for fiscal 1998 and $58.0 million for fiscal 1997. During fiscal 1999,
the Company opened three new stores and completed 29 renovations and
enlargements to existing supermarkets. Capital expenditures for the six-month
period of fiscal 2000 were $43.1 million compared to $47.7 million for the prior
year. During the six-month period of fiscal 2000, the Company opened three new
stores, closed one store and completed one renovation and one enlargement.
During the remainder of fiscal 2000, the Company expects to open one additional
store and complete up to an additional 25 renovations. Capital expenditures for
fiscal 2000, including property to be acquired under capital leases, are
estimated to be $100.0 million. Management believes that cash flows generated
from operations, supplemented by the unused borrowing capacity under the Exit
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 $21.1
million in fiscal 1999 compared to cash used for operating activities of $25.5
million in the prior year. The change in cash flow from operating activities was
primarily due to cash provided by operating assets and liabilities. Cash used
for operating activities in the prior year was impacted by the transition to
C&S. Cash used for investing activities was $38.7 million in fiscal 1999
compared to cash provided by investing activities of $15.1 million in the prior
year. The increase in cash used for investing activities was due to an increase
in expenditures of property and equipment, offset by a decrease in proceeds from
property dispositions. Cash provided by financing activities was $25.8 million
in fiscal 1999 compared to cash used for financing activities of $45.1 million
in the prior year. The increase in cash provided by financing activities was
primarily due to an increase in former working capital facility borrowings and a
decrease in book overdrafts, partially offset by a reduction in the former term
loan and a reduction in lease obligations. Cash used for financing activities in
fiscal 1998 included the payoff of $30.4 million of the PTK Exchangeable
Guaranteed Debentures. Cash increased from $7.9 million at January 30, 1999 to
$16.2 million at January 29, 2000 due to higher store cash funds at January 29,
2000 resulting from increased sales at year end.
Cash provided by operating activities was $31.1 million in the second
quarter of fiscal 2000 compared to $6.0 million in the prior year. The change in
cash flow from operating activities was primarily due to the increase in the net
loss, the reduction in cash interest paid due to the Plan of Reorganization,
partially offset by the decrease in cash used for other operating assets and
liabilities. Cash used for investing activities was $8.9 million in the
six-month period of fiscal 2000 compared to $23.6 million in the prior year. The
change in cash flow from investing activities was primarily due to a decrease in
expenditures for property and equipment and an increase in proceeds from
property sales or disposals. Cash used for financing activities was $22.8
million in the six-month period of fiscal 2000 compared to cash provided by
financing activities of $18.2 million in the prior year. The change in cash flow
from financing activities was primarily due to the impact of the Plan of
Reorganization.
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New Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 represents a
comprehensive framework of accounting rules that standardizes the accounting for
all derivatives. SFAS No. 133 applies to all entities and to all types of
derivatives. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferred of the Effectual Date
of FASB Statement No. 133", which delayed the effectual date of SFAS No. 133 for
all fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000,
the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" ("SFAS No. 138"), an amendment of SFAS No. 133. The
Company has not determined the impact, if any, that the adoption of SFAS No. 133
and SFAS No. 138 will have on its financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
No. 101"). SAB No. 101 provides guidance on the recognition, presentation and
disclosure of revenue, and is effective for the Company in the quarter ending
February 3, 2001. The Company continues to study SAB No. 101; however, it is
anticipated that its adoption will not affect the Company's financial position
or results of operations.
Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact the
consolidated financial position, results of operations of 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.
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BUSINESS
General
The predecessor of the registrant was incorporated in the State of
Delaware in June 1987 as a wholly owned subsidiary of Holdings. Holdings is a
wholly owned subsidiary of SMG-II. In October 1987, Holdings acquired
Supermarkets General Corporation ("SGC"). In 1990, SGC was merged into the
registrant and the registrant retained the name SGC. In 1993, the registrant
changed its name from SGC to Pathmark Stores, Inc.
Pursuant to the Plan of Reorganization, on the Plan Effective Date the
following mergers occurred in the following order (a) PTK merged with Pathmark,
with Pathmark being the surviving entity, (b) immediately thereafter, Holdings
merged with Pathmark, with Pathmark being the surviving entity, and (c)
immediately thereafter, SMG-II merged with Pathmark, with Pathmark being the
surviving entity.
Business
At July 29, 2000, Pathmark operated 137 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 and Delaware and consist of approximately 5.2 million selling
square footage and 7.1 million total square footage.
Business Strategy
Pathmark's business strategy is to increase sales, profitability and
market penetration in its existing markets by focusing on the following five
operating priorities: concentrate on core business, Pathmark "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.
Recent Developments
On December 12, 2000 Pathmark filed its report for the quarter ended
October 28, 2000 under Section 13 or 15(d) of the Securities Exchange Act of
1934 ("Form 10-Q") includes unaudited consolidated financial statements of the
Company and Managment's Discussion and analysis of Financial Condition and
Results of Operations for the quarter ended October 28, 2000. Form 10-Q is
attached hereto from pages G-1 to G-18 and should be read in conjunction with
financial information already included in this Post-Effective Amendment No. 1 to
Form S-1.
Marketing and Merchandising
o Super Center Format. Of Pathmark's 137 stores, 135 are Super Centers.
The average Pathmark Super Center is approximately 35% 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 departments, improved signs
and graphics, and increased availability of Pathmark associates,
particularly in the perishables departments.
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 "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.
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Store Expansion and Renovation Program
o New Stores, Enlargements and Renovations. During fiscal 1999, Pathmark
opened three new stores, and completed 26 renovations and three
enlargements. During fiscal 2000, Pathmark has opened three new
supermarkets and plans to open one more and to complete up to an
aggregate of 27 renovations and enlargements. Two of the four planned
supermarkets opened in fiscal 2000 are smaller stores of approximately
30,000 to 35,000 square feet.
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 1999, Pathmark
derived approximately 76% 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 40 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. 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 EFT, 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 the
last two years, the Company took several steps to accomplish this goal.
Pathmark's "Stop Shrink" program, implemented in the latter part of
fiscal 1998, resulted in lower inventory shrinkage in fiscal 1999. In
addition, the Company has implemented a program entitled "Best Ball,"
which is designed to identify the best operating practices in use by
certain stores and implement these best practices throughout the
Company.
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.
33
<PAGE>
Pathmark Supermarkets
Pathmark operated 135 supermarkets on January 29, 2000. The following
table presents selected data reflecting supermarket sales and stores for the
last five fiscal years.
<TABLE>
<CAPTION>
Fiscal Years
------------
1999 1998 1997 1996 1995(a)
---- ---- ---- ---- -------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Supermarket sales.................................... $3,698 $3,655 $3,692 $3,701 $3,853
Average sales per Supermarket(b)..................... $28.0 $27.8 $27.5 $26.1 $26.4
Number of Supermarkets:
Renovations(c).................................. 26 13 5 16 14
Enlargements(d)................................. 3 1 8 5 4
Opened.......................................... 3 -- 2 4 5
Closed.......................................... -- 3 11 4 4
Total Supermarkets Open at Year End(e)............... 135 132 135 144 144
</TABLE>
---------------------
(a) Fiscal 1995 was a 53-week year.
(b) Computed on the basis of aggregate sales of stores open for the full
year, based on a 52-week period.
(c) Renovations involve an investment of $350,000 or more and in fiscal
1999 averaged approximately $1.0 million per store.
(d) Enlargements involve the addition of selling space and in fiscal 1999
averaged an investment in excess of $4.0 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 52,800 square feet in size and generating high average
sales volume of approximately $28.0 million per store ($723 per selling square
foot) for stores open for all of fiscal 1999. Pathmark's 137 supermarkets at
July 29, 2000 ranged from 26,008 to 66,463 square feet in size and included 126
supermarkets that are 40,000 square feet or larger in size. All Pathmark stores
carry a broad variety of food and drug store products, including an extensive
variety of the Pathmark brand. All but five supermarkets contained in-store
pharmacy departments at the end of fiscal 1999.
Pathmark pioneered the development of the large "superstore" in the
Middle Atlantic States, opening the first "Pathmark Super Center" in 1977, and
currently operates 135 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, a pharmacy,
expanded produce department, meat department, cheese shop, bakery, seafood,
service delicatessen department and expanded health and beauty care department.
All supermarkets have EFT (including debit and credit) capability at their
checkout terminals, and 48 supermarkets also feature in-store automated teller
machines. The Company has entered into master licensing agreements with two
regional banking institutions to place in-store banks in Pathmark supermarkets.
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 July 29, 2000, 96
stores had in-store banks and Pathmark expects to have five additional in-store
banks by the end of fiscal 2000.
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.
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. 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. The Company has recently
commenced a customer loyalty program which will reward loyal Pathmark customers
with the savings and improved service exclusive to the card
34
<PAGE>
holder supplementing its Smart Coupons. 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's website, www.pathmark.com, offers promotional discounts and
on-line services and the Company participates with the www.priceline.com
WebHouse Club internet business.
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.
Employees
At July 29, 2000, the Company employed approximately 27,000 people, of
whom approximately 19,000 were employed on a part-time basis.
Approximately 85% of the Company's employees are covered by 15
collective bargaining agreements (typically having three or four year terms)
negotiated with approximately 13 different local unions. During fiscal 2000, two
contracts, covering approximately 2,200 Pathmark associates, will expire. The
Company does not anticipate any difficulty in renegotiating these contracts.
The Company believes that its relationship with its employees is
generally satisfactory.
Properties
On July 29, 2000, Pathmark operated 137 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 and Delaware.
Pathmark's 137 supermarkets have an aggregate selling area of
approximately 5.2 million square feet. Seventeen of the supermarkets are owned
by Pathmark and the remaining 120 are leased. These supermarkets are either
freestanding stores or are located in shopping centers. Forty-four 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, New Jersey in
premises totaling approximately 150,000 square feet in size.
All of the facilities owned by Pathmark are 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.
The Company continues to operate a 266,000 square foot leased general
mechandise, health and beauty care products and tobacco distribution center in
Edison, New Jersey, which opened in 1980. Since fiscal 1997, the Company has
purchased its pharmacy merchandise requirements from a pharmaceutical wholesaler
instead of directly from the manufacturer.
Competition
The supermarket business is highly competitive and is characterized by
high inventory 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 cost-effective store operations
and logistics techniques. Pathmark's
35
<PAGE>
main competitors are national, regional and local supermarkets, "warehouse" and
"club" stores, drug stores, convenience stores, discount merchandisers, and
other local retailers in the areas served. Principal competitive factors include
price, store location, advertising and promotion, product mix, quality and
service.
Legal Proceedings
Holdings, its parent, SMG-II and the directors of Holdings are
defendants (collectively, the "Defendants") in a purported stockholder class
action lawsuit filed on March 9, 1999, in the court of Chancery of the State of
Delaware (the "Court") entitled Wolfson v. Supermarkets General Holdings
Corporation, et al., C.A. No. 17047 (the "Action"), in which the plaintiff
alleged, among other things, that the directors of Holdings and SMG-II breached
their fiduciary duties to the holders of Redeemable Preferred Stock. The
plaintiff (by his counsel) entered into a Settlement Agreement, dated June 9,
1999 (the "Settlement Agreement"), with the Defendants (by their counsel)
pursuant to which the parties agreed to settle the Action.
The Settlement Agreement provides for, among other things, the
certification of the action as a class action under the rules of the Court,
which class would consist of all holders of the Redeemable Preferred Stock from
and including March 9, 1999 (the "Class") through and including the consummation
of the SMG-II merger (the merger of Ahold Acquisition, Inc. with and into
SMG-II) (the "SMG-II Merger") or, if the SMG-II Merger failed to close, the
stock purchase pursuant to the Stock Purchase Agreement, dated March 9, 1999, by
and among Ahold Acquisition, Inc. a wholly owned subsidiary of Ahold (the
"Purchaser"), SMG-II and PTK (the "Alternative Transaction"). In addition,
pursuant to the terms of the Settlement Agreement, the Defendants agreed,
subject to Final Court Approval (as defined below), that the Purchaser increase
its tender offer price to $40.25 per share of Redeemable Preferred Stock (from
$38.25), less the total amount awarded as fees and expenses to plaintiff's
counsel by the Court divided by the total number of outstanding shares of
Redeemable Preferred Stock (the "New Offer Price"). Plaintiff's counsel applied
to the Court for an award of fees and expenses in an aggregate amount of
$1,956,268, or $0.40 per share of Redeemable Preferred Stock.
The Settlement Agreement also provided among other things, that any of
the Defendants shall have the right to withdraw from the proposed settlement in
the event that (i) any claims related to the SMG-II Merger, the Alternative
Transaction, or the subject matter of the Action are commenced by any member of
the Class against any Defendants or certain others employed by, affiliated with,
or retained by the Defendants in any court prior to Final Court Approval of the
settlement, and the court in which such claims are pending denies Defendants'
application to dismiss or stay such action in contemplation of dismissal, or
(ii) any of the other conditions to the consummation of the settlement described
below shall not have been satisfied. The consummation of the settlement is
subject to (i) Final Court Approval of the settlement; (ii) dismissal of the
Action by the Court with prejudice and without awarding fees or costs to any
party; and (iii) the Purchaser closing (A) its tender offer and the SMG-II
Merger, or (B) the Alternative Transaction.
After notice and a hearing, on July 22, 1999, the Court approved the
settlement and the fee application of the plaintiff's attorneys. As of August
23, 1999, all applicable appeal periods expired, thus constituting "Final Court
Approval." As a result of the settlement, the New Offer Price was $39.85 per
share of Redeemable Preferred Stock. However, on December 16, 1999, Purchaser
and Ahold terminated the SMG-II Merger Agreement. On January 5, 2000, plaintiff
moved to enforce the Settlement Agreement against Purchaser, which motion is
pending.
On December 16, 1999, Ahold terminated the SMG-II Merger Agreement
claiming that despite its best efforts, it could not obtain necessary antitrust
clearance from government regulators. That same day, Ahold filed a complaint in
the Supreme Court, State of New York, County of New York against SMG-II,
entitled Koninklijke Ahold, N.V. and Ahold Acquisition, Inc. v. SMG-II Holdings
Corp., (99/605644) seeking a declaratory judgment that Ahold had used its "best
efforts" under the SMG-II Merger Agreement. On January 18, 2000, SMG-II filed
its answer and counterclaims, denying Ahold's assertion that it used its best
efforts to consummate the SMG-II Merger Agreement. Additionally, SMG-II asserted
counterclaims against Ahold for (i) breach of contract by failure to use best
efforts; (ii) breach of the covenant of good faith and fair dealing; and (iii)
unfair competition. SMG-II has requested compensatory damages in an unspecified
amount.
36
<PAGE>
On February 7, 2000, Ahold answered SMG-II's counterclaims and denied
the allegations contained therein, and filed an amended complaint seeking
declarations that (i) the "best efforts" clause in the SMG-II Merger Agreement
is unenforceable; (ii) if the "best efforts" clause is enforceable, Ahold did
not breach that clause; and (iii) Ahold properly terminated the SMG-II Merger
Agreement. Additionally, Ahold alleged that SMG-II breached the best efforts
clause of the SMG-II Merger Agreement and has requested compensatory damages in
an unspecified amount. SMG-II filed its amended answer and the amended complaint
and amended counterclaims on February 27, 2000. At this juncture, discovery is
proceeding
On the Plan Effective Date, the following entities merged with
Pathmark: (a) PTK merged with Pathmark, with Pathmark being the surviving
entity, (b) immediately thereafter, Holdings merged with Pathmark, with Pathmark
being the surviving entity, and (c) immediately thereafter, SMG-II merged with
Pathmark, with Pathmark being the surviving entity.
As of the Plan Effective Date, Pathmark shall be vested with all of the
Causes of Action and liabilities of SMG-II, Holdings, PTK or Pathmark arising in
connection with the Ahold Litigation including, without limitation, any Cause of
Action for money damages or equitable or other relief therein and to retain
counsel in connection therewith. As of the Plan Effective Date, Pathmark shall
be vested with all of the Causes of Action and liabilities of SMG-II, Holdings,
PTK or Pathmark arising in connection with the Redeemable Preferred Stock
Litigation including, without limitation, any Cause of Action for money damages
or equitable or other relief therein and to retain counsel in connection
therewith.
The Company is a party to a number of other legal proceedings in the
ordinary course of business. Management believes that the ultimate resolution of
these proceedings will not, in the aggregate, have a material adverse impact on
the financial condition, results of operations, cash flows or business of the
Company.
37
<PAGE>
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.
<TABLE>
<CAPTION>
Director of the
Company
Name Age Positions and Office Since
---- --- -------------------- -----
<S> <C> <C>
JAMES DONALD 46 Chairman of the Board, President and Chief Executive 1996
Officer since October, 1996; President of the Eastern
Division of Safeway, Inc. prior thereto.
Mr. Donald is a member of the Board of Directors of
Modell's Sporting Goods.
FRANK VITRANO 45 Executive Vice President, Chief Financial Officer and 2000
Treasurer since January 2000; Senior Vice President,
Chief Financial Officer and Treasurer from September
1998 to January 2000; Vice President and Treasurer from
December 1996 to September 1998, Treasurer prior thereto.
STEVEN L. VOLLA 53 Chairman of Primary Health Systems, Inc., a hospital 2000
management company; prior thereto Mr. Volla was the
Chairman, President and Chief Executive Officer of
American Healthcare Management, Inc., a NYSE publicly
traded hospital management company. From 1995 through the
Plan Effective Date, Mr. Volla was a Director of
Supermarkets General Holdings Corporation.
ROBERT G. MILLER 56 Chairman of the Board and Chief Executive Officer of 2000
Rite Aid Corporation, a drugstore chain, since January
2000; Vice Chairman of Kroger Corporation from May 1999 to
December 1999; Chairman and Chief Executive Officer of
Fred Meyer, Inc. prior thereto. Mr. Miller is a member of
the Board of Directors of Scottish Power, Harrah's
Entertainment and the Jim Pattison Group. Mr. Miller
previously served on the Board of Directors of the Company
from 1997 through March 6, 2000.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Director of the
Company
Name Age Positions and Office Since
---- --- -------------------- -----
<S> <C> <C>
EUGENE M. FREEDMAN 68 Senior Advisor and Director of Monitor Clipper Partners, 2000
Inc., a private equity firm, since January 2000, and a
Director and Chairman of the Finance Committee of Monitor
Company, Inc., an international business strategy and
consulting firm, since January 1995. Managing Director and
President of Monitor Clipper Partners Inc. from 1997 until
the end of 1999. Until October 1994 and for many prior
years, Mr. Freedman was a senior partner of Coopers &
Lybrand LLP, where he served as Chairman and Chief
Executive Officer of Coopers & Lybrand LLP, U.S., and as
Chairman of Coopers & Lybrand International. He is
currently a Director of The Limited, Inc., Bernard
Technologies, Inc. e-Studio live, Inc., and iAskweb, Inc.
DANIEL H. FITZGERALD 47 Managing Director of Gleacher Natwest, from 1996 to 2000
2000, heading up its High Yield Bond Department. Prior
thereto, Mr. Fitzgerald spent 14 years at Donaldson Lufkin
Jenrette as Managing Director - High Yield Sales.
WILLIAM J. BEGLEY 58 Former Deputy Chairman at Wasserstein Perella Co. Inc., 2000
an investment bank and President of the firm's trading
division. He is currently Chairman Emeritus of Wasserstein
Perella Securities, Inc. Mr. Begley is also a Director of
the Bank of Somerset Hills.
</TABLE>
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>
JAMES DONALD 46 Chairman, President and Chief Executive Officer since 1996
October, 1996; President of the Eastern Division of
Safeway, Inc. prior thereto.
ROBERT JOYCE 55 Executive Vice President - Administration since January 1989
2000; Senior Vice President - Administration (from
October 1996 to January 2000); Executive Vice President
- Operations prior thereto. Mr. Joyce joined the
Company in 1963.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Officer of the
Company
Name Age Positions and Office Since
---- --- -------------------- -----
<S> <C> <C>
EILEEN SCOTT 47 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 prior
thereto. Ms. Scott joined the Company in 1969.
FRANK VITRANO 45 Executive Vice President, Chief Financial Officer and 1995
Treasurer since January 2000; Senior Vice President,
Chief Financial Officer and Treasurer from September
1998 to January 2000; Vice President and Treasurer from
December 1996 to September 1998; Treasurer prior
thereto. Mr. Vitrano joined the Company in 1972.
JOSEPH ADELHARDT 54 Senior Vice President and Controller since January 1996; 1987
Vice President and Controller prior thereto. Mr.
Adelhardt joined the Company in 1976.
HARVEY GUTMAN 54 Senior Vice President - Retail Development. Mr. Gutman 1990
joined the Company in 1976.
MARC STRASSLER 52 Senior Vice President, Secretary and General Counsel 1987
since May 1998; Vice President, Secretary and General
Counsel prior thereto. Mr. Strassler joined the Company
in 1974.
MYRON WAXBERG 67 Vice President and General Counsel - Real Estate. Mr. 1991
Waxberg joined the Company in 1976.
</TABLE>
Board Composition
All directors are elected and serve until a successor is duly elected
and qualified or until the earlier of his death, resignation or removal. There
are no family relationships between any of our directors or executive officers.
Our executive officers are elected by and serve at the discretion of the Board
of Directors.
Director Compensation
Directors' Fees. Directors, who are not full-time employees of the
Company ("outside directors"), receive compensation for serving as a director
and are reimbursed for out-of-pocket traveling expenses incurred in attending
Board and committee meetings.
Effective as of the Plan Effective Date, each outside director is
entitled to receive $1,500 for each Board meeting attended and $750 for each
committee meeting attended. Each outside director is also entitled to receive a
retainer of $22,000 annually for serving as a director, a retainer of $750 per
year for serving as a member of a committee of the Board, and an additional
retainer of $750 per year for serving as a chair of a committee of the Board.
2000 Non Employee Directors Equity Plan. Pursuant to the 2000
Non-Employee Directors Equity Plan, each outside director is eligible to receive
an annual grant of an option to purchase 3,000 shares of Common Stock
immediately following the first regularly scheduled meeting of the Board during
the Company's third fiscal quarter while such plan is in effect.
40
<PAGE>
Committees of the Board of Directors
Subsequent to this offering, our Board of Directors will have two
committees, the Audit Committee and the Compensation Committee. The Board may
also establish other committees to assist in the discharge of its
responsibilities.
The Audit Committee makes recommendations to the Board of Directors
regarding the selection of independent auditors to be approved by the
stockholders, reviews the independence of the independent auditors, approves the
scope of the annual audit activities of the independent auditors, approves the
audit fee payable to the independent auditors and reviews audit results with the
independent auditors. Following this offering, the Audit Committee will be
selected. Deloitte & Touche, LLP presently serves as our independent auditors.
The Compensation Committee determines salaries for corporate officers;
administers the Executive Incentive Bonus Plan, including the selection of
participants and award levels; determines supplemental retirement and employment
arrangements for officers, including the selection of participants and benefit
formulas; considers new executive compensation plans, and administers the 2000
Employee Equity Plan.
41
<PAGE>
<TABLE>
<CAPTION>
Executive Compensation
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards
--------------------------------------------------- -------------------------------------------
Securities
Other Annual Restricted Underlying All Other
Salary Bonus Compensation Stock Awards Options/SARs Compensation
Name and Principal Position Year ($) ($) (1) ($) (2) ($) (3) (#) ($) (4)
--------------------------- ---- --- ------- ------- ------- --- -------
<S> <C> <C> <C> <C> <C> <C> <C>
James Donald.................... 1999 600,000 750,000 1,125,000 -- -- 8,422
Chairman, President and 1998 600,000 750,000 1,125,000 -- -- 8,480
Chief Executive Officer 1997 600,000 425,000 1,179,390 -- -- 3,632
Robert Joyce.................... 1999 231,749 173,811 2,195 -- -- 5,600
Executive Vice President - 1998 231,749 127,461 2,195 250,000 -- 5,600
Administration 1997 230,062 63,267 2,195 -- -- 5,600
Eileen Scott.................... 1999 231,075 173,306 -- -- -- 5,600
Executive Vice President - 1998 220,000 182,600 -- 500,000 -- 5,600
Merchandising &
Distribution 1997 153,846 80,707 -- -- -- 5,405
John Sheehan (5)................ 1999 231,075 173,306 -- -- -- --
Executive Vice President - 1998 220,000 182,600 -- 500,000 -- --
Operations 1997 186,312 52,537 80,793 -- -- --
Frank Vitrano................... 1999 209,272 174,825 -- -- -- 5,600
Executive Vice President and 1998 161,284 110,000 -- 300,000 -- 5,600
Chief Financial Officer 1997 122,700 61,350 -- -- -- 4,609
</TABLE>
---------------------
(1) The amounts with respect to fiscal 1999 in this column represent bonuses
awarded pursuant to the Company's executive incentive plan.
(2) Represents in fiscal 1999 (i) with respect to Mr. Donald, forgiveness of
loan payments due to the Company of $1,125,000; and (ii) with respect to
Mr. Joyce, payments as reimbursement for interest paid to Holdings for a
loan, of less than $60,000, from Holdings in connection with the purchase
of the Class A Common Stock of SMG-II 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) The grants of restricted stock reflected in the Summary Compensation Table
were made pursuant to the SMG-II Holdings Corporation 1997 Restricted Stock
Plan (the "RS Plan"). Each award consisted of shares of SMG-II Class A
Common Stock and SMG-II Series C Preferred Stock (collectively, the
"Restricted Shares"). Under the terms of the RS Plan, each restricted stock
award will become nonforfeitable upon the earlier of (i) the seventh
anniversary of the date of grant and (ii) thirty days prior to a
Realization Event (as defined in the RS Plan). Generally, a Realization
Event would occur upon a sale or merger transaction involving SMG-II and/or
it subsidiaries and a nonaffiliated entity, or a public offering of SMG-II
Class A Common Stock as a result of which the aggregate price for all
shares sold in the public offering exceeds $50 million dollars. Since the
shares of SMG-II are privately owned and not traded on the public market,
amounts shown in the Summary Compensation Table are based on the Company's
determination of the fair market value of the Restricted Shares at the time
of the grant. In determining the fair market value of the Restricted Shares
at the time of the award, SMG-II considered various factors such as SMG-II
and its subsidiaries' performance, financial condition and forecasts and
projections prepared by management with respect to the Company for the
fiscal years 1998 through 2001 as well as the opinion of an independent
advisory firm. Based on the foregoing, SMG-II determined that the fair
market value of its Class A Common Stock and Series C Preferred Stock on
the date of grant was $0 and $200 per share, respectively. With respect to
the value at the end of fiscal 1999, SMG-II determined that, based on
various factors such as SMG-II and its subsidiaries performance, financial
condition and forecasts and projections prepared by management with respect
to the
42
<PAGE>
fiscal years 2000 through 2004, the fair market value of the Restricted
Shares at January 29, 2000 is zero dollars. The value and number of
restricted stock holdings at January 29, 2000 for each of the named
executives are as follows: Mr. Donald - $0 (19,851 shares of SMG-II Class A
Common Stock and 8,520 shares of SMG-II Series C Preferred Stock); Mr.
Vitrano - $0 (4,500 shares of SMG-II Class A Common Stock and 1,500 shares
of SMG-II Series C Preferred Stock); Mr. Joyce - $0 (3,750 shares of SMG-II
Class A Common Stock and 1,250 shares of SMG-II Series C Preferred Stock);
Ms. Scott - $0 (7,500 shares of SMG-II Class A Common Stock and 2,500
shares of SMG-II Series C Preferred Stock); and Mr. Sheehan - $0 (7,500
shares of SMG-II Class A Common Stock at 2,500 shares of SMG-II Series C
Preferred Stock). For a discussion of Mr. Donald's award of Restricted
Shares, see "Employment Agreements" below. As a result of the effectiveness
of the Plan of Reorganization, all shares of SMG-II capital stock have been
cancelled.
(4) Represents in fiscal 1999 (i) with respect to Mr. Donald, payments of
$3,622 for a term life insurance premium on Mr. Donald's life and $4,800
representing the Company's matching contribution to the SGC Savings Plan
and (ii) with respect to the other named executive officers, the Company's
matching contribution under the SGC Savings Plan.
(5) Mr. Sheehan resigned in April, 2000.
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values (1)
Number of Securities
Underlying Unexcercised
Options/SARs at
FY-End (#)
Name Exercisable/Unexercisable
---- -------------------------
James Donald.......................................... 0/100,000
Robert Joyce.......................................... 2,300/0
Eileen Scott.......................................... 150/0
John Sheehan.......................................... 0/0
Frank Vitrano......................................... 160/0
------------------------
(1) Except with respect to Mr. Donald, options shown were granted pursuant to
the SMG-II 1987 Management Investors Stock Option Plan (the "Plan"), relate
to shares of Class A Common Stock of SMG-II and have an exercise price of
$100 per share. No options were either granted to or exercised by any of
the above named executives in fiscal 1999. As a result of the effectiveness
of the Plan of Reorganization, all options to purchase SMG-II capital stock
have been cancelled.
43
<PAGE>
<TABLE>
<CAPTION>
Pension Plan Table (1)
Years of Service
----------------------
Final Average Pay 10 15 20 25 30 or more
----------------- -- -- -- -- ----------
<S> <C> <C> <C> <C> <C>
300,000...................... 40,000 60,000 80,000 100,000 120,000
350,000...................... 46,667 70,000 93,333 116,667 140,000
400,000...................... 53,333 80,000 106,667 133,333 160,000
450,000...................... 60,000 90,000 120,000 150,000 180,000
500,000...................... 66,667 100,000 133,333 166,667 200,000
550,000...................... 73,333 110,000 146,667 183,333 220,000
600,000...................... 80,000 120,000 160,000 200,000 240,000
650,000...................... 86,667 130,000 173,333 216,667 260,000
700,000...................... 93,333 140,000 186,667 233,333 280,000
750,000...................... 100,000 150,000 200,000 250,000 300,000
800,000...................... 106,667 160,000 213,334 266,668 320,000
850,000...................... 113,333 170,000 226,666 283,333 340,000
900,000...................... 120,000 180,000 240,000 300,000 360,000
950,000...................... 126,667 190,000 253,334 316,668 380,000
1,000,000...................... 133,334 200,000 266,668 333,335 400,000
1,100,000...................... 146,666 220,000 293,332 366,665 440,000
1,200,000...................... 160,000 240,000 320,000 400,000 480,000
1,300,000...................... 173,334 260,000 346,668 433,335 520,000
1,400,000...................... 186,666 280,000 373,332 466,665 560,000
1,500,000...................... 200,000 300,000 400,000 500,000 600,000
1,600,000...................... 213,332 320,000 426,664 533,330 640,000
1,700,000...................... 226,666 340,000 453,332 566,669 680,000
</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 2000 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 2000. As of December 31, 1999, the following individuals had the
number of years of credited service indicated after their names: Mr.
Donald, 3.2, Mr. Vitrano, 22.2; Mr. Joyce, 29.7, Mr. Sheehan, 3.2; and Ms.
Scott, 24.8. As described below in "Compensation Plans and
Arrangements--Supplemental Retirement Agreements," each of the named
executive officers is a party to a Supplemental Retirement Agreement with
Pathmark.
Compensation Plans and Arrangements
Supplemental Retirement Agreements. The Company has entered into
supplemental retirement agreements with Messrs. Vitrano, Sheehan, Joyce and Ms.
Scott and Mr. Donald, 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) with respect to Ms. Scott and
Messrs. Sheehan, Joyce and Vitrano, equal to (i) 30% (20% with respect to Mr.
Sheehan) of his or her final average Compensation based on ten years of service
with the Company and
44
<PAGE>
increasing 1% (20% with respect to Mr. Sheehan) per year for each year of
service thereafter, to a maximum of 40%, of his or her final average
Compensation based on 20 years of service, or (ii) $250,000 ($150,000 with
respect to Mr. Joyce), whichever is less and (B) with respect to Mr. Donald,
equal to (i) 30% of his final average compensation based on ten years of service
with the Company and increasing 2% per year for each year of service thereafter,
to a maximum of 50% of his final average compensation based on 20 years of
service, or (ii) $600,000, whichever is less. "Compensation" includes base
salary and bonus payments, but excludes Company matching contributions under the
Savings Plan. If the executive leaves the Company prior to completing 20 years
of service (other than for disability), the supplemental benefit would be
reduced proportionately. Should the executive die, the surviving spouse then
receiving or, if he or she was not then receiving a supplemental pension
benefit, the spouse would be entitled to a benefit equal to two-thirds of the
benefit to which the executive would have been entitled, provided the executive
has attained at least ten years of service with the Company. With respect to
Messrs. Donald and Sheehan, seven years have been added to each of their actual
years of service with the Company.
Employment Agreements
Employment Agreement between Pathmark 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. Under the Donald Agreement, Mr. Donald is guaranteed an annual
bonus for each of the 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. Additionally, Mr. Donald received 19,851
restricted shares of SMG-II Class A common stock, 8,520 restricted shares of
SMG-II Series C preferred stock and options to purchase 100,000 Shares of SMG-II
Class A common stock at an initial exercise price of $100 per share
(collectively, the "Equity Strip"). As of the Plan Effective Date, the Equity
Strip has been cancelled.
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. The
loan matured on October 8, 2000.
In the event of Mr. Donald's Involuntary Termination, Pathmark will pay
him (w) the full amount of any accrued but unpaid base salary, plus a cash
payment (calculated on the basis of the base salary then in effect) for all
unused vacation time which Mr. Donald may have accrued as of the date of
Involuntary Termination; (x) the amount of any earned but unpaid Annual Bonus
for any Fiscal Year of Pathmark ended on or prior to the date of Involuntary
Termination; (y) any unpaid reimbursement for business expenses; and (z) a
severance amount equal to four times Mr. Donald's annual rate of salary, based
upon the annual rate then in effect immediately prior to the date of
termination, payable in monthly installments over 24 months. In addition, in the
event of an Involuntary Termination, Mr. Donald and his eligible dependents
shall continue to be eligible to participate in the medical, dental, health and
life insurance plans applicable to Mr. Donald immediately prior to the
Involuntary Termination on the same terms and conditions in effect immediately
prior to such Involuntary Termination until the earliest to occur of (i) the end
of the 24-month period after the date of termination, the date Mr. Donald
becomes eligible to be covered under the benefit plans of a subsequent employer
and (iii) the date Mr. Donald breaches any of the protective covenants described
below. 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
45
<PAGE>
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 Employment Agreement.
In the event Mr. Donald's employment ends at any time during the term
as a result of a Termination Event, the Company shall pay him only the amounts
decried in clauses (w), (x) and (y) above. In addition, each note will become
immediately due and payable as to all outstanding principal and all accrued and
unpaid interest if Mr. Donald's employment ends prior to a Change in Control as
a result of a Termination Event.
Although, in the event of an Involuntary Termination, Mr. Donald has no
duty to mitigate the severance amount by seeking new employment, any severance
amount payable during the second year of the severance period shall be reduced
by any compensation or benefits Mr. Donald earns in connection with any
employment by another employer.
The Donald Agreement includes protective covenants that prohibit Mr.
Donald from engaging (i) in any activity in competition with Pathmark, or any
parent or subsidiary thereof or (ii) in soliciting employees or customers of
Pathmark, or any parent or subsidiary thereof, during his term of employment and
up to two years thereafter. The Donald Agreement also includes a confidentiality
clause which prohibits Mr. Donald from disclosing any confidential information
regarding Pathmark.
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
(i) the acquisition by any Person of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended) of 35% or more of the Common Stock of
the Company (the "Common Stock") then outstanding, and the individuals
who, as of the Plan Effective Date, constitute the Board and
subsequently elected members of the Board whose election is approved or
recommended by at least a majority of such current members or their
successors whose election was so approved or recommended (other than
any subsequently elected members whose initial assumption of office
occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board) cease for any reason to constitute at
least a majority of such Board; provided, however, that in no event
shall a Triggering Event be deemed to have occurred upon any such
acquisition by (A) any employee benefit plan of the Company, (B) any
Person or entity organized, appointed or established by the Company for
or pursuant to the terms of any such employee benefit plan, or (C) any
Person (other than any of Fidelity Management & Research Company or
Fidelity Management Trust Company or by any fund or account associated
with either Fidelity Management & Research Company or Fidelity
Management Trust Company) who as of the Plan Effective Date was the
beneficial owner of 15% or more of the shares of Common Stock
outstanding on such date unless and until such Person, together with
all Affiliates of such Person, becomes the beneficial owner of 35% or
more of the shares of Common Stock then outstanding whereupon a Change
in Control shall be deemed to have occurred;
(ii) the Company enters into a binding agreement with one or
more Persons to directly acquire, in exchange for cash, stock, claims
or property, 50% or more of the aggregate equity Securities of the
Company; or
46
<PAGE>
(iii) the Company enters into a binding agreement providing
for a merger, consolidation, reorganization or other business
combination upon consummation of which one or more Persons would own or
control 50% or more of either (A) the aggregate voting Securities of
the Company, or (B) the aggregate value of the assets of the Company.
For purposes of the above definition of Change in Control only, the
following defined terms shall apply:
"Affiliate" means, with respect to any Person, any other entity which
(i) is a Subsidiary of such Person, (ii) is, directly or indirectly, under
common control with such Person, or (iii) is, directly or indirectly,
controlling such Person.
"Person" means any person, entity or "group" within the meaning of
Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, except that such term
shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or
other fiduciary holding Securities under an employee benefit plan of the Company
or any of its subsidiaries, (iii) an underwriter temporarily holding Securities
pursuant to an offering of such Securities, or (iv) an entity owned, directly or
indirectly, by the shareholders of Pathmark in substantially the same
proportions as their ownership of stock of the Company.
"Subsidiary" means, with respect to any Person, any entity of which:
(i) if a corporation, a majority of the total voting power of
shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees
thereof is at the time of determination owned or controlled, directly
or indirectly, collectively or individually, by such Person or by one
or more Affiliates of such Person, and
(ii) if a partnership, association, limited liability company
or other entity, a majority of the partnership, membership or other
similar ownership interest thereof is at the time of determination
owned or controlled, directly or indirectly, collectively or
individually, by such Person or by one or more Affiliates of such
Person.
"Good Reason" means Mr. Donald's resignation because of (i) the failure
of Pathmark to pay any material amount of compensation to Mr. Donald when due,
(ii) a material adverse reduction or material adverse diminution in Mr. Donald's
titles, duties, positions or responsibilities with Pathmark, including, but not
limited to, failure by Pathmark to elect Mr. Donald to the office of Chief
Executive Officer, or (iii) any other material breach by Pathmark of the Donald
Agreement. In order to assert Good Reason, Mr. Donald must provide written
notification of his intention to resign within 30 business days after he knows
or has reason to know the occurrence of any such event. After Mr. Donald
provides such written notice to Pathmark, Pathmark shall have 15 days from the
date of receipt of such notice to effect a cure of the condition constituting
Good Reason.
"Involuntary Termination" means (i) the termination of Mr. Donald's
employment by Pathmark other than for Cause or disability or (ii) Mr. Donald's
resignation of employment with Pathmark for Good Reason.
Pursuant to the Plan of Reorganization, the Donald Agreement has been
amended (i) to extend the term of his employment until October 8, 2005; (ii) to
change the definition of Change in Control (see "Definitions" above); and (iii)
to delete all reference to the Equity Strip which was cancelled in accordance
with the Plan of Reorganization.
Other Executive Employment Agreements
As of February 1, 1999, Pathmark entered into employment agreements
with each of Ms. Scott and Messrs. Sheehan, Vitrano and Joyce. Mr. Sheehan's
agreement terminated when he resigned in April, 2000. Each remaining agreement
has a two-year term which renews automatically for an additional one-year term
unless proper notice is provided by either party to the other of such party's
desire to terminate the agreement. Each agreement provides for a certain minimum
level of compensation ($280,000 per annum base salary for Ms. Scott and Mr.
Vitrano, and $231,749 per annum base salary for Mr. Joyce), and benefits.
Each of the employment agreements also provide that each executive
shall be entitled an annual bonus of up to 75% of his or her annual base salary
and shall be provided the opportunity to participate in pension and welfare
plans,
47
<PAGE>
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.
In the event any of the three above named executives' employment is
terminated by Pathmark without Cause (as defined in the employment agreements),
or by the executive for Good Reason (as defined in the employment agreements),
that executive is entitled to receive his or her base salary and continued
coverage under health and insurance plans for a period of two years from the
date of such termination or resignation.
The employment agreements contain agreements by the executives not to
compete with Pathmark as long as they are receiving payments under the
employment agreement.
Retention Agreements
The Company has entered into agreements with certain of its key
executives, including each of the following named executives officers, providing
for the payment under specified conditions of a retention bonus and a sale
bonus.
Mr. Donald's Agreement. Mr. Donald's Agreement provides that under the
circumstances described below, Mr. Donald shall receive a Retention Bonus of $4
million (payable $2 million in cash in August, 2000 and $2 million dollars worth
of restricted Common Stock in the Company) and a Sale Bonus. The Retention Bonus
is intended to encourage Mr. Donald to remain employed by Pathmark until at
least one year from the Plan Effective Date. On or about the Plan Effective
Date, Mr. Donald received 98,510 shares of restricted Common Stock. The
restricted Common Stock will vest on the first anniversary of the issuance
thereof, if he is so employed on that date. In addition to the Retention Bonus,
under certain circumstances, Mr. Donald will become entitled to receive the Sale
Bonus. Mr. Donald will become entitled to receive the Sale Bonus in the event
that an event that could result in a Change in Control (defined as a "Triggering
Event" in the Agreement as amended) occurs during the term of the Agreement, and
a Change in Control contemplated by such Triggering Event occurs thereafter. The
amount of the Sale Bonus shall be equal to 0.0043 multiplied by an amount equal
to the sum of the aggregate fair market value of any Securities issued and any
other non-cash consideration delivered, and any cash consideration paid to the
stock of the Company holders in connection with a Change in Control, plus the
amount of all indebtedness of the Company which is assumed or acquired by any
Purchaser in connection with a Change in Control or retired or defeased in
connection with such Change in Control (which amount is defined as the
"Aggregate Consideration").
Joyce, Scott and Vitrano Agreements. Mr. Joyce, Ms. Scott and Mr.
Vitrano (the "Class 1 Executives") all have essentially the same terms in their
Agreements. Like Mr. Donald, the Class 1 Executives' Agreements provide that
under the circumstances described below, each Class 1 Executive will receive a
Retention Bonus and a Sale Bonus. The Retention Bonus is intended to encourage
the Class 1 Executives to remain employed by Pathmark until at least January 31,
2001. Each Class 1 Executive received a Retention Bonus equal to 50% of the
annual rate of his or her base salary, as in effect on July 31, 2000. In the
event the Class 1 Executive is so employed by the Company on January 31, 2001,
he or she shall receive a payment equal to the payment previously received. In
addition to the Retention Bonus, under certain circumstances, the Class 1
Executives will become entitled to receive the Sale Bonus. The Class 1
Executives will become entitled to receive the Sale Bonus in the event that a
Triggering Event occurs during the term of the Agreement, and a Change in
Control contemplated by such Triggering Event occurs thereafter. The amount of
the Sale Bonus will be equal to a specified number (.002 for Mr. Vitrano, .001
for Ms. Scott, and .00075 for Mr. Joyce) multiplied by an amount equal to the
Aggregate Consideration.
48
<PAGE>
PRINCIPAL SHAREHOLDER AND SELLING SECURITY HOLDER
As of September 19, 2000, we had 100,000,000 shares of Common Stock and
5,000,000 shares of Preferred Stock authorized out of which 30,098,510 shares of
Common Stock are issued and outstanding and no Preferred Stock is issued and
outstanding. When we issued our Common Stock to our financial creditors,
including Fidelity, in connection with our reorganization, these shares were not
registered under the Securities Act. Persons acquiring such shares from Fidelity
after the registration statement that includes this prospectus has become
effective will receive shares of Common Stock that are registered under the
Securities Act.
In the following table, we disclose certain information concerning the
ownership of our shares of Common Stock as of September 19, 2000 (September 30,
2000 as for the management). The table discloses each shareholder that (a) we
know to own more than 5% of any class of our ordinary shares and (b) each member
of management that owns a significant amount of shares of Common Stock, and all
directors and executive officers as a group. Information about each Selling
Shareholder has been provided by each Selling Shareholder.
<TABLE>
<CAPTION>
Selling Security holders: Shares of
Common Stock &
Warrants After
Shares Owned Prior To Warrants Owned Prior Completion of
Offering To Offering Offering
Fund Name Number Percentage Number Percentage
<S> <C> <C> <C> <C> <C>
Fidelity Advisor Series II:
Fidelity Advisor Strategic Income Fund**
48,545 * 0 0 *****
Fidelity School Street Trust:
Fidelity Strategic Income Fund** 7,201 * 0 0 *****
Fidelity Advisor Series I:
Fidelity Advisor Balanced Fund** 14,937 * 0 0 *****
Fidelity Puritan Trust:
Fidelity Puritan Fund** 100,825 * 0 0 *****
Variable Insurance Products Fund:
High Income Portfolio** 607,457 2.0 0 0 *****
Fidelity Charles Street Trust:
Fidelity Asset Manager: Growth** 662,564 2.2 0 0 *****
Fidelity Charles Street Trust:
Fidelity Asset Manager: Income** 63,215 * 0 0 *****
Fidelity Advisor Series I:
Fidelity Advisor Asset Allocation Fund** 2,667 * 0 0 *****
Fidelity American High Yield Fund**** 533 * 0 0 *****
Fidelity Charles Street Trust:
Fidelity Asset Manager: Aggressive** 2,133 * 0 0 *****
Fidelity Charles Street Trust:
Fidelity Asset Manager** 1,119,745 3.7 0 0 *****
</TABLE>
49
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Fidelity Canadian Balanced Fund**** 2,667 * 0 0 *****
Fidelity Global Asset Allocation
Fund**** 69,350 * 0 0 *****
Fidelity Management Trust Company on
behalf of accounts managed by it*** 164,874 * 51,658 * *****
Fidelity Advisor Series II:
Fidelity Advisor High Income Fund** 27,570 * 1,011 * *****
Fidelity Summer Street Trust:
Fidelity Capital & Income Fund** 4,109,319 13.7 762,627 2.5 *****
Fidelity Fixed-Income Trust:
Fidelity High Income Fund** 1,115,027 3.7 548,673 1.8 *****
Fidelity Advisor World Global High
Income Fund (Bermuda) Ltd. **** 9,336 * 0 0 *****
Illinois Municipal Retirement Fund
Master Trust*** 436,244 1.5 229,708 * *****
Variable Insurance Products Fund II:
Asset Manager Portfolio** 328,081 1.1 0 0 *****
Variable Insurance Products Fund II:
Asset Manager: Growth Portfolio 65,616 * 0 0 *****
Fidelity Advisor Series II:
Fidelity Advisor High Yield Fund** 2,669,376 8.9 747,828 2.5 *****
Pension Investment Committee of General
Motors for General Motors Employees
Domestic Group Pension Trust*** 390,433 1.3 132,891 * *****
Pension Reserves Investment Management
Trust*** 207,379 * 65,439 * *****
-------- -------- -------- ------- ---------
Total 12,225,094(1) 38.1 2,539,835(1) 6.8 *****
============= ==== ============ === =====
Aegon USA 2,136,994 7.1 0 0 N/A
Management:
James Donald 98,510 * 0 0 N/A
Frank Vitrano 1,818 * 202 * N/A
Robert Joyce 600 * 0 0 N/A
All directors and executive officers as
a group 101,428 * 202 * N/A
</TABLE>
* Less than one percent
** The entity is either an investment company or a portfolio of an
investment company registered under Section 8 of the Investment Company Act of
1940, as amended, or a private investment account advised by Fidelity Management
& Research Company ("FMR Co."). FMR Co. is a Massachusetts corporation and an
investment advisor registered under Section 203 of the Investment Advisors Act
of 1940, as amended, and provides investment advisory services to each of
50
<PAGE>
such Fidelity entities identified above, and to other registered investment
companies and to certain other funds which are generally offered to a limited
group of investors. FMR Co. is a wholly-owned subsidiary of FMR Corp. ("FMR"), a
Massachusetts corporation. These holdings are as of September 19, 2000.
*** Shares indicated as owned by such entity directly by various private
investment accounts, primarily employee benefit plans for which Fidelity
Management Trust Company ("FMTC") serves as a trustee or managing agent. FMTC is
a wholly-owned subsidiary of FMR and a bank as defined in Section 3(a)(6) of the
Securities Exchange Act of 1934, as amended. These holdings are as of September
19, 2000.
**** This entity is an Ontario Mutual Fund Trust. Its trustee and manager is
Fidelity Investments Canada Limited (FICL). FICL is advised by FMR Co. These
holdings are as of September 19, 2000.
***** Because the Selling Holders may offer all or some portion of the above
referenced security pursuant to this Prospectus or otherwise, no estimate can be
given as to the amount or percentage of such securities that will be held by the
Selling Holders upon termination of any such sale. In addition, the Selling
Holders identified above may have sold, transferred or otherwise disposed of all
or a portion of such securities since September 19, 2000 in transactions exempt
from the registration requirements of the Securities Act of 1933. The Selling
Holders may sell all, part or none of the securities listed above.
None of the Selling Holders listed above has, or within the past three
years has had, any position, office or other material relationship with Pathmark
or any of its predecessors or affiliates.
(1) Rounding off of shares owned by different Fidelity Funds has resulted
in a discrepancy of 22 shares and 7 warrants as such the totals as per tables
are 12,225,094 for shares and 2,539,835 for the warrants and we are actually
registering 12,225,116 shares and 2,539,842 warrants.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for
us by Shearman & Sterling, which from time to time acts as counsel for us and
our subsidiaries.
EXPERTS
The consolidated financial statements of Pathmark Stores, Inc. as of
January 29, 2000 and January 30, 1999, and for each of the years in the
three-year period ended January 29, 2000, included in this registration
statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein and elsewhere in the registration
statement (which report expresses an unqualified opinion and includes an
explanatory paragraph relating to the Company's ability to continue as a going
concern) and has been so included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1996, pursuant to the Donald Agreement, James L. Donald,
Chairman, President and Chief Executive Officer, 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. Under
the Donald Agreement, one promissory note will be forgiven at the end of each
quarter of a year during which Mr. Donald remains employed by Pathmark. In the
event that Mr. Donald resigns his employment without Good Reason or is
terminated for Cause or in the event of his death, the outstanding portion of
the loan will become immediately due and payable. The above described loan
matured on October 8, 2000.
51
<PAGE>
PLAN OF DISTRIBUTION
Certain of the Securities offered herein are being offered pursuant to
this prospectus because the Selling Shareholders may be deemed to be affiliates
of Pathmark and, accordingly, ineligible to utilize the exemption from the
registration requirements of the Securities Act contained in Secion 1145 of the
United States Bankruptcy Code.
We will not receive any of the proceeds from the offering of the
Securities by the Selling Shareholders. The Securities may be sold from time to
time:
o directly by any Selling Shareholder to one or more purchasers;
o to or through underwriters, brokers or dealers;
o through agents on a best-efforts basis or otherwise; or
o through a combination of such methods of sale.
If the Securities are sold through underwriters, brokers or dealers,
the Selling Shareholders will be responsible for underwriting discounts or
commissions or agents' commission.
The Securities may be sold:
o in one or more transactions at a fixed price or prices, which may
be changed;
o at prevailing market prices at the time of sale or at prices
related to such prevailing prices;
o at varying prices determined at the time of sale; or
o at negotiated prices.
Such sales may be effected in transactions (which may involve crosses
or block transactions):
o on any national Securities exchange or quotation service on which
the notes or shares of Common Stock may be listed or quoted at the
time of sale;
o in the over-the-counter market;
o in transactions otherwise than on such exchanges or service or in
the over-the-counter market; or
o through the writing of options.
In connection with sales of the Securities or otherwise, any selling
security holder may:
o enter into hedging transactions with brokers, dealers or others,
which may in turn engage in short sales of the Securities in the
course of hedging the positions they assume.
A Selling Shareholder may pledge or grant a security interest in some
or all of the Securities owned by it, and if it defaults in the performance of
its secured obligations, the pledgees or secured parties may offer and sell the
Securities from time to time pursuant to this prospectus. The Selling
Shareholders may also transfer and donate shares in other circumstances in which
case the transferees, donees, pledgees or other successors in interest will be
the Selling Shareholders for purposes of this prospectus.
Upon any sale of the Securities offered hereby, the Selling
Shareholders, any underwriter and any participating broker-dealers or selling
agents may be deemed to be "underwriters" as that term is defined in the
Securities Act, in which event any discount, concession or commissions received
by them, which are not expected to exceed those customary in the types of
transactions involved, or any profit on resales on the Securities by them, may
be deemed to be underwriting commissions or discounts under the Securities Act.
The Company will not receive any of the proceeds from the sale by the Selling
Shareholder of the Securities offered hereby. See the above section of this
prospectus entitled "Use of Proceeds." The Company has agreed to pay all
expenses in connection with the registration and sale of the Securities other
than commissions and discounts. Underwriters, broker-dealers and agents may be
entitled, under agreements entered into with the Company or the Selling
Shareholders, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act.
In addition, any Securities covered by this prospectus which qualify
for sale pursuant to Rule 144, Rule 144A or any other available exemption from
registration under the Securities Act may be sold under Rule 144, Rule 144A or
such other available exemption rather than pursuant to this prospectus. There is
no assurance that any Selling Security Holder
52
<PAGE>
will sell any or all of the Securities herein, and any Selling Shareholder may
transfer, devise or gift such Securities by other means not described herein.
At the time a particular offer to Securities is made, to the extent
required, a prospectus supplement will be distributed which will set forth the
aggregate amount of Securities being offered and the terms of the offering,
including shares being offered and the terms of the offering, including the name
or names of any underwriters, broker-dealers or selling agents, any discounts,
commissions and other items constituting compensation from the Selling
Shareholders and any discounts, commissions or concessions allowed or reallowed
or paid to underwriters, broker-dealers or selling agents.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital Stock consists of 100,000,000 shares of Common
Stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, (the
Board of Directors is authorized to issued preferred stock in one or more
classes or series and fix, for such classes powers, preferences and rights) (the
"Preferred Stock") par value $0.01 per share. As of September 19, 2000,
30,098,510 shares of Common Stock are issued and outstanding and no Preferred
Stock is issued and outstanding.
Common Stock
The holders of our Common Stock are entitled to one vote per share on
matters to be voted upon by the stockholders.
The holders of Common Stock are entitled to receive dividends out of
funds legally available for distribution when and if declared by our board of
directors.
The holders of Common Stock shall share ratably in our assets legally
available for distribution to our stockholders in the event of our liquidation,
dissolution or winding up, after the payment in full of all debts and
distributions and after the holder of all series of outstanding preferred stock
have received their liquidation preferences in full.
The holders of the Common Stock have no preemptive, redemption or
conversion rights. The outstanding shares of our Common Stock are fully paid and
nonassessable.
The transfer agent and registrar for our Common Stock is ChaseMellon
Shareholder Services, LLC.
Our Board of Directors has the authority, under our Articles of
Incorporation, to classify or reclassify any unissued preferred stock from time
to time by setting or changing the preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications, or
terms or conditions of redemption of the stock.
Preferred Stock
Our Board of Directors is authorized by our amended and restated
certificate of incorporation to provide for the issuance of up to 5,000,000
shares of Preferred Stock in one or more classes or series, and to fix for any
such class or series the voting powers (if any) and the designations,
preferences, rights, qualifications and limitations or restrictions of such
class or series as expressly stated in the resolutions adopted by the Board of
Directors providing for the issuance of such class or series and as may be
permitted by the Delaware General Corporation Law.
DESCRIPTION OF WARRANTS
We may issue, separately or together with other Securities, Warrants to
purchase shares of our Common Stock. Warrants may be attached to or separate
from those other Securities. The Company has entered into the Warrant Agreement
with ChaseMellon Shareholder Services, LLC, acting as Warrant agent, dated
September 19, 2000. The Agreement entitles the holders to purchase 5,294,118
shares of Common Stock at an Exercise Price of $22.31 based on a reorganization
value of the Company of $1.3 billion. Each Warrant represents the right of a
holder to purchase one share of Common Stock of the Company upon its exercise of
its Warrants. This is a summary of the provisions of the Warrant Agreement and
is not complete. It does not describe some exceptions and qualifications
contained in the Warrant Agreement or the certificates representing the
Warrants. If you would like more information on the provisions of the agreement,
you should review the form of agreement, which we have filed as an exhibit to
this registration statement for the Securities.
53
<PAGE>
Exercise of Warrants
Each Warrant will entitle its holder to purchase for cash a number of
shares of Common Stock at the exercise price of $22.31 per Warrant share as
adjusted in accordance with the terms of the Warrant Agreement. Holders may
exercise their Warrants at any time up to the close of business (until 5:00 pm,
New York City time) on the expiration date on September 19, 2010, after which
time any unexercised Warrants will become void and all rights under the Warrant
Agreement shall cease as of such time.
Under the terms of the Warrant Agreement, the exercise price may be
adjusted in the event that the Company pays a dividend or makes a distribution
on its shares of Common Stock in shares of Common Stock or other shares of
capital stock, subdivides its outstanding shares of Common Stock into a larger
number of shares of Common Stock, combines its outstanding shares of Common
Stock smaller number of shares of Common Stock or increases or decreases the
number of shares of Common Stock outstanding by reclassification of its shares
of Common Stock, so that, after giving effect to such adjustment, holder of each
Warrant shall be entitled to receive the number of shares of Stock or other
shares of capital stock upon exercise that such holder would have or have been
entitled to receive had such Warrants been exercised immediately the happening
of the events described above.
In case of any cash dividend or other distribution, the number of
Warrant Shares purchased upon the exercise each Warrant shall be increased in
accordance with a formula set forth in the Warrant Agreement which ensures that
the economic value of each Warrant will not be reduced in any such event.
Upon receipt of the exercise price and the Warrant certificate properly
completed and executed, Company shall issue shares of Common Stock purchased
upon such exercise. The Company shall not issue fractional Warrant shares on the
exercise of Warrants, and instead, at its option, pay an amount in cash equal to
current market value of one Warrant share on the business day immediately
preceding the date the Warrant is exercised, multiplied by such fraction,
computed to the nearest whole U.S. dollar.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission ("SEC"). You may
read and copy any document we file at the SEC's public reference rooms at 450
Fifth Street, N.W., Washington, D.C. 20549 and in the regional office of the SEC
located at Seven World Trade Center, 13th Floor, New York, New York 10048.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public from the SEC's
web site at http:/www.sec.gov. Our Common Stock is listed on the Nasdaq National
Market under the Symbol "PTMK." Information about us also is available at the
exchange.
The prospectus is part of a Form S-1 registration statement that we
have filed with the SEC's office. The registration statement includes
information that is not included in this prospectus. You can review the entire
registration statement, including its exhibits and schedules, at the SEC's
offices at the addresses listed in the paragraph above.
54
<PAGE>
Pathmark Stores, Inc.
Index to Consolidated Financial Statements
Page
Fiscal Years 1999, 1998 and 1997
Independent Auditors' Report...................................... F-2
Consolidated Statements of Operations............................. F-3
Consolidated Balance Sheets....................................... F-4
Consolidated Statements of Stockholders' Deficiency............... F-5
Consolidated Statements of Cash Flows............................. F-6
Notes to Consolidated Financial Statements........................ F-7 to F-30
Six Months of Fiscal Years 2000 and 1999
Consolidated Statements of Operations (Unaudited)................. F-31
Consolidated Balance Sheets (Unaudited)........................... F-32
Consolidated Statements of Stockholders' Deficiency (Unaudited)... F-33
Consolidated Statements of Cash Flows (Unaudited)................. F-34
Notes to Consolidated Financial Statements (Unaudited)............ F-35 to F-39
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Pathmark Stores, Inc.
Carteret, New Jersey
We have audited the accompanying consolidated balance sheets of Pathmark
Stores, Inc. (the "Company") as of January 29, 2000 and January 30, 1999, and
the related consolidated statements of operations, stockholders' deficiency and
cash flows for each of the three years in the period ended January 29, 2000.
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 29,
2000 and January 30, 1999, and the results of their operations and their cash
flows for each of the three years in the period ended January 29, 2000 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company is
experiencing difficulty in generating sufficient cash flow to meet its
obligations and sustain its operations, which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Deloitte & Touche LLP
Parsippany, New Jersey
April 27, 2000,
(except for Note 2, which is September 19, 2000.)
F-2
<PAGE>
Pathmark Stores, Inc.
Consolidated Statements of Operations
(in thousands except per share amounts)
52 Weeks Ended
-------------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
------------ ----------- ------------
Sales..................... $ 3,698,084 $ 3,655,211 $ 3,696,040
Cost of sales (exclusive
of depreciation and
amortization shown
separately below)......... 2,639,317 2,611,984 2,652,028
------------ ----------- ------------
Gross profit.............. 1,058,767 1,043,227 1,044,012
Selling, general and
administrative expenses... 850,714 832,948 840,942
Depreciation and
amortization.............. 74,734 77,027 83,585
------------ ----------- ------------
Operating earnings........ 133,319 133,252 119,485
Interest expense.......... (163,111) (161,314) (166,756)
------------ ----------- ------------
Loss before income taxes
and extraordinary items... (29,792) (28,062) (47,271)
Income tax provision...... (2,107) (1,688) (2,205)
------------ ----------- ------------
Loss before extraordinary
items..................... (31,899) (29,750) (49,476)
Extraordinary items, net
of an income tax benefit
of $5,456 in fiscal 1997.. -- -- (7,488)
------------ ----------- ------------
Net loss.................. (31,899) (29,750) (56,964)
Less: non-cash preferred
stock accretion and
dividend requirements..... (37,948) (36,007) (34,092)
------------ ----------- ------------
Net loss attributable to
common stockholders....... $ (69,847) $ (65,757) $ (91,056)
============ =========== ============
Weighted average common
shares outstanding-basic.. 1,068 1,039 992
============ =========== ============
Net loss per common
share-basic............... $ (65.40) $ (63.29) $ (91.79)
============ =========== ============
Weighted average
common shares
outstanding-diluted....... 1,068 1,039 992
============ =========== ============
Net loss per common
share-diluted............. $ (65.40) $ (63.29) $ (91.79)
============ =========== ============
See notes to consolidated financial statements.
F-3
<PAGE>
Pathmark Stores, Inc.
Consolidated Balance Sheets
(in thousands except share and per share amounts)
January 29, January 30,
2000 1999
----------- -----------
ASSETS
Current Assets
Cash........................................ $ 16,196 $ 7,931
Accounts receivable, net.................... 15,787 13,792
Merchandise inventories..................... 141,559 143,212
Income taxes receivable..................... 751 1,509
Deferred income taxes, net.................. 2,598 4,026
Prepaid expenses............................ 21,183 21,527
Due from suppliers.......................... 53,975 49,600
Other current assets........................ 18,136 10,710
--------- ---------
Total Current Assets...................... 270,185 252,307
Property and Equipment, Net.................... 472,157 471,583
Deferred Financing Costs, Net.................. 11,805 15,723
Deferred Income Taxes, Net..................... 45,190 46,148
Other Assets................................... 43,854 40,735
--------- ---------
$ 843,191 $ 826,496
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable and book overdrafts......... $ 89,434 $ 98,967
Current maturities of long-term debt......... 78,982 15,902
Accrued payroll and payroll taxes............ 50,766 52,014
Current portion of lease obligations......... 25,192 21,956
Accrued interest payable..................... 26,850 21,325
Accrued expenses and other current
liabilities................................ 80,058 86,404
--------- ---------
Total Current Liabilities.................. 351,282 296,568
--------- ---------
Long-Term Debt................................. 1,264,103 1,258,539
--------- ---------
Lease Obligations, Long-Term................... 173,289 160,820
--------- ---------
Other Noncurrent Liabilities................... 377,852 385,287
--------- ---------
Redeemable Securities
Cumulative Exchangeable Redeemable
Preferred Stock, $.01 par value............. 111,038 109,069
--------- ---------
Authorized: 9,000,000 shares; issued and
outstanding: 4,890,671 shares
Liquidation preference, $25 per share:
$122,267
Commitments and Contingencies
Stockholders' Deficiency
Class A Common Stock, $.01 par value......... 8 8
Authorized: 3,000,000 shares; issued and
outstanding: 748,476 shares and 672,476
shares at January 29, 2000 and January 30,
1999, respectively
Class B Common Stock, $.01 par value......... 3 3
Authorized: 3,000,000 shares; issued and
outstanding: 320,000 shares
Series A Convertible Preferred Stock,$.01
par value.................................... 2 2
Authorized: 1,500,000 shares; issued and
outstanding: 236,731 shares
Stated value and liquidation preference
($200 per share): $47,346
Series B Convertible Preferred Stock, $.01
par value.................................. 2 2
Authorized: 1,500,000 shares; issued and
outstanding: 180,769 shares
Stated value and liquidation preference
($200 per share): $36,154
Series C Convertible Preferred Stock, $.01
par value.................................. -- --
Authorized: 33,520 shares; issued and
outstanding: 33,520 shares
Stated value and liquidation preference
($200 per share): $6,704
Undesignated Preferred Stock, $.01 par value. -- --
Authorized: 966,480 shares; issued and
outstanding: none
Paid-in Capital.............................. 193,677 195,438
Accumulated Deficit.......................... (1,625,617) (1,576,503)
Unamortized Value of Restricted Stock Grants. (2,448) (2,737)
---------- ----------
Total Stockholders' Deficiency.......... (1,434,373) (1,383,787)
---------- ----------
$ 843,191 $ 826,496
========== ==========
See notes to consolidated financial statements.
F-4
<PAGE>
Pathmark Stores, Inc.
Consolidated Statements of Stockholders' Deficiency
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Series A Series B Series C
Class A Class B Convertible Convertible Convertible
Common Common Preferred Preferred Preferred
Stock Stock Stock Stock Stock
------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, February 1, 1997..... $ 7 $ 3 $ 2 $ 2 $ --
Net loss................... -- -- -- -- --
Accrued dividends on
redeemable preferred stock
($3.52 per share)........ -- -- -- -- --
Accretion on redeemable
preferred stock.......... -- -- -- -- --
------- ------- ------- ------ ------
Balance, January 31, 1998..... 7 3 2 2 --
Net loss................... -- -- -- -- --
Accrued dividends on
redeemable preferred stock
($3.52 per share)........ -- -- -- -- --
Accretion on redeemable
preferred stock.......... -- -- -- -- --
Issuance of restricted
stock grants............. 1 -- -- -- --
Amortization of restricted
stock grants............. -- -- -- -- --
------- ------- ------- ------ ------
Balance, January 30, 1999..... 8 3 2 2 --
Net loss................... -- -- -- -- --
Accrued dividends on
redeemable preferred stock
($3.52 per share)........ -- -- -- -- --
Accretion on redeemable
preferred stock.......... -- -- -- -- --
Amortization of restricted
stock grants............. -- -- -- -- --
Repayment of Management
Investors' loan.......... -- -- -- -- --
------- ------- ------- ------ ------
Balance, January 29, 2000..... $ 8 $ 3 $ 2 $ 2 $ --
======= ======= ======= ====== ======
Paid-in Accumulated
Capital Deficit
--------- -------------
Balance, February 1, 1997 .................. $ 195,923 $(1,455,359)
Net loss ................................ -- (56,964)
Accrued dividends on
redeemable preferred stock
($3.52 per share)...................... -- (17,215)
Accretion on redeemable
preferred stock ....................... (1,811) --
--------- -----------
Balance, January 31, 1998 .................. 194,112 (1,529,538)
Net loss ................................ -- (29,750)
Accrued dividends on
redeemable preferred stock
($3.52 per share) ..................... -- (17,215)
Accretion on redeemable
preferred stock ....................... (1,886) --
Issuance of restricted
stock grants .......................... 3,212 --
Amortization of restricted
stock grants .......................... -- --
--------- -----------
Balance, January 30, 1999 .................. 195,438 (1,576,503)
Net loss ................................ -- (31,899)
Accrued dividends on
redeemable preferred stock
($3.52 per share)...................... -- (17,215)
Accretion on redeemable
preferred stock ....................... (1,969) --
Amortization of restricted
stock grants .......................... -- --
Repayment of Management
Investors' loan ....................... 208 --
--------- -----------
Balance, January 29, 2000 .................. $ 193,677 $(1,625,617)
========= ===========
Unamortized
Value of Total
Restricted Stock Shareholders'
Grants Deficiency
---------------- -------------
Balance, February 1, 1997 .................. $ -- $(1,259,422)
Net loss ................................ -- (56,964)
Accrued dividends on
redeemable preferred stock
($3.52 per share)...................... -- (17,215)
Accretion on redeemable
preferred stock ....................... -- (1,811)
------- -----------
Balance, January 31, 1998 .................. -- (1,335,412)
Net loss ................................ -- (29,750)
Accrued dividends on
redeemable preferred stock
($3.52 per share) ..................... -- (17,215)
Accretion on redeemable
preferred stock ....................... -- (1,886)
Issuance of restricted
stock grants .......................... (3,213) --
Amortization of restricted
stock grants .......................... 476 476
------- -----------
Balance, January 30, 1999 .................. (2,737) (1,383,787)
Net loss ................................ -- (31,899)
Accrued dividends on
redeemable preferred stock -- (17,215)
($3.52 per share) .....................
Accretion on redeemable
preferred stock ....................... -- (1,969)
Amortization of restricted
stock grants .......................... 289 289
Repayment of Management
Investors' loan ....................... -- 208
------- -----------
Balance, January 29, 2000 .................. $(2,448) $(1,434,373)
======= ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
Pathmark Stores, Inc.
Consolidated Statements of Cash Flows
(in thousands)
52 Weeks Ended
------------------------------------
January 29, January 30, January 31,
2000 1999 1998
--------- --------- ---------
Operating Activities
Net loss ........................... $(31,899) $(29,750) $ (56,964)
Adjustments to reconcile
net loss to net cash provided
by (used for) operating
activities:
Extraordinary loss
on early extinguishment
of debt ...................... -- -- 7,488
Depreciation and
amortization ................. 78,414 80,684 87,513
Deferred income tax
(benefit) expenses ........... 2,386 4,597 (5,272)
Interest accruable but
not payable ................. 17,253 20,812 18,509
Amortization of original
issue discount .............. 355 1,097 3,341
Amortization of debt
issuance costs ............... 4,441 4,159 5,542
(Gain) loss on disposal
of property and
equipment .................... (435) (4,332) 127
Cash provided by (used for)
operating assets and
liabilities:
Accounts receivable, net ..... (1,995) (2,273) 1,280
Merchandise inventories ...... 1,653 5,771 22,471
Income taxes ................. 758 (1,867) 7,950
Prepaid expenses ............. (2,921) (3,169) (849)
Due from suppliers ........... (4,375) (36,573) 923
Other current assets ......... (5,144) 975 (4,869)
Other assets ................. (3,039) (5,566) 9,710
Accounts payable ............. (5,192) (34,946) (38,074)
Accrued payroll and
payroll taxes ............... (1,248) 2,415 (6,815)
Accrued interest payable ..... 5,661 2,933 (2,289)
Accrued expenses and
other current
liabilities ................. (6,346) (7,029) 2,707
Other noncurrent
liabilities ................. (27,178) (23,397) 5,733
-------- -------- ---------
Cash provided by (used for)
operating activities .............. 21,149 (25,459) 58,162
-------- -------- ---------
Investing Activities
Property and equipment
expenditures ...................... (48,956) (41,332) (34,327)
Proceeds from disposition
of property and
equipment ......................... 10,239 56,436 26,132
Net proceeds in connection
with C&S Purchase Agreement ....... -- -- 103,858
-------- -------- ---------
Cash provided by
(used for) investing
activities .................... (38,717) 15,104 95,663
--------- --------- ---------
Financing Activities
Increase (decrease) in working
capital facilities
borrowings ...................... 66,800 43,000 (73,500)
Increase in other
long-term debt .................. -- 26,652 1,956
Repayment of term loans ........... (14,242) (7,566) (279,877)
Repayment of other
long-term debt .................. (1,522) (61,359) (6,136)
Reduction in lease
obligations ..................... (20,139) (22,718) (21,409)
Decrease in book
overdrafts ...................... (4,541) (21,789) (14,756)
Deferred financing costs .......... (523) (1,335) (8,044)
Borrowings under the term loan .... -- -- 300,000
Premiums incurred in early
extinguishment of debt .......... -- -- (132)
--------- --------- ---------
Cash provided by
(used for) financing
activities ................. 25,833 (45,115) (101,898)
--------- --------- ---------
Increase (decrease) in cash .......... 8,265 (55,470) 51,927
Cash at beginning of period .......... 7,931 63,401 11,474
--------- --------- ---------
Cash at end of period ................ $ 16,196 $ 7,931 $ 63,401
========= ========= =========
Supplemental Disclosures of
Cash Flow Information
Interest paid ................... $ 135,374 $ 132,220 $ 141,607
========= ========= =========
Income taxes paid ................. $ 493 $ 1,083 $ 4,880
========= ========= =========
Noncash Investing and Financing
Activities Capital lease
obligations ..................... $ 38,035 $ 12,200 $ 23,626
========= ========= =========
See notes to consolidated financial statements (unaudited).
F-6
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statements
Note 1--Management's Plan
The consolidated financial statements of Pathmark Stores, Inc. ("the
Company" or "Pathmark") indicated that, at January 29, 2000, current liabilities
exceeded current assets by $81.1 million and the stockholders' deficiency was
$1.4 billion. Historically, the cash flows generated from operations,
supplemented by the unused borrowing capacity under the working capital facility
and the availability of capital lease financing were sufficient to pay the
Company's debts as they came due, provide for its capital expenditure program
and meet its other cash requirements. Management evaluated its fiscal 2000 cash
flow projections and debt service requirements and based upon this evaluation,
the Company does not anticipate making all of its scheduled debt payments. The
Company's fiscal 2000 debt requirements increase substantially over the prior
year due primarily to the semi-annual interest payments of $12.1 million on the
10.75% Junior Subordinated Deferred Coupon Notes (the "Junior Subordinated
Notes") which, for the first time, must be paid in cash on May 1, 2000 and the
sinking fund payment of $50.0 million on the 11.625% Subordinated Notes due 2002
(the "Subordinated Notes") on June 15, 2000.
The Company does not anticipate making its May 1, 2000 interest payments of
$21.2 million on its $440.0 million of 9.625% Senior Subordinated Notes due 2003
(the "Senior Subordinated Notes") and $12.1 million on its Junior Subordinated
Notes. The failure to make these scheduled interest payments would constitute a
default under the Indentures governing the applicable bonds, subject to a 30-day
grace period, and would also constitute an Event of Default pursuant to Article
VII(f) of the Credit Agreement (see Note 9) relating to a failure to make any
payments in respect of Material Indebtedness (as defined in the Credit
Agreement). In addition, although the Company was in compliance with its various
debt covenants at January 29, 2000, the Company believes that it mostly likely
will not comply with such debt covenants throughout fiscal 2000 based on
management's projections. The Company and its lenders under the Credit Agreement
have entered into a Waiver Agreement dated April 18, 2000 pursuant to which said
lenders have agreed to waive compliance by the Company with certain provisions
of the Credit Agreement through July 29, 2000 including certain debt covenants
and any Event of Default to the extent arising out of a failure to pay any
Material Indebtedness. Upon the occurrence of an Event of Default resulting from
the failure to pay any Material Indebtedness, the Company's long-term debt in
the amount of $1.3 billion would become due currently.
The Company announced on March 22, 2000 that it has retained Wasserstein
Perella & Co. ("WP&Co.") in order to assist it in developing a financial
restructuring plan and that an ad hoc committee of its bondholders has been
formed. The Company has commenced discussions with this committee towards
developing a consensual financial restructuring plan to deleverage the Company's
capital structure. The Company is seeking to restructure its bond debt and does
not intend to impair in any way its trade creditors or implement layoffs as part
of its financial restructuring plan.
Note 2--Subsequent Events--Restructuring Proceedings Under Chapter 11 of the
Bankruptcy Code
On May 1, 2000, the Company elected not to make interest payments of $21.2
million on its Senior Subordinated Notes and $12.1 million on its Junior
Subordinated Notes. On June 15, 2000, the Company elected not to make interest
payments of $6.0 million on its $95.8 million of 12.625% Subordinated Debentures
due 2002 (the "Subordinated Debentures") and $11.6 million on its Subordinated
Notes. Also, on June 15, 2000, the Company elected not to make a sinking fund
payment of $50.0 million on its Subordinated Notes. The grace period under each
of the Indentures governing the various notes has expired constituting an Event
of Default under each such Indenture.
On July 12, 2000 (the "Petition Date"), the Company, along with its direct
and indirect parent companies and certain of its subsidiaries, filed a voluntary
petition (the "Petition") under Chapter 11 of Title 11 of the United States Code
(the "Bankruptcy Code"). The Petition was filed in the United States Bankruptcy
Court for the District of Delaware (the "Court") under case number 00-2963
through 00-2968 (the "Bankruptcy Case"). As of the Plan Effective Date, as
defined herein, the Company was in arrears with respect to interest on its
Senior Subordinated Notes in the amount of $37.6 million, on its Subordinated
Notes in the amount of $13.4 million, on its Subordinated Debentures in the
amount of $6.9 million, and on its Junior Subordinated Notes in the amount of
$16.9 million. The Company continued to manage its affairs and operate its
business as a debtor-in-possession ("DIP") while the Bankruptcy Case was
pending.
F-7
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 2--Subsequent Events - Restructuring Proceedings Under Chapter 11 of the
Bankruptcy Code -- (Continued)
The Bankruptcy Case was commenced to implement a Plan of Reorganization of
reorganization (the "Plan of Reorganization") developed jointly with an ad hoc
committee of the Company's bondholders (the "Bondholders Committee"). Members of
the Bondholders Committee hold or control $445.7 million principal amount, or
approximately 46% of the Company's total bond indebtedness outstanding. Over 99%
of the principal amount of bond indebtedness voted agreed to accept the Plan of
Reorganization.
The Plan of Reorganization provided that, upon consummation of the
reorganization, current holders of the Company's bond indebtedness will receive
100% of the opening Common Stock of the reorganized Company (the "New Common
Stock"). In addition to New Common Stock, holders of the Subordinated Notes, the
Subordinated Debentures and the Junior Subordinated Notes will receive ten-year
Warrants to purchase 15% of the diluted New Common Stock of the reorganized
Company (the "New Warrants"). The New Warrants will be exercisable at the
opening reorganization equity value established in connection with the Plan of
Reorganization. Such ownership is subject to dilution from (1) the exercise of
the New Warrants, (2) the exercise of any options to purchase New Common Stock
issued pursuant to the Company's long-term management incentive plan, and (3)
the grant to the Chief Executive Officer of restricted New Common Stock.
Pursuant to the Plan of Reorganization and in full satisfaction of their
claims, (1) holders of the Senior Subordinated Notes will receive 78.24% of the
New Common Stock, (2) holders of the Subordinated Notes and the Subordinated
Debentures will receive their ratable share of 18.71% of the New Common Stock
and 75% of the New Warrants, (3) holders of the Junior Subordinated Notes will
receive 2.88% of the New Common Stock and 25% of the New Warrants, and (4)
holders of approximately $0.98 million of the 11.625% Supermarkets General
Holdings Corporation ("Holdings") Subordinated Notes due 2002 will receive 0.17%
of the New Common Stock, subject to dilution as described in the preceding
paragraph.
The Plan of Reorganization provided that holders of the Company's
Cumulative Exchangeable Redeemable Preferred Stock ("Redeemable Preferred
Stock") are to receive their ratable portions of $0.5 million in cash payable
upon the effective date of the Plan of Reorganization.
In connection with its financial restructuring plan, the Company received a
commitment from The Chase Manhattan Bank for a $75.0 million revolving credit
agreement (the "DIP Facility") in support of the Plan of Reorganization and a
$600.0 million senior secured credit facility (the "Exit Facility"). The DIP
Facility, which was approved by the Court on July 28, 2000, will enable the
Company to continue normal business operations during the restructuring
proceedings. The Exit Facility will be used to repay in full the former credit
agreement and the DIP Facility, pay expenses of the Plan of Reorganization and
provide approximately $200.0 million of liquidity for post-reorganization
operations.
On July 13, 2000, the Court approved various "first day" requests
including, among other things, the payment of prepetition claims of employees,
utilities, critical trade vendors and other key constituents. The Court also
granted the Company's motion to reject 16 unexpired real estate leases, related
to closed stores. Under Bankruptcy Law, the Company's liability to the landlord
on claims resulting from such rejections is capped at the greater of 15% of the
remaining lease payments (limited to three years' lease payments) or one year's
lease payments. Rejection of these leases, however, does not limit the Company's
obligation with respect to damages arising from the rejection of any
corresponding subleases. Outstanding claims related to these 16 rejected leases
approximate $10.6 million.
On September 7, 2000, the Court entered an order confirming the Plan of
Reorganization, and on September 19, 2000 (the "Plan Effective Date"), the
Company emerged from Chapter 11 bankruptcy protection and the Company's direct
and indirect parent companies merged with the Company, which became the
surviving entity. Such mergers are being accounted for in the historical
financial statements at historical cost in a manner similar to
pooling-of-interests accounting. Accordingly, the historical financial
information presented herein reflects the assets and liabilities and related
results of operations of the combined entity. In addition, Notes 17, 24 and 25
have been updated to reflect the impact of the Plan of Reorganization.
F-8
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 3--Business and Summary of Significant Accounting Policies
Business:
The Company operated 135 supermarkets as of January 29, 2000, primarily in
the New York-New Jersey and Philadelphia metropolitan areas.
Basis of Presentation:
The Company is a wholly owned subsidiary of PTK, Inc. ("PTK") and an
indirect-wholly owned subsidiary of Supermarkets General Holdings Corporation
("Holdings") and SMG-II Holdings Corporation ("SMG-II"). Pursuant to the Plan of
Reorganization, the Company's direct and indirect parent companies merged with
the Company, which became the surviving entity. Such mergers are being accounted
for at historical cost in a manner similar to pooling-of-interest accounting.
Accordingly, the historical financial information presented herein reflects the
assets and liabilities and related results of operations of the combined entity.
On November 7, 1990, SMG-II was organized by Merrill Lynch Capital
Partners, Inc., a wholly owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), to act as the holding company for Holdings, to effect an exchange offer
(the "Exchange Offer"), pursuant to which the then existing Common Stockholders
of Holdings would exchange on a one-for-one basis shares of Holdings Common
Stock for Common Stock of the Company, and to effect the purchase of certain
debt and preferred stock Securities of Holdings.
Holdings and its wholly owned subsidiary, SMG Acquisition Corporation
("SMG"), were formed by ML&Co. to effect the acquisition (the "Acquisition") of
Supermarkets General Corporation ("Old Supermarkets"). On June 15, 1987,
Holdings completed the first step in the Acquisition when it acquired 32.8
million shares (approximately 85%) of Old Supermarkets' Common Stock through a
tender offer by SMG. The remaining outstanding Common Stock of Old Supermarkets
was acquired by Holdings on October 5, 1987 when SMG was merged with and into
Old Supermarkets, pursuant to a merger agreement dated April 22, 1987, as
amended. The Acquisition was accounted for as a purchase and, accordingly, the
assets and liabilities of Old Supermarkets were recorded at their fair values at
the date of the Acquisition. The tax basis for the assets and liabilities
acquired was retained.
On February 4, 1991, all outstanding shares of Holdings Common Stock were
exchanged, pursuant to the Exchange Offer. Simultaneously, SMG-II sold 417,500
shares of its cumulative convertible preferred stock for an aggregate purchase
price of $83.5 million to various institutional investors. SMG-II utilized these
proceeds to purchase certain Holdings debt instruments and shares of Holdings
$3.52 Cumulative Exchangeable Redeemable Preferred Stock (the "Preferred
Stock"). Such Securities were contributed to and retired by Holdings; in
addition, cash sufficient to pay associated income taxes was also contributed to
Holdings.
The holders of the Company's voting and non-voting Common Stock and
cumulative convertible preferred stock include certain limited partnerships
controlled directly or indirectly by Merrill Lynch Capital Partners, Inc. and
certain indirectly wholly owned subsidiaries of ML & Co.
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
F-9
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 3--Business and Summary of Significant Accounting Policies--(Continued)
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, which will occur
in fiscal 2000.
Cash:
All investments and marketable Securities with a maturity of three months
or less at date of purchase are considered to be cash equivalents. The Company
had no cash equivalent investments as of January 29, 2000 and January 30, 1999.
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 $3.3 million, $3.1 million and $3.4 million in
fiscal 1999, fiscal 1998 and fiscal 1997, respectively.
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:
The carrying value of long-lived assets used in the Company's operations
are assessed for recoverability based upon groups of assets and the related
undiscounted cash flow generated by such assets. Assets held for sale are
reviewed for impairment based upon the estimated fair value of such assets.
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 $18.8 million, $18.5 million and $18.9 million in fiscal 1999, fiscal
1998 and fiscal 1997, respectively.
F-10
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 3--Business and 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).
Net Loss Per Common Share:
Net loss per common share is computed by dividing the net loss attributable
to Common Stockholders, including preferred stock accretion and dividend
requirements, by the weighted average number of common shares outstanding. Net
loss per common share - assuming dilution is computed based on the assumption
that all of the convertible preferred stock is converted into common shares as
of the beginning of the fiscal year and, accordingly, the stock dividend
requirements related to such convertible preferred stock did not increase the
net loss attributable to Common Stockholders. In fiscal 1999, fiscal 1998 and
fiscal 1997, conversion of the preferred shares would have been anti-dilutive
and, therefore, was not considered in the computation of net loss per common
share-assuming dilution.
Software:
Internally developed software, which creates a new system or adds
identifiable functionality to an existing system, and externally purchased
software are capitalized and amortized over three years. Prior to fiscal 1998,
internally developed software was expensed as incurred. The amortization of
capitalized software, included in selling, general and administrative expenses,
approximated $0.4 million in fiscal 1999 and $0.5 million in both fiscal 1998
and fiscal 1997.
Comprehensive Income:
The Company has no items of comprehensive income other than net income and,
accordingly, the total comprehensive loss is the same as the reported net loss
for all periods presented.
Segment Reporting:
The Company has one reportable segment (retail grocery), operates in one
geographical area (United States), and has no major customers representing 10%
or more of sales.
New Accounting Standards Not Yet Adopted:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 represents a
comprehensive framework of accounting rules that standardizes the accounting for
all derivatives. SFAS No. 133 applies to all entities and to all types of
derivatives. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133", which delayed the effective date of SFAS No. 133 for
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
has not determined the impact, if any, that the adoption of SFAS No. 133 will
have on its financial position or results of operations.
Reclassifications:
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the fiscal 1999 presentation.
F-11
<PAGE>
Note 4--Accounts Receivable
Accounts receivable are comprised of the following (dollars in thousands):
January 29, January 30,
2000 1999
---------- ----------
Prescription plans ................................. $14,672 $13,431
Other .............................................. 2,129 1,604
------- -------
Accounts receivable ................................ 16,801 15,035
Less: allowance for doubtful accounts .............. 1,014 1,243
------- -------
Accounts receivable, net ........................... $15,787 $13,792
======= =======
Note 5--Merchandise Inventories
Merchandise inventories are comprised of the following (dollars in
thousands):
January 29, January 30,
2000 1999
---------- ----------
Merchandise inventories at FIFO cost ............. $180,996 $182,679
Less: LIFO reserve ............................... 39,437 39,467
-------- --------
Merchandise inventories at LIFO cost ............. $141,559 $143,212
======== ========
In fiscal 1999, fiscal 1998 and fiscal 1997, cost of goods sold were
impacted by a pretax LIFO credit of $0.03 million, a pretax LIFO charge of $3.4
million and a pretax LIFO credit of $5.4 million, respectively. The pretax LIFO
charge for fiscal 1998 was primarily due to inflation in dairy related products
and cigarettes. The pretax LIFO credit for fiscal 1997 included 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 a 15-year supply agreement with C&S Wholesale Grocers, Inc. ("C&S") (see
Note 18).
Note 6--Property and Equipment
Property and equipment are comprised of the following (dollars in
thousands):
January 29, January 30,
2000 1999
----------- ----------
Land ................................................. $ 35,731 $ 40,295
Buildings and building improvements .................. 142,575 147,630
Fixtures and equipment ............................... 166,260 173,687
Leasehold costs and improvements ..................... 272,951 268,092
Transportation equipment ............................. 11,415 12,551
-------- --------
Property and equipment, owned ........................ 628,932 642,255
Property and equipment under capital leases .......... 225,546 205,555
-------- --------
Property and equipment, at cost ...................... 854,478 847,810
Less: accumulated depreciation and amortization ...... 382,321 376,227
-------- --------
Property and equipment, net .......................... $472,157 $471,583
======== ========
During fiscal 1999, the Company sold certain real estate for $5.5 million,
and recognized a gain of $0.4 million. During fiscal 1998, the Company sold
certain real estate for $55.7 million, including $22.9 million related to the
sale of the distribution center previously leased to Rickel Home Centers, Inc.
("Rickel") (see Note 25), and recognized a gain of $5.1 million. The proceeds
were used to paydown the related mortgages and a portion of the Working Capital
Facility.
F-12
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 7--Deferred Financing Costs, Net
Deferred financing costs are comprised of the following (dollars in
thousands):
January 29, January 30,
2000 1999
----------- -----------
Deferred financing costs ....................... $29,800 $29,938
Less: accumulated amortization ................. 17,995 14,215
------- -------
Deferred financing costs, net .................. $11,805 $15,723
======= =======
Note 8--Other Noncurrent Liabilities
Other noncurrent liabilities are comprised of the following (dollars in
thousands):
January 29, January 30,
2000 1999
----------- ----------
Deferred income related to the
C&S transaction (see Note 18).............. $ 50,059 $ 55,448
Self-insured liabilities.................... 42,877 48,187
Pension and deferred compensation
(see Note 13).............................. 18,636 21,906
Other postretirement and
postemployment benefits (see Note 13)...... 35,203 37,813
Accrued dividends (see Note 20)............. 124,810 107,595
Closed stores............................... 15,691 20,747
Lease commitments........................... 6,989 7,104
Other....................................... 83,587 86,487
--------- ---------
Other noncurrent liabilities................ $ 377,852 $ 385,287
========= =========
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):
January 29, January 30,
2000 1999
---------- ----------
Term Loan ("Term Loan") ................. $ 241,442 $ 255,684
Working Capital Facility
("Working Capital Facility") ....... 109,800 43,000
9.625% Senior Subordinated Notes due 2003
("Senior Subordinated Notes") ........ 438,844 438,489
11.625% Subordinated Notes due 2002
("Subordinated Notes") ............... 200,000 200,000
12.625% Subordinated Debentures due 2002
("Subordinated Debentures") .......... 95,750 95,750
10.75% Junior Subordinated Deferred
Coupon Notes due 2003
("Junior Subordinated Notes") ........ 225,133 207,880
Industrial revenue bonds ................ 8,217 8,302
Other debt (primarily mortgages) ........ 23,899 25,336
---------- ----------
Total debt .............................. 1,343,085 1,274,441
Less: current maturities ................ 78,982 15,902
---------- ----------
Long-term portion ....................... $1,264,103 $1,258,539
========== ==========
F-13
<PAGE>
Note 9--Long-Term Debt--(Continued)
Management has evaluated its fiscal 2000 cash flow projections and debt
service requirements and based upon this evaluation, the Company does not
anticipate making all of its scheduled debt service payments. The Company's
fiscal 2000 debt requirements increase substantially over the prior year due
primarily to the semiannual interest payments of $12.1 million on its Junior
Subordinated Notes which, for the first time, must be paid in cash beginning on
May 1, 2000 and the sinking fund payment of $50.0 million on its Subordinated
Notes on June 15, 2000. The Company does not anticipate making its May 1, 2000
interest payments of $21.2 million on the Senior Subordinated Notes and $12.1
million on the Deferred Coupon Notes (see Notes 1 and 2).
Scheduled Maturities of Debt:
Long-term debt principal payments are as follows (dollars in thousands):
Principal
Fiscal Years Payments
------------ ----------
2000............................................... $ 78,982
2001............................................... 374,214
2002............................................... 196,288
2003............................................... 672,122
2004............................................... 552
Thereafter......................................... 20,927
----------
$ 1,343,085
===========
Bank Credit Agreement:
On June 30, 1997, the Company entered into a Credit Agreement with a group
of lenders led by The Chase Manhattan Bank (the "Credit Agreement"). The Credit
Agreement includes a $300.0 million Term Loan and a $200.0 million Working
Capital Facility.
Under the Credit Agreement, the Term Loan and Working Capital Facility bear
interest at floating rates, ranging from LIBOR plus 2.75% to LIBOR plus 3.00%.
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 an amount up to $200.0 million, including a maximum of $125.0
million in letters of credit. Outstanding letters of credit were $43.0 million
at January 29, 2000 and $39.0 million at April 19, 2000. In addition, pursuant
to 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.
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
Pathmark to deposit approximately $50.0 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.
Subordinated Debentures:
The Subordinated Debentures mature in fiscal 2002. These debentures pay
cash interest on a semiannual basis and have no sinking fund requirements.
F-14
<PAGE>
Note 9--Long-Term Debt--(Continued)
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 three industrial revenue bonds range from 5.0% to
10.9%. The industrial revenue bonds are payable in installments ending in fiscal
2003, fiscal 2008 and fiscal 2018.
Other Debt:
Other debt includes mortgage notes, which are secured by property and
equipment having a net book value of $27.0 million at January 29, 2000. These
borrowings, whose interest rates averaged 7.4%, are payable in installments
ending in fiscal 2008, including a scheduled final payment of $18.6 million.
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):
January 29, 2000
------------------------------
Carrying Fair
Amount Value
---------- ----------
Debt:
Term Loan ............................ $ 241,442 $ 241,442
Working Capital Facility ............. 109,800 109,800
Senior Subordinated Notes ............ 438,844 332,860
Subordinated Notes ................... 200,000 54,000
Subordinated Debentures .............. 95,750 22,980
Deferred Coupon Notes ................ 225,133 24,778
Industrial revenue bonds ............. 8,217 8,217
Other debt (primarily mortgages) ..... 23,899 23,899
---------- ----------
Total debt ........................... $1,343,085 $ 817,976
========== ==========
Redeemable Securities:
Redeemable Preferred Stock ........... $ 111,038 $ 14,672
========== ==========
January 30, 1999
------------------------------
Carrying Fair
Amount Value
----------- ----------
Debt:
Term Loan ............................. $ 255,684 $ 255,684
Working Capital Facility .............. 43,000 43,000
Senior Subordinated Notes ............. 438,489 442,200
Subordinated Notes .................... 200,000 200,000
Subordinated Debentures ............... 95,750 95,271
Deferred Coupon Notes ................. 207,880 195,968
Industrial revenue bonds .............. 8,302 8,302
Other debt (primarily mortgages) ...... 25,336 25,336
---------- ----------
Total debt ............................ $1,274,441 $1,265,761
========== ==========
Redeemable Securities:
Redeemable Preferred Stock ............ $ 109,069 $ 132,342
========== ==========
The fair value of the Term Loan and Working Capital Facility at January 29,
2000 and January 30, 1999 approximated their carrying value due to their
floating interest rates. The fair value of the notes, debentures and Redeemable
Preferred Stock are based on the quoted market prices at January 29, 2000 and
January 30, 1999, since such instruments are publicly traded. The Company
believes that the fair value of the notes, debentures and Redeemable Preferred
Stock were adversely affected by the termination of the Agreement and Plan of
Merger dated as of March 9, 1999 among Koninklijke Ahold N.V. ("Ahold"), Ahold
Acquisition, Inc. ("Purchaser") and the Company (see Note 25). The Company has
evaluated its other debt (primarily mortgages) and industrial revenue bonds and
believes, based on interest rates, related terms and maturities, that the fair
value of such instruments approximates their respective carrying amounts. As of
January 29, 2000 and January 30, 1999, the carrying values of accounts
receivable, due from suppliers and accounts payable approximated their fair
values due to the short-term maturities of these accounts.
F-15
<PAGE>
Note 11--Interest Expense
Interest expense is comprised of the following (dollars in thousands):
Fiscal Years
---------------------
1999 1998 1997
-------- -------- --------
Term loans .................................... $ 19,709 $ 21,021 $ 22,884
Working capital facilities .................... 7,057 5,098 4,969
Senior Subordinated Notes
Amortization of original issue discount .... 355 355 354
Currently payable .......................... 42,350 42,350 42,350
Subordinated Notes ............................ 23,250 23,250 23,265
Subordinated Debentures ....................... 12,088 12,088 12,088
Deferred Coupon Notes
Accrued but not payable .................... 17,253 20,812 18,509
Currently payable .......................... 6,054 -- --
Exchangeable Guaranteed Debentures
Amortization of original issue discount .... -- 742 2,987
Amortization of debt issuance costs ........... 4,441 4,159 5,542
Lease obligations ............................. 21,353 21,286 22,126
Mortgages payable ............................. 1,782 2,562 3,462
Other, net .................................... 7,419 7,591 8,220
-------- -------- --------
Interest expense .............................. $163,111 $161,314 $166,756
======== ======== ========
Note 12--Lease Obligations
At January 29, 2000, the Company was liable under terms of noncancellable
leases for the following minimum lease commitments (dollars in thousands):
Capital Operating
Fiscal Years Leases Leases
------------ ---------- ----------
2000.............................................. $ 44,149 $ 37,359
2001.............................................. 36,234 36,544
2002.............................................. 32,150 34,911
2003.............................................. 26,344 33,780
2004.............................................. 22,279 32,484
Thereafter........................................ 246,407 294,198
---------- ----------
Total minimum lease payments(a)................... 407,563 $ 469,276
==========
Less: executory costs
(such as taxes, maintenance and insurance)...... 1,746
----------
Net minimum lease payments........................ 405,817
Less: amounts representing interest............... 207,336
----------
Present value of net minimum lease payments
(including current installments of $25,192)(b).. $ 198,481
==========
-------------
(a) Net of sublease income of $0.1 million and $33.1 million for capital and
operating leases, respectively.
(b) Includes $20.5 million related to a sale and leaseback accounted for as a
financing.
Rent expense, under all operating leases having noncancellable terms of
more than one year, is summarized as follows (dollars in thousands):
Fiscal Years
--------------------------------------------
1999 1998 1997
---- ---- ----
Minimum rentals.................. $ 43,692 $ 42,755 $ 44,525
Less: rentals from subleases(a).. (4,944) (5,253) (8,131)
--------- --------- ---------
Rent expense..................... $ 38,748 $ 37,502 $ 36,394
========= ========= =========
----------
(a) The decrease in sublease rentals is attributable to properties sold, as
discussed in Note 6.
F-16
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 13--Pension and Other Benefit Plans
Pension and Other Postretirement Benefit Plans:
The Company maintains a defined benefit pension plan, which covers
substantially all non-union and certain union associates. The Company also
maintains an unfunded supplemental retirement plan for participants in the
defined benefit 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.
In addition, the Company provides its associates other postretirement
benefits, principally health care for non-union associates who retired prior to
January 1, 1998 and certain associates for whom benefits are a subject of
collective bargaining and life insurance benefits.
The following tables provide a reconciliation of the benefit obligations,
plan assets and the funded status of the plans, along with the amounts
recognized in the consolidated balance sheets and the weighted average
assumptions used (dollars in thousands):
Pension Benefits
----------------
January 29, January 30,
2000 1999
----------- -----------
Change in benefit obligations:
Benefit obligations at beginning of period ....... $ 159,118 $ 147,068
Service cost ..................................... 2,962 2,984
Interest cost .................................... 10,352 10,173
Plan amendment ................................... (32) 1,880
Benefits paid .................................... (7,543) (8,239)
Actuarial experience (gains) losses .............. (17,032) 5,252
--------- ---------
Benefit obligations at end of period ............. $ 147,825 $ 159,118
========= =========
Change in fair value of plan assets:
Fair value of plan assets at beginning of year ... $ 243,219 $ 214,131
Actual return on plan assets ..................... (4,487) 35,579
Employer contribution ............................ -- 9
Benefits or expenses paid ........................ (5,649) (6,500)
--------- ---------
Fair value of plan assets at end of year ......... $ 233,083 $ 243,219
========= =========
Reconciliation of funded status at end of period:
Funded status .................................... $ 85,258 $ 84,101
Unrecognized prior service cost .................. 2,233 2,488
Unrecognized net actuarial gains ................. (69,983) (80,933)
--------- ---------
Prepaid (accrued) benefit cost ................... $ 17,508 $ 5,656
========= =========
Amount recognized in the consolidated balance sheets:
Prepaid benefit cost ............................. $ 37,296 $ 25,361
Accrued benefit liabilities ...................... (20,518) (23,881)
Intangible asset ................................. 730 4,176
--------- ---------
Net amount recognized ............................ $ 17,508 $ 5,656
========= =========
Weighted average assumption at the end of year:
Discount rate .................................... 8.00% 6.75%
Expected return on plan assets ................... 9.50% 9.50%
Rate of compensation increases ................... 5.00% 3.75%
Other Postretirement Benefits
-----------------------------
January 29, January 30,
2000 1999
----------- -----------
Change in benefit obligations:
Benefit obligations at beginning of period ....... $ 15,408 $ 17,308
Service cost ..................................... 348 314
Interest cost .................................... 949 959
Plan amendment ................................... -- (2,577)
Benefits paid .................................... (712) (379)
Actuarial experience (gains) losses .............. (868) (217)
-------- --------
Benefit obligations at end of period ............. $ 15,125 $ 15,408
======== ========
Change in fair value of plan assets:
Fair value of plan assets at beginning of year ... $ -- $ --
Actual return on plan assets ..................... -- --
Employer contribution ............................ -- --
Benefits or expenses paid ........................ -- --
-------- --------
Fair value of plan assets at end of year ......... $ -- $ --
======== ========
Reconciliation of funded status at end of period:
Funded status .................................... $(15,125) $(15,408)
Unrecognized prior service cost .................. (5,341) (6,833)
Unrecognized net actuarial gains ................. (8,564) (8,276)
-------- --------
Prepaid (accrued) benefit cost ................... $(29,030) $(30,517)
======== ========
Amount recognized in the consolidated balance sheets:
Prepaid benefit cost ............................. $ -- $ --
Accrued benefit liabilities ...................... (29,030) (30,517)
Intangible asset ................................. -- --
-------- --------
Net amount recognized ............................ $(29,030) $(30,517)
======== ========
Weighted average assumption at the end of year:
Discount rate .................................... 8.00% 6.75%
Expected return on plan assets ................... -- --
Rate of compensation increases ................... -- --
F-17
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 13--Pension and Other Benefit Plans--(Continued)
Net pension and other postretirement benefits include the following cost
(cost reduction) components (dollars in thousands):
Pension Benefits
Fiscal Years
---------------------------------
1999 1998 1997
-------- -------- --------
Service cost ............................... $ 2,962 $ 2,984 $ 3,224
Interest cost .............................. 10,352 10,173 9,866
Expected return on assets .................. (20,523) (17,414) (14,057)
Amortization of prior service cost ......... 223 82 89
Recognition of gains ....................... (2,972) (1,908) (471)
Recognition of plan amendment............... -- -- 165
-------- -------- --------
Net benefit cost reduction ................. $ (9,958) $ (6,083) $ (1,184)
======== ======== ========
Other Postretirement Benefits
Fiscal Years
---------------------------------
1999 1998 1997
-------- -------- --------
Service cost ............................... $ 348 $ 314 $ 399
Interest cost .............................. 949 959 1,139
Expected return on assets .................. -- -- --
Amortization of prior service cost ......... (1,492) (1,492) (1,276)
Recognition of gains ....................... (580) (631) (590)
Recognition of plan amendment .............. -- -- --
-------- -------- -------
Net benefit cost reduction ................. $ (775) $ (850) $ (328)
======== ======== =======
Assets of the Company's defined benefit pension plan are invested in
marketable Securities comprised primarily of equities of domestic corporations,
U.S. Government instruments and money market investments. The increase in other
assets in the consolidated balance sheet is primarily attributable to the
increase in the pension plan's funded status. The projected benefit obligation
(included in the above table) and the accumulated benefit obligation for the
unfunded supplemental retirement plans were $21.6 million and $20.5 million,
respectively at January 29, 2000 and $24.7 million and $23.9 million,
respectively, at January 30, 1999.
The health-care cost trend rate at January 29, 2000 was 5% and is expected
to remain at this level. A 1% change in the assumed health-care cost trend rate
would have the following effects at January 29, 2000 (dollars in thousands):
1%
------
Increase Decrease
---------- ---------
Total of service and interest cost components ........ $ 210 $ 170
Postretirement benefit obligation .................... $1,920 $1,580
The Company also contributes to several multi-employer plans, which provide
defined benefits to certain union associates. The Company's contributions to
these multi-employer plans were $15.7 million, $16.5 million and $19.0 million
in fiscal 1999, fiscal 1998 and fiscal 1997, respectively.
Savings Plan:
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, $3.1 million and $3.0 million in fiscal 1999, fiscal 1998 and fiscal
1997, respectively.
Other Postemployment Benefits:
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 29, 2000
and January 30, 1999 was $6.8 million and $8.0 million, respectively.
F-18
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 14--Income Taxes
The income tax provision is comprised of the following (dollars in
thousands):
Fiscal Years
-----------------------------------------------
1999 1998 1997
-------- -------- --------
Current
Federal ..................... $ 400 $ 3,596 $ (4,643)
State ....................... (120) (687) (2,834)
Deferred
Federal ..................... 9,723 6,462 19,639
State ....................... 2,683 3,577 7,433
Change in valuation allowance (14,793) (14,636) (21,800)
-------- -------- --------
Income tax provision ............ $ (2,107) $ (1,688) $ (2,205)
======== ======== ========
The income tax provision differs from the expected federal statutory income
tax provision as follows (dollars in thousands):
Fiscal Years
---------------------------------------------
1999 1998 1997
---- ---- ----
Federal income tax benefit
at a statutory tax rate ........... $ 10,428 $ 9,822 $ 16,545
State income taxes ................... 1,656 1,878 2,984
Change in valuation allowance ........ (14,793) (14,636) (21,800)
Other ................................ 602 1,248 66
-------- -------- --------
Income tax provision ................. $ (2,107) $ (1,688) $ (2,205)
======== ======== ========
Deferred income tax assets and liabilities consist of the following
(dollars in thousands):
January 29, 2000
--------------------------
Assets Liabilities
------ -----------
Property and equipment....................... $ -- $ 32,408
Merchandise inventory and gross profit....... -- 12,672
Prepaid expenses............................. -- 6,154
Self-insured liabilities..................... 28,124 --
Lease capitalization......................... 20,726 --
Closed store reserves........................ 10,150 --
Alternative minimum taxes.................... 3,933 --
General business credits..................... 10,169 --
Net operating loss carryforwards............. 74,795 --
Benefit plans and other postretirement and
postemployment benefits.................... 11,299 --
Deferred income.............................. 20,304 --
Capital loss carryforward.................... 17,818 --
Other........................................ 8,763 3,375
--------- ---------
Subtotal..................................... 206,081 54,609
Less: valuation allowance.................... 103,684 --
--------- ---------
Total........................................ $ 102,397 $ 54,609
========= =========
January 30, 1999
----------------------------
Assets Liabilities
------ -----------
Property and equipment....................... $ -- $ 34,521
Merchandise inventory and gross profit....... -- 11,811
Prepaid expenses............................. -- 5,615
Self-insured liabilities..................... 32,354 --
Lease capitalization......................... 19,725 --
Closed store reserves........................ 11,829 --
Alternative minimum taxes.................... 4,685 --
General business credits..................... 9,194 --
Net operating loss carryforwards............. 49,513 --
Benefit plans and other postretirement and
postemployment benefits.................... 17,481 --
Deferred income.............................. 23,097 --
Capital loss carryforward.................... 20,259 --
Other........................................ 9,571 6,696
--------- ---------
Subtotal..................................... 197,708 58,643
Less: valuation allowance.................... 88,891 --
--------- ---------
Total........................................ $ 108,817 $ 58,643
========= =========
F-19
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 14--Income Taxes--(Continued)
The balance sheet classification of the deferred income tax assets and
liabilities is as follows (dollars in thousands):
January 29, 2000
-------------------------------------
Current Noncurrent Total
------- ---------- -----
Assets.......................... $ 30,496 $ 175,585 $ 206,081
Liabilities..................... (22,262) (32,347) (54,609)
--------- ---------- ---------
Subtotal........................ 8,234 143,238 151,472
Less: valuation allowance....... (5,636) (98,048) (103,684)
--------- ---------- ---------
Total........................... $ 2,598 $ 45,190 $ 47,788
========= ========== =========
January 30, 1999
-------------------------------------
Current Noncurrent Total
------- ---------- -----
Assets.......................... $ 33,967 $ 163,741 $ 197,708
Liabilities..................... (20,651) (37,992) (58,643)
--------- ---------- ---------
Subtotal........................ 13,316 125,749 139,065
Less: valuation allowance....... (9,290) (79,601) (88,891)
--------- ---------- ---------
Total........................... $ 4,026 $ 46,148 $ 50,174
========= ========== =========
The Company's net deferred income tax assets were $47.8 million and $50.2
million, net of a valuation allowance of $103.7 million and $88.9 million at
January 29, 2000 and January 30, 1999, 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 1999 and fiscal 1998, the net increases in the valuation
allowance were $14.8 million and $14.6 million, respectively. These changes
reflect increases in the valuation allowance related to those deferred tax
assets which the Company has concluded are not likely to be realized. 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. Federal and state net operating loss
carryforwards expire in fiscal 2000 through fiscal 2020. General business
credits consist of federal jobs credits and expire in fiscal 2004 through fiscal
2013. Capital loss carryforwards expire in fiscal 2001.
In fiscal 1999, fiscal 1998 and fiscal 1997, respectively, the Company made
income tax payments of $0.5 million, $1.1 million and $4.9 million,
respectively, and received income tax refunds of $1.9 million, $4.5 million and
$5.8 million, respectively.
Note 15--Stockholders' Deficiency
During fiscal 1998, the Company issued restricted stock grants to certain
officers and key employees, pursuant to the SMG-II Holdings Corporation 1997
Restricted Stock Plan (the "RS Plan"). Each restricted stock award consisted of
shares of SMG-II Class A Common Stock and SMG-II Series C Preferred Stock and
will become nonforfeitable upon the earlier of (i) the seventh anniversary of
the date of grant, and (ii) thirty days prior to a Realization Event (as defined
in the RS Plan), provided the awardee is an employee of the Company or
subsidiary at the time such anniversary or Realization Event occurs. Generally,
a Realization Event would occur upon a sale or merger transaction involving
SMG-II and/or its subsidiaries and a nonaffiliated entity, or a public offering
of SMG-II Class A Common Stock as a result of which the aggregate price for all
shares sold in the public offering exceeds $50.0 million. Each restricted stock
award will be forfeited upon termination of employment prior to both a
Realization Event and the seventh anniversary of any restricted stock award (i)
180 days after such termination if the termination is without Cause (as
defined), or by reason of death, retirement or disability, and (ii) immediately
in the case of a resignation or termination for Cause. The restricted stock
awards were recorded based on an independent appraisal, and are being amortized
as compensation expense in the Company's consolidated statements of operations
over the seven-year vesting period, with a corresponding credit to paid-in
capital.
F-20
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 16--Extraordinary Items
The extraordinary items, representing losses on early extinguishment of
debt, consist of the following (dollars in thousands):
Fiscal Year
1997
-----------
Loss before income taxes.................... $ (12,944)
Income tax benefit.......................... 5,456
-----------
Extraordinary items, net of a tax benefit... $ (7,488)
===========
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.
Note 17--Related Party Transactions
During fiscal 1998, the Company retained ML&Co. to act as its exclusive
financial advisor in connection with any proposed business combination involving
SMG-II, PTK and the Company and any successors thereto (collectively the
"Company Group"). During fiscal 2000, said agreement was amended to permit the
Company Group to engage WP&Co. as its financial advisor.
Note 18--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, including the fixtures, equipment and inventory in each
of those Facilities, for $104.5 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, during fiscal 1998, 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 at January 31, 1998. Such deferred income consisted of (i)
$25.0 million received by the Company for future trade discounts and rebates,
which is being amortized to operations 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 is being amortized to operations over the life of
the Supply Agreement. The deferred income balance was $50.1 million and $55.4
million at January 29, 2000 and January 30, 1999, respectively.
Note 19--Divested Stores
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):
Fiscal Year
1997
-----------
Sales.............................. $ 42,877
=========
Operating loss..................... $ 10,590
=========
F-21
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 20--Cumulative Exchangeable Redeemable Preferred Stock
The Company's Preferred Stock which has a maturity date of December 31,
2007, consists of 9,000,000 authorized shares, of which 4,890,671 shares are
issued and outstanding at January 29, 2000 and January 30, 1999. The fair market
value of the Preferred Stock, at date of original issuance of October 5, 1987,
was $20 per share and the liquidation preference is $25 per share. Due to its
mandatory redemption requirements, the Preferred Stock has been stated on the
balance sheet as redeemable Securities. The difference between fair market value
at date of issue and liquidation preference is being accreted quarterly.
In the event of any liquidation, dissolution or winding up of the Company,
holders of the Preferred Stock will be entitled to receive their full
liquidation preference per share, together with accrued and unpaid dividends,
before the distribution of any assets of the Company to the holders of shares of
the Company's Common Stock or other shares, which would rank junior to the
Preferred Stock. The Preferred Stock may be redeemed at the option of the
Company, in whole or in part, at liquidation preference, together with all
accrued and unpaid dividends to the redemption date.
Commencing December 31, 2004, the Company is required to redeem in each
year 20% of the highest amount at any time outstanding of the Preferred Stock.
The redemption process is calculated to retire 60% of the issue prior to final
maturity, with the remaining amount of the issue to be redeemed at maturity.
The Company has the option to require holders to exchange the Preferred
Stock on any dividend payment date, in whole or in part, for exchange debentures
(the "Exchange Debentures") of the Company. Such option is available at any time
if (a) no event of default exists under any of the Company's loan agreements and
(b) the exchange is allowed under the provisions of the limitation on the
Company's indebtedness and other applicable provisions of the Company's loan
agreements. Any such exchange will result in the issuance of Exchange Debentures
in an amount equal to the aggregate liquidation preference of all shares of
Preferred Stock being exchanged into Exchange Debentures and in an amount equal
to all accrued but unpaid dividends.
Preferred Stock activity for the three years ended January 29, 2000 was as
follows (dollars in thousands):
Number of
Shares Amount
---------- ----------
Balance, February 1, 1997.................... 4,890,671 $ 105,372
Accretion............................... -- 1,811
---------- ----------
Balance, January 31, 1998.................... 4,890,671 107,183
Accretion............................... -- 1,886
---------- ----------
Balance, January 30, 1999.................... 4,890,671 109,069
Accretion............................... -- 1,969
---------- ----------
Balance, January 29, 2000.................... 4,890,671 $ 111,038
========== ==========
The terms of the Preferred Stock provide for cumulative quarterly dividends
at an annual rate of $3.52 per share when, as, and if declared by the Board of
Directors of the Company. Dividends for the first 20 quarterly dividend periods
(through October 15, 1992) were paid at the Company's option in additional
shares of Preferred Stock. Prior to the Recapitalization, the terms of the
Company's debt instruments restricted the payment of cash dividends on the
Preferred Stock unless certain conditions were met, including tests relating to
earnings and to cash flow ratios of the Company. Prior to the Recapitalization,
the Company had not met the conditions permitting cash dividend payments on the
Preferred Stock. Subsequent to the Recapitalization, Holdings has not paid any
cash dividends on the Preferred Stock and does not expect to receive cash flow
sufficient to permit payments of dividends on the Preferred Stock in the
foreseeable future. All dividends not paid in cash will accumulate at the rate
of $3.52 per share per annum, without interest, until declared and paid. As
such, at January 29, 2000, the unpaid dividends of $124.8 million were accrued
and included in other noncurrent liabilities.
F-22
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 20--Cumulative Exchangeable Redeemable Preferred Stock--(Continued)
The Certificate of Designation of the Preferred Stock provides that the
Preferred Stock is non-voting except that if an amount equal to six quarterly
dividends is in arrears in whole, or in part, the Preferred Stockholders voting
as a class are entitled to elect an additional two members to the Board of
Directors of the Company. The Company is currently in arrears on the payment of
29 quarterly dividends. Accordingly, the holders of the Preferred Stock
reelected two members of the Company's Board of Directors at its 1998 annual
meeting.
Dividends on the Preferred Stock must be paid in full for all prior periods
as of the most recent dividend payment date before any dividends, other than
dividends payable in shares of the Company's Common Stock or in any other class
of the Company's capital stock ranking junior to the Preferred Stock, can be
paid or can be set apart for payment to holders of Common Stock or to holders of
any other shares ranking junior to the Preferred Stock. In addition, dividends
on the Preferred Stock must be paid in full for all prior periods before the
redemption or purchase by the Company of shares of Common Stock or any other
shares ranking junior to the Preferred Stock. See Note 25 regarding the tender
offer for the Preferred Stock.
Note 21--Common Stock
The Company's authorized Common Stock, par value $0.01 per share, consists
of 3,000,000 shares of Class A Common Stock and 3,000,000 shares of Class B
Common Stock. There were 748,476 and 672,476 shares of Class A Common Stock
outstanding at January 29, 2000 and January 30, 1999, respectively, and 320,000
shares of Class B Common Stock outstanding at January 29, 2000 and January 30,
1999. All shares of Company's Class A Common Stock were exchanged for all
outstanding shares of Holdings Common Stock.
Holders of shares of Company Class A Common Stock are entitled to one vote
per share on all matters to be voted on by stockholders. Holders of shares of
Company 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 the Company. Subject to compliance with certain procedures,
holders of shares of Company Class B Common Stock may exchange their shares for
shares of Company Class A Common Stock and holders of shares of Company Class A
Common Stock may exchange their shares for shares of Company Class B Common
Stock, in each case on a share-for-share basis. Upon liquidation or dissolution
of the Company, holders of Company Common Stock are entitled to share ratably in
all assets available for distribution to stockholders after payment of all prior
claims, including liquidation rights of the holders of any outstanding shares of
Company Preferred Stock. Holders of Company Preferred Stock have no preemptive
rights, subscription rights or conversion rights, except for certain first
refusal rights granted pursuant to the Company's stockholders agreement with
respect to new issues of Securities by the Company and the right to exchange
Company Class B Common Stock for Company Class A Common Stock and vice versa.
The Restated Certificate of Incorporation of the Company requires the Company to
reserve, as authorized but unissued capital, sufficient shares of Company Class
A Common Stock and Company Class B Common Stock to ensure that adequate amounts
of each class of Company Common Stock is available to satisfy requests for
conversion of one class for another class of Company Common Stock, or to convert
shares of Company Preferred Stock to Company Common Stock.
Holders of Company Common Stock are party with the holders of Company
Preferred Stock to the Company stockholders agreement (the "Company Stockholders
Agreement"), which, among other things, restricts the transferability of Company
capital stock and relates to the corporate governance of the Company.
In connection with the Acquisition, certain executives of Pathmark (the
"Management Investors") purchased an aggregate of 100,000 shares of Class A
Common Stock for consideration of $100 per share. In connection with the
Exchange Offer, the Management Investors entered into an agreement with respect
to the SMG-II Common Stock, which was received in exchange for the Company's
Class A Common Stock.
F-23
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 21--Common Stock--(Continued)
Certain Management Investors, who purchased shares of Class A Common Stock,
borrowed a portion of the purchase price from Holdings and were required to
deliver a Recourse Note to Holdings in the principal amount of the loan.
Interest on the Recourse Note is to be paid annually and the principal is
payable on January 16, 2001. Each Management Investor who issued a Recourse Note
was required to enter into a stock pledge agreement ("Stock Pledge Agreement")
with Holdings, pursuant to which the Management Investor pledged shares of
Holdings Class A Common Stock to secure the repayment of the Recourse Note. In
connection with the Exchange Offer, each Management Investor who issued a
Recourse Note executed an amendment to the Stock Pledge Agreement, which
provided for the substitution of the Company Common Stock received in the
Exchange Offer for the Holdings Class A Common Stock, in order to secure the
repayment of the Recourse Note. Recourse Notes in the amount of $1.5 million and
$1.7 million were outstanding at January 29, 2000 and January 30, 1999.
Note 22--Cumulative Convertible Preferred Stock
The Company's authorized preferred stock (the "Company Preferred Stock")
consists of 4,000,000 shares, of which 1,500,000 shares have been designated
Series A Cumulative Convertible Preferred Stock (the "Company Series A Preferred
Stock"), 1,500,000 shares have been designated Series B Cumulative Convertible
Preferred Stock (the "Company Series B Preferred Stock"), 33,520 shares have
been designated Series C Cumulative Convertible Preferred Stock (the "Company
Series C Preferred Stock") and 966,480 shares are undesignated and unissued. At
January 29, 2000 and January 30, 1999, 236,731 shares of Company Series A
Preferred Stock, 180,769 shares of Company Series B Preferred Stock, and 33,520
shares of Company Series C Preferred Stock were issued and outstanding. The
Company Preferred Stock has a stated value and liquidation preference of $200
per share and bears dividends at the rate of 10% of the stated value per annum,
payable annually. At the option of the Company, dividends are payable in cash or
may accumulate and the amount of undeclared, accumulated dividends on Company
Preferred Stock aggregated $116.2 million, or $258 per share at January 29,
2000.
Holders of shares of Company Series A Preferred Stock and Company Series C
Preferred Stock are entitled to one vote per share of Company Class A Common
Stock into which Company Series A Preferred Stock and Company Series C Preferred
Stock is convertible on all matters to be voted on by Company stockholders,
subject to increase to 1.11 votes per share upon the occurrence of certain
events. Holders of shares of Company Series B Preferred Stock are entitled to
one vote per share of Company Class B Common Stock into which such Company
Series B Preferred Stock is convertible for the purpose of voting on any
consolidation or merger, any sale, lease or exchange of substantially all of the
assets of any liquidation, dissolution or winding up, of the Company.
Additionally, holders of Company Preferred Stock have separate voting
rights with respect to alterations in the voting powers, rights and preferences
and certain other terms affecting the Company Preferred Stock. Subject to
compliance with certain procedures, holders of Company Series B Preferred Stock
may exchange their shares for Company Series A Preferred Stock, and holders of
Company Series A Preferred Stock may exchange their shares for Company Series B
Preferred Stock, on a share-for-share basis. Each series of Company Preferred
Stock ranks pari passu with each other series.
At the option of the holder, Company Preferred Stock is convertible into
Company 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 Company Common Stock, at a conversion ratio of one
share of the corresponding class of Company Common Stock for each share of
Company Preferred Stock, subject to adjustment upon the occurrence of certain
events.
Holders of Company Preferred Stock are party with the holders of Company
Common Stock to the Company Stockholders Agreement, which, among other things,
restricts the transferability of Company capital stock and relates to the
corporate governance of the Company.
Dividends on Company Preferred Stock must be paid in full in cash for all
prior periods, and paid or declared and set apart for payment in full for the
current period, before the payment of any dividends (other than dividends
payable in shares of the Company's Common Stock or any other class of the
Company's capital stock ranking junior to Company Preferred Stock, the "Junior
Stock") on any shares of Junior Stock.
F-24
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 22--Cumulative Convertible Preferred Stock--(Continued)
Except for purchases of Junior Stock, pursuant to agreements with
management of the Company and Holdings and certain other exceptions, unless the
Company has either purchased all outstanding Company Preferred Stock or offered
to purchase all outstanding Preferred Stock and has purchased Company Preferred
Stock tendered pursuant thereto, neither the Company nor Holdings may redeem or
purchase any Junior Stock.
In the event of any liquidation, dissolution or winding up of the Company,
holders of Company Preferred Stock will be entitled to receive the stated value,
together with all accumulated and unpaid dividends, with respect to such shares
before the distribution of any assets to the holders of Junior Stock.
Note 23--Stock Option Plans
The Management Investors 1987 Stock Option Plan (the "Management Plan") and
the 1987 Employee Stock Option Plan (the "Employee Plan") were approved by the
Board of Directors of the Company on November 24, 1987 and by the Stockholders
on December 21, 1987. Under the terms of the Management and the Employee Plans,
associates receive either incentive stock options ("ISO's") or nonqualified
stock options, the duration of which may not exceed ten years from the date of
grant, to purchase shares of Company Class A Common Stock. In connection with
the Exchange Offer, adjustments to outstanding options under the Management and
the Employee Plans were made. As a result of these adjustments, each option
under the Management and the Employee Plans, which were outstanding on February
4, 1991, became an option for the purchase of an equal number of shares of
Company Class A Common Stock. Both of the aforementioned plans expired in
December 1997. See Note 15 regarding the 1997 Restricted Stock Plan.
As permitted by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"), the Company continues
to account for its stock option plans in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees and its related
Interpretations and, accordingly, no compensation expense has been recognized.
Had compensation expense been determined based on the fair value at the grant
date for such awards, the Company's net loss and net loss per common share would
have been increased to the pro forma amounts indicated below (dollars in
thousands):
Fiscal Years
---------------------------------------
1999 1998 1997
---------- ---------- ----------
Net loss
As reported .............. $ (31,899) $ (29,750) $ (56,964)
========== ========== ==========
Pro forma ................ $ (32,308) $ (30,159) $ (57,373)
========== ========== ==========
Net loss per common share-basic
As reported .............. $ (65.40) $ (63.29) $ (91.79)
========== ========== ==========
Pro forma ................ $ (65.78) $ (63.68) $ (92.20)
========== ========== ==========
Net loss per common share-diluted
As reported .............. $ (65.40) $ (63.29) $ (91.79)
========== ========== ==========
Pro forma ................ $ (65.78) $ (63.68) $ (92.20)
========== ========== ==========
The effects of applying SFAS No. 123, for providing pro forma disclosures,
are not likely to be representative of the effects on reported net earnings for
future years because options vest over several years and additional awards
generally are made each year.
For the purpose of the pro forma amounts indicated above and other
disclosures, the fair value of each option granted during fiscal 1996 was
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions: expected volatility of 30%, expected life of five
years, risk free interest rate of 6.2% and no payment of dividends during the
expected life of any option. The weighted average fair value of the granted
options was estimated to be approximately $17 per option in fiscal 1996. No
options were granted during fiscal 1999 and fiscal 1998.
F-25
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 23--Stock Option Plans--(Continued)
Under the Management Plan, the option price per share for a nonqualified
stock option will be $100, while the option price per share for ISO's will be no
less than 100% of the fair market value of a share of Company Class A Common
Stock on the date of grant. Under the Management Plan, options shall be fully
vested at the time of the grant. Under the Employee Plan, the option price per
share for a nonqualified stock option will not be less than 60% of the fair
market value of Company Class A Common Stock on the date of grant. The option
price per share for ISO's will be no less than 100% of the fair market value of
a share of Company Class A Common Stock on the date of grant. Options granted
under the Employee Plan do not vest and options granted under either plan
generally cannot be exercised until a registration statement, under the
Securities Act of 1933, pertaining to shares of Company Class A Common Stock has
been duly filed and declared effective. The Management Plan provides for the
granting of 80,000 shares and had no shares available for future grants as of
January 29, 2000. The Employee Plan provides for the granting of 42,000 shares
and had no shares available for future grants as of January 29, 2000.
The stock options, to purchase an aggregate of 100,000 shares of Company
Class A Common Stock, granted to the CEO by the Company consists of component A
("Option Component A"), covering 50,000 shares of SMG-II Class A Common Stock
and component B ("Option Component B"), covering the remaining 50,000 shares of
Common Stock. Subject to the vesting terms described below, Option Component A
has an initial per share exercise price of $100 per share. The per share
exercise price of Option Component A will increase to $125 per share on the
first day of the fiscal year beginning in calendar 2000 ("fiscal 2000") and to
$150 per share on the first day of the fiscal year beginning in calendar year
2001 ("fiscal 2001"). Subject to the vesting terms described below, Option
Component B has an initial per share exercise price of $100 per share. The per
share exercise price of Option Component B will increase to $150 per share on
the first day of the fiscal year beginning in calendar year 1999; to $250 per
share on the first day of fiscal 2000; and to $350 per share on the first day of
fiscal 2001. Option Component A and Option Component B each vest over four years
and expire one year after being fully vested, except for the portion that vests
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 stock options
(whether or not then vested) will be immediately and irrevocably forfeited,
except in certain circumstances. The vested portion does not become exercisable
until the occurrence of certain events related generally to the realization of a
third party sale of Company Common Stock.
A summary of option transactions during fiscal 1999 and fiscal 1998 was as
follows:
Shares(a)
---------
Balance, January 31, 1998 ............................. 191,614
Canceled .............................................. (1,000)
--------
Balance, January 30, 1999 ............................. 190,614
Canceled .............................................. (14,274)
--------
Balance, January 29, 2000 ............................. 176,340(b)
========
----------
(a) The weighted average exercise price for all options presented is
$100 per share. No options were granted during fiscal 1998 and fiscal 1999.
(b) The weighted average remaining contractual life of the options outstanding
as of January 29, 2000 was 2 years.
F-26
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 24--Chief Executive Officer Employment Arrangements
On October 8, 1996, the Company hired a Chief Executive Officer (the "CEO")
pursuant to a five-year employment agreement (the "Employment Agreement"). In
conjunction with his employment, SMG-II granted to the CEO an equity package
(the "Equity Strip") consisting of 8,520 restricted shares of a new series of
SMG-II Preferred Stock and 19,851 restricted shares of SMG-II Common Stock and
options to purchase 100,000 shares of SMG-II Common Stock at an initial exercise
price of $100 per share (the "Options"), with the said exercise price increasing
over time. The Equity Strip was valued at $3.4 million at the date of issuance,
based upon an independent appraisal, and will vest over the term of the
employment agreement or earlier with the occurrence of an employment-related
event, as defined, and will be forfeited in its entirety upon the occurrence of
a termination event, as defined. The Equity Strip is being amortized as
compensation expense in the Company's statements 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 $1.0 million, which is being
amortized as compensation expense in the Company's statements 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 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. The balance of the loan was
approximately $0.8 million and $2.0 million at January 29, 2000 and January 30,
1999, respectively.
In addition to the Employment Agreement, in fiscal 2000, Pathmark and the
CEO entered into a retention bonus and sale bonus agreement. The retention bonus
and sale bonus agreement provides that under the circumstances described below,
the CEO shall receive a retention bonus of $4.0 million and a sale bonus. The
retention bonus is intended to encourage the CEO to remain employed by Pathmark
for at least one year subsequent to the effective date of the plan of
reorganization. In August 2000, Mr. Donald received a payment of $2.0 million.
Subsequent to September 19, 2000, Mr. Donald will receive 98,510 shares of
restricted Common Stock of the Company. The restricted stock will vest on the
first anniversary of the receipt of such restricted stock, if Mr. Donald is
employed on that date.
In addition to the retention bonus, under certain circumstances, the CEO
will become entitled to receive the sale bonus. The CEO will become entitled to
receive the sale bonus in the event that an event could result in a change in
control (defined as a "Triggering Event" in the Agreement) occurs during the
term of the agreement, and (ii) a change in control contemplated by such
Triggering Event occurs thereafter. The amount of the sale bonus shall be equal
to 0.0043 multiplied by an amount equal to the sum of the aggregate fair market
value of any Securities issued and any other non-cash consideration delivered,
and any cash consideration paid to the Company Group or their security holders
in connection with a change in control, plus the amount of all indebtedness of
the Company Group which is assumed or acquired by any Purchaser in connection
with a change in control or retired or defeased in connection with such change
in control.
Note 25--Commitments and Contingencies
Ahold Acquisition:
On March 15, 1999, Ahold, a company organized under the laws of the
Netherlands and Purchaser, a Delaware corporation and an indirect wholly-owned
subsidiary of Ahold, commenced a tender offer to purchase all of the issued and
outstanding shares (the "Shares") of Preferred Stock at a price of $38.25 per
Share (subsequently increased to $39.85 per Share), net to the seller in cash,
without interest thereon (the "Offer Price"), upon the terms and subject to the
conditions set forth in the Offer to Purchase dated March 15, 1999 (the "Offer
to Purchase") and the related Letter of Transmittal (which, together with the
Offer to Purchase and all amendments and supplements thereto, constitute the
"Offer").
F-27
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 25--Commitments and Contingencies--(Continued)
The Offer was an integral part of the transactions contemplated by the
SMG-II Merger Agreement pursuant to which Ahold was to have acquired all of the
issued and outstanding shares of the capital stock of SMG-II, the indirect
parent of the Company, through the merger of the Purchaser with and into SMG-II
(the "SMG-II Merger"), subject to the terms and conditions contained in the
SMG-II Merger Agreement.
The Company, SMG-II and the directors of the Company are defendants
(collectively, the "Defendants") in a purported stockholder class action lawsuit
filed in the Court of Chancery of the State of Delaware (the "Court") entitled
Wolfson v. Supermarkets General Holdings Corporation, et al., C.A. No. 17047
(the "Action"), in which the plaintiff alleged, among other things, that the
defendant directors of the Company and SMG-II breached their fiduciary duties to
the holders of Preferred Stock. The plaintiff, by his counsel, entered into a
Settlement Agreement, dated June 9, 1999, (the "Settlement Agreement") with the
Defendants (by their counsel) pursuant to which the parties agreed to settle the
Action.
The Settlement Agreement provides for, among other things, the
certification of the action as a class action under the rules of the Court,
which class would consist of all holders of the Preferred Stock from and
including March 9, 1999 (the "Class") through and including the consummation of
the SMG-II Merger or, if the SMG-II Merger fails to close, the stock purchase
pursuant to the Stock Purchase Agreement, dated March 9, 1999, by and among
Ahold, the Purchaser, SMG-II and PTK (the "Alternative Transaction"). In
addition, pursuant to the terms of the Settlement Agreement, the Defendants
agreed, subject to Final Court Approval (as defined below), that the Purchaser
increase its tender offer price to $40.25 per share of Preferred Stock (from
$38.25), less the total amount awarded as fees and expenses to plaintiff's
counsel by the Court divided by the total number of outstanding shares of
Preferred Stock (the "New Offer Price"). Plaintiff's counsel applied to the
Court for an award of fees and expenses in an aggregate amount of $1,956,268, or
$0.40 per share of Preferred Stock.
The Settlement Agreement also provides, among other things, that any of the
Defendants shall have the right to withdraw from the proposed settlement in the
event that (i) any claims related to the SMG-II Merger, the Alternative
Transaction, or the subject matter of the Action are commenced by any member of
the Class against any Defendants or certain others employed by, affiliated with,
or retained by the Defendants in any court prior to Final Court Approval of the
settlement, and the court in which such claims are pending denies Defendants'
application to dismiss or stay such action in contemplation of dismissal, or
(ii) any of the other conditions to the consummation of the settlement described
below shall not have been satisfied. The consummation of the settlement is
subject to (i) Final Court Approval of the settlement; (ii) dismissal of the
Action by the Court with prejudice and without awarding fees or costs to any
party; and (iii) the Purchaser closing (A) its tender offer and the SMG-II
Merger, or (B) the Alternative Transaction.
After notice and a hearing on July 22, 1999, the Court approved the
Settlement Agreement and the fee application of the plaintiff's attorneys. As of
August 23, 1999, all applicable appeal periods expired, thus constituting Final
Court Approval. As a result of the settlement, the New Offer Price was $39.85
per share of Preferred Stock, had Ahold not terminated the SMG-II Merger
Agreement and the SMG-II Merger had been consummated. With the termination of
the SMG-II Merger Agreement by Ahold on December 16, 1999, plaintiff moved on
January 5, 2000, to enforce the Settlement Agreement against Purchaser, which
motion is pending.
On December 16, 1999, Ahold terminated the SMG-II Merger Agreement claiming
that despite its best efforts, it could not obtain necessary antitrust clearance
from government regulators. That same day, Ahold filed a complaint in the
Supreme Court, State of New York, County of New York seeking a declaratory
judgement that Ahold had used its "best efforts" under the SMG-II Merger
Agreement. On January 18, 2000, SMG-II filed its Answer and Counterclaims,
denying Ahold's assertion that it used its best efforts to consummate the SMG-II
Merger Agreement. Additionally, SMG-II asserted counterclaims against Ahold for
(i) breach of contract by failure to use best efforts; (ii) breach of the
covenant of good faith and fair dealing; and (iii) unfair competition. SMG-II
requested compensatory damages in an unspecified amount.
F-28
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 25--Commitments and Contingencies--(Continued)
On February 7, 2000, Ahold answered SMG-II's counterclaims and denied the
allegations contained therein, and filed an Amended Compliant seeking
declarations that (i) the "best efforts" clause in the SMG-II Merger Agreement
is unenforceable; (ii) if the "best efforts" clause is enforceable, Ahold did
not breach that clause; and (iii) Ahold properly terminated the SMG-II Merger
Agreement. Additionally, Ahold alleged that SMG-II breached the "best efforts"
clause of the SMG-II Merger Agreement and requested compensatory damages in an
unspecified amount. SMG-II filed its amended answer to the amended compliant and
amended counterclaims on February 27, 2000. At this juncture, discovery is
proceeding.
Rickel:
In connection with the sale of its home centers segment in fiscal 1994, the
Company, as lessor, entered into ten leases for certain of the Company's owned
real estate properties, including a distribution center, with Rickel as tenant.
In addition, the Company assigned 25 third-party leases to Rickel. In 1996,
Rickel filed for bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code. Subsequent to the bankruptcy filing, of the 35 locations leased
to Rickel, 16 leases were assigned by Rickel in 1998 to Staples, Inc., 13 leases
have either been terminated, sold or assigned to third parties, including
Rickel's distribution center which was sold by the Company during fiscal 1998,
and two leases have been rejected by the Company as part of its Plan of
Reorganization. The remaining four Rickel leases, representing three sites owned
by the Company and one site jointly leased with the Company, are actively being
marketed by the Company.
Information Services Outsourcing:
In August 1991, the Company entered into a ten-year agreement with IBM to
provide a wide range of information systems services. Under the agreement, IBM
has taken over the Company's data center operations and mainframe processing and
information system functions and is providing business applications and systems
designed to enhance the Company's customer service and efficiency. The charges
under this agreement are based upon the services requested at predetermined
rates. The Company may terminate the agreement upon 90 days notice with payment
of a specified termination charge. The amounts expensed under this agreement in
the accompanying consolidated statements of operations were $28.7 million, $26.5
million and $23.7 million during fiscal 1999, fiscal 1998 and fiscal 1997,
respectively.
Other:
The Company is a party to a number of other legal proceedings in the
ordinary course of business. Management believes that the ultimate resolution of
these proceedings will not, in the aggregate, have a material adverse impact on
the financial condition, results of operations, cash flows or business of the
Company.
F-29
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statement--(Continued)
Note 26--Quarterly Financial Data (Unaudited)
On September 7, 2000, the Court entered an order confirming the Plan of
Reorganization, and, on September 19, 2000, the Company emerged from Chapter 11
bankruptcy protection and the Company's direct and indirect parent companies
merged with the Company, which became the surviving entity. Such mergers are
being accounted for in the historical financial statements at historical cost in
a manner similar to pooling-of-interests accounting. Accordingly, the financial
data for the interim periods of fiscal 1999 and fiscal 1998 reflects the results
of operations of the combined entity as follows (dollars in thousands):
<TABLE>
<CAPTION>
13 Weeks Ended
------------------------------------------------------
May 1, July 31, October 30, January 29, Fiscal
1999 1999 1999 2000 1999
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
52 Weeks Ended January 29, 2000
Sales ............................................. $ 894,457 $ 922,728 $ 924,854 $ 956,045 $ 3,698,084
Cost of sales ..................................... 639,510 657,887 663,794 678,126 2,639,317
--------- --------- --------- --------- -----------
Gross profit(a) ................................... 254,947 264,841 261,060 277,919 1,058,767
Selling, general and
administrative expenses ......................... 206,519 212,243 214,813 217,139 850,714
Depreciation and amortization ..................... 18,227 18,382 19,111 19,014 74,734
--------- --------- --------- --------- -----------
Operating earnings ................................ 30,201 34,216 27,136 41,766 133,319
Interest expense .................................. (39,473) (40,366) (41,026) (42,246) (163,111)
--------- --------- --------- --------- -----------
Loss before income taxes .......................... (9,272) (6,150) (13,890) (480) (29,792)
Income tax provision .............................. (34) (34) (34) (2,005) (2,107)
--------- --------- --------- --------- -----------
Net loss .......................................... $ (9,306) $ (6,184) $ (13,924) $ (2,485) $ (31,899)
========= ========= ========= ========= ===========
Net loss attributable to common
stockholders .................................... $ (18,785) $ (15,668) $ (23,414) $ (11,980) $ (69,847)
========= ========= ========= ========= ===========
Net loss per common share-basic
and diluted ..................................... $ (17.59) $ (14.67) $ (21.92) $ (11.22) $ (65.40)
========= ========= ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
13 Weeks Ended
------------------------------------------------------
May 2, August 1, October 31, January 30, Fiscal
1998 1998 1998 1999 1998
--------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
52 Weeks Ended January 30, 1999
Sales ............................................. $ 916,015 $ 922,909 $ 899,990 $ 916,297 $ 3,655,211
Cost of sales ..................................... 651,984 661,009 644,554 654,437 2,611,984
--------- --------- --------- --------- -----------
Gross profit(b) ................................... 264,031 261,900 255,436 261,860 1,043,227
Selling, general and
administrative expenses(c) ...................... 211,073 204,460 210,389 207,026 832,948
Depreciation and amortization ..................... 19,686 19,750 19,597 17,994 77,027
--------- --------- --------- --------- -----------
Operating earnings ................................ 33,272 37,690 25,450 36,840 133,252
Interest expense .................................. (41,564) (39,828) (39,772) (40,150) (161,314)
--------- --------- --------- --------- -----------
Loss before income taxes .......................... (8,292) (2,138) (14,322) (3,310) (28,062)
Income tax provision .............................. (40) (34) (48) (1,566) (1,688)
--------- --------- --------- --------- -----------
Net loss .......................................... $ (8,332) $ (2,172) $ (14,370) $ (4,876) $ (29,750)
========= ========= ========= ========= ===========
Net loss attributable to common
stockholders .................................... $ (17,327) $ (11,171) $ (23,374) $ (13,885) $ (65,757)
========= ========= ========= ========= ===========
Net loss per common share-basic
and diluted ..................................... $ (16.68) $ (10.75) $ (22.50) $ (13.36) $ (63.29)
========= ========= ========= ========= ===========
</TABLE>
--------------
(a) The pretax LIFO credit for fiscal 1999 was $0.03 million consisting of
charges of $0.4 million in each of the first three quarters and a $1.23
million credit in the fourth quarter.
(b) The pretax LIFO charge for fiscal 1998 was $3.4 million consisting of
charges of $0.35 million in each of the first three quarters and a $2.35
million charge in the fourth quarter.
(c) Selling, general and administrative expenses for fiscal 1998 included a
second quarter gain of $5.1 million recognized on the sale of certain real
estate.
F-30
<PAGE>
Pathmark Stores, Inc.
Consolidated Statements of Operations (Unaudited)
(in thousands except per share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
------------------------ -------------------------
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Sales ............................................. $ 929,597 $ 922,728 $ 1,848,793 $ 1,817,185
Cost of sales (exclusive of depreciation and
amortization shown separately below) ........... 667,228 657,887 1,328,772 1,297,397
--------- --------- ----------- -----------
Gross profit ...................................... 262,369 264,841 520,021 519,788
Selling, general and administrative expenses ...... 215,751 212,243 428,466 418,762
Reorganization items .............................. 4,753 -- 9,887 --
Depreciation and amortization ..................... 19,626 18,382 38,554 36,609
--------- --------- ----------- -----------
Operating earnings ................................ 22,239 34,216 43,114 64,417
Interest expense .................................. (45,699) (40,366) (87,833) (79,839)
--------- --------- ----------- -----------
Loss before income taxes .......................... (23,460) (6,150) (44,719) (15,422)
Income tax provision .............................. (32) (34) (65) (68)
--------- --------- ----------- -----------
Net loss .......................................... (23,492) (6,184) (44,784) (15,490)
Less: non-cash preferred stock accretion and
dividend requirements .......................... (511) (4,793) (5,321) (9,581)
--------- --------- ----------- -----------
Net loss attributable to common stockholders ...... $ (24,003) $ (10,977) $ (50,105) $ (25,071)
========= ========= =========== ===========
Weighted average common shares
outstanding-basic .............................. 1,068 1,068 1,068 1,068
========= ========= =========== ===========
Net loss per common share-basic ................... $ (22.47) $ (10.28) $ (46.91) $ (23.47)
========= ========= =========== ===========
Weighted average common shares
outstanding-diluted ............................ 1,068 1,068 1,068 1,068
========= ========= =========== ===========
Net loss per common share-diluted ................. $ (22.47) $ (10.28) $ (46.91) $ (23.47)
========= ========= =========== ===========
</TABLE>
See notes to consolidated financial statements (unaudited).
F-31
<PAGE>
Pathmark Stores, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands except per share amounts)
July 29, January 29,
2000 2000
------------ ------------
ASSETS
Current Assets
Cash..................................... $ 15,574 $ 16,196
Accounts receivable, net................. 16,341 15,787
Merchandise inventories.................. 138,670 141,559
Income taxes receivable.................. 474 751
Deferred income taxes, net............... 2,336 2,598
Prepaid expenses......................... 20,942 21,183
Due from suppliers....................... 46,334 53,975
Other current assets..................... 21,302 18,136
------------ ------------
Total Current Assets................. 261,973 270,185
Property and Equipment, Net................. 461,609 472,157
Deferred Financing Costs, Net............... 13,008 11,805
Deferred Income Taxes, Net.................. 45,452 45,190
Other Noncurrent Assets..................... 57,023 43,854
------------ ------------
$ 839,065 $ 843,191
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable and book overdrafts ........... $ 76,997 $89,434
Current maturities of long-term debt ........... 382,939 78,982
Accrued payroll and payroll taxes .............. 45,197 50,766
Current portion of lease obligations ........... 22,900 25,192
Accrued interest payable ....................... 6,111 26,850
Accrued expenses and other current liabilities . 89,145 80,058
-------- ---------
Total Current Liabilities ............... 623,289 351,282
--------- ---------
Long-Term Debt ................................. -- 1,264,103
--------- ---------
Lease Obligations, Long-Term ................... 185,060 173,289
--------- ---------
Other Noncurrent Liabilities ................... 200,908 377,852
--------- ---------
Liabilities Subject to Discharge and Exchange .... 1,314,024 --
--------- ---------
Redeemable Securities
Cumulative Exchangeable Redeemable
Preferred Stock, $0.01 par value .............. -- 111,038
--------- ---------
Authorized: 9,000,000 shares
Issued and outstanding: 4,890,671 shares
Liquidation preference, $25 per share: $122,267
Commitments and Contingencies
Stockholders' Deficiency
Common Stock......................... 11 11
Convertible Preferred Stock.......... 4 4
Paid-in Capital...................... 192,693 193,677
Accumulated Deficit.................. (1,674,705) (1,625,617)
Unamortized Value of
Restricted Stock Grants.............. (2,219) (2,448)
------------ ------------
Total Stockholders' Deficiency... (1,484,216) (1,434,373)
------------ ------------
$ 839,065 $ 843,191
============ ============
See notes to consolidated financial statements (unaudited).
F-32
<PAGE>
Pathmark Stores, Inc.
Consolidated Statements of Stockholders' Deficiency (Unaudited)
(in thousands except per share amounts)
Convertible
Common Preferred Paid-in
Stock Stock Capital
------ --------- -----
Balance, January 29, 2000.............. $ 11 $ 4 $ 193,677
Net loss............................. -- -- --
Accrued dividends on redeemable
preferred stock ($0.88 per share).. -- -- --
Accretion on redeemable
preferred stock.................... -- -- (1,017)
Amortization of restricted stock
grants............................. -- -- --
Repayment of Management
Investors' loan.................... -- -- 33
---- --- --------
Balance, July 29, 2000................. $ 11 $ 4 $ 192,693
==== === ========
Unamortized
Value of Total
Accumulated Restricted Stockholders'
Deficit Stock Grants Deficiency
----------- ------------ ------------
Balance, January 29, 2000 ............. $(1,625,617) $(2,448) $(1,434,373)
Net loss ............................ (44,784) -- (44,784)
Accrued dividends on redeemable
preferred stock ($0.88 per share).. (4,304) -- (4,304)
Accretion on redeemable
preferred stock ................... -- -- (1,017)
Amortization of
restricted stock grants ........... -- 229 229
Repayment of Management
Investors' loan ................... -- -- 33
----------- ------- -----------
Balance, July 29, 2000 ................ $(1,674,705) $(2,219) $(1,484,216)
=========== ======= ===========
See notes to consolidated financial statements (unaudited).
F-33
<PAGE>
Pathmark Stores, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
26 Weeks Ended
--------------------------
July 29, July 31,
2000 1999
--------- ---------
Operating Activities
Net loss .........................................$ (44,784) $ (15,490)
Adjustments to reconcile net loss to net
cash provided by (used for)
operating activities:
Depreciation and amortization............... 41,026 38,376
Reorganization items........................ 9,887 --
Interest accruable but not payable.......... -- 11,344
Amortization of original issue discount..... 89 178
Amortization of deferred financing costs.... 2,566 2,186
Gain on sale or disposal
of property and equipment................. (1,883) (369)
Cash provided by (used for)
operating assets and liabilities:
Accounts receivable, net.................. (554) 1,013
Income taxes receivable................... 278 (333)
Merchandise inventories................... 2,889 (4,128)
Due from suppliers........................ 7,641 3,454
Other current assets...................... (5,372) (4,828)
Noncurrent assets......................... (12,638) (2,406)
Accounts payable.......................... (3,255) 1,870
Accrued expenses and other
current liabilities..................... 47,774 (8,880)
Noncurrent liabilities.................... (12,610) (16,005)
--------- ---------
Cash provided by operating activities 31,054 5,982
--------- ---------
Investing Activities
Property and equipment expenditures......... (18,660) (24,476)
Proceeds from sale or disposal of
property and equipment.................... 9,799 886
--------- ---------
Cash used for investing activities... (8,861) (23,590)
--------- ---------
Financing Activities
(Decrease) increase in working capital
facility borrowings........................ (4,800) 27,600
Repayments of the term loan................ (5,229) (3,783)
Repayment of other long-term debt........... (689) (620)
(Decrease) increase in book overdrafts...... (9,182) 5,055
Reduction in lease obligations.............. (9,446) (9,631)
Deferred financing costs.................... (3,769) (431)
Increase in DIP Facility borrowings......... 10,300 --
---------- ----------
Cash provided by (used for)
financing activities............... (22,815) 18,190
--------- ---------
Increase (decrease) in cash.................... (622) 582
Cash at beginning of period.................... 16,196 7,931
--------- ---------
Cash at end of period.......................... $ 15,574 $ 8,513
========= =========
Supplemental Disclosures of Cash Flow
Information Interest paid................... $ 31,217 $ 66,413
========= =========
Income taxes paid........................... $ 64 $ 447
========= =========
Noncash Investing and Financing Activities
Capital lease obligations................... $ 24,436 $ 23,217
========= =========
See notes to consolidated financial statements (unaudited).
F-34
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Restructuring Proceedings Under Chapter 11 of the Bankruptcy Code
Historically, the cash flows that Pathmark Stores, Inc. (the "Company")
generated from operations, supplemented by the unused borrowing capacity under
the working capital facility (the "Working Capital Facility") and the
availability of capital lease financing were sufficient to pay the Company's
debts as they came due, provide for its capital expenditure program and meet its
other cash requirements. Management evaluated its fiscal 2000 cash flow
projections and debt service requirements and based upon this evaluation, the
Company elected not to make all of its scheduled debt payments. The Company's
fiscal 2000 debt requirements increase substantially over the prior year due
primarily to the semi-annual interest payments of $12.1 million on the 10.75%
Junior Subordinated Deferred Coupon Notes (the "Junior Subordinated Notes")
which, for the first time, was required to be paid in cash on May 1, 2000 and
the sinking fund payment of $50.0 million on the 11.625% Subordinated Notes due
2002 (the "Subordinated Notes") on June 15, 2000.
On May 1, 2000, the Company elected not to make interest payments of $21.2
million on its $440.0 million of 9.625% Senior Subordinated Notes due 2003 (the
"Senior Subordinated Notes") and $12.1 million on its Junior Subordinated Notes.
On June 15, 2000, the Company elected not to make interest payments of $6.0
million on its $95.8 million of 12.625% Subordinated Debentures due 2002 (the
"Subordinated Debentures") and $11.6 million on its Subordinated Notes. Also, on
June 15, 2000, the Company elected not to make a sinking fund payment of $50.0
million on its Subordinated Notes. The grace period under each of the Indentures
governing the various notes has expired constituting an Event of Default under
each such Indenture.
On July 12, 2000 (the "Petition Date"), the Company, along with its direct
and indirect parent companies and certain of its subsidiaries, filed a voluntary
petition (the "Petition") under Chapter 11 of Title 11 of the United States Code
(the "Bankruptcy Code"). The Petition was filed in the United States Bankruptcy
Court for the District of Delaware (the "Court") under case number 00-2963
through 00-2968 (the "Bankruptcy Case"). As of the Petition Date, the Company
was in arrears with respect to interest on the Senior Subordinated Notes in the
amount of $37.6 million, on the Subordinated Notes in the amount of $13.4
million, on the Subordinated Debentures in the amount of $6.9 million, and on
the Junior Subordinated Notes in the amount of $16.9 million. The Company
continued to manage its affairs and operate its business as a
debtor-in-possession ("DIP") while the Bankruptcy Case was pending. The
Bankruptcy Case was commenced to implement a prepackaged plan of reorganization
(the "Plan of Reorganization") developed jointly with an ad hoc committee of the
Company's bondholders (the "Bondholders Committee"). Members of the Bondholders
Committee hold or control $445.7 million principal amount, or approximately 46%
of the Company's total bond indebtedness outstanding. Over 99% of the principal
amount of bond indebtedness voted agreed to accept the Plan of Reorganization.
The Plan of Reorganization provided that, upon consummation of the
reorganization, current holders of the Company's bond indebtedness will receive
100% of the opening Common Stock of the reorganized Company (the "New Common
Stock"). In addition to New Common Stock, holders of the Subordinated Notes, the
Subordinated Debentures and the Junior Subordinated Notes will receive ten-year
Warrants to purchase 15% of the diluted New Common Stock of the reorganized
Company (the "New Warrants"). The New Warrants will be exercisable at the
opening reorganization equity value established in connection with the Plan of
Reorganization. Such ownership is subject to dilution from (1) the exercise of
the New Warrants, (2) the exercise of any options to purchase New Common Stock
issued pursuant to the Company's long-term management incentive plan, and (3)
the grant to the Chief Executive Officer of restricted New Common Stock.
Pursuant to the Plan of Reorganization and in full satisfaction of their
claims, (1) holders of the Senior Subordinated Notes will receive 78.24% of the
New Common Stock, (2) holders of the Subordinated Notes and the Subordinated
Debentures will receive their ratable share of 18.71% of the New Common Stock
and 75% of the New Warrants, (3) holders of the Junior Subordinated Notes will
receive 2.88% of the New Common Stock and 25% of the New Warrants, and (4)
holders of approximately $0.98 million of the 11.625% Supermarkets General
Holdings Corporation ("Holdings") Subordinated Notes due 2002, which
Subordinated Notes are guaranteed by the Company, will receive 0.17% of the New
Common Stock, subject to dilution as described in the preceding paragraph.
F-35
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statements (Unaudited)--(Continued)
Note 1. Restructuring Proceedings Under Chapter 11 of the Bankruptcy
Code--(Continued)
The Plan of Reorganization provided that holders of the Company's
Cumulative Exchangeable Redeemable Preferred Stock ("Redeemable Preferred
Stock") are to receive their ratable portions of $0.5 million in cash payable
upon the effective date of the Plan of Reorganization.
In connection with its financial restructuring plan, the Company received a
commitment from The Chase Manhattan Bank for a $75.0 million revolving credit
agreement (the "DIP Facility") in support of the Plan of Reorganization and a
$600.0 million senior secured credit facility (the "Exit Facility"). The DIP
Facility, which was approved by the Court on July 28, 2000, will enable the
Company to continue normal business operations during the restructuring
proceedings. The Exit Facility will be used to repay in full the former credit
agreement and the DIP Facility, pay expenses of the Plan of Reorganization and
provide approximately $200.0 million of liquidity for post-reorganization
operations.
On July 13, 2000, the Court approved various "first day" requests
including, among other things, the payment of prepetition claims of employees,
utilities, critical trade vendors and other key constituents. The Court also
granted the Company's motion to reject 16 unexpired real estate leases, related
to closed stores. Under Bankruptcy Law, the Company's liability to the landlord
on claims resulting from such rejections is capped at the greater of 15% of the
remaining lease payments (limited to three years' lease payments) or one year's
lease payments. Rejection of these leases, however, does not limit the Company's
obligation with respect to damages arising from the rejection of any
corresponding subleases. Outstanding claims related to these 16 rejected leases
approximate $10.6 million.
On September 7, 2000, the Court entered an order confirming the Plan of
Reorganization, and on September 19, 2000, the Company emerged from Chapter 11
bankruptcy protection and the Company's direct and indirect parent companies
merged with the Company, which became the surviving entity. Such mergers are
being accounted for in the historical financial statements at historical cost in
a manner similar to pooling-of-interests accounting. Accordingly, the historical
financial information presented herein reflect the assets and liabilities and
related results of operations of the combined entity.
Note 2. Business and Basis of Presentation
Business:
The Company operated 137 supermarkets as of July 29, 2000, primarily in the
New York, New Jersey and Philadelphia metropolitan areas.
Basis of Presentation:
The unaudited consolidated financial statements included herein have been
prepared by the Company in accordance with the same accounting principles
followed in the presentation of the Company's annual financial statements for
the year ended January 29, 2000, pursuant to the rules and regulations of the
Securities and Exchange Commission. Since the Petition Date, the Company has
operated its business as a debtor-in-possession under the Bankruptcy Code. The
American Institute of Certified Public Accountant's Statement of Position 90-7
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7") provides guidance for financial reporting by entities that have
filed petitions with a bankruptcy court and expect to reorganize under Chapter
11 of the Bankruptcy Code. In the opinion of management, the consolidated
financial statements included herein reflect all adjustments, which are of a
normal and recurring nature and are necessary to present fairly the results of
operations and financial position of the Company.
F-36
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statements (Unaudited)--(Continued)
Note 2. Business and Basis of Presentation--(Continued)
Consolidated Statement of Operations:
Expenses directly attributable to the Plan of Reorganization, including
employee retention bonuses and professional fees related to legal, accounting
and consulting services, are expensed as incurred and reported in the
consolidated statement of operations separately as reorganization items.
Interest expense on bond indebtedness, as of July 29, 2000, has been accrued
through the Petition Date, except for the Senior Subordinated Notes, which has
been accrued through September 19, 2000; such interest accrual is in accordance
with the Plan of Reorganization, presuming the Company exits from Chapter 11 on
or before September 19, 2000. Income taxes are based on the estimated effective
tax rate expected to be applicable for the full fiscal year. The Company has
recorded a valuation allowance related to the income tax benefit for the second
quarters and six-month periods of fiscal 2000 and fiscal 1999; therefore, no
income tax benefit has been recognized.
Consolidated Balance Sheet:
The consolidated balance sheet separately classifies liabilities subject to
discharge and exchange, which refer to those impaired liabilities incurred prior
to the Petition Date. The liabilities subject to discharge and exchange
represent management's best estimate in connection with the Bankruptcy Case and
may be subject to future adjustment depending on Court action, further
developments with respect to disputed claims or other events. The liabilities
subject to discharge and exchange consist of the following (dollars in
thousands):
Bond indebtedness, including accrued interest....... $ 1,034,629(a)
Preferred stock, including accrued dividends........ 241,169(a)
Rejected leases on closed stores.................... 38,226(b)
------------
Liabilities subject to discharge and exchange....... $ 1,314,024
============
----------
(a) See Note 4.
(b) Represents the liability for closed stores related to the 16
rejected leases.
Note 3. Long-Term Debt
Long-term debt, excluding liabilities subject to discharge and exchange, is
comprised of the following (dollars in thousands):
July 29, January 29,
2000 2000
----------- -----------
Term Loan............................ $ 236,213 $ 241,442
Working Capital Facility............. 105,000 109,800
DIP Facility........................ 10,300 --
Industrial revenue bonds............. 8,173 8,217
Other debt (primarily mortgages)..... 23,253 23,899
----------- ------------
Subtotal 382,939 383,358
Senior Subordinated Notes............ -- 438,844
Subordinated Notes................... -- 199,017
Holdings Subordinated Notes.......... -- 983
Subordinated Debentures.............. -- 95,750
Junior Subordinated Notes............ -- 225,133
----------- ------------
Total debt........................... 382,939(a) 1,343,085
Less: current maturities............ 382,939 78,982
----------- ------------
Long-term portion.................... $ -- $ 1,264,103
============ ============
-------------
(a) As a result of the filing of the Petition, all debt has been
classified as current (see Note 1).
F-37
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statements (Unaudited)
Note 4. Bond Indebtedness and Preferred Stock Subject to Discharge and
Exchange
Bond indebtedness subject to discharge and exchange, including accrued
interest, is comprised of the following (dollars in thousands):
Bond Accrued
Indebtedness Interest Total
------------ -------- -----------
Senior Subordinated Notes..... $ 438,933 $ 37,616 $ 476,549
Subordinated Notes............ 200,000 13,377 213,377
Subordinated Debentures....... 95,750 6,955 102,705
Junior Subordinated Notes..... 225,141 16,857 241,998
----------- --------- ----------
Bond indebtedness subject
to discharge and exchange... $ 959,824 $ 74,805 $1,034,629
=========== ========= ==========
Preferred stock subject to discharge and exchange, including accrued
dividends, is comprised of the following (dollars in thousands):
Preferred Accrued
Stock Dividends Total
--------- --------- --------
Preferred stock subject
to discharge and exchange.. $112,055 $129,114 $241,169
========= ========= ========
Note 5. Interest Expense
Interest expense is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
------------------------- -------------------------
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Term Loan............................. $ 5,518 $ 4,769 $ 10,698 $ 9,606
Working Capital Facility.............. 2,594 1,688 4,863 2,789
DIP Facility.......................... 44 -- 44 --
Senior Subordinated Notes............. 16,441 10,676 27,117 21,352
Subordinated Notes.................... 4,658 5,812 10,471 11,625
Subordinated Debentures............... 2,422 3,022 5,444 6,044
Junior Subordinated Notes............. 4,750 5,748 10,811 11,344
Amortization of debt issuance costs... 1,458 1,102 2,566 2,186
Lease obligations..................... 5,462 5,260 10,829 10,367
Other, net............................ 2,352 2,289 4,990 4,526
-------- -------- -------- --------
Interest expense...................... $ 45,699 $ 40,366 $ 87,833 $ 79,839
======== ======== ======== ========
</TABLE>
Note 6. Commitments and Contingencies
Legal Proceedings:
See Note 1, "Restructuring Proceedings under Chapter 11 of the Bankruptcy
Code".
Rickel:
In connection with the sale of its home centers segment in fiscal 1994, the
Company, as lessor, entered into ten leases for certain of the Company's owned
real estate properties, including a distribution center, with Rickel as tenant.
In addition, the Company assigned 25 third-party leases to Rickel. In 1996,
Rickel filed for bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code. Subsequent to the bankruptcy filing, of the 35 locations leased
to Rickel, 16 leases were assigned by Rickel in 1998 to Staples, Inc., 13 leases
have either been terminated, sold or assigned to third parties, including
Rickel's distribution center which was sold by the Company during fiscal 1998,
and two leases have been rejected by the Company as part of its Plan of
Reorganization. The remaining four Rickel leases, representing three sites owned
by the Company and one site jointly leased with the Company, are actively being
marketed by the Company.
F-38
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statements (Unaudited)--(Continued)
Note 6. Commitments and Contingencies--(Continued)
Information Services Outsourcing:
In August 1991, the Company entered into a ten-year agreement with IBM to
provide a wide range of information systems services. Under the agreement, IBM
has taken over the Company's data center operations and mainframe processing and
information system functions and is providing business applications and systems
designed to enhance the Company's customer service and efficiency. The charges
under this agreement are based upon the services requested at predetermined
rates. The Company may terminate the agreement upon 90 days notice with payment
of a specified termination charge. The Company is in discussions with IBM for an
extension of the agreement.
Other:
The Company is a party to a number of legal proceedings in the ordinary
course of business. Management believes that the ultimate resolution of these
proceedings will not, in the aggregate, have a material adverse impact on the
financial condition, results of operations, cash flows or business of the
Company.
F-39
<PAGE>
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
----------
For the Quarter Ended Commission File Number
October 28, 2000 1-5287
Pathmark Stores, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-2879612
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Milik Street 07008
Carteret, New Jersey (Zip Code)
Address of principal executive offices)
(732) 499-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- -----
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
---- -----
On December 1, 2000, 30,098,510 shares of common stock ($0.01 par value)
were issued and outstanding.
===============================================================================
G-1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Pathmark Stores, Inc.
Consolidated Statements of Operations (Unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
Successor
Company Predecessor Company
------- -----------------------------------------------------------
6 Weeks 7 Weeks 13 Weeks 33 Weeks 39 Weeks
Ended Ended Ended Ended Ended
October 28, September 16, October 30, September 16, October 30,
2000 2000 1999 2000 1999
--------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Sales.......................... $437,727 $499,393 $924,854 $2,348,186 $2,742,039
Cost of sales (exclusive of
depreciation and 315,050 359,734 663,794 1,688,506 1,961,191
amortization shown
separately below).............. --------- -------- --------- ---------- ----------
Gross profit................... 122,677 139,659 261,060 659,680 780,848
Selling, general and
administrative 99,582 121,593 214,813 550,059 633,575
expenses....................
Reorganization expenses........ -- 9,189 -- 19,076 --
Depreciation and amortization.. 8,743 9,049 19,111 47,603 55,720
Amortization of excess
reorganization 32,069 -- -- -- --
value....................... --------- -------- --------- ---------- ----------
Operating earnings (loss)...... (17,717) (172) 27,136 42,942 91,553
Interest expense............... (8,817) (11,298) (41,026) (99,131) (120,865)
------- -------- --------- ---------- ----------
Loss before income taxes and
extraordinary items......... (26,534) (11,470) (13,890) (56,189) (29,312)
Income tax provision........... (2,466) (23) (34) (88) (102)
------- -------- --------- ---------- ----------
Loss before extraordinary items (29,000) (11,493) (13,924) (56,277) (29,414)
Extraordinary items, net of tax
provision -- 331,928 -- 331,928 --
of $46,557..................
------- -------- --------- ---------- ----------
Net earnings (loss)............ (29,000) 320,435 (13,924) 275,651 (29,414)
Less: non-cash preferred stock
accretion and dividend
requirements.................. -- -- (9,490) (5,321) (28,453)
------- -------- --------- ---------- ----------
Net earnings (loss)
attributable to common stock... $(29,000) $320,435 $(23,414) $270,330 $(57,867)
======= ====== ====== ======== ========
Weighted average number of
shares outstanding............. 30,000
=======
Net loss per common share
- basic and diluted......... $ (0.97)
=======
</TABLE>
See notes to consolidated financial statements (unaudited).
G-2
<PAGE>
Pathmark Stores, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands except share and per share amounts)
Successor Predecessor
Company Company
------- --------
October January
28, 29,
2000 2000
------- --------
ASSETS
Current assets
Cash and marketable securities...................... $ 59,561 $ 16,196
Accounts receivable, net............................ 18,260 15,787
Merchandise inventories............................. 198,704 141,559
Prepaid expenses.................................... 20,309 21,183
Due from suppliers.................................. 53,647 53,975
Other current assets................................ 21,192 21,485
------- --------
Total current assets............................. 371,673 270,185
Property and equipment, net........................... 481,522 472,157
Deferred financing costs, net......................... 14,324 11,805
Deferred income taxes................................. -- 45,190
Excess reorganization value, net...................... 801,717 --
Other noncurrent assets............................... 113,034 43,854
------- --------
$1,782,270 $843,191
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable and book overdrafts................ $100,061 $ 89,434
Current maturities of long-term debt................ 9,545 78,982
Accrued payroll and payroll taxes................... 44,981 50,766
Current portion of lease obligations................ 21,510 25,192
Accrued interest payable............................ 5,497 26,850
Accrued expenses and other current liabilities...... 91,846 80,058
------- --------
Total current liabilities........................ 273,440 351,282
------- --------
Long-term debt........................................ 444,638 1,264,103
------- --------
Long-term lease obligations........................... 181,220 173,289
------- --------
Deferred income taxes................................. 45,987 --
------- --------
Other noncurrent liabilities.......................... 199,824 377,852
------- --------
Redeemable securities
Exchangeable preferred stock (Predecessor Company).. -- 111,038
------- --------
Commitments and contingencies
Stockholders' equity (deficiency)
Common stock (Successor Company) $0.01 par value.... 301 --
Authorized: 100,000,000 shares; issued and
outstanding: 30,098,510 shares
Common stock (Predecessor Company).................. -- 11
Preferred stock (Successor Company)................. -- --
Authorized: 5,000,000 shares; issued and
outstanding: none issued
Convertible preferred stock (Predecessor Company)... -- 4
Paid-in capital..................................... 666,969 193,677
Accumulated deficit................................. (29,000) (1,625,617)
Unamortized value of restricted stock grants........ (1,109) (2,448)
------- --------
Total stockholders' equity (deficiency).......... 637,161 (1,434,373)
------- --------
$1,782,270 $843,191
======= ========
See notes to consolidated financial statements (unaudited).
G-3
<PAGE>
<TABLE>
<CAPTION>
Pathmark Stores, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Successor
Company Predecessor Company
------- ------------------
6 Weeks 33 Weeks 39 Weeks
Ended Ended Ended
October 28, September 16, October 30,
2000 2000 1999
------- ------ ------
<S> <C> <C> <C>
Operating Activities
Net earnings (loss) ................................ $ (29,000) $ 275,651 $ (29,414)
Adjustments to reconcile net earnings (loss) to net
cash provided by
(used for) operating activities:
Depreciation and amortization .................... 9,086 49,975 58,599
Amortization of excess reorganization value ...... 32,069 -- --
Amortization of deferred financing costs ......... 241 2,500 3,283
Gain on sale or disposal of property and equipment -- (1,926) (426)
Extraordinary gain ............................... -- (331,928) --
Cash provided by (used for) operating assets and
liabilities:
Accounts receivable, net ....................... (412) (2,061) (1,710)
Merchandise inventories ........................ (19,908) (5,716) (23,636)
Due from suppliers ............................. 50 278 (2,133)
Other current assets ........................... (205) (1,131) (8,430)
Noncurrent assets .............................. (2,923) (16,076) (3,655)
Accounts payable ............................... (1,605) 12,232 6,102
Accrued interest payable ....................... 1,578 51,932 34,882
Accrued expenses and other current liabilities . 3,988 4,440 (4,842)
Noncurrent liabilities ......................... (1,365) (12,796) (24,014)
--------- -------- ---------
Cash provided by (used for) operating activities (8,406) 25,374 4,606
--------- -------- ---------
Investing Activities
Property and equipment expenditures ................ (5,125) (24,555) (37,259)
Proceeds from sale or disposal of property and 2,718 9,800 888
equipment
--------- -------- ---------
Cash used for investing activities ............ (2,407) (14,755) (36,371)
--------- -------- ---------
Financing Activities
Borrowings under the new term loan ................. -- 425,000 --
Repayment of the new term loan ..................... (1,862) -- (9,012)
Expenses related to common stock issuance .......... -- (822) --
Repayments of the former term loan ................. -- (241,442) --
Repayments of the former DIP facility .............. -- (10,300) --
Borrowings (repayments) under the former working -- (99,500) 62,700
capital facility
Repayments of other debt ........................... (165) (905) (969)
Decrease in book overdrafts ........................ -- -- (4,541)
Decrease in lease obligations ...................... (2,107) (11,591) (14,991)
Deferred financing costs ........................... -- (12,747) (431)
--------- -------- ---------
Cash provided by (used for)financing activities (4,134) 47,693 32,756
--------- -------- ---------
Increase (decrease) in cash and marketable securities (14,947) 58,312 991
Cash and marketable securities at beginning of period 74,508 16,196 7,931
--------- -------- ---------
Cash and marketable securities at end of period ...... $ 59,561 $ 74,508 $ 8,922
=========== =========== =========
Supplemental Disclosures of Cash Flow Information
Interest paid ...................................... $ 8,205 $ 40,910 $ 82,525
========== ========== =========
Income taxes paid .................................. $ -- $ 155 $ 501
========== ========== =========
Noncash Investing and Financing Activities
Capital lease obligations .......................... $ -- $ 19,181 $ 34,981
========== =========== =========
Cancellation of bond indebtedness .................. $ -- $1,034,629 $ --
========== =========== =========
Issuance of common stock and warrants .............. $ -- $ 666,882 $ --
========== =========== =========
Issuance of restricted common stock ................ $ -- $ 1,210 $ --
========== =========== =========
</TABLE>
See notes to consolidated financial statements (unaudited).
G-4
<PAGE>
Pathmark Stores, Inc.
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Reorganization
On July 12, 2000 (the "Petition Date"), Pathmark Stores, Inc. (the
"Company"), along with its direct and indirect parent companies and certain of
its subsidiaries, filed a voluntary petition (the "Petition") under Chapter 11
of Title 11 of the United States Code (the "Bankruptcy Code"). The Petition was
filed in the United States Bankruptcy Court for the District of Delaware (the
"Court") under case numbers 00-02963 through 00-2968. On September 7, 2000, the
Court entered an order confirming the Company's plan of reorganization (the
"Plan of Reorganization") and on September 19, 2000 (the "Effective Date") the
Company formally exited Chapter 11.
Consummation of the Plan of Reorganization resulted in former holders of
the Company's bond indebtedness receiving 30,000,000 shares, representing 100%
of the opening common stock of the reorganized Company (the "New Common Stock").
In addition to New Common Stock, former holders of the Company's 11.625%
Subordinated Notes due 2002 (the "Subordinated Notes"), the Company's 12.625%
Subordinated Debentures due 2002 (the "Subordinated Debentures") and the
Company's 10.75% Junior Subordinated Deferred Coupon Notes (the "Junior
Subordinated Notes") received ten-year warrants to purchase up to 5,294,118
shares of New Common Stock of the reorganized Company (the "New Warrants"). The
New Warrants are exercisable at $22.31 per share. Additionally, 98,510 shares of
restricted New Common Stock were issued to the Chief Executive Officer on
October 3, 2000. Shares of New Common Stock issued pursuant to the Plan of
Reorganization are subject to dilution from (1) the exercise of the New
Warrants, and (2) the exercise of any options to purchase New Common Stock
issued pursuant to the Company's Employee Plan and Directors' Plan (as defined
in Note 11).
Pursuant to the Plan of Reorganization and in full satisfaction of their
claims, (1) former holders of the Company's 9.625% Senior Subordinated Notes
(the "Senior Subordinated Notes") received 78.24% of the New Common Stock, (2)
former holders of the Subordinated Notes and the Subordinated Debentures
received their ratable share of 18.71% of the New Common Stock and 75% of the
New Warrants, (3) former holders of the Junior Subordinated Notes received 2.88%
of the New Common Stock and 25% of the New Warrants, and (4) former holders of
the 11.625% Supermarkets General Holdings Corporation ("Holdings") Subordinated
Notes due 2002 received 0.17% of the New Common Stock, subject to dilution as
described herein. In addition, former holders of Holdings' Cumulative
Exchangeable Redeemable Preferred Stock (the "Exchangeable Preferred Stock")
received their ratable portions of $0.5 million in cash payable upon the
Effective Date. The Company's New Common Stock and New Warrants trade on the
Nasdaq Stock Market under the ticker symbols "PTMK" and "PTMKW", respectively.
On the Effective Date, in connection with the consummation of the Plan of
Reorganization, the Company entered into a $600 million senior secured credit
facility (the "Exit Facility") with a group of lenders led by The Chase
Manhattan Bank. The Exit Facility includes a $425 million term loan (the "New
Term Loan") and a $175 million working capital facility (the "New Working
Capital Facility"). Proceeds from the Exit Facility were used to repay in full
the former bank credit agreement and the revolving credit agreement the Company
had entered into in support of the Plan of Reorganization (the "DIP Facility")
and will be used to provide liquidity for ongoing operations. In addition, the
Company's direct and indirect parent companies merged with the Company, which
became the surviving entity.
Note 2. Business and Basis of Presentation
Business:
The Company operated 138 supermarkets as of October 28, 2000, primarily in
the New York, New Jersey and Philadelphia metropolitan areas.
Basis of Presentation:
Pursuant to the Plan of Reorganization, which became effective September
19, 2000, the Company's direct and indirect parent companies merged with the
Company, which became the surviving entity. Such mergers are being accounted for
in the historical financial statements at historical cost in a manner similar to
pooling-of-interests accounting. Accordingly, the historical financial
information of the Predecessor Company are presented at historical cost and
reflects the assets and liabilities and related results of operations of the
combined entity.
G-5
<PAGE>
Pathmark Stores, Inc.
Note 2. Business and Basis of Presentation--(Continued)
The unaudited consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). In the opinion of management, the
consolidated financial statements included herein reflect all adjustments which
are of a normal and recurring nature and are necessary to present fairly the
results of operations and financial position of the Company. This report should
be read in conjunction with the financial statements and notes thereto included
in the Company's Amendment No. 1 to Form S-1 as filed with the SEC on October
19, 2000.
Fresh-Start Reporting:
Upon the Effective Date, the Company adopted fresh-start reporting in
accordance with American Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting By Entities in Reorganization Under the
Bankruptcy Code" ("Fresh-Start Reporting"). Fresh-Start Reporting is adopted
because holders of existing voting shares immediately before filing and
confirmation of the Plan of Reorganization received less than 50% of the voting
shares of the emerging entity, thereby resulting in a new control group, and the
reorganization value of the emerging entity is less than its prepetition
liabilities and allowed claims. In connection with the adoption of Fresh-Start
Reporting, a new entity has been deemed created for financial reporting
purposes. The periods presented prior to the Effective Date have been designated
"Predecessor Company" and the period subsequent to the Effective Date has been
designated "Successor Company". September 16, 2000, the Saturday nearest the
Effective Date, was utilized for the accounting closing date related to the
Predecessor Company financial statements. As a result of the implementation of
Fresh-Start Reporting and the substantial debt reduction resulting from the
completion of the Company's Plan of Reorganization, the financial position and
results of operations of the Predecessor and Successor Company are not
comparable.
In accordance with Fresh-Start Reporting, the Company and its advisors,
along with representatives of the bondholders, determined the reorganization
value of the reorganized company. This value has been allocated, based on
estimated fair market value, to the Company's assets and liabilities, resulting
in an intangible asset equal to the reorganization value in excess of amounts
allocable to identifiable net assets. Such excess is classified as "excess
reorganization value, net" in the accompanying consolidated balance sheet and is
being amortized on a straight-line basis over a three-year period. The
adjustments related to Fresh-Start Reporting are preliminary and may differ from
the amounts ultimately determined.
The reorganization value at the Effective Date related to the Plan of
Reorganization is as follows (in thousands):
Debt and capital leases, net of cash.............. $ 633,118
Stockholders' equity, on the Effective Date....... 666,882
----------
Reorganization value.............................. $1,300,000
==========
The preliminary Fresh-Start Reporting adjustments are as follows (in
thousands):
Stockholders' deficiency, pre-Fresh-Start Reporting.......... $ (256,208)
Adjustments to assets and liabilities to reflect estimated
fair values:
Increase (decrease) in assets:
Current assets and property and equipment (a)........... 57,438
Other noncurrent assets (b)............................. 50,525
Deferred income taxes (c)............................... (44,979)
Decrease in liabilities:
Accrued expenses and other noncurrent liabilities (d)... 26,320
Excess reorganization value (e).......................... 833,786
---------
Stockholders' equity, on the Effective Date................. $ 666,882
=========
(a) Primarily related to merchandise inventories and property and equipment,
including capital leases.
(b) Primarily related to the excess of pension plan assets over projected
benefit obligations.
(c) Primarily related to the tax effects of the Fresh-Start Reporting
adjustments.
(d) Primarily related to the liability for postretirement benefits.
(e) The excess reorganization value is being amortized over three years.
G-6
<PAGE>
Pathmark Stores, Inc.
Note 2. Business and Basis of Presentation--(Continued)
Net Loss Per Share:
The net loss per share is computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 requires that entities present, on the face of the income statement
for all periods reflected, basic and diluted per share amounts. Basic earnings
per share is computed using the weighted average number of common shares
outstanding for the period. Diluted earnings per share is computed using the
weighted average number of common shares outstanding for the period adjusted for
dilutive potential common shares. Weighted average outstanding shares, for both
basic and diluted loss per share, was 30,000,000 shares for the 6 weeks ended
October 28, 2000. The 98,510 shares of restricted stock issued on October 3,
2000 (see Note 10) were excluded from the calculations of basic loss per share
as such shares do not vest until the first anniversary of the Effective Date.
All stock options, warrants and restricted stock were excluded from the
computation of the Company's diluted loss per share because their effect would
have been anti-dilutive. Net loss per share data is not meaningful for periods
prior to September 16, 2000 due to the significant change in the Company's
capital structure.
Note 3. Reorganization Expenses
Reorganization expenses of $19.1 million consisted primarily of
professional fees related to legal, accounting and consulting services directly
attributable to the Plan of Reorganization and employee retention bonuses.
Note 4. Income Taxes
Predecessor Company:
The Company has recorded a valuation allowance related to the income tax
benefit for the 7 weeks and 33 weeks ended September 16, 2000 and for the 13
weeks and 39 weeks ended October 30, 1999; therefore, no income tax benefit has
been recognized for such periods.
Successor Company:
The tax provision for the 6 weeks ended October 28, 2000 is based on
statutory rates, excluding the non-deductible amortization of excess
reorganization value.
As a result of the exchange of the former bond indebtedness for common
stock and warrants, the amount of the Company's aggregate indebtedness was
reduced, generating income from the cancellation of debt for tax purposes of
approximately $350.0 million. Since the realization of such income occurred
under the Bankruptcy Code, the Company will not recognize income from
cancellation of debt for tax purposes, but instead will reduce certain tax
attributes after the end of the current fiscal year. The Company anticipates
that it will first elect to reduce the basis of its depreciable property and,
with the remaining income from the cancellation of debt, reduce its net
operating loss tax carryforwards. Accordingly, the Company will reduce the tax
benefits attributable to depreciation that would have otherwise been claimed in
future years. The Company's net operating loss tax carryforwards for federal
income tax purposes, after such attribute reduction, is estimated to be $77.0
million. Such net operating loss tax carryforwards expire from fiscal 2008
through fiscal 2020 and are subject to an annual limitation of approximately
$36.0 million.
The Company's deferred income tax liability at October 28, 2000 was $46.0
million and included a valuation allowance of approximately $25.0 million,
primarily related to capital loss carryforwards which expire in fiscal 2001 and
certain state net operating loss tax carryforwards.
Note 5. Extraordinary Items
The extraordinary items of $331.9 million, net of a tax provision of $46.6
million, for the 7 and 33 weeks ended September 16, 2000 are comprised of income
from the cancellation of debt in connection with the exchange of bond
indebtedness and accrued interest for common stock and warrants, as well as
income from the reduction of lease liabilities, net of estimated landlord
claims,
G-7
<PAGE>
Pathmark Stores, Inc.
Note 5. Extraordinary Items--(Continued)
attributable to the rejection of certain leases in connection with the Plan of
Reorganization; such income is reduced by the write-off of deferred financing
costs related to the former debt. The tax provision of such cancellation of debt
income is based on the deferred tax impact of the tax attribute reductions, net
of the valuation allowance reversal related to certain deferred tax assets.
Note 6. Cash and Marketable Securities
Cash and marketable securities are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
-------- ---------
October 28, January 29,
2000 2000
-------- ---------
<S> <C> <C>
Cash ...................................................... $ 13,114 $ 16,196
Marketable securities ..................................... 46,447 --
-------- --------
Cash and marketable securities ............................ $ 59,561 $ 16,196
======== ========
</TABLE>
Note 7 Inventories
Merchandise inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
-------- ---------
October 28, January 29,
2000 2000
-------- ---------
<S> <C> <C>
Merchandise inventories at FIFO cost ...................... $199,220 $180,996
Less: LIFO reserve ........................................ 516 39,437
-------- --------
Merchandise inventories at LIFO cost ...................... $198,704 $141,559
======== ========
</TABLE>
In connection with the implementation of Fresh-Start Reporting, the Company
adjusted its merchandise inventories to reflect fair value on the Effective
Date.
Note 8. Long-Term Debt
Long-term debt is comprised of the following (in thousands):
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
-------- ---------
October 28, January 29,
2000 2000
-------- ---------
<S> <C> <C>
New Term Loan............................................. $423,138 $ --
Former Term Loan.......................................... -- 241,442
Former Working Capital Facility........................... -- 109,800
Industrial revenue bonds.................................. 8,150 8,217
Other debt (primarily mortgages).......................... 22,895 23,899
-------- ---------
Subtotal.............................................. 454,183 383,358
Senior Subordinated Notes................................. -- 438,844
Subordinated Notes........................................ -- 200,000
Subordinated Debentures................................... -- 95,750
Junior Subordinated Notes................................. -- 225,133
-------- ---------
Total debt................................................ 454,183 1,343,085
Less: current maturities.................................. 9,545 78,982
-------- ---------
Long-term portion......................................... $444,638 $1,264,103
======== =========
</TABLE>
G-8
<PAGE>
Pathmark Stores, Inc.
Note 8. Long-Term Debt--(Continued)
On September 19, 2000, the Company entered into the Exit Facility,
which includes the New Term Loan and the New Working Capital Facility. The Exit
Facility bears interest at floating rates, ranging from LIBOR plus 3% to LIBOR
plus 4%. The Company is required to repay a portion of its borrowings under the
New Term Loan each year, so as to retire such indebtedness in its entirety by
July 15, 2007. Under the New Working Capital Facility, which expires on July 15,
2005, the Company can borrow an amount up to $175 million, including a maximum
of $125 million in letters of credit. At October 28, 2000, no borrowings were
made under the New Working Capital Facility and $36.1 million in letters of
credit were outstanding.
Note 9. Interest Expense
Interest expense is comprised of the following (in thousands):
<TABLE>
<CAPTION>
Successor
Company Predecessor Company
------- -----------------------------------------------------------
6 Weeks 7 Weeks 13 Weeks 33 Weeks 39 Weeks
Ended Ended Ended Ended Ended
October 28, September 16, October 30, September 16, October 30,
2000 2000 1999 2000 1999
--------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Term Loan ............... $ 4,925 $ 3,314 $ 4,932 $ 14,012 $ 14,538
Working Capital Facility -- 1,155 1,778 6,062 4,567
DIP Facility ............ -- 2,183 -- 2,539 --
Senior Subordinated Notes -- -- 10,677 27,117 32,029
Subordinated Notes ...... -- -- 5,812 10,419 17,437
Subordinated Debentures . -- -- 3,022 5,444 9,066
Junior Subordinated Notes -- -- 5,902 10,811 17,246
Amortization of deferred 241 336 1,097 2,500 3,283
financing costs
Other, net .............. 3,651 4,310 7,806 20,227 22,699
-------- -------- -------- -------- --------
Interest expense ........ $ 8,817 $ 11,298 $ 41,026 $ 99,131 $120,865
======== ======== ======== ======== ========
</TABLE>
Note 10. Chief Executive Officer Employment Agreement
Pursuant to the Plan of Reorganization, the Company's employment agreement
with its Chief Executive Officer (the "CEO") has been extended until October 8,
2005 (the "Employment Agreement"). In addition to the Employment Agreement, the
Company and the CEO entered into an agreement in fiscal 2000 which provides
that, under the circumstances described below, the CEO shall receive a retention
bonus and a sale bonus. The retention bonus is intended to encourage the CEO to
remain employed by the Company for at least one year subsequent to the Effective
Date. Pursuant to said retention and sale bonus agreement, the CEO received a
payment of $2.0 million in August 2000 and received 98,510 shares of restricted
New Common Stock of the Company on October 3, 2000. The restricted stock will
vest on the first anniversary of the Effective Date, if the CEO is employed on
that date. The restricted stock award was valued at $1.2 million and is being
amortized as compensation expense in the Company's consolidated statement of
operations over the vesting period.
In addition to the retention bonus, under certain circumstances, the CEO
will become entitled to receive a sale bonus. This will occur in the event that
a triggering event occurs during the term of the agreement and a change in
control contemplated by such event occurs thereafter. The amount of the sale
bonus shall be equal to 0.0043 multiplied by an amount equal to the sum of the
aggregate fair market value of any securities issued and any other non-cash
consideration delivered, and any cash consideration paid to the Company or their
security holders in connection with such change of control, plus the amount of
all indebtedness of the Company which is assumed or acquired by any purchaser in
connection with a change in control or retired or defeased in connection with
such change in control.
G-9
<PAGE>
Pathmark Stores, Inc.
Note 11. Common Stock, Options, Warrants and Preferred Stock Outstanding
On the Effective Date, pursuant to the Plan of Reorganization, the Company
issued 30,000,000 shares of New Common Stock and ten-year warrants to purchase
5,294,118 shares of New Common Stock at an exercise price of $22.31 per share in
exchange for approximately $1.0 billion in bond indebtedness. The Company also
issued 98,510 shares of restricted New Common Stock to the CEO on October 3,
2000, in accordance with his retention bonus and sale bonus agreement. As of
October 28, 2000, 30,098,510 shares of New Common Stock were outstanding.
The 2000 Employee Equity Plan (the "Employee Plan") was also implemented as
of the Effective Date. The Employee Plan makes available the granting of options
aggregating 5,164,118 shares of New Common Stock. All of the Company's officers
and certain employees are eligible to receive options under the Employee Plan.
On October 25, 2000, options aggregating 2,080,200 shares were granted to
certain officers and employees of the Company. Options for additional shares may
be granted by the Board of Directors' Compensation Committee.
The Company also implemented the 2000 Non-Employee Directors' Plan (the
"Directors' Plan") as of the Effective Date. The Directors' Plan makes available
to the Company's directors, who are not officers of the Company, options to
acquire up to 130,000 shares of New Common Stock. On October 25, 2000, options
aggregating 15,000 shares were granted under the Directors' Plan.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") defines a fair value based method of
accounting for an employee stock option by which compensation cost is measured
at the grant date based on the fair value of the award and is recognized over
the service period. A Company may elect to adopt SFAS No. 123 or elect to
account for its stock option or similar equity awards using the method of
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"), by which compensation cost is
measured at the date of grant based on the excess of the market value of the
underlying stock over the exercise price. No compensation expense has been
recognized in the accompanying consolidated financial statements relative to the
Company's Employee and Directors' Plans because the options were granted at fair
value.
The Company is also authorized to issue 5,000,000 shares of preferred
stock. No such shares have been issued.
Note 12. Commitments and Contingencies
Information Services Outsourcing:
In August 1991, the Company entered into a ten-year agreement with IBM to
provide a wide range of information systems services. Under the agreement, IBM
has taken over the Company's data center operations and mainframe processing and
information system functions and is providing business applications and systems
designed to enhance the Company's customer service and efficiency. The charges
under this agreement are based upon the services requested at predetermined
rates. The Company may terminate the agreement upon 90 days notice with payment
of a specified termination charge. The Company is in discussions with IBM for an
extension of the agreement.
Other:
The Company is a party to a number of legal proceedings in the ordinary
course of business. Management believes that the ultimate resolution of these
proceedings will not, in the aggregate, have a material adverse impact on the
financial condition, results of operations, cash flows or business of the
Company.
Note 13. Subsequent Event
On December 5, 2000, the Company announced the signing of a letter of
intent to acquire six Grand Union supermarkets from C&S Wholesale Grocers, Inc.
("C&S") which, in turn, is buying the stores from the Grand Union Company,
subject to Bankruptcy Court approval. The Company's acquisition of these stores
is subject to the signing of a definitive agreement with C&S, C&S' consummation
of its purchase from Grand Union and various governmental approvals. The six
stores are all located in New York and New Jersey. These six stores average
40,000 square feet in space and generated annual sales of approximately $120
million. The Company expects to close the transaction with C&S in the first
quarter of fiscal 2001.
G-10
<PAGE>
Pathmark Stores, Inc.
G-26
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
As discussed in Note 1 to the accompanying consolidated financial
statements, the Company formally exited from Chapter 11 effective September 19,
2000. For financial reporting purposes, the Company accounted for the
consummation of the Plan of Reorganization effective September 16, 2000.
Fresh-Start Reporting has resulted in significant changes to the valuation of
certain of the Company's assets and liabilities, and to its stockholders'
equity. With the adoption of Fresh-Start Reporting, a new entity has been deemed
created for financial reporting purposes. The periods prior to the Effective
Date have been designated "Predecessor Company" and the period subsequent to the
Effective Date has been designated "Successor Company". For purposes of the
discussion of Results of Operations for the 13 weeks and the 39 weeks ended
October 28, 2000, the results of the Predecessor Company and Successor Company
have been combined.
Results of Operations
The following table sets forth selected consolidated statements of
operations data (in millions):
<TABLE>
<CAPTION>
Successor Predecessor Combine Predecessor Successor Predecessor Combined Predecessor
Company Company Results Company Company Company Results Company
--------- ----------- ------- ----------- --------- ----------- --------- ----------
6 Weeks 7 Weeks 13 Weeks 13 Weeks 6 Weeks 33 Weeks 39 Weeks 39 Weeks
Ended Ended Ended Ended Ended Ended Ended Ended
October 28, September 16, October 28, October 30, October 28, September 16, October 28, October 30
2000 2000 2000 2000 2000 2000 2000 2000
--------- ----------- ------- ----------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................ $437.7 $499.4 $937.1 $924.8 $437.7 $2,348.2 $2,785.9 $2,742.0
Gross profit......... 122.6 139.7 262.3 261.0 122.6 659.7 782.3 780.8
Selling, general and
administrative 99.5 121.6 221.1 214.8 99.5 550.1 649.6 633.6
expenses.............
Reorganization -- 9.2 9.2 -- -- 19.1 19.1 --
expenses.............
Depreciation and 8.7 9.1 17.8 19.1 8.7 47.6 56.3 55.7
amortization.........
Amortization of excess
reorganization value 32.1 -- 32.1 -- 32.1 -- 32.1 --
Operating earnings (17.7) (0.2) (17.9) 27.1 (17.7) 42.9 25.2 91.5
(loss)...............
Interest expense..... (8.8) (11.3) (20.1) (41.0) (8.8) (99.1) (107.9) (120.9)
Income tax provision. (2.5) -- (2.5) -- (2.5) (0.1) (2.6) --
Extraordinary items.. -- 331.9 331.9 -- -- 331.9 331.9 --
Net earnings (loss).. (29.0) 320.4 291.4 (13.9) (29.0) 275.6 246.6 (29.4)
</TABLE>
Sales: Sales in the third quarter of fiscal 2000 were $937.1 million
compared to $924.8 million in the prior year, an increase of 1.3%. For the
nine-month period of fiscal 2000, sales were $2.8 billion compared to $2.7
billion in the prior year, an increase of 1.6%. The sales increase was primarily
due to new stores opened in fiscal 2000. Same store sales decreased 0.5% in the
third quarter of fiscal 2000 and were flat for the nine-month period of fiscal
2000. The Company operated 138 and 134 supermarkets at the end of the third
quarters of fiscal 2000 and fiscal 1999, respectively.
Gross Profit: Gross profit in the third quarter of fiscal 2000 was $262.3
million or 28.0% of sales compared with $261.0 million or 28.2% of sales in the
prior year. For the nine-month period of fiscal 2000, gross profit was $782.3
million or 28.1% of sales compared to $780.8 million or 28.5% for the prior
year. The increase in gross profit of $1.3 million for the third quarter of
fiscal 2000 compared to the prior year and $1.5 million for the nine-month
period of fiscal 2000 compared to the prior year was primarily due to higher
sales, offset by higher shrink and promotional expenses. The cost of goods sold
comparisons were affected by a pretax LIFO charge of $0.6 million in the third
quarter of fiscal 2000 compared to $0.4 million in the prior year and a pretax
LIFO charge of $1.4 million in the nine-month period of fiscal 2000 compared to
$1.2 million in the prior year.
G-11
<PAGE>
Pathmark Stores, Inc.
Selling, General and Administrative Expenses ("SG&A"): SG&A in the third
quarter of fiscal 2000 increased $6.3 million or 3.0% compared to $214.8 million
in the prior year and $16.0 million or 2.5% in the nine-month period of fiscal
2000 compared to $633.6 million in the prior year. The increase in SG&A in the
third quarter and the nine-month period of fiscal 2000 compared to the prior
year was primarily due to higher expenses related to store labor and related
benefits. Included in the nine-month periods were gains on the sale of certain
real estate of $1.8 million and $0.4 million in fiscal 2000 and fiscal 1999,
respectively. As a percentage of sales, SG&A was 23.6% in the third quarter and
23.3% in the nine-month period of fiscal 2000, compared to 23.2% in the third
quarter and 23.1% in the nine-month period of fiscal 1999.
Reorganization Expenses: Reorganization expenses in the third quarter and
the nine-month period of fiscal 2000 were $9.2 million and $19.1 million,
respectively. Such items primarily consist of professional fees related to
legal, accounting and consulting services directly attributable to the Plan of
Reorganization and employee retention bonuses.
Depreciation and Amortization: Depreciation and amortization of $17.8
million in the third quarter of fiscal 2000 was $1.3 million lower than the
$19.1 million in the prior year primarily due to the impact of lower capital
expenditures in fiscal 2000. For the nine-month period of fiscal 2000,
depreciation and amortization was $56.3 million compared to $55.7 million in the
prior year. Depreciation and amortization excludes video tape amortization,
which is recorded in cost of goods sold, of $0.1 million and $1.0 million in the
third quarters of fiscal 2000 and fiscal 1999, respectively, and $2.2 million
and $2.6 million in the nine-month periods of fiscal 2000 and fiscal 1999,
respectively.
Amortization of Excess Reorganization Value: Excess reorganization value of
$833.8 million is being amortized over three years. Amortization expense for the
6 weeks ended October 28, 2000 was $32.1 million.
Operating Earnings (Loss): The operating loss in the third quarter of
fiscal 2000 was $17.9 million compared to operating earnings in the prior year
of $27.1 million. For the nine-month period of fiscal 2000, operating earnings
were $25.2 million compared to $91.5 million in the prior year. The decrease in
operating earnings in the third quarter and the nine-month period of fiscal 2000
compared to the prior year was due to the amortization of the excess
reorganization value and reorganization expenses.
Interest Expense: Interest expense was $20.1 million in the third quarter
of fiscal 2000 compared to $41.0 million in the prior year and $107.9 million
for the nine-month period of fiscal 2000 compared to $120.9 million in the prior
year. The decrease in interest expense in the third quarter and the nine-month
period of fiscal 2000 compared to the prior year was primarily due to the
cancellation of bond indebtedness under the Plan of Reorganization. Interest
expense on bond indebtedness, as of July 29, 2000, was accrued through the
Petition Date, except for the Senior Subordinated Notes, which was accrued
through September 19, 2000; such interest accrual was in accordance with the
allocations set forth in the Plan of Reorganization.
Income Tax Provision: Refer to Note 4 of the consolidated financial
statements for information related to the Company's income taxes. During the
nine-month period of fiscal 2000, the Company made income tax payments of $0.2
million and received income tax refunds of $0.4 million. During the nine-month
period of fiscal 1999, the Company made income tax payments of $0.5 million and
received income tax refunds of $0.09 million.
G-12
<PAGE>
Pathmark Stores, Inc.
Extraordinary Items: The extraordinary items of $331.9 million, net of a
tax provision of $46.6 million, for the 7 and 33 weeks ended September 16, 2000
are comprised of income from the cancellation of debt in connection with the
exchange of bond indebtedness and accrued interest for common stock and
warrants, as well as income from the reduction of lease liabilities, net of
estimated landlord claims, attributable to the rejection of certain leases in
connection with the Plan of Reorganization; such income is reduced by the
write-off of deferred financing costs related to the former debt. The tax
provision of such cancellation of debt income is based on the deferred tax
impact of the tax attribute reductions, net of the valuation allowance reversal
related to certain deferred tax assets.
Summary of Operations: The Company's net earnings in the third quarter of
fiscal 2000 were $291.4 million compared to a net loss of $13.9 million for the
prior year. For the nine-month period of fiscal 2000, the Company's net earnings
were $246.6 million compared to a net loss of $29.4 million in the prior year.
The increase in net earnings in the third quarter and nine-month period of
fiscal 2000 compared to the prior year was primarily due to the extraordinary
items.
Comprehensive Income (Loss): The Company has no items of comprehensive
income (loss) other than net earnings (loss) and, accordingly, the total
comprehensive income (loss) is the same as the reported net earnings (loss) for
all periods presented.
EBITDA-FIFO: EBITDA-FIFO was $42.0 million and $47.8 million in the third
quarters of fiscal 2000 and fiscal 1999, respectively and $135.0 million and
$150.9 million for the nine-month period of fiscal 2000 and fiscal 1999,
respectively. EBITDA-FIFO represents net earnings before interest, income taxes,
depreciation, amortization, reorganization expenses, the gain on sale of real
estate and the LIFO charge. While EBITDA-FIFO is a widely accepted financial
indicator of a company's ability to service and/or incur debt, it should not be
construed as an alternative to, or a better indicator of, operating earnings or
of cash flows from operating activities, as determined in accordance with
generally accepted accounting principles. EBITDA-FIFO may not be comparable to
similarly titled measures reported by other companies.
Financial Condition
Debt Service and Liquidity: As a result of the substantial debt reduction
resulting from the completion of the Plan of Reorganization on September 19,
2000, the Company's debt service and liquidity have improved significantly
compared to the Predecessor Company's financial condition.
In connection with its financial restructuring plan, the Company received a
commitment from The Chase Manhattan Bank for a $75 million DIP Facility in
support of the Plan of Reorganization and a $600 million Exit Facility. The DIP
Facility enabled the Company to continue normal business operations during the
restructuring proceedings. The Exit Facility, which closed on September 19,
2000, was used to repay in full the former credit agreement and the DIP
Facility, pay expenses of the Plan of Reorganization and provide liquidity for
post-reorganization operations.
The Exit Facility includes a New Term Loan of $425 million and a New
Working Capital Facility of $175 million and bears interest at floating rates,
ranging from LIBOR plus 3% to LIBOR plus 4%. The Company is required to repay a
portion of its borrowings under the New Term Loan each year, so as to retire
such indebtedness in its entirety by July 15, 2007. Under the New Working
Capital Facility, which expires on July 15, 2005, the Company can borrow an
amount up to $175 million, including a maximum of $125 million in letters of
credit. At October 28, 2000 and December 6, 2000, no borrowings have been made
under the New Working Capital Facility. Letters of credit of $36.1 million and
$35.4 million were outstanding at October 28, 2000 and December 6, 2000,
respectively. The Company's liquidity also included marketable securities of
$46.4 million and $54.0 million at October 28, 2000 and December 6, 2000,
respectively.
The Exit Facility restricts, among other things, the payment of cash
dividends and the redemption of common stock. Other provisions of the Exit
Facility limit the amount of obligations under leases and capital expenditures
in excess of specified amounts. The Company is also required to meet certain
financial covenants including maximum leverage, minimum interest coverage and
minimum cash flow. The Company was in compliance with all covenants under the
Exit Facility at October 28, 2000.
G-13
<PAGE>
Pathmark Stores, Inc.
The principal payments of the New Term Loan are as follows (in millions):
Fiscal Years Principal Payments
------------ ------------------
2000...................... $ 3.6
2001...................... 10.4
2002...................... 16.6
2003...................... 26.0
2004...................... 44.8
2005...................... 102.4
2006...................... 147.5
2007...................... 73.7
-----
Total..................... $425.0
=====
Capital Expenditures: Capital expenditures in the third quarter of fiscal
2000, including property acquired under capital leases, were $11.1 million
compared to $24.5 million in the prior year and in the nine-month period of
fiscal 2000 were $48.9 million compared to $72.2 million in the prior year.
During the nine-month period of fiscal 2000, the Company opened four new stores,
including one replacement store and renovated nine stores. During the remainder
of fiscal 2000, the Company expects to complete an additional 12 renovations.
Capital expenditures for fiscal 2000, including property to be acquired under
capital leases, are estimated to be $70 million. Management believes that cash
flows generated from operations, supplemented by the unused borrowing capacity
under the New Working Capital Facility, its marketable securities and the
availability of capital lease financing, will be sufficient to provide for the
Company's capital expenditure program.
Cash Flows: The following table sets forth certain consolidated
statements of cash flows data (in thousands):
<TABLE>
<CAPTION>
Successor Predecessor Combined Predecessor
Company Company Results Company
--------- ----------- -------- -----------
6 Weeks 33 Weeks 39 Weeks 39 Weeks
Ended Ended Ended Ended
October 28, September 16, October 28, October 30,
2000 2000 2000 1999
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Cash provided by (used for) operating $(8,406) $25,374 $16,968 $4,606
activities............................
Cash (used for) investing activities.. (2,407) (14,755) (17,162) (36,371)
Cash provided by (used for) financing (4,134) 47,693 43,559 32,756
activities............................
</TABLE>
Cash provided by operating activities was $17.0 million in the nine-month
period of fiscal 2000 compared to $4.6 million in the prior year. The increase
in cash flow from operating activities was primarily due to the reduction in
cash interest paid due to the Plan of Reorganization, partially offset by the
decrease in cash used for other operating assets and liabilities. Cash used for
investing activities was $17.2 million in the nine-month period of fiscal 2000
compared to $36.4 million in the prior year. The decrease in cash flow from
investing activities was primarily due to a decrease in expenditures for
property and equipment and an increase in proceeds from property sales or
disposals. Cash provided by financing activities was $43.6 million in the
nine-month period of fiscal 2000 compared to $32.8 million in the prior year.
The increase in cash flow from financing activities was primarily due to the
impact of the Plan of Reorganization.
New Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 represents a
comprehensive framework of accounting rules that standardizes the accounting for
all derivatives. SFAS No. 133 applies to all entities and to all types of
derivatives. In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FASB Statement No. 133", which delayed the
effective date of SFAS No. 133 for all fiscal quarters of fiscal years beginning
after June 15, 2000. In June 2000, the FASB issued Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities"
G-14
<PAGE>
("SFAS No. 138"), an amendment of SFAS No. 133. The Company has determined that
the adoption of SFAS No. 133 and SFAS No. 138 will not affect its financial
position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
No. 101"). SAB No. 101 provides guidance on the recognition, presentation and
disclosure of revenue, and is effective for the Company in its quarter ending
February 3, 2001. The Company believes that SAB No. 101 will not affect its
financial position or results of operations.
Forward-Looking Information
This report contains certain "forward-looking statements" (within the
meaning of the Private Securities Litigation Reform Act of 1995) about the
future performance of the Company which are based on management's assumptions
and beliefs in light of the information currently available to it. The Company
assumes no obligation to update the information contained herein. These
forward-looking statements are subject to uncertainties and other factors that
could cause actual results to differ materially from such statements including,
but not limited to, competitive practices, including store openings and
remodels, and pricing and promotional activity in the food industry generally
and particularly in the Company's principal markets; the Company's relationships
with its employees and the terms of future collective bargaining agreements; the
costs of other legal and administrative cases and proceedings; the nature and
extent of continued consolidation in the food industry; availability and terms
of financing; supply or quality control problems with the Company's vendors and
changes in economic conditions which affect the spending patterns of the
Company's customers.
For additional information about the Company and its various risk factors,
see the Company's Amendment No. 1 to Form S-1 as filed with the SEC on October
19, 2000 and other documents as filed with the SEC.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact the 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 New Term Loan and
borrowing activities under the New 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.
G-15
<PAGE>
Pathmark Stores, Inc.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously disclosed in the Company's Annual Report on Form 10-K for the
year ended January 29, 2000, on December 16, 1999, Koninklijke Ahold, N.V.
("Ahold") terminated the Merger Agreement dated March 9, 1999 by and among
Ahold, an affiliate of Ahold, and the Company (the "Merger Agreement"), claiming
that despite its best efforts, it could not obtain necessary antitrust clearance
from government regulators. That same day, Ahold filed a complaint in the
Supreme Court, State of New York, County of New York (the "Court"), against the
Company seeking a declaratory judgment that Ahold had used its "best efforts"
under the Merger Agreement. On January 18, 2000, the Company filed its Answer
and Counterclaims, denying Ahold's assertion that it used its best efforts to
consummate the Merger Agreement. Additionally, the Company asserted
counterclaims against Ahold for (i) breach of contract by failure to use best
efforts; (ii) breach of the covenant of good faith and fair dealing; and (iii)
unfair competition. The Company has requested compensatory damages in an
unspecified amount.
On February 7, 2000, Ahold answered the Company's counterclaims and denied
the allegations contained therein and filed an Amended Complaint seeking
declarations that (i) the "best efforts" clause in the Merger Agreement is
unenforceable; (ii) the "best efforts" clause is enforceable and Ahold did not
breach that clause; and (iii) Ahold properly terminated the Company's Merger
Agreement. Additionally, Ahold alleged that the Company breached the "best
efforts" clause of the Company's Merger Agreement and has requested compensatory
damages in an unspecified amount. The Company filed its amended answer and the
amended complaint and amended counterclaims on February 27, 2000.
In April 2000, the Company filed a motion seeking partial summary judgment
in its favor on Ahold's claim for a declaratory judgment that the "best efforts"
provisions in the Merger Agreement are unenforceable. Ahold opposed the motion
and cross moved for summary judgment on the same claim. On December 6, 2000, the
Court indicated that it intended to enter an order granting Ahold's motion for
partial summary judgment regarding the Company's counterclaim alleging that
Ahold had failed to comply with the "best efforts" provision of the Merger
Agreement. If such an order is entered, the Company intends to take all
appropriate action to have that order vacated through either a motion for
reconsideration filed with the Court or an appeal to the New York State Supreme
Court, Appellate Division. Notwithstanding the Court's order, the Company has
two viable counterclaims against Ahold that it intends to pursue.
Item 2. Change In Securities
On September 19, 2000, the Company consummated its plan of reorganization
(the "Plan of Reorganization"). In connection with the Plan of Reorganization,
the Company canceled its former bond indebtedness, common stock and preferred
stock. There are 100,000,000 shares of common stock authorized under the
Company's Certificate of Incorporation. Of such authorized shares, 30,000,000
shares have been distributed to the holders of the former bond indebtedness and
98,510 shares have been issued to the Chief Executive Officer. In addition, the
Company also issued warrants to purchase 5,294,118 shares of common stock, with
an exercise price of $22.31 per share.
Item 5. Other Information
The Company's common stock and warrants are currently trading on the Nasdaq
Stock Market under the ticker symbols "PTMK" AND "PTMKW", respectively.
G-16
<PAGE>
Pathmark Stores, Inc.
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits:
Exhibit 27-1 -- Financial Data Schedule, for the 6 weeks ended
October 28, 2000.
Exhibit 27.2 -- Financial Data Schedule, for the 33 weeks ended
September 16, 2000.
(b) Report on Form 8-K: A current report on Form 8-K, dated September 22,
2000, relating to the confirmation of the Company's Plan of
Reorganization, was filed during the quarter ended October 28, 2000.
G-17
<PAGE>
Pathmark Stores, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PATHMARK STORES, INC.
By /s/ Frank Vitrano
--------------------------------------
(Frank Vitrano)
Executive Vice President and
Chief Financial Officer
By /s/ Joseph Adelhardt
--------------------------------------
(Joseph Adelhardt)
Senior Vice President and
Controller,
Chief Accounting Officer
Date: December 12, 2000
G-18
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following are the expenses in connection with the issuance and
distribution of the Securities being registered, other than underwriting fees
and commissions. All such expenses other than the Securities and Exchange
Commission registration fee and National Association of Securities Dealers, Inc.
filing fee are estimates.
Securities and Exchange Commission Registration Fee $ 72,888
National Association of Securities Dealers, Inc. Filing Fee 8,875
Nasdaq National Market Listing Fee 94,000
Accounting Fees and Expenses 200,000
Legal Fees 150,000
----------
Total $525,763
==========
Item 14. Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law, the registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended ("Securities Act"). The registrant's Amended and
Restated Certificate of Incorporation and Bylaws also provide that the
registrant will indemnify its directors and executive officers and may indemnify
its other officers, employees and other agents to the fullest extent permitted
by Delaware law.
Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a Delaware corporation may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of the corporation, by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no cause to believe his
or her conduct was unlawful.
Section 145(b) of the DGCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if he or she acted under similar standards to
those set forth above, except that no indemnification may be made in respect to
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 in
which such action or suit was brought shall determine that despite the
adjudication of liability, but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to be indemnified for such
expenses which the court shall deem proper.
Section 145 of the DGCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (a) and (b) of Section 145 or in the
defense of any claim, issue or matter therein, he or she shall be indemnified
against expenses actually and reasonably incurred by him or her in connection
therewith; that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation may purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
such officer or director and incurred by him or her in any such capacity or
arising out of his or her status as such, whether or not the corporation would
have the power to indemnify him or her against such liabilities under Section
145.
II-1
<PAGE>
At present, there is no pending litigation or proceeding involving a
director or officer of the registrant as to which indemnification is being
sought nor is the registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
Item 16. Exhibits
The following is a list of all exhibits filed as a part of this
Registration Statement on Form S-1, including those incorporated herein by
reference.
Exhibit
Number Description of Exhibit
------ ----------------------
*2.1 Plan of Reorganization
*3.1 Amended and Restated Certificate of Incorporation of the Company
*3.2 Amended and Restated Bylaws of the Company
*4.1 Form of Registrant's Common Stock Certificate
*4.2 Registration Rights Agreement
*4.3 Warrant Agreement
*5.1 Opinion of Shearman & Sterling
*10.1 Exit Facility
*10.2 Side Letter to the Sale and Retention Bonus Agreement, the Stock Award
Agreement and the Employment Agreement dated as of July 1, 2000 between
the Registrant and James L. Donald
*10.3 Side Letter to the Sale and Retention Bonus Agreement, the Stock Award
Agreement and the Employment Agreement dated as of July 1, 2000 between
the Registrant and Robert Joyce
*10.4 Side Letter to the Sale and Retention Bonus Agreement, the Stock Award
Agreement and the Employment Agreement dated as of July 1, 2000 between
the Registrant and Eileen Scott
*10.5 Side Letter to the Sale and Retention Bonus Agreement, the Stock Award
Agreement and the Employment Agreement dated as of July 1, 2000 between
the Registrant and Frank Vitrano
*10.6 Sale and Retention Bonus Agreement dated as of February 1, 2000 between
the Registrant and James L. Donald
*10.7 Sale and Retention Bonus Agreement dated as of February 1, 2000 between
the Registrant and Robert Joyce
*10.8 Sale and Retention Bonus Agreement dated as of February 1, 2000 between
the Registrant and Eileen Scott
*10.9 Sale and Retention Bonus Agreement dated as of February 1, 2000 between
the Registrant and Frank Vitrano
*10.10 Sale and Retention Bonus Agreement dated as of February 1, 2000 between
the Registrant and John Sheehan
*10.11 2000 Employee Equity Plan
*10.12 2000 Non-Employee Directors Equity Plan
*10.13 First Amended and Restated Supply Agreement among Pathmark,Plainbridge
and C&S (Previously filed as an exhibit to Form 10-K of Pathmark for
the year ended January 31 1998)
*10.14 Supplemental Retirement Agreement dated March 1, 2000, between Pathmark
and James Donald (Previously filed as an Exhibit to 1999 Form 10-K)
*10.15 Supplemental Retirement Agreement dated June 1, 1994, between Pathmark
* and Robert Joyce (Previously filed as an Exhibit to 1994 Form 10-K)
*10.16 Supplemental Retirement Agreement dated March 1, 2000, between Pathmark
and Eileen Scott (Previously filed as an Exhibit to 1999 Form 10-K)
*10.17 Supplemental Retirement Agreement dated March 1, 2000, between Pathmark
and Frank Vitrano (Previously filed as an Exhibit to 1999 Form 10-K)
*10.18 Supplemental Retirement Agreement dated March 1, 2000, between Pathmark
and John Sheehan (Previously filed as an Exhibit to 1999 Form 10-K)
II-2
<PAGE>
*10.19 Employment Agreement dated as of October 8, 1996, between Registrant,
SMG-II and James Donald (Previously filed as an Exhibit to 1997 Form
10-K)
*10.20 Employment Agreement between Pathmark and Robert Joyce dated
February 1, 1999 (Previously filed as an Exhibit to the Holdings 14D-9)
* 10.21 Employment Agreement between Pathmark and Eileen Scott dated
February 1, 1999 (Previously filed as an Exhibit to the Holdings 14D-9)
*10.22 Employment Agreement between Pathmark and Frank Vitrano dated
February 1, 1999 (Previously filed as an Exhibit to the Holdings 14D-9)
*10.23 Employment Agreement between Pathmark and John Sheehan dated
February 1, 1999 (Previously filed as an Exhibit to the Holdings 14D-9)
*10.24 Supermarkets General Corporation Savings Plan (Previously filed as
Amended and Registration Statement on Form S-1 of Holdings, File No.
33-16963)
23.1 Consent of Deloitte & Touche, Independent Auditors
*23.2 Consent of Counsel (included as part of Exhibit 5.1)
*24.1 Power of Attorneys (included in part II of Registration Statement)
_______________
* Previously Filed.
Item 17. Undertakings
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. Notwithstanding the
foregoing, any increase or decrease in volume of Securities offered (if the
total dollar value of Securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement; and (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; provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference 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; and
(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.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the Securities offered herein, and the offering of such Securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions set forth in Item 14, 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 Act
and is, therefore, unenforceable. In the event that a claim for
II-3
<PAGE>
indemnification against such liabilities (other than the payment by the
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 Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this
Post-Effective Amendment No. 1 to the this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Carteret, State of New Jersey, on January 8, 2001.
PATHMARK STORES, INC.
(registrant)
By /s/ James L. Donald
----------------------
Name: James L. Donald
Title: Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to the registration statement has been signed by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
* Director January 8, 2001
--------------------------------------------
William J. Begley
* Director January 8, 2001
--------------------------------------------
Daniel H. Fitzgerald
/s/ James L. Donald Director, Chairman, President and January 8, 2001
-------------------------------------------- Chief Executive Officer
James L. Donald (Principal Executive Officer)
* Director January 8, 2001
--------------------------------------------
Eugene M. Freedman
* Director January 8, 2001
--------------------------------------------
Robert G. Miller
/s/ Frank G. Vitrano Director, Executive Vice President and Chief January 8, 2001
-------------------------------------------- Financial Officer
Frank G. Vitrano (Principal Financial Officer)
* Director January 8, 2001
--------------------------------------------
Steven L. Volla
/s/ Joseph Adelhardt Senior Vice President and Controller January 8, 2001
-------------------------------------------- (Principal Accounting Officer)
Joseph Adelhardt
*By: /s/ Marc A. Strassler Attorney-in-fact
-------------------------
Marc A. Strassler
</TABLE>
II-5
<PAGE>
Exhibit
Number Description of Exhibit
------ ----------------------
*2.1 Plan of Reorganization
*3.1 Amended and Restated Certificate of Incorporation of the Company
*3.2 Amended and Restated Bylaws of the Company
*4.1 Form of Registrant's Common Stock Certificate
*4.2 Registration Rights Agreement
*4.3 Warrant Agreement
*5.1 Opinion of Shearman & Sterling
*10.1 Exit Facility
*10.2 Side Letter to the Sale and Retention Bonus Agreement, the Stock Award
Agreement and the Employment Agreement dated as of July 1, 2000 between
the Registrant and James L. Donald
*10.3 Side Letter to the Sale and Retention Bonus Agreement, the Stock Award
Agreement and the Employment Agreement dated as of July 1, 2000 between
the Registrant and Robert Joyce
*10.4 Side Letter to the Sale and Retention Bonus Agreement, the Stock Award
Agreement and the Employment Agreement dated as of July 1, 2000 between
the Registrant and Eileen Scott
*10.5 Side Letter to the Sale and Retention Bonus Agreement, the Stock Award
Agreement and the Employment Agreement dated as of July 1, 2000 between
the Registrant and Frank Vitrano
*10.6 Sale and Retention Bonus Agreement dated as of February 1, 2000 between
the Registrant and James L. Donald
*10.7 Sale and Retention Bonus Agreement dated as of February 1, 2000 between
the Registrant and Robert Joyce
*10.8 Sale and Retention Bonus Agreement dated as of February 1, 2000 between
the Registrant and Eileen Scott
*10.9 Sale and Retention Bonus Agreement dated as of February 1, 2000 between
the Registrant and Frank Vitrano
*10.10 Sale and Retention Bonus Agreement dated as of February 1, 2000 between
the Registrant and John Sheehan
*10.11 2000 Employee Equity Plan
*10.12 2000 Non-Employee Directors Equity Plan
*10.13 First Amended and Restated Supply Agreement among Pathmark,Plainbridge
and C&S (Previously filed as an exhibit to Form 10-K of Pathmark for
the year ended January 31 1998)
*10.14 Supplemental Retirement Agreement dated March 1, 2000, between Pathmark
and James Donald (Previously filed as an Exhibit to 1999 Form 10-K)
*10.15 Supplemental Retirement Agreement dated June 1, 1994, between Pathmark
and Robert Joyce (Previously filed as an Exhibit to 1994 Form 10-K)
*10.16 Supplemental Retirement Agreement dated March 1, 2000, between Pathmark
and Eileen Scott (Previously filed as an Exhibit to 1999 Form 10-K)
*10.17 Supplemental Retirement Agreement dated March 1, 2000, between Pathmark
and Frank Vitrano (Previously filed as an Exhibit to 1999 Form 10-K)
*10.18 Supplemental Retirement Agreement dated March 1, 2000, between Pathmark
and John Sheehan (Previously filed as an Exhibit to 1999 Form 10-K)
*10.19 Employment Agreement dated as of October 8, 1996, between Registrant,
SMG-II and James Donald (Previously filed as an Exhibit to 1997 Form
10-K)
*10.20 Employment Agreement between Pathmark and Robert Joyce dated
February 1, 1999 (Previously filed as an Exhibit to the Holdings 14D-9)
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<PAGE>
*10.21 Employment Agreement between Pathmark and Eileen Scott dated
February 1, 1999 (Previously filed as an Exhibit to the Holdings 14D-9)
*10.22 Employment Agreement between Pathmark and Frank Vitrano dated
February 1, 1999 (Previously filed as an Exhibit to the Holdings 14D-9)
*10.23 Employment Agreement between Pathmark and John Sheehan dated
February 1, 1999 (Previously filed as an Exhibit to the Holdings 14D-9)
*10.24 Supermarkets General Corporation Savings Plan (Previously filed as
Amended and Registration Statement on Form S-1 of Holdings, File No.
33-16963)
23.1 Consent of Deloitte & Touche, Independent Auditors
*23.2 Consent of Counsel (included as a part of Exhibit 5.1)
*24.1 Power of Attorneys (included in part II fo Registration Statement)
______________
* Previously Filed.
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<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to use in this Post-Effective Amendment No. 1 to Registration
Statement No. 333-46882 of Pathmark Stores, Inc. on Form S-1 of our report dated
April 27, 2000, except for Note 2, as to which the date is September 19, 2000
(which expresses an unqualified opinion and includes an explanatory paragraph
relating to the Company's ability to continue as a going concern) appearing in
the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected Historical
Consolidated Financial Data" and "Experts" in such Prospectus.
/s/ Deloitte & Touche, LLP
Parsippany, New Jersey
January 8, 2001
