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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended Commission File Number
January 31, 1998 1-5287
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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)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of exchange on which registered
Junior Subordinated Deferred New York Stock Exchange
Coupon Notes due 2003
Securities registered pursuant to Section 12(g) of the Act: None
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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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / X /
As of April 1, 1998, there were outstanding 100 shares of Common Stock,
$0.10 par value, all of which are privately owned and not traded on a public
market.
Documents Incorporated by Reference: None
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PART I
ITEM 1. Business*
General
The predecessor of the registrant was incorporated in the state of
Delaware in June 1987 as a wholly owned subsidiary of Supermarkets General
Holdings Corporation ("Holdings"). In October 1987, Holdings acquired
Supermarkets General Corporation ("SGC"). In 1990, SGC was merged into the
registrant and the registrant retained the name SGC. In connection with the
1993 recapitalization referred to below, the registrant changed its name from
SGC to Pathmark Stores, Inc. ("Pathmark" or the "Company").
Pathmark consummated a recapitalization plan (the "Recapitalization") on
October 26, 1993. In connection with the Recapitalization, its former parent,
Holdings, transferred all of the capital stock of Pathmark to PTK Holdings,
Inc. ("PTK"), a then newly formed, wholly owned subsidiary of Holdings. PTK
was incorporated in the State of Delaware in 1993 and owns 100% of the
capital stock of Pathmark.
During the fiscal year ended February 1, 1997 ("Fiscal 1996"), the Company
reported that it had decided to divest 12 supermarkets located in its southern
region. During the course of the fiscal year ended January 31, 1998 ("Fiscal
1997"), the Company sold or closed 11 of the 12 stores held for divestiture and
decided to continue to operate the remaining store.
On June 30, 1997, the Company entered into a new $500 million bank credit
agreement (the "Credit Agreement") with a group of lenders led by The Chase
Manhattan Bank. The Credit Agreement includes a $300 million term loan (the
"Term Loan") and a $200 million working capital facility (the "Working Capital
Facility"). The Company repaid in full the former term loan and former working
capital facility with the borrowings obtained under the Credit Agreement.
Under the Credit Agreement, the Term Loan and Working Capital Facility bear
interest at floating rates, ranging from LIBOR plus 2.25% to LIBOR plus 2.50%.
The Company is required to repay a portion of its borrowings under the Term Loan
each year so as to retire such indebtedness in its entirety by December 15,
2001. Under the Working Capital Facility, which expires on June 15, 2001, the
Company can borrow or obtain letters of credit in an aggregate amount not to
exceed $200 million, of which the maximum of $125 million can be in letters of
credit. In addition, pursuant to a Permitted Subordinated Debt Refinancing (as
defined in the Credit Agreement), the Working Capital Facility and a portion of
the Term Loan can be extended up to an additional two and one-half years
and the remainder of the Term Loan can be extended up to an additional three
and one-half years from the original expiration dates.
The Credit Agreement contains certain covenants, including financial
covenants concerning levels of operating cash flow, minimum interest and rent
expense coverage, maximum leverage ratio, maximum senior debt leverage ratio,
maximum consolidated rental payments and maximum capital expenditures. The
Credit Agreement also contains other covenants including, but not limited to,
covenants with respect to the following matters: (i) limitation on indebtedness;
(ii) limitation on liens; (iii) restriction on mergers (iv) restriction on
investments, loans, advances, guarantees and acquisitions; (v) restriction on
assets sales and sale/leaseback transactions; (vi) restriction on certain
payments of indebtedness and incurrence of certain agreements, and (vii)
restriction on transactions with affiliates.
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* Except as otherwise indicated, information contained in this Item is given as
of January 31, 1998.
1
On January 29, 1998, the Company sold its Woodbridge, New Jersey
distribution center and office complex and its leasehold interests in its two
distribution centers and its banana ripening facility in North Brunswick, New
Jersey, Dayton, New Jersey and Avenel, New Jersey, respectively (all of the
foregoing buildings are hereinafter referred to as, collectively, the
"Facilities"), to C&S Wholesale Grocers, Inc. ("C&S"), including the fixtures,
equipment and inventory in each of those Facilities, for approximately $104
million (approximately $60 million, excluding inventory) ("the C&S Purchase
Agreement"). The Company used a portion of the net proceeds to partially reduce
borrowings under the Credit Agreement. At the same time, the term of the
Company's 15 year supply agreement with C&S (the "Supply Agreement") commenced,
pursuant to which C&S will supply substantially all of the Company's grocery,
frozen and perishable merchandise requirements, formerly owned and warehoused by
the Company (see Item 1. Business - Supply and Distribution).
Business
At January 31, 1998, Pathmark operated 135 supermarkets primarily in the
densely populated New York-New Jersey and Philadelphia metropolitan areas. These
metropolitan areas contain over 10% of the population and grocery sales in the
United States. These supermarkets are located in New Jersey, New York,
Pennsylvania, Delaware and Connecticut and consist of 5.2 million selling square
footage and 7.1 million total square footage.
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.
Marketing and Merchandising
- Super Center Format. Of Pathmark's 135 stores, 132 are Super Centers. The
average Pathmark Super Center is approximately 39% larger than the average
size supermarket in the United States and offers greater convenience by
providing one-stop shopping and a wider assortment of foods and general
merchandise than is offered by conventional supermarkets. The Pathmark
Super Center format is designed to provide Pathmark customers with a
substantially greater selection of quality perishable products and to be
more "customer friendly", with wider aisles, more accessible customer
service and information departments, improved signs and graphics, and
increased availability of Pathmark associates, particularly in the
perishable departments. All of Pathmark's new supermarkets and enlargements
completed in Fiscal 1997 were Super Centers and Pathmark expects that all
new stores and enlargements thereafter will employ the same concept.
- Flexible Merchandising. Pathmark believes that its large-store format gives
it considerable flexibility to respond to changing consumer demands and
competition by varying and enhancing its merchandise selection. Pathmark's
"Big Deals" program, currently consisting of over 500 merchandise items,
offers large-sized merchandise at prices that Pathmark believes are
competitive with those available in "warehouse" and "club" stores. Pathmark
emphasizes competitive pricing plus weekly sales and
2
promotions supported by extensive advertising, primarily in print media.
Merchandising flexibility and effectiveness is enhanced through the
increased utilization of a category management approach. In addition,
Pathmark offers for sale over 3,000 items through its private label
program.
- Pharmacy. Pathmark provides full pharmacy services in virtually all of its
stores. Pathmark's broad market coverage within its marketing area has
enabled it to become a leading filler of third-party prescriptions.
Pathmark believes that its well-established pharmacy operations provide a
competitive advantage in attracting and retaining customers.
Store Expansion and Renovation Program
- New Stores, Enlargements and Renovations. During Fiscal 1997, Pathmark
opened two new Pathmark Super Centers, closed 11 other stores, and
completed five renovations and eight enlargements. During the fiscal year
ending January 30, 1999 ("Fiscal 1998"), Pathmark plans to open up to two
new Super Centers and to complete up to an aggregate of 19 renovations and
enlargements.
- Pathmark recognizes the importance of keeping its stores looking fresh and
up-to-date; thus, each store typically receives a renovation or enlargement
every five years. At the end of Fiscal 1997, Pathmark derived approximately
77% of its supermarket sales from stores that were opened, enlarged or
renovated during the last five years.
- Core Market Focus. Pathmark has identified over 50 potential locations for
new supermarkets within its current marketing areas and expects that all
new stores opened during the current and next two fiscal years will be
located in these areas. Pathmark believes that, by opening stores in its
current marketing areas, it can achieve additional operating economies and
other benefits from its store expansion program without the risks and costs
associated with opening stores in new marketing areas.
Operating Efficiencies
- Technology. Pathmark has made a significant and continuing investment in
information technology. All Pathmark supermarket checkout terminals have
third-generation IBM 4680 scanner systems supported by a RISC 6000
application processor in each store. These systems allow consumer credit
and electronic fund transfer ("EFT") transactions, greatly facilitate
system-wide promotion and merchandising programs, and improve the speed and
control of consumer transactions. In addition, all Pathmark supermarkets
utilize radio frequency technology for direct vendor receivings and shelf
labels.
- Cost Reduction. The Company is continuously evaluating its operations in an
effort to reduce operating costs consistent with its overall objective of
providing a high level of customer service. During Fiscal 1997, the Company
took several steps to accomplish this goal. The Company closed or sold 11
stores, which had experienced unprofitable operating results. The Company
reevaluated its merchandise distribution methods, resulting in decisions to
outsource its trucking business and hire a trucking company to meet its
transportation needs, to outsource its pharmacy merchandise requirements to
a drug wholesaler, and to sell its grocery, frozen and perishable
distribution centers to and enter into a 15 year supply arrangement with
C&S, thereby lowering the Company's distribution costs (see Item 1 -
Business - Supply and Distribution).
3
- Demographic and Geographic Concentration. The Company's stores serve
densely populated communities. In addition, all Pathmark supermarkets are
located within 100 miles of its corporate headquarters in Carteret, New
Jersey and the principal warehousing facilities that serve them. The high
population density, as well as the geographic concentration of stores,
provide substantial economy of scale opportunities.
Pathmark Supermarkets
Pathmark operated 135 supermarkets at January 31, 1998. Super Centers
accounted for approximately 98% of Pathmark's supermarket sales for Fiscal 1997.
The following table presents selected data reflecting supermarket sales and
stores for the last five fiscal years.
Fiscal Years
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1997 1996 1995(a) 1994 1993
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(Dollars in millions)
Supermarket sales................................. $ 3,692 $ 3,701 $ 3,853 $ 3,785 $3,839
Average sales per Supermarket(b).................. 27.5 26.1 26.4 25.9 25.4
Number of Supermarkets:
Renovations(c).............................. 5 16 14 14 12
Enlargements(d)............................. 8 5 4 11 5
Opened...................................... 2 4 5 4 4
Closed...................................... 11 4 4 6 5
Type of Supermarket(e):
Super Center................................ 132 139 139 137 138
Conventional................................ 3 5 5 6 7
Total Supermarkets Open at Year End......... 135 144 144 143 145
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(a) Fiscal 1995 was a 53-week year.
(b) Computed on the basis of aggregate sales of stores open for the full year,
based on a 52-week period.
(c) Renovations involve an investment of $400,000 or more and in Fiscal 1997
averaged over $1.0 million per store.
(d) Enlargements involve the addition of selling space and in Fiscal 1997
averaged an investment in excess of $3.5 million.
(e) Includes two stores not wholly owned. The sales figures for these stores
are not included above.
By industry standards, Pathmark stores are large and productive, averaging
approximately 52,500 square feet in size and generating high average sales
volume of approximately $27.5 million per store ($712 per selling square foot)
for stores open for all of Fiscal 1997. Pathmark's 135 supermarkets at January
31, 1998 ranged from 26,008 to 66,463 square feet in size and included 126
supermarkets that are 40,000 square feet or larger in size. All Pathmark stores
carry a broad variety of food and drug store products, including an extensive
variety of the Pathmark, No Frills and Pathmark Preferred brands. All but five
supermarkets contained in-store pharmacy departments at the end of Fiscal 1997.
Pathmark pioneered the development of the large "superstore" in the Middle
Atlantic States, opening the first "Pathmark Super Center" in 1977, and
currently operates 132 such stores. The majority of Super Centers were created
through the enlargement or renovation of existing stores. In addition to the
broad variety of food and non-food items carried in conventional Pathmark
stores, a typical Super Center includes a customer service center, videotape
rental, a pharmacy, expanded produce department, meat department, cheese shop,
bakery, seafood, service delicatessen department and expanded health and beauty
care department. All Super Centers have EFT and credit transaction capability at
their checkout terminals, and 77 supermarkets also feature in-store automated
teller machines. During Fiscal 1996, the Company entered into master licensing
agreements with two regional banking institutions to place up to 98
4
in-store banks in Pathmark supermarkets over the next two years. Each bank,
which occupies approximately 400 square feet, offers a full array of
financial services and is open seven days a week. The license agreements have
an initial term of five years with optional renewal periods. At the close of
Fiscal 1997, 58 stores had in-store banks and Pathmark expects to have 36
additional in-store banks by the end of Fiscal 1998.
Over the past several years, Pathmark stores have been designed to be more
"customer friendly", with wider aisles, more accessible customer service and
information departments, improved signs and graphics, and increased availability
of Pathmark associates. For example, Pathmark has introduced "GREAT" service, a
customer service program emphasizing proactive, inter-personal communication
between store associates and customers. All of Pathmark's new supermarkets and a
majority of supermarket enlargements completed in Fiscal 1997 were Super Centers
and Pathmark expects that virtually all new stores and enlargements will employ
the same concept.
Pathmark's supermarket business is generally not seasonal, although sales in
the second and fourth quarters tend to be slightly higher than those in the
first and third quarters.
Store Expansion and Renovation Program
A key to Pathmark's business strategy has been, and will continue to be, the
expansion of the total selling square footage of its operations. Pathmark
believes, that by adding new stores and increasing the selling area of existing
stores, it can improve its competitive position and operating margins by
achieving economies of scale in merchandising, advertising, distribution and
supervision. During the five years ending with Fiscal 1997, Pathmark completed
94 renovations and enlargements and opened 19 new supermarkets. At the close of
Fiscal 1997, sales in these stores accounted for approximately 77% of its total
supermarket sales. Pathmark currently expects to open up to two non-replacement
Pathmark Super Centers and to complete up to 19 renovations and enlargements
during Fiscal 1998.
Advertising and Promotion
As part of its marketing strategy, Pathmark emphasizes value through its
competitive pricing and weekly sales and promotions supported by extensive
advertising. Additional savings are offered each week from Pathmark "super
coupons" in newspapers and circulars. Pathmark's advertising expenditures are
concentrated on print advertising, including advertisements and circulars in
local and area newspapers and advertising flyers distributed in stores, and
radio. Several years ago, Pathmark introduced "Smart Coupons" in its
advertisements. With "Smart Coupons", customers no longer are required to cut
out Pathmark coupons from its advertisement and physically present them at the
cash registers. Rather, when a coupon item is scanned during the check-out
process, the coupon savings is automatically deducted from the price. Pathmark
believes that its "Smart Coupons" greatly convenience its customers and improve
customer service at the checkout.
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.
5
Technology
Pathmark has made a significant and continuing investment in information
technology. All Pathmark supermarket checkout terminals have IBM 4680 scanner
systems supported by a RlSC 6000 application processor in each store. These
systems allow consumer credit and EFT transactions, greatly facilitate
system-wide promotion and merchandising programs, and improve the speed and
control of customer transactions. This technology and the data generated by
scanning have not only led to lower labor costs, improved price control and
shelf allocation, and quicker customer check-out, but have also assisted in the
analysis of product movement, profit contribution and demographic merchandising.
Pathmark also has a computer-assisted ordering system that enables it to
replenish inventory to avoid "out of stocks" at store level while maintaining
optimum overall inventory levels. In addition, all Pathmark supermarkets utilize
radio frequency technology for direct vendor receivings and shelf labels.
All of the pharmacies are equipped with pharmacy computers. In addition to
improving customer service, these computers aid pharmacists in detecting drug
interactions, improve the collection of third-party receivables and help to
attract third-party businesses, such as health maintenance organizations and
union welfare plans.
In August 1991, Pathmark entered into a ten year facilities management and
systems integration agreement with IBM Company. Under the agreement, IBM has
taken over Pathmark's data center operations, mainframe processing and
information system functions and is providing business applications and systems
designed to enhance Pathmark's customer service and efficiency.
Supply and Distribution
During the third quarter of Fiscal 1997, the Company decided to outsource
its trucking operations and retained a local trucking company to provide the
requisite trucking services. Management believes that the outsourcing
arrangement will result in lower transportation costs to the Company.
Beginning in January 1998, the Supply Agreement with C&S commenced. Under
the Supply Agreement, C&S supplies to the Company and distributes from the
Facilities substantially all of the grocery, frozen and perishable (includes
meat, produce, seafood and delicatessen items) merchandise formerly owned and
warehoused by the Company. Management believes that the Supply Agreement with
C&S enhances the Company's ability to offer consistently fresh and high quality
products to its customers at a reduced distribution cost to the Company. Prior
to the Supply Agreement, products purchased for resale by the Company were
purchased directly from a large group of unaffiliated suppliers, including large
consumer products companies.
The Company continues to operate a 266,000 square foot leased general
merchandise, health and beauty care products and tobacco distribution center in
Edison, New Jersey (the "GMDC"), which opened in 1980. During Fiscal 1997, the
Company outsourced its pharmacy merchandise distribution requirements to a
pharmaceutical wholesaler. In addition, Chefmark Inc., an affiliate of the
Company, owns and operates a 16,000 square foot commissary in Somerset, New
Jersey (the "Chefmark Facility") in which high quality cooked meat products and
salads are prepared for sale and supplied to the Company for sale in the
Company's delicatessen departments. The Chefmark Facility opened in 1976.
Prior to the Supply Agreement with C&S, the Company operated, in addition to
the GMDC and Chefmark Facility, four distribution centers and a banana ripening
facility, aggregating approximately 1.3 million square feet.
6
In addition to reducing the Company's distribution and transportation costs,
management believes that the logistics outsourcing will enhance its ability to
better concentrate on the core business of the Company.
Competition
The supermarket business is highly competitive and is characterized by high
asset turnover and narrow profit margins. Pathmark's earnings are primarily
dependent on the maintenance of relatively high sales volume per supermarket,
efficient product purchasing and distribution, and cost-effective store
operating and distribution techniques. Pathmark's main competitors are national,
regional and local supermarkets, drug stores, convenience stores, discount
merchandisers, "warehouse" and "club" stores and other local retailers in the
areas served. Principal competitive factors include price, store location,
advertising and promotion, product mix, quality and service.
Trade Names, Service Marks and Trademarks
Pathmark has registered a variety of trade names, service marks and
trademarks with the United States Patent and Trademark Office, each for an
initial period of 20 years, renewable for as long as the use thereof continues.
Pathmark considers its Pathmark service marks to be of material importance to
its business and actively defends and enforces such service marks.
Regulation
Pathmark's food and drug business requires it to hold various licenses and
to register certain of its facilities with state and federal health, drug and
alcoholic beverage regulatory agencies. By virtue of these licenses and
registration requirements, Pathmark is obligated to observe certain rules and
regulations, and a violation of such rules and regulations could result in a
suspension or revocation of the licenses or registrations. In addition, most of
Pathmark's licenses require periodic renewals. Pathmark has experienced no
material difficulties with respect to obtaining, effecting or retaining its
licenses and registrations.
Employees
At January 31, 1998, the Company employed approximately 28,000 people, of
whom approximately 20,500 were employed on a part-time basis.
Approximately 88% of the Company's employees are covered by 18 collective
bargaining agreements (typically having three or four year terms) negotiated
with approximately 15 different local unions. During Fiscal 1998, eight
contracts, covering approximately 13,000 Pathmark associates in approximately
90% of the stores and approximately 130 associates in GMDC, will expire. The
Company does not anticipate any difficulty in renegotiating these contracts.
The Company believes that its relationship with its employees is generally
satisfactory.
ITEM 2. Properties**
Reference is made to the answer to Item 1, "Business" of this report for
information concerning the states in which the Company's supermarkets and
distribution facilities are located. See "Business of Pathmark-Supply and
Distribution" in Item 1 of this report for information concerning the Company's
distribution facilities.
7
Pathmark's 135 supermarkets have an aggregate selling area of approximately
5.2 million square feet. Eighteen of the supermarkets are owned by Pathmark and
the remaining 117 are leased. These supermarkets are either freestanding stores
or are located in shopping centers. Twenty-nine leases expire during the current
and next four calendar years and Pathmark has options to renew all of them.
Pathmark leases its corporate headquarters in Carteret, NJ in premises
totaling approximately 150,000 square feet in size.
Most of the facilities owned by Pathmark are owned subject to mortgages.
Pathmark plans to acquire leasehold or fee interests in any property on which
new stores or other facilities are opened and will consider entering into
sale/leaseback or mortgage transactions with respect to owned properties if
Pathmark believes such transactions are financially advantageous.
ITEM 3. Legal Proceedings
The Company is a party to a number of legal proceedings in the ordinary
course of business. Management believes that the ultimate resolution of these
proceedings will not, in the aggregate, have a material adverse impact on the
financial condition, results of operations or business of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
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** Except as otherwise indicated, information contained in this Item is given as
of January 31, 1998.
8
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters (as of April 1, 1998)
All of registrant's outstanding Common Stock is held by PTK and not traded
on the public market. All of PTK's outstanding common stock is held by Holdings.
All of Holdings outstanding common stock is held by SMG-II Holdings Corporation
("SMG-II").
The authorized preferred stock of Holdings consists of 9,000,000 shares of
$3.52 Cumulative Exchangeable Redeemable Preferred Stock, of which 4,890,671
shares were issued and outstanding at April 1, 1998 (the "Exchangeable Preferred
Stock"). The Exchangeable Preferred Stock has a liquidation preference of $25
per share and its terms 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
Holdings.
The Exchangeable Preferred Stock is non-voting, except that if an amount
equal to six quarterly dividends is in arrears in whole or in part, the holders
thereof, voting as a class, are entitled to elect an additional two members of
the board of directors of Holdings. Holdings is currently in arrears on payment
of more than six quarterly dividends on the Exchangeable Preferred Stock and
does not expect to receive cash flow sufficient to permit payments of dividends
on the Exchangeable Preferred Stock in the foreseeable future. The holders of
the Exchangeable Preferred Stock reelected two persons to Holdings' Board of
Directors at Holdings' 1997 annual meeting.
The authorized capital stock of SMG-II consists of 3,000,000 shares of
SMG-II Class A Common Stock, 3,000,000 shares of SMG-II Class B Common Stock, of
which 672,476 and 320,000 shares, respectively, were issued and outstanding at
April 1, 1998, and 4,000,000 shares of SMG-II Preferred Stock, of which
1,500,000 shares are designated SMG-II Series A Preferred Stock, 1,500,000
shares are designated SMG-II Series B Preferred Stock, and 33,520 shares are
designated SMG-II Series C Preferred Stock (the three series of Preferred Stock
hereinafter collectively referred to as "SMG-II Preferred Stock").
At April 1, 1998, there were outstanding 236,731 shares of SMG-II Series A
Preferred Stock, 180,769 shares of SMG-II Series B Preferred Stock and 8,520
shares of SMG-II Series C Preferred Stock.
SMG-II's capital stock is held beneficially as follows: (i) SMG-II Class A
Common Stock by approximately 55 holders, including six affiliates of Merrill
Lynch & Co., Inc. (The "ML Common Investors"), Chemical Investments, Inc.
("CII"), an affiliate of Chase Manhattan Corp., and 48 current and former
members of the Company's management or their heirs (the "Management Investors");
(ii) SMG-II Series A Preferred Stock by five affiliates of Merrill Lynch & Co.,
Inc. (the "ML Preferred Investors", the ML Common Investors and ML Preferred
Investors hereinafter collectively referred to as the "ML Investors"); (iii)
SMG-II Class B Common Stock held by three holders, including CII, The Equitable
Life Assurance Society of the United States ("Equitable") and an affiliate of
Equitable (collectively, the "Equitable Investors"); (iv) SMG-II Series B
Preferred Stock held by three holders, including CII and the Equitable
Investors; and (v) SMG-II Series C Preferred Stock held by one Management
Investor. Holders of shares of SMG-II Class A Common Stock are entitled to one
vote per share on all matters to be voted on by stockholders. Holders of shares
of SMG-II Class B Common Stock are not entitled to any voting rights, except as
required by law or as otherwise provided in the Restated Certificate of
Incorporation of SMG-II. Subject to compliance with certain procedures, holders
of shares of SMG-II Class B Common Stock may exchange their shares for shares of
SMG-II Class A Common Stock and holders of shares of SMG-II Class A Common Stock
may exchange their shares for shares of SMG-II Class B Common Stock, in each
case on a share-for-shares basis. All holders of SMG-II capital stock are
parties to a Stockholders Agreement dated as of February 4, 1991, as amended,
with SMG-II (the "Stockholders Agreement").
9
SMG-II 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 SMG-II, dividends are payable in cash or may
accumulate (and the amount thereof shall compound annually).
Holders of shares of SMG-II Series A Preferred Stock and SMG-II Series C
Preferred Stock are entitled to one vote per share of SMG-II Class A Common
Stock into which such SMG-II Series A Preferred Stock and SMG-II Series C
Preferred Stock are convertible on all matters to be voted on by SMG-II
stockholders, subject to increase to 1.11 votes per share upon the occurrence of
certain events. Holders of shares of SMG-II Series B Preferred Stock are
entitled to one vote per share of SMG-II Class B Common Stock into which such
SMG-II Series B Preferred Stock is convertible for the purpose of voting on any
consolidation or merger, sale, lease or exchange of substantially all of the
assets or any liquidation, dissolution or winding up, of SMG-II. Additionally,
holders of SMG-II Preferred Stock have separate voting rights with respect to
alteration in the voting powers, rights and preferences and certain other terms
affecting the SMG-II Preferred Stock. Subject to compliance with certain
procedures, holders of SMG-II Series B Preferred Stock may exchange their shares
for shares of SMG-II Series A Preferred Stock and holders of SMG-II Series A
Preferred Stock may exchange their shares for shares of SMG-II Series B
Preferred Stock, on a share-for-share basis. Each series of SMG-II Preferred
Stock ranks pari passu with each other series.
At the option of the holder, SMG-II Preferred Stock is convertible into
SMG-II Common Stock at any time, on or prior to the occurrence of certain
events, including an initial public offering of in excess of 25% of the number
of outstanding shares of common stock of SMG-II, at a conversion ratio of one
share of the corresponding class of SMG-II Common Stock for each share of SMG-II
Preferred Stock, subject to adjustment upon the occurrence of certain events.
Holders of SMG-II Preferred Stock are party with the holders of SMG-II
Common Stock to the Stockholders Agreement which, among other things, restricts
the transferability of SMG-II capital stock and relates to the corporate
governance of SMG-II. None of SMG-II's capital stock is publicly traded on any
market. See Item 12, "Security Ownership of Certain Beneficial Owners and
Management."
The payment of dividends to the holders of registrant's Common Stock is
prohibited under the Credit Agreement and subject to restrictions in its other
debt instruments. During Fiscal 1996 and Fiscal 1997, the Company paid no
dividends to its sole stockholder. The Company does not currently anticipate
paying dividends during Fiscal 1998.
10
ITEM 6. Selected Financial Data
The following table represents selected financial data for the last five
fiscal years and should be read in conjunction with the Company's Consolidated
Financial Statements in Item 8 of this report.
PATHMARK STORES, INC.
SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS
(in millions)
Fiscal Years(a)
----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Sales..................................................... $3,696 $3,710 $3,972 $3,968 $4,021
Cost of sales (exclusive of depreciation and
amortization shown separately below)................... 2,652 2,619 2,838 2,866 2,952
------- ------- -------- ------- ------
Gross profit.............................................. 1,044 1,091 1,134 1,102 1,069
Selling, general and administrative expenses.............. 841 857 866 851 837
Depreciation and amortization(b).......................... 84 89 80 75 70
Restructuring charge(c)................................... -- 9 -- -- --
Lease commitment charge(d)................................ -- 9 -- -- --
Gain on disposition of freestanding drug stores(e)........ -- -- 16 -- --
Recapitalization expense(f)............................... -- -- -- -- 17
Provision for store closings(g)........................... -- -- -- -- 6
------- ------- -------- ------- ------
Operating earnings........................................ 119 127 204 176 139
Interest expense, net(h).................................. (164) (161) (165) (148) (172)
------- ------- -------- ------- ------
Earnings (loss) from continuing operations before income
taxes, gain on disposal of home centers segment,
extraordinary items and cumulative effect of
accounting changes....................................... (45) (34) 39 28 (33)
Income tax benefit (provision)............................ 17 14 (6) (4) 20
------- ------- -------- ------- ------
Earnings (loss) from continuing operations before gain on disposal of home
centers segment, extraordinary
items and cumulative effect of accounting changes........ (28) (20) 33 24 (13)
Loss from discontinued operations......................... -- -- -- (2) --
Gain on disposal of home centers segment, net of tax(i)... -- -- -- 17 --
------- ------- -------- ------- ------
Earnings (loss) before extraordinary items and cumulative
effect of accounting changes............................. (28) (20) 33 39 (13)
Extraordinary items, net of tax(j)........................ (8) (1) -- -- (97)
------- ------- -------- ------- ------
Earnings (loss) before cumulative effect of accounting
changes................................................ (36) (21) 33 39 (110)
Cumulative effect of accounting changes, net of tax(k).... -- -- -- -- (38)
------- ------- -------- ------- ------
Net earnings (loss)....................................... $ (36) $ (21) $ 33 $ 39 $ (148)
------- ------- -------- ------- ------
------- ------- -------- ------- ------
Ratio of earnings to fixed charges(l)..................... -- -- 1.22x 1.17x --
------- ------- -------- ------- ------
------- ------- -------- ------- ------
Deficiency in earnings available to cover fixed charges(m) $ 45 $ 34 $ -- $ -- $ 33
------- ------- -------- ------- ------
------- ------- -------- ------- ------
As of
----------------------------------------------------------------------------
Jan. 31, Feb. 1, Feb. 3, Jan. 28, Jan. 29,
1998 1997 1996 1995 1994
------- ------- ------ ------- -------
Balance Sheet Data:
Total assets...................................... $ 900 $ 990 $ 986 $1,018 $1,119
Working capital deficiency........................ 109 182 173 122 107
Lease obligations, long-term...................... 170 175 140 127 132
Long-term debt, net of current maturities......... 1,178 1,186 1,215 1,273 1,286
Stockholder's deficiency.......................... 1,077 1,042 1,024 1,030 1,001
(footnotes on following page)
11
PATHMARK STORES, INC.
NOTES TO SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS
(a) The Company's fiscal year ends on the Saturday nearest to January 31 of
the following calendar year. Fiscal years consist of 52 weeks, except for
53 weeks in Fiscal 1995.
(b) Fiscal 1996 depreciation and amortization includes a $5 million pretax
charge to write down certain fixed assets held for sale to their
estimated net realizable values. See Note 6 of the Notes to Consolidated
Financial Statements at Item 8, Part II of this Form 10-K.
(c) During Fiscal 1996, the Company recorded a pretax charge of $9 million
for reorganization and restructuring costs related to its administrative
operations. See Note 18 of the Notes to Consolidated Financial Statements
at Item 8, Part II of this Form 10-K.
(d) During Fiscal 1996, the Company recorded a pretax charge of $9 million
related to unfavorable lease commitments of certain unprofitable stores
in the Company's southern region. See Note 19 of the Notes to
Consolidated Financial Statements at Item 8, Part II of this Form 10-K.
(e) During Fiscal 1995, the Company recorded a pretax gain of $16 million
related to the disposition of its freestanding drug stores. See Note 20
of the Notes to Consolidated Financial Statements at Item 8, Part II of
this Form 10-K.
(f) In connection with the Recapitalization in Fiscal 1993, the Company
recorded a pretax charge of $17 million related to reorganization and
restructuring costs.
(g) During Fiscal 1993, the Company closed or disposed of five stores and
recorded a pretax charge of $6 million.
(h) Prior to Fiscal 1995, interest expense was net of interest charged to
discontinued operations.
(i) During Fiscal 1994, the Company sold its home centers segment, which
resulted in a gain on sale of $17 million, net of $2 million of income
taxes.
(j) During Fiscal 1997, the Company recorded an extraordinary charge of $8
million, net of an income tax benefit of $5 million and during Fiscal
1996, the Company recorded an extraordinary charge of $1 million, net of
an income tax benefit, both related to the early extinguishment of debt.
See Note 17 of the Notes to Consolidated Financial Statements at Item 8,
Part II of this Form 10-K. During Fiscal 1993, in connection with the
Recapitalization, the Company recorded an extraordinary charge of $97
million, net of an income tax benefit of $15 million, related to the
early extinguishment of debt.
(k) The cumulative effect of accounting changes in Fiscal 1993 of $38
million, net of an income tax benefit of $28 million, reflects the
adoption of Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits other than Pensions";
the adoption of Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits"; the change in the
method utilized to calculate last-in, first-out (LIFO) inventories; and
the change in the determination of the discount rate utilized to record
the present value of certain noncurrent liabilities. All of the
accounting changes were made as of the beginning of Fiscal 1993.
(l) For the purpose of this calculation, earnings before fixed charges
consist of earnings from continuing operations before income taxes plus
fixed charges. Fixed charges consist of interest expense on all
indebtedness (including amortization of deferred debt issuance costs) and
the portion of operating lease rental expense that is representative of
the interest factor (deemed to be one-third of operating lease rentals).
(m) For purposes of determining the deficiency in earnings available to cover
fixed charges, earnings are defined as earnings (loss) from continuing
operations before income taxes plus fixed charges. Fixed charges consist
of interest expense on all indebtedness (including amortization of
deferred debt issuance costs) and the portion of operating lease rental
expense that is representative of the interest factor (deemed to be
one-third of operating lease rentals).
12
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The matters discussed herein, with the exception of historical information,
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks, uncertainties and other factors which could cause actual results to
differ materially from future results expressed or implied by such
forward-looking statements. Potential risks and uncertainties include, but are
not limited to, the competitive environment in which the Company operates and
the general economic conditions in the Company's trading areas.
Results of Operations
Fiscal 1997 v. Fiscal 1996
Sales: Sales in Fiscal 1997 were $3.70 billion compared to $3.71
billion in the prior year, a decrease of 0.4%. Same store sales increased
0.8% for the year. Sales in Fiscal 1997 compared to Fiscal 1996 were also
impacted by new store openings and remodels, offset by sold and closed
stores. During Fiscal 1997, the Company opened two new Pathmark stores,
completed 13 major renovations and enlargements to existing supermarkets, and
sold four and closed seven stores. The Company operated 135 and 144
supermarkets at the end of Fiscal 1997 and Fiscal 1996, respectively.
Gross Profit: Gross profit in Fiscal 1997 was $1.04 billion or 28.2% of
sales compared to $1.09 billion or 29.4% of sales for the prior year. The
decrease in gross profit in both dollars and as a percentage of sales for Fiscal
1997 compared to the prior year was due to the promotional pricing program
introduced during the first quarter of Fiscal 1997, as well as the
pre-Thanksgiving holiday promotions during the third quarter of Fiscal 1997. The
cost of goods sold comparisons were impacted by a pretax LIFO credit of $5.4
million and $1.3 million in Fiscal 1997 and Fiscal 1996, respectively. The
pretax LIFO credit for Fiscal 1997 includes a $2.0 million gain on a LIFO
liquidation related to the sale of the Company's pharmaceutical warehouse
inventory and a $0.8 million gain on a LIFO liquidation related to the sale of
the Company's grocery, frozen and perishable merchandise in connection with the
C&S Supply Agreement (see Note 3 of the Notes to the Consolidated Financial
Statements at Item 8, Part II of this Form 10-K).
Selling, General and Administrative Expenses ("SG&A"): SG&A in Fiscal 1997
decreased $16.4 million or 1.9% compared to the prior year. As a percentage of
sales, SG&A was 22.8% in Fiscal 1997, down from 23.1% in the prior year. The
decrease in SG&A as a percentage of sales in Fiscal 1997 compared to the prior
year was primarily due to lower administrative, advertising, claims and
utilities expenses, partially offset by higher store labor expenses.
Depreciation and Amortization: Depreciation and amortization of $83.4
million in Fiscal 1997 was $5.6 million lower than the prior year of $89.0
million. The decrease in depreciation and amortization expense in Fiscal 1997
compared to the prior year was primarily due to a pretax charge of $5.4 million
in Fiscal 1996 to write down fixed assets held for sale, principally in the
Company's southern region, partially offset by capital expenditures in Fiscal
1997. Depreciation and amortization excludes video tape amortization, which is
recorded in cost of goods sold, of $3.4 million and $3.1 million in Fiscal 1997
and Fiscal 1996, respectively.
Operating Earnings: Operating earnings in Fiscal 1997 were $119.3 million
compared to the prior year of $127.1 million. The decrease in operating earnings
in Fiscal 1997 compared to the prior year was primarily due to lower gross
profit, partially offset by lower SG&A and depreciation expense in Fiscal 1997
and the restructuring charge and the lease commitment charge in Fiscal 1996.
13
Interest Expense: Interest expense was $164.2 million in Fiscal 1997
compared to $161.5 million in the prior year. The increase in interest expense
in Fiscal 1997 compared to the prior year was primarily due to increases in
lease obligations and the debt accretion on the Deferred Coupon Notes, partially
offset by lower amortization of debt issuance costs.
Income Taxes: The income tax benefit was $16.7 million and $14.4 million
in Fiscal 1997 and Fiscal 1996, respectively. The 1997 benefit is net of a $1.9
million increase in the valuation allowance related to the Company's deferred
income tax assets. The Company believes that it is more likely than not that the
net deferred income tax assets of $54.0 million at January 31, 1998 will be
realized through the implementation of tax strategies which could generate
taxable income.
During Fiscal 1997, the Company made income tax payments of $4.8 million
and received income tax refunds of $4.3 million. During Fiscal 1996, the Company
made income tax payments of $4.6 million and received income tax refunds of $5.5
million.
Extraordinary Items: During the second quarter of Fiscal 1997, in
connection with the Credit Agreement, the Company wrote off deferred financing
fees of $12.8 million related to the former bank credit agreement, resulting in
a net loss on early extinguishment of debt of $7.4 million. In addition, during
the second quarter of Fiscal 1997, in connection with the sale of certain
mortgaged property, the Company made a mortgage 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.
During the second quarter of Fiscal 1996, in connection with the sale of
certain mortgaged property, the Company made a mortgage paydown of $5.3 million,
including accrued interest and debt premiums, resulting in a net loss on early
extinguishment of debt of $0.2 million. During the first quarter of Fiscal 1996,
in connection with the termination of the Plainbridge, Inc. credit agreement due
to the reacquisition of Plainbridge, Inc. by Pathmark, the Company wrote off
deferred financing fees resulting in a net loss on early extinguishment of debt
of $0.7 million.
Summary of Operations: For Fiscal 1997, the Company's net loss was $35.7
million compared to a net loss of $20.8 million for the prior year. The increase
in net loss in Fiscal 1997 compared to the prior year was primarily due to lower
operating earnings, the extraordinary loss on early extinguishment of debt and
higher interest expense, partially offset by a higher income tax benefit.
EBITDA-FIFO: EBITDA-FIFO was $201.2 million and $236.4 million in Fiscal
1997 and Fiscal 1996, respectively. EBITDA-FIFO represents net earnings before
interest expense, income taxes, depreciation, amortization, the LIFO charge
(credit) and unusual transactions. EBITDA-FIFO is a widely accepted financial
indicator of a company's ability to service and/or incur debt and should not be
construed as an alternative to, or a better indicator of, operating income or
cash flows from operating activities, as determined in accordance with generally
accepted accounting principles.
Fiscal 1996 (52-week year) v. Fiscal 1995 (53-week year)
Sales: Sales in Fiscal 1996 were $3.71 billion compared to $3.97 billion
in Fiscal 1995. Sales comparisons were impacted by the extra week in the prior
year and the disposition of the freestanding drug stores during Fiscal 1995.
Sales generated by the freestanding drug stores were $110.8 million in Fiscal
1995. Same store sales from supermarkets decreased 2.8% for the year primarily
due to a significant increase in competitive new store openings and remodels,
particularly in the Company's southern region.
14
During Fiscal 1996, the Company opened four new Pathmark stores, two of which
replaced smaller stores, and completed 21 major renovations and enlargements to
existing supermarkets. Two stores were closed and not replaced during the year.
The Company operated 144 supermarkets at the end of both Fiscal 1996 and Fiscal
1995.
Gross Profit: Gross profit in Fiscal 1996 was $1.09 billion or 29.4% of
sales compared with $1.13 billion or 28.6% of sales in Fiscal 1995. Excluding
the impact of the disposition of the freestanding drug stores, gross profit as a
percentage of sales was 28.8% in Fiscal 1995. The improvement in gross profit,
as a percentage of sales in Fiscal 1996 compared to Fiscal 1995, was primarily
due to increased focus on merchandising programs, the impact of the disposition
of the freestanding drug stores, as well as the Company's continuing emphasis on
the Pathmark 2000 format stores which allow expanded variety in all departments
particularly high margin perishables. The decrease in gross profit was primarily
attributable to the lower sales. The cost of goods sold comparisons were
affected by a pretax LIFO credit of $1.3 million and a pretax LIFO charge of
$1.1 million in Fiscal 1996 and Fiscal 1995, respectively.
Selling, General and Administrative Expenses ("SG&A"): SG&A decreased $8.4
million or 1.0% in Fiscal 1996 compared with Fiscal 1995. SG&A, on a proforma
basis eliminating the SG&A impact of the freestanding drug stores, increased
2.0% in Fiscal 1996 compared to Fiscal 1995. As a percentage of sales, SG&A were
23.1% in Fiscal 1996, up from 21.8% in Fiscal 1995 due to the impact of lower
sales, higher labor and labor related expenses, claims expenses and occupancy
costs, partially offset by lower advertising expenses and the impact of the
disposition of the freestanding drug stores in Fiscal 1995. SG&A for Fiscal 1996
also included a first quarter provision of $5.8 million representing the
termination costs for two former executives of the Company, a first quarter gain
of $5.6 million recognized on the sale of certain real estate and a second
quarter curtailment gain of $2.0 million due to the elimination of
postretirement medical coverage for active non-union associates. SG&A for Fiscal
1995 also included a fourth quarter gain of $3.4 million recognized on the sale
of a former warehouse of Purity Supreme, Inc., a previously divested company.
Depreciation and Amortization: Depreciation and amortization of $89.0
million in Fiscal 1996 was $8.6 million higher than $80.4 million in Fiscal
1995. The increase for Fiscal 1996 was primarily due to a pretax charge of $5.4
million to write down certain fixed assets held for sale, principally in the
Company's southern region, to their estimated net realizable values and capital
expenditures. Depreciation and amortization excludes video tape amortization,
which is recorded in cost of goods sold, of $3.1 million and $2.8 million in
Fiscal 1996 and Fiscal 1995, respectively.
Restructuring Charge: During the fourth quarter of Fiscal 1996, the
Company recorded a pretax charge of $9.1 million for reorganization and
restructuring costs related to its administrative operations. The restructuring
charge included $4.2 million for the costs of a voluntary early retirement
program and $1.2 million for severance and termination benefits. The remaining
charge of $3.7 million primarily relates to consulting fees incurred in
connection with the restructuring and exit costs for facility consolidation.
Lease Commitment Charge: During the fourth quarter of Fiscal 1996, the
Company decided to divest a group of its southern region stores, certain of
which have experienced unprofitable operating results. The Company concluded
that the operating losses being experienced by these stores were other than
temporary and that the projected operating results of such stores would not be
sufficient to recover their long-lived assets and their contractual lease
commitments. Further, the Company believes that these lease costs will not be
significantly recoverable through any future sublease. Therefore, the Company
recorded a $8.8 million pretax charge related to these unfavorable lease
commitments, in addition to writing down the long-lived assets of these stores
(see "Depreciation and Amortization" above).
15
Operating Earnings: Operating earnings for Fiscal 1996 were $127.1 million
compared with $203.4 million for Fiscal 1995. The decrease in operating earnings
during Fiscal 1996 compared to Fiscal 1995 was due to lower sales, higher
depreciation and amortization expense, the restructuring charge and the lease
commitment charge in Fiscal 1996 and the gain on disposition of freestanding
drug stores in Fiscal 1995, partially offset by lower SG&A.
Interest Expense: Interest expense was $161.5 million for Fiscal 1996
compared to $164.7 million in Fiscal 1995 primarily due to reductions in the
Term Loan along with lower interest rates.
Income Taxes: The income tax benefit for Fiscal 1996 was $14.4 million.
The income tax provision for Fiscal 1995 was $5.9 million reflecting the
reversal of the valuation allowance of $9.1 million related to the Company's
deferred income tax assets. The reversal was recorded in conjunction with the
Company's continuing evaluation of its deferred income tax assets.
During Fiscal 1996, the Company made income tax payments of $4.6 million
and received income tax refunds of $5.5 million. During Fiscal 1995, the Company
made income tax payments of $21.9 million and received income tax refunds of
$10.3 million.
Extraordinary Items: During the first quarter of Fiscal 1996, in
connection with the termination of the Plainbridge, Inc. credit agreement due to
the reacquisition of Plainbridge, Inc. by Pathmark, the Company wrote off
deferred financing fees resulting in a net loss on early extinguishment of debt
of $0.7 million. During the second quarter of Fiscal 1996, in connection with
the proceeds from the sale of certain mortgaged property, the Company made a
mortgage paydown of $5.3 million, including accrued interest and debt premiums,
resulting in a net loss on early extinguishment of debt of $0.2 million.
Summary of Operations: The Company's net loss in Fiscal 1996 was $20.8
million compared to net earnings of $32.7 million in Fiscal 1995. The decrease
in net earnings for Fiscal 1996 compared to Fiscal 1995 was due to lower
operating earnings in Fiscal 1996, partially offset by lower interest expense
and an income tax benefit in Fiscal 1996 compared to an income tax provision in
Fiscal 1995.
EBITDA-FIFO: EBITDA-FIFO was $236.4 million in Fiscal 1996 and $268.9
million in Fiscal 1995, respectively.
Financial Condition
Debt Service: During Fiscal 1997, total long-term debt decreased $38.7
million from Fiscal 1996 year end primarily due to a net decrease in borrowings
under the Credit Agreement compared to the former credit agreement and a
decrease in certain mortgages, partially offset by debt accretion on the
Deferred Coupon Notes. In addition, during Fiscal 1997, total lease obligations
decreased $3.9 million from Fiscal 1996.
On January 29, 1998, the Company sold its fee and leasehold interests in the
Facilities to C&S for approximately $104 million (approximately $60 million,
excluding inventory) in connection with the C&S Purchase Agreement.
Simultaneously, Pathmark and C&S commenced the 15 year Supply Agreement,
pursuant to which C&S will supply Pathmark with substantially all of its
grocery, frozen and perishable merchandise requirements. In conjunction with the
C&S Purchase Agreement, the Company used $32.5 million of the net proceeds to
pay down a portion of the Term Loan. The remainder of the net proceeds were used
to pay down the Working Capital Facility and invest in marketable securities of
$52.0 million at January 31, 1998. As a result, there were no borrowings under
the Working Capital Facility at January 31, 1998. However, subsequent to Fiscal
1997, the Company utilized its marketable securities and borrowings
16
under the Working Capital Facility, which have increased to $15.0 million at
April 21, 1998, primarily to paydown trade accounts payable related to the
inventory sold in connection with the C&S Purchase Agreement and other
liabilities.
During the second quarter of Fiscal 1997, the Company sold four supermarkets
that it announced for divestiture at the end of Fiscal 1996 for $14.9 million
and sold two former drug stores for $11.1 million. There was no gain or loss
recognized on these transactions. The proceeds were used to paydown a portion of
the former working capital facility and related mortgages.
On June 30, 1997, the Company entered into the Credit Agreement with a group
of lenders led by The Chase Manhattan Bank. The Credit Agreement includes a $300
million Term Loan and a $200 million Working Capital Facility. In connection
with this refinancing, the Company repaid in full the former term loan ($230.5
million) and the former working capital facility ($57.5 million) with the
borrowings obtained under the Credit Agreement.
Under the Credit Agreement, the Term Loan and Working Capital Facility bear
interest at floating rates, ranging from LIBOR plus 2.25% to LIBOR plus 2.50%.
The Company is required to repay a portion of its borrowings under the Term Loan
each year, so as to retire such indebtedness in its entirety by December 15,
2001. Under the Working Capital Facility, which expires on June 15, 2001, the
Company can borrow or obtain letters of credit in an aggregate amount not to
exceed $200 million, of which the maximum of $125 million can be in letters of
credit. In addition, pursuant to a Permitted Subordinated Debt Refinancing (as
defined in the Credit Agreement), the Working Capital Facility and a portion of
the Term Loan can be extended up to an additional two and one-half years and the
remainder of the Term Loan can be extended up to an additional three and
one-half years from the original expiration dates.
The Company is required to make sinking fund payments on the Subordinated
Notes (as defined in Note 9 of the Notes to Consolidated Financial Statements at
Item 8, Part II of this Form 10-K) in the amount of 25% of the original
aggregate principal amount of the Subordinated Notes on each of June 15, 2000
and June 15, 2001. The Subordinated Debentures (as defined in Note 9 of the
Notes to Consolidated Financial Statements at Item 8, Part II of this Form 10-K)
and the remaining Subordinated Notes mature on June 15, 2002. The Senior
Subordinated Notes (as defined in Note 9 of the Notes to Consolidated Financial
Statements at Item 8, Part II of this Form 10-K) and the Deferred Coupon Notes
mature in Fiscal 2003. The Company has no payment obligations, through
intercompany notes or otherwise, with respect to its parent's indebtedness.
The majority of the cash interest payments are scheduled in the second and
fourth quarters.
The amounts of principal payments required each year on outstanding
long-term debt (excluding the original issue discount with respect to the
Deferred Coupon Notes) are as follows (dollars in millions):
Principal
Fiscal Years Payments
------------ --------
1998........................... $ 43.5
1999........................... 14.9
2000........................... 78.2
2001........................... 263.8
2002........................... 195.8
2003........................... 625.2
17
Liquidity: The consolidated financial statements of the Company indicate
that, at January 31, 1998, current liabilities exceeded current assets by $109.3
million and stockholder's deficiency was $1.08 billion. Management believes that
cash flows generated from operations, supplemented by the unused borrowing
capacity under the Working Capital Facility (refer to Notes 1 and 9 of the Notes
to Consolidated Financial Statements at Item 8, Part II of this Form 10-K) and
the availability of capital lease financing will be sufficient to pay the
Company's debts as they come due, provide for its capital expenditure program
and meet its other cash requirements.
The Company believes that it will be able to make the scheduled payments or
refinance its obligations with respect to its indebtedness through a combination
of operating funds and borrowing facilities. Future refinancing will be
necessary if the Company's cash flow from operations is not sufficient to meet
its debt service requirements related to the maturity of a portion of the Term
Loan and Working Capital Facility in Fiscal 2001, and the maturity of the
Subordinated Notes and Subordinated Debentures in Fiscal 2002. The Company
expects that it will be necessary to refinance all or a portion of the Senior
Subordinated Notes and the Deferred Coupon Notes due in Fiscal 2003. The Company
may undertake a refinancing of some or all of such indebtedness sometime prior
to its maturity. The Company was in compliance with its various debt covenants
at January 31, 1998 and, based on management's operating projections for Fiscal
1998, the Company believes that it will continue to be in compliance with its
various debt covenants. The Company's ability to make scheduled payments, to
refinance or otherwise meet its obligations with respect to its indebtedness
depends on its financial and operating performance, which in turn, is subject to
prevailing economic conditions and to financial, business and other factors
beyond its control. Although the Company's cash flow from its operations and
borrowings has been sufficient to meet its debt service obligations, there can
be no assurance that the Company's operating results will continue to be
sufficient or that future borrowing facilities will be available for payment or
refinancing of the Company's indebtedness.
While it is the Company's intention to enter into other refinancings that it
considers advantageous, there can be no assurances that the prevailing market
conditions will be favorable to the Company. In the event the Company obtains
any future refinancing on less than favorable terms, the holders of outstanding
indebtedness could experience increased credit risk and could experience a
decrease in the market value of their investment, because the Company might be
forced to operate under terms that would restrict its operations and might find
its cash flow reduced.
Capital Expenditures: Capital expenditures for Fiscal 1997, including
property acquired under capital leases, were $57.9 million compared to $94.1
million for Fiscal 1996 and $110.6 million for Fiscal 1995. During Fiscal 1997,
the Company opened two new Pathmark stores, completed 13 major renovations and
enlargements to existing supermarkets, and sold four and closed seven stores.
During Fiscal 1998, the Company plans to open up two new Pathmark stores, close
one store and complete up to an aggregate of 19 major renovations and
enlargements. Capital expenditures for Fiscal 1998, including property to be
acquired under capital leases, are estimated to be $70.0 million. Management
believes that cash flows generated from operations, supplemented by the unused
borrowing capacity under the Working Capital Facility and the availability of
capital lease financing will be sufficient to provide for the Company's capital
expenditure program.
Cash Flows: Cash provided by operating activities amounted to $56.5 million
in Fiscal 1997 compared to $73.6 million in the prior year. The decrease in net
cash provided by operating activities was primarily due to an increase in the
net loss and an increase in cash used for operating assets and liabilities. Cash
provided by investing activities was $95.5 million in Fiscal 1997 compared to
cash used for investing activities of $46.8 million in the prior year. The
increase in cash provided by investing activities was primarily due to an
increase in proceeds related to the C&S Purchase Agreement, property
dispositions and a decrease in expenditures of property and equipment. Cash used
for financing activities was $101.8
18
million in Fiscal 1997 compared to $28.6 million in the prior year. The
increase in cash used for financing activities was primarily due to a decrease
in borrowings in conjunction with the Credit Agreement, net of repaying in full
the former term loan and former working capital facility in Fiscal 1997, the
proceeds from the lease financing of three supermarket locations in Fiscal 1996,
a decrease in book overdrafts and an increase in deferred financing fees related
to the Credit Agreement in Fiscal 1997.
Cash provided by operating activities amounted to $73.6 million in Fiscal
1996 compared to $118.3 million in Fiscal 1995. The decrease in net cash
provided by operating activities was primarily due to a decline in cash provided
by operating assets and liabilities and a decrease in net earnings. Cash used
for investing activities in Fiscal 1996 was $46.8 million due to expenditures of
property and equipment of $55.0 million, offset by proceeds from property
dispositions of $8.2 million. Cash used for investing activities in Fiscal 1995
was $0.7 million primarily due to property and equipment expenditures of $69.5
million, partially offset by the net proceeds from the disposition of the
freestanding drug stores of $59.9 million, the proceeds from the sale of real
estate of $3.4 million and the proceeds from the disposal of home centers
segment of $4.7 million. Cash used for financing activities in Fiscal 1996 was
$28.6 million compared to $128.0 million in Fiscal 1995. The decrease in cash
used for financing activities is primarily due to an increase in borrowings
under the former working capital facility, the proceeds from the lease financing
of three supermarket locations, a decrease in dividends to PTK and a paydown of
$25.0 million on the Term Loan in Fiscal 1995 in conjunction with the
disposition of the freestanding drug stores. During Fiscal 1995, the Company
paid a dividend to PTK of $26.5 million from the net proceeds related to the
disposition of the freestanding drug stores and the sale of the home centers
segment.
Year 2000 Compliance: The Company has initiated a program to prepare the
Company's computer systems and applications for the year 2000. This is necessary
because computer programs have been written using two digits rather than four to
define the applicable year. Any of the Company's computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process normal business transactions.
The Company expects that the principal costs will be those associated
with the remediation and testing of its computer applications. Through IBM,
this effort is under way across the Company, and is following a process of
inventory, scoping and analysis, modification, testing and certification, and
implementation. A major portion of these costs will be met under the existing
agreement with IBM through a reprioritization of technology development
initiatives, with the remainder representing incremental costs (refer to Note
22 of the Notes to Consolidated Financial Statements at Item 8, Part II of
this Form 10-K). The Company does not believe that the total cost of such
compliance will be material. Additionally, the Company believes, based on
available information, that it will be able to manage its total year 2000
transition without any material adverse effect on its operations.
In addition, the Company is communicating with major vendors to determine
the extent to which the Company is vulnerable to third-party year 2000
compliance issues.
19
New Accounting Standards Not Yet Adopted
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is not expected
to have an effect on the Company's financial statements currently being
presented because the Company, at this time, has no items of comprehensive
income other than net income.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS No. 131"), which will be effective for financial statements beginning
after December 15, 1997. SFAS No. 131 redefines how operating segments are
determined and requires expanded quantitative disclosures relating to a
company's operating statements. SFAS No. 131, which the Company is evaluating,
will impact the financial statements to the extent that it is necessary to
provide additional disclosure about the Company's segments.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits ("SFAS No. 132"), which will be effective for financial
statements beginning after December 15, 1997. SFAS No. 132 revises employers'
disclosure about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. The Company will adopt
SFAS No. 132 in Fiscal 1998 and believes it will impact the financial statements
to the extent that it is necessary to provide additional disclosure about the
Company's pensions and other postretirement benefits.
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company due to
adverse changes in financial rates. The Company is exposed to market risk in the
area of interest rates. This exposure is directly related to its Term Loan and
borrowing activities under the Working Capital Facility. The Company does not
currently maintain any interest rate hedging arrangements due to the reasonable
risk that near-term interest rates will not rise significantly. The Company is
continuously evaluating this risk and will implement interest rate hedging
arrangements when deemed appropriate.
20
ITEM 8. Consolidated Financial Statements.
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
January 31, February 1, February 3,
1998 1997 1996
------------ -------------- --------------
Sales...................................................... $ 3,695,865 $ 3,710,523 $ 3,971,593
Cost of sales (exclusive of depreciation and
amortization shown separately below)..................... 2,652,289 2,619,277 2,837,631
------------ ------------ -----------
Gross profit............................................... 1,043,576 1,091,246 1,133,962
Selling, general and administrative expenses............... 840,886 857,290 865,679
Depreciation and amortization.............................. 83,413 88,956 80,408
Restructuring charge....................................... -- 9,137 --
Lease commitment charge.................................... -- 8,763 --
Gain on disposition of freestanding drug stores............ -- -- 15,535
------------ ------------ -----------
Operating earnings......................................... 119,277 127,100 203,410
Interest expense........................................... (164,168) (161,469) (164,749)
------------ ------------ -----------
Earnings (loss) before income taxes and
extraordinary items..................................... (44,891) (34,369) 38,661
Income tax benefit (provision)............................. 16,705 14,411 (5,914)
------------ ------------ -----------
Earnings (loss) before extraordinary items................. (28,186) (19,958) 32,747
Extraordinary items, net of an income tax benefit of
$5,456 in Fiscal 1997 and $613 in Fiscal 1996........... (7,488) (877) --
------------ ------------ -----------
Net earnings (loss)........................................ $ (35,674) $ (20,835) $ 32,747
------------ ------------ -----------
------------ ------------ -----------
See notes to consolidated financial statements.
21
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
January 31, February 1,
1998 1997
----------- ---------
ASSETS
Current Assets
Cash and cash equivalents.................................................. $ 60,076 $ 9,880
Accounts receivable, net................................................... 10,928 12,492
Merchandise inventories.................................................... 148,775 216,931
Deferred income taxes, net................................................. 10,621 7,111
Prepaid expenses........................................................... 21,449 24,951
Due from suppliers......................................................... 13,027 13,923
Other current assets....................................................... 11,331 5,908
----------- ---------
Total Current Assets..................................................... 276,207 291,196
Property and Equipment, Net................................................... 529,542 603,577
Deferred Financing Costs, Net................................................. 18,547 28,743
Deferred Income Taxes, Net.................................................... 43,389 22,846
Other Assets.................................................................. 32,687 43,534
----------- ---------
$ 900,372 $ 989,896
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current Liabilities
Accounts payable........................................................... $ 128,484 $ 166,199
Book overdrafts............................................................ 26,330 41,085
Current maturities of long-term debt....................................... 43,478 74,431
Income taxes payable....................................................... 1,771 860
Accrued payroll and payroll taxes.......................................... 49,533 56,335
Current portion of lease obligations....................................... 24,337 23,133
Accrued interest payable................................................... 18,300 20,712
Accrued expenses and other current liabilities............................. 93,297 90,589
----------- ---------
Total Current Liabilities................................................ 385,530 473,344
----------- ---------
Long-Term Debt................................................................ 1,177,898 1,185,639
----------- ---------
Lease Obligations, Long-Term.................................................. 170,273 175,353
----------- ---------
Other Noncurrent Liabilities.................................................. 244,011 197,226
----------- ---------
Commitments and Contingencies (Notes 3, 12 and 22)
Stockholder's Deficiency
Common Stock $.10 par value................................................... -- --
Authorized, issued and outstanding: 100 shares
Paid-in Capital............................................................... 68,703 68,703
Accumulated Deficit........................................................... (1,146,043) (1,110,369)
----------- ---------
Total Stockholder's Deficiency........................................... (1,077,340) (1,041,666)
----------- ---------
$ 900,372 $ 989,896
----------- ---------
----------- ---------
See notes to consolidated financial statements.
22
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY
(in thousands)
Total
Common Paid-in Accumulated Stockholder's
Stock Capital Deficit Deficiency
--------- ----------- --------------- -----------------
Balance, January 28, 1995............................ $ -- $ 91,809 $ (1,122,281) $ (1,030,472)
Net earnings...................................... -- -- 32,747 32,747
Dividend to PTK Holdings, Inc. in conjunction
with the disposition of freestanding drug stores -- (21,800) -- (21,800)
Dividend to PTK Holdings, Inc. in conjunction
with the disposal of the home centers segment... -- (4,706) -- (4,706)
--------- ----------- --------------- ---------
Balance, February 3, 1996............................ -- 65,303 (1,089,534) (1,024,231)
Net loss.......................................... -- -- (20,835) (20,835)
Capital contribution from SMG-II Holdings
Corporation..................................... -- 3,400 -- 3,400
--------- ----------- --------------- ---------
Balance, February 1, 1997............................ -- 68,703 (1,110,369) (1,041,666)
Net loss.......................................... -- -- (35,674) (35,674)
--------- ----------- --------------- ---------
Balance, January 31, 1998............................ $ -- $ 68,703 $ (1,146,043) $ (1,077,340)
--------- ----------- --------------- ---------
--------- ----------- --------------- ---------
See notes to consolidated financial statements.
23
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
52 Weeks Ended 52 Weeks Ended 53 Weeks Ended
January 31, 1998 February 1, 1997 February 3, 1996
---------------- ---------------- ----------------
Operating Activities
Net earnings (loss)......................................... $(35,674) $(20,835) $ 32,747
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of debt........ 7,488 877 --
Depreciation and amortization............................. 87,341 92,485 83,263
Deferred income tax (benefit) expense..................... (24,053) (12,558) 6,417
Interest accruable but not payable........................ 18,509 16,678 15,028
Amortization of original issue discount................... 354 354 354
Amortization of debt issuance costs....................... 5,542 7,426 7,140
(Gain) loss on disposal of property and equipment......... 127 (5,347) 200
Gain on disposition of freestanding drug stores........... -- -- (15,535)
Gain on sale of real estate............................... -- -- (3,371)
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net................................ 1,564 (1,939) 2,380
Merchandise inventories................................. 22,170 8,517 15,653
Income taxes............................................ 6,367 (2,584) 8,932
Prepaid expenses........................................ (861) (2,889) (1,631)
Due from suppliers...................................... 896 (745) 5,079
Other current assets.................................... (4,749) (3,009) 2,221
Other assets............................................ 9,700 2,309 (23,419)
Accounts payable........................................ (37,715) (17,883) (9,114)
Accrued payroll and payroll taxes....................... (6,802) 2,013 780
Accrued interest payable................................ (2,289) 1,403 (363)
Accrued expenses and other current liabilities.......... 2,708 (1,867) (6,997)
Other noncurrent liabilities............................ 5,860 11,191 (1,462)
---------- ---------- -------------
Cash provided by operating activities................. 56,483 73,597 118,302
---------- ---------- -------------
Investing Activities
Property and equipment expenditures......................... (34,322) (54,963) (69,544)
Proceeds from disposition of property and equipment......... 26,132 8,170 896
Net proceeds in connection with the C&S Purchase Agreement.. 103,728 -- --
Net proceeds from disposition of freestanding drug stores... -- -- 59,876
Net proceeds from sale of real estate....................... -- -- 3,371
Net proceeds from disposal of home centers segment.......... -- -- 4,706
---------- ---------- -------------
Cash provided by (used for) investing activities...... 95,538 (46,793) (695)
---------- ---------- -------------
Financing Activities
Borrowings under Term Loan in connection with new Credit 300,000 -- --
Agreement...................................................
Repayments of term loans.................................... (279,877) (44,828) (60,295)
Increase (decrease) in working capital facilities borrowings (73,500) 27,500 (17,000)
Decrease in book overdrafts................................. (14,755) (2,635) (1,262)
Increase in other borrowings................................ 1,956 2,052 895
Repayment of other long-term borrowings..................... (6,136) (8,085) (5,208)
Reduction in lease obligations.............................. (21,337) (20,032) (18,221)
Premiums incurred in early extinguishment of debt........... (132) (352) --
Deferred financing fees..................................... (8,044) (3,597) (374)
Proceeds from lease financing............................... -- 21,405 --
Dividend to PTK Holdings, Inc............................... -- -- (26,506)
---------- ---------- -------------
Cash used for financing activities.................... (101,825) (28,572) (127,971)
---------- ---------- -------------
Increase (decrease) in cash and cash equivalents............... 50,196 (1,768) (10,364)
Cash and cash equivalents at beginning of period............... 9,880 11,648 22,012
---------- ---------- -------------
Cash and cash equivalents at end of period..................... $ 60,076 $ 9,880 $ 11,648
---------- ---------- -------------
---------- ---------- -------------
See notes to consolidated financial statements.
24
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continiued)
Note 1-Business
Organization and Basis of Presentation:
Pathmark Stores, Inc. (the "Company") operated 135 supermarkets as of
January 31, 1998, primarily in the New York-New Jersey and Philadelphia
metropolitan areas and is a wholly owned subsidiary of PTK Holdings, Inc.
("PTK") and an indirect wholly owned subsidiary of Supermarkets General Holdings
Corporation ("Holdings").
Holdings was formed by Merrill Lynch Capital Partners, Inc., a wholly
owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."), to effect the
acquisition (the "Acquisition") of the Company. On June 15, 1987, Holdings
completed the first step in the Acquisition when it acquired 32.8 million shares
(approximately 85%) of the Company's common stock through a tender offer. The
remaining outstanding common stock of the Company was acquired by Holdings on
October 5, 1987 pursuant to a Merger Agreement dated April 22, 1987, as amended.
The Acquisition of the Company by Holdings was accounted for as a purchase and,
accordingly, Holdings recorded the assets and liabilities of the Company at
their fair values at the date of the Acquisition. The accompanying consolidated
financial statements of the Company reflect Holdings' basis. The tax basis for
the assets and liabilities acquired was retained.
During Fiscal 1993, the Board of Directors of Holdings authorized
management of the Company and Holdings to proceed with a recapitalization plan
(the "Recapitalization"), which included a refinancing of Holdings' debt and the
distribution to Holdings of certain of the Company's assets and liabilities. In
conjunction with the Recapitalization, the assets, liabilities and related
operations of the Company's home centers segment, as well as certain assets and
liabilities of the warehouse, distribution and processing facilities which
service the Company's supermarkets and drug stores, and certain inventories and
real property were contributed to Plainbridge, Inc. ("Plainbridge"), a then
newly formed wholly owned subsidiary of the Company and the shares of
Plainbridge were then distributed to PTK, a then newly formed wholly owned
subsidiary of Holdings (the "Plainbridge Spin-Off"). Following the Plainbridge
Spin-Off, PTK held 100% of the capital stock of both Plainbridge and the
Company. On May 3, 1993, the Company contributed total assets of $1.7 million
and total liabilities of $1.8 million, which represented the Chefmark deli food
preparation operations and the related warehouse and a leased banana ripening
warehouse to Chefmark, Inc. ("Chefmark"), a then newly formed Delaware
corporation, and distributed the shares of Chefmark to Holdings.
On March 1, 1996, the Company reacquired all of the outstanding capital
stock of Plainbridge by means of a capital contribution from PTK. As a result,
Plainbridge is a wholly-owned subsidiary of the Company. Since the acquisition
of the capital stock of Plainbridge is a transfer of interest among entities
under common control, it is being accounted for at historical cost in a manner
similar to pooling-of-interests accounting. Accordingly, the consolidated
financial statements presented herein reflect the assets and liabilities and
related results of operations of the combined entity for all periods.
Management's Plan:
The consolidated financial statements of the Company indicated that, at
January 31, 1998, current liabilities exceeded current assets by $109.3 million
and the stockholder's deficiency was $1.08 billion. Management believes that
cash flows generated from operations, supplemented by the unused borrowing
capacity under its working capital facility (the "Working Capital Facility") and
the availability of capital lease financing, will be sufficient to pay the
Company's debts as they come due, provide for its capital expenditure program
and meet its other cash requirements.
25
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 1-Business-(Continued)
On June 30, 1997, the Company entered into a new $500 million bank credit
agreement (the "Credit Agreement") with a group of lenders led by The Chase
Manhattan Bank. The Credit Agreement includes a $300 million term loan (the
"Term Loan") and a $200 million Working Capital Facility. The Company repaid in
full the former term loan and former working capital facility with the
borrowings obtained under the Credit Agreement (see Note 9).
Note 2-Summary of Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All intercompany
transactions have been eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The accompanying consolidated balance sheets include reserves for self
insured claims relating to customer, employee and vehicle accidents and covered
employee medical benefits. The liabilities for customer and employee accident
claims are recorded at present value, due to the long-term payout of these
claims (see Note 8). While the Company believes that the amounts provided are
adequate to cover its self-insured liabilities, it is reasonably possible that
the final resolution of these claims may differ from the amounts provided.
Fiscal Year:
The Company's fiscal year ends on the Saturday nearest to January 31 of
the following calendar year. Normally, each fiscal year consists of 52 weeks,
but every five or six years the fiscal year consists of 53 weeks. Fiscal 1995
consists of 53 weeks.
Statements of Cash Flows:
All investments and marketable securities with a maturity of three month
or less are considered to be cash equivalents. The Company had $52.0 million of
cash equivalent investments as of January 31, 1998 and had no cash equivalent
investments as of February 1, 1997.
Merchandise Inventories:
Merchandise inventories are valued at the lower of cost or market. Cost
for substantially all merchandise inventories is determined on a last-in,
first-out ("LIFO") basis.
Rental Video Tapes:
Video tapes purchased for rental purposes are capitalized and amortized
over their estimated useful lives. The amortization of video tapes, included in
cost of goods sold, approximated $3.4 million, $3.1 million and $2.8 million in
Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively.
26
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 2-Summary of Significant Accounting Policies-(Continued)
Software:
Externally purchased software is capitalized and amortized over a three
year period. The amortization of capitalized software included in selling,
general and administrative expenses approximated $0.5 million, $0.4 million and
$0.1 million in Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively.
Internally developed software, including software developed by IBM (see Note
22), is expensed as incurred.
Property and Equipment:
Property and equipment are stated at cost. Depreciation and amortization
expense on owned property and equipment is computed on the straight-line method
over the following useful lives: buildings, 40 years; fixtures and equipment,
3-10 years; and leasehold improvements, 8-15 years or lease term, whichever is
shorter. Capital leases are recorded at the present value of minimum lease
payments or fair market value of the related property, whichever is less.
Amortization of property under capital leases is computed on the straight-line
method over the term of the lease or the leased property's estimated useful
life, whichever is shorter.
Long-Lived Assets:
Effective February 4, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of ("SFAS No. 121"). SFAS No. 121
establishes accounting standards for the measurement of the impairment of
long-lived assets, certain intangibles and goodwill related to those assets.
SFAS No. 121 requires that an asset to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The carrying value of
long-lived assets, which are being used in the Company's operations, are
assessed for recoverability based upon groups of assets and the related cash
flow generated by such assets. Assets held for sale are reviewed for impairment
based upon the estimated net realizable value of such assets. The adoption of
SFAS No. 121, on February 4, 1996, had no effect on the Company's
financial condition or results of operations.
Deferred Financing Costs:
Deferred financing costs are amortized utilizing the interest method over
the life of the related indebtedness.
Book Overdraft:
Under the Company's cash management system, checks issued but not
presented to banks result in overdraft balances for accounting purposes and are
classified as book overdrafts.
Revenue Recognition:
Revenue is recognized at the point of sale to the customer.
Advertising Costs:
Advertising costs, net of vendor reimbursements, are expensed as incurred
and were $18.9 million, $23.7 million and $30.6 million in Fiscal 1997, Fiscal
1996 and Fiscal 1995, respectively.
27
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 2-Summary of Significant Accounting Policies-(Continued)
Store Preopening and Closing Costs:
Store preopening costs are expensed as incurred. Store closing costs, such
as future rent and real estate taxes subsequent to the actual store closing, net
of expected sublease recovery, are recorded at present value when management
makes a decision to close a store (see Note 8).
Income Taxes:
The Company's income taxes are computed based on a tax sharing agreement
with its ultimate parent, SMG-II Holdings Corporation ("SMG-II"), in which the
Company computes a hypothetical tax return as if the Company was not joined in a
consolidated or combined return with SMG-II. The Company must pay SMG-II the
positive amount of any such hypothetical tax. If the hypothetical tax return
shows entitlement to a refund, including any refund attributable to a carryback,
then SMG-II will pay to the Company the amount of such refund.
Earnings (Loss) Per Common Share:
Since the Company is a wholly owned subsidiary, earnings (loss) per share
is not presented.
Reclassifications:
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the Fiscal 1997 presentation.
New Accounting Standards Not Yet Adopted:
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is not expected
to have an effect on the Company's financial statements currently being
presented because the Company, at this time, has no items of comprehensive
income other than net income.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS No. 131"), which will be effective for financial statements beginning
after December 15, 1997. SFAS No. 131 redefines how operating segments are
determined and requires expanded quantitative disclosures relating to a
company's operating statements. SFAS No. 131, which the Company is evaluating,
will impact the financial statements to the extent that it is necessary to
provide additional disclosure about the Company's segments.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits ("SFAS No. 132"), which will be effective for financial
statements beginning after December 15, 1997. SFAS No. 132 revises employers'
disclosure about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. The Company will adopt
SFAS No. 132 in Fiscal 1998 and believes it will impact the financial statements
to the extent that it is necessary to provide additional disclosure about the
Company's pensions and other postretirement benefits.
28
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 3-Supply and Distribution Agreements
On January 29, 1998, the Company sold its Woodbridge, New Jersey
distribution center and office complex and its leasehold interests in its two
distribution centers and its banana ripening facility in North Brunswick, New
Jersey, Dayton, New Jersey and Avenel, New Jersey, respectively (all of the
foregoing buildings are hereinafter referred to as, collectively the
"Facilities"), to C&S Wholesale Grocers, Inc. ("C&S"), including the fixtures,
equipment and inventory in each of those Facilities, for $104.4 million (the
"C&S Purchase Agreement"). The Company used $32.5 million of the net proceeds to
pay down a portion of the Term Loan. A portion of the net proceeds were used to
pay down the Working Capital Facility at the end of Fiscal 1997. The remainder
of the proceeds were invested in marketable securities and subsequent to year
end were utilized to pay down accounts payable related to the inventory sold in
connection with the C&S Purchase Agreement and other liabilities.
Simultaneously, the Company and C&S entered into a 15 year supply agreement (the
"Supply Agreement") pursuant to which C&S will supply substantially all of the
Company's grocery, frozen and perishable merchandise requirements, formerly
owned and warehoused by the Company. As a result of these agreements, the
Company recorded deferred income of $60.8 million. Such deferred income consists
of (i) $25.0 million received by the Company for future trade discounts and
rebates, which will be amortized to operations by the Company as it is earned,
and (ii) $35.8 million in net proceeds received in excess of the fair value of
the assets sold; such excess has been deferred and will be amortized to
operations over the life of the Supply Agreement. In addition, current year
results include a $0.8 million gain on a LIFO liquidation related to the sale of
such inventory.
In addition, the Company outsourced its trucking operations to a third party
trucking company, pursuant to a ten year trucking services agreement effective
October 5, 1997, in which the trucking company will deliver merchandise to all
of the Company's stores.
Note 4-Accounts Receivable
Accounts receivable are comprised of the following (dollars in thousands):
January 31, February 1,
1998 1997
--------- ---------
Prescription plans..................................... $ 10,074 $ 10,397
Other.................................................. 2,048 3,366
--------- ---------
Accounts receivable.................................... 12,122 13,763
Less: allowance for doubtful accounts(a)............... 1,194 1,271
--------- ---------
Accounts receivable, net............................... $ 10,928 $ 12,492
--------- ---------
--------- ---------
---------
(a) Fiscal 1997 includes a credit of $0.2 million and a recovery of $0.1
million. Fiscal 1996 includes a provision of $0.1 million and a recovery of
$0.3 million.
Note 5--Merchandise Inventories
Merchandise inventories are comprised of the following (dollars in
thousands):
January 31, February 1,
1998 1997
--------- -------------
Merchandise inventories at FIFO cost.............. $ 184,862 $ 258,417
Less: LIFO reserve................................ 36,087 41,486
--------- -------------
Merchandise inventories at LIFO cost.............. $ 148,775 $ 216,931
--------- -------------
--------- -------------
29
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 5-Merchandise Inventories-(Continued)
The decrease in the merchandise inventories and the LIFO reserve was
primarily due to the sale of the Company's warehouse inventory related to its
grocery, frozen and perishable merchandise (see Note 3). In addition, the
Company sold its warehouse pharmaceutical inventory to a pharmacecutical
wholesaler. For Fiscal 1997, the liquidation of LIFO layers resulted in a $2.8
million gain related to such inventory. Liquidation of LIFO layers in Fiscal
1996 and Fiscal 1995 did not have a significant effect on the results of
operations.
Note 6-Property and Equipment
Property and equipment are comprised of the following (dollars in
thousands):
January 31, February 1,
1998 1997
--------- --------------
Land................................................ $ 54,065 $ 61,258
Buildings and building improvements................. 169,490 201,364
Fixtures and equipment.............................. 176,443 202,952
Leasehold costs and improvements.................... 279,386 293,626
Transportation equipment............................ 19,820 19,706
--------- --------------
Property and equipment, owned....................... 699,204 778,906
Property and equipment under capital leases......... 213,094 206,819
--------- --------------
Property and equipment, at cost..................... 912,298 985,725
Less: accumulated depreciation and amortization..... 382,756 382,148
--------- --------------
Property and equipment, net......................... $ 529,542 $ 603,577
--------- --------------
--------- --------------
The decrease in the owned property and equipment was primarily due to the
sale of the distribution facilities (see Note 3). During the fourth quarter of
Fiscal 1996, the Company recorded a pretax charge of $5.4 million to write down
fixed assets held for sale, principally in its southern region, to their
estimated net realizable values. This charge is included in depreciation and
amortization expense in the accompanying consolidated statement of operations
for Fiscal 1996.
Note 7--Deferred Financing Costs, Net
Deferred financing costs are comprised of the following (dollars in
thousands):
January 31, February 1,
1998 1997
--------- ---------
Deferred financing costs................ $ 28,599 $ 51,378
Less: accumulated amortization.......... 10,052 22,635
--------- ---------
Deferred financing costs, net........... $ 18,547 $ 28,743
--------- ---------
--------- ---------
In connection with the Credit Agreement, the Company incurred deferred
financing costs of $8.0 million. Also, in connection therewith, the Company
wrote off, as part of the extraordinary items, $12.8 million of net deferred
financing costs associated with debt which was extinguished (see Note 17).
30
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 8-Other Noncurrent Liabilities
Other noncurrent liabilities are comprised of the following (dollars in
thousands):
January 31, February 1,
1998 1997
--------- ---------
Deferred income related to the C&S transaction (see Note 3).... $ 60,837 $ --
Self-insured liabilities....................................... 58,567 62,485
Pension and deferred compensation.............................. 20,296 20,227
Other postretirement and postemployment benefits............... 39,942 41,399
Closed stores.................................................. 13,798 20,117
Lease commitments.............................................. 6,810 7,107
Other.......................................................... 43,761 45,891
--------- ---------
Other noncurrent liabilities................................... $ 244,011 $ 197,226
--------- ---------
--------- ---------
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 31, February 1,
1998 1997
------------ ---------
Term loans................................................................... $ 263,250 $ 243,127
Working capital facilities................................................... -- 73,500
9.625% Senior Subordinated Notes due 2003 ("Senior Subordinated Notes")...... 438,134 437,780
11.625% Subordinated Notes due 2002 ("Subordinated Notes")................... 199,017 199,017
12.625% Subordinated Debentures due 2002 ("Subordinated Debentures")......... 95,750 95,750
10.75% Deferred Coupon Notes due 2003 ("Deferred Coupon Notes").............. 187,068 168,559
Debt payable to Holdings..................................................... 983 983
Industrial revenue bonds..................................................... 6,375 6,375
Other debt (primarily mortgages)............................................. 30,799 34,979
------------ ---------
Total debt................................................................... 1,221,376 1,260,070
Less: current maturities..................................................... 43,478 74,431
------------ ---------
Long-term portion............................................................ $ 1,177,898 $ 1,185,639
------------ ---------
------------ ---------
Scheduled Maturities of Debt:
Long-term debt principal payments are as follows (dollars in thousands):
Principal
Fiscal Years Payments
------------ --------
1998................ $ 43,478
1999................ 14,858
2000................ 78,238
2001................ 263,849
2002................ 195,750
2003................ 625,203
-----------
$ 1,221,376
-----------
-----------
31
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 9-Long-Term Debt-(Continued)
Bank Credit Agreement:
On June 30, 1997, the Company entered into the Credit Agreement with a
group of lenders led by The Chase Manhattan Bank. The Credit Agreement includes
a $300 million Term Loan and a $200 million Working Capital Facility. The
Company repaid in full the former term loan and former working capital facility
with the borrowings obtained under the Credit Agreement.
Under the Credit Agreement, the Term Loan and Working Capital Facility
bear interest at floating rates, ranging from LIBOR plus 2.25% to LIBOR plus
2.50%. The Company is required to repay a portion of its borrowings under the
Term Loan each year, so as to retire such indebtedness in its entirety by
December 15, 2001. Under the Working Capital Facility, which expires on June 15,
2001, the Company can borrow or obtain letters of credit in an aggregate amount
not to exceed $200 million, of which the maximum of $125 million can be in
letters of credit. In addition, pursuant to a Permitted Subordinated Debt
Refinancing (as defined in the Credit Agreement), the Working Capital Facility
and a portion of the Term Loan can be extended up to an additional two and
one-half years and the remainder of the Term Loan can be extended up to an
additional three and one-half years from the original expiration dates.
At January 31, 1998, the Company was in compliance with all of its debt
covenants. Based upon projected results for the upcoming fiscal year, the
Company believes it will be in compliance with its debt covenants which include
financial covenants concerning levels of operating cash flow, minimum interest
and rent expense coverage, maximum leverage ratio, maximum senior debt leverage
ratio, maximum consolidated rental payments and maximum capital expenditures.
The Credit Agreement also contains other covenants including, but not limited
to, covenants with respect to the following matters: (i) limitation on
indebtedness; (ii) limitation on liens; (iii) restriction on mergers; (iv)
restriction on investments, loans, advances, guarantees and acquisitions; (v)
restriction on assets sales and sale/leaseback transactions; (vi) restriction on
certain payments of indebtedness and incurrence of certain agreements and (vii)
restriction on transactions with affiliates.
The Company believes it has sufficient unused borrowing capacity under the
Working Capital Facility, which can be utilized for unforeseen or for seasonal
cash requirements. At January 31, 1998, the Company had $92.8 million in
outstanding letters of credit and $107.2 million in unused borrowing capacity
under its Working Capital Facility.
Senior Subordinated Notes:
The Senior Subordinated Notes accrete to a maturity value of $440.0
million in Fiscal 2003. These notes pay cash interest on a semiannual basis and
have no sinking fund requirements.
Subordinated Notes:
The Subordinated Notes mature in Fiscal 2002 and pay cash interest on a
semiannual basis. These notes contain a sinking fund provision that requires the
Company to deposit $49.8 million (25% of the original aggregate principal
amount) with the trustee of the Subordinated Notes on June 15 in each of Fiscal
2000 and Fiscal 2001 for the redemption of the Subordinated Notes, at a
redemption price equal to 100% of the principal amount thereof, plus accrued
interest to the redemption date and providing for the redemption of 50% of the
original aggregate principal amount of such notes prior to maturity.
32
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 9-Long-Term Debt-(Continued)
Subordinated Debentures:
The Subordinated Debentures mature in Fiscal 2002. These debentures pay
cash interest on a semiannual basis and have no sinking fund requirements.
Deferred Coupon Notes:
The Deferred Coupon Notes accrete to a maturity value of $225.3 million in
Fiscal 2003. These notes begin paying cash interest on a semiannual basis on May
1, 2000 and have no sinking fund requirements.
Industrial Revenue Bonds:
Interest rates for the industrial revenue bonds range from 10.5% to 10.9%.
The industrial revenue bonds are payable in Fiscal 2003.
Other Debt:
Other debt includes mortgage notes, which are secured by property and
equipment, having a net book value of $51.7 million at January 31, 1998 and
$54.5 million at February 1, 1997. These borrowings, whose interest rates
averaged 10.5%, are payable in installments ending in Fiscal 2000, including a
scheduled payment of $27.4 million in Fiscal 1998.
Note 10-Fair Value of Financial Instruments
The carrying amount and fair values of the Company's financial instruments
are as follows (dollars in thousands):
January 31, 1998 February 1, 1997
---------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- --------- -----------
Term loans................................. $ 263,250 $ 263,250 $ 243,127 $ 243,127
Working capital facilities................. -- -- 73,500 73,500
Senior Subordinated Notes.................. 438,134 421,344 437,780 415,015
Subordinated Notes......................... 199,017 181,782 199,017 202,340
Subordinated Debentures.................... 95,750 88,846 95,750 96,353
Deferred Coupon Notes...................... 187,068 133,596 168,559 142,471
Debt payable to Holdings................... 983 898 983 999
Industrial revenue bonds................... 6,375 6,375 6,375 6,375
Other debt (primarily mortgages)........... 30,799 30,799 34,979 34,979
----------- ---------- ---------- -----------
Total debt............................ $ 1,221,376 $ 1,126,890 $ 1,260,070 $ 1,215,159
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
The fair value of the term loans and working capital facilities at January
31, 1998 and February 1, 1997 approximated their carrying value due to their
floating interest rates. The fair value of the notes and debentures are based on
the quoted market prices at January 31, 1998 and February 1, 1997 since such
instruments are publicly traded. The Company has evaluated its other debt
(primarily mortgages) and industrial revenue bonds and believes, that based on
interest rates, related terms and maturities, that the fair value of such
instruments approximates their respective carrying amounts. As of January 31,
1998 and February 1, 1997, the carrying values of cash and cash equivalents,
accounts receivable and accounts payable approximated their fair values due to
the short-term maturities of these instruments.
33
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 11-Interest Expense
Interest expense is comprised of the following (dollars in thousands):
Fiscal Years
---------------------------------------------
1997 1996 1995
---- ---- ----
Term loans...................................................... $ 22,884 $ 22,616 $ 29,067
Working capital facilities...................................... 4,969 5,444 5,601
Senior Subordinated Notes
Amortization of original issue discount...................... 354 354 354
Currently payable............................................ 42,350 42,350 42,350
Subordinated Notes.............................................. 23,151 23,136 23,136
Subordinated Debentures......................................... 12,088 12,088 12,088
Deferred Coupon Notes, accruable but not payable................ 18,509 16,678 15,028
Debt payable to Holdings........................................ 114 114 114
Amortization of debt issuance costs............................. 5,542 7,426 7,140
Lease obligations............................................... 22,091 19,364 16,646
Mortgages payable............................................... 3,462 3,736 4,210
Other, net...................................................... 8,654 8,163 9,015
--------- -------- ---------
Interest expense................................................ $ 164,168 $ 161,469 $ 164,749
--------- -------- ---------
--------- -------- ---------
The Company made cash interest payments of $142.0 million, $135.5 million
and $142.7 million in Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively.
Note 12-Leases
At January 31, 1998, the Company was liable under terms of noncancellable
leases for the following minimum lease commitments (dollars in thousands):
Capital Operating
Fiscal Years Leases Leases
- ------------ ------ ------
1998............................................................... $ 43,337 $ 28,865
1999............................................................... 37,948 29,116
2000............................................................... 35,391 29,164
2001............................................................... 26,165 27,489
2002............................................................... 22,312 26,131
Later years........................................................ 249,473 297,742
---------- ----------
Total minimum lease payments(a).................................... 414,626 $ 438,507
----------
----------
Less: executory costs (such as taxes, maintenance and insurance)... 2,440
----------
Net minimum lease payments......................................... 412,186
Less: amounts representing interest................................ 217,576
----------
Present value of net minimum lease payments (including current
installments of $24,337)........................................ $ 194,610
----------
----------
-------
(a) Net of sublease income of $0.8 million and $74.4 million for capital and
operating leases, respectively.
During Fiscal 1997, Fiscal 1996 and Fiscal 1995, the Company incurred
capital lease obligations of $23.6 million, $39.2 million and $41.1 million,
respectively, in connection with property and equipment lease agreements. These
capital lease amounts are noncash and, accordingly, have been excluded from the
consolidated statements of cash flows.
34
PATHMARK STORES, INC.
NOTES TO CONSOLIDATION FINANCIAL STATEMENTS (Continued)
Note 12--Leases--(Continued)
During the third quarter of Fiscal 1996, the Company sold three of its
supermarket properties for $19.3 million, net of fees of $1.4 million and income
taxes of $0.7 million, and simultaneously leased back such properties. The net
proceeds were used to paydown debt, primarily the former working capital
facility. Due to the Company's continuing involvement in such properties, no
gain has been recorded and the transaction has been accounted for as a
financing, with the associated liability of $21.0 million and $21.1 million
included in lease obligations in the consolidated balance sheet at January 31,
1998 and February 1, 1997, respectively.
Rent expense, under all operating leases having noncancellable terms of more
than one year, is summarized as follows (dollars in thousands):
Fiscal Years
-------------------------------------------
1997 1996 1995
---- ---- ----
Minimum rentals........................ $ 44,396 $ 42,481 $ 42,576
Less: rentals from subleases........... (8,131) (9,691) (10,917)
--------- --------- -------
Rent expense........................... $ 36,265 $ 32,790 $ 31,659
--------- --------- -------
--------- --------- -------
Note 13--Related Party Transactions
The Company is a party to an agreement pursuant to which the Company
provides certain administrative services to Chefmark. Such services include,
among other things, legal, human resources, data processing, insurance,
accounting, tax, treasury and property management services. The agreement has an
initial term of seven years, which expires in Fiscal 2000, with renewal options.
The cost of the services charged to Chefmark under this agreement was
approximately $1.4 million in each of Fiscal 1997, Fiscal 1996 and Fiscal 1995.
During Fiscal 1996, in conjunction with the hiring of a Chief Executive
Officer (the "CEO"), SMG-II granted the CEO an equity package (the "Equity
Strip") independently valued at $3.4 million and consisting of restricted shares
of SMG-II Preferred Stock and restricted shares and options of SMG-II Common
Stock. The Company recorded the Equity Strip as deferred compensation by the
means of a capital contribution from SMG-II (see Note 21).
In addition, the Company retained John W. Boyle, a Director of the Company,
to act as its interim Chairman & Chief Executive Officer for the period of March
20, 1996 through October 7, 1996 (the "Transition Period"). Under the terms of
the consulting arrangement between the Company and Mr. Boyle, the Company paid
Mr. Boyle a consulting fee of $41,667 per month ($288,980 in the aggregate) plus
living and travel expenses during the Transition Period. In addition, Mr. Boyle
received a completion bonus of $100,000 when the CEO commenced employment with
the Company.
During Fiscal 1995, the Company paid ML&Co. fees of approximately $0.6
million related to the sale of the freestanding drug stores.
In March 1990, Jerry G. Rubenstein, a Director of the Company, borrowed from
Holdings $100,000 in order to help finance his purchase of Holdings' Class A
Common Stock. Subsequently, such shares of Holdings' Class A Common Stock were
exchanged for shares of SMG-II Class A Common Stock. The foregoing indebtedness
to Holdings is evidenced by a full recourse promissory note (the "Recourse
Note"). The Recourse Note is for a term of ten years and bears interest at the
rate of 8.02% per annum, payable annually. Except as otherwise provided in the
Recourse Note, no principal on such recourse loan shall be due and payable until
the tenth anniversary of the date of issue for such Recourse Note. Under the
terms of
35
PATHMARK STORES, INC.
NOTES TO CONSOLIDATION FINANCIAL STATEMENTS(Continued)
Note 13--Related Party Transactions--(Continued)
the agreement pursuant to which the shares of Holdings' Class A Common Stock
were exchanged for shares of SMG-II Class A Common Stock, the Company is
obligated to pay to each Management Investor who pays interest on his Recourse
Note (except under certain circumstances) an amount equal to such interest, plus
an amount sufficient to pay any income taxes resulting from the above prescribed
payment after taking into account the value of any deduction available to him as
a result of the payment of such interest or taxes. As of April 1, 1998, Mr.
Rubenstein remained indebted to Holdings in the amount of $100,000.
Note 14--Retirement and Benefit Plans
The Company has several noncontributory defined benefit pension plans, the
most significant of which is the SGC Pension Plan, which covers substantially
all non-union and certain union associates. Pension benefits to retired and to
terminated vested associates are primarily based upon their length of service
and upon a percentage of qualifying compensation. The Company's funding policy,
which is consistent with federal funding requirements, is intended to provide
not only for benefits attributed to service to date, but also for those benefits
expected to be earned in the future. Due to the overfunding status of the SGC
Pension Plan, no contributions were required during the last three fiscal years.
The Company also maintains an unfunded supplemental retirement plan for
participants in the SGC Pension Plan to provide benefits in excess of amounts
permitted to be paid under the provisions of the tax law. Additionally, the
Company has entered into individual retirement agreements with certain
current and retired executives providing for unfunded supplemental pension
benefits upon their retirement after attainment of age 60.
The following table sets forth the funded status of the pension plans and
the amounts recognized in the Company's financial statements (dollars in
thousands):
January 31, 1998 February 1, 1997
--------------------------------- ----------------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
------------ ------------ ------------ ------------
Actuarial present value of accumulated
benefit obligation:
Vested............................... $ (100,353) $ (20,573) $ (84,092) $ (20,922)
Unvested............................. (1,982) -- (5,988) (215)
------------ ------------ ------------- ----------
Total (102,335) (20,573) (90,080) (21,137)
Plan assets at fair value............... 213,771 -- 171,270 447
------------ ------------ ------------- ----------
Plan assets higher (lower) than
accumulated benefit obligation........ $ 111,436 $ (20,573) $ 81,190 $ (20,690)
------------ ------------ ------------- ----------
------------ ------------ ------------- ----------
Actuarial present value of projected
benefit obligation.................... $ (124,303) $ (22,461) $ (114,776) $ (23,200)
Plan assets at fair value............... 213,771 -- 171,270 447
------------ ------------ ------------- ----------
Plan assets higher (lower) than
projected benefit obligation.......... 89,468 (22,461) 56,494 (22,753)
Unrecognized net gain from past
experience
different from that assumed and (72,162) (274) (43,296) (90)
effects of
changes in assumptions................
Unrecognized prior service cost......... (13) 702 1,111 955
------------ ------------ ------------- ----------
Prepaid (accrued) pension cost.......... $ 17,293 $ (22,033) $ 14,309 $ (21,888)
------------ ------------ ------------- ----------
------------ ------------ ------------- ----------
Assets of the Company's pension plans are invested in marketable securities
comprised primarily of equities of domestic corporations, U.S. Government
instruments and money market investments.
36
PATHMARK STORES, INC.
NOTES TO CONSOLIDATION FINANCIAL STATEMENTS(Continued)
Note 14--Retirement and Benefit Plans--(Continued)
The following table provides the assumptions used in determining the
actuarial present value of the projected benefit obligation at January 31, 1998
and February 1, 1997:
January 31, February 1,
1998 1997
---------- ----------
Weighted average discount rate....................... 7.0% 7.5%
Rate of increase in future compensation levels....... 4.0 4.5
Expected long-term rate of return on plan assets..... 9.5 9.5
The change in the weighted average discount rate, which is used in
determining the actuarial present value of the projected benefit obligation,
will not have a material impact on the Company's net pension cost in Fiscal
1998.
The net periodic pension cost (income) is comprised of the following
components (dollars in thousands):
Fiscal Years
-------------------------------------------------
1997 1996 1995
---- ---- ----
Service cost of benefits earned during the year.............. $ 3,208 $ 3,771 $ 3,402
Interest cost on projected benefit obligation................ 9,847 10,182 9,533
Actual return on plans' assets............................... (49,357) (28,109) (40,531)
Net amortization and deferral................................ 35,105 15,988 27,747
-------- -------- ----------
Net periodic pension (income) cost........................... $ (1,197) $ 1,832 $ 151
-------- -------- ----------
-------- -------- ----------
The Company also contributes to many multi-employer plans which provide
defined benefits to certain union associates. The Company's contributions to
these multi-employer plans were $19.0 million, $18.7 million and $17.7 million
in Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively.
The Company sponsors a savings plan for eligible non-union associates.
Contributions under the plan are based on specified percentages of associate
contributions. The Company's contributions to the savings plan were $3.0
million, $3.6 million and $3.7 million in Fiscal 1997, Fiscal 1996 and Fiscal
1995, respectively.
Note 15--Other Postretirement and Postemployment Benefits
The Company provides its associates other postretirement benefits,
principally health care and life insurance benefits. The accumulated
postretirement benefit obligation was determined utilizing an assumed discount
rate of 7.0% at January 31, 1998 and 7.5% at February 1, 1997 and by applying
the provisions of the Company's medical plans, the established maximums and
sharing of costs, the relevant actuarial assumptions and the health-care cost
trend rates, which are projected at 6.25% and grade down to 4.0% in Fiscal 2002.
The effect of a 1% increase in the assumed cost trend rate would change the
accumulated postretirement benefit obligation by approximately $1.2 million as
of January 31, 1998 and would increase the net periodic postretirement benefit
income by $0.1 million for Fiscal 1997.
37
PATHMARK STORES, INC.
NOTES TO CONSOLIDATION FINANCIAL STATEMENTS(Continued)
Note 15--Other Postretirement and Postemployment Benefits--(Continued)
The net postretirement benefit cost (income) is comprised of the following
components (dollars in thousands):
Fiscal Years
-----------------------------------------------
1997 1996 1995
---- ---- ----
Service cost of benefits earned during the year............... $ 399 $ 545 $ 613
Interest cost on accumulated postretirement benefit
obligation................................................. 1,139 1,640 2,267
Net amortization and deferral................................. (1,866) (931) (460)
Curtailment gain.............................................. -- (2,000) --
-------- -------- --------
Net postretirement benefit cost (income)...................... $ (328) $ (746) $ 2,420
-------- -------- --------
-------- -------- --------
During the second quarter of Fiscal 1996, the Company eliminated
postretirement medical coverage for active non-union associates who retire after
December 31, 1997. This change resulted in a pretax curtailment gain of $2.0
million.
The following table provides information on the status of the
postretirement plans (dollars in thousands):
January 31, February 1,
1998 1997
----------- -----------
Accumulated postretirement benefit obligation:
Retirees.................................................................... $ 7,231 $ 9,678
Other active plan participants.............................................. 10,077 10,180
--------- ---------
Total....................................................................... 17,308 19,858
Unrecognized prior service cost................................................. 5,748 7,026
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions................................ 8,690 6,798
--------- ---------
Accrued postretirement cost..................................................... $ 31,746 $ 33,682
--------- ---------
--------- ---------
The decrease in the accumulated postretirement benefit obligation and the
unrecognized prior service cost was due to actual benefit payments made and
amortization gains recognized from the elimination of postretirement medical
coverage for active non-union associates in Fiscal 1996.
The Company also provides its associates postemployment benefits, primarily
long-term disability and salary continuation. The obligation for these benefits
was determined by application of the provisions of the Company's long-term
disability plan and includes the age of active claimants at disability and at
valuation, the length of time on disability and the probability of the claimant
remaining on disability to maximum duration. These liabilities are recorded at
their present value utilizing a discount rate of 4%.
38
PATHMARK STORES, INC.
NOTES TO CONSOLIDATION FINANCIAL STATEMENTS(Continued)
Note 15--Other Postretirement and Postemployment Benefits--(Continued)
The accumulated postemployment benefit obligation as of January 31, 1998 and
February 1, 1997 was $8.9 million and $8.5 million, respectively. The net
postemployment benefit cost consisted of the following components (dollars in
thousands):
Fiscal Years
-------------------------------------------
1997 1996 1995
---- ---- ----
Service cost of benefits earned during the year................. $ 1,412 $ 1,314 $ 997
Interest cost on accumulated postemployment obligation.......... 409 316 296
------- -------- -------
Net postemployment benefit cost................................. $ 1,821 $ 1,630 $ 1,293
------- -------- -------
------- -------- -------
Note 16--Income Taxes
The income tax benefit (provision) is comprised of the following (dollars in
thousands):
Fiscal Years
----------------------------------------------------
1997 1996 1995
---- ---- ----
Current
Federal.......................................... $ (4,629) $ 1,084 $ (1,669)
State............................................ (2,719) 769 2,172
Deferred
Federal.......................................... 18,755 9,626 (9,233)
State............................................ 7,198 2,932 (6,254)
Change in valuation allowance.................... (1,900) -- 9,070
---------- ---------- ---------
Income tax benefit (provision)....................... $ 16,705 $ 14,411 $ (5,914)
---------- ---------- ---------
---------- ---------- ---------
The effective tax rate for the income tax benefit (provision) differs from
the federal statutory tax rate as follows:
Fiscal Years
----------------------------------------
1997 1996 1995
---- ---- ----
Federal statutory tax rate..................................... 35.0% 35.0% (35.0)%
State income taxes............................................. 6.5 7.0 (6.9)
Change in valuation allowance.................................. (4.2) -- 23.5
Tax credits.................................................... -- -- 1.5
Other.......................................................... (0.1) (0.1) 1.6
------ ------ ------
Effective tax rate............................................. 37.2% 41.9% (15.3)%
------ ------ ------
------ ------ ------
39
PATHMARK STORES, INC.
NOTES TO CONSOLIDATION FINANCIAL STATEMENTS(Continued)
Note 16--Income Taxes--(Continued)
Deferred income tax assets and liabilities consist of the following
(dollars in thousands):
January 31, 1998 February 1, 1997
---------------------------------- ------------------------------
Assets Liabilities Assets Liabilities
Depreciation and amortization.......... $ -- $ 50,216 $ -- $ 65,449
Merchandise inventory and gross profit. -- 11,840 -- 20,449
Prepaid expenses....................... -- 6,108 -- 6,969
Self-insured liabilities............... 36,230 -- 38,906 --
Benefit plans.......................... 6,248 -- 10,011 --
Lease capitalization................... 19,290 -- 17,927 --
Alternative minimum taxes.............. 8,752 -- 8,316 --
General business credits............... 9,019 -- 9,019 --
Net operating loss carryforwards....... 9,223 -- 9,631 --
Other postretirement and
postemployment benefits.............. 17,306 -- 17,791 --
Deferred income........................ 26,909 -- -- --
Closed stores reserves and accrued
expenses............................. 15,402 -- 18,281 --
Capital loss carryforward.............. 29,732 -- 45,850 --
Other.................................. 683 8,870 721 7,779
---------- ---------- -------- --------
Subtotal............................... 178,794 77,034 176,453 100,646
Less: valuation allowance.............. 47,750 -- 45,850 --
---------- ---------- -------- --------
Total.................................. $ 131,044 $ 77,034 $ 130,603 $ 100,646
---------- ---------- -------- --------
---------- ---------- -------- --------
The balance sheet classification of the deferred income tax assets and
liabilities is as follows (dollars in thousands):
January 31, 1998 February 1, 1997
------------------------------- ---------------------------
Current Noncurrent Current Noncurrent
Assets................................ $ 37,695 $ 141,099 $ 36,884 $ 139,569
Liabilities........................... (17,685) (59,349) (29,773) (70,873)
----------- ----------- ---------- -----------
`
Subtotal.............................. 20,010 81,750 7,111 68,696
Less: valuation allowance............. (9,389) (38,361) -- (45,850)
----------- ----------- ---------- -----------
`
Total................................. $ 10,621 $ 43,389 $ 7,111 $ 22,846
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
`
The Company's net deferred income tax assets were $54.0 million and $30.0
million, net of a valuation allowance of $47.8 million and $45.9 million at
January 31, 1998 and February 1, 1997, respectively. The Company believes that
it is more likely than not that the net deferred tax assets will be realized
through the implementation of tax strategies which could generate taxable
income.
During Fiscal 1997, the net increase in the valuation allowance was $1.9
million. This change reflects an increase in the valuation allowance related to
those deferred tax assets which the Company has concluded are not likely to be
realized, partially offset by a decrease in the valuation allowance related to
the utilization of the Company's capital loss carryforwards due to generation of
capital gains from the C&S transaction.
The Company will continue to assess the recoverability of its deferred
income tax assets and further adjustments to the valuation allowance may be
necessary based on the evidence available at that time.
40
PATHMARK STORES, INC.
NOTES TO CONSOLIDATION FINANCIAL STATEMENTS(Continued)
Note 16--Income Taxes--(Continued)
During Fiscal 1995, in conjunction with the Company's evaluation of its
deferred income tax assets, the Company reversed the valuation allowance
related to its net deferred income tax assets. Such reversal of the
valuation allowance totaled $9.1 million and has been included as a
component of the Fiscal 1995 income tax provision.
In Fiscal 1997, Fiscal 1996 and Fiscal 1995, the Company made income tax
payments of $4.8 million, $4.6 million and $21.9 million, respectively, and
received income tax refunds of $4.3 million, $5.5 million and $10.3 million,
respectively.
Note 17--Extraordinary Items
The extraordinary items, representing losses on early extinguishment of
debt, consist of the following (dollars in thousands):
Fiscal Years
-----------------------------------
1997 1996
---- ----
Loss before income taxes.................................................. $ (12,944) $ (1,490)
Income tax benefit........................................................ 5,456 613
------------- -------------
Extraordinary items, net of a tax benefit................................. $ (7,488) $ (877)
------------- -------------
------------- -------------
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.
During the second quarter of Fiscal 1996, in connection with the proceeds
from the sale of certain mortgaged property, the Company made a mortgage paydown
of $5.3 million, including accrued interest and debt premium, resulting in a net
loss on early extinguishment of debt of $0.2 million, net of an income tax
benefit of $0.1 million. During the first quarter of Fiscal 1996, in connection
with the termination of the Plainbridge credit agreement due to the
reacquisition of Plainbridge by Pathmark, the Company wrote off deferred
financing fees, resulting in a net loss on early extinguishment of debt of $0.7
million, net of an income tax benefit of $0.5 million.
Note 18--Restructuring Charge
During the fourth quarter of Fiscal 1996, the Company recorded a pretax
charge of $9.1 million for reorganization and restructuring costs related to its
administrative operations. The restructuring charge included $4.2 million for
the costs of a voluntary early retirement program, which was accepted by 142
employees, and $1.2 million for severance and termination benefits for 80
employees. The remaining charge of $3.7 million primarily relates to consulting
fees incurred in connection with the restructuring and exit costs for facility
consolidation.
As of January 31, 1998, $7.7 million have been expended, of which $4.2
million related to the early retirement program and severance benefits and $3.5
million related to consulting costs and the facility consolidation. The Company
estimates it will expend $0.2 million in Fiscal 1998. The remaining balance of
$1.2 million relates to early retirement benefits which will be expended over
time; such balance is included in the respective pension and postretirement
liability accounts.
41
PATHMARK STORES, INC.
NOTES TO CONSOLIDATION FINANCIAL STATEMENTS(Continued)
Note 19--Lease Commitment Charge
During the fourth quarter of Fiscal 1996, the Company decided to divest a
group of its southern region stores, certain of which have experienced
unprofitable operating results. The Company concluded that the operating losses
being experienced by these stores were other than temporary and that the
projected operating results of such stores would not be sufficient to recover
their long-lived assets and their contractual lease commitments. Further, the
Company believes that these lease costs will not be significantly recoverable
through any future sublease. Therefore, the Company recorded a $8.8 million
pretax charge related to these unfavorable lease commitments, in addition to
writing down the long-lived assets of these stores (see Note 6).
During Fiscal 1997, the Company sold four and closed seven stores that it
announced for divestiture at the end of Fiscal 1996. The results of operations
for these 11 stores were as follows (dollars in thousands):
Fiscal Years
-----------------------------------------------------
1997 1996 1995
---- ---- ----
Sales................................................... $ 42,877 $ 152,599 $ 160,133
----------- ----------- ----------
----------- ----------- ----------
Operating loss.......................................... $ 10,590 $ 10,663 $ 8,364
----------- ----------- ----------
----------- ----------- ----------
Note 20--Disposition of Freestanding Drug Stores
During the second quarter of Fiscal 1995, the Company made a decision to
dispose of its 36 freestanding drug stores and, on July 28, 1995, completed the
sale of 30 of its freestanding drug stores, including merchandise inventory, to
Rite Aid Corporation for $59.9 million. The Company used $25.0 million of the
proceeds to repay a portion of its existing Term Loan and paid a dividend of
$21.8 million to PTK. The Company paid $13.1 million to Holdings in accordance
with the tax sharing agreement, representing income taxes currently due related
to the gain on the sale.
In Fiscal 1995, the Company recorded a pretax gain on the disposition of its
freestanding drug stores of $15.5 million, net of a $19.0 million charge related
to the estimated exit costs of the remaining six freestanding drug stores. Five
of the remaining six freestanding drug stores closed during Fiscal 1995 and the
sixth store closed during the second quarter of Fiscal 1996.
The following summarizes the activity related to the exit costs (dollars in
thousands):
Amount
Balance, January 28, 1995.............................................................. $ --
To record estimated exit costs...................................................... 18,955
Activity............................................................................ (804)
-------------
Balance, February 3, 1996.............................................................. 18,151
Activity............................................................................ (2,306)
-------------
Balance, February 1, 1997.............................................................. 15,845
Activity............................................................................ (3,007)
-------------
Balance, January 31, 1998.............................................................. $ 12,838
-------------
-------------
During Fiscal 1997, two of the closed drug stores were sold and one lease
was terminated. The remaining balance of $12.8 million at January 31, 1998
reflects the future rent and real estate taxes, net of expected sublease
recoveries, related to the remaining three closed drug stores which have not
been subleased.
42
PATHMARK STORES, INC.
NOTES TO CONSOLIDATION FINANCIAL STATEMENTS(Continued)
Note 21--Chief Executive Officer 1996 Employment Agreement
On October 8, 1996, the Company hired a CEO pursuant to a five-year
employment agreement (the "Employment Agreement"). In conjunction with his
employment, SMG-II granted to the CEO an Equity Strip consisting of 8,520
restricted shares of a new series of SMG-II Preferred Stock and 19,851
restricted shares of SMG-II Common Stock and options to purchase 100,000 shares
of SMG-II Common Stock at an initial exercise price of $100 per share (the
"Options") with the said exercise price increasing over time. The Equity Strip
was valued at $3.4 million at the date of issuance, based upon an independent
appraisal, and will vest over the term of the Employment Agreement or earlier
with the occurrence of an employment-related event, as defined, and will be
forfeited in its entirety upon the occurrence of a termination event, as
defined. The Equity Strip is being amortized as compensation expense in the
Company's statement of operations over the term of the Employment Agreement. The
Options were accounted for by SMG-II using the methods prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
as a result, no compensation expense was recorded. The Options will vest over
four years and expire one year after being fully vested, except for the portion
of the Options that vest on the day before the fifth year and has not yet become
exercisable, the expiration of which will be extended to year seven. If
employment with the Company should end as a result of a termination event, the
Options (whether or not then vested) will be immediately and irrevocably
forfeited, except in certain circumstances. Vested Options do not become
exercisable until the occurrence of certain events related generally to the
realization of a third-party sale of SMG-II Common Stock. The CEO also received
(a) a one-time signing bonus of $1 million, which is being amortized as
compensation expense in the Company's statement of operations over the term of
the Employment Agreement, and (b) a $4.5 million loan evidenced by sixteen
separate promissory notes. Under the terms of each note, if he is in full
employment of the Company on a quarterly anniversary of his hiring date, his
obligation to pay such note maturing on such date will be forgiven as to
principal, but not any then accrued and unpaid interest. The Company has and
will continue to record compensation expense upon the forgiveness of each note.
In the event his employment ends, as a result of a termination event, prior to a
change in control, as defined, each note will become immediately due and payable
as to all outstanding principal and all accrued and unpaid interest. These
notes, which bear interest at a blended rate of approximately 6%, are on a
full-recourse basis and secured by the Equity Strip, the Options and any shares
acquired upon exercise of such Options.
Note 22--Commitments and Contingencies
Rickel:
In connection with the sale of its home centers segment in Fiscal 1994,
the Company, as lessor, entered into nine leases for certain of the Company's
owned real estate properties with Rickel, as tenant. In addition, the Company
assigned to Rickel twenty-six third party leases.
In January 1996, Rickel filed for bankruptcy protection under Chapter
11 of the United States Bankruptcy Code. Subsequent to the filing, Rickel
assigned two leases, terminated two leases and rejected nine leases returning
these nine leases back to the Company. Of these nine rejected leases, two
have been settled with the landlord, one has been assigned to a large
retailer, one of the properties has been sold and the other five properties
are being actively marketed by the Company to other prospective tenants.
In September 1997, Rickel announced that it was terminating its retail
operations and liquidating its retail inventory. In February 1998, Rickel
entered into an agreement to assign thirteen of the Company's leases to Staples,
Inc. and additionally, allow Staples, Inc. until May 1, 1998 to decide whether
to lease an additional seven properties.
With respect to the remaining two locations, Rickel has not yet determined
whether they will reject or assign such leases.
43
PATHMARK STORES, INC.
NOTES TO CONSOLIDATION FINANCIAL STATEMENTS(Continued)
Note 22--Commitments and Contingencies--(Continued)
Management has assessed its exposure with respect to this matter and has
concluded that it has sufficient reserves to cover any resulting liability which
may occur, including the future rent and real estate taxes, net of expected
sublease recoveries, of the five properties that have been returned to the
Company, as well as the nine other properties that could be returned to the
Company.
Information Services Outsourcing:
In August 1991, the Company entered into a ten year agreement with IBM, to
provide a wide range of information systems services. Under the agreement, IBM
has taken over the Company's data center operations and mainframe processing and
information system functions and is providing business applications and systems
designed to enhance the Company's customer service and efficiency. The charges
under this agreement are based upon the services requested at predetermined
rates. The Company may terminate the agreement upon 90 days notice with payment
of a specified termination charge. The amounts expensed under this agreement in
the accompanying consolidated statements of operations were $23.7 million, $22.1
million and $21.0 million during Fiscal 1997, Fiscal 1996 and Fiscal 1995,
respectively.
Other:
The Company is also a party to a number of legal proceedings in the
ordinary course of business. Management believes that the ultimate resolution of
these proceedings will not, in the aggregate, have a material adverse impact on
the financial condition, results of operations or business of the Company.
44
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 23--Quarterly Financial Data (Unaudited)
Financial data for the interim periods of Fiscal 1997 and Fiscal 1996 is
as follows (dollars in thousands):
13 Weeks Ended
----------------------------------------------------------------
May 3, August 2, November 1, January 31, Fiscal
1997 1997 1997 1998 1997
-------- --------- ---------- ---------- ----------
52 Weeks Ended
January 31, 1998
Sales......................... $922,319 $931,833 $900,986 $940,727 $3,695,865
Gross profit(a)............... 259,262 262,150 248,174 273,990 1,043,576
Selling, general and
administrative expenses...... 212,341 213,095 205,292 210,158 840,886
Depreciation and
amortization.................. 20,174 19,942 21,366 21,931 83,413
Operating earnings............. 26,747 29,113 21,516 41,901 119,277
Interest expense............... (41,290) (41,262) (40,368) (41,248) (164,168)
Earnings (loss) before income
taxes and extraordinary
items........................ (14,543) (12,149) (18,852) 653 (44,891)
Income tax benefit
(provision).................. 5,701 4,836 7,630 (1,462) 16,705
Loss before
extraordinary items.......... (8,842) (7,313) (11,222) (809) (28,186)
Extraordinary items, net of an
income tax benefit........... -- (7,488) -- -- (7,488)
Net loss....................... $ (8,842) $(14,801) $(11,222) $ (809) $ (35,674)
13 Weeks Ended
----------------------------------------------------------------
May 4, August 3, November 2, February 1, Fiscal
1996 1996 1996 1997 1996
-------- --------- ---------- ---------- ----------
52 Weeks Ended
February 1, 1997
Sales.......................... $912,837 $931,237 $911,099 $955,350 $3,710,523
Gross profit(b)................ 266,024 274,697 266,747 283,778 1,091,246
Selling, general and
administrative expenses(c)... 213,680 214,957 211,820 216,833 857,290
Depreciation and
amortization................. 20,639 21,410 20,488 26,419 88,956
Restructuring charge........... -- -- -- 9,137 9,137
Lease commitment
charge....................... -- -- -- 8,763 8,763
Operating earnings............. 31,705 38,330 34,439 22,626 127,100
Interest expense............... (39,889) (40,470) (40,304) (40,806) (161,469)
Loss before income taxes and
extraordinary items.......... (8,184) (2,140) (5,865) (18,180) (34,369)
Income tax benefit............. 3,321 699 2,314 8,077 14,411
Loss before
extraordinary items.......... (4,863) (1,441) (3,551) (10,103) (19,958)
Extraordinary items, net of an
income tax benefit........... (673) (204) -- -- (877)
Net loss....................... $ (5,536) $ (1,645) $ (3,551) $(10,103) $ (20,835)
- -----------------------
(a) The pretax LIFO credit for Fiscal 1997 was $5.4 million consisting of
provisions of $0.4 million and $0.5 million in the first and second
quarters, respectively, and credits of $1.7 million and $4.6 million in
the third and fourth quarters, respectively.
(b) The pretax LIFO credit for Fiscal 1996 was $1.3 million consisting of
provisions of $0.85 million in the first and second quarters, no provision
in the third quarter and a $3.0 million credit in the fourth quarter.
(c) Selling, general and administrative expenses for Fiscal 1996 included a
first quarter provision of $5.8 million representing the termination costs
of two former executives of the Company, a first quarter gain of $5.6
million recognized on the sale of certain real estate and a second quarter
curtailment gain of $2.0 million due to the elimination of postretirement
medical coverage for active non-union associates.
45
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
Pathmark Stores, Inc.
Carteret, New Jersey
We have audited the accompanying consolidated balance sheets of Pathmark
Stores, Inc. and its subsidiaries (the "Company") as of January 31, 1998 and
February 1, 1997, and the related consolidated statements of operations,
stockholder's deficiency and cash flows for each of the three years in the
period ended January 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of January 31,
1998 and February 1, 1997, and the results of their operations and their cash
flows for each of the three years in the period ended January 31, 1998 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
April 16, 1998
46
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
ITEM 10. Directors and Executive Officers of the Company (As of April 15, 1998)
(a) Directors of the Company
The following table sets forth the name, principal occupation or employment
at the present time and during the last five years, and the name and principal
business of any corporation or other organization in which such occupation or
employment is or was conducted, of the directors of the Company, all of whom are
citizens of the United States unless otherwise indicated. Each individual named
below is a director of both the Company and Holdings.
Director of the
Company
Name, Age, Principal Occupation and Other Directorships Since
------------------------------------------------------- --------------
MATTHIAS BOWMAN, 49, Director of Merrill Lynch Capital Partners, Inc., 1997
("MLCP"), an investment firm affiliated with Merrill Lynch & Co., ("ML& Co."),
the financial services concern, since 1998; Chief Executive Officer of MLCP
from 1994 to 1998; Vice Chairman of Investment Banking with ML&Co. since 1993;
Managing Director of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPFS")
since at least 1992. Mr. Bowman is also a Director of U.S. Foodservice Corp.
JOHN W. BOYLE, 69, Chairman and Chief Executive Officer of the Company from March 1996 to 1995
October 1996 (Retired); Vice Chairman (retired), Eckerd Corporation, a drug store
chain, between 1983 and 1995. Mr. Boyle is also Chairman of United Artists Theater
Circuit, Inc.
JAMES J. BURKE, JR., 46, Partner and a Director of Stonington Partners, Inc. ("SPI"), a 1988
private investment firm, since 1993, and a Director of MLCP since 1987; Partner of
MLCP from 1993 to 1994; President and Chief Executive Officer of MLCP from 1987 to
1993. Mr. Burke was also a Managing Director of ML&Co. until 1994. Mr. Burke is also
a Director of Ann Taylor Stores Corp., Borg-Warner Security Corp., Education
Management Corp. and United Artists Theater Circuit, Inc.(1)
JAMES DONALD, 44, Chairman, President and Chief Executive Officer of the Company (since 1996
October 1996); Senior Vice President and General Manager, Safeway, Inc., Eastern
Division from February 1994 until October 1996; Vice President-Marketing, Wal-mart
Corp. prior thereto.
U. PETER C. GUMMESON, 39, Senior Vice President, Albion Alliance LLC, an asset manager 1996
specializing in private debt and equity securities (since 1996). Mr. Gummeson has
also been Managing Director of Alliance Corporate Finance Group Incorporated, an asset
manager specializing in private debt and equity securities since 1984. Both firms are
affiliated with the Equitable Investors.
STEPHEN M. McLEAN, 40, Partner and a Director of SPI since 1993; Partner of MLCP from 1993 1987
to 1994; Senior Vice President of MLCP from 1987 to 1993; Director of MLCP since 1987;
Managing Director of the Investment Banking Division of ML&Co. until 1994. Mr.
McLean is also a Director of CMI Industries, Inc., Dictaphone Corporation, Merisel,
Inc. and Packard Bio Science Company(1)
47
Director of the
Company
Name, Age, Principal Occupation and Other Directorships Since
------------------------------------------------------- --------------
ROBERT G. MILLER, 54, Chief Executive Officer of Fred Meyer, Inc., a diversified 1997
retailer. Mr. Miller is also a Director of PacifiCorp.
ROBERT J. MYLOD, JR., 31, Principal of SPI since 1996; Associate of SPI from November 1993 1998
to December 1995; Associate of MLCP prior thereto. Mr. Mylod was also an associate of
the Investment Banking Division of MLPFS from 1993 to 1994. Mr. Mylod is also a
Director of Goss Graphic Systems, Inc.
JERRY G. RUBENSTEIN, 68, Managing Partner, Omni Management Associates; Consultant to MLCP 1996
since 1988.
- ------------------
(1) Includes service with Pathmark's predecessor.
Pursuant to the Stockholders Agreement, the ML Investors are entitled to
designate seven directors, the Management Investors are entitled to designate
three directors and The Equitable Investors are entitled to designate one
director to Holdings' Board of Directors. By having the ability to designate a
majority of Holdings' Board of Directors, the Merrill Lynch Investors have the
ability to control the Company. Currently, six of the persons serving as
directors were designated by the Merrill Lynch Investors (Messrs. Bowman, Boyle,
Burke, McLean, Mylod and Rubenstein), one was designated by the Management
Investors (Mr. Donald) and one was designated by the Equitable Investors (Mr.
Gummeson). Mr. Miller was designated by the three investor groups. No family
relationship exists between any director and any other director or executive
officer of the Company.
(b) 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.
Officer of
the Company
Name Age Positions and Office Since
---- ---- --------------------- ----------
JAMES DONALD 44 Chairman, President and Chief Executive Officer since 1996
October 1996 (1)
RON MARSHALL 44 Executive Vice President and Chief Financial Officer since 1994
October 1994. Senior Vice President and Chief Financial
Officer of Dart Group Corporation (a diversified retailer)
prior thereto.
EILEEN SCOTT 45 Executive Vice President, Marketing and Distribution 1998
(since January 1998); Vice President, Non-Foods
Merchandising and Pharmacy (November 1995 - December
1997); Vice President, Sales & Advertising (August 1994 -
November 1995); Director of Grocery Sales prior thereto.
Ms. Scott joined the Company in 1969.
48
Officer of
the Company
Name Age Positions and Office Since
---- ---- --------------------- ----------
JOHN SHEEHAN 40 Executive Vice President--Operations (since January 1998); 1996
Senior Vice President--Operations (October 1996 to December
1997); Director of Operations, Albertsons, Inc., prior
thereto.
JOSEPH W. ADELHARDT 51 Senior Vice President and Controller since January 1996; 1987
Vice President and Controller prior thereto.
Mr. Adelhardt joined the Company in 1976.(2)
HARVEY M. GUTMAN 52 Senior Vice President--Retail Development. 1990
Mr. Gutman joined the Company in 1976.(2)
ROBERT JOYCE 52 Senior Vice President--Administration (since October 1996); 1989
Executive Vice President--Operations (from January 1996 to
October 1996); Senior Vice President--Operations--from
March 1995 to January 1996; Senior Vice
President--Administration prior thereto. Mr. Joyce joined
the Company in 1963.(2)
MARC A. STRASSLER 49 Vice President, Secretary and General Counsel. Mr. 1987
Strassler joined the Company in 1974.(2)
FRANK VITRANO 42 Vice President and Treasurer since December 1996; 1996
Treasurer from July 1995 to December 1996; Director--Risk
Management prior thereto. Mr. Vitrano joined the Company
in 1972.
MYRON D. WAXBERG 64 Vice President and General Counsel--Real Estate. Mr. 1991
Waxberg joined the Company in 1976.(2)
- ------------------
(1) Member of the Company's Board of Directors.
(2) Includes service with Pathmark's predecessor.
49
ITEM 11. Executive Compensation.
Summary Compensation Table
Annual Compensation Long Term Compensation Awards
----------------------------------------------------------- -----------------------------------
Securities
Position Other Annual Restricted Underlying All Other
Name and Bonus Compensation Stock Awards Options/SARs Compensation
Principal Year Salary ($) ($)(1) ($)(2) ($) (#) ($) (3)
----- --------- ------- -------------------- -------------- ------------- --------------
James L. Donald...... 1997 600,000 425,000 1,179,390 -- -- 3,632
Chairman, President 1996 193,846 1,175,000 340,021 3,400,000 100,000 16,821
and Chief
Executive Officer
Ron Marshall......... 1997 306,750 202,455 -- -- -- 4,750
Executive Vice 1996 300,000 36,000 49,177 -- -- 5,250
President and 1995 280,289 168,173 -- -- -- --
Chief Financial
Officer
John Sheehan......... 1997 186,312 52,537 80,793 -- -- --
Executive Vice 1996 51,923 81,231 9,733 -- -- --
President--
Operations
Robert Joyce......... 1997 230,062 63,267 2,195 -- -- 5,600
Senior Vice 1996 223,846 26,862 2,195 -- -- 5,250
President-- 1995 205,437 97,334 2,200 -- 250 5,250
Administration
Marc A. Strassler.... 1997 163,600 81,800 3,841 -- -- 5,600
Vice President, 1996 143,950 10,796 3,841 -- -- 5,250
Secretary and 1995 135,850 42,793 3,849 -- -- 5,250
General Counsel
Neill Crowley(4)..... 1997 219,746 -- -- -- -- 242,043
Executive Vice 1996 253,750 30,450 -- -- -- 5,250
President-- 1995 247,212 112,241 15,000 -- -- 4,341
Retail Services
Ronald Rallo(4).... 1997 197,131 -- 4,023 -- -- 183,215
Senior Vice 1996 245,000 29,400 4,389 -- -- 5,250
President-- 1995 227,500 113,585 4,399 -- -- 5,250
Merchandising
- --------------------
(1) The amounts with respect to Fiscal 1997 paid to Mr. Donald was the minimum
amount payable pursuant to the -- Donald Agreement (as hereinafter
defined). The amounts with respect to Fiscal 1997 in this column represent
bonuses awarded to the other named executives in recognition of their
efforts in connection with the -- Company's distribution outsourcing with
C&S and refinancing of its outstanding bank indebtedness.
(2) Represents in Fiscal 1997 (i) with respect to Mr. Donald, payment of
$54,390 as reimbursement for -- relocation expenses and forgiveness of loan
payments due to the Company of $1,125,000; (ii) with respect to Mr.
Sheehan, reimbursement of relocation expenses; and (iii) with respect to
Messrs. Rallo, Joyce and -- Strassler, payments as reimbursement for
interest paid to Holdings for loans, each of less than $60,000 from
Holdings in connection with the purchase of SMG-II Class A Common Stock and
includes an amount sufficient to pay any income taxes resulting therefrom
after taking into account the value of any deductions available as a result
of the payment of such interest and taxes.
(3) Represents in Fiscal 1997 (i) with respect to Mr. Donald, payments of
$3,632 for a term life insurance -- premium on Mr. Donald's life; (ii) with
respect to Mr. Rallo, payments of $5,600 representing the Company's
matching contribution to the SGC Savings Plan and $177,615 paid to Mr.
Rallo pursuant to a Resignation -- Agreement dated November 4, 1997 among
Mr. Rallo, the Company and SMG-II (the "Rallo Agreement"); (iii) -- with
respect to Mr. Crowley, payments of $5,600, representing the Company's
matching contribution to the SGC Savings Plan and $236,443 pursuant to a
Resignation Agreement dated November 4, 1997 among Mr. Crowley, -- SMG-II
and the Company (the "Crowley Agreement"); and (iv) with respect to the
other named executive -- officers, the Company's matching contribution
under the SGC Savings Plan.
(4) Messrs. Rallo and Crowley each retired on November 4, 1997.
50
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values(1)
Number of Securities
Underlying Unexercised
Options/SARs at FY-End
(#)
Exercisable/
Name Unexercisable
---- -----------------------
Neill Crowley............................................................................. 1,000/0
James Donald.............................................................................. 0/100,000
Robert Joyce.............................................................................. 2,420/0
Ron Marshall.............................................................................. 2,000/0
Ronald Rallo.............................................................................. 2,850/0
John Sheehan.............................................................................. 0/0
Marc Strassler............................................................................ 1,080/0
- --------------
(1) Options shown were granted pursuant to the SMG-II 1987 Management Investors
Stock Option Plan (except with respect to Mr. Donald) and relate to shares
of Class A Common Stock of SMG-II. No options were either granted to or
exercised by any of the above named executives in Fiscal 1997.
Pension Plan Table(1)
Years of Service
-------------------------------------------------------------------------------------
Final Average Pay 10 15 20 25 30 35
- ----------------- -- -- -- -- -- --
$ 150,000............. $ 20,000 $ 30,000 $ 40,000 $ 50,000 $ 60,000 $ 60,000
200,000............. 26,667 40,000 53,333 66,667 80,000 80,000
225,000............. 30,000 45,000 60,000 75,000 90,000 90,000
250,000............. 33,333 50,000 66,667 83,333 100,000 100,000
300,000............. 40,000 60,000 80,000 100,000 120,000 120,000
350,000............. 46,667 70,000 93,333 116,667 140,000 140,000
400,000............. 53,333 80,000 106,667 133,333 160,000 160,000
450,000............. 60,000 90,000 120,000 150,000 180,000 180,000
500,000............. 66,667 100,000 133,333 166,667 200,000 200,000
550,000............. 73,333 110,000 146,667 183,333 220,000 220,000
600,000............. 80,000 120,000 160,000 200,000 240,000 240,000
650,000............. 86,667 130,000 173,333 216,667 260,000 260,000
700,000............. 93,333 140,000 186,667 233,333 280,000 280,000
750,000............. 100,000 150,000 200,000 250,000 300,000 300,000
- ------------------
(1) The table above illustrates the aggregate annual pension benefits payable
under the SGC Pension Plan and Excess Benefit Plan (collectively, the
"Pension Plans"). The retirement benefit for individuals with 30 years of
credited service is 40% of the individual's average compensation during his
or her highest five compensation years in the last ten years before
retirement, less one-half of the social security benefit received. The
retirement benefit is reduced by 3.33% for every year of credited service
less than 30. Covered compensation under the Pension Plans includes all
cash compensation subject to withholding plus amounts deferred under the
Savings Plan pursuant to Section 401(k) of the Internal Revenue Code of
1986, as amended, and as to individuals identified in the Summary
Compensation Table, would be the amount set forth in that table under the
headings "Salary" and "Bonus". The table shows the estimated annual
benefits an individual would be entitled to receive if normal retirement at
age 65 occurred in January 1998 after the indicated number of years of
covered employment and if the average of the participant's covered
compensation for the five years out of the last ten years of such
employment yielding the highest such average equaled the amounts indicated.
The estimated annual benefits are based on the assumption that the
individual will receive retirement benefits in the form of a single life
annuity (married participants may elect a joint survivorship option) and
are before applicable deductions for social security benefits in effect as
of January 1998. As of December 31, 1997, the following individuals had the
number of years of credited service indicated after their names: Mr.
Donald, 1.2,
51
Mr. Crowley, 3.6; Mr. Rallo, 30; Mr. Joyce, 27.7; Mr.
Marshall, 3.2; Mr. Sheehan, 1.2; and Mr. Strassler, 23.8. As described
below in "Compensation Plans and Arrangements--Supplemental Retirement
Agreements", certain of the named executives is party to a Supplemental
Retirement Agreement with Pathmark.
Compensation Plans and Arrangements
Supplemental Retirement Agreements. The Company has entered into
supplemental retirement agreements with certain key executives, including
certain of the executive officers named in the Summary Compensation Table, which
provide that said executive officers will be paid upon termination of employment
after attainment of age 60 a supplemental pension benefit in such an amount as
to assure him or her an annual amount of pension benefits payable under the
supplemental retirement agreement, the Company's qualified pension plans and
certain other plans of the Company, including Savings Plan balances as of March
31, 1983, (a) in the case of Messrs. Joyce, Strassler and Rallo equal to (i) 30%
of his final average Compensation based on ten years of service with the Company
and increasing 1% per year for each year of service thereafter, to a maximum of
40%, of his final average Compensation based on 20 years of service, or (ii)
$150,000 ($100,000 for Mr. Strassler), whichever is less, and (c) in the case of
Messrs. Crowley and Marshall, equal to 12.5% of his final average Compensation
based on five years of service with the Company and increasing 2.5% per year for
each year of service thereafter to a maximum of 35% of his final average
Compensation based on 14 years of service. "Compensation" includes base salary
and bonus payments under the Executive Incentive Plan, but excludes Company
matching contributions under the Savings Plan. If the executive leaves the
Company prior to completing 20 years of service (other than for disability), the
supplemental benefit would be reduced proportionately. Should the executive die,
the surviving spouse then receiving or, if he or she was not then receiving a
supplemental pension benefit, the spouse would be entitled to a benefit equal to
two-thirds of the benefit to which the executive would have been entitled,
provided the executive has attained at least ten years of service with the
Company.
Employment Agreements:
Employment Agreement Among Pathmark, SMG-II and James L. Donald. On October
8, 1996 (the "Effective Date"), the Company and SMG-II entered into an
employment agreement with Mr. James L. Donald (the "Donald Agreement") pursuant
to which Mr. Donald was elected Chairman, President and Chief Executive Officer
for a term of five years. The Donald Agreement provides Mr. Donald with an
initial annual base salary of $600,000 and provides that he shall participate in
the Pathmark Executive Incentive Plan, under which Mr. Donald may earn an annual
bonus of up to 125% of his annual salary based on performance targets that are
set by the Board. For the first full fiscal year during the term of the Donald
Agreement, Mr. Donald shall receive a minimum annual bonus of $425,000.
Furthermore, under the Donald Agreement, Mr. Donald is guaranteed an annual
bonus for each of the second, third and fourth full fiscal years of the term of
at least 25% of his base salary. The Donald Agreement provides Mr. Donald with
the right to defer up to 50% of his annual bonus and salary, which shall be held
in a grantor trust established by the Company. During the term of the Donald
Agreement, in addition to the base salary, bonus eligibility and other customary
annual benefits and perquisites that the Company generally provides to its
executive officers, the Company will provide Mr. Donald with a company car and
term life insurance in the amount of $4.5 million during the first year and $3.2
million thereafter. The Company also reimbursed Mr. Donald for the legal
expenses incurred by him in the negotiation of the Donald Agreement. Mr. Donald
also received a one-time signing bonus of $1 million, which is being amortized
over the term of the Donald Agreement.
52
Furthermore, Mr. Donald received an equity package (the "Equity Strip"),
consisting of 8,520 restricted shares of a new series of SMG-II Preferred Stock
with a stated value of $200 per share and 19,851 restricted shares of SMG-II
Class A Common Stock, the terms of which are set forth in the stock award
agreement (the "Stock Award Agreement"). The Equity Strip, which as of the
Effective Date was valued by the Company at $3.4 million based upon an
independent appraisal, will vest in its entirety upon the occurrence of an
Employment-Related Event, as defined in the Stock Award Agreement, and will be
forfeited in its entirety upon the occurrence of a Termination Event, as defined
in the Donald Agreement. The valuation of $3.4 million is being amortized by the
Company over the term of the Donald Agreement. The Preferred Stock ranks pari
passu with the existing SMG-II convertible preferred stock and will accrue
dividends at a rate of 10% per annum. The Preferred Stock will be convertible
into Common Stock on a one-for-one basis. As of the Effective Date, the
Preferred Stock had accumulated dividends of approximately $122 per share.
In addition, Mr. Donald received a stock option (the "Option") to purchase
an aggregate of 100,000 shares of SMG-II Class A Common Stock. The Option
consists of component A ("Option Component A") covering 50,000 shares of SMG-II
Class A Common Stock and component B ("Option Component B") covering the
remaining 50,000 shares of SMG-II Class A Common Stock. Any terms used herein
not otherwise defined shall have the meanings assigned to them in the Donald
Agreement. Option Component A shall have an initial per share exercise price of
$100 per share. The per share exercise price of Option Component A will increase
to $125 per share on the first day of the Fiscal Year beginning in calendar year
2000 ("Fiscal Year 2000") and to $150 per share on the first day of the Fiscal
Year beginning in calendar year 2001 ("Fiscal Year 2001"). Option Component B
will have an initial per share exercise price of $100 per share. The per share
exercise price of Option Component B will increase to $150 per share on the
first day of the Fiscal Year beginning in calendar year 1999; to $250 per share
on the first day of Fiscal Year 2000; and to $350 per share on the first day of
Fiscal 2001. The Option will expire on the fifth anniversary of the Effective
Date to the extent not previously exercised (the "Expiration Date"); provided,
however, that the Expiration Date for the portion of Option Component A and
Option Component B which is vested (as explained below) immediately prior to
such Expiration Date will be extended until the seventh anniversary of the
Effective Date if such vested portion of Option Component A and Option Component
B, as the case may be, has not become exercisable by such initial Expiration
Date. During the period of such extension, the per share exercise price of
Option Component A and Option Component B, as the case may be (to the extent not
previously exercised), will increase at the end of each month during such
extension period at an annual rate of 10%. Mr. Donald will vest in 25% of Option
Component A and in 25% of Option Component B on the Effective Date and on each
of the first through third anniversaries of the Effective Date, provided that
the Optionee is in the employ of Pathmark on each such date. Upon the occurrence
of a Minimum IPO (as defined below) while the Optionee is in the employ of the
Company, the entire Option shall immediately and fully vest. In addition, the
Option will immediately and fully vest upon the occurrence of a Change in
Control (as defined below) occurring prior to the Termination Event (as defined
below). If Mr. Donald's employment with the Company should end as a result of a
Termination Event, then, as of the applicable date of termination, the entire
Option (whether or not then vested) will be immediately and irrevocably
forfeited.
Except for purposes of tag-along rights under Article V of the Stockholders
Agreement and the piggyback rights under Article VI of the Stockholders
Agreement, the Option shall not be exercisable (even though the Option or a
portion thereof is vested) unless and until it becomes exercisable in accordance
with the following provisions:
53
(i) The Exercisable Percentage (as defined below) of each component of the
Option will become exercisable if the ML Investors (as defined in the
Stockholders Agreement) have a Realization Event (as defined below) in
respect of the Common Stock at a per share price in excess of the
amounts (the "Target Prices") set forth below :
Period of Time Target Price per Target Price per
Share/Option Component A Share/Option Component B
------------------------------- ----------------------------- -------------------------
Prior to 2/1/00 $ 100 $150
2/1/00 to 1/31/01 $ 125 $250
2/1/01 and after $ 150 $350
(ii) Notwithstanding the above, if the ML Investors have a Realization Event
for more than 15% of the shares of Common Stock beneficially owned by
them on the date of grant and Option at a per share price in excess of
the Target Price described above applicable to the date when such
Realization Event occurs, then the components of the Option for which
such Target Prices have been achieved shall become immediately vested
and exercisable and the exercise price shall not thereafter increase.
In the event that Mr. Donald becomes entitled to any tag-along rights under
Section 5.6 or registration rights under Section 6.2 of the Stockholders
Agreement, he will be permitted to exercise his sale or transfer rights with
respect to the portion of the Option for which the Target Price has been met.
For purposes of Section 5.6(b) of the Stockholders Agreement, 100% of the
portion of the Option for which the Target Amount has been realized will be
considered exercisable in order to determine the number of shares to be included
under Section 5.6(b) of the Stockholders Agreement. If, prior to the Expiration
Date, the Board determines that it is necessary or desirable to list, register
or qualify the shares of Common Stock subject to the Option, and if such
listing, registration or qualification is delayed beyond the Expiration Date,
the vested and exercisable portion of the Option will remain exercisable until
30 days after such listing, registration, or qualification is accomplished.
Pursuant to the Donald Agreement, the Company lent Mr. Donald $4.5 million
(the "Loan") evidenced by 16 separate promissory notes. Under the terms of each
note, if Mr. Donald is in full employment of the Company on a quarterly
anniversary of the Effective Date, Mr. Donald's obligation to pay such note
maturing on such date will be forgiven as to principal, but not any then accrued
and unpaid interest. In the event his employment ends at any time during the
term of the Donald Agreement prior to a Change in Control as a result of a
Termination Event, each note will become immediately due and payable as to all
outstanding principal and all accrued and unpaid interest. These notes bear
interest at an effective rate of 6%. The Loan is on a full recourse basis and
secured by the Equity Strip, the Option and any shares acquired upon exercise of
the Option.
In the event of Mr. Donald's Involuntary Termination, Pathmark will pay him
(w) the full amount of any accrued but unpaid base salary, plus a cash payment
(calculated on the basis of the base salary then in effect) for all unused
vacation time which Mr. Donald may have accrued as of the date of Involuntary
Termination; (x) the amount of any earned but unpaid Annual Bonus for any Fiscal
Year of Pathmark ended on or prior to the date of Involuntary Termination; (y)
any unpaid reimbursement for business expenses; and (z) a severance amount equal
to four times Mr. Donald's annual rate of salary, based upon the annual rate
then in effect immediately prior to the date of termination, payable in monthly
installments over 24 months. In addition, in the event of an Involuntary
Termination, Mr. Donald and his eligible dependents shall continue to be
eligible to participate in the medical, dental, health and life insurance plans
applicable to Mr. Donald immediately prior to the Involuntary Termination on the
same terms and conditions in effect
54
immediately prior to such Involuntary Termination until the earliest to
occur of (i) the end of the 24-month period after the date of termination, the
date Mr. Donald becomes eligible to be covered under the benefit plans of a
subsequent employer and (iii) the date Mr. Donald breaches any of the protective
covenants described below. Furthermore, in the event of an Involuntary
Termination, the Equity Strip will automatically and without the need for
further action or consent by Pathmark become fully vested in the manner provided
by the Stock Award Agreement, and the Option will continue to remain outstanding
to the extent provided by the Option Agreement. All notes not previously
delivered to Mr. Donald will automatically and without the need for further
action or consent by Pathmark be delivered by the escrow agent to Mr. Donald
marked "Paid in Full" upon payment by Mr. Donald of any then accrued but unpaid
interest on the Loan. During the 30-day period beginning 6 months after a Change
in Control, Mr. Donald shall be eligible to resign from the Company for no
stated reason and receive all the amounts listed in clauses (w), (x), (y) and
(z) above. Any such resignation in such 30-day period following a Change in
Control shall be treated as an Involuntary Termination for all purposes of this
Agreement.
In the event Mr. Donald's employment ends at any time during the term as a
result of a Termination Event, the Company shall pay him only the amounts
decried in clauses (w), (x) and (y) above, and Mr. Donald will immediately
forfeit the Equity Strip and the Option. In addition, each note will become
immediately due and payable as to all outstanding principal and all accrued and
unpaid interest if Mr. Donald's employment ends prior to a Change in Control as
a result of a Termination Event.
Although, in the event of an Involuntary Termination, Mr. Donald has no duty
to mitigate the severance amount by seeking new employment, any severance amount
payable during the second year of the severance period shall be reduced by any
compensation or benefits Mr. Donald earns in connection with any employment by
another employer.
The Donald Agreement includes protective covenants that prohibit Mr. Donald
from engaging (i) in any activity in competition with Pathmark, or any parent or
subsidiary thereof or (ii) in soliciting employees or customers of Pathmark, or
any parent or subsidiary thereof, during his term of employment and up to two
years thereafter. The Donald Agreement also includes a confidentiality clause
which prohibits Mr. Donald from disclosing any confidential information
regarding Pathmark.
The following definitions apply to the terms of the Donald Agreement:
"Cause" means the termination of Mr. Donald's employment with Pathmark
because of (i) his willful and repeated failure (other than by reason of
incapacity due to physical or mental illness) to perform the material
duties of his employment after notice from Pathmark of such failure and
his inability or unwillingness to correct such failure within 30 days of
such notice, (ii) his conviction of a felony or plea of no contest to a
felony or (iii) perpetration by Mr. Donald of a material dishonest act or
fraud against Pathmark or any parent or subsidiary thereof; provided
however, that, before Pathmark may terminate Mr. Donald for Cause, the
Board shall deliver to him a written notice of Pathmark's intent to
terminate him for Cause, including the reasons for such termination, and
Pathmark must provide him an opportunity to meet once with the Board prior
to such termination.
"Change in Control" means the acquisition by a person (other than a person
or group of persons that beneficially owns an equity interest in SMG-II or
Pathmark on the Effective Date or any person controlled thereby) of more
than 50% control of the voting securities of SMG-II as a result of a sale
of voting securities after the Effective Date by the persons who, on the
Effective Date, have a beneficial interest in such voting securities, but
shall not include any change in the ownership of Pathmark or SMG-II
resulting from a public offering.
"Common Stock" means SMG-II Class A Common Stock, par value $0.01 per share.
55
"Exercisable Percentage" means (i) in connection with a Third Party Sale,
the percentage of the shares of Common Stock subject to the Option that
Mr. Donald is entitled to sell pursuant to the exercise of his "tag-along"
rights under the Stockholders Agreement and (ii) in connection with a
Public Offering, the percentage of the shares of Common Stock then
beneficially owned by the ML Investors (as defined in the Stockholders
Agreement) which are sold in the Public Offering.
"Good Reason" means Mr. Donald's resignation because of (i) the failure of
Pathmark to pay any material amount of compensation to Mr. Donald when
due, (ii) a material adverse reduction or material adverse diminution in
Mr. Donald's titles, duties, positions or responsibilities with Pathmark,
including, but not limited to, failure by Pathmark to elect Mr. Donald to
the office of Chief Executive Officer, or (iii) any other material breach
by Pathmark of the Donald Agreement. In order to assert Good Reason, Mr.
Donald must provide written notification of his intention to resign within
30 business days after he knows or has reason to know the occurrence of
any such event. After Mr. Donald provides such written notice to Pathmark,
Pathmark shall have 15 days from the date of receipt of such notice to
effect a cure of the condition constituting Good Reason.
"Involuntary Termination" means (i) the termination of Mr. Donald's
employment by Pathmark other than for Cause or disability or (ii) Mr.
Donald's resignation of employment with Pathmark for Good Reason.
"Minimum IPO" means a Public Offering of the Common Stock after the Date of
Grant at the conclusion of which the aggregate price for all the shares of
Common Stock having been sold to the public in such Public Offering, plus
the aggregate offering price for all shares of Common Stock sold in all
prior Public Offerings of Common Stock occurring after the date that Mr.
Donald is granted any Option, exceeds $50 million.
"Preferred Stock" shall mean a new series of convertible preferred stock
that will be issued for purposes of the Donald Agreement.
"Public Offering" means a public offering of the Common Stock pursuant to an
effective registration statement under the Securities Act.
"Realization Event" means the receipt by the ML Investors (as defined in the
Stockholders Agreement) of cash or property from an unrelated third party
as consideration for the sale of shares of Common Stock then beneficially
owned by the ML Investors. For purposes of the Donald Agreement, any
property other than cash received by the ML Investors in the Realization
Event shall have the value ascribed to such property by the parties to
such sale.
"Securities Act" means the Securities Act of 1933, as amended.
"Stockholders Agreement" shall mean the Stockholders Agreement, dated as of
February 4, 1991, as amended, among SMG-II and its stockholders.
"Termination Event" shall mean Mr. Donald's resignation without Good Reason
or a termination by Pathmark for Cause.
"Third Party Sale" means a sale of Common Stock subject to Section 5.6 of
the Stockholders Agreement.
56
Other Executive Agreements
As of April 1, 1997, the Company entered into an employment agreement with
Mr. Sheehan. As of September 9, 1994, the Company entered into an employment
agreement with Mr. Marshall. As of June 1, 1995, the Company entered into an
employment agreement with Mr. Strassler and Mr. Joyce, respectively. The four
above mentioned employment agreements are hereinafter referred to collectively
as the "Employment Agreements". Each of the Employment Agreements is for an
initial term of two years. The term of each Employment Agreement is
automatically extended for an additional year on (a) April 1, 1999 for Mr.
Sheehan and on each successive April 1st thereafter; (b) February 1, 1999 for
Mr. Marshall and on each successive February 1st thereafter, and (c) June 1,
1998 for Mr. Strassler and Mr. Joyce and on each successive June 1st thereafter.
Under the terms of his respective Employment Agreement, each executive is
entitled to a minimum annual base salary of (a) $205,000 for Mr. Sheehan, (b)
$309,000 for Mr. Marshall, (c) $164,800 for Mr. Strassler, and (d) $231,750 for
Mr. Joyce, which salary is subject to upward adjustment by the Company. The
Employment Agreements also provide that each executive shall be entitled to
receive an annual bonus of up to 66% of his annual base salary with respect to
Messrs. Sheehan and Marshall, up to 55% and 50% of his annual base salary with
respect to Messrs. Joyce and Strassler, respectively, and shall be provided the
opportunity to participate in pension and welfare plans, programs and
arrangements that are generally made available to executives of Pathmark or as
may be deemed appropriate by the Compensation Committee of the Board of
Directors of SMG-II.
In the event one of the four above named executives' employment is
terminated by the Company without Cause (as defined in the Employment
Agreements), or by the executive for Good Reason (as defined in the Employment
Agreements) prior to the termination of the applicable Employment Agreement,
such executive will be entitled to continue to receive his base salary and
continued coverage under health and insurance plans for the period commencing on
the date of such termination or resignation through the date of applicable
Employment Agreement would have expired had it not been automatically renewed
but for said termination or resignation, reduced by any compensation or benefits
which the executive is entitled to receive in connection with his employment by
another employer during said period.
The Employment Agreements contain agreements by the executives not to
compete with the Company as long as they are receiving payments under an
employment agreement and an agreement by the executives not to disclose
confidential information.
On November 4, 1997 (the "Retirement Date"), Messrs. Crowley and Rallo each
retired as executive officers of the Company. Pursuant to the Rallo Agreement,
Mr. Rallo will be entitled to receive his base salary at the annual rate of
$252,350 per year during the period commencing November 5, 1997 and ending May
31, 1999, or the date of his death, if earlier (the "Rallo Benefit Period").
Additionally, Mr. Rallo will be entitled to receive continued health coverage
through the Rallo Benefit Period under the Company's health and insurance plans
applicable to him immediately prior to the Retirement Date. Each of the above
described payments and benefits shall be reduced by any compensation and
benefits earned by Mr. Rallo for any calendar year during the Rallo Benefit
Period. Additionally, pursuant to the terms of the Rallo Agreement, the Company
made a cash lump sum payment to Mr. Rallo of $138,792 on December 15, 1997.
Pursuant to the Crowley Agreement, Mr. Crowley will be entitled to receive his
base salary at the annual rate of $288,399 per year during the period commencing
November 5, 1997 and ending July 31, 1999, or the date of his death, if earlier
(the "Crowley Benefit Period"). Additionally, Mr. Crowley will be entitled to
receive continued health coverage through the Crowley Benefit Period under the
Company's health and insurance plans applicable to him immediately prior to the
Retirement Date. Each of the above described payments and benefits shall be
reduced by any compensation and benefits earned by Mr. Crowley for any calendar
year during the Crowley Benefit Period. Additionally, pursuant to the terms of
the Crowley Agreement, the Company made a cash lump sum payment to Mr. Crowley
of $192,074 on April 15, 1998.
57
Compensation Committee Interlocks and Insider Participation
Messrs. Burke, Boyle and McLean comprise the compensation committee of the
Board of Directors of SMG-II and are responsible for decisions concerning
compensation of the executive officers of the Company. Messrs. Burke and McLean
are directors of MLCP and have been retained by MLCP as consultants. MLCP is an
indirect wholly-owned subsidiary of ML&Co. See "Security Ownership of Certain
Beneficial Ownership and Management."
Compensation of Directors
Each director who is not employed by the Company or one of its subsidiaries,
SPI, MLCP or the Equitable Investors or its affiliates receives an aggregate
annual retainer of $20,000 per year, plus travel expenses, for service as a
director on the Board of Directors of SMG-II and its subsidiaries, including the
Company.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
As of April 15, 1998, all shares of the Company's capital stock is held by
PTK. All of PTK's capital stock is held by Holdings. Since February 4, 1991, all
shares of the Holdings Common Stock are held by SMG-II. As of April 15, 1998,
the number of shares of SMG-II (i) Class A Common Stock, (ii) Class B Common
Stock, (iii) Series A Preferred Stock, (iv) Series B Preferred Stock and (v)
Series C Preferred Stock, beneficially owned by the persons known by management
of the Company to be the beneficial owners of more than 5% of the outstanding
shares of any class as "beneficial ownership" has been defined under Rule 13d-3,
as amended, under the Securities Exchange Act of 1934, are set forth in the
following table:
Number % of
Name of Shares Class
SMG-II Class A Common Stock
Merrill Lynch Capital Appreciation Partnership No. IX, L.P.(2)......... 488,704.8 66.6
ML Offshore LBO Partnership No. IX(2).................................. 12,424.7 1.7
Barfield House
St. Julians Avenue
St. Peter Port
Guernsey
Channel Islands
ML Employees LBO Partnership No. I, L.P.(2)............................ 12,148.6 1.6
ML IBK Positions, Inc.(3).............................................. 21,258.9 2.9
Merchant Banking L.P. No. 1(3)......................................... 8,119 1.1
Merrill Lynch KECALP L.P. 1987(3)...................................... 7,344 1.0
Chemical Investments, Inc.(4).......................................... 30,000 4.1
270 Park Avenue
New York, NY 10017
Management and other employees (including former employees of Pathmark) 153,894 (1) 21.0
200 Milik Street
Carteret, NJ 07008
SMG-II Class B Common Stock
The Equitable Life Assurance Society of the United States(5)........... 150,000 46.9
c/o Albion Alliance LLC
1345 Avenue of the Americas, 39th Floor
New York, NY 10005
Equitable Deal Flow Fund, L.P.(5)...................................... 150,000 46.9
c/o Albion Alliance LLC
1345 Avenue of the Americas, 39th Floor
New York, NY 10005
58
Number % of
Name of Shares Class
Chemical Investments, Inc.(4).................................................... 20,000 6.2
SMG-II Series A Preferred Stock(6)...................................................
Merrill Lynch Capital Appreciation Partnership No. B-X, L.P.(2).................. 133,043 56.2
ML Offshore LBO Partnership No. B-X(2)........................................... 40,950 17.3
MLCP Associates, L.P. No. II(2).................................................. 1,740 .7
ML IBK Positions, Inc.(3)........................................................ 46,344.5 19.6
Merchant Banking L.P. No. IV(3).................................................. 3,779 1.6
Merrill Lynch KECALP L.P. 1989(3)................................................ 7,000 3.0
Merrill Lynch KECALP L.P. 1991(3)................................................ 3,874.5 1.6
SMG-II Series B Preferred Stock(6)
Chemical Investments, Inc.(4).................................................... 12,500 7.0
The Equitable Life Assurance Society of the United States(5)..................... 84,134 46.5
Equitable Deal Flow Fund, L.P.(5)................................................ 84,135 46.5
SMG-II Series C Preferred Stock(6)................................................... 8,520 100.0
James Donald
200 Milik Street
Carteret, NJ 07008
- ---------
(1) Includes presently exercisable options granted under the Plan for
61,418 shares of SMG-II Class A Common Stock held by Management Investors.
(2) MLCP and its affiliates are the direct or indirect managing partners of ML
Offshore LBO Partnership No. IX, Merrill Lynch Capital Appreciation
Partnership No. IX, L.P., ML Employees LBO Partnership No. 1, L.P., Merrill
Lynch Capital Appreciation Partnership No. B-x, L.P., ML Offshore LBO
Partnership No. B-X and MLCP Associates, L.P. No. II. Such entities and
those disclosed in footnote (3) below, are referred to herein as the ML
Investors. The address of such entities is c/o Merrill Lynch Capital
Partners, Inc., in care of Stonington Partners, Inc., 767 Fifth Avenue, New
York, New York 10153. MLCP is an indirect wholly owned subsidiary of ML&Co.
The partners and principals of SPI (including Messrs. Burke, McLean and
Mylod) are consultants to MLCP. Mr. Bowman is Chief Executive Officer of
MLCP.
(3) Merchant Banking L.P. No. 1, Merchant Banking L.P. No. IV, Merrill Lynch
KECALP L.P. 1987, Merrill Lynch KECALP L.P. 1989, Merrill Lynch KECALP
L.P. 1991 and ML IBK Positions, Inc. are indirectly controlled by ML&Co.
The address of such entities is c/o James Caruso, Merrill Lynch & Co.,
Inc., World Financial Center, South Tower, New York, New York, 10080-6123.
(4) Chemical Investments, Inc. is an affiliate of Chase Manhattan Corp.
(5) The Equitable Investors are separate purchasers who are affiliates of each
other.
(6) SMG-II Preferred stock may be converted into an equivalent number of shares
of common stock of SMG-II in accordance with its terms.
59
No officer or director claims beneficial ownership of any share of the
Company's Common Stock, Holdings Common Stock, or of SMG-II stock other than
SMG-II Class A Common Stock, except Mr. Donald who claims beneficial ownership
of 8,520 (100%) shares of SMG-II Series C Preferred Stock. As of April 15, 1998,
the number of shares of SMG-II Class A Common Stock beneficially owned by each
director, by each of the executive officers named in the Summary Compensation
Table and by all directors and executive officers as a group is as follows:
Name Number of Shares % of Class
---- ---------------- ----------
Matthias Bowman(1)........................................ -- --
James J. Burke, Jr.(1).................................... -- --
James Donald.............................................. 19,851 2.6
Robert Miller............................................. -- --
Neill Crowley(2).......................................... 1,000 *
U. Peter C. Gummeson...................................... -- --
Ron Marshall(2)........................................... 2,000 *
Robert J. Mylod, Jr.(1)................................... -- --
Stephen M. McLean(1)...................................... -- --
John W. Boyle(2).......................................... 3,000 *
Ronald Rallo(2)........................................... 3,250 *
Jerry G. Rubenstein(2).................................... 2,500 *
Robert Joyce(2)........................................... 3,120 *
Marc Strassler(2)......................................... 1,430 *
John Sheehan.............................................. -- --
Directors and named executive officers as a group(1)(2) 36,151 4.9
- -----------
* Less than 1%
(1) Does not include 550,000 shares of SMG-II Class A Common Stock or 236,731.5
shares of SMG-II Series A Preferred Stock owned beneficially by a group of
which MLCP is a part. Messrs. Burke, McLean and Bowman, directors of MLCP,
disclaim beneficial ownership in all such shares.
(2) Includes presently exercisable options granted under the Plan to
purchase shares of SMG-II Class A Common Stock, as follows: Mr. Crowley,
1,000; Mr. Marshall, 2,000; Mr. Joyce, 2,420; Mr. Rallo, 2,850;
Mr.Rubenstein, 1,000; Mr. Strassler, 1,080 and Mr. Boyle, 3,000 and all
directors and executive officers as a group, 42,461.
ITEM 13. Certain Relationships and Related Transactions
The holders of SMG-II Preferred Stock are a party with the holders of SMG-II
Common Stock to the Stockholders Agreement, which, among other things, restricts
the transferability of SMG-II capital stock and relates to the corporate
governance of SMG-II and Holdings. Among other provisions, the Stockholders
Agreement requires a vote of at least 80% of the members of the Board of
Directors to cause the Company to conduct any business other than that engaged
in by the Company in February of 1991 and the approval of stockholders
representing 662/3% of the number of shares of SMG-II voting capital stock
voting together as a single class for SMG-II to enter into any Significant
Transaction (as defined), including certain mergers, sales of assets,
acquisitions, sales or redemptions of stock, the amendment of the certificate of
incorporation or by-laws or the liquidation of SMG-II. The Stockholders
Agreement also provides that SMG-II must obtain the prior written consent of the
Equitable Investors with respect to certain of these transactions and that the
Equitable Investors have certain preemptive rights with respect to the sale of
capital stock of Holdings or the Company.
60
The Stockholders Agreement also contains an agreement of the stockholders of
SMG-II with respect to the composition of SMG-II's and Holdings' Board of
Directors. Under this agreement, the Merrill Lynch Investors will be entitled to
designate up to seven directors, the Management Investors will be entitled to
designate up to three directors and the Equitable Investors will be entitled to
designate one director to both of SMG-II's and Holdings' Board of Directors.
Such agreement furthermore entitles the ML Investors to designate a majority of
Holdings' Board of Directors at all times. By having the ability to designate a
majority of Holdings' Board of Directors, the ML Investors have the ability to
control the Company, since Holdings (through PTK) owns all of the outstanding
shares of the Company's Common Stock. The ML Investors are controlled by ML&Co.
In addition to the foregoing, the Stockholders Agreement contains terms
restricting the transfer of SMG-II Common Stock and SMG-II Preferred Stock
(collectively, the "SMG-II Stock") by the stockholders of SMG-II, and providing
to the stockholders of SMG-II rights of first offer with respect to resales of
SMG-II Stock, rights of first refusal with respect to certain issuances of
shares of SMG-II Stock, certain rights to demand or participate in registrations
of shares of SMG-II Stock under the Securities Act and certain "tag-along"
rights.
In October 1996, pursuant to the Donald Agreement, James L. Donald, an
Officer and Director, was provided by Pathmark with a four-year loan of $4.5
million. The foregoing indebtedness to Pathmark is evidenced by 16 full recourse
promissory notes for $281,250 each bearing interest at the short-term or
intermediate-term federal rate in effect as of the date of each note (effective
rate of 6%) and secured by the Equity Strip and the Option. Under the Donald
Agreement, one promissory note will be forgiven at the end of each quarter of a
year during which Mr. Donald remains employed by Pathmark. In the event that Mr.
Donald resigns his employment without Good Reason or is terminated for Cause or
in the event of his death, the outstanding portion of the loan will become
immediately due and payable. As of April 1, 1998, Mr. Donald remained indebted
to the Company in the amount of $3,093,750.
In March 1990, Jerry G. Rubenstein, a Director, borrowed from Holdings
$100,000 in order to help finance his purchase of Holdings' Class A Common
Stock. Subsequently, such shares of Holdings' Class A Common Stock were
exchanged for shares of SMG-II Class A Common Stock. The foregoing indebtedness
to Holdings is evidenced by a full recourse promissory note (the "Recourse
Note"). The Recourse Note is for a term of ten years and bears interest at the
rate of 8.02% per annum, payable annually. Except as otherwise provided in the
Recourse Note, no principal on such recourse loan shall be due and payable until
the tenth anniversary of the date of issue of such Recourse Note. Under the
terms of the agreement pursuant to which the shares of Holdings' Class A Common
Stock were exchanged for shares of SMG-II Class A Common Stock, the Company is
obligated to pay to each Management Investor who pays interest on his Recourse
Note (except under certain circumstances) an amount equal to such interest, plus
an amount sufficient to pay any income taxes resulting from the above prescribed
payment after taking into account the value of any deduction available to him as
a result of the payment of such interest or taxes. As of April 1, 1998, Mr.
Rubenstein remained indebted to Holdings in the amount of $100,000.
61
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this Report.
1. Financial Statement Schedules: None required
2. Exhibits:
Incorporated herein by reference is a list of the Exhibits
contained in the Exhibit Index on Pages 64 through 66 of this
Report.
(b) Reports on Form 8-K.
None
(c) Exhibits required by Item 601 of Regulation S-K.
See item 14(a) above.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 28, 1998 PATHMARK STORES, INC.
By: /s/ RON MARSHALL
------ ------------------
Ron Marshall
Executive Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ JAMES DONALD Director, Chairman, President and Chief April 28, 1998
---------------- Executive Officer
(James Donald) (Principal Executive Officer)
/s/ RON MARSHALL Executive Vice President and Chief April 28, 1998
---------------- Financial Officer
(Ron Marshall) (Principal Financial Officer)
/s/ JOSEPH ADELHARDT Senior Vice President and Controller April 28, 1998
-------------------- (Principal Accounting Officer)
(Joseph Adelhardt)
MATTHIAS BOWMAN Director* April 28, 1998
--------------------
(Matthias Bowman)
JOHN W. BOYLE Director* April 28, 1998
-------------
(John W. Boyle)
JAMES J. BURKE, JR. Director* April 28, 1998
-------------------
(James J. Burke, Jr.)
STEPHEN M. McLEAN Director* April 28, 1998
-----------------
(Stephen M. McLean)
ROBERT G. MILLER Director* April 28, 1998
----------------
(Robert G. Miller)
ROBERT MYLOD, JR. Director* April 28, 1998
--------------------
(Robert Mylod, Jr.)
U. PETER C. GUMMESON Director* April 28, 1998
--------------------
(U. Peter C. Gummeson)
JERRY G. RUBENSTEIN Director* April 28, 1998
-------------------
(Jerry G. Rubenstein)
*By: /s/ MARC A. STRASSLER
---------------------
Marc A. Strassler
Attorney-in-Fact
63
EXHIBIT INDEX
Exhibit Page
No. Exhibit No.
- ----- ------ -----
2.1 --Distribution and Transfer Agreement among the Registrant, PTK and Plainbridge................
2.2 --Distribution and Transfer Agreement dated as of May 3, 1993 among the Registrant, Holdings
and Chefmark (incorporated by reference from Exhibit 2.2 to the Registration Statement on
Form S-1 of the Registrant and Holdings, File No. 33-59616)...............................
2.3 --Agreement and Plan of Merger dated as of April 22, 1987 by
and among Old Supermarkets, SMG Acquisition Corporation and
Holdings, as amended and restated (incorporated by reference
from Exhibit 2 to the Registration Statement on Form S-1 of
Holdings, File No. 33-16963)..............................................................
3.1* --Restated Certificate of Incorporation of the Registrant......................................
3.2 --Amendment to the Restated Certificate of Incorporation of the Registrant, as amended
(incorporated by reference from Annual Report on Form 10-K of Registrant for the year
ended January 29, 1994 (the "1994 10-K)...................................................
3.3 --By-Laws of the Registrant (incorporated by reference from Exhibit 3.3 to the Registration
Statement on Form S-1 of Registrant, File No. 33-59612, (the "October 1993 Registration
Statement")...............................................................................
4.1 --Indenture between the Registrant and United States Trust Company of New York, Trustee,
relating to the Senior Subordinated Notes due 2003 of the Registrant (incorporated by
reference from the 1994 10-K).............................................................
4.1A --Senior Subordinated Note due 2003 of the Registrant (contained in the Indenture filed as
Exhibit 4.1) (incorporated by reference from the 1994 10-K)...............................
4.2 --Indenture between the Registrant and NationsBank of Georgia, National Association, Trustee,
relating to the Junior Subordinated Deferred Coupon Notes due 2003 of the Registrant
(incorporated by reference from the 1994 contained in the Indenture filed as Exhibit 4.2)
(incorporated by reference from the 1994 10-K)............................................
4.2B --Indenture between the Registrant and Wilmington Trust Company, Trustee, relating to the
11 5/8% Subordinated Notes due 2002 of the Registrant (incorporated by reference from the
1994 10-K)................................................................................
4.3 --Indenture between the Company and Wilmington Trust Company, Trustee, relating to the 12 5/8%
Subordinated Debentures due 2002 of the Registrant (incorporated by reference from the
1994 10-K)................................................................................
4.4 --Credit Agreement dated as of June 30, 1997 ("the Credit Agreement") among the Registrant,
the Lenders listed therein, and Chase Manhattan Bank as Agent (incorporated by reference
from Registrant's Form 10-Q for the period ended August 2, 1997)........................
10.3** --First Amended and Restated Supply Agreement among Registrant, Plainbridge and C&S Wholesale
Grocers, Inc. dated as of January 29, 1998................................................
10.4 --Services Agreement dated as of May 3, 1993 between the Registrant and Chefmark (incorporated
by reference from Exhibit 10.4 to the Registration Statement on Form S-1 of the
Registrant and Holdings, File No. 33-59616)...............................................
64
Exhibit Page
No. Exhibit No.
------- ------- ----
10.5 --Chefmark Supply Agreement, dated May 3, 1993, between the Registrant and Chefmark
(incorporated by reference from Exhibit 10.5 to the Registrant Statement on Form S-1 of
the Registrant, and Holdings, File No. 33-59616)..........................................
10.6 --Tax Sharing Agreement between the Registrant and SMG-II (incorporated by reference from the
1994 10-K)................................................................................
10.7 --Tax Indemnity Agreement between the Registrant and Plainbridge (incorporated by reference
from the 1994 10-K).......................................................................
10.8 --Supermarkets General Corporation Pension Plan (as Amended and Restated effective January 1,
1979) as amended through May 29, 1987 (incorporated by reference from Exhibit 10.21 to
the Registration Statement on Form S-1 of Holdings, File No. 33-16963)....................
10.9 --Supermarkets General Corporation Savings Plan (as Amended and Registration Statement on Form
S-1 of Holdings, File No. 33-16963).......................................................
10.10 --Supermarkets General Corporation Management Incentive Plan effective June 17, 1971
(incorporated by reference from Exhibit 10.23 to the Registration Statement on Form S-1
of Holdings, File No. 33-16963............................................................
10.11 --Supplemental Retirement Agreements dated as of March 9, 1987 between Old Supermarkets and
Jack Futterman, (incorporated by reference from Exhibit 10.25 to the Registration
Statement on Form S-1 of Holdings, File No. 33-16963).....................................
10.12 --Excess Benefit Plan of Supermarkets General Corporation, effective as of March 9,
1987 (incorporated by reference from Exhibit 10.12 to the October 1993 Registration
Statement)................................................................................
10.13 --Recourse Secured Promissory Note, dated October 5, 1987, given to Holdings from each
Management Investor listed therein (incorporated by reference from Exhibit 10.43 to
Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 of Holdings,
File No. 33-16963)........................................................................
10.14 --Stock Pledge Agreement dated October 5, 1987, between Holdings and each Management Investor
listed therein (incorporated by reference from Exhibit 10.44 to Post-Effective Amendment
No. 1 to the Registration Statement on Form S-1 of Holdings, File No. 33-16963)...........
10.15 --SMG-II Holdings Corporation Management Investors Stock Option Plan, as amended and restated
May 17, 1991 (the "Option Plan") (incorporated by reference from Exhibit 10.15 to the
October 1993 Registration Statement)......................................................
10.16 --Form of Stock Option Agreement under the Option Plan (incorporated by reference from Exhibit
10.16 to the October 1993 Registration Statement).........................................
10.17 --SMG-II Holdings Corporation Employees 1987 Stock Option Plan, as amended and restated May
17, 1991 (incorporated by reference from Exhibit 10.17 to the October 1993 Registration
Statement)................................................................................
10.18 --Management Investors Exchange Agreement dated as of February 4, 1991 among SMG-II Holdings
Corporation, Holdings and each of the Management Investors party thereto (incorporated by
reference from Exhibit 10.53 to the Registration Statement on Form S-1 of Holdings, No.
33-16963).................................................................................
65
Exhibit Page
No. Exhibit No.
------- ------- ----
10.19* --Employment Agreement dated as of June 1, 1995 among the Registrant, Robert Joyce and SMG-II..
10.20* --Employment Agreement dated as of June 1, 1995 among the Registrant, Marc Strassler and SMG-II
10.21 --Supplemental Retirement Agreement dated June 1, 1994, between the Registrant and Neill
Crowley (incorporated by reference from Registrant's Annual Report on Form 10-K for the
year ended February 3, 1996)..............................................................
10.22 --Supplemental Retirement Agreement dated October 3, 1994 between the Registrant and Ron
Marshall (incorporated by reference from Registrant's Annual Report on Form 10-K for the
year ended February 3, 1996)..............................................................
10.23* --Employment Agreement dated April 1, 1997 among the Registrant, John Sheehan and SMG-II.......
10.24* --Resignation Agreement dated as of November 4, 1997 among Registrant, Neill Crowley and SMG-II
10.25 --Employment Agreement dated as of September 9, 1994 between Registrant and Ron Marshall
(incorporated by reference from Registrant's Annual Report on Form 10-K for the year
ended February 3, 1996)...................................................................
10.26* --Resignation Agreement dated as of November 4, 1997 among Registrant, Ron Rallo and SMG-II...
10.27 --Employment Agreement dated as of October 8, 1996 among Registrant, SMG-II and James Donald
(incorporated by reference from Registrant's Annual Report on Form 10-K for the year
ended February 1, 1997)...................................................................
12.1* --Statements Regarding Computation of Ratio of Earnings to Fixed Charges.......................
22.1* --List of Subsidiaries of the Registrant.......................................................
24.1* --Power of Attorney of Robert J. Mylod, Jr.
- ------------
* Filed herewith.
** Confidential treatment requested
66