<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------
<TABLE>
<S> <C>
FOR THE FISCAL YEAR ENDED COMMISSION FILE
FEBRUARY 1, 1997 NUMBER
1-5287
</TABLE>
PATHMARK STORES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 22-2879612
(State of other jurisdiction (I.R.S. Employer
of Identification
incorporation or organization) No.)
301 BLAIR ROAD, P.O. BOX 5301 07095-0915
WOODBRIDGE, NEW JERSEY (Zip Code)
(Address of principal
executive offices)
</TABLE>
908-499-3000
(Registrant's telephone number, including area code)
------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
- ----------------------------------- ----------------------------------
<S> <C>
JUNIOR SUBORDINATED DEFERRED NEW YORK STOCK EXCHANGE
COUPON NOTES DUE 2003
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
------------------------
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, 1997, 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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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. In 1990, Supermarkets General Corporation was merged into
the registrant and the registrant retained the name Supermarkets General
Corporation. In connection with the recapitalization referred to below, the
registrant changed its name from Supermarkets General Corporation to Pathmark
Stores, Inc. ("Pathmark" or the "Company").
Pathmark consummated a recapitalization plan (the "Recapitalization") on
October 26, 1993. In connection with the Recapitalization, its former parent,
Holdings, transferred all of the capital stock of Pathmark to PTK Holdings, Inc.
("PTK"), a then newly formed, wholly owned subsidiary of Holdings. PTK was
incorporated in the State of Delaware in 1993 and owns 100% of the capital stock
of Pathmark.
In connection with the Recapitalization, Pathmark contributed warehouse,
distribution and transportation operations and the inventory therein that
service the Pathmark supermarkets and drug stores and certain other assets to
Plainbridge, Inc., a then newly formed subsidiary ("Plainbridge") and
distributed the Capital Stock of Plainbridge to PTK (the "Plainbridge
Spin-Off"). In addition, Pathmark contributed to Chefmark, Inc., a newly formed
Delaware corporation ("Chefmark"), the Chefmark deli food preparation operations
and a related warehouse and a leased banana ripening warehouse, and distributed
the shares of Chefmark to Holdings (the "Chefmark Spin-Off", and, together with
the Plainbridge Spin-Off"). In connection with the Plainbridge Spin-Off,
Pathmark entered into a logistical services agreement with Plainbridge (the
"Logistical Services Agreement") that provided for the continuing supply of
merchandise to the Pathmark supermarkets and drug stores and for the provision
of warehousing, distribution and logistical services relating to the supply of
such merchandise. During the fiscal year ended February 1, 1997 ("Fiscal 1996"),
PTK contributed 100% of the capital stock of Plainbridge to Pathmark, making
Plainbridge a wholly owned subsidiary of Pathmark.
During Fiscal 1996, Pathmark twice amended its existing bank credit
agreement dated as of October 26, 1993, as amended, (the "Bank Credit
Agreement") by prospectively modifying certain of its financial covenants
(interest coverage, leverage and consolidated adjusted earnings before interest,
taxes, depreciation and amortization) and, in connection with the contribution
of Plainbridge shares to the Company, by increasing its working capital facility
(the "Working Capital Facility") under the Bank Credit Agreement by $25 million
to $200 million. Also, Pathmark and Plainbridge terminated the Logistical
Services Agreement. As used herein, "Pathmark" or the "Company" means Pathmark
and its wholly-owned subsidiaries.
As part of its continuing policy to examine the productivity of its assets,
Pathmark has decided to divest 12 supermarkets, all but one of which is located
in its southern region.
BUSINESS
At February 1, 1997, Pathmark operated 144 supermarkets primarily in the New
York--New Jersey and Philadelphia metropolitan states. These metropolitan areas
contain over 10% of the population and grocery sales in the United States.
- ------------------------
* Except as otherwise indicated, information contained in this Item is given
as of February 1, 1997.
1
<PAGE>
The following table presents the market area, number of stores, selling and
total square footage for Pathmark's supermarkets.
<TABLE>
<CAPTION>
SELLING
NUMBER OF SQ. FT TOTAL SQ. FT
MARKET AREA STORES (000'S) (000'S)
- -------------------------------------------------------------------------------- ------------- ----------- -------------
<S> <C> <C> <C>
NJ, NY, PA, DE, CT.............................................................. 144 5,475 7,467
</TABLE>
BUSINESS STRATEGY
Pathmark's business strategy is to increase sales, profitability and market
penetration in its existing markets by focusing on the following five operating
priorities: concentrate on core business, Pathmark "smart" service, lower
operating costs, spend capital wisely and have the right management team. By
concentrating on and implementing these five priorities, the Company expects to
accomplish its strategic goals (i) by providing superior perishable and
non-perishable merchandise, value and service to its customers through its
marketing, merchandising and customer service programs; (ii) through efficient
use of capital to renovate and enlarge its existing store base; and (iii)
through increased operating efficiencies.
MARKETING AND MERCHANDISING
- - SUPER CENTER FORMAT. The average Pathmark Super Center is approximately 39%
larger than the average size supermarket in the United States and offers
greater convenience by providing one-stop shopping and a wider assortment of
foods and general merchandise than is offered by conventional supermarkets.
- - PATHMARK 2000. Pathmark 2000 is a new, larger Super Center format designed to
provide Pathmark customers with a substantially greater selection of quality
perishable products. Pathmark 2000 stores are also designed to be more
"customer friendly", with wider aisles, more accessible customer service and
information departments, improved signs and graphics, and increased
availability of Pathmark associates, particularly in the perishable
departments. All of Pathmark's new supermarkets and enlargements completed in
Fiscal 1996 employed the Pathmark 2000 concept, and Pathmark expects that all
new stores and enlargements thereafter will employ the same concept. At
February 1, 1997, 53 of Pathmark's supermarkets were Pathmark 2000s.
- - FLEXIBLE MERCHANDISING. Pathmark believes that its large-store format gives it
considerable flexibility to respond to changing consumer demands and
competition by varying and enhancing its merchandise selection. Pathmark's
"Big Deals" program, currently consisting of over 500 merchandise items offers
large-sized merchandise at prices which Pathmark believes are competitive with
those available in "warehouse" and "club" stores. Pathmark emphasizes
competitive pricing plus weekly sales and promotions supported by extensive
advertising, both in print and electronic media. Merchandising flexibility and
effectiveness is enhanced through the increased utilization of a category
management approach. In addition, Pathmark offers for sale over 3,000 items
through its private label program.
- - PHARMACY. Pathmark provides full pharmacy services in virtually all of its
stores. Pathmark's broad market coverage within its marketing area has enabled
it to become a leading filler of third-party prescriptions in this area.
Pathmark believes that its well-established pharmacy operations provide a
competitive advantage in attracting and retaining customers.
STORE EXPANSION AND RENOVATION PROGRAM
- - NEW STORES, ENLARGEMENTS AND RENOVATIONS. During Fiscal 1996, Pathmark opened
four new Pathmark 2000s (two of which replaced smaller stores), closed two
other smaller stores, and completed 16 renovations and five enlargements.
During the fiscal year ending January 31, 1998 ("Fiscal 1997"), Pathmark plans
to open up to three new Pathmark 2000s (one of which has already opened), and
to complete up to an aggregate of ten renovations and enlargements.
2
<PAGE>
Pathmark recognizes the importance of keeping its stores looking fresh
and up-to-date; thus, each store typically receives a renovation or
enlargement every five years. At the end of Fiscal 1996, Pathmark derived
approximately 76% of its supermarket sales from stores that were opened,
enlarged or renovated during the last five years.
- - CORE MARKET FOCUS. Pathmark has identified over 50 potential locations for new
supermarkets within its current marketing areas and expects that all new
stores opened during the current and next two fiscal years will be located in
these areas. Pathmark believes that, by opening stores in its current
marketing areas, it can achieve additional operating economies and other
benefits from its store expansion program without the risks and costs
associated with opening stores in new marketing areas.
OPERATING EFFICIENCIES
- - TECHNOLOGY. Pathmark has made a significant and continuing investment in
information technology. All Pathmark supermarket checkout terminals have
third-generation IBM 4680 scanner systems supported by a RISC 6000 application
processor in each store. These systems allow consumer credit and electronic
fund transfer ("EFT") transactions, greatly facilitate system-wide promotion
and merchandising programs, and improve the speed and control of consumer
transactions. In addition, all Pathmark supermarkets utilize radio frequency
technology for direct vendor receivings and shelf labels.
- - GEOGRAPHIC CONCENTRATION. All Pathmark supermarkets are located within 100
miles of the Pathmark headquarters and principal warehousing facilities that
service them. This allows for more efficient management supervision, increased
speed of delivery and reduced transportation costs. All of the stores, which
Pathmark expects to open in the current fiscal year, will be within this 100
mile radius.
- - COST REDUCTION. During the fourth quarter of Fiscal 1996, Pathmark, in an
effort to reduce its costs, effectuated a 25% reduction in administrative
headcount and held for divestiture 12 supermarkets, principally in its
southern region.
PATHMARK SUPERMARKETS
Pathmark operated 144 supermarkets at February 1, 1997. Super Centers
accounted for approximately 97% of Pathmark's supermarket sales for Fiscal 1996.
The following table presents selected data respecting supermarket sales and
stores for the last five fiscal years.
<TABLE>
<CAPTION>
FISCAL YEARS
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994 1993 1992
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Supermarket sales.............................................. $ 3,701 $ 3,853 $ 3,785 $ 3,839 $ 3,942
Average sales per Supermarket.................................. 26.1 26.4(b) 25.9 25.4 24.7
Number of Supermarkets:
Renovations(c)............................................... 16 14 14 12 8
Enlargements(d).............................................. 5 4 11 5 10
Opened....................................................... 4 5 4 4 3
Closed....................................................... 4 4 6 5 3
Type of Supermarket(e):
Pathmark 2000................................................ 53 44 29 10 2
Super Center................................................. 86 95 108 128 137
Conventional................................................. 5 5 6 7 7
Total Supermarkets Open at Year End.......................... 144 144 143 145 146
</TABLE>
- ------------------------
(a) Fiscal 1995 was a 53-week year.
(b) Computed on the basis of aggregate sales of stores open for the full year,
based on a 52-week period.
3
<PAGE>
(c) Renovations involve an investment of $350,000 or more and in Fiscal 1996
averaged nearly $1.5 million per store.
(d) Enlargements involve the addition of selling space and in Fiscal 1996
averaged an investment in excess of $3.7 million.
(e) Includes two stores not wholly owned. The sales figures for these stores are
not included above.
By industry standards, Pathmark stores are large and productive, averaging
approximately 51,900 square feet in size and generating high average sales
volume of approximately $26.1 million per store ($690 per selling square foot)
for stores open for all of Fiscal 1996. Pathmark's 144 supermarkets at February
1, 1997 ranged from 26,000 to 66,500 square feet in size and included 132
supermarkets that are 40,000 square feet or larger in size. All Pathmark stores
carry a broad variety of food and drug store products, including an extensive
variety of the Pathmark, No Frills and Pathmark Preferred brands. All but seven
supermarkets contained in-store pharmacy departments at year end.
Pathmark pioneered the development of the large "superstore" in the Middle
Atlantic States, opening the first "Pathmark Super Center" in 1977, and
currently operates 139 such stores, including 53 "Pathmark 2000" stores. The
majority of Super Centers were created through the enlargement or renovation of
existing stores. In addition to the broad variety of food and non-food items
carried in conventional Pathmark stores, a typical Super Center includes a
customer service center, videotape rental, a pharmacy, expanded produce
department, meat department, cheese shop, bakery, seafood, service delicatessen
department, expanded health and beauty care department and book department. All
Super Centers have EFT and credit transaction capability at their checkout
terminals, and 130 supermarkets also feature in-store automated teller machines.
During 1996, the Company entered into master licensing agreements with two
regional banking institutions to place up to 114 in-store banks in Pathmark
supermarkets over the next three years. Each bank, which occupies approximately
400 square feet, offers a full array of financial services and is open seven
days a week. The license agreements have an initial term of five years with
optional renewal periods. At the close of Fiscal 1996, 13 stores had in-store
banks within them and Pathmark expects to have 50 additional in-store banks by
the end of Fiscal 1997.
Pathmark has developed a new, larger Super Center format called "Pathmark
2000" designed to provide Pathmark customers with a substantially greater
selection of perishable products, particularly produce. The average weekly sales
for Pathmark 2000 stores in Fiscal 1996 was $28.5 million compared to $25.2
million for the balance of the chain. Pathmark 2000 stores are also designed to
be more "customer friendly", with wider aisles, more accessible customer service
and information departments, improved signs and graphics, and increased
availability of Pathmark associates. For example, Pathmark has recently
introduced "GREAT" service, a customer service program emphasizing proactive
inter-personal communication between store associates and customers. All of
Pathmark's new supermarkets and a majority of supermarket enlargements completed
in Fiscal 1996 employed the Pathmark 2000 concept and Pathmark expects that
virtually all new stores and enlargements will employ the same concept.
Pathmark's supermarket business is generally not seasonal, although sales in
the second and fourth quarters tend to be slightly higher than those in the
first and third quarters.
STORE EXPANSION AND RENOVATION PROGRAM
A key of Pathmark's business strategy has been, and will continue to be, the
expansion of the total selling square footage of its operations. Pathmark
believes, that by adding new stores and increasing the selling area of existing
stores, it can improve its competitive position and operating margins by
achieving economies of scale in merchandising, advertising, distribution and
supervision. During the five years ending with Fiscal 1996, Pathmark completed
99 renovations and enlargements and opened 20 new supermarkets. At the close of
Fiscal 1996, sales in these stores accounted for approximately 76% of its total
supermarket sales. Pathmark currently expects to open up to three new Pathmark
"2000" Super Centers
4
<PAGE>
during Fiscal 1997 (one of which has already opened), none of which will replace
smaller stores, and to complete up to ten renovations and enlargements.
ADVERTISING AND PROMOTION
As part of its marketing strategy, Pathmark emphasizes value through its
competitive pricing and weekly sales and promotions supported by extensive
advertising. Additional savings are offered each week Pathmark "super coupons"
in newspapers and circulars. Pathmark's advertising expenditures are
concentrated on print advertising, including advertisements and circulars in
local and area newspapers and advertising flyers distributed in stores, radio
and television. Several years ago, Pathmark introduced "Smart Coupons" in its
advertisements. With "Smart Coupons", customers no longer are required to cut
out Pathmark coupons from its advertisement and physically present them at the
cash registers. Rather, when a coupon item is scanned during the check-out
process, the coupon savings is automatically deducted from the price. Pathmark
believes that its "Smart Coupons" greatly convenience its customers and improve
customer service at the checkout.
CONSUMER RESEARCH
Pathmark conducts numerous ongoing and special consumer research projects.
These typically involve customer surveys (both in-store and by telephone) as
well as focus groups. The information derived from these projects is used to
evaluate consumers' attitudes and purchasing patterns and helps shape Pathmark's
marketing programs.
TECHNOLOGY
Pathmark has made a significant and continuing investment in information
technology. All Pathmark supermarket checkout terminals have third-generation
IBM 4680 scanner systems supported by a RlSC 6000 application processor in each
store. These systems allow consumer credit and EFT transactions, greatly
facilitate system-wide promotion and merchandising programs, and improve the
speed and control of customer transactions. This technology and the data
generated by scanning have not only led to lower labor costs, improved price
control, shelf allocation and quicker customer check-out, but have also assisted
in the analysis of product movement, profit contribution and demographic
merchandising. Pathmark also has a computer-assisted ordering system which
enables it to replenish inventory to avoid "out of stocks" at store level while
maintaining optimum overall inventory levels. In addition, all Pathmark
supermarkets utilize radio frequency technology for direct vendor receivings and
shelf labels.
All of the pharmacies are equipped with pharmacy computers. In addition to
improving customer service, these computers aid pharmacists in detecting drug
interactions, improve the collection of third-party receivables and help to
attract third-party businesses such as health maintenance organizations and
union welfare plans.
In August 1991, Pathmark entered into a long-term facilities management and
systems integration agreement with IBM Company. Under the agreement, IBM has
taken over Pathmark's data center operations, mainframe processing and
information system functions, (formerly performed by approximately 150
employees) and is providing business applications and systems designed to
enhance Pathmark's customer service and efficiency.
SUPPLY AND DISTRIBUTION
Most of the merchandise sold in Pathmark's supermarkets is supplied through
its distribution facilities located in New Jersey. In addition, pursuant to a
supply agreement between Chefmark and Pathmark (the "Chefmark Supply
Agreement"), Chefmark supplies Pathmark with merchandise from its banana
ripening and deli food preparation operations. The Chefmark Supply Agreement
provides that, for a period of seven years, such services are to be performed by
Chefmark in substantially the same manner as they have
5
<PAGE>
been performed by Pathmark's banana ripening and deli food preparation
operations prior to the Chefmark Spin-Off.
All of Pathmark's stores are located within 100 miles of the principal
Pathmark and Chefmark distribution centers. The following table presents
information concerning the distribution and processing facilities through which
Pathmark is supplied, and the product lines relevant to each.
DISTRIBUTION FACILITIES
<TABLE>
<CAPTION>
SQUARE YEAR
LOCATION PRODUCT LINE FOOTAGE OPENED
- ------------------------ ------------------------------------------------------------------- --------- -----------
<S> <C> <C> <C>
Woodbridge, NJ(1) Dry Grocery 475,000 1968
Edison, NJ(2) General Merchandise, Health and Beauty Care Products,
Pharmaceuticals, Tobacco 266,000 1980
Woodbridge, NJ(1) Meat, Dairy, Deli, Produce 255,000 1970
Dayton, NJ(2) Frozen Food Distribution Center 112,000 1994
No. Brunswick, NJ(2) Dry Grocery 425,000 1996
</TABLE>
PROCESSING FACILITIES
<TABLE>
<CAPTION>
SQUARE YEAR
LOCATION PRODUCT LINE FOOTAGE OPENED
- ------------------------ ------------------------------------------------------------------- --------- -----------
<S> <C> <C> <C>
Somerset, NJ(3) Delicatessen Products 16,000 1976
Avenel, NJ(4) Banana Ripening 30,000 1984
</TABLE>
- ------------------------
(1) Owned by Pathmark.
(2) Leased by Pathmark.
(3) Owned by Chefmark.
(4) Leased by Chefmark.
COMPETITION
The supermarket business is highly competitive and is characterized by high
asset turnover and narrow profit margins. Pathmark's earnings are primarily
dependent on the maintenance of relatively high sales volume per supermarket,
efficient product purchasing and distribution, and cost-effective store
operating and distribution techniques. Pathmark's main competitors are national
and regional supermarkets, drug stores, convenience stores, discount
merchandisers, "warehouse" and "club" stores and other local retailers in the
areas served. Principal competitive factors include price, store location,
advertising and promotion, product mix, quality and service.
TRADE NAMES, SERVICE MARKS AND TRADEMARKS
Pathmark has registered a variety of trade names, service marks and
trademarks with the United States Patent and Trademark Office, each for an
initial period of 20 years, renewable for as long as the use thereof continues.
Pathmark considers its Pathmark service marks to be of material importance to
its business and actively defends and enforces such service marks.
REGULATION
Pathmark's food and drug business requires it to hold various licenses and
to register certain of its facilities with state and federal health, drug and
alcoholic beverage regulatory agencies. By virtue of these licenses and
registration requirements, Pathmark is obligated to observe certain rules and
regulations, and
6
<PAGE>
a violation of such rules and regulations could result in a suspension or
revocation of the licenses or registrations. In addition, most of Pathmark's
licenses require periodic renewals. Pathmark has experienced no material
difficulties with respect to obtaining, effecting or retaining its licenses and
registrations.
EMPLOYEES
At February 1, 1997, the Company employed approximately 29,700 people, of
whom approximately 20,200 were employed on a part-time basis.
Approximately 89% of the Company's employees are covered by 28 collective
bargaining agreements (typically having three or four year terms) negotiated
with approximately 17 different local unions. During Fiscal 1997, eight
contracts, covering approximately 13,000 Pathmark associates in 92 stores, will
expire. The Company does not anticipate any difficulty in renegotiating these
contracts.
The Company believes that its relationship with its employees is generally
satisfactory.
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.
Pathmark's 144 supermarkets have an aggregate selling area of approximately
5.5 million square feet. Twenty of the supermarkets are owned by Pathmark and
the remaining 124 are leased. These supermarkets either are freestanding stores
or are located in shopping centers. Thirty leases expire during the current and
next four calendar years and Pathmark has options to renew all of them.
Pathmark owns its corporate headquarters in Woodbridge, NJ and maintains
administrative and accounting offices in Carteret, New Jersey in leased premises
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.
- ------------------------
** Except as otherwise indicated, information contained in this Item is given
as of February 1, 1997.
7
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(AS OF APRIL 1, 1997)
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
Exchangeable Preferred Stock, of which 4,890,671 shares were issued and
outstanding at April 1, 1997 (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' 1996 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, 1997, 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 8,520 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, 1997, 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 56 holders, including six affiliates of Merrill
Lynch & Co., Inc. (The "ML Common Investors"), CBC Capital Partners, Inc.
("CBC"), an affiliate of Chase Manhattan Corp., and 49 current and former
members of the Company's management (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 CBC, 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 CBC 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").
8
<PAGE>
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 Company's Bank Credit Agreement and subject to restrictions
in its other debt instruments. Pursuant to the consent of the lenders party to
the Bank Credit Agreement, the Company paid dividends totaling $26.5 million to
its sole stockholder during its fiscal year ended February 3, 1996. During
Fiscal 1996, the Company paid no dividends to its sole stockholder. The Company
does not currently anticipate paying dividends during Fiscal 1997.
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.
9
<PAGE>
PATHMARK STORES, INC.
SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS
(IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEARS(A)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
STATEMENTS OF OPERATIONS DATA:
Sales(b)......................................................... $ 3,710 $ 3,972 $ 3,968 $ 4,021 $ 4,110
Cost of sales(b) (exclusive of depreciation and amortization
shown separately below)........................................ 2,619 2,838 2,866 2,952 3,031
--------- --------- --------- --------- ---------
Gross profit..................................................... 1,091 1,134 1,102 1,069 1,079
Selling, general and administrative expenses(b).................. 857 866 851 837 817
Depreciation and amortization(c)................................. 89 80 75 70 69
Restructuring charge(d).......................................... 9 -- -- -- --
Lease commitment charge(e)....................................... 9 -- -- -- --
Recapitalization expense(f)...................................... -- -- -- 17 --
Provision for store closings(g).................................. -- -- -- 6 --
Amortization of goodwill......................................... -- -- -- -- 18
Goodwill write-off............................................... -- -- -- -- 601
--------- --------- --------- --------- ---------
Operating earnings (loss)........................................ 127 188 176 139 (426)
Interest expense, net(h)......................................... (161) (165) (148) (172) (183)
Gain on disposition of freestanding drug stores(i)............... -- 16 -- -- --
--------- --------- --------- --------- ---------
Earnings (loss) from continuing operations before income taxes,
gain on disposal of home centers segment, extraordinary items
and cumulative effect of accounting changes.................... (34) 39 28 (33) (609)
Income tax benefit (provision)................................... 14 (6) (4) 20 (8)
--------- --------- --------- --------- ---------
Earnings (loss) from continuing operations before gain on
disposal of home centers segment, extraordinary items and
cumulative effect of accounting changes........................ (20) 33 24 (13) (617)
Loss from discontinued operations................................ -- -- (2) -- (1)
Gain on disposal of home centers segment, net of tax(j).......... -- -- 17 -- --
--------- --------- --------- --------- ---------
Earnings (loss) before extraordinary items and cumulative effect
of accounting changes.......................................... (20) 33 39 (13) (618)
Extraordinary items, net of tax(k)............................... (1) -- -- (97) (5)
--------- --------- --------- --------- ---------
Earnings (loss) before cumulative effect of accounting changes... (21) 33 39 (110) (623)
Cumulative effect of accounting changes, net of tax(l)........... -- -- -- (38) --
--------- --------- --------- --------- ---------
Net earnings (loss).............................................. $ (21) $ 33 $ 39 $ (148) $ (623)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of earnings to fixed charges(m)............................ -- 1.21x 1.16x -- --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Deficiency in earnings available to cover fixed charges(n)....... $ 34 $ -- $ -- $ 33 $ 609
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS OF
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
FEB. 1, FEB. 3, JAN. 28, JAN. 29, JAN. 30,
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Total assets...................................................... $ 990 $ 986 $ 1,018 $ 1,119 $ 1,101
Working capital deficiency........................................ 182 173 122 107 55
Obligations under capital leases, long-term....................... 175 140 127 132 127
Other long-term debt, net of current maturities................... 1,186 1,215 1,273 1,286 1,278
Stockholder's deficit............................................. (1,042) (1,024) (1,030) (1,001) (967)
</TABLE>
10
<PAGE>
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) Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the Fiscal 1996 presentation, the most
significant of which was the Company's change in reporting of Pathmark
coupon expenses (excluding manufacturers' coupons). Prior to this change,
Pathmark coupon expenses, net of any vendor reimbursements, were recorded in
selling, general and administrative expenses. As a result of this change,
Pathmark gross coupon expenses have now been recorded as a reduction of
sales with any vendor reimbursements being recorded as a reduction of cost
of goods sold.
(c) In Fiscal 1996, depreciation and amortization includes a $5 million pretax
charge to write down certain fixed assets held for sale to their estimated
net realizable values. See Note 7 of the Notes to Consolidated Financial
Statements at Item 8, Part II of this Form 10-K.
(d) During Fiscal 1996, the Company recorded a pretax charge of $9 million for
reorganization and restructuring costs related to its administrative
operations. See Note 3 of the Notes to Consolidated Financial Statements at
Item 8, Part II of this Form 10-K.
(e) During Fiscal 1996, the Company recorded a pretax charge of $9 million
related to unfavorable lease commitments of certain unprofitable stores in
the Company's southern region. See Note 4 of the Notes to Consolidated
Financial Statements 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 decided to close or dispose of five stores
and recorded a pretax charge of $6 million.
(h) Prior to Fiscal 1995, interest expense was net of interest charged to
discontinued operations.
(i) During Fiscal 1995, the Company decided to dispose of its 36 freestanding
drug stores. See Note 19 of the Notes to Consolidated Financial Statements
at Item 8, Part II of this Form 10-K.
(j) During Fiscal 1994, the Company sold its home centers segment, which
resulted in a gain on sale of $17 million, net of $2 million of income
taxes. See Note 20 of the Notes to Consolidated Financial Statements at Item
8, Part II of this Form 10-K.
(k) During Fiscal 1996, the Company recorded an extraordinary charge of $1
million, net of an income tax benefit, related to the early extinguishment
of debt. See Note 18 of the Notes to Consolidated Financial Statements 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. During Fiscal 1992, the Company recorded an
extraordinary charge of $5 million, net of an income tax benefit of $3
million, related to the early extinguishment of debt.
(l) The cumulative effect of accounting changes in Fiscal 1993 of $38 million,
net of an income tax benefit of $28 million, reflects the adoption of
Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits other than Pensions"; the adoption of Statement
of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits"; the change in the method utilized to calculate
last-in, first-out (LIFO) inventories; and the change in
11
<PAGE>
the determination of the discount rate utilized to record the present value
of certain noncurrent liabilities. All of the accounting changes were made
as of the beginning of Fiscal 1993.
(m) For the purpose of this calculation, earnings before fixed charges consist
of earnings from continuing operations before income taxes plus fixed
charges. Fixed charges consist of interest expense on all indebtedness
(including amortization of deferred debt issuance costs) and the portion of
operating lease rental expense that is representative of the interest factor
(deemed to be one-third of operating lease rentals).
(n) For purposes of determining the deficiency in earnings available to cover
fixed charges, earnings are defined as earnings (loss) from continuing
operations before income taxes plus fixed charges. Fixed charges consist of
interest expense on all indebtedness (including amortization of deferred
debt issuance costs) and the portion of operating lease rental expense that
is representative of the interest factor (deemed to be one-third of
operating lease rentals).
12
<PAGE>
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
RECLASSIFICATIONS: Certain reclassifications have been made to the prior
years' consolidated financial statements to conform to the Fiscal 1996
presentation, the most significant of which was the Company's change in
reporting of Pathmark coupon expenses (excluding manufacturers' coupons). Prior
to this change, Pathmark coupon expenses, net of any vendor reimbursements, were
recorded in selling, general and administrative expenses. As a result of this
change, Pathmark gross coupon expenses have now been recorded as a reduction of
sales, with any vendor reimbursements being recorded as a reduction of cost of
goods sold.
FISCAL 1996 (52-WEEK YEAR) V. FISCAL 1995 (53-WEEK YEAR)
SALES: Sales in Fiscal 1996 were $3.71 billion compared to $3.97 billion in
Fiscal 1995. Sales comparisons were impacted by the extra week in the prior year
and the disposition of the freestanding drug stores during Fiscal 1995. Sales
generated by the freestanding drug stores were $110.8 million in Fiscal 1995.
Same store sales from supermarkets decreased 2.8% for the year primarily due to
a significant increase in competitive new store openings and remodels,
particularly in the Company's southern region. During Fiscal 1996, the Company
opened four new Pathmark 2000 format stores, two of which replaced smaller
stores, and completed 21 major renovations and enlargements to existing
supermarkets. Two stores were closed and not replaced during the year. At Fiscal
1996 year end, the Company operated 144 supermarkets, including 53 Pathmark 2000
format stores, compared with the end of Fiscal 1995 when the Company operated
144 supermarkets, including 44 Pathmark 2000 format stores.
GROSS PROFIT: Gross profit in Fiscal 1996 was $1.09 billion or 29.4% of
sales compared with $1.13 billion or 28.6% of sales in Fiscal 1995. Excluding
the impact of the disposition of the freestanding drug stores, gross profit as a
percentage of sales was 28.8% in Fiscal 1995. The improvement in gross profit,
as a percentage of sales in Fiscal 1996 compared to Fiscal 1995, was primarily
due to increased focus on merchandising programs, the impact of the disposition
of the freestanding drug stores, as well as the Company's continuing emphasis on
the Pathmark 2000 format stores which allow expanded variety in all departments
particularly high margin perishables. The decrease in gross profit was primarily
attributable to the lower sales. The cost of goods sold comparisons were
affected by a pretax LIFO credit of $1.3 million and a pretax LIFO charge of
$1.1 million in Fiscal 1996 and Fiscal 1995, respectively.
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
13
<PAGE>
gain of $3.4 million recognized on the sale of a former warehouse of Purity
Supreme, Inc. ("Purity"), a previously divested company.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization of $89.0
million in Fiscal 1996 was $8.6 million higher than $80.4 million in Fiscal
1995. The increase for Fiscal 1996 was primarily due to a pretax charge of $5.4
million to write down certain fixed assets held for sale, principally in the
Company's southern region, to their estimated net realizable values and capital
expenditures. Depreciation and amortization excludes video tape amortization,
which is recorded in cost of goods sold, of $3.1 million and $2.8 million in
Fiscal 1996 and Fiscal 1995, respectively.
RESTRUCTURING CHARGE: During the fourth quarter of Fiscal 1996, the Company
recorded a pretax charge of $9.1 million for reorganization and restructuring
costs related to its administrative operations. The restructuring charge
included $4.2 million for the costs of a voluntary early retirement program and
$1.2 million for severance and termination benefits. The remaining charge of
$3.7 million primarily relates to consulting fees incurred in connection with
the restructuring and exit costs for facility consolidation.
LEASE COMMITMENT CHARGE: During the fourth quarter of Fiscal 1996, the
Company decided to divest a group of its southern region stores, certain of
which have experienced unprofitable operating results. The Company concluded
that the operating losses being experienced by these stores were other than
temporary and that the projected operating results of such stores would not be
sufficient to recover their long-lived assets and their contractual lease
commitments. Further, the Company believes that these lease costs will not be
significantly recoverable through any future sublease. Therefore, the Company
recorded a $8.8 million pretax charge related to these unfavorable lease
commitments, in addition to writing down the long-lived assets of these stores
(see "DEPRECIATION AND AMORTIZATION" above).
OPERATING EARNINGS: Operating earnings for Fiscal 1996 were $127.1 million
compared with $187.9 million for Fiscal 1995. The decrease in operating earnings
during Fiscal 1996 compared to Fiscal 1995 was due to lower sales, higher
depreciation and amortization expense, the restructuring charge and the lease
commitment charge, partially offset by lower SG&A.
INTEREST EXPENSE: Interest expense was $161.5 million for Fiscal 1996
compared to $164.7 million in Fiscal 1995 primarily due to reductions in the
Term Loan along with lower interest rates.
INCOME TAXES: The income tax benefit for Fiscal 1996 was $14.4 million. The
income tax provision for Fiscal 1995 was $5.9 million reflecting the reversal of
the valuation allowance of $9.1 million related to the Company's deferred income
tax assets. The reversal was recorded in conjunction with the Company's
continuing evaluation of its deferred income tax assets. In the opinion of
management, sufficient evidence continues to exist, which indicates that it is
more likely than not, that the Company will be able to realize its deferred
income tax assets.
During Fiscal 1996, the Company made income tax payments of $4.6 million and
received income tax refunds of $5.5 million. During Fiscal 1995, the Company
made income tax payments of $21.9 million and received income tax refunds of
$10.3 million.
EXTRAORDINARY ITEMS: During the first quarter of Fiscal 1996, in connection
with the termination of the Plainbridge credit agreement due to the
reacquisition of Plainbridge by Pathmark, the Company wrote off deferred
financing fees resulting in a net loss on early extinguishment of debt of $0.7
million. During the second quarter of Fiscal 1996, in connection with the
proceeds from the sale of certain mortgaged property, the Company made a
mortgage paydown of $5.3 million, including accrued interest and debt premiums,
resulting in a net loss on early extinguishment of debt of $0.2 million.
NET EARNINGS: The Company's net loss in Fiscal 1996 was $20.8 million
compared to net earnings of $32.7 million in Fiscal 1995. The decrease in net
earnings for Fiscal 1996 compared to Fiscal 1995 was due to lower operating
earnings in Fiscal 1996, the gain on disposition of the freestanding drug stores
in Fiscal
14
<PAGE>
1995, partially offset by lower interest expense and an income tax benefit in
Fiscal 1996 compared to an income tax provision in Fiscal 1995.
FISCAL 1995 (53-WEEK YEAR) V. FISCAL 1994 (52-WEEK YEAR)
SALES: Sales were $3.97 billion in both Fiscal 1995 and Fiscal 1994. The
decrease in sales, due to the sale of the freestanding drug stores on July 28,
1995, was offset by sales for the extra week in Fiscal 1995. Same store sales
from supermarkets decreased 0.3% for the year. During Fiscal 1995, the Company
opened five supermarkets, of which three replaced older, smaller stores and
completed 18 renovations and enlargements. One store was closed and not replaced
during the year. At Fiscal 1995 year end, the Company operated 144 supermarkets,
including 44 Pathmark 2000 format stores, compared with the end of Fiscal 1994
when the Company operated 143 supermarkets, including 29 Pathmark 2000 format
stores. The Company operated one freestanding drug store at Fiscal 1995 year end
compared to 36 freestanding drug stores at the end of Fiscal 1994 (see
"Disposition of Freestanding Drug Stores" below).
GROSS PROFIT: Gross profit in Fiscal 1995 was $1.13 billion or 28.6% of
sales compared with $1.10 billion or 27.8% of sales in Fiscal 1994. The
improvement in gross profit, as a percentage of sales for Fiscal 1995 compared
to Fiscal 1994, was primarily due to increased focus on merchandising programs
as well as to the Company's continuing emphasis on the Pathmark 2000 format
stores, which allow expanded variety in all departments particularly high margin
perishables and lower inventory shrink. The cost of goods sold comparisons were
affected by a pretax LIFO charge of $1.1 million and a pretax LIFO credit of
$0.7 million for Fiscal 1995 and Fiscal 1994, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"): SG&A increased $14.7
million or 1.7% in Fiscal 1995 compared with Fiscal 1994. SG&A, on a proforma
basis eliminating the SG&A impact of the freestanding drug stores in the third
and fourth quarters of Fiscal 1994, increased 4.0% in Fiscal 1995 compared to
Fiscal 1994. As a percentage of sales, SG&A were 21.8% in Fiscal 1995 up from
21.4% in Fiscal 1994 due to higher claims expenses, occupancy costs and
supplies, partially offset by lower promotional costs and labor related
expenses, along with weather related expenses that adversely affected the first
quarter of Fiscal 1994. SG&A for Fiscal 1995 also included a fourth quarter gain
of $3.4 million recognized on the sale of a former warehouse of Purity, a
previously divested company.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization of $80.4
million in Fiscal 1995 was $4.9 million higher than the $75.5 million in Fiscal
1994. The increase for Fiscal 1995 was primarily due to capital expenditures.
Depreciation and amortization excludes video tape amortization, which is
recorded in cost of goods sold, of $2.8 million and $2.6 in Fiscal 1995 and
Fiscal 1994, respectively.
OPERATING EARNINGS: Operating earnings for Fiscal 1995 were $187.9 million
compared with the $175.7 million in Fiscal 1994. The increase in operating
earnings in Fiscal 1995 compared to Fiscal 1994 was due to higher gross profit,
partially offset by higher SG&A and depreciation and amortization expenses.
INTEREST EXPENSE: Interest expense was $164.7 million for Fiscal 1995
compared to $158.5 million in Fiscal 1994 due to the higher interest rates on
the Company's floating rate bank debt and higher average borrowings under its
Working Capital Facilities. During Fiscal 1994, the Company allocated $11.0
million of interest expense to discontinued operations.
DISPOSITION OF FREESTANDING DRUG STORES: During the second quarter of
Fiscal 1995, the Company made a decision to dispose of its 36 freestanding drug
stores and, on July 28, 1995, completed the sale of 30 of its freestanding drug
stores, including merchandise inventory, to Rite Aid Corporation for $59.9
million. The Company recorded a pretax gain on the disposition of its
freestanding drug stores of $15.5 million, net of a $19.0 million charge related
to the estimated exit costs of the remaining six freestanding drug stores.
15
<PAGE>
Five of the remaining six freestanding drug stores were closed during Fiscal
1995 and the sixth store closed during the second quarter of Fiscal 1996.
INCOME TAXES: The income tax provision of $5.9 million for Fiscal 1995 is
net of reversals through July 29, 1995 of the deferred income tax valuation
allowance totaling $9.1 million related to the Company's deferred income tax
assets. The reversals were recorded in conjunction with the Company's continuing
evaluation of its deferred income tax assets. In the opinion of management,
sufficient evidence exists, such as the positive trend in earnings, which
indicates that it is more likely than not that the Company will be able to
realize its deferred income tax assets. The income tax provision was $4.1
million in Fiscal 1994.
During Fiscal 1995, the Company made income tax payments of $21.9 million
and received income tax refunds of $10.3 million. During Fiscal 1994, the
Company made income tax payments of $6.3 million and received income tax refunds
of $25.9 million.
SUMMARY OF CONTINUING OPERATIONS: Earnings from continuing operations were
$32.7 million for Fiscal 1995 compared to $24.1 million for Fiscal 1994. The
increase in earnings from continuing operations for Fiscal 1995 was primarily
due to the gain of disposition of freestanding drug stores and higher operating
earnings, partially offset by higher interest expense.
NET EARNINGS: Net earnings were $32.7 million in Fiscal 1995 compared to
$39.1 million in Fiscal 1994. Fiscal 1994 included the gain on disposal of home
centers segment of $17.0 million and a loss from discontinued operations of $2.1
million.
FINANCIAL CONDITION
DEBT SERVICE: During Fiscal 1996, total debt decreased $6.3 million from
Fiscal 1995 year end primarily due to term loan repayments under the Bank Credit
Agreement (the "Term Loan") of $44.8 million, offset by borrowings under the
Working Capital Facility and debt accretion on the Deferred Coupon Notes (as
defined in Note 10 of the Notes to Consolidated Financial Statements at Item 8,
Part II of this Form 10-K). Borrowings under the Working Capital Facility were
$73.5 million at February 1, 1997 and have increased to $79.0 million at April
29, 1997.
During the third quarter of Fiscal 1996, the Company sold three of its
supermarket properties for $19.3 million, net of fees of $1.4 million and income
taxes of $0.7 million and simultaneously leased back the properties. The net
proceeds were used to paydown debt, primarily the Working Capital Facility.
During Fiscal 1996, Pathmark twice amended its existing Bank Credit
Agreement. In conjunction with the reacquisition of the Plainbridge capital
stock, the outstanding obligations of Plainbridge under its bank credit
agreement were satisfied by the Company and the Plainbridge bank credit
agreement was terminated. The Company simultaneously entered into an amendment
to its Bank Credit Agreement with its existing lenders increasing the Company's
Working Capital Facility from $175 million to $200 million (of which the maximum
of $125.0 million can be in letters of credit) to satisfy any additional
liquidity needs and prospectively modifying certain of its financial covenants
to take into account the operations of Plainbridge. In December 1996, the
Company amended its Bank Credit Agreement with existing lenders modifying
certain of its covenants, including those concerning the generation of minimum
levels of cash flow (as defined), minimum interest coverage and maximum leverage
rates.
The Company is required to repay a portion of its borrowings under the Term
Loan each year, so as to retire such indebtedness in its entirety by Fiscal
1999. The Company is also required to make sinking fund payments on the
Subordinated Notes (as defined in Note 10 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 10
of the Notes to Consolidated Financial Statements at Item 8, Part II of
16
<PAGE>
this Form 10-K) and the remaining Subordinated Notes mature on June 15, 2002.
The Senior Subordinated Notes (as defined in Note 10 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 indebtedness under the Working Capital Facility and Term Loan bear
interest at floating rates and cash interest payments on such indebtedness may
vary in future years. The Company does not currently maintain any interest rate
hedging arrangements due to the reasonable risk that the near term interest
rates will not rise significantly. The Company is continuously evaluating this
risk and will implement interest rate hedging arrangements when deemed
appropriate.
The majority of the cash interest payments are scheduled in the second and
fourth quarters.
The amounts of principal payments required each year on outstanding
long-term debt (excluding the original issue discount with respect to the
Deferred Coupon Notes) are as follows (dollars in millions):
<TABLE>
<CAPTION>
PRINCIPAL
FISCAL YEARS PAYMENTS
- ----------------------------------------------------------------------------------- -----------
<S> <C>
1997............................................................................... $ 74.4
1998............................................................................... 155.7
1999............................................................................... 127.2
2000............................................................................... 50.6
2001............................................................................... 50.0
2002............................................................................... 195.8
2003............................................................................... 606.3
</TABLE>
LIQUIDITY: The consolidated financial statements of the Company indicate
that, at February 1, 1997, current liabilities exceeded current assets by $182.1
million and stockholder's deficit was $1.04 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 10 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, Working Capital Facility and certain mortgages in Fiscal 1998, the
amortization and subsequent maturity of the Term Loan in Fiscal 1999 and the
maturity of the Subordinated Notes and Subordinated Debentures in Fiscal 2002.
The Company expects that it will be necessary to refinance all or a portion of
the Senior Subordinated Notes and the Deferred Coupon Notes due in Fiscal 2003.
The Company may undertake a refinancing of some or all of such indebtedness
sometime prior to its maturity. The Bank Credit Agreement includes an annual
cleandown provision requiring borrowings under the Company's Working Capital
Facility not to exceed $60.0 million for a period of 30 consecutive days. The
Company was in compliance with its various debt covenants at February 1, 1997
and, based on management's operating projections for Fiscal 1997, the Company
believes that it will be able to satisfy this cleandown provision and continue
to be in compliance with its other debt covenants. The Company's ability to make
scheduled payments, to refinance or otherwise meet its obligations with respect
to its indebtedness depends on its financial and operating performance, which in
turn, is subject to prevailing economic conditions and to financial, business
and other factors beyond its control. Although the Company's cash flow from its
operations and borrowings has been sufficient to meet its debt service
obligations, there can be no assurance that the Company's
17
<PAGE>
operating results will continue to be sufficient or that future borrowing
facilities will be available for payment or refinancing of the Company's
indebtedness.
The Company is currently holding discussions with its lenders with respect
to refinancing its Bank Credit Agreement. The Working Capital Facility expires
in July 1998 and the Term Loan matures in Fiscal 1999. Management believes it
will successfully refinance this debt, however, there can be no assurances that
the refinancing will occur or that the terms associated with any such new
agreement will be more favorable to the Company. 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 1996, including
property acquired under capital leases, were $94.1 million compared to $110.6
million for Fiscal 1995 and $105.2 for Fiscal 1994. During Fiscal 1996, the
Company opened four new Pathmark 2000 format stores, two of which replaced
smaller stores, and completed 21 major renovations and enlargements. During
Fiscal 1997, the Company plans to open up to three new Pathmark 2000 format
stores (one of which has already opened), and to complete up to an aggregate of
ten major renovations and enlargements.
CASH FLOWS: Cash provided by operating activities amounted to $73.6 million
in Fiscal 1996 compared to $118.3 million in Fiscal 1995. The decrease in net
cash provided by operating activities was primarily due to a decline in cash
provided by operating assets and liabilities and a decrease in net earnings.
Cash used for investing activities in Fiscal 1996 was $46.8 million due to
expenditures of property and equipment of $55.0 million, offset by proceeds from
property dispositions of $8.2 million. Cash used for investing activities in
Fiscal 1995 was $0.7 million primarily due to property and equipment
expenditures of $69.5 million, partially offset by the net proceeds from the
disposition of the freestanding drug stores of $59.9 million, the proceeds from
the sale of real estate of $3.4 million and the proceeds from the disposal of
home centers segment of $4.7 million. Cash used for financing activities in
Fiscal 1996 was $28.6 million compared to $128.0 million in Fiscal 1995. The
decrease in cash used for financing activities is primarily due to an increase
in borrowings under the Working Capital Facility, the proceeds from the lease
financing of three supermarket locations, a decrease in dividends to PTK and a
paydown of $25.0 million on the Term Loan in Fiscal 1995 in conjunction with the
disposition of the freestanding drug stores. During Fiscal 1995, the Company
paid a dividend to PTK of $26.5 million from the net proceeds related to the
disposition of the freestanding drug stores and the sale of the home centers
segment.
Cash provided by operating activities amounted to $118.3 million in Fiscal
1995 compared to $110.1 million in Fiscal 1994. The increase in net cash
provided by operating activities was primarily due to an improvement in cash
provided by operating assets and liabilities. Cash used for investing activities
in Fiscal 1995 was $0.7 million primarily due to property and equipment
expenditures of $69.5 million, partially offset by the net proceeds from the
disposition of the freestanding drug stores of $59.9 million, the proceeds from
the sale of real estate of $3.4 million and the proceeds from the disposal of
the home centers segment of $4.7 million, compared to cash used for investing
activities of $1.5 million in Fiscal 1994, primarily reflecting the expenditures
for property and equipment of $83.9 million, net of the proceeds of the home
centers segment of $81.1 million. Cash used for financing activities in Fiscal
1995 was $128.0 million compared to $92.3 million in Fiscal 1994. The increase
in cash used for financing activities is primarily due to a decrease in
borrowings under the Working Capital Facilities and a paydown of $25.0 million
on the Term Loan, partially offset by a decrease in dividends to PTK. During
Fiscal 1995, the Company paid a dividend to PTK of $26.5 million from the net
proceeds related to the disposition of the freestanding drug stores and the sale
of the home centers segment. During Fiscal 1994, the Company paid a dividend of
$66.6 million to PTK from the net proceeds related to the disposal of the home
centers segment.
18
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS.
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Sales................................................................... $ 3,710,523 $ 3,971,593 $ 3,968,184
Cost of sales (exclusive of depreciation and amortization shown
separately below)..................................................... 2,619,277 2,837,631 2,866,091
------------ ------------ ------------
Gross profit............................................................ 1,091,246 1,133,962 1,102,093
Selling, general and administrative expenses............................ 857,290 865,679 850,961
Depreciation and amortization........................................... 88,956 80,408 75,468
Restructuring charge.................................................... 9,137 -- --
Lease commitment charge................................................. 8,763 -- --
------------ ------------ ------------
Operating earnings...................................................... 127,100 187,875 175,664
Interest expense........................................................ (161,469) (164,749) (158,503)
Interest charged to discontinued operations............................. -- -- 11,035
Gain on disposition of freestanding drug stores......................... -- 15,535 --
------------ ------------ ------------
Earnings (loss) from continuing operations before income taxes, gain on
disposal of home centers segment and extraordinary items.............. (34,369) 38,661 28,196
Income tax benefit (provision).......................................... 14,411 (5,914) (4,083)
------------ ------------ ------------
Earnings (loss) from continuing operations before gain on disposal of
home centers segment and extraordinary items.......................... (19,958) 32,747 24,113
Loss from discontinued operations....................................... -- -- (2,099)
Gain on disposal of home centers segment, net of an income tax provision
of $2,324............................................................. -- -- 17,044
------------ ------------ ------------
Earnings (loss) before extraordinary items.............................. (19,958) 32,747 39,058
Extraordinary items, net of an income tax benefit of $613............... (877) -- --
------------ ------------ ------------
Net earnings (loss)..................................................... $ (20,835) $ 32,747 $ 39,058
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................................................... $ 9,880 $ 11,648
Accounts receivable, net.......................................................... 12,492 10,553
Merchandise inventories........................................................... 216,931 225,448
Deferred income taxes............................................................. 7,111 4,156
Prepaid expenses.................................................................. 24,951 25,189
Due from suppliers................................................................ 13,923 13,178
Other current assets.............................................................. 5,908 5,854
------------- -------------
Total Current Assets............................................................ 291,196 296,026
Property and Equipment, Net......................................................... 603,577 602,888
Deferred Financing Costs, Net....................................................... 28,743 33,685
Deferred Income Taxes............................................................... 22,846 13,243
Other Assets........................................................................ 43,534 39,915
------------- -------------
$ 989,896 $ 985,757
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Accounts payable.................................................................. $ 166,199 $ 184,082
Book overdrafts................................................................... 41,085 43,720
Current maturities of long-term debt.............................................. 74,431 51,753
Income taxes payable.............................................................. 860 4,057
Accrued payroll and payroll taxes................................................. 56,335 54,322
Current portion of lease obligations.............................................. 23,133 20,680
Accrued interest payable.......................................................... 20,712 19,309
Accrued expenses and other current liabilities.................................... 90,589 91,223
------------- -------------
Total Current Liabilities....................................................... 473,344 469,146
------------- -------------
Long-Term Debt...................................................................... 1,185,639 1,214,645
------------- -------------
Lease Obligations, Long-Term........................................................ 175,353 140,161
------------- -------------
Other Noncurrent Liabilities........................................................ 197,226 186,036
------------- -------------
Commitments and Contingencies (Notes 13 and 22)
Stockholder's Deficit
Common Stock $.10 par value......................................................... -- --
Authorized, issued and outstanding: 100 shares
Paid-in Capital..................................................................... 68,703 65,303
Accumulated Deficit................................................................. (1,110,369) (1,089,534)
------------- -------------
Total Stockholder's Deficit..................................................... (1,041,666) (1,024,231)
------------- -------------
$ 989,896 $ 985,757
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT DEFICIT
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, January 29, 1994.................................. $ -- $ 160,045 $ (1,161,339) $ (1,001,294)
Net earnings............................................. -- -- 39,058 39,058
Capital contribution to PTK Holdings, Inc. .............. -- (1,657) -- (1,657)
Dividend to PTK Holdings, Inc. in conjunction with the
disposal of the home centers segment................... -- (66,579) -- (66,579)
---------- ---------- ------------- -------------
Balance, January 28, 1995.................................. -- 91,809 (1,122,281) (1,030,472)
Net earnings............................................. -- -- 32,747 32,747
Dividend to PTK Holdings, Inc. in conjunction with the
disposition of freestanding drug stores................ -- (21,800) -- (21,800)
Dividend to PTK Holdings, Inc. in conjunction with the
disposal of home centers segment....................... -- (4,706) -- (4,706)
---------- ---------- ------------- -------------
Balance, February 3, 1996.................................. -- 65,303 (1,089,534) (1,024,231)
Net loss................................................. -- -- (20,835) (20,835)
Capital contribution from SMG-II Holdings Corporation.... -- 3,400 -- 3,400
---------- ---------- ------------- -------------
Balance, February 1, 1997.................................. $ -- $ 68,703 $ (1,110,369) $ (1,041,666)
---------- ---------- ------------- -------------
---------- ---------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities
Net earnings (loss)...................................................... $ (20,835) $ 32,747 $ 39,058
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization.......................................... 92,485 83,263 78,056
Deferred income tax (benefit) expense.................................. (12,558) 6,417 (661)
Interest accruable but not payable..................................... 16,678 15,028 13,541
Amortization of original issue discount................................ 354 354 354
Amortization of debt issuance costs.................................... 7,426 7,140 7,028
(Gain) loss on disposal of property and equipment...................... (5,347) 200 (252)
Extraordinary loss on early extinguishment of debt..................... 877 -- --
Gain on disposition of freestanding drug stores........................ -- (15,535) --
Gain on sale of real estate............................................ -- (3,371) --
Gain on disposal of home centers segment............................... -- -- (17,044)
Loss from discontinued operations...................................... -- -- 2,099
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net............................................. (1,939) 2,380 1,206
Merchandise inventories.............................................. 8,517 15,653 2,497
Income taxes......................................................... (2,584) 8,932 15,779
Prepaid expenses..................................................... (2,889) (1,631) (10,707)
Due from suppliers................................................... (745) 5,079 481
Other current assets................................................. (3,009) 2,221 (9,778)
Other assets......................................................... 2,309 (23,419) 6,647
Accounts payable..................................................... (17,883) (9,114) (21,704)
Accrued payroll and payroll taxes.................................... 2,013 780 (929)
Accrued interest payable............................................. 1,403 (363) 3,039
Accrued expenses and other current liabilities....................... (1,867) (6,997) 4,999
Other noncurrent liabilities......................................... 11,191 (1,462) (3,589)
----------- ----------- -----------
Cash provided by operating activities.............................. 73,597 118,302 110,120
----------- ----------- -----------
Investing Activities
Property and equipment expenditures...................................... (54,963) (69,544) (83,866)
Proceeds from disposition of property and equipment...................... 8,170 896 1,262
Net proceeds from disposition of freestanding drug stores................ -- 59,876 --
Net proceeds from sale of real estate.................................... -- 3,371 --
Net proceeds from disposal of home centers segment....................... -- 4,706 81,147
----------- ----------- -----------
Cash used for investing activities................................. (46,793) (695) (1,457)
----------- ----------- -----------
Financing Activities
Increase (decrease) in Working Capital Facility borrowings............... 27,500 (17,000) 25,500
Decrease in Term Loan.................................................... (44,828) (60,295) (36,750)
Increase (decrease) in book overdrafts................................... (2,635) (1,262) 5,660
Increase in other borrowings............................................. 2,052 895 3,676
Repayment of other long-term borrowings.................................. (8,085) (5,208) (5,527)
Reduction in lease obligations........................................... (20,032) (18,221) (17,275)
Proceeds from lease financing............................................ 21,405 -- --
Premiums incurred in early extinguishment of debt........................ (352) -- --
Deferred financing fees.................................................. (3,597) (374) (977)
Dividend to PTK Holdings, Inc. .......................................... -- (26,506) (66,579)
----------- ----------- -----------
Cash used for financing activities................................. (28,572) (127,971) (92,272)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents........................... (1,768) (10,364) 16,391
Cash and cash equivalents at beginning of period........................... 11,648 22,012 5,621
----------- ----------- -----------
Cash and cash equivalents at end of period................................. $ 9,880 $ 11,648 $ 22,012
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes on consolidated financial statements.
22
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BUSINESS
ORGANIZATION AND BASIS OF PRESENTATION:
Pathmark Stores, Inc. (the "Company") operates 144 supermarkets as of
February 1, 1997, primarily in the New York-New Jersey and Philadelphia
metropolitan areas and is an indirect wholly owned subsidiary of Supermarkets
General Holdings Corporation ("Holdings"). Holdings was formed by Merrill Lynch
Capital Partners, Inc., a wholly owned subsidiary of Merrill Lynch & Co., Inc.
("ML&Co."), to effect the acquisition (the "Acquisition") of the Company. On
June 15, 1987, Holdings completed the first step in the Acquisition when it
acquired 32.8 million shares (approximately 85%) of the Company's common stock
through a tender offer. The remaining outstanding common stock of the Company
was acquired by Holdings on October 5, 1987 pursuant to a Merger Agreement dated
April 22, 1987, as amended. The Acquisition of the Company by Holdings was
accounted for as a purchase, and accordingly, Holdings recorded the assets and
liabilities of the Company at their fair values at the date of the Acquisition.
The accompanying consolidated financial statements of the Company reflect
Holdings' basis. The tax basis for the assets and liabilities acquired was
retained.
During Fiscal 1993, the Board of Directors of Holdings authorized management
of the Company and Holdings to proceed with a recapitalization plan (the
"Recapitalization"), which included a refinancing of Holdings' debt and the
distribution to Holdings of certain of the Company's assets and liabilities. In
conjunction with the Recapitalization, the assets, liabilities and related
operations of the Company's home centers segment, as well as, certain assets and
liabilities of the warehouse, distribution and processing facilities which
service the Company's supermarkets and drug stores and certain inventories and
real property, were contributed to Plainbridge, Inc. ("Plainbridge"), a then
newly formed wholly owned subsidiary of the Company and the shares of
Plainbridge were then distributed to PTK Holdings, Inc. ("PTK"), a then newly
formed wholly owned subsidiary of Holdings (the "Plainbridge Spin-Off").
Following the Plainbridge Spin-Off, PTK held 100% of the capital stock of both
Plainbridge and the Company. On May 3, 1993, the Company contributed total
assets of $1.7 million and total liabilities of $1.8 million, which represented
the Chefmark deli food preparation operations and the related warehouse and a
leased banana ripening warehouse to Chefmark, Inc. ("Chefmark"), a then newly
formed Delaware corporation, and distributed the shares of Chefmark to Holdings.
On March 1, 1996, the Company reacquired all of the outstanding capital
stock of Plainbridge by means of a capital contribution from PTK. As a result,
Plainbridge is a wholly-owned subsidiary of the Company. Since the acquisition
of the capital stock of Plainbridge is a transfer of interest among entities
under common control, it is being accounted for at historical cost in a manner
similar to pooling-of-interests accounting. Accordingly, the consolidated
financial statements presented herein reflect the assets and liabilities and
related results of operations of the combined entity for all periods.
MANAGEMENT'S PLAN:
The consolidated financial statements of the Company indicated that, at
February 1, 1997, current liabilities exceeded current assets by $182.1 million
and the stockholder's deficit was $1.04 billion. Management believes that cash
flows generated from operations, supplemented by the unused borrowing capacity
under its working capital facility (the "Working Capital Facility") and the
availability of capital lease financing, will be sufficient to pay the Company's
debts as they come due, provide for its capital expenditure program and meet its
other cash requirements.
The Company was in compliance with its various debt covenants at February 1,
1997. In December 1996, the Company amended its bank credit agreement (the "Bank
Credit Agreement") with existing
23
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--BUSINESS (CONTINUED)
lenders modifying certain of its covenants, including those concerning the
generation of minimum levels of cash flow (as defined), minimum interest
coverage and maximum leverage rates. Such convenants also include an annual
cleandown provision requiring borrowings under the Company's Working Capital
Facility not to exceed $60.0 million for a period of 30 consecutive days. Based
on management's operating projections for Fiscal 1997, the Company believes that
it will be able to satisfy this cleandown provision and continue to be in
compliance with its other debt covenants.
The Company is currently holding discussions with its lenders with respect
to refinancing its Bank Credit Agreement. The Working Capital Facility expires
in July 1998 and the term loan (the "Term Loan") matures in Fiscal 1999 (see
Note 10). Management believes it will successfully refinance its debt, however,
there can be no assurances that the refinancing will occur or that the terms
associated with any such new agreement will be more favorable to the Company.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of whom are wholly owned. All intercompany
transactions have been eliminated in consolidation. The accompanying
consolidated statement of operations for Fiscal 1994 includes the operating
results of the Company's home centers segment as discontinued operations through
the date of disposal.
USE OF ESTIMATES:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The accompanying consolidated balance sheets include reserves for self
insured claims relating to customer, employee and vehicle accidents and covered
employee medical benefits. The liabilities for customer and employee accident
claims are recorded at present value, due to the long-term payout of these
claims (see Note 9). While the Company believes that the amounts provided are
adequate to cover its self-insured liabilities, it is reasonably possible that
the final resolution of these claims may differ from the amounts provided.
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the Fiscal 1996 presentation, the most
significant of which was the Company's change in reporting of Pathmark coupon
expenses (excluding manufacturers' coupons). Prior to this change, Pathmark
coupon expenses, net of any vendor reimbursements, were recorded in selling,
general and administrative expenses. As a result of this change, Pathmark gross
coupon expenses have now been recorded as a reduction of sales, with any vendor
reimbursements being recorded as a reduction of cost of goods sold.
24
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FISCAL YEAR:
The Company's fiscal year ends on the Saturday nearest to January 31 of the
following calendar year. Normally, each fiscal year consists of 52 weeks, but
every five or six years the fiscal year consists of 53 weeks. Fiscal 1995
consists of 53 weeks.
STATEMENTS OF CASH FLOWS:
All investments and marketable securities with a maturity of three month or
less are considered to be cash equivalents. The Company had no cash equivalent
investments as of February 1, 1997 and February 3, 1996.
MERCHANDISE INVENTORIES:
Merchandise inventories are valued at the lower of cost or market. Cost for
substantially all merchandise inventories is determined on a last-in, first-out
("LIFO") basis.
RENTAL VIDEO TAPES:
Video tapes purchased for rental purposes are capitalized and amortized over
their estimated useful lives. The amortization of video tapes, included in cost
of goods sold, approximate $3.1 million, $2.8 million and $2.6 million in Fiscal
1996, Fiscal 1995 and Fiscal 1994, respectively.
SOFTWARE:
Externally purchased software is capitalized and amortized as part of
selling, general and administrative expenses over a three year period.
Internally developed software, including software developed by IBM (see Note
22), is expensed as incurred.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation and amortization
expense on owned property and equipment is computed on the straight-line method
over the following useful lives: buildings, 40 years; fixtures and equipment,
3-10 years; and leasehold improvements, 8-15 years or lease term, whichever is
shorter. Capital leases are recorded at the present value of minimum lease
payments or fair market value of the related property, whichever is less.
Amortization of property under capital leases is computed on the straight-line
method over the term of the lease or the leased property's estimated useful
life, whichever is shorter.
LONG-LIVED ASSETS:
Effective February 4, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). SFAS No.
121 establishes accounting standards for the measurement of the impairment of
long-lived assets, certain intangibles and goodwill related to those assets.
SFAS No. 121 requires that an asset to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The carrying value of
long-lived assets, which are being used in the Company's operations, are
assessed for recoverability based upon groups of assets and the related cash
flow generated by such assets. Assets held for sale are reviewed
25
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for impairment based upon the estimated net realizable value of such assets. The
adoption of SFAS No. 121 had no effect on the Company's financial condition or
results of operations.
DEFERRED FINANCING COSTS:
Deferred financing costs are amortized utilizing the interest method over
the life of the related indebtedness.
BOOK OVERDRAFT:
Under the Company's cash management system, checks issued but not presented
to banks result in overdraft balances for accounting purposes and are classified
as book overdrafts.
REVENUE RECOGNITION:
Revenue is recognized at the point of sale to the customer.
ADVERTISING COSTS:
Advertising costs, net of vendor reimbursements, are expensed as incurred
and were $23.7 million, $30.6 million and $32.4 million in Fiscal 1996, Fiscal
1995 and Fiscal 1994, respectively.
STORE PREOPENING AND CLOSING COSTS:
Store preopening costs are expensed as incurred. Store closing costs, such
as future rent and real estate taxes subsequent to the actual store closing, net
of expected sublease recovery, are recorded at present value, when management
makes a decision to close a store (See Note 9).
INCOME TAXES:
The Company's income taxes are computed based on a tax sharing agreement
with its ultimate parent, SMG-II Holdings Corporation ("SMG-II"), in which the
Company computes a hypothetical tax return as if the Company was not joined in a
consolidated or combined return with SMG-II. The Company must pay SMG-II the
positive amount of any such hypothetical tax. If the hypothetical tax return
shows entitlement to a refund, including any refund attributable to a carryback,
then SMG-II will pay to the Company the amount of such refund.
EARNINGS (LOSS) PER COMMON SHARE:
Since the Company is a wholly owned subsidiary, earnings (loss) per share is
not presented.
NOTE 3--RESTRUCTURING CHARGE
During the fourth quarter of Fiscal 1996, the Company recorded a pretax
charge of $9.1 million for reorganization and restructuring costs related to its
administrative operations. The restructuring charge included $4.2 million for
the costs of a voluntary early retirement program which was accepted by 142
employees and $1.2 million for severance and termination benefits for 80
employees. The remaining charge of $3.7 million primarily relates to consulting
fees incurred in connection with the restructuring and exit costs for facility
consolidation. As of February 1, 1997, $3.2 million has been expended, of which
$1.6 million relates to the early retirement program and severance benefits and
$1.6 million relates to
26
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--RESTRUCTURING CHARGE (CONTINUED)
consulting costs and the facility consolidation. The Company estimates that it
will expend $4.7 million in Fiscal 1997. The remaining $1.2 million relates to
early retirement benefits which will be expended over time.
NOTE 4--LEASE COMMITMENT CHARGE
During the fourth quarter of Fiscal 1996, the Company decided to divest a
group of its southern region stores, certain of which have experienced
unprofitable operating results. The Company concluded that the operating losses
being experienced by these stores were other than temporary and that the
projected operating results of such stores would not be sufficient to recover
their long-lived assets and their contractual lease commitments. Further, the
Company believes that these lease costs will not be significantly recoverable
through any future sublease. Therefore, the Company recorded a $8.8 million
pretax charge related to these unfavorable lease commitments, in addition to
writing down the long-lived assets of these stores (see Note 7).
NOTE 5--ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
<S> <C> <C>
Prescription plans.................................................. $ 10,397 $ 9,250
Other............................................................... 3,366 2,240
----------- -----------
Accounts receivable................................................. 13,763 11,490
Less: allowance for doubtful accounts(a)............................ 1,271 937
----------- -----------
Accounts receivable, net............................................ $ 12,492 $ 10,553
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(a) Fiscal 1996 includes a provision of $0.1 million and a recovery of $0.3
million. Fiscal 1995 includes a provision of $1.3 million and a write off of
$1.3 million.
NOTE 6--MERCHANDISE INVENTORIES
Merchandise inventories are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
<S> <C> <C>
Merchandise inventories at FIFO cost................................ $ 258,417 $ 268,212
Less: LIFO reserve.................................................. 41,486 42,764
----------- -----------
Merchandise inventories at LIFO cost................................ $ 216,931 $ 225,448
----------- -----------
----------- -----------
</TABLE>
Liquidation of LIFO layers in the periods reported did not have a
significant effect on the results of continuing operations. The decrease in the
LIFO reserve was primarily due to a decrease in the inventory levels of the
distribution centers.
27
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
<S> <C> <C>
Land................................................................ $ 61,258 $ 62,606
Buildings and building improvements................................. 201,364 199,690
Fixtures and equipment.............................................. 202,952 202,019
Leasehold costs and improvements.................................... 293,626 279,400
Transportation equipment............................................ 19,706 18,448
----------- -----------
Property and equipment, owned....................................... 778,906 762,163
Property and equipment under capital leases......................... 206,819 188,585
----------- -----------
Property and equipment, at cost..................................... 985,725 950,748
Less: accumulated depreciation and amortization..................... 382,148 347,860
----------- -----------
Property and equipment, net......................................... $ 603,577 $ 602,888
----------- -----------
----------- -----------
</TABLE>
During the fourth quarter of Fiscal 1996, the Company recorded a pretax
charge of $5.4 million to write down fixed assets held for sale, principally in
its southern region, to their estimated net realizable values. This charge is
included in depreciation and amortization expense in the accompanying
consolidated statement of operations for Fiscal 1996.
NOTE 8--DEFERRED FINANCING COSTS, NET
Deferred financing costs, primarily related to the Recapitalization, are
comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
<S> <C> <C>
Deferred financing costs............................................ $ 51,378 $ 50,377
Less: accumulated amortization...................................... 22,635 16,692
----------- -----------
Deferred financing costs, net....................................... $ 28,743 $ 33,685
----------- -----------
----------- -----------
</TABLE>
NOTE 9--OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
<S> <C> <C>
Self-insured liabilities............................................ $ 62,485 $ 65,183
Pension and deferred compensation................................... 20,227 17,003
Other postretirement and postemployment benefits.................... 41,399 41,001
Closed stores....................................................... 20,117 23,871
Lease commitments................................................... 7,107 --
Other............................................................... 45,891 38,978
----------- -----------
Other noncurrent liabilities........................................ $ 197,226 $ 186,036
----------- -----------
----------- -----------
</TABLE>
28
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--OTHER NONCURRENT LIABILITIES (CONTINUED)
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 10--LONG-TERM DEBT
Long-term debt is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
------------ ------------
<S> <C> <C>
Term Loan............................................................................. $ 243,127 $ 287,955
Working Capital Facility.............................................................. 73,500 46,000
9.625% Senior Subordinated Notes due 2003 ("Senior Subordinated Notes")............... 437,780 437,426
10.75% Deferred Coupon Notes due 2003 ("Deferred Coupon Notes")....................... 168,559 151,881
12.625% Subordinated Debentures due 2002 ("Subordinated Debentures").................. 95,750 95,750
11.625% Subordinated Notes due 2002 ("Subordinated Notes")............................ 199,017 199,017
Debt payable to Holdings.............................................................. 983 983
Industrial revenue bonds.............................................................. 6,375 6,375
Other debt (primarily mortgages)...................................................... 34,979 41,011
------------ ------------
Total debt...................................................................... 1,260,070 1,266,398
Less: current maturities.............................................................. 74,431 51,753
------------ ------------
Long-term portion..................................................................... $ 1,185,639 $ 1,214,645
------------ ------------
------------ ------------
</TABLE>
SCHEDULED MATURITIES OF DEBT:
Long-term debt principal payments are as follows (dollars in thousands):
<TABLE>
<CAPTION>
PRINCIPAL
FISCAL YEARS PAYMENTS
- -------------------------------------------------------------------------------- ------------
<S> <C>
1997............................................................................ $ 74,431
1998............................................................................ 155,688
1999............................................................................ 127,219
2000............................................................................ 50,643
2001............................................................................ 50,000
Thereafter...................................................................... 802,089
------------
$ 1,260,070
------------
------------
</TABLE>
BANK CREDIT AGREEMENT:
Under the Bank Credit Agreement, the Term Loan and the Working Capital
Facility bear interest at floating rates. At February 1, 1997, the interest
rates for the Term Loan and Working Capital Facility were 8.4% and 8.9%,
respectively. At February 3, 1996, the interest rates for the Term Loan and
Working Capital Facility were 8.4% and 9.2% respectively. The Company is
required to repay a portion of its borrowings under the Term Loan each year, so
as to retire such indebtedness in its entirety by October 31, 1999. In
conjunction with the reacquisition of the Plainbridge capital stock by the
Company, the outstanding obligations of Plainbridge under its bank credit
agreement were satisfied by the Company and the
29
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--LONG-TERM DEBT (CONTINUED)
Plainbridge bank credit agreement, which allowed for $40.0 million of
availability, was terminated. The Company simultaneously entered into an
amendment to its Bank Credit Agreement with its existing lenders, increasing the
Company's Working Capital Facility, from $175 million to $200 million (of which
the maximum of $125.0 million can be in letters of credit), to satisfy any
additional liquidity needs and prospectively modifying certain of its financial
covenants to take into account the operations of Plainbridge. The Working
Capital Facility is subject to an annual cleandown provision. Under the terms of
the cleandown provision, in each fiscal year, loans cannot exceed $60.0 million
(formerly $50.0 million) under the Working Capital Facility for a period of 30
consecutive days. The Company satisfied the terms of the cleandown provision
through Fiscal 1996. The Company believes it has sufficient unused borrowing
capacity under the Working Capital Facility, which can be utilized for
unforeseen or for seasonal cash requirements. At February 1, 1997, the Company
had approximately $70.2 million in outstanding letters of credit and
approximately $56.3 million in unused borrowing capacity under its Working
Capital Facility.
In December 1996, the Company amended its Bank Credit Agreement with its
existing lenders modifying certain of its covenants, including those financial
covenants concerning levels of operating cash flow (as defined), minimum
interest coverage and maximum leverage ratio. At February 1, 1997, the Company
was in compliance with all of its debt covenants as amended. Based upon
projected results for the upcoming fiscal year, the Company believes it will be
in compliance with its debt covenants which includes certain levels of operating
cash flow (as defined), minimum interest coverage and a maximum leverage ratio,
throughout the upcoming fiscal year, as well as satisfying its cleandown
provision (see above). The Bank Credit Agreement and the indentures for certain
debt also contain other restrictive covenants, including, but not limited to,
covenants with respect to the following matters: (i) limitation on indebtedness;
(ii) limitation on restricted payments; (iii) limitation on transactions with
affiliates; (iv) limitation on liens; (v) limitation on the issuance of
preferred stock by subsidiaries; (vi) limitation on issuances of guarantees of
indebtedness by subsidiaries; (vii) limitation on transfer of assets to
subsidiaries; (viii) limitation on dividends and other payment restrictions
affecting subsidiaries; and (ix) restriction on mergers and transfers of assets.
SENIOR SUBORDINATED NOTES:
The Senior Subordinated Notes accrete to a maturity value of $440.0 million
in Fiscal 2003. These notes pay cash interest on a semiannual basis and have no
sinking fund requirements.
DEFERRED COUPON NOTES:
The Deferred Coupon Notes accrete to a maturity value of $225.3 million in
Fiscal 2003. These notes begin paying cash interest on a semiannual basis on May
1, 2000 and have no sinking fund requirements.
SUBORDINATED DEBENTURES:
The Subordinated Debentures mature in Fiscal 2002. These debentures pay cash
interest on a semiannual basis and have no sinking fund requirements.
SUBORDINATED NOTES:
The Subordinated Notes mature in Fiscal 2002 and pay cash interest on a
semiannual basis. These notes contain a sinking fund provision that requires the
Company to deposit $49.8 million (25% of the original aggregate principal
amount) with the trustee of the Subordinated Notes on June 15 in each of
30
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--LONG-TERM DEBT (CONTINUED)
Fiscal 2000 and Fiscal 2001 for the redemption of the Subordinated Notes, at a
redemption price equal to 100% of the principal amount thereof, plus accrued
interest to the redemption date and providing for the redemption of 50% of the
original aggregate principal amount of such notes prior to maturity.
INDUSTRIAL REVENUE BONDS:
Interest rates for the industrial revenue bonds range from 10.5%-10.9%. The
industrial revenue bonds are payable in Fiscal 2003.
OTHER DEBT:
Other debt includes mortgage notes, which are secured by property and
equipment, having a net book value of $54.5 million at February 1, 1997 and
$65.4 million at February 3, 1996. These borrowings, whose interest rates
averaged 10.5%, are payable in installments ending in Fiscal 2000, including a
scheduled payment of $30.1 million in Fiscal 1998.
NOTE 11--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and fair values of the Company's financial instruments
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, 1997 FEBRUARY 3, 1996
-------------------------- --------------------------
<S> <C> <C> <C> <C>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
Term Loan................................................ $ 243,127 $ 243,127 $ 287,955 $ 287,955
Working Capital Facility................................. 73,500 73,500 46,000 46,000
Senior Subordinated Notes................................ 437,780 415,015 437,426 419,929
Deferred Coupon Notes.................................... 168,559 142,471 151,881 135,578
Subordinated Debentures.................................. 95,750 96,353 95,750 100,959
Subordinated Notes....................................... 199,017 202,340 199,017 206,220
Holdings Subordinated Notes.............................. 983 999 983 1,017
Industrial revenue bonds................................. 6,375 6,375 6,375 6,375
Other debt (primarily mortgages)......................... 34,979 34,979 41,011 41,011
------------ ------------ ------------ ------------
Total debt......................................... $ 1,260,070 $ 1,215,159 $ 1,266,398 $ 1,245,044
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The fair value of the Term Loan and Working Capital Facility at February 1,
1997 and February 3, 1996 approximated their carrying value due to their
floating interest rates. The fair value of the notes and debentures are based on
the quoted market prices at February 1, 1997 and February 3, 1996, since such
instruments are publicly traded. The Company has evaluated its other debt,
primarily mortgages and industrial revenue bonds and believes, that based on
interest rates, related terms and maturities, that the fair value of such
instruments approximates their respective carrying amounts. As of February 1,
1997 and February 3, 1996, the carrying values of cash and cash equivalents,
accounts receivable and accounts payable approximate fair values due to the
short-term maturities of these instruments.
31
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--INTEREST EXPENSE
Interest expense is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Term Loan.................................................................... $ 22,616 $ 29,067 $ 27,281
Working Capital Facility..................................................... 5,444 5,601 4,996
Senior Subordinated Notes
Amortization of original issue discount.................................... 354 354 354
Currently payable.......................................................... 42,350 42,350 42,350
Deferred Coupon Notes, accruable but not payable............................. 16,678 15,028 13,541
Subordinated Debentures...................................................... 12,088 12,088 12,088
Subordinated Notes........................................................... 23,136 23,136 23,136
Amortization of debt issuance costs.......................................... 7,426 7,140 7,028
Obligations under capital leases............................................. 17,992 16,646 15,694
Mortgages payable............................................................ 3,736 4,210 4,398
Debt payable to Holdings..................................................... 114 114 149
Other, net................................................................... 9,535 9,015 7,488
---------- ---------- ----------
Interest expense............................................................. $ 161,469 $ 164,749 $ 158,503
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Company made cash interest payments of $130.6 million, $135.1 million
and $129.4 in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively.
NOTE 13--LEASES
At February 1, 1997, the Company was liable under terms of noncancellable
leases for the following minimum lease commitments (dollars in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEARS LEASES LEASES
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
1997...................................................................................... $ 42,549 $ 30,604
1998...................................................................................... 40,878 30,172
1999...................................................................................... 34,191 29,659
2000...................................................................................... 32,166 29,430
2001...................................................................................... 22,989 27,727
Later years............................................................................... 245,108 311,106
---------- ----------
Total minimum lease payments(a)........................................................... 417,881 $ 458,698
----------
----------
Less: executory costs (such as taxes, maintenance and insurance).......................... 2,221
----------
Net minimum lease payments................................................................ 415,660
Less: amounts representing interest....................................................... 217,174
----------
Present value of net minimum lease payments (including current installments of $23,133)... $ 198,486
----------
----------
</TABLE>
- ------------------------
(a) Net of sublease income of $1,147 and $134,010 for capital and operating
leases, respectively.
32
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--LEASES (CONTINUED)
During Fiscal 1996, Fiscal 1995 and Fiscal 1994, the Company incurred
capital lease obligations of $39.2 million, $41.1 million and $21.3 million,
respectively, in connection with property and equipment lease agreements. These
capital lease amounts are non-cash and, accordingly, have been excluded from the
consolidated statements of cash flows.
During the third quarter of Fiscal 1996, the Company sold three of its
supermarket properties for $19.3 million, net of fees of $1.4 million and income
taxes of $0.7 million, and simultaneously leased back such properties. The net
proceeds were used to paydown debt, primarily the Working Capital Facility. Due
to the Company's continuing involvement in such properties, no gain has been
recorded and the transaction has been accounted for as a financing, with the
associated liability of $21.4 million included in lease obligations in the
consolidated balance sheet.
Rent expense, included in continuing operations, under all operating leases
having noncancellable terms of more than one year is summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Minimum rentals............................................................... $ 47,366 $ 47,461 $ 49,564
Contingent rentals(b)......................................................... -- -- 318
Less: rentals from subleases.................................................. (14,576) (15,802) (13,092)
---------- ---------- ----------
Rent expense.................................................................. $ 32,790 $ 31,659 $ 36,790
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(b) Primarily based on sales.
NOTE 14--RELATED PARTY TRANSACTIONS
The Company is a party to an agreement pursuant to which the Company
provides certain administrative services to Chefmark. Such services include,
among other things, legal, human resources, data processing, insurance,
accounting, tax, treasury and property management services. The agreement has an
initial term of seven years which expires in Fiscal 2000, with renewal options.
The cost of the services charged to Chefmark under this agreement was
approximately $1.4 million in each of Fiscal 1996, Fiscal 1995 and Fiscal 1994.
During Fiscal 1995, the Company paid ML&Co. fees of approximately $0.6
million related to the sale of the freestanding drug stores. During Fiscal 1994,
the Company paid ML&Co. fees of approximately $1.0 million related to the
disposal of the home centers segment.
NOTE 15--RETIREMENT AND BENEFIT PLANS
The Company has several noncontributory defined benefit pension plans, the
most significant of which is the SGC Pension Plan, which covers substantially
all non-union and certain union associates. Pension benefits to retired and to
terminated vested associates are primarily based upon their length of service
and upon a percentage of qualifying compensation. The Company's funding policy,
which is consistent with federal funding requirements, is intended to provide
not only for benefits attributed to service to date, but also for those benefits
expected to be earned in the future. Due to the overfunding status of the SGC
Pension Plan, no contributions were required during the last three fiscal years.
33
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--RETIREMENT AND BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of the pension plans and
the amounts recognized in the Company's financial statements (dollars in
thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, 1997 FEBRUARY 3, 1996
-------------------------- --------------------------
<S> <C> <C> <C> <C>
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------ ------------ ------------ ------------
Actuarial present value of accumulated benefit obligation:
Vested................................................ $ (84,092) $ (20,922) $ (94,648) $ (17,929)
Unvested.............................................. (5,988) (215) (5,749) (250)
------------ ------------ ------------ ------------
Total................................................. (90,080) (21,137) (100,397) (18,179)
Plan assets at fair value................................. 171,270 447 164,306 265
------------ ------------ ------------ ------------
Plan assets higher (lower) than accumulated benefit
obligation.............................................. $ 81,190 $ (20,690) $ 63,909 $ (17,914)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Actuarial present value of projected benefit obligation... $ (114,776) $ (23,200) $ (118,859) $ (20,894)
Plan assets at fair value................................. 171,270 447 164,306 265
------------ ------------ ------------ ------------
Plan assets higher (lower) than projected benefit
obligation.............................................. 56,494 (22,753) 45,447 (20,629)
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions...... (43,296) (90) (33,156) (90)
Unrecognized prior service cost........................... 1,111 955 1,209 1,671
------------ ------------ ------------ ------------
Prepaid (accrued) pension cost............................ $ 14,309 $ (21,888) $ 13,500 $ (19,048)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Assets of the Company's pension plans are invested in marketable securities
comprised primarily of equities of domestic corporations, U.S. Government
instruments and money market investments.
During the fourth quarter of Fiscal 1996, the Company recorded a
restructuring charge (see Note 3) which included $2.1 million for the costs of a
voluntary early retirement program. The liability related to this charge is
included as part of the net accrued pension cost.
The decrease in the vested benefit obligation in Fiscal 1996 compared to
Fiscal 1995 was primarily due to the recognition of the lump sum payment option
in the voluntary early retirement program, which also resulted in a
corresponding offset in the plan assets.
The following table provides the assumptions used in determining the
actuarial present value of the projected benefit obligation at February 1, 1997
and February 3, 1996:
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
--------------- -------------
<S> <C> <C>
Weighted average discount rate...................................... 7.5% 7.25%
Rate of increase in future compensation levels...................... 4.5 4.25%
Expected long-term rate of return on plan assets.................... 9.5 9.5
</TABLE>
34
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--RETIREMENT AND BENEFIT PLANS (CONTINUED)
The change in the weighted average discount rate, which is used in
determining the actuarial present value of the projected benefit obligation,
will not have a material impact on the Company's net pension cost in Fiscal
1997.
The net periodic pension cost (income) included in continuing operations is
comprised of the following components (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Service cost of benefits earned during the year................................... $ 3,771 $ 3,402 $ 4,402
Interest cost on projected benefit obligation..................................... 10,182 9,533 9,085
Actual gain on plans' assets...................................................... (28,109) (40,531) (71)
Net amortization and deferral..................................................... 15,988 27,747 (10,848)
--------- --------- ---------
Net periodic pension cost......................................................... $ 1,832 $ 151 $ 2,568
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company also contributes to many multi-employer plans which provide
defined benefits to certain union associates. The Company's contributions to
these multi-employer plans were $18.7 million, $17.7 million and $16.8 million
in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively.
The Company sponsors a savings plan for eligible non-union associates.
Contributions under the plan are based on specified percentages of associate
contributions. The Company's contributions to the savings plan were $3.6
million, $3.7 million and $3.5 million in Fiscal 1996, Fiscal 1995 and Fiscal
1994, respectively.
NOTE 16--OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company provides its associates other postretirement benefits,
principally health care and life insurance benefits. The accumulated
postretirement benefit obligation was determined utilizing an assumed discount
rate of 7.5% at February 1, 1997 and 7.25% at February 3, 1996 and by applying
the provisions of the Company's medical plans, the established maximums and
sharing of costs, the relevant actuarial assumptions and the health-care cost
trend rates, which are projected at 6.75% and grade down to 4.5% in Fiscal 2000.
The effect of a 1% change in the assumed cost trend rate would change the
accumulated postretirement benefit obligation by approximately $1.2 million as
of February 1, 1997 and would change the net periodic postretirement benefit
income by $0.2 million for Fiscal 1996.
The net postretirement benefit cost (income) included in continuing
operations is comprised of the following components (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Service cost of benefits earned during the year..................................... $ 545 $ 613 $ 699
Interest cost on accumulated postretirement benefit obligation...................... 1,640 2,267 2,051
Net amortization and deferral....................................................... (931) (460) (182)
Curtailment gain.................................................................... (2,000) -- --
--------- --------- ---------
Net postretirement benefit cost (income)............................................ $ (746) $ 2,420 $ 2,568
--------- --------- ---------
--------- --------- ---------
</TABLE>
35
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
During the second quarter of Fiscal 1996, the Company eliminated
postretirement medical coverage for active non-union associates who retire after
December 31, 1997. This change resulted in a pretax curtailment gain of $2.0
million.
The following table provides information on the status of the postretirement
plans (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.......................................................... $ 9,678 $ 14,276
Other active plan participants.................................... 10,180 13,855
----------- -----------
Total............................................................. 19,858 28,131
Unrecognized prior service cost..................................... 7,026 --
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions..................... 6,798 4,669
----------- -----------
Accrued postretirement cost......................................... $ 33,682 $ 32,800
----------- -----------
----------- -----------
</TABLE>
During the fourth quarter of Fiscal 1996, the Company recorded a
restructuring charge (see Note 3) which included $2.1 million for the estimated
costs of a voluntary early retirement program. The liability related to this
charge is included as part of the accrued postretirement cost.
The decrease in the accumulated postretirement benefit obligation and the
recording of an unrecognized prior service cost are due to the elimination of
postretirement medical coverage for active non-union associates.
The Company also provides its associates postemployment benefits, primarily
long-term disability and salary continuation. The obligation for these benefits
was determined by application of the provisions of the Company's long-term
disability plan and includes the age of active claimants at disability and at
valuation, the length of time on disability and the probability of the claimant
remaining on disability to maximum duration. These liabilities are recorded at
their present value utilizing a discount rate of 4%.
The accumulated postemployment benefit obligation as of February 1, 1997 and
February 3, 1996 was $8.5 million and $8.3 million, respectively. The net
postemployment benefit cost included in continuing operations consisted of the
following components (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Service cost of benefits earned during the year...................................... $ 1,314 $ 997 $ 1,644
Interest cost on accumulated postemployment obligation............................... 316 296 304
--------- --------- ---------
Net postemployment benefit cost...................................................... $ 1,630 $ 1,293 $ 1,948
--------- --------- ---------
--------- --------- ---------
</TABLE>
36
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--INCOME TAXES
The income tax benefit (provision) included in continuing operations is
comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Current
Federal......................................................................... $ 1,084 $ (1,669) $ --
State........................................................................... 769 2,172 (4,744)
Deferred
Federal......................................................................... 9,626 (9,233) (4,449)
State........................................................................... 2,932 (6,254) (2,871)
Change in valuation allowance..................................................... -- 9,070 7,981
--------- --------- ---------
Income tax benefit (provision).................................................... $ 14,411 $ (5,914) $ (4,083)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The effective tax rate applicable to continuing operations for the income
tax benefit (provision) differs from the federal statutory tax rate as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Federal statutory tax rate.............................................................. 35.0% (35.0)% (35.0)%
State income taxes...................................................................... 7.0 (6.9) (17.6)
Tax credits............................................................................. -- 1.5 3.7
Change in valuation allowance........................................................... -- 23.5 28.3
Other................................................................................... (0.1) 1.6 6.1
--- --------- ---------
Effective tax rate...................................................................... 41.9% (15.3)% (14.5)%
--- --------- ---------
--- --------- ---------
</TABLE>
37
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--INCOME TAXES (CONTINUED)
Deferred income tax assets and liabilities consist of the following (dollars
in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, 1997 FEBRUARY 3, 1996
---------------------- ----------------------
<S> <C> <C> <C> <C>
ASSETS LIABILITIES ASSETS LIABILITIES
---------- ---------- ---------- ----------
Depreciation and amortization.................................... $ -- $ 65,449 $ -- $ 71,629
Merchandise inventory and gross profit........................... -- 20,449 -- 19,576
Prepaid expenses................................................. -- 6,969 -- 5,975
Self-insured liabilities......................................... 38,906 -- 42,127 --
Benefit plans.................................................... 10,011 -- 9,100 --
Lease capitalization............................................. 17,927 -- 16,990 --
Alternative minimum taxes........................................ 8,316 -- 6,063 --
General business credits......................................... 9,019 -- 8,821 --
Net operating loss carryforwards................................. 9,631 -- 5,245 --
Other postretirement and postemployment benefits................. 17,791 -- 18,470 --
Closed stores reserves and accrued expenses...................... 18,281 -- 15,361 --
Capital loss carryforward........................................ 45,850 -- -- --
Other............................................................ 721 7,779 1,873 9,471
---------- ---------- ---------- ----------
Subtotal......................................................... 176,453 100,646 124,050 106,651
Less: valuation allowance........................................ 45,850 -- -- --
---------- ---------- ---------- ----------
Total............................................................ $ 130,603 $ 100,646 $ 124,050 $ 106,651
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The balance sheet classification of the deferred income tax assets and
liabilities is as follows (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, 1997 FEBRUARY 3, 1996
----------------------- -----------------------
<S> <C> <C> <C> <C>
CURRENT NONCURRENT CURRENT NONCURRENT
---------- ----------- ---------- -----------
Assets.......................................................... $ 36,884 $ 139,569 $ 31,122 $ 92,928
Liabilities..................................................... (29,773) (70,873) (26,966) (79,685)
---------- ----------- ---------- -----------
Subtotal........................................................ 7,111 68,696 4,156 13,243
Less: valuation allowance....................................... -- 45,850 -- --
---------- ----------- ---------- -----------
Total........................................................... $ 7,111 $ 22,846 $ 4,156 $ 13,243
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
The Company's net deferred income tax assets were $30.0 million and $17.4
million at February 1, 1997 and February 3, 1996, respectively. At February 1,
1997, management believes that sufficient evidence exists which indicates that
it is more likely than not that the Company will be able to realize these net
deferred income tax assets. In addition, during Fiscal 1996, as a result of a
sale of a minority interest in a special purpose subsidiary of the Company to an
unrelated party, the Company recorded a tax capital loss of $131.0 million (a
$45.9 million tax benefit) due to a basis differential in such stock. A related
valuation allowance was recorded to fully reserve the deferred income tax
capital loss carryforward, which expires in Fiscal 2001. Reversal of the
valuation allowance will occur when and if the Company is able to generate
capital gains. Federal and state net operating loss carryforwards expire from
Fiscal 1998 to Fiscal 2012. General business credits consist of federal jobs
credits and expire from Fiscal 2001 to Fiscal 2011.
38
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--INCOME TAXES (CONTINUED)
During Fiscal 1995, in conjunction with the Company's continuing evaluation
of its deferred income tax assets, the Company reversed the valuation allowance
related to its net deferred income tax assets. Such reversals of the valuation
allowance totaled $9.1 million and have been included as a component of the
Fiscal 1995 income tax provision. The Fiscal 1994 state income tax provision
includes the recording of state income taxes for certain issues related to prior
years.
In Fiscal 1996, Fiscal 1995 and Fiscal 1994, the Company made income tax
payments of $4.6 million, $21.9 million and $6.3 million, respectively, and
received income tax refunds of $5.5 million, $10.3 million and $25.9 million,
respectively.
NOTE 18--EXTRAORDINARY ITEMS
The extraordinary items, representing the loss on extinguishment of
indebtedness, consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL
1996
---------
<S> <C>
Loss before income taxes............................................................ $ (1,490)
Income tax benefit.................................................................. 613
---------
Extraordinary items, net of a tax benefit........................................... $ (877)
---------
---------
</TABLE>
During the first quarter of Fiscal 1996, in connection with the termination
of the Plainbridge credit agreement due to the reacquisition of Plainbridge by
Pathmark, the Company wrote off deferred financing fees, resulting in a net loss
on early extinguishment of debt of $0.7 million, net of an income tax benefit of
$0.5 million. During the second quarter of Fiscal 1996, in connection with the
proceeds from the sale of certain mortgaged property, the Company made a
mortgage paydown of $5.3 million, including accrued interest and debt premium,
resulting in a net loss on early extinguishment of debt of $0.2 million, net of
an income tax benefit of $0.1 million.
NOTE 19--DISPOSITION OF FREESTANDING DRUG STORES
During the second quarter of Fiscal 1995, the Company made a decision to
dispose of its 36 freestanding drug stores and, on July 28, 1995, completed the
sale of 30 of its freestanding drug stores, including merchandise inventory, to
Rite Aid Corporation for $59.9 million. The Company used $25.0 million of the
proceeds to repay a portion of its existing Term Loan and paid a dividend of
$21.8 million to PTK. The Company paid $13.1 million to Holdings in accordance
with the tax sharing agreement, representing income taxes currently due, related
to the gain on the sale.
The Company recorded a pretax gain on the disposition of its freestanding
drug stores of $15.5 million, net of a $19.0 million charge related to the
estimated exit costs of the remaining six freestanding drug stores. Five of the
remaining six freestanding drug stores closed during Fiscal 1995 and the sixth
store closed during the second quarter of Fiscal 1996.
NOTE 20--GAIN ON DISPOSAL OF HOME CENTERS SEGMENT AND DISCONTINUED OPERATIONS
On November 4, 1994, the Company's Plainbridge subsidiary completed the sale
of its home centers segment to Rickel Home Centers, Inc. ("Rickel") for
approximately $88.7 million in cash, plus the
39
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20--GAIN ON DISPOSAL OF HOME CENTERS SEGMENT AND DISCONTINUED OPERATIONS
(CONTINUED)
assumption of certain indebtedness. During Fiscal 1994, the Company recognized a
gain of $17.0 million on the sale of the home centers segment, net of an income
tax provision of $2.3 million. Such gain included a pension plan curtailment
gain of $6.2 million and a reduction in the deferred tax valuation allowance of
$5.1 million, resulting from the utilization of tax loss carryforwards for which
reserves had previously been provided. The Company used net cash proceeds of
$66.6 million in Fiscal 1994 and $4.7 million in Fiscal 1995 to pay a dividend
to PTK.
Through the date of the sale, the Company reported the home centers segment
as discontinued operations. Operating results of such discontinued operations
were as follows (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL
1994(A)
----------
<S> <C>
Sales............................................................................. $ 271,989
----------
----------
Loss before income taxes(b)....................................................... $ (2,383)
Income tax benefit................................................................ 284
----------
Loss from discontinued operations................................................. $ (2,099)
----------
----------
</TABLE>
- ------------------------
(a) Represents the results of operations related to the home centers segment
from January 30, 1994 through November 3, 1994.
(b) The Company charged the home centers segment interest expense, which related
to a proportionate share of certain borrowings. This charge amounted to
$11.0 million Fiscal 1994 and is included in the results of the discontinued
operations.
NOTE 21--NEW CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
On October 8, 1996, the Company hired a new Chief Executive Officer (the
"CEO") pursuant to a five-year employment agreement (the "Employment
Agreement"). In conjunction with his employment, SMG-II granted to the CEO an
equity package (the "Equity Strip") consisting of 8,520 restricted shares of a
new series of SMG-II Preferred Stock and 19,851 restricted shares of SMG-II
Common Stock and options to purchase 100,000 shares of SMG-II Common Stock at an
initial exercise price of $100 per share (the "Options") with the said exercise
price increasing over time. The Equity Strip was valued at $3.4 million at the
date of issuance, based upon an independent appraisal, and will vest over the
term of the Employment Agreement or earlier with the occurrence of an
employment-related event, as defined, and will be forfeited in its entirety upon
the occurrence of a termination event, as defined. The Equity Strip is being
amortized as compensation expense in the Company's statement of operations over
the term of the Employment Agreement. The Options were accounted for by SMG-II
using the methods prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and as a result, no compensation
expense was recorded. The Options will vest over four years and expire one year
after being fully vested, except for the portion of the Options that vest on the
day before the fifth year and has not yet become exercisable, the expiration of
which will be extended to year seven. If employment with the Company should end
as a result of a termination event, the Options (whether or not then vested)
will be immediately and irrevocably forfeited, except in certain circumstances.
Vested Options do not become 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
40
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21--NEW CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT (CONTINUED)
amortized as compensation expense over the term of the Employment Agreement, and
(b) a $4.5 million loan evidenced by sixteen separate promissory notes. Under
the terms of each note, if he is in full employment of the Company on a
quarterly anniversary of his hiring date, his obligation to pay such note
maturing on such date will be forgiven as to principal, but not any then accrued
and unpaid interest. The Company will record compensation expense upon the
forgiveness of each note. In the event his employment ends, as a result of a
termination event, prior to a change in control, as defined, each note will
become immediately due and payable as to all outstanding principal and all
accrued and unpaid interest. These notes, which bear interest at a blended rate
of approximately 6%, are on a full-recourse basis and secured by the Equity
Strip, the Options and any shares acquired upon exercise of such Options.
NOTE 22--COMMITMENTS AND CONTINGENCIES
RICKEL:
In connection with the sale of its home centers segment in Fiscal 1994, the
Company, as lessor, entered into leases for certain real estate properties with
Rickel, as tenant (the "Leases"), pursuant to which the Company is entitled to
receive annual aggregate rentals of approximately $4.5 million. In addition, as
part of the sale, the Company assigned to Rickel, and Rickel assumed, various
liabilities of the home centers segment, primarily third party leases (the
"Assumed Liabilities"). As of February 1, 1997, the estimated present value of
obligations under the Assumed Liabilities approximated $29.0 million.
In January 1996, Rickel filed for bankruptcy protection under Chapter 11 of
the United States Bankruptcy Code. In April 1996, the Company filed its proofs
of claim in connection with the bankruptcy proceedings. In August 1996, Rickel
filed an order with the Bankruptcy Court to reject a third party lease. The
estimated present value of this lease obligation is approximately $4.5 million.
In November 1996, Rickel filed an order with the Bankruptcy Court to reject four
Leases related to property owned by the Company, with aggregate annual rentals
of approximately $2.4 million. The Company is actively marketing these
properties to other prospective tenants. In February 1997, Rickel filed an order
with the Bankruptcy Court to reject one additional third party lease which the
Company has settled with the landlord. Management has evaluated its exposure
with respect to these rejected Leases and has concluded that the Company has
sufficient reserves to cover any resulting liability which may occur with
respect to these rejected Leases. Since the bankruptcy is not concluded, the
Company cannot determine whether Rickel will reject any additional Leases or the
extent to which the Company may become liable with respect to the Assumed
Liabilities in the event of Rickel's nonpayment thereof.
OUTSOURCING:
In August 1991, the Company entered into a long-term agreement with IBM, to
provide a wide range of information systems services. Under the agreement, IBM
has taken over the Company's data center operations and mainframe processing and
information system functions and is providing business applications and systems
designed to enhance the Company's customer service and efficiency. The charges
under this agreement are based upon the services requested at predetermined
rates. The Company may terminate the agreement upon 90 days notice with payment
of a specified termination charge. The amounts expensed under this agreement in
the accompanying consolidated statements of operations were $22.1 million, $21.0
million and $16.0 million during Fiscal 1996, Fiscal 1995 and Fiscal 1994,
respectively.
41
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
NOTE 23--QUARTERLY FINANCIAL DATA (UNAUDITED)
Financial data for the interim periods of Fiscal 1996 and Fiscal 1995 is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
13 WEEKS ENDED
------------------------------------------------
<S> <C> <C> <C> <C> <C>
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(a)................................. 266,024 274,697 266,747 283,778 1,091,246
Selling, general and administrative
expenses(b)................................... 213,680 214,957 211,820 216,833 857,290
Depreciation and amortization................... 20,639 21,410 20,488 26,419 88,956
Restructuring charge............................ -- -- -- 9,137 9,137
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 from operations 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 from operations before extraordinary
items......................................... (4,863) (1,441) (3,551) (10,103) (19,958)
Extraordinary items, net of an income tax
benefit....................................... (673) (204) -- -- (877)
Net loss........................................ $ (5,536) $ (1,645) $ (3,551) $ (10,103) $ (20,835)
</TABLE>
42
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 14 WEEKS
----------------------------------- ENDED
APRIL 29, JULY 29, OCTOBER 28, FEBRUARY 3, FISCAL
1995 1995 1995 1996 1995
---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
53 WEEKS ENDED FEBRUARY 3, 1996
Sales........................................... $ 981,866 $ 972,247 $ 939,748 $ 1,077,732 $ 3,971,593
Gross profit(c)................................. 277,489 276,598 261,127 318,748 1,133,962
Selling, general and administrative
expenses(b)................................... 213,789 215,342 208,105 228,443 865,679
Depreciation and amortization................... 19,945 20,083 20,100 20,280 80,408
Operating earnings.............................. 43,755 41,173 32,922 70,025 187,875
Interest expense................................ (41,105) (41,883) (40,318) (41,443) (164,749)
Gain on disposition of freestanding drug
stores........................................ -- 15,535 -- -- 15,535
Earnings (loss) before income taxes............. 2,650 14,825 (7,396) 28,582 38,661
Income tax (provision) benefit.................. (328) 1,676 3,673 (10,935) (5,914)
Net earnings (loss)............................. $ 2,322 $ 16,501 $ (3,723) $ 17,647 $ 32,747
</TABLE>
- ------------------------
(a) The pretax LIFO provision for Fiscal 1996 was $0.85 million in the first and
second quarter with no provision in the third quarter. The annual credit was
$1.3 million, resulting in a $3.0 million credit in the fourth quarter.
(b) Selling, general and administrative expenses ("SG&A") for Fiscal 1996
included a first quarter provision of $5.8 million representing the
termination costs of two former executives of the Company, a first quarter
gain of $5.6 million recognized on the sale of certain real estate and a
second quarter curtailment gain of $2.0 million due to the elimination of
postretirement medical coverage for active non-union associates. SG&A for
Fiscal 1995 also included a fourth quarter gain of $3.4 million recognized
on the sale of a former warehouse of Purity Supreme, Inc., a previously
divested company.
(c) The pretax LIFO provision for Fiscal 1995 was $0.8 million in the first
quarter, $0.5 million in the second quarter and $0.8 million in the third
quarter. The annual provision was $1.1 million, resulting in a $1.0 million
credit in the fourth quarter.
43
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
Pathmark Stores, Inc.
Woodbridge, New Jersey
We have audited the accompanying consolidated balance sheets of Pathmark
Stores, Inc. and its subsidiaries (the "Company") as of February 1, 1997 and
February 3, 1996, and the related consolidated statements of operations,
stockholder's deficit and cash flows for each of the three years in the period
ended February 1, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of February 1,
1997 and February 3, 1996, and the results of their operations and their cash
flows for each of the three years in the period ended February 1, 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
April 23, 1997
44
<PAGE>
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, 1997)
(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.
<TABLE>
<CAPTION>
DIRECTOR OF THE
COMPANY
NAME, AGE, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS SINCE (1)
- --------------------------------------------------------------------------------------------------- ---------------
<S> <C>
MATTHIAS BOWMAN, 48, Chief Executive Officer of Merrill Lynch Capital Partners, Inc., ("MLCP"), an 1997
investment firm affiliated with Merrill Lynch & Co., ("ML& Co."), the financial services concern,
since 1994; Vice Chairman of Investment Banking with ML&Co. since 1993; Managing Director of
Merrill Lynch, Pierce, Fenner & Smith Incorporated since at least 1992. Mr. Bowman is also a
Director of Rykoff-Sexton, Inc.
JOHN W. BOYLE, 68, Chairman and Chief Executive Officer of the Company from March 1996 to October 1995
1996 (Retired); Vice Chairman (retired), Eckerd Corporation, a drug store chain, between 1983 and
1995. Mr. Boyle is also a Director of United Artists Theater Circuit, Inc.(2)
JAMES J. BURKE, JR., 45, Managing Partner and a Director of Stonington Partners, Inc. ("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.
JAMES DONALD, 43, Chairman, President and Chief Executive Officer of the Company (since October 1996
1996); Senior Vice President and General Manager, Safeway, Inc., Eastern Division from February
1994 until October 1996; Vice President-Marketing, Wal-mart Corp. prior thereto(3).
U. PETER C. GUMMESON, 38, Managing Director of Alliance Corporate Finance Group, Incorporated, an 1996
investment firm affiliated with the Equitable Life Assurance Society of the United States (the
"Equitable") and an investment officer of the Equitable.
SUNIL C. KHANNA, 40, Principal of SPI since 1993; Principal of MLCP from 1993 to 1994; Vice 1987
President of MLCP from 1989 to 1993; a Director of the Investment Banking Division of ML&Co. from
1993 to 1994, and a Vice President thereof prior thereto. Mr. Khanna is also a Director of
Rykoff-Sexton, Inc.
STEPHEN M. McLEAN, 39, Partner and a Director of SPI since 1993; Partner of MLCP from 1993 to 1994; 1987
Senior Vice President of MLCP from 1987 to 1993; Director of MLCP since 1987; Managing Director
of the Investment Banking Division of ML&Co. until 1994. Mr. McLean is also a Director of CMI
Industries, Inc. and Dictaphone Corporation.
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR OF THE
COMPANY
NAME, AGE, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS SINCE (1)
- --------------------------------------------------------------------------------------------------- ---------------
<S> <C>
ROBERT G. MILLER, 53, Chairman & Chief Executive Officer of Fred Meyer, Inc., a diversified 1997
retailer. Mr. Miller is also a Director of PacifiCorp.
JERRY G. RUBENSTEIN, 67, Managing Partner, Omni Management Associates; Consultant to MLCP since 1996
1988.
</TABLE>
- ------------------------
(1) Includes service with Pathmark's predecessor.
(2) Mr. Boyle was retained on March 20, 1996 to act as the Company's interim
Chairman and Chief Executive Officer. He resigned said position on October
7, 1996.
(3) Mr. Donald was elected as Chairman, President and Chief Executive Officer of
the Company effective October 8, 1996.
Pursuant to the Stockholders Agreement, the ML Investors are entitled to
designate seven directors, the Management Investors are entitled to designate
three directors and The Equitable Investors are entitled to designate one
director to Holdings' Board of Directors. By having the ability to designate a
majority of Holdings' Board of Directors, the Merrill Lynch Investors have the
ability to control the Company. Currently, six of the persons serving as
directors were designated by the Merrill Lynch Investors (Messrs. Bowman, Boyle,
Burke, Khanna, McLean and Rubenstein), one was designated by the Management
Investors (Mr. Donald) and one was designated by the Equitable Investors (Mr.
Gummeson). Mr. Miller was designated by the three investor groups. No family
relationship exists between any director and any other director or executive
officer of the Company.
(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.
<TABLE>
<CAPTION>
OFFICER OF THE
COMPANY
NAME AGE POSITIONS AND OFFICE SINCE(1)
- --------------------------------- --- ---------------------------------------------------------- ---------------
<S> <C> <C> <C>
JAMES DONALD..................... 43 Chairman, President and Chief Executive Officer since 1996
October 1996(2)
NEILL CROWLEY.................... 54 Executive Vice President--Retail Services since October 1994
1996; Executive Vice President-- Distribution since May
1995; Executive Vice President--Marketing from May 1994 to
May 1995; Executive Vice President--Marketing and Store
Support, The Vons Companies, Inc. (a supermarket chain)
prior thereto.
RON MARSHALL..................... 43 Executive Vice President and Chief Financial Officer since 1994
October 1994. Senior Vice President and Chief Financial
Officer of Dart Group Corporation (a diversified retailer)
prior thereto.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
OFFICER OF THE
COMPANY
NAME AGE POSITIONS AND OFFICE SINCE(1)
- --------------------------------- --- ---------------------------------------------------------- ---------------
<S> <C> <C> <C>
JOSEPH W. ADELHARDT.............. 50 Senior Vice President and Controller since January 1996; 1987
Vice President and Controller prior thereto. Mr. Adelhardt
joined the Company in 1976.
HARVEY M. GUTMAN................. 51 Senior Vice President--Retail Development. Mr. Gutman 1990
joined the Company in 1976.
ROBERT JOYCE..................... 51 Senior Vice President (since October 1996); Executive Vice 1989
President--Operations (from January 1996 to October 1996;
Senior Vice President--Operations--from March 1995 to
January 1996; Senior Vice President-- Administration prior
thereto. Mr. Joyce joined the Company in 1963.
RONALD RALLO..................... 59 Senior Vice President--Merchandising (since October 1996); 1993
Executive Vice President-- Merchandising (from May 1995 to
October 1996); Senior Vice President--Merchandising from
July 1993 to May 1995); Senior Vice President--
Merchandising Pathmark division (from September 1992 to
July 1993); Senior Vice President-- Perishable
Merchandising, Pathmark division prior thereto. Mr. Rallo
joined the Company in 1962.
JOHN SHEEHAN..................... 39 Senior Vice President--Operations (since October 1996); 1996
Director of Operations, Albertsons, Inc. prior thereto.
MARC A. STRASSLER................ 48 Vice President, Secretary and General Counsel. Mr. 1987
Strassler joined the Company in 1974.
FRANK VITRANO.................... 41 Vice President and Treasurer since December 1996; 1996
Treasurer from July 1995 to December 1996; Director-Risk
management prior thereto. Mr. Vitrano joined the Company
in 1972.
MYRON D. WAXBERG................. 63 Vice President and General Counsel--Real Estate Mr. 1991
Waxberg joined the Company in 1976.
</TABLE>
- ------------------------
(1) Includes service with Pathmark's predecessor.
(2) Member of the Company's Board of Directors.
47
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------- ---------------------------
AWARDS SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPENSATION STOCK AWARDS OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) (1) ($) (2) (#) (3) ($) (4)
- ------------------------------- --------- ----------- ---------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
James L. Donald(5)............. 1996 193,846 1,175,000 340,021 3,400,000 100,000 16,821
Chairman, President and Chief
Executive Officer
Jack Futterman(6).............. 1996 70,673 -- -- -- -- 2,545,000
Retired Chairman, President 1995 526,442 332,658 -- -- -- 5,250
and CEO 1994 491,346 92,127 -- -- -- 5,250
John W. Boyle(5)............... 1996 -- -- -- -- 3,000 388,980
Retired Interim Chairman,
President and CEO
Ron Marshall................... 1996 300,000 36,000 49,177 -- -- 5,250
Executive Vice President and 1995 280,289 168,173 -- -- -- --
Chief Financial Officer 1994 89,904 53,942 -- -- 2,000 --
Neill Crowley.................. 1996 253,750 30,450 -- -- -- 5,250
Executive Vice President- 1995 247,212 112,241 -- -- -- 4,341
Retail Services 1994 168,712 21,089 -- -- 1,000 --
Ronald Rallo................... 1996 245,000 29,400 4,389 -- -- 5,250
Senior Vice President- 1995 227,500 113,585 4,399 -- -- 5,250
Merchandising 1994 200,385 21,141 4,265 -- -- 5,250
Robert Joyce................... 1996 223,846 26,862 2,195 -- -- 5,250
Senior Vice President 1995 205,437 84,650 2,200 -- 250 5,250
1994 169,125 21,141 2,133 -- -- 5,250
</TABLE>
- ------------------------
(1) Represents (i) with respect to Mr. Donald, payment of $58,771 to Mr. Donald
as reimbursement of legal expenses in connection with the negotiation of his
employment agreement and forgiveness of a loan payment due to the Company of
$281,250; (ii) with respect to Mr. Marshall, reimbursement of relocation
expenses; and (iii) with respect to Messrs. Rallo and Joyce, payments as
reimbursement for interest paid to Holdings for loans each of less than
$60,000 from Holdings in connection with the purchase of SMG-II Class A
Common Stock, and includes an amount sufficient to pay any income taxes
resulting therefrom after taking into account the value of any deductions
available as a result of the payment of such interest and taxes.
(2) Includes accumulated dividends of $1,039,440 with respect to an award of
8,520 restricted shares of SMG-II Series C Preferred Stock.
(3) Stock options shown were granted (i) to Mr. Donald pursuant to the
Employment Agreement dated October 8, 1996 among the Company, SMG-II and Mr.
Donald (the "Donald Agreement"); and (ii) to Messrs. Boyle, Marshall,
Crowley and Joyce pursuant to the Management Investors 1987 Stock Option
Plan of SMG-II (the "Plan"). All options relate to shares of SMG-II Class A
Common Stock.
48
<PAGE>
(4) Represents (i) with respect to Mr. Donald, payments of $11,756 on behalf of
Mr. Donald for temporary housing and $5,065 for a term life insurance
premium on Mr. Donald's life; (ii) with respect to Mr. Futterman, payments
of $4,594 representing the Company's matching contribution to the SGC
Savings Plan, $2,128,150 paid to Mr. Futterman pursuant to a Retirement
Agreement dated March 20, 1996 among Mr. Futterman, the Company and SMG-II
(the "Retirement Agreement"), and $412,256 paid pursuant to Mr. Futterman's
Supplemental Retirement Agreement; (iii) with respect to Mr. Boyle, payments
of $288,980 representing a consulting fee for acting as the Company's
interim Chief Executive Officer payable pursuant to a Consulting Agreement
dated March 20, 1996 between the Company and Mr. Boyle, and a completion
bonus of $100,000 in connection with the identification and hiring of Mr.
Donald as Chief Executive Officer; and (iv) with respect to the other four
named executive officers, the Company's matching contribution under the SGC
Savings Plan.
(5) Mr. Donald was employed by the Company on October 8, 1996 as Chairman,
President and CEO replacing Mr. Boyle who acted as interim Chairman and CEO
from March 20, 1996 to October 7, 1996.
(6) Mr. Futterman retired on March 20, 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
INDIVIDUAL GRANTS ASSUMED
------------------------------------------------------------ ANNUAL RATES OF STOCK
% OF TOTAL PRICE
OPTIONS/ APPRECIATION FOR OPTION
SARS GRANTED EXERCISE OR TERM
OPTIONS/SARS TO EMPLOYEES BASE PRICE EXPIRATION ------------------------
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- -------------------------------------- ------------- --------------- --------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
James L. Donald....................... 100,000 95.7 (1) (2) 6,288,946 15,937,425
John W. Boyle......................... 3,000(3) 2.9 100 5/02/06 188,668 478,123
</TABLE>
- ------------------------
(1) The stock option to purchase an aggregate of 100,000 shares of SMG-II Class
A Common Stock granted to Mr. Donald by SMG-II consists of component A
("Option Component A") covering 50,000 shares of SMG-II Class A Common Stock
and component B ("Option Component B") covering the remaining 50,000 shares
of Common Stock. Subject to the vesting terms described below, Option
Component A has an initial per share exercise price of $100 per share. The
per share exercise price of Option Component A will increase to $125 per
share on the first day of the Fiscal Year beginning in calendar year 2000
("Fiscal Year 2000") and to $150 per share on the first day of the Fiscal
Year beginning in calendar year 2001 ("Fiscal Year 2001"). Subject to the
vesting terms described below, Option Component B has an initial per share
exercise price of $100 per share. The per share exercise price of Option
Component B will increase to $150 per share on the first day of the Fiscal
Year beginning in calendar year 1999; to $250 per share on the first day of
Fiscal Year 2000; and to $350 per share on the first day of Fiscal Year
2001. Mr. Donald will vest in 25% of the Option Component A and in 25% of
the Option Component B on the Effective Date and on each of the first
through third anniversaries of the Effective Date, provided that the
Optionee is in the employ of the Company on each such date. Upon the
occurrence of a Minimum IPO (as defined below) while the Optionee is in the
employ of the Company, the entire Option shall immediately and fully vest.
In addition, the Option will immediately and fully vest upon the occurrence
of a Change in Control occurring prior to a Termination Event. Except for
purposes of tag-along rights and piggyback rights under the Stockholders
Agreement, the Option shall not be exercisable (even though the Option or a
portion thereof is vested) unless and until it becomes exercisable in
accordance with the following provisions:
(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
49
<PAGE>
Event (as defined below) in respect of the SMG-II Class A Common Stock at
a per share price in excess of the amounts (the "Target Prices") set
forth below :
<TABLE>
<CAPTION>
TARGET PRICE PER TARGET PRICE PER
SHARE/OPTION SHARE/OPTION
PERIOD OF TIME COMPONENT A COMPONENT B
- -------------------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Prior to 2/1/00................................................................. $ 100 $ 150
2/1/00 to 1/31/01 $ 125 $ 250
2/1/01 and after................................................................ $ 150 $ 350
</TABLE>
- ------------------------
(ii) Notwithstanding the above, if the ML Investors have a Realization Event
for more than 15% of the shares of SMG-II Class A Common Stock
beneficially owned by them on the date Mr. Donald is granted an Option at
a per share price in excess of the Target Price described above
applicable to the date when such Realization Event occurs, then the
components of the Option for which such Target Prices have been achieved
shall become immediately vested and exercisable and the exercise price
shall not thereafter increase.
(2) The Option will expire on October 8, 2001 to the extent not previously
exercised (the "Expiration Date"); provided, however, that the Expiration
Date for the portion of Option Component A and Option Component B which is
vested prior to such Expiration Date will be extended until October 8, 2003
if such vested portion of Option Component A and Option Component B, as the
case may be, has not become exercisable by such initial Expiration Date.
During the period of such extension, the per share exercise price of Option
Component A and Option Component B, as the case may be (to the extent not
previously exercised), will increase at the end of each month during such
extension period at an annual rate of 10%.
(3) Options shown were granted pursuant to the Plan and relate to shares of
Class A Common Stock of SMG-II. Options are fully vested and exercisable at
the time of grant, provided that no exercise may occur unless a registration
statement has been filed under the Securities Act of 1933 with respect to
the shares subject to the option or the Compensation Committee of the Board
of Directors of SMG-II determines that an exemption from registration is
available.
50
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS/SARS
AT FY-END (#)
EXERCISABLE/
NAME UNEXERCISABLE
- ------------------------------------------------------------------------- -------------------
<S> <C>
John W. Boyle............................................................ 3,000/0
Jack Futterman........................................................... 13,000/0
James Donald............................................................. 0/100,000
Neill Crowley............................................................ 1,000/0
Ron Marshall............................................................. 2,000/0
Ronald Rallo............................................................. 2,850/0
Robert Joyce............................................................. 2,500/0
</TABLE>
- ------------------------
(1) Options shown were granted pursuant to the Plan (except with respect to Mr.
Donald) and relate to shares of Class A Common Stock of SMG-II. No options
were exercised in Fiscal 1996 by any of the above named executives.
<TABLE>
<CAPTION>
PENSION PLAN TABLE(1)
YEARS OF SERVICE
----------------------------------------------------------------------
FINAL AVERAGE PAY 10 15 20 25 30 35
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$150,000......................................... $ 20,000 $ 30,000 $ 40,000 $ 50,000 $ 60,000 $ 60,000
200,000.......................................... 26,667 40,000 53,333 66,667 80,000 80,000
225,000.......................................... 30,000 45,000 60,000 75,000 90,000 90,000
250,000.......................................... 33,333 50,000 66,667 83,333 100,00 100,000
300,000.......................................... 40,000 60,000 80,000 100,000 120,000 120,000
350,000.......................................... 46,667 70,000 93,333 116,667 140,000 140,000
400,000.......................................... 53,333 80,000 106,667 133,333 160,000 160,000
450,000.......................................... 60,000 90,000 120,000 150,000 180,000 180,000
500,000.......................................... 66,667 100,000 133,333 166,667 200,000 200,000
550,000.......................................... 73,333 110,000 146,667 183,333 220,000 220,000
600,000.......................................... 80,000 120,000 160,000 200,000 240,000 240,000
650,000.......................................... 86,667 130,000 173,333 216,667 260,000 260,000
700,000.......................................... 93,333 140,000 186,667 233,333 280,000 280,000
750,000.......................................... 100,000 150,000 200,000 250,000 300,000 300,000
</TABLE>
- ------------------------
(1) The table above illustrates the aggregate annual pension benefits payable
under the SGC Pension Plan and Excess Benefit Plan (collectively, the
"Pension Plans"). The retirement benefit for individuals with 30 years of
credited service is 40% of the individual's average compensation during his
or her highest five compensation years in the last ten years before
retirement, less one-half of the social security benefit received. The
retirement benefit is reduced by 3.33% for every year of credited service
less than 30. Covered compensation under the Pension Plans includes all cash
compensation subject to withholding plus amounts deferred under the Savings
Plan pursuant to Section 401(k) of the Internal Revenue Code of 1986, as
amended, and as to individuals identified in the Summary Compensation Table,
would be the amount set forth in that table under the headings "Salary" and
"Bonus". The table shows the estimated annual benefits an individual would
be entitled to receive if normal retirement at age 65 occurred in January
1997 after the indicated number of years of covered employment and if the
average of the participant's covered compensation for the five years out of
the
51
<PAGE>
last ten years of such employment yielding the highest such average equaled
the amounts indicated. The estimated annual benefits are based on the
assumption that the individual will receive retirement benefits in the form
of a single life annuity (married participants may elect a joint
survivorship option) and are before applicable deductions for social
security benefits in effect as of January 1997. As of December 31, 1996, the
following individuals had the number of years of credited service indicated
after their names: Mr. Futterman, 22.8; Mr. Crowley, 1.5; Mr. Rallo, 30, Mr.
Joyce, 26.7 and Mr. Marshall, 1.0. Neither Mr. Donald nor Mr. Boyle had any
credited service. As described below in "Compensation Plans and
Arrangements--Supplemental Retirement Agreements", certain of the named
executives is party to a Supplemental Retirement Agreement with Pathmark.
COMPENSATION PLANS AND ARRANGEMENTS
SUPPLEMENTAL RETIREMENT AGREEMENTS. The Company has entered into
supplemental retirement agreements with certain key executives, including
certain of the executive officers named in the Summary Compensation Table, and
set forth below, which provide that said executive officers will be paid upon
termination of employment after attainment of age 60 a supplemental pension
benefit in such an amount as to assure him or her an annual amount of pension
benefits payable under the supplemental retirement agreement, the Company's
qualified pension plans and certain other plans of the Company, including
Savings Plan balances as of March 31, 1983, (a) in the case of Mr. Futterman,
equal to $525,000, (b) in the case of Messrs. Joyce and Rallo equal to (i) 30%
of his final average Compensation based on ten years of service with the Company
and increasing 1% per year for each year of service thereafter, to a maximum of
40%, of his final average Compensation based on 20 years of service, or (ii)
$150,000, whichever is less, and (d) in the case of Messrs. Crowley and
Marshall, equal to 12.5% of his final average Compensation based on five years
of service with the Company and increasing 2.5% per year for each year of
service thereafter to a maximum of 35% of his final average Compensation based
on 14 years of service. "Compensation" includes base salary and payments under
the Executive Incentive Plan, but excludes Company matching contributions under
the Savings Plan. If the executive leaves the Company prior to completing 20
years of service (other than for disability), the supplemental benefit would be
reduced proportionately. Should the executive die, the surviving spouse then
receiving or, if he or she was not then receiving a supplemental pension
benefit, the spouse would be entitled to a benefit equal to two-thirds of the
benefit to which the executive would have been entitled, provided the executive
has attained at least ten years of service with the Company.
EMPLOYMENT AGREEMENTS:
EMPLOYMENT AGREEMENT AMONG PATHMARK, SMG-II AND JAMES L. DONALD. On October
8, 1996 (the "Effective Date"), the Company entered into the Donald Agreement
with Mr. James L. Donald pursuant to which Mr. Donald was elected Chairman,
President and Chief Executive Officer for a term of five years. The Donald
Agreement provides Mr. Donald with an initial annual base salary of $600,000 and
provides that he shall participate in the Pathmark Executive Incentive Plan,
under which Mr. Donald may earn an annual bonus of up to 125% of his annual
salary based on performance targets that are set by the Board. For the partial
fiscal year commencing on the Effective Date and ending on February 1, 1997, the
Donald Agreement guaranties Mr. Donald a minimum bonus of $175,000 and, for the
first full fiscal year during the term of the Donald Agreement, Mr. Donald shall
receive a minimum annual bonus of $425,000. Furthermore, under the Donald
Agreement, Mr. Donald is guaranteed an annual bonus for each of the second,
third and fourth full fiscal years of the term of at least 25% of his base
salary. The Donald Agreement provides Mr. Donald with the right to defer up to
50% of his annual bonus and salary, which shall be held in a grantor trust
established by the Company. During the term of the Donald Agreement, in addition
to the base salary, bonus eligibility and other customary annual benefits and
perquisites that the Company generally provides to its executive officers, the
Company will provide Mr. Donald with a company car and term life insurance in
the amount of $4.5 million during the first year and $3.2 million thereafter.
The Company also reimbursed Mr. Donald for the legal expenses incurred by him in
the negotiation of the Donald Agreement. Mr. Donald also received a one-time
signing bonus of $1 million, which is being amortized over the term of the
Donald Agreement.
52
<PAGE>
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:
(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
53
<PAGE>
Event (as defined below) in respect of the Common Stock at a per share
price in excess of the amounts (the "Target Prices") set forth below :
<TABLE>
<CAPTION>
TARGET PRICE PER TARGET PRICE PER
SHARE/OPTION SHARE/OPTION
PERIOD OF TIME COMPONENT A COMPONENT B
- -------------------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Prior to 2/1/00................................................................. $ 100 $ 150
2/1/00 to 1/31/01............................................................... $ 125 $ 250
2/1/01 and after................................................................ $ 150 $ 350
</TABLE>
(ii) Notwithstanding the above, if the ML Investors have a Realization Event
for more than 15% of the shares of Common Stock beneficially owned by
them on the date of grant and Option at a per share price in excess of
the Target Price described above applicable to the date when such
Realization Event occurs, then the components of the Option for which
such Target Prices have been achieved shall become immediately vested and
exercisable and the exercise price shall not thereafter increase.
In the event that Mr. Donald becomes entitled to any tag-along rights under
Section 5.6 or registration rights under Section 6.2 of the Stockholders
Agreement, he will be permitted to exercise his sale or transfer rights with
respect to the portion of the Option for which the Target Price has been met.
For purposes of Section 5.6(b) of the Stockholders Agreement, 100% of the
portion of the Option for which the Target Amount has been realized will be
considered exercisable in order to determine the number of shares to be included
under Section 5.6(b) of the Stockholders Agreement. If, prior to the Expiration
Date, the Board determines that it is necessary or desirable to list, register
or qualify the shares of Common Stock subject to the Option, and if such
listing, registration or qualification is delayed beyond the Expiration Date,
the vested and exercisable portion of the Option will remain exercisable until
30 days after such listing, registration, or qualification is accomplished.
Pursuant to the Donald Agreement, the Company lent Mr. Donald $4.5 million
(the "Loan") evidenced by 16 separate promissory notes. Under the terms of each
note, if Mr. Donald is in full employment of the Company on a quarterly
anniversary of the Effective Date, Mr. Donald's obligation to pay such note
maturing on such date will be forgiven as to principal, but not any then accrued
and unpaid interest. In the event his employment ends at any time during the
term of the Donald Agreement prior to a Change in Control as a result of a
Termination Event, each note will become immediately due and payable as to all
outstanding principal and all accrued and unpaid interest. These notes bear
interest at an effective rate of 6%. The Loan is on a full recourse basis and
secured by the Equity Strip, the Option and any shares acquired upon exercise of
the Option.
In the event of Mr. Donald's Involuntary Termination, Pathmark will pay him
(w) the full amount of any accrued but unpaid base salary, plus a cash payment
(calculated on the basis of the base salary then in effect) for all unused
vacation time which Mr. Donald may have accrued as of the date of Involuntary
Termination; (x) the amount of any earned but unpaid Annual Bonus for any Fiscal
Year of Pathmark ended on or prior to the date of Involuntary Termination; (y)
any unpaid reimbursement for business expenses; and (z) a severance amount equal
to four times Mr. Donald's annual rate of salary, based upon the annual rate
then in effect immediately prior to the date of termination, payable in monthly
installments over 24 months. In addition, in the event of an Involuntary
Termination, Mr. Donald and his eligible dependents shall continue to be
eligible to participate in the medical, dental, health and life insurance plans
applicable to Mr. Donald immediately prior to the Involuntary Termination on the
same terms and conditions in effect immediately prior to such Involuntary
Termination until the earliest to occur of (i) the end of the 24-month period
after the date of termination, 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
54
<PAGE>
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.
"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
55
<PAGE>
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.
OTHER EXECUTIVE AGREEMENTS
As of May 23, 1994, the Company entered into an employment agreement with
Mr. Crowley. As of September 9, 1994, the Company entered into an employment
agreement with Mr. Marshall. As of June 1, 1995, the Company entered into an
employment agreement with Mr. Rallo and Mr. Joyce, respectively. The four above
mentioned employment agreements are hereinafter referred to collectively as the
"Employment Agreements". Each of the Employment Agreements is for an initial
term of two years. The term of each Employment Agreement is automatically
extended for an additional year on (a) August 1, 1997 for Mr. Crowley and on
each successive August 1st thereafter; (b) February 1, 1998 for Mr. Marshall and
on each successive February 1st thereafter, and (c) June 1, 1997 for Mr. Rallo
and Mr. Joyce and on each successive June 1st thereafter. Under the terms of his
respective Employment Agreement, each executive is entitled to a minimum annual
base salary of (a) $280,000 for Mr. Crowley; (b) $300,000 for Mr. Marshall, (c)
$245,000 for Mr. Rallo, and (d) $225,000 for Mr. Joyce, which salary is subject
to upward adjustment by the Company. The Employment Agreements also provide that
each executive shall be entitled to receive an annual bonus of up to 66% of his
annual base salary with respect to Messrs. Crowley
56
<PAGE>
and Marshall and upto 55% of his annual base salary with respect to Messrs.
Joyce and Rallo, and shall be provided the opportunity to participate in pension
and welfare plans, programs and arrangements that are generally made available
to executives of Pathmark or as may be deemed appropriate by the Compensation
Committee of the Board of Directors of SMG-II.
In the event one of the four above named executives' employment is
terminated by the Company without Cause (as defined in the Employment
Agreements), or by the executive for Good Reason (as defined in the Employment
Agreements) prior to the termination of the applicable Employment Agreement,
such executive will be entitled to continue to receive his base salary and
continued coverage under health and insurance plans for the period commencing on
the date of such termination or resignation through the date of applicable
Employment Agreement would have expired had it not been automatically renewed
but for said termination or resignation, reduced by any compensation or benefits
which the executive is entitled to receive in connection with his employment by
another employer during said period.
The Employment Agreements contain agreements by the executives not to
compete with the Company as long as they are receiving payments under an
employment agreement and an agreement by the executives not to disclose
confidential information.
On March 20, 1996 (the "Retirement Date"), Mr. Futterman retired as Chairman
and Chief Executive Officer of the Company. Pursuant to the Retirement
Agreement, Mr. Futterman will be entitled to receive his base salary at the
annual rate of $525,000 per year during the period, commencing on the day
following the Retirement Date and ending on July 31, 1998, or the date of his
death, if earlier (the "Benefit Period"), plus the bonus or bonuses attributable
to the financial targets set forth for the Company under its Executive Incentive
Plan ("EIP") that he would have earned (a maximum of 75% of base salary) had his
employment continued through the Benefit Period, subject to the Company reaching
the applicable financial targets set under the EIP or any other bonus plan;
provided however, that the minimum bonus paid for each fiscal year of the
Company ending during the Benefit Period shall not be less than 25% of the 75%
target amount. Additionally, Mr. Futterman will be entitled to receive continued
health coverage through the Benefit Period under the Company's health and
insurance plans applicable to him immediately prior to the Retirement Date. Each
of the above described payments and benefits shall be reduced by any
compensation or benefits he is entitled to receive in connection with any
employment by another employer during the Benefit Period; provided, however,
that such reduction shall not apply to the first $100,000 of compensation and
benefits earned by Mr. Futterman for any calendar year during the Benefit
Period. The Retirement Agreement also provides that Mr. Futterman shall be
entitled to be reimbursed by the Company for secretarial and office expenses
incurred by him during the two year period beginning September 1, 1996, up to
$30,000 per year (or an aggregate reimbursement of $60,000). Additionally,
pursuant to the terms of the Retirement Agreement, the Company made a cash lump
sum payment to Mr. Futterman of $1.5 million on April 1, 1996.
The Company retained John W. Boyle, a Director of the Company, to act as its
interim Chairman and Chief Executive Officer for the period of March 20, 1996
through October 7, 1996 (the "Transition Period"). Under the terms of the
consulting arrangement between the Company and Mr. Boyle, the Company paid Mr.
Boyle a consulting fee of $41,667 per month plus living and travel expenses
during the Transition Period. In addition, Mr. Boyle received a completion bonus
of $100,000 when Mr. Donald commenced employment with the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to January 10, 1997, Messrs. Burke, Khanna and McLean comprised the
compensation committee of the Board of Directors of SMG-II, and were responsible
for decisions concerning compensation of the executive officers of the Company.
Messrs. Burke and McLean are directors of MLCP and they, along with Mr. Khanna,
have been retained by MLCP as consultants. MLCP is an indirect wholly-owned
57
<PAGE>
subsidiary of ML&Co. See "Security Ownership of Certain Beneficial Ownership and
Management." On January 10, 1997, Mr. Boyle became a member of the Compensation
Committee.
COMPENSATION OF DIRECTORS
Each director who is not employed by the Company or one of its subsidiaries,
SPI, MLCP or the Equitable Investors or its affiliates receives an annual
retainer of $20,000 per year, plus travel expenses.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of April 15, 1997, all shares of the Company's capital stock is held by
PTK. All of PTK's capital stock is held by Holdings. Since February 4, 1991, all
shares of the Holdings Common Stock are held by SMG-II. As of April 15, 1997,
the number of shares of SMG-II (i) Class A Common Stock, (ii) Class B Common
Stock, (iii) Series A Preferred Stock, (iv) Series B Preferred Stock and (v)
Series C Preferred Stock, beneficially owned by the persons known by management
of the Company to be the beneficial owners of more than 5% of the outstanding
shares of any class as "beneficial ownership" has been defined
58
<PAGE>
under Rule 13d-3, as amended, under the Securities Exchange Act of 1934, are set
forth in the following table:
<TABLE>
<CAPTION>
NUMBER % OF
NAME OF SHARES CLASS
- ------------------------------------------------------------------------------------------- ---------- ---------
<S> <C> <C>
SMG-II Class A Common Stock
Merrill Lynch Capital Appreciation Partnership No. IX, L.P.(2)........................... 488,704.8 65.2
ML Offshore LBO Partnership No. IX(2).................................................... 12,424.7 1.7
Barfield House
St. Julians Avenue
St. Peter Port
Guernsey
Channel Islands
ML Employees LBO Partnership No. I, L.P.(2).............................................. 12,148.6 1.6
ML IBK Positions, Inc.(3)................................................................ 21,258.9 2.8
Merchant Banking L.P. No. 1(3)........................................................... 8,119 1.1
Merrill Lynch KECALP L.P. 1987(3)........................................................ 7,344 1.0
CBC Capital Partners, Inc.(4)............................................................ 30,000 4.0
270 Park Avenue
New York, NY 10017
Management and other employees (including former employees of Pathmark).................. 169,419(1) 22.6
301 Blair Road
Woodbridge, NJ 07095
SMG-II Class B Common Stock
The Equitable Life Assurance Society of the United States(5)............................. 114,000 35.6
c/o Alliance Corporate Finance Group Incorporated
1345 Avenue of the Americas, 39th Floor
New York, NY 10005
Equitable Deal Flow Fund, L.P.(5)........................................................ 150,000 46.9
c/o Alliance Corporate Finance Group Incorporated
1345 Avenue of the Americas, 39th Floor
New York, NY 10005
Equitable Variable Life Insurance Company(5)............................................. 36,000 11.3
c/o Alliance Corporate Finance Group Incorporated
1345 Avenue of the Americas, 39th Floor
New York, NY 10005
CBC Capital Partners, Inc.(4)............................................................ 20,000 6.2
SMG-II Series A Preferred Stock(6)
Merrill Lynch Capital Appreciation Partnership No. B-X, L.P.(2).......................... 133,043 56.2
ML Offshore LBO Partnership No. B-X(2)................................................... 40,950 17.3
MLCP Associates, L.P. No. II(2).......................................................... 1,740 .7
ML IBK Positions, Inc.(3)................................................................ 46,344.5 19.6
Merchant Banking L.P. No. IV(3).......................................................... 3,779 1.6
Merrill Lynch KECALP L.P. 1989(3)........................................................ 7,000 3.0
Merrill Lynch KECALP L.P. 1991(3)........................................................ 3,874.5 1.6
SMG-II Series B Preferred Stock(6)
CBC Capital Partners, Inc.(4)............................................................ 12,500 7.0
The Equitable Life Assurance Society of the United States(5)............................. 84,134 46.5
Equitable Deal Flow Fund, L.P.(5)........................................................ 84,135 46.5
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
NUMBER % OF
NAME OF SHARES CLASS
- ------------------------------------------------------------------------------------------- ---------- ---------
<S> <C> <C>
SMG-II Series C Preferred Stock(6)......................................................... 8,520 100.0
James Donald
301 Blair Road
Woodbridge, NJ 07095
</TABLE>
- ------------------------
(1) Includes presently exercisable options granted under the Plan for 76,943
shares of SMG-II Class A Common Stock held by Management Investors.
(2) MLCP and its affiliates are the direct or indirect managing partners of ML
Offshore LBO Partnership No. IX, Merrill Lynch Capital Appreciation
Partnership No. IX, L.P., ML Employees LBO Partnership No. 1, L.P., Merrill
Lynch Capital Appreciation Partnership No. B-x, L.P., ML Offshore LBO
Partnership No. B-X and MLCP Associates, L.P. No. II. Such entities and
those disclosed in footnote (3) below, are referred to herein as the ML
Investors. The address of such entities is c/o Merrill Lynch Capital
Partners, Inc., in care of Stonington Partners, Inc., 767 Fifth Avenue, New
York, New York 10153. MLCP is an indirect wholly owned subsidiary of ML&Co.
The partners and principals of SPI (including Messrs. Burke, McLean and
Khanna) are consultants to MLCP. Mr. Bowman is Chief Executive Officer of
MLCP.
(3) Merchant Banking L.P. No. 1, Merchant Banking L.P. No. IV, Merrill Lynch
KECALP L.P. 1987, Merrill Lynch KECALP L.P. 1989, Merrill Lynch KECALP L.P.
1991 and ML IBK Positions, Inc. are indirectly controlled by ML&Co. The
address of such entities is c/o James Caruso, Merrill Lynch & Co., Inc.,
World Financial Center, South Tower, New York, New York, 10080-6123.
(4) CBC Capital Partners, Inc. is an affiliate of Chase Manhattan Corp.
(5) The Equitable Investors are separate purchasers who are affiliates of each
other.
(6) SMG-II Preferred stock may be converted into an equivalent number of shares
of common stock of SMG-II in accordance with its terms.
No officer or director claims beneficial ownership of any share of the
Company's Common Stock, Holdings Common Stock, or of SMG-II stock other than
SMG-II Class A Common Stock, except Mr. Donald who claims beneficial ownership
of 8,520 (100%) shares of SMG-II Series C Preferred Stock. As of April 15, 1997
the number of shares of SMG-II Class A Common Stock beneficially owned by each
60
<PAGE>
director, by each of the executive officers named in the Summary Compensation
Table and by all directors and executive officers as a group is as follows:
<TABLE>
<CAPTION>
NUMBER % OF
NAME OF SHARES CLASS
- --------------------------------------------------------------- ----------------- ---------------
<S> <C> <C>
Matthias Bowman(1) -- --
James J. Burke, Jr.(1) -- --
James Donald................................................... 19,851 2.6
Jack Futterman(2).............................................. 23,000 3.1
Neill Crowley(2)............................................... 1,000 *
U. Peter C. Gummeson -- --
Ron Marshall(2)................................................ 2,000 *
Sunil C. Khanna................................................ 700 *
Stephen M. McLean(1) -- --
John W. Boyle(2)............................................... 3,000 *
Ronald Rallo(2)................................................ 3,250 *
Jerry G. Rubenstein(2)......................................... 2,500 *
Robert Joyce(2)................................................ 3,200 *
Directors and named executive officers as a group(1)(2)........ 66,011 8.8
</TABLE>
- ------------------------
* Less than 1%
(1) Does not include 550,000 shares of SMG-II Class A Common Stock or 236,731.5
shares of SMG-II Series A Preferred Stock owned beneficially by a group of
which MLCP is a part. Messrs. Burke, McLean and Bowman, directors of MLCP,
disclaim beneficial ownership in all such shares.
(2) Includes presently exercisable options granted under the Plan to purchase
shares of SMG-II Class A Common Stock, as follows: Mr. Futterman, 13,000;
Mr. Crowley, 1,000; Mr. Marshall, 2,000; Mr. Joyce, 2,500; Mr. Rallo, 2,850,
Mr. Rubenstein, 1,000; and Mr. Boyle, 3,000 and all directors and executive
officers as a group, 31,110.
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 66 2/3% of the number of shares of SMG-II voting capital stock
voting together as a single class for SMG-II to enter into any Significant
Transaction (as defined), including certain mergers, sales of assets,
acquisitions, sales or redemptions of stock, the amendment of the certificate of
incorporation or by-laws or the liquidation of SMG-II. The Stockholders
Agreement also provides that SMG-II must obtain the prior written consent of the
Equitable Investors with respect to certain of these transactions and that the
Equitable Investors have certain preemptive rights with respect to the sale of
capital stock of Holdings or the Company.
The Stockholders Agreement also contains an agreement of the stockholders of
SMG-II with respect to the composition of SMG-II's and Holdings' Board of
Directors. Under this agreement, the Merrill Lynch Investors will be entitled to
designate up to seven directors, the Management Investors will be entitled to
designate up to three directors and the Equitable Investors will be entitled to
designate one director to both of SMG-II's and Holdings' Board of Directors.
Such agreement furthermore entitles the ML Investors to designate a majority of
Holdings' Board of Directors at all times. Since Holdings (through PTK) owns all
of the outstanding shares of the Company's Common Stock, by having the ability
to
61
<PAGE>
designate a majority of Holdings' Board of Directors, the ML Investors have the
ability to control the Company. 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, 1997, Mr. Donald remained indebted
to the Company in the amount of $4,218,750.
The Company retained John W. Boyle, a Director of the Company, to act as its
interim Chairman and Chief Executive Officer for the Transition Period. Under
the terms of the consulting arrangement between the Company and Mr. Boyle, the
Company paid Mr. Boyle a consulting fee of $41,667 per month ($288,980 in the
aggregate) plus living and travel expenses during the Transition Period. In
addition, Mr. Boyle received a completion bonus of $100,000 when Mr. Donald
commenced employment with the Company.
In March 1990, Jerry G. Rubenstein, a Director, borrowed from Holdings
$100,000 in order to help finance his purchase of Holdings' Class A Common
Stock. Subsequently, such shares of Holdings' Class A Common Stock were
exchanged for shares of SMG-II Class A Common Stock. The foregoing indebtedness
to Holdings is evidenced by a full recourse promissory note (the "Recourse
Note"). The Recourse Note is for a term of ten years and bears interest at the
rate of 8.02% per annum, payable annually. Except as otherwise provided in the
Recourse Note, no principal on such recourse loan shall be due and payable until
the tenth anniversary of the date of issue of such Recourse Note. Under the
terms of the agreement pursuant to which the shares of Holdings' Class A Common
Stock were exchanged for shares of SMG-II Class A Common Stock, the Company is
obligated to pay to each Management Investor who pays interest on his Recourse
Note (except under certain circumstances) an amount equal to such interest, plus
an amount sufficient to pay any income taxes resulting from the above prescribed
payment after taking into account the value of any deduction available to him as
a result of the payment of such interest or taxes. As of April 1, 1997, Mr.
Rubenstein remained indebted to Holdings in the amount of $100,000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report.
1. Financial Statements Schedules: None required
2. Exhibits:
Incorporated herein by reference is a list of the Exhibits contained in
the Exhibit Index on Pages 64 through 67 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
<PAGE>
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: May 2, 1997 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
- ------------------------------ --------------------------- -------------------
Director, Chairman,
/s/ JAMES DONALD President and Chief
- ------------------------------ Executive Officer May 2, 1997
(James Donald) (Principal Executive
Officer)
Executive Vice President
/s/ RON MARSHALL and Chief Financial
- ------------------------------ Officer (Principal May 2, 1997
(Ron Marshall) Financial Officer)
/s/ JOSEPH ADELHARDT Senior Vice President and
- ------------------------------ Controller (Principal May 2, 1997
(Joseph Adelhardt) Accounting Officer)
MATTHIAS BOWMAN Director*
- ------------------------------ May 2, 1997
(Matthias Bowman)
JOHN W. BOYLE Director*
- ------------------------------ May 2, 1997
(John W. Boyle)
JAMES J. BURKE, JR. Director*
- ------------------------------ May 2, 1997
(James J. Burke, Jr.)
SUNIL C. KHANNA Director*
- ------------------------------ May 2, 1997
(Sunil C. Khanna)
STEPHEN M. MCLEAN Director*
- ------------------------------ May 2, 1997
(Stephen M. McLean)
ROBERT G. MILLER Director*
- ------------------------------ May 2, 1997
(Robert G. Miller)
U. PETER C. GUMMESON Director*
- ------------------------------ May 2, 1997
(U. Peter C. Gummeson)
JERRY G. RUBENSTEIN Director*
- ------------------------------ May 2, 1997
(Jerry G. Rubenstein)
*By: /s/ MARC A. STRASSLER
------------------------
Marc A. Strassler
ATTORNEY-IN-FACT
63
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. EXHIBIT NO.
- ---------- ---------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
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, as amended (incorporated by
reference from Exhibit 3.1 to the Registration Statement on Form S-1 of Pathmark, File No.
33-59612, the "October 1993 Registration Statement")
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 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 October 26, 1993 ("the Credit Agreement") among the Registrant,
the Lenders listed therein, and Bankers Trust Company as Agent (incorporated by reference
from the 1994 10-K)
4.4A --First Amendment to the Credit Agreement (incorporated by reference from the registrant's
Form 8-K dated March 15, 1996 (the "March 1996 8-K")
4.4B --Second Amendment to the Credit Agreement (incorporated by reference from the March 1996 8-K)
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. EXHIBIT NO.
- ---------- ---------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
4.4C --Third Amendment to the Credit Agreement (incorporated by reference from the March 1996 8-K)
4.4D* --Fourth Amendment to the Credit Agreement (incorporated by reference from the March 1996 8-K)
4.4E --Fifth Amendment to the Credit Agreement (incorporated by reference from the March 1996 8-K)
4.4F --Sixth Amendment to the Credit Agreement (incorporated by reference from the Registrant's
Form 10-Q, as amended, for the period ended November 2, 1996
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)
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)
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. EXHIBIT NO.
- ---------- ---------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
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 193 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 --Agreement dated as of March 20, 2996 among Registrant, Jack Futterman, Holdings and SMG-II
(incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended
February 3, 1996)
10.20 --Agreement dated as of April 10, 1996 between the Registrant, Anthony Cuti and SMG-II
(incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended
February 3, 1996)
10.21 --Management Investors Exchange Agreement dated as of February 4, 1991 among SMG-II Holdings
Corporation, Holdings and each of the Management Investors party thereto (incorporated by
reference from Exhibit 10.53 to the Registration Statement on Form S-1 of Holdings, No.
33-16963)
10.22 --Supplemental Retirement Agreement dated as of March 12, 1993 between the Registrant and
Anthony Cuti (incorporated by reference from the Registrant's Annual Report on Form 10-K for
the year ended January 28, 1995)
10.24 --Supplemental Retirement Agreement dated June 1, 1994, between the Registrant and Neill
Crowley (incorporated by reference from Registrant's Annual Report on Form 10-K for the year
ended February 3, 1996)
10.25 --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)
10.26 --Interim Agreement dated March 20, 1996 between the Registrant and John W. Boyle
(incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended
February 3, 1996)
10.27 --Employment Agreement dated as of May 23, 1994 between Registrant and Neill Crowley
(incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended
February 3, 1996)
10.28 --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)
10.29 --Employment Agreement dated as of June 1, 1995 between Registrant and Ron Rallo (incorporated
by reference from Registrant's Annual Report on Form 10-K for the year ended February 3,
1996)
10.30* --Employment Agreement dated as of October 8, 1996 among Registrant, SMG-II and James Donald
12.1* --Statements Regarding Computation of Ratio of Earnings to Fixed Charges
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. EXHIBIT NO.
- ---------- ---------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
22.1* --List of Subsidiaries of the Registrant
24A.* --Power of Attorney of Matthias Bowman
24B.* --Power of Attorney of Robert G. Miller
</TABLE>
- ------------------------
* Filed herewith.
67
<PAGE>
Exhibit 10.30
Pathmark Stores, Inc.
Mr. James L. Donald
26 Carriage Place
Edison, New Jersey 08820
Employment Agreement
Dear Mr. Donald:
The following sets forth the agreement among Pathmark Stores, Inc.
(the "Company"), SMG-II Holdings Corporation ("Holdings") and you regarding
the terms and provisions of your employment as an officer and employee of the
Company and as a director of Holdings during the Term. Capitalized words
which are not otherwise defined herein shall have the meanings assigned to
such words in Section 9 of this Agreement. This Agreement consists of the
text hereof and each of the Exhibits attached hereto.
1. Term of Employment Under the Agreement. The Term of your
employment under this Agreement (the "Term") shall commence on October 8,
1996 (the "Effective Date") and shall continue until the fifth anniversary of
the Effective Date. For purposes of this Agreement, "Fiscal Year" means the
Company's fiscal year. Subject to the provisions of Section 6 below, either
party may terminate your employment under this Agreement at any time.
2. Employment During the Term. During the Term, you shall be
employed as the Chairman, President and Chief Executive Officer of the
Company and shall report directly to the Board of Directors of the Company
(the "Board"), and your duties and responsibilities to the Company shall be
consistent in all respects with such positions. During the Term, the Company
will take all reasonable steps to assure that you continue to be elected or
appointed to the Board of Directors of Holdings. In addition, pursuant to
this Agreement and for no additional consideration, you agree to serve as an
officer and director of any subsidiary or parent corporation of the Company,
including, without limitation, PTK Holdings, Inc., Supermarkets General
Holdings Corporation and Holdings. You shall devote substantially all of
your business time, attention, skills and efforts exclusively to the business
and affairs of the Company, other than de minimis amounts of time devoted by
you to the management of your personal finances or to engaging in charitable
or community services. Your principal place of employment shall be the
executive offices of the Company as
<PAGE>
2
established from time to time, although you understand and agree that you
will be required to travel from time to time for business purposes.
3. Compensation During the Term.
(a) Base Salary. As compensation to you for all services rendered
to the Company, the Company will pay you a base salary (the "Salary") at the
rate of $600,000 per annum, which will be reviewed annually by the Board and
may be increased but not decreased by the Board on the basis of such review.
Your Salary will be paid to you in accordance with the Company's regular
payroll practices applicable to its executive officers.
(b) Bonuses. (i) Annual Bonus. During the Term, you shall be
eligible to participate in the Company's Executive Incentive Plan (the
"EIP"). Under the EIP, for each full twelve-month Fiscal Year occurring
during the Term, you will be eligible to earn an annual bonus (the "Annual
Bonus") of up to 125% of your Salary, at the rate in effect at the beginning
of the applicable Fiscal Year, based on targets set by the Board for your
Annual Bonus for such Fiscal Year. The target for your Annual Bonus for any
partial Fiscal Year occurring during the Term shall be prorated by
multiplying the target by a fraction (not greater than one), the numerator of
which shall be the number of days in such Fiscal Year occurring during the
Term and the denominator of which shall be 365. Notwithstanding the
foregoing, the minimum Annual Bonus paid to you for the partial Fiscal Year
that includes the Effective Date shall be $175,000 and the minimum annual
bonus for the first full Fiscal Year during the Term shall be $425,000.
Annual Bonus payments for each of the second, third and fourth full Fiscal
Years during the Term will not be less than 25% of the Salary paid to you for
such Fiscal Year at the rate in effect at the start of such Fiscal Year. The
Annual Bonus earned by you for any Fiscal Year will be paid to you within 120
days following the end of such Fiscal Year.
(ii) Signing Bonus. In addition to any amounts payable under
Section 3(b)(i) above, the Company will pay you within five (5) business days
following the Effective Date a one-time signing bonus of $1,000,000. The
signing bonus shall be paid to you in a lump sum cash payment, subject to
applicable withholding taxes.
(c) Deferral Arrangement. (i) Right to Defer. You will be
permitted to defer some or all the Annual Bonus and up to 50% of the Salary
payable to you hereunder. Any deferral of an Annual Bonus shall be
irrevocable and must be requested by you in writing prior to the start of the
Fiscal Year to which such Annual Bonus relates (except that any deferral
election for the Fiscal Year that includes the Effective Date may be made
within thirty (30) days following the Effective Date). Any deferral of
Salary shall be irrevocable and must be requested by you in writing prior to
the start of the calendar year to which such Salary relates (except that the
deferral election for the calendar year that includes the Effective Date may
be made within thirty (30) days following the Effective Date, but will
<PAGE>
3
relate only to amounts payable after the election is received by the
Company). An election for a given Fiscal Year or calendar year shall be
deemed a continuing election for each subsequent Fiscal Year or calendar
year, as the case may be, unless a subsequent election to defer (or not to
defer) is provided to the Company by you prior to the start of such Fiscal
Year or calendar year.
(ii) Bookkeeping Account and Grantor Trust. Any amounts deferred by
you hereunder will be credited to a bookkeeping account established on the
books and records of the Company for this purpose. In addition, the Company
will deposit in a separate, irrevocable grantor trust established by the
Company an amount in cash equal to the amounts deferred by you. Such amounts
will be deposited in the trust within thirty (30) days following the date
such amount would otherwise have been payable to you but for the deferral
election. In connection with the deferral election, you shall have the right
to specify general investment categories for the investment of the amounts
deposited in the trust, and the Company shall cause the trustee to invest the
assets of the trust in one or more publicly-traded mutual funds, government
securities, or other similar investment vehicles corresponding to the
investment categories selected by you. Thereafter the value of your account
with the Company will be adjusted to reflect income, gains and losses on the
assets of the trust. The parties hereto agree that to the extent that any
investment vehicle that you select results in a loss to the bookkeeping
account, the Company will have no obligation to compensate you for such loss
or to make any compensatory adjustment to the bookkeeping account to make up
for such loss.
(iii) Distributions. The timing of the payment of all amounts
deferred by you shall be specified in your initial deferral election and may
not be subsequently changed by you without the prior written approval of the
Board. Your initial deferral may specify a lump sum payment or up to five
(5) annual installment payments to be paid out in their entirety by no later
than the sixth anniversary of the Date of Termination; provided, however,
that, notwithstanding your deferral election, all amounts will be paid to you
within thirty (30) days following a Change in Control or the date of your
Involuntary Termination.
(d) Benefits. During the Term, you shall be eligible to
participate in each pension, welfare and fringe benefit program made
available generally to executives of the Company in accordance with the terms
and provisions of each such program; provided, however, that the Company
shall not be obligated to provide any supplemental retirement plan or any
similar arrangement to you. In addition, the Company will provide you with
(i) a company car and (ii) $4.5 million in term life insurance during the
first twelve (12) months of the Term and $3.2 million of life insurance
thereafter during the Term, subject to your insurability. In the event that
such life insurance is not available to the Company, you will be provided
with an alternative arrangement which will provide amounts equal to the
benefits contemplated herein, the details of which will be negotiated between
you and the Company in good faith. The Company will also provide you with
relocation benefits in
<PAGE>
4
accordance with its current policies for executive employees; provided,
however, that the Company will have no obligation to purchase your current
residence.
(e) Business Expenses. The Company will reimburse you upon
presentation by you of appropriate documentation for business expenses
reasonably incurred by you in connection with the performance of your duties
under this Agreement.
(f) Legal Expenses. The Company will pay reasonable legal fees and
expenses incurred by you in the current negotiation of this Agreement.
4. Long-Term Incentive Compensation. In order to align your
interests more closely with those of the Company, the following long-term
incentive compensation arrangements will be offered to you, subject to the
terms and conditions set forth below.
(a) Equity Award. Subject to the terms and conditions set forth
herein, in the Stockholders Agreement and in the stock award agreement (the
"Stock Award Agreement") attached hereto as Exhibit A, as soon as practicable
after the Effective Date, Holdings will award you 8,520 shares of a new
series of Preferred Stock with a stated value of $200 per share, and 19,851
shares of Common Stock (together, the "Equity Strip"), which together
constitute approximately 2% of the issued and outstanding equity securities
of Holdings as of the Effective Date. The Preferred Stock will be pari passu
with the existing Holdings 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. The parties agree that
as of the Effective Date, the shares have already accrued dividends of
approximately $122 a share in accordance with Holdings' normal dividend
accrual policy. The grant of the Equity Strip is expressly conditioned upon
your signing the Stock Award Agreement and your agreement to be bound by the
terms thereof.
(b) The Option. Subject to the terms and conditions set forth
herein, in the Stockholders Agreement and in the option agreement (the
"Option Agreement") attached hereto as Exhibit B, as soon as practicable
after the Effective Date, Holdings will grant you an option (the "Option") to
purchase 100,000 shares of Common Stock. The Option will consist of
component A covering 50,000 shares of Common Stock and component B covering
the remaining 50,000 shares of Common Stock. The grant of the Option is
expressly conditioned upon your signing the Option Agreement and your
agreement to be bound by the terms thereof.
(c) The Stockholders Agreement. As a condition precedent to the
award of the Equity Strip and the grant of the Options, you must become a
party to the Stockholders Agreement and agree to be bound by the terms and
conditions of the Stockholders Agreement.
<PAGE>
5
5. Loan.
(a) Terms. Within 30 days following the Effective Date, the
Company will lend you $4.5 million (the "Loan"). The parties acknowledge
that the Company is providing the Loan to you, according to the terms herein,
as consideration for the loss of value incurred by you as a consequence of
the termination of your employment with your prior employer, which value is
evidence of a portion of the value to the Company of your agreement to be
employed by the Company. The Loan will be on a full recourse basis and
secured in accordance with the terms of the Security Agreement (attached
hereto as Exhibit D) by (i) the Equity Strip, (ii) the Option and (iii) the
shares acquired upon exercise of the Option. The Loan will bear interest at
the minimum statutory interest rate necessary for tax purposes. Interest on
the Loan will be payable quarterly in arrears.
(b) Notes. The Loan will be payable according to the terms of this
Agreement and 16 separate promissory notes, the form of which is attached
hereto as Exhibit C, delivered by you to the Company (collectively, the
"Notes"). Each Note will have an initial principal amount of $281,250.00.
The Notes will be contemporaneously delivered to an escrow agent designated
by mutual agreement of the parties and shall be held by the escrow agent
pursuant to the terms of the Escrow Agreement attached hereto as Exhibit E.
If you are in the full-time employment of the Company on a quarterly
anniversary of the Effective Date, your obligation to pay the Note maturing
on such date will automatically and without the need for further action or
consent by the Company be forgiven as to principal (but not any then accrued
and unpaid interest) and will automatically and without the need for further
action or consent by the Company be delivered by the escrow agent to you
marked "Paid in Full." The sole condition to such delivery is your payment
of any then accrued but unpaid interest on the Loan.
6. Effect of Termination of Employment.
(a) Involuntary Termination. (i) Subject to Sections 6(f) and
6(g) below, in the event of your Involuntary Termination, the Company shall
pay you (w) the full amount of the accrued but unpaid Salary you have earned
through the date of such Involuntary Termination, plus a cash payment
(calculated on the basis of your rate of Salary then in effect) for all
unused vacation time which you 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 the Company ended on or prior to the Date of Termination; (y)
any unpaid reimbursement for business expenses you are entitled to receive
under Section 3(e) above; and (z) a Severance Amount equal to four times your
annual rate of Salary, based upon the annual rate then in effect immediately
prior to the Date of Termination, payable in monthly installments over the
Severance Period.
<PAGE>
6
(ii) In the event of your Involuntary Termination, you and your
eligible dependents shall continue to be eligible to participate during the
Benefit Continuation Period in the medical, dental, health and life insurance
plans applicable to you immediately prior to your Involuntary Termination on
the same terms and conditions in effect for you and your dependents
immediately prior to such Involuntary Termination.
(iii) In the event of your Involuntary Termination, the Equity Strip
will automatically and without the need for further action or consent by the
Company 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.
(iv) In the event of your Involuntary Termination, all Notes not
previously delivered to you will automatically and without the need for
further action or consent by the Company be delivered by the escrow agent to
you marked "Paid in Full." The sole condition to such delivery is your
payment of any then accrued but unpaid interest on the Loan.
(v) Except as otherwise provided in this Section 6(a) or the
provisions of any employee benefit plan in which you are a participant, in
the event of your Involuntary Termination, as of the Date of Termination, you
will relinquish the right to any additional payments or benefits from the
Company under this Agreement or otherwise.
(b) Termination Event. In the event your employment ends at any
time during the Term as a result of a Termination Event, the Company shall
pay you the full amount of the accrued but unpaid Salary you have earned
through the Date of Termination, plus a cash payment (calculated on the basis
of your rate of Salary then in effect) for all unused vacation time which you
may have accrued as of the Date of Termination and any unpaid reimbursement
for business expenses you are entitled to receive under Section 3(e) above.
In addition, the Company shall pay you the amount of any earned but unpaid
Annual Bonus for any Fiscal Year of the Company ended on or prior to the Date
of Termination. You will immediately forfeit as of the Date of Termination
the Equity Strip and the Option, as provided in the Stock Award Agreement and
the Option Agreement, respectively. In addition, each Note will become
immediately due and payable as to all outstanding principal and all accrued
and unpaid interest if your employment ends prior to a Change in Control as a
result of a Termination Event. In addition, you shall immediately relinquish
the right to any other payments or benefits from the Company under this
Agreement or otherwise, except with respect to any employee benefit plan that
provides otherwise.
(c) Death or Disability. If your employment with the Company ends
as a result of your death or Disability during the Term, the Company shall
pay you (or, in the event of your death, your Beneficiary) the full amount of
the accrued but unpaid Salary you have earned through the Date of
Termination, plus a cash payment (calculated on the basis of
<PAGE>
7
your rate of Salary then in effect) for all unused vacation time which you
may have accrued as of the Date of Termination and any unpaid reimbursement
for business expenses you are entitled to receive under Section 3(e) above.
In addition, the Company shall pay you the amount of any earned but unpaid
Annual Bonus for any Fiscal Year of the Company ended on or prior to the Date
of Termination. In the event of your death or Disability, you (or in the
event of your death, your Beneficiary) will retain the Equity Strip which
will vest immediately upon the occurrence of your death or Disability in the
manner provided by the Stock Award Agreement, and the Option will continue to
remain outstanding to the extent provided in the Option Agreement. In
addition, for purposes of Section 5(b), you will be deemed in the "employ" of
the Company during any period of your Disability. If, following any period of
Disability that ends during the Term, you do not return to full-time
employment with the Company, then, as of the last day of such period of
Disability, you shall be deemed to have resigned without Good Reason for
purposes of the Loan. Except as otherwise provided in this Section 6(c) or
the provisions of any employee benefit plan in which you are a participant,
as of the Date of Termination, you will relinquish the right to any
additional payments or benefits from the Company under this Agreement or
otherwise. Each Note will become immediately due and payable as to all
outstanding principal and all accrued and unpaid interest if your employment
ends prior to a Change in Control as a result of your death.
(d) Resignation After a Change in Control. "During the thirty-day
period beginning six (6) months after a Change in Control, you shall be
eligible to resign from the Company for no stated reason and receive the
Severance Amounts, benefits and consideration described in Sections 6(a)(i)
through 6(a)(v) above. Any such resignation by you in such thirty-day period
following a Change in Control shall be treated as an Involuntary Termination
for all purposes of this Agreement. In addition, as of the date of a Change
in Control, all Notes not previously delivered to you will be delivered by
the escrow agent to you marked "Paid in Full," subject to your payment of all
accrued but unpaid interest on the Loan.
(e) Date and Notice of Termination. Any termination of your
employment by the Company or by you during the Term shall be communicated by
a notice of termination to the other party hereto (the "Notice of
Termination"). The Notice of Termination shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of your employment under the provision so indicated. The date of
your termination of employment with the Company (the "Date of Termination")
shall be determined as follows: (i) if your employment is terminated for
Disability, thirty (30) days after a Notice of Termination is given (provided
that you shall not have returned to the full-time performance of your duties
during such thirty-day period); (ii) if your employment is terminated by the
Company in an Involuntary Termination, the date specified in the Notice of
Termination (or if no date is specified in the Notice of Termination, the
date the Notice of
<PAGE>
8
Termination is delivered to you); and (iii) if your employment is terminated
by the Company for Cause, the later of (x) the date specified in the Notice
of Termination and (y) the expiration of the applicable period set forth in
the definition of Cause during which you may effect a cure or meet with the
Board if such period expires without such cure being effected by you and
without a reversal on the part of the Board regarding its decision to
terminate you for Cause. If the basis for your Involuntary Termination is
your resignation for Good Reason (which shall include your resignation for
any reason or no stated reason after a Change in Control pursuant to Section
6(d) above), the Date of Termination shall be the later of (x) the date
specified in the Notice of Termination and (y) the expiration of the
applicable cure period set forth in the definition of Good Reason if such
period expires without such cure being effected by the Company (it being
understood that no cure period shall apply if your resignation is pursuant to
Section 6(d) above). The Date of Termination for a resignation of employment
other than for Good Reason shall be the date set forth in the applicable
notice, which shall be no earlier than thirty (30) days after the date such
notice is received by the Company. The Date of Termination in the event of
your death shall be the date of your death.
(f) Mitigation. You will have no duty to mitigate the Severance
Amount. Notwithstanding the previous sentence, any Severance Amount payable
during the second year of the Severance Period will be reduced by any
compensation or benefits you earn in connection with any employment by
another employer during the second year of the Severance Period. You agree
promptly to provide the Company with any evidence of amounts received in
connection with such other employment which the Company shall reasonably
request.
(g) Breach of Protective Covenants. If, following the Effective
Date, you breach any of the provisions of Section 7 below, you shall not be
eligible, as of the date of such breach, for any Severance Amount, and all
obligations of the Company to pay any Severance Amount hereunder shall
thereupon cease.
7. Protective Covenants.
(a) No Competing Employment. During the Restricted Period, you
shall not, without the prior written consent of the Board, directly or
indirectly, whether as owner, consultant, employee, partner, venturer, or
agent, through stock ownership, investment of capital, lending of money or
property, rendering of services, or otherwise (except ownership of less than
5% of the number of shares outstanding of any securities which are publicly
traded), compete with the retail supermarket business, or any other business
contributing at least 15% of the consolidated revenues, of the Company or any
parent or subsidiary of the Company (such businesses are hereinafter referred
to as the "Business"), provide services to, whether as an employee or
consultant, own, manage, operate, control, participate in or be connected
with (as a stockholder, partner, or any similar ownership interest) any
corporation,
<PAGE>
9
firm, partnership, joint venture, sole proprietorship or other entity which
so competes with the Business, except for the aforementioned 5% ownership of
publicly traded securities. The restrictions imposed by this Section 7(a)
shall not apply to any geographic area in which the Company, its parent or
its subsidiaries are not engaged in the Business at the Date of Termination.
(b) No Solicitation of Employees and Certain Other Persons. During
the Restricted Period, you shall not, without the prior written consent of
the Board, directly or indirectly (i) solicit in competition with the
Business any person, group or class of persons who at any time either during
the Term or during the Restricted Period have any business relationship with
the Business, the loss, diminution or moderation of which would likely be
detrimental to the Business; (ii) solicit or recruit, directly or indirectly,
any employee or independent contractor of the Company for the purpose of
being employed by you, directly or indirectly, or by any competitor of the
Company on behalf of which you are acting as an agent, representative or
employee; (iii) solicit, influence, or attempt to influence, for a purpose or
in a manner that would likely be materially detrimental to the Business, any
provider of services or products to the Business with respect to its
relationship with the Business, including, without limitation, any person or
entity which has been a provider of services or products to the Business
during the Executive's employment with the Company, or take any action
detrimental to the existing or prospective relationships between the Business
and any provider of services; or (iv) assist or encourage any other person in
carrying out, directly or indirectly, any activity that would be prohibited
by the provisions of this Section 7(b) if such activity were carried out by
you, and, in particular, you agree that you will not, directly or indirectly,
induce any employee of the Business to carry out any such activity.
(c) Confidentiality. You recognize that the services you perform
for the Company are special, unique and extraordinary in that you may acquire
confidential information and trade secrets concerning the operations of the
Company, its parent and its subsidiaries, the use or disclosure of which
could cause the Company substantial loss and damages which could not be
readily calculated, and for which no remedy at law would be adequate.
Accordingly, you covenant and agree with the Company that you will not at any
time, except in performance of your obligations to the Company hereunder or
with the prior written consent of the Board, directly or indirectly, disclose
any secret or confidential information that you may learn by reason of your
association with the Company. The term "confidential information" includes,
without limitation, information not previously disclosed to the public or to
the trade by the Company's management with respect to the Company or any of
its parent's or subsidiaries' business plans, prospects and opportunities,
the identity of any suppliers, proprietary information regarding customers,
operational strengths and weaknesses, trade secrets, know-how and other
intellectual property, systems, procedures, manuals, confidential reports,
product price lists, marketing plans or strategies, and financial
information. You understand and agree that the rights and obligations set
forth in this
<PAGE>
10
Section 7(b) are perpetual and, in any case, shall extend beyond the
Restricted Period and the Severance Period.
(d) Injunctive Relief. Without limiting the remedies available to
the Company, you acknowledge that a breach of any of the covenants contained
in this Section 7 may result in material irreparable injury to the Company
for which there is no adequate remedy at law, that it will not be possible to
measure damages for such injuries precisely and that, in the event of such a
breach or threat thereof, the Company shall be entitled to obtain a temporary
restraining order or a preliminary or permanent injunction restraining you
from engaging in activities prohibited by this Section 7 or such other relief
as may be required to specifically enforce any of the covenants in this
Section 7.
8. Successors; Binding Agreement.
(a) Assumption by Successor. The Company and Holdings will require
any successor (whether direct or indirect, by purchase, merger, consolidation
or otherwise) to all or substantially all of the business or assets of the
Company or Holdings expressly to assume and to agree to perform this
Agreement in the same manner and to the same extent that the Company and
Holdings would be required to perform it if no such succession had taken
place; provided, however, that no such assumption shall relieve the Company
or Holdings of its obligations hereunder.
(b) Enforceability; Beneficiaries. This Agreement shall be binding
upon and inure to the benefit of you (and your personal representatives and
heirs) and the Company and any organization which succeeds to substantially
all of the business or assets of the Company, whether by means of merger,
consolidation, acquisition of all or substantially all of the assets of the
Company or otherwise, including, without limitation, as a result of a Change
in Control or by operation of law.
9. Definitions. For purposes of this Agreement, the following
capitalized words shall have the meanings set forth below:
"Beneficiary" shall mean the person or persons designated by you in
writing to receive any benefits payable to you hereunder in the event of your
death or, if no such persons are so designated, your estate. No Beneficiary
designation shall be effective unless it is in writing and received by the
Company prior to the date of your death.
"Benefit Continuation Period" shall mean, in connection with your
Involuntary Termination, the period beginning on the Date of Termination and
ending on the earliest to occur of (i) the end of the Severance Period, (ii)
the date you are eligible to be covered under the benefit plans of a
subsequent employer and (iii) the date of your breach of any provision of
Section 7 hereof.
<PAGE>
11
"Cause" shall mean the termination of your employment with the
Company because of (i) your willful and repeated failure (other than by
reason of incapacity due to physical or mental illness) to perform the
material duties of your employment with the Company after notice from the
Company of such failure and your inability or unwillingness to correct such
failure within thirty (30) days of such notice, (ii) your conviction of a
felony or your plea of no contest to a felony, or (iii) perpetration by you
of a material dishonest act or fraud against the Company or any parent or
subsidiary thereof; provided, however, that, before the Company may terminate
you for Cause, the Board shall deliver to you a written notice of the
Company's intent to terminate you for Cause, including the reasons for such
termination, and the Company must provide you, and your legal counsel, an
opportunity to meet once with the Board prior to such termination.
"Change in Control" shall mean the acquisition by a person (other
than a person or group of persons that beneficially own an equity interest in
Holdings or the Company on the Effective Date or any person controlled
thereby) of more than 50% control of the voting securities of Holdings 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 the Company
or Holdings resulting from a public offering.
"Common Stock" shall mean Holdings Class A Common Stock, par value
$0.01 per share.
"Disability" shall mean your absence from continuous full-time
employment with the Company for a period of at least 180 consecutive days by
reason of a mental or physical illness.
"Good Reason" shall mean your resignation because of (i) the failure
of the Company to pay any material amount of compensation to you when due,
(ii) a material, adverse reduction or material, adverse diminution in your
titles, duties, positions or responsibilities with the Company, including,
but not limited to, failure by the Company to elect you to the office of
Chief Executive Officer, or (iii) any other material breach by the Company of
the Agreement (including a rejection or termination of the Agreement by the
Company pursuant to any provision or section of the federal bankruptcy laws
of the United States). In order to constitute Good Reason, you must provide
written notification of your intention to resign within thirty (30) business
days after you know or have reason to know of the occurrence of any such
event. After you provide such written notice to the Company, the Company
shall have fifteen (15) days from the date of receipt of such notice to
effect a cure of the condition constituting Good Reason, and, upon cure
thereof by the Company (which cure shall be retroactive with respect to any
monetary matter), such event shall no longer constitute Good Reason.
<PAGE>
12
"Involuntary Termination" shall mean (i) your termination of
employment by the Company other than for Cause or Disability or (ii) your
resignation of employment with the Company for Good Reason.
"Preferred Stock" shall mean a new series of convertible preferred
stock that will be issued for purposes of this Agreement.
"Restricted Period" shall mean the period beginning on the Effective
Date and ending on the second anniversary of the Date of Termination;
provided, however, that, in the event of a Change in Control, the Restricted
Period shall end upon the later to occur of (i) the Termination Date and (ii)
the date of the Change in Control.
"Security Agreement" shall mean the agreement set forth in Exhibit D.
"Severance Amount" shall mean the cash amounts payable under Section
6(a)(i)(z).
"Severance Period" shall mean, in the event of an Involuntary
Termination, the 24-month period commencing on the Date of Termination.
"Stockholders Agreement" shall mean the Stockholders Agreement,
dated as of February 4, 1991, as amended, among Holdings and its stockholders.
"Term Sheet" shall mean the initial agreement to the terms of
employment between the Company, Holdings and you, dated as of October 2, 1996.
"Termination Event" shall mean your resignation without Good Reason
or a termination by the Company for Cause.
10. Notice. For the purpose of this Agreement, notices and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered by hand, sent by
telecopier or mailed by United States registered mail, return receipt
requested, postage prepaid, addressed to Corporate Secretary, Pathmark
Stores, Inc., 301 Blair Road, P.O. Box 5301, Woodbridge, New Jersey,
07095-0915, telecopier: (908) 499-3460, with a copy to the General Counsel of
the Company, or to you at the address set forth on the first page of this
Agreement or to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notice of change of
address shall be effective only upon receipt.
<PAGE>
13
11. Miscellaneous.
(a) No Rights to Continued Employment. Neither this Agreement nor
any of the rights or benefits evidenced hereby shall confer upon you any
right to continuance of employment by the Company or interfere in any way
with the right of the Company to terminate your employment, subject to the
provisions of Section 6 above, for any reason, with or without Cause.
(b) Amendments, Waivers, Etc. No provision of this Agreement may
be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing by the parties hereto. No waiver by either
party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time. No
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not expressly set forth in this Agreement, and this Agreement shall supersede
all prior agreements, negotiations, correspondence, undertakings and
communications of the parties, oral or written, with respect to the subject
matter hereof, including, without limitation, the Term Sheet.
(c) Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force and
effect.
(d) Representation. You hereby represent and warrant to the
Company that the execution and delivery by you of this Agreement to the
Company will not breach the terms of any contract, agreement or understanding
to which you are a party. You further acknowledge and agree that a breach of
this representation by you shall render this Agreement void ab initio and of
no further force and effect.
(e) Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
(f) Withholding. Amounts paid to you hereunder shall be subject to
all applicable federal, state and local wage withholdings.
(g) Source of Payments. All payments provided under this Agreement
(other than payments made pursuant to a plan which provides otherwise or as
otherwise expressly provided hereunder) shall be paid in cash from the
general funds of the Company, and no special or separate fund shall be
established, and no other segregation of assets made, to assure payment. You
will have no right, title or interest whatsoever in or to any
<PAGE>
14
investments which the Company may make to aid it in meeting its obligations
hereunder. To the extent that any person acquires a right to receive
payments from the Company hereunder, such right shall be no greater than the
right of an unsecured creditor of the Company.
(h) Headings. The headings contained in this Agreement are
intended solely for convenience of reference and shall not affect the rights
of the parties to this Agreement.
(i) Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
New York applicable to contracts entered into and performed in such state.
<PAGE>
15
If this letter sets forth our agreement on the subject matter
hereof, kindly sign and return to the Company the enclosed copy of this
letter, which will then constitute our agreement on this subject.
Sincerely,
PATHMARK STORES, INC.
By______________________
Name:
Title:
SMG-II HOLDINGS CORPORATION
By______________________
Name:
Title:
(For purposes of Section
4 only)
Agreed to as of this 8th day of November, 1996.
____________________________
James L. Donald
<PAGE>
Exhibit A
STOCK AWARD AGREEMENT
<PAGE>
STOCK AWARD AGREEMENT
AGREEMENT, dated as of this 8th day of October, 1996, between SMG-II
Holdings Corporation, a Delaware corporation ("Holdings"), and James L.
Donald (the "Executive").
W I T N E S S E T H:
WHEREAS, Holdings, Pathmark Stores, Inc. (the "Company") and the
Executive are parties to an employment agreement, dated October 8, 1996 (the
"Employment Agreement"), which contemplates that Holdings will grant the
Executive an equity interest in Holdings consisting of a specified number of
shares of a new series of Holdings convertible preferred stock, with a stated
value of $200 ("Preferred Stock") and shares of Holdings Class A Common
Stock, par value $0.01 per share ("Common Stock"), subject to the terms and
conditions set forth herein; and
WHEREAS, Holdings now desires to award the Executive the Equity
Strip, and the Executive now desires to accept the award of the Equity Strip,
in accordance with the terms and provisions hereof;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants hereinafter set forth, and for good and valuable consideration, the
parties hereto hereby agree as follows:
1. Equity Award. Holdings hereby grants to the Executive, subject
to the terms and conditions of this Agreement, an Equity Strip, consisting of
an aggregate of 19,851 shares of Common Stock and an aggregate of 8,520
shares of Preferred Stock. The Preferred Stock will be pari passu with the
existing SMG-II convertible preferred stock and will accrue dividends at a
rate of 10% per annum. Each share of Preferred Stock will be convertible
into one share of Common Stock.
Capitalized words which are not otherwise defined in the text of
this Agreement shall have the meanings assigned to such words in the
Employment Agreement.
2. Issuance of Share Certificates. The Executive will enjoy full
ownership rights in connection with the Equity Strip, including voting rights
and the right to receive dividends when declared and paid. Share
certificates for the shares of Common Stock and Preferred Stock subject to
the Equity Strip will be issued in the name of the Executive but will be held
by Holdings until such time as the Executive makes a valid disposition of
such shares in accordance with the terms and provisions set forth herein and
in the Stockholders Agreement and Security Agreement. Each such share
certificate will contain a legend in the form below indicating that it has
<PAGE>
2
not been registered under the Securities Act of 1933, as amended, and that
the shares are subject to transfer restrictions set forth in the Stockholders
Agreement and the Security Agreement:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO, AND ARE
TRANSFERABLE ONLY UPON COMPLIANCE WITH, THE PROVISIONS OF A
STOCKHOLDERS AGREEMENT AMONG SMG-II HOLDINGS CORPORATION AND THE OTHER
PARTIES THERETO AND THE SECURITY AGREEMENT BETWEEN THE HOLDER AND
SMG-II HOLDINGS CORPORATION. COPIES OF THE ABOVE-REFERENCED AGREEMENTS
ARE ON FILE AT THE OFFICES OF SMG-II HOLDINGS CORPORATION AT
301 BLAIR ROAD, WOODBRIDGE, NEW JERSEY.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT
BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
OR AN EXEMPTION FROM REGISTRATION UNDER SAID ACT.
3. Vesting. The Equity Strip will vest in its entirety upon the
occurrence of an Employment-Related Event and will be forfeited in its
entirety upon the occurrence of a Termination Event; provided, however, that
no portion of the Equity Strip will be subject to forfeiture to the extent
that it has been sold or otherwise transferred in accordance with Section 4
below prior to the occurrence of a Termination Event.
4. Sales and Transfers of the Equity Strip. (a) The award of
the Equity Strip hereunder is expressly conditioned upon the Executive
becoming a party to the Stockholders Agreement and agreeing to be bound by
the terms thereof.
(b) The shares of Common Stock and Preferred Stock subject to the
Equity Strip shall be subject to all of the transfer restrictions set forth
in the Stockholders Agreement and may be transferred by the Executive only in
the manner and to the extent permitted by the Stockholders Agreement. Except
as permitted by the Stockholders Agreement, the shares subject to the Equity
Strip may not be transferred by the Executive until such time as they have
vested in accordance with the provisions of Section 3 above.
(c) Holdings shall cause the release of the shares from the
Security Agreement to the extent necessary to permit the Executive to
exercise his sale or transfer rights under Section 5.6 or 6.2 of the
Stockholders Agreement; provided, however, that the cash or other proceeds
received in connection with such sale or transfer shall be held as collateral
for the Loan in accordance with the terms of the Security Agreement.
5. Investment Representation. The Executive hereby represents and
warrants to Holdings that (i) the Equity Strip is being acquired by him for
investment only and not for resale, (ii) he has such knowledge and experience
in financial and business matters as to be capable of evaluating the merits
of the acquisition of the interest in Holdings constituting the Equity Strip,
(iii) he has carefully reviewed and understood the terms of this Agreement
and the Stockholders Agreement and (iv) he is an "accredited investor" within
the meaning of Rule 501 of Regulation D under the Securities Act of 1933, as
amended, by reason of (A) having a net worth (or joint net worth of the
Executive and his spouse) on the date of this Agreement that exceeds
<PAGE>
3
$1,000,000, or (B) having had individual income in excess of $200,000 in each
of the two most recent years (or joint income of the Executive and his spouse
in excess of $300,000 in each of those years) and having a reasonable
expectation of reaching the same income level in the current year.
6. No Restriction on Right of Company to Effect Corporate Changes.
The Equity Strip shall not affect in any way the right or power of
Holdings or its stockholders to make or authorize any or all adjustments,
recapitalization, reorganizations or other changes in Holdings' capital
structure or its business, or any merger or consolidation of Holdings, or any
issue of stock or of options, warrants or rights to purchase stock or of
bonds, debentures, preferred or prior preference stocks whose rights are
superior to or affect the Common Stock or the rights thereof or which are
convertible into or exchangeable for Common Stock, or the dissolution or
liquidation of Holdings, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise. This Section 6 is not intended to constitute
a waiver of any rights the parties may have under state law.
7. Interpretation and Construction. Holdings shall have full
authority to interpret and construe this Agreement and any interpretation,
construction or determination made by Holdings pursuant hereto shall be final
and conclusive.
8. Headings. The headings of sections and subsections herein are
included solely for convenience of reference and shall not affect the meaning
of any of the provisions of this Agreement.
9. Notices. Any notice provided by either party hereto will be
provided in accordance with the notice provision set forth in Section 10 of
the Employment Agreement.
10. Governing Law. This Agreement and all rights hereunder shall
be construed in accordance with and governed by the laws of the State of New
York.
<PAGE>
4
IN WITNESS WHEREOF, Holdings has caused this Agreement to be
executed by its duly authorized officers and the Executive has executed this
Agreement, both as of the day and year first above written.
SMG-II HOLDINGS CORPORATION
By: ____________________________________
Name:_______________________________
Title: _____________________________
EXECUTIVE
__________________________________________
__________________________________________
__________________________________________
(address)
<PAGE>
SMG-II HOLDINGS CORPORATION
March 7, 1997
Mr. James L. Donald
Chairman, President and Chief Executive Officer
Pathmark Stores, Inc.
301 Blair Road
Woodbridge, New Jersey 07095
Amendment to the Stock Award Agreement
Dear Mr. Donald:
Reference is made to the Stock Award Agreement, dated October 8,
1996, between SMG-II Holdings Corporation ("Holdings") and you (the "Stock
Award Agreement").
This will confirm our agreement that the following sentence is
hereby added to the end of Section 3 of the Stock Award Agreement:
"'Employment-Related Event' shall mean any of the following: (i) your
termination of employment at the end of the full Term of employment, (ii)
your Involuntary Termination or (iii) your death or Disability."
This letter constitutes an amendment to your Stock Award Agreement.
Please indicate your agreement by signing the attached copy of this letter.
SMG-II HOLDINGS CORPORATION
By:____________________
Title:
ACCEPTED AND AGREED
______________________
James L. Donald
______________________
Date
<PAGE>
Exhibit B
STOCK OPTION AGREEMENT
<PAGE>
STOCK OPTION AGREEMENT
AGREEMENT, dated as of this 8th day of October, 1996
(the "Date of Grant"), between SMG-II Holdings Corporation, a Delaware
corporation (the "Holdings"), and James L. Donald (the "Optionee").
W I T N E S S E T H:
WHEREAS, the Holdings, Pathmark Stores, Inc. (the "Company") and the
Optionee are parties to an employment agreement, dated October 8, 1996
(the "Employment Agreement") which contemplates that Holdings will grant the
Optionee a stock option consisting of an aggregate of 100,000 shares of
Holdings Class A Common Stock, par value $0.01 per share (the "Common Stock"),
subject to the terms and conditions set forth herein; and
WHEREAS, Holdings now desires to grant the Optionee the Option, and
the Optionee desires to accept the grant of the Option, in accordance with the
terms and provisions hereof;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants hereinafter set forth, and for good and valuable consideration, the
parties hereto hereby agree as follows:
1. Grant of Option.
Holdings hereby grants to the Optionee, subject to the terms and
conditions of this Stock Option Agreement (the "Agreement"), a stock option
(the "Option") to purchase an aggregate of 100,000 shares of Common Stock. The
Option will consist of component A ("Option Component A") covering 50,000
shares of Common Stock and component B ("Option Component B") covering the
remaining 50,000 shares of Common Stock. Any terms used herein not otherwise
defined shall have the meanings assigned to them in the Employment Agreement.
2. Terms and Conditions of Option.
The Option shall be subject to the following terms and conditions:
(a) Exercise Price of the Option Component A. Subject to
Section 2(c) below, 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").
<PAGE>
2
(b) Exercise Price of the Option Component B. Subject to
Section 2(c) below, 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 Year 2001.
(c) Expiration Date. Subject to Section 2(e)(vi) below, 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 the Option Component A and the Option
Component B which is vested in accordance with Section 2(d) immediately prior
to such Expiration Date will be extended until the seventh anniversary of the
Effective Date if such vested portion of the Option Component A and the 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 the Option Component A and the 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%.
(d) Vesting. Subject to Section 3, the Optionee will vest in 25% of
the Option Component A and in 25% of the Option Component B on the Effective
Date and on each of the first through third anniversaries of the Effective
Date, provided that the Optionee is in the employ of the Company on each such
date. Upon the occurrence of a Minimum IPO (as defined below) while the
Optionee is in the employ of the Company, the entire Option shall immediately
and fully vest. In addition, the Option will immediately and fully vest upon
the occurrence of a Change in Control occurring prior to a Termination Event.
(e) Exercisability.
(i) Except for purposes of tag-along rights under Article V of the
Stockholders Agreement and the piggy-back 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 provisions of this Section 2(e).
(ii) 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:
<PAGE>
3
Period of Time Target Price per Target Price per
Share/Option Share/Option
Component A 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
--------------------------------------------------------------
Notwithstanding the above, if the ML Investors (as defined in the
Stockholders Agreement) have a Realization Event for more than 15% of the
shares of Common Stock beneficially owned by them on the Date of Grant 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.
(iii) If the Optionee ceases for any reason to be in the employ of
the Company, the provisions of Section 2(e)(ii) above will be applied only
to the then vested portion of each component of the Option.
(iv) Holdings and the Optionee agree to use all reasonable efforts
to assure that the Optionee shall be permitted to exercise the portion of
the Option that becomes exercisable pursuant to this Section 2(e) prior
to the consummation of any applicable Third-Party Sale or Public Offering
so that the Optionee will be able to participate in such Third-Party Sale
or Public Offering to the extent permitted by the provisions of the
Stockholders Agreement.
(v) In the event that the Optionee becomes entitled to any tag-along
rights under Section 5.6 or registration rights under Section 6.2 of the
Stockholders Agreement, the Optionee 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, one hundred percent 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.
(vi) 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 in accordance with Section 5 (b)
hereunder, and if such listing, registration, or qualification is delayed
beyond the Expiration Date, the vested and
<PAGE>
4
exercisable portion of the Option will remain exercisable until 30 days
after such listing, registration, or qualification is accomplished.
(f) Agreement to Become Party to and Abide by the Terms of the
Stockholders Agreement. No shares of Common Stock shall be issued to the
Optionee upon exercise of the Option unless the Optionee is then a party to the
Stockholders Agreement or the Stockholders Agreement shall have previously
expired in accordance with its terms. All shares of Common Stock acquired by
the Optionee upon the exercise of any portion of the Option will be subject to
the terms of the Stockholders Agreement. The Optionee shall hold and transfer
the shares of Common Stock issuable upon the exercise of the Option subject to,
and in accordance with, the terms, conditions and restrictions applicable to
shares of Common Stock owned by Management Investors (as defined in the
Stockholder Agreement) as provided in the Stockholders Agreement; provided such
terms, conditions and restrictions contained in the Stockholders Agreement are
then still in effect, and the agreements and restrictions contained therein
will apply to the shares of Common Stock issuable upon exercise of the Option
without any action on the part of Holdings or the Optionee.
(g) Nontransferability; Nonassignability. The Option shall not be
transferable or assignable, other than by will or the laws of descent and
distribution and the Option may not be exercised by anyone other than the
Optionee during the Optionee's lifetime, except in the event of the Optionee's
Disability, the Options may be exercised by the Optionee's legal custodian or
guardian.
3. Termination of Employment.
(a) Termination Without Cause or by Reason of Death; Resignation for
Good Reason. If the Optionee's employment with the Company is terminated by
the Company without Cause or by reason of the Optionee's death, or if the
Optionee should resign his employment with the Company for Good Reason, the
Optionee shall be entitled to retain the portion of the Option which is vested
as of the Date of Termination, and the remaining portion of the Option shall be
immediately and irrevocably forfeited as of such date.
(b) Disability In the event of the Optionee's Disability, the
period of such Disability shall be treated as continuing employment with the
Company for purposes of Section 2(d) above. If, following the expiration of
such period of Disability during the Term, the Optionee does not return to the
full-time employ of the Company, the last day of such period of Disability
shall be treated for purposes hereof as a Termination Event.
(c) Termination Event. If the Optionee'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 as of such date.
<PAGE>
5
(d) Exercisability After Termination of Employment. The vested
portion of the Option retained by the Optionee (or in the event of the
Optionee's death, by his estate or beneficiary) following the Optionee's
termination of employment with the Company for any reason shall remain
outstanding until the Expiration Date but shall become exercisable only to the
extent provided in Section 2(e) above.
4. Method of Exercise.
(a) Notice. Subject to the conditions set forth in Section 4(b)
hereof, the Optionee may exercise any then exercisable portion of the Option by
giving written notice to Holdings specifying the number of shares of Common
Stock in respect of which the Option is being exercised. The date of exercise
of the Option with respect to the shares of Common Stock specified in the
notice shall be the later of (i) the date on which Holdings receives the
written notice or (ii) the date on which all the conditions provided in
Sections 4(b) and 4(c) hereof are satisfied.
(b) Payment and Other Conditions. Prior to the issuance to the
Optionee of any stock certificates evidencing shares of Common Stock in respect
of which the Option shall have been exercised, the Optionee shall have paid to
Holdings the aggregate exercise price for all shares of Common Stock for which
the Option is then exercised in cash or in shares of Common Stock already owned
by the Optionee with a fair market value on the date of exercise equal to the
aggregate exercise price or any combination of cash and shares. In addition,
the Optionee shall pay to Holdings an amount in cash equal to the federal,
state and local taxes, if any, required to be withheld or paid by Holdings
as a result of such exercise.
(c) Issuance of Stock Certificates; Pledge of Shares Acquired.
Subject to the terms of the Security Agreement, upon receipt of payment and
satisfaction of the conditions pursuant to Section 4(b), Holdings shall issue
to the Optionee a certificate or certificates for the number of shares of
Common Stock in respect of which the Option shall have been exercised. Such
certificates shall contain one or more legends indicating any then applicable
transfer restrictions or limitations applicable to the shares. Holdings will
bear all expenses in connection with the preparation, issuance and delivery of
the stock certificates.
5. Registration of Shares and Limitations on Exercisability.
(a) Notwithstanding anything contained herein to the contrary, the
Option shall not be exercisable and no transfer of shares of Common Stock may
be made to the Optionee, and any attempt to exercise the Option or to transfer
any shares of Common Stock to the Optionee shall be void and of no effect,
unless and until (i) a registration statement under the Securities Act has been
duly filed and declared effective pertaining to the shares of Common Stock
subject to this Option and the shares of Common Stock subject to this Option
have been duly qualified under applicable state securities or blue sky laws or
(ii) Holdings, in its sole discretion after securing the advice of counsel,
determines, or the Optionee provides an opinion of counsel reasonably
satisfactory to Holdings, that such registration or
<PAGE>
6
qualification is not required as a result of the availability of an exemption
from registration or qualification under such laws.
(b) Without limiting the foregoing, if at any time the Board shall
determine in its discretion that the listing, registration or qualification of
the shares of Common Stock subject to this Option under any state or federal
law or on any securities exchange, or the consent or approval of any
governmental regulatory body, is necessary or desirable as a condition of, or
in connection with, delivery or purchase of shares pursuant to the exercise of
the Option, the Option may not be exercised in whole or in part unless such
listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Board.
(c) Following a Public Offering of the Common Stock, the Option and
the shares subject to the Option shall be registered on a Form S-8, to the
extent such form of registration statement is then available to Holdings, and,
if necessary, Holdings will file a reoffering prospectus to facilitate the
Optionee's resale of shares of Common Stock acquired upon exercise of the
Option.
6. No Restriction on Right of Company to Effect Corporate Changes.
Neither the Agreement nor the Option shall affect in any way the
right or power of Holdings or its stockholders to make or authorize any or all
adjustments, recapitalization, reorganizations or other changes in Holdings'
capital structure or its business, or any merger or consolidation of Holdings,
or any issue of stock or of options, warrants or rights to purchase stock, or
of bonds, debentures, preferred or prior preference stocks whose rights are
superior to or affect the Common Stock or the rights thereof or which are
convertible into or exchangeable for Common Stock, or the dissolution or
liquidation of Holdings, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise. This Section 6 is not intended to constitute
a waiver of any rights the parties may have under state law.
7. Dilution and Other Adjustments.
In the event of any stock dividend or split, issuance or repurchase
of stock or securities convertible into or exchangeable for shares of stock,
grants of options, warrants or rights to purchase stock, recapitalization,
combination, exchange or similar change affecting the Common Stock, Holdings
shall make one or more of the following equitable adjustments to the Option:
(i) adjust the aggregate number of shares of Common Stock which may be acquired
upon exercise of the Option, (ii) adjust the exercise price to be paid for the
shares subject to the Option, or (iii) make any other equitable adjustments or
take such other equitable action as Holdings, in its discretion, shall deem
appropriate. Such equitable adjustments or actions shall be negotiated in good
faith by Holdings with the Optionee, and any agreement between the parties
shall be conclusive and binding for all purposes. In the
<PAGE>
7
event of a change in the Common Stock which is limited to a change in the
designation thereof to "Capital Stock" or other similar designation, or to a
change in the par value thereof, or from par value to no par value, without
increase or decrease in the number of issued shares, the shares resulting from
any such change shall be deemed to be Common Stock within the meaning of this
Agreement.
8. Optionee Bound by the Agreement.
The Optionee hereby agrees that he and any other person who may be
entitled to any rights hereunder shall be bound by all the terms and conditions
of this Agreement.
9. Headings.
The headings of sections and subsections herein are included solely
for convenience of reference and shall not affect the meaning of any of the
provisions of this Agreement.
10. Definitions.
"Exercisable Percentage" means (i) in connection with a Third Party
Sale, the percentage of the shares of Common Stock subject to the Option that
the Optionee is entitled to sell pursuant to the exercise of his "tag-along"
rights under Section 5.6 of 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.
"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 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 of Grant, exceeds
$50 million.
"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 this 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.
<PAGE>
8
"Third Party Sale" means a sale of Common Stock subject to
Section 5.6 of the Stockholders Agreement.
11. Governing Law.
This Agreement and all rights hereunder shall be construed in
accordance with and governed by the laws of the State of Delaware.
12. Notices.
Any notice provided by either party hereto will be provided in
accordance with the notice provision set forth in Section 10 of the Employment
Agreement.
IN WITNESS WHEREOF, Holdings has caused this Agreement to be executed
by its duly authorized officers and the Optionee has executed this Agreement,
both as of the day and year first above written.
SMG-II HOLDINGS CORPORATION
By:____________________________________
Title:_________________________________
OPTIONEE
_______________________________________
_______________________________________
_______________________________________
(address)
<PAGE>
SMG-II HOLDINGS CORPORATION
AGREEMENT
AGREEMENT, dated as of this 8th day of November, 1996 between
SMG-II Holdings Corporation, a Delaware corporation ("Holdings"), and
James L. Donald ("Donald").
W I T N E S S E T H:
WHEREAS, Holdings, Pathmark Stores, Inc. (the "Company") and Donald
are parties to an employment agreement, dated October 8, 1996 (the "Employment
Agreement"), which contemplates that Holdings will grant to Donald an equity
interest in Holdings consisting of a specified number of shares of a new series
of Holdings convertible preferred stock, with a stated value of $200, shares of
Holdings Class A Common Stock, par value $0.01 per share (the "Common Stock")
(together, the "Equity Strip"), and a stock option (the "Option") consisting of
an aggregate of 100,000 shares of Common Stock; and
WHEREAS, Holdings now desires to grant Donald the Equity Strip and
the Option, and Donald desires to accept the grant of the Equity Strip and
the Option;
WHEREAS, the Stockholders Agreement between Holdings and its
stockholders dated as of February 4, 1991 (the "Stockholders Agreement") was
amended prior to the execution of this Agreement by Amendment No. 1 to provide
Donald with the Equity Strip and the Option and all the rights and obligations
associated therewith; and
WHEREAS, according to the terms of the Stockholders Agreement, in
order to receive either grant of the Equity Strip or the Option, Donald must
agree to become subject to the terms, conditions, rights, responsibilities and
all other provisions of the Stockholders Agreement;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants hereinafter set forth, and for good and valuable consideration, the
parties hereto hereby agree as follows:
1. Defined Terms. Any capitalized words which are not otherwise
defined herein shall have the meanings assigned to such words in the
Stockholders Agreement.
2. Management Investor. The parties hereby agree that Donald shall
become a Management Investor upon his receipt of the Equity Strip, the Option
or any portion thereof.
3. Agreement to Become Party to and Abide by the Terms of the
Stockholders Agreement. The parties hereby irrevocably agree that Donald shall
be subject
<PAGE>
2
to the terms and conditions of the Stockholders Agreement in its entirety. The
parties further agree that all shares of Common Stock or preferred stock
acquired by Donald or granted to Donald by Holdings will be subject to the
terms of the Stockholders Agreement. Donald shall hold and transfer all shares
of Common Stock and preferred stock granted to him under the Equity Strip or
issuable upon the exercise of the Option subject to, and in accordance with,
the terms, conditions and restrictions applicable to shares of Common Stock and
preferred stock owned by Management Investors as provided in the Stockholders
Agreement for as long as such terms, conditions and restrictions contained in
the Stockholders Agreement are then still in effect, and the agreements and
restrictions contained therein will apply to the shares of Common Stock and
preferred stock granted through the Equity Strip and issuable upon exercise of
the Option without any other action on the part of Holdings or Donald.
4. All Provisions of the Stockholders Agreement. The parties agree
that all the provisions of the Stockholders Agreement shall apply to this
Agreement, including, without limitation, the notice provisions and the
governing law provisions.
IN WITNESS WHEREOF, Holdings has caused this Agreement to be executed
by its duly authorized officers and Donald has executed this Agreement, both as
of the day and year first above written.
SMG-II HOLDINGS CORPORATION
By: ___________________________________
Title: ____________________________
JAMES L. DONALD
_______________________________________
_______________________________________
_______________________________________
(address)
<PAGE>
Exhibit C
FORM OF NOTE
<PAGE>
THIS NOTE IS NON-NEGOTIABLE
FORM OF PROMISSORY NOTE
A-16
$281,250 Dated: November 8, 1996
FOR VALUE RECEIVED, the undersigned, JAMES L. DONALD, an individual
residing at 26 Carriage Place; Edison, New Jersey; 08820 (the "Borrower"),
HEREBY PROMISES TO PAY to PATHMARK STORES, INC. (the "Lender") on the
Termination Date (as defined below) the principal amount of TWO HUNDRED AND
EIGHTY ONE THOUSAND TWO HUNDRED AND FIFTY U.S. DOLLARS (US$281,250) in lawful
money of the United States of America ("U.S. Dollars" or "US$") and in same day
funds.
ARTICLE I
DEFINITIONS
SECTION 1.01 Certain Defined Terms. As used in this Note, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Board" means the Board of Directors of the Lender.
"Borrower" has the meaning specified in the recital of parties to this
Note.
"Business Day" means a day of the year on which banks are not required
or authorized to close in New York City.
"Employment Agreement" means the Employment Agreement between the
Borrower and the Lender dated October 8, 1996 which sets forth the terms of the
Borrower's employment with the Lender.
<PAGE>
2
THIS NOTE IS NON-NEGOTIABLE
"Federal Short-Term Rate" means the interest rate that is the Federal
short-term rate which rate per annum shall at all times be equal to the rate of
interest in effect on the date hereof and published by the Secretary of the
Treasury, in accordance with Section 1274(d) of the Internal Revenue Code, as
the monthly Federal short-term rate.
"Holdings" means SMG-II Holdings Corporation, a Delaware corporation
and the parent company of the Lender, together with any successors.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended from time to time, and the regulations promulgated and rulings issued
thereunder.
"Lender" has the meaning specified in the recital of parties to this
Note.
"Loan Documents" means this Note, the Security Agreement and any other
Note of the Borrower payable to the order of the Lender, in each case as amended
or modified from time to time.
"Security Agreement" means a pledge, assignment and security agreement
entered into by the Borrower for the benefit of the Lender, in substantially the
form of Exhibit A hereto, as such agreement may be amended or modified from time
to time.
"Termination Date" means the earlier of (a) October 8, 2001 or (b) the
date of the termination in whole of the Loan hereunder pursuant to Section 2.04
or 5.01.
SECTION 1.02 Computation of Time Periods. In this Note in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
mean "to but excluding".
SECTION 1.03 Other Terms. All other terms not defined in this Note
shall have the meaning assigned such terms in the Employment Agreement.
<PAGE>
3
THIS NOTE IS NON-NEGOTIABLE
ARTICLE II
AMOUNT AND TERMS OF THE LOAN
SECTION 2.01. The Loan. The Lender agrees, on the terms and
conditions hereinafter set forth, to make a loan (the "Loan") to the Borrower on
the date hereof in the amount set forth above in U.S. Dollars and in same day
funds.
SECTION 2.02. Repayment. The Borrower shall repay the aggregate
unpaid principal amount of the Loan on the Termination Date.
SECTION 2.03. Interest. (a) Scheduled Interest. The Borrower shall
pay interest on the unpaid principal amount of this Note from the date of this
Note until this Note shall be paid in full at a rate per annum equal at all
times to the Federal Mid-Term Rate in effect and applicable to this Note
pursuant to the terms hereof, payable quarterly in arrears beginning on January
8, 1997 and on the Termination Date.
(b) Default Interest. Upon the occurrence and during the continuance
of an Event of Default (other than an Event of Default listed in Section 5.01(g)
to which this Section 2.03(b) shall not apply until 60 days after the occurrence
of such Event of Default), the Borrower shall pay interest on the unpaid
principal amount of this Note, payable in arrears on the dates referred to in
clause (a) above and on demand, at a rate per annum equal at all times to 2% per
annum above the rate per annum required to be paid on this Note pursuant to
clause (a) above.
SECTION 2.04. Mandatory Prepayments. The Borrower shall, on the next
succeeding Business Day following the Borrower's failure to be in the Lender's
employ as a result of a termination of employment for Cause or by reason of the
Borrower's death or a resignation of employment other than for Good Reason,
prepay the outstanding principal amount of the Loan and pay accrued interest to
the date of such prepayment on the entire principal amount of the Loan
outstanding as of such date; provided however that the Borrower shall be
considered to be in the Lender's "employ" during any period of the Borrower's
Disability.
SECTION 2.05. Payments and Computations. The Borrower shall make
each payment hereunder not later than 3:00 P.M. (New York City time) on the day
when due in U.S. Dollars to the Lender at its address referred to in Section
6.02 in same day funds. All computations of interest shall be made by the
Lender on the basis of a year of 365 or 366
<PAGE>
4
THIS NOTE IS NON-NEGOTIABLE
days, as the case may be, in each case for the actual number of days
(including the first day but excluding the last day) occurring in the period
for which such interest is payable.
SECTION 2.06. Payment on Non-Business Days. Whenever any payment
under any Loan Document shall be stated to be due on a day other than a Business
Day, such payment shall be made on the next succeeding Business Day, and such
extension of time shall in such case be included in the computation of payment
of interest.
ARTICLE III
CONDITIONS OF LENDING
SECTION 3.01. Conditions Precedent to the Loan. The obligation of
the Lender to make the Loan hereunder is subject to the conditions precedent
that the Lender shall have received on or before the date of such Loan the
following, dated such day, in form and substance satisfactory to the Lender:
(a) The Security Agreement, together with:
(i) acknowledgment copies or stamped receipt copies of proper
financing statements, duly filed under the Uniform Commercial Code of
all jurisdictions that the Lender may deem necessary or desirable in
order to perfect the security interests created by the Security
Agreement,
(ii) completed requests for information, listing the financing
statements referred to in paragraph (i) above and all other effective
financing statements filed in the jurisdictions referred to in
paragraph (i) above that name the Borrower as debtor, together with
copies of such other financing statements (none of which shall cover
the collateral purported to be covered by the Security Agreement),
(iii) evidence of the completion of all recordings and
filings of or with respect to the collateral that the Lender may deem
necessary or desirable in order to perfect the security interests
created by the Security Agreement, and
<PAGE>
5
THIS NOTE IS NON-NEGOTIABLE
(iv) evidence that all other actions necessary or, in the opinion
of the Lender, desirable to perfect and protect the security interests
created by the Security Agreement have been taken; and
(b) the Lender shall have received such other approvals or documents
as the Lender may reasonably request.
ARTICLE IV
COVENANTS OF THE BORROWER
SECTION 4.01. Affirmative Covenants. So long as this Note shall
remain unpaid, the Borrower will, unless the Lender shall otherwise consent in
writing:
(a) Compliance with Laws, Etc. Comply in all material respects with
all applicable laws, rules, regulations and orders, such compliance to
include, without limitation, paying before the same become delinquent all
taxes, assessments and governmental charges imposed upon the Borrower or
upon the property of the Borrower except to the extent contested in good
faith.
(b) Reporting Requirements. Furnish to the Lender:
(i) as soon as possible and in any event within five days after
the occurrence of each Event of Default and each event which, with the
giving of notice or lapse of time, or both, would constitute an Event
of Default, continuing on the date of such statement, a statement of
the Borrower setting forth details of such Event of Default or event
and the action which the Borrower has taken and proposes to take with
respect thereto; and
(ii) such other information respecting the condition or
operations, financial or otherwise, of the Borrower as the Lender may
from time to time reasonably request.
<PAGE>
6
THIS NOTE IS NON-NEGOTIABLE
ARTICLE V
EVENTS OF DEFAULT
SECTION 5.01. Events of Default. If any of the following events
("Events of Default") shall occur and be continuing:
(a) The Borrower shall fail to pay any principal of, or interest on,
this Note or any other amount under any other Loan Document, including, but
not limited to, any mandatory prepayments, within 30 days after the same
becomes due and payable;
(b) The Borrower shall fail to perform or observe (i) any term,
covenant or agreement contained in Section 4.01 or (ii) any other term,
covenant or agreement contained in any Loan Document on the part of the
Borrower to be performed or observed if such failure shall remain
unremedied for 30 days after written notice thereof shall have been given
to the Borrower by the Lender;
(c) The Borrower shall generally not pay his debts as such debts
become due, or shall admit in writing his inability to pay his debts
generally, or shall make a general assignment for the benefit of creditors;
or any proceeding shall be instituted by or against the Borrower seeking to
adjudicate the Borrower a bankrupt or insolvent, or seeking liquidation,
protection, relief, or composition of the Borrower or of his debts under
any law relating to bankruptcy, insolvency or relief of debtors, or seeking
the entry of an order for relief for the Borrower or for any substantial
part of his property and, in the case of any such proceeding instituted
against the Borrower (but not instituted by the Borrower), either such
proceeding shall remain undismissed or unstayed for a period of 30 days, or
any of the actions sought in such proceeding (including, without
limitation, the entry of an order for relief against the Borrower or for
any substantial part of his property) shall occur;
(d) Any judgment or order for the payment of money in excess of
$250,000 shall be rendered against the Borrower and either (i) enforcement
proceedings shall have been commenced by any creditor upon such judgment or
order or (ii) there shall be any period of 30 consecutive days during which
a stay of enforcement of such judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect;
<PAGE>
7
THIS NOTE IS NON-NEGOTIABLE
(e) Any provision of the Security Agreement after delivery thereof
pursuant to Section 3.01 shall for any reason cease to be valid and binding
on the Borrower, or the Borrower shall so state in writing;
(f) The Security Agreement after delivery thereof pursuant to Section
3.01 shall for any reason (other than pursuant to the terms thereof) cease
to create a valid and perfected first priority security interest in any of
the collateral purported to be covered thereby;
(g) The Borrower shall die; or
(h) The Borrower shall be terminated for Cause or resign without Good
Reason, or shall give or receive notice of such termination or resignation;
then, and in any such event, the Lender may, by notice to the Borrower, declare
this Note, all interest thereon and all other amounts payable under the Loan
Documents to be forthwith due and payable, whereupon this Note, all such
interest and all such amounts shall become and be forthwith due and payable,
without presentment, demand, protest or further notice of any kind, all of which
are hereby expressly waived by the Borrower; provided, that in the event of the
death of the Borrower or in the event of an actual or deemed entry of an order
for relief with respect to the Borrower under the Federal Bankruptcy Code, this
Note, all such interest and all such amounts shall automatically become and be
due and payable, without presentment, demand, protest or any notice of any kind,
all of which are hereby expressly waived by the Borrower.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01. Amendments, Etc. No amendment or waiver of any
provision of this Note, nor consent to any departure by the Borrower therefrom,
shall in any event be effective unless the same shall be in writing and signed
by the Lender and then any such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
SECTION 6.02. Notices, Etc. All notices and other communications
provided for hereunder shall be in writing (including telecopier, telegraphic,
telex or cable
<PAGE>
8
THIS NOTE IS NON-NEGOTIABLE
communication) and mailed, telecopied, telegraphed, telexed, cabled or
delivered, if to the Borrower, at its address as indicated in the recital of
parties to this Note; and if to the Lender, at its address at 301 Blair Road;
Woodbridge, New Jersey; 07095, Attn: Corporate Secretary; or, as to each
party, at such other address and to such other individual as shall be
designated by such party in a written notice to the other party. All such
notices and communications shall, when mailed, telecopied, telegraphed,
telexed or cabled, be effective when deposited in the mails, telecopied,
delivered to the telegraph company, confirmed by telex answerback or
delivered to the cable company, respectively.
SECTION 6.03. No Waiver; Remedies. No failure on the part of the
Lender to exercise, and no delay in exercising, any right under any Loan
Document shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right preclude any other or further exercise thereof or the
exercise of any other right. The remedies provided in the Loan Documents are
cumulative and not exclusive of any remedies provided by law.
SECTION 6.04. Binding Effect. This Note shall (a) be binding upon
the Borrower and his personal representatives, estate, heirs, devisees, legatees
and assigns, (b) inure to the benefit of the Borrower and his assigns and (c) be
binding upon and inure to the benefit of the Lender and its respective
successors and assigns, except that the Borrower shall not have the right to
assign his rights hereunder or any interest herein without the prior written
consent of the Lender.
SECTION 6.05. Governing Law. This Note shall be governed by, and
construed in accordance with, the laws of the State of New York.
<PAGE>
9
THIS NOTE IS NON-NEGOTIABLE
IN WITNESS WHEREOF, the Borrower has executed and the Lender has
caused this Note to be executed by its officer thereunto duly authorized, in
each case, as of the date first above written.
______________________________
JAMES L. DONALD, as
Borrower
CONSENTED TO AND ACKNOWLEDGED:
PATHMARK STORES, INC.,
as Lender
By:__________________________________
Name:
Title:
<PAGE>
Exhibit D
SECURITY AGREEMENT
<PAGE>
PLEDGE, ASSIGNMENT AND SECURITY AGREEMENT
PLEDGE, ASSIGNMENT AND SECURITY AGREEMENT, dated as of November 8,
1996, made by the individual identified on the signature page hereof (the
"Pledgor"), residing at the address indicated for the Pledgor on the
signature page hereof, to PATHMARK STORES, INC. (the "Pledgee"), a Delaware
corporation.
PRELIMINARY STATEMENTS:
(1) The Pledgor has made various Notes to the order of the Pledgee,
each dated November 8, 1996 (each such Note, as it may hereinafter be amended
or modified from time to time, being a "Note", and collectively, the "Notes",
the terms defined therein and not otherwise defined herein being used herein
as therein defined).
(2) The Pledgor is the owner of the shares of stock set forth on
Part I of Schedule I hereto and issued by the corporations indicated therein
and the options set forth in Part II of Schedule I hereto and issued by the
corporations indicated therein.
(3) The Pledgor has entered into an Option Agreement relating to
the options listed on Part II of Schedule I (said agreement, as amended or
modified from to time, being the "Option Agreement") and a Stock Award
Agreement relating to the shares listed on Part I of Schedule I (said
agreement, as amended or modified from to time, being the "Stock Award
Agreement").
(4) Each of the Notes requires that the Pledgor shall grant the
security interest contemplated by this Agreement.
NOW, THEREFORE, in consideration of the premises and in order to
induce the Pledgee to make the loans under the Notes, the Pledgor hereby
agrees with the Pledgee as follows:
SECTION 1. Grant of Security. The Pledgor hereby assigns,
transfers and pledges to the Pledgee, and hereby grants to the Pledgee a
security interest in, all of the Pledgor's right, title and interest in, to
and under the following, in each case, as to each type of property described
below, whether now owned or hereafter acquired, wherever located and whether
now or hereafter existing (the "Collateral"):
(a) (i) the shares of stock set forth in Part I of Schedule I
hereto and issued by the corporations indicated therein
(collectively referred to herein as the "Initial Pledged Shares",
and together with the shares referred to in clause (ii) below, the
"Pledged Shares"), together with the certificates
<PAGE>
2
representing such Initial Pledged Shares and all dividends, cash,
instruments and other property from time to time received,
receivable or otherwise distributed in respect of or in exchange for
any or all of such Initial Pledged Shares;
(ii) all additional shares of stock of any issuer of any
Initial Pledged Shares from time to time acquired by the Pledgor in
any manner, other than additional shares of stock acquired by the
Pledgor in open market purchases, together with the certificates
representing such additional shares and all dividends, cash,
instruments and other property from time to time received,
receivable or otherwise distributed in respect of or in exchange for
any or all of such shares;
(b) (i) the option set forth in Part II of Schedule I hereto and
issued by the corporation indicated therein (referred to herein as
the "Initial Pledged Option", and together with the options referred
to in clause (ii) below, the "Pledged Options"; the Pledged Shares
and Pledged Options being referred to herein as the "Security
Collateral"), together with all shares, dividends, cash, instruments
and other property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of
such Initial Pledged Option, including, without limitation, the
shares issued upon exercise of such Pledged Options;
(ii) all additional options of the issuer of the Initial
Pledged Option from time to time acquired by the Pledgor in any
manner and all shares, dividends, cash, instruments and other
property from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of such
options;
(c) the Option Agreement and the Stock Award Agreement
(collectively, the "Assigned Agreements"), including, without limitation,
(i) all rights of the Pledgor under or pursuant to the Assigned
Agreements, (ii) all rights of the Pledgor to receive proceeds of any
insurance, indemnity, warranty or guaranty with respect to the Assigned
Agreements, (iii) all claims of the Pledgor for damages arising out of or
for breach of or default under the Assigned Agreements and (iv) all
rights of the Pledgor to terminate the Assigned Agreements, to perform
thereunder and to compel performance and otherwise exercise all remedies
thereunder (all such Collateral being the "Agreement Collateral"); and
(d) all proceeds of any and all of the foregoing Collateral
(including, without limitation, (i) proceeds which constitute property of
the types described in clauses (a) through (c) of this Section 1 and (ii)
cash) and, to the extent not
<PAGE>
3
otherwise included, all payments under insurance (whether or not the
Pledgee is the loss payee thereof), or any indemnity, warranty or
guaranty, payable by reason of loss or damage to or otherwise with
respect to any of the foregoing Collateral.
SECTION 2. Security for Obligations. This Agreement secures the
payment of all obligations of the Pledgor now or hereafter existing under the
Loan Documents (all such obligations of the Pledgor being the "Obligations").
Without limiting the generality of the foregoing, this Agreement secures the
payment of all amounts that constitute part of the Obligations and would be
owed by the Pledgor to the Pledgee under any of the Notes but for the fact
that they are unenforceable or not allowable due to the existence of a
bankruptcy, reorganization or similar proceeding involving the Pledgor.
SECTION 3. Pledgor Remains Liable. Anything herein to the contrary
notwithstanding, (a) the Pledgor shall remain liable under the contracts and
agreements included in the Collateral to the extent set forth therein to
perform all of its duties and obligations thereunder to the same extent as if
this Agreement had not been executed, (b) the exercise by the Pledgee of any
of the rights hereunder shall not release the Pledgor from any of its duties
or obligations under the contracts and agreements included in the Collateral,
and (c) the Pledgee shall have no obligation or liability under the contracts
and agreements included in the Collateral by reason of this Agreement, nor
shall the Pledgee be obligated to perform any of the obligations or duties of
the Pledgor thereunder or to take any action to collect or enforce any claim
for payment assigned hereunder.
SECTION 4. Delivery of Collateral. All certificates or instruments
representing or evidencing the Collateral are being delivered to and will be
held by or on behalf of the Pledgee pursuant hereto and shall be in suitable
form for transfer by delivery, or shall be accompanied by duly executed
instruments of transfer or assignment in blank, all in form and substance
satisfactory to the Pledgee. The Pledgee shall have the right, at any time
in its discretion and without notice to the Pledgor, to transfer to or to
register in the name of the Pledgee (as pledgee hereunder) or any of its
nominees any or all of the Collateral. In addition, the Pledgee shall have
the right at any time to exchange certificates or instruments representing or
evidencing the Collateral for certificates or instruments of smaller or
larger denominations.
SECTION 5. Representations and Warranties. The Pledgor represents
and warrants as follows:
(a) The residence of the Pledgor is located at the address
specified on the signature page of this Agreement. A fully executed original
counterpart of each of the Assigned Agreements has been delivered to the
Pledgee. Each party to the Assigned
<PAGE>
4
Agreements other than the Pledgor has executed and delivered to the Pledgee a
consent, substantially in the form of Exhibit A, to the assignment of the
Agreement Collateral to the Pledgee pursuant to this Agreement.
(b) The Pledgor is the legal and beneficial owner of the Collateral
free and clear of any lien, security interest, option or other charge or
encumbrance, except for the security interests created by this Agreement. No
effective financing statement or other document similar in effect covering
all or any part of the Collateral is on file in any recording office, except
such as may have been filed in favor of the Pledgee relating to this
Agreement.
(c) This Agreement has been duly executed and delivered by the
Pledgor and is a valid and binding obligation of the Pledgor, enforceable
against the Pledgor in accordance with its terms.
(d) The execution and delivery by the Pledgor of this Agreement and
the performance of its obligations thereunder are within the Pledgor's
authority and capacity and do not contravene any law, regulation, order or
contractual restriction binding on or affecting the Pledgor.
SECTION 6. Further Assurances. (a) The Pledgor agrees that from
time to time, at the expense of the Pledgee, the Pledgor will promptly
execute and deliver all further instruments and documents, and take all
further action, that may be necessary or desirable, or that the Pledgee may
reasonably request, in order to perfect and protect any pledge, assignment or
security interest granted or purported to be granted hereby or to enable the
Pledgee to exercise and enforce its rights and remedies hereunder with
respect to any Collateral. Without limiting the generality of the foregoing,
the Pledgor will: (i) deliver and pledge to the Pledgee promptly upon
receipt thereof all instruments or certificates representing or evidencing
any of the Collateral duly indorsed and accompanied by duly executed
instruments of transfer or assignment, all in form and substance satisfactory
to the Pledgee; and (ii) execute and file such financing or continuation
statements, or amendments thereto, and such other instruments or notices, as
may be necessary or desirable, or as the Pledgee may request, in order to
perfect and preserve the pledge, assignment and security interest granted or
purported to be granted hereby.
(b) The Pledgor hereby authorizes the Pledgee to file one or more
financing or continuation statements, and amendments thereto, relating to all
or any part of the Collateral without the signature of the Pledgor where
permitted by law. A photocopy or other reproduction of this Agreement or any
financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law.
<PAGE>
5
(c) The Pledgor will furnish to the Pledgee from time to time
statements and schedules further identifying and describing the Collateral
and such other reports in connection with the Collateral as the Pledgee may
reasonably request, all in reasonable detail.
(d) The Pledgor will give the Pledgee not less than 30 days' prior
written notice of any change in his residence from the residence specified in
Section 5(a) hereof (or any subsequent location).
SECTION 7. As to the Assigned Agreements. The Pledgor shall at its
expense (a) perform and observe all the terms and provisions of the Assigned
Agreements to be performed or observed by it, enforce the Assigned Agreements
in accordance with their respective terms, and take all such action to such
end as may be from time to time reasonably requested by the Pledgee, (b)
furnish to the Pledgee such information and reports regarding the Collateral
as the Pledgee may reasonably request and (c) upon request of the Pledgee
make to any other party to the Assigned Agreements such demands and requests
for information and reports or for action as the Pledgor is entitled to make
thereunder.
SECTION 8. Voting Rights; Dividends; Etc. (a) So long as no Event
of Default shall have occurred and be continuing:
(i) The Pledgor shall be entitled to exercise any and all voting
and other consensual rights pertaining to the Security Collateral of the
Pledgor or any part thereof for any purpose not inconsistent with the
terms of this Agreement or the other Loan Documents.
(ii) Any and all
(A) dividends and interest paid or payable including cash in
respect of, and instruments and other property received, receivable
or otherwise distributed in respect of, or in exchange for, any
Security Collateral,
(B) dividends and other distributions paid or payable in cash
in respect of any Security Collateral in connection with a partial
or total liquidation or dissolution or in connection with a
reduction of capital, capital surplus or paid-in-surplus,
(C) cash paid, payable or otherwise distributed in respect of
principal of or in exchange for, any Security Collateral, and
<PAGE>
6
(D) cash dividends paid or payable in violation of the terms
of the Loan Documents,
shall be, and shall be forthwith delivered to the Pledgee to hold as,
Security Collateral and shall, if received by the Pledgor, be received in
trust for the benefit of the Pledgee, be segregated from the other
property or funds of the Pledgor and be forthwith delivered to the
Pledgee as Security Collateral in the same form as so received (with any
necessary indorsement).
(iii) The Pledgee shall (A) execute and deliver (or cause to be
executed and delivered) to the Pledgor all such proxies and other
instruments as the Pledgor may reasonably request for the purpose of
enabling the Pledgor to exercise the voting and other rights that it is
entitled to exercise pursuant to paragraph (i) above and (B) release to
the Pledgor amounts of the Collateral as the Pledgor may reasonably
request, but solely to the extent necessary to permit the Pledgor to
exercise the rights set forth in the Employment Agreement and Stockholder
Agreement (the "Rights Agreements"); provided that such exercise shall
comply with the terms and provisions of the Rights Agreements and
provided further that upon the exercise by the Pledgor of any such
rights, all proceeds resulting from such exercise shall be, and shall be
forthwith delivered to the Pledgee to hold as, Collateral and shall, if
received by the Pledgor, be received in trust for the benefit of the
Pledgee, be segregated from the other property or funds of the Pledgor
and be forthwith delivered to the Pledgee as Collateral in the same form
as so received (with any necessary indorsement).
(iv) The Pledgee shall release to the Pledgor amounts of the
Collateral as the Pledgor may reasonably request, but solely to the
extent necessary to pay all taxes due and payable by the Pledgor upon the
exercise of the options under the Option Agreement, the inclusion of any
income of shares received under the Stock Award Agreement, and any gain
recognized upon the sale or exchange of any collateral, or on any
dividends or distributions previously received by the Pledgor and pledged
to the Pledgee pursuant to paragraph (ii) above.
(b) Upon the occurrence and during the continuance of any Event of
Default all rights of the Pledgor to exercise or refrain from exercising the
consensual rights that it would otherwise be entitled to exercise pursuant to
Section 8(a)(i) shall, upon notice to the Pledgor by the Pledgee, cease, and
all such rights shall thereupon become vested in the Pledgee, which shall
thereupon have the sole right to exercise or refrain from exercising such
consensual rights.
SECTION 9. Transfers and Other Liens. (a) The Pledgor shall not
(i) sell, assign (by operation of law or otherwise) or otherwise dispose of,
or grant any
<PAGE>
7
option with respect to, any of the Collateral or (ii) create or permit to
exist any lien, security interest, option or other charge or encumbrance upon
or with respect to any of the Collateral, except for the security interest
under this Agreement.
(b) The Pledgor agrees that it shall pledge hereunder, immediately
upon its acquisition (directly or indirectly) thereof, any and all additional
shares of stock or other securities of each issuer of any Pledged Shares or
Pledged Options.
SECTION 10. Pledgee Appointed Attorney-in-Fact. The Pledgor hereby
irrevocably appoints the Pledgee the Pledgor's attorney-in-fact, with full
authority in the place and stead of the Pledgor and in the name of the
Pledgor or otherwise, from time to time in the Pledgee's discretion, to take
any action and to execute any instrument that the Pledgee may deem necessary
or advisable to accomplish the purposes of this Agreement, including, without
limitation:
(a) to ask for, demand, collect, sue for, recover, compromise,
receive and give acquittance and receipts for moneys due and to become
due under or in respect of any of the Collateral,
(b) to receive, indorse and collect any drafts or other
instruments, documents and chattel paper in connection with clause (a)
above, and
(c) to file any claims or take any action or institute any
proceedings that the Pledgee may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights of
the Pledgee with respect to any of the Collateral.
SECTION 11. Pledgee May Perform. If the Pledgor fails to perform
any agreement contained herein, the Pledgee may itself perform, or cause
performance of, such agreement, and the expenses of the Pledgee incurred in
connection therewith shall be payable by the Pledgor under Section 14.
SECTION 12. The Pledgee's Duties. The powers conferred on the
Pledgee hereunder are solely to protect its interest in the Collateral and
shall not impose any duty upon it to exercise any such powers. Except for
the safe custody of any Collateral in its possession and the accounting for
moneys actually received by it hereunder, the Pledgee shall have no duty as
to any Collateral, as to ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, tenders or other matters relative to any
Collateral, whether or not the Pledgee has or is deemed to have knowledge of
such matters, or as to the taking of any necessary steps to preserve rights
against prior parties or any other rights pertaining to any Collateral. The
Pledgee shall be deemed to have exercised reasonable care in the custody and
preservation of any
<PAGE>
8
Collateral in its possession if such Collateral is accorded treatment
substantially equal to that which the Pledgee accords its own property.
SECTION 13. Remedies. If any Event of Default shall have occurred
and be continuing:
(a) The Pledgee may exercise in respect of the Collateral, in
addition to other rights and remedies provided for herein or otherwise
available to it, all the rights and remedies of a secured party on
default under the Uniform Commercial Code in effect in the State of New
York at that time (the "Code") (whether or not the Code applies to the
affected Collateral), and also may (i) require the Pledgor to, and the
Pledgor hereby agrees that it will at its expense and upon request of the
Pledgee forthwith, assemble all or part of the Collateral as directed by
the Pledgee and make it available to the Pledgee at a place to be
designated by the Pledgee which is reasonably convenient to both parties
and (ii) without notice except as specified below, sell or, to the extent
permitted by applicable law, purchase the Collateral or any part thereof
in one or more parcels at public or private sale, at any of the Pledgee's
offices or elsewhere, for cash, on credit or for future delivery, and
upon such other terms as the Pledgee may deem commercially reasonable.
The Pledgor agrees that, to the extent notice of sale shall be required
by law, at least ten days' notice to the Pledgor of the time and place of
any public sale or the time after which any private sale is to be made
shall constitute reasonable notification. The Pledgee shall not be
obligated to make any sale of Collateral regardless of notice of sale
having been given. The Pledgee may adjourn any public or private sale
from time to time by announcement at the time and place fixed therefor,
and such sale may, without further notice, be made at the time and place
to which it was so adjourned.
(b) Any cash held by the Pledgee as Collateral and all cash
proceeds received by the Pledgee in respect of any sale of, collection
from, or other realization upon all or any part of the Collateral may, in
the discretion of the Pledgee, be held by the Pledgee as collateral for,
and then or at any time thereafter be applied (after payment of any
amounts payable to the Pledgee pursuant to Section 14) in whole or in
part by the Pledgee against, all or any part of the Obligations in such
order as the Pledgee shall elect. Any surplus of such cash or cash
proceeds held by the Pledgee and remaining after payment in full of all
the Obligations shall be paid over to the Pledgor or to whomsoever may be
lawfully entitled to receive such surplus.
(c) The Pledgee may exercise any and all rights and remedies of the
Pledgor under or in connection with the Assigned Agreements or otherwise
in respect of the Collateral, including, without limitation, any and all
rights of the
<PAGE>
9
Pledgor to demand or otherwise require payment of any amount under, or
performance of any provision of, the Assigned Agreements.
(d) Subject to Section 8, all payments received by the Pledgor
under or in connection with the Assigned Agreements or otherwise in
respect of the Collateral shall be received in trust for the benefit of
the Pledgee, shall be segregated from other funds of the Pledgor and
shall be forthwith paid over to the Pledgee in the same form as so
received (with any necessary indorsement).
In exercising the remedies provided for herein, the Pledgee shall
comply with all provisions of the Assigned Agreements and with applicable
law, including without limitation the securities laws.
SECTION 14. Expenses. The Pledgor will upon demand pay to the
Pledgee the amount of any and all reasonable expenses, including the
reasonable fees and expenses of its counsel and of any experts and agents,
which the Pledgee incurs in connection with the exercise or enforcement of
any of its rights hereunder.
SECTION 15. Amendments; Etc. No amendment or waiver of any
provision of this Agreement, and no consent to any departure by the Pledgor
herefrom, shall in any event be effective unless the same shall be in writing
and signed by the Pledgee, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given.
SECTION 16. Addresses for Notices. All notices and other
communications provided for hereunder shall be in writing (including
telecopier, telegraphic, telex or cable communication) and mailed,
telecopied, telegraphed, telexed, cabled or delivered to it, if to the
Pledgor, at its address specified in the recital of parties to this
Agreement, and if to the Pledgee, at its address specified in the Notes, or,
as to either party, at such other address as shall be designated by such
party in a written notice to the other party. All such notices and other
communications shall, when mailed, telecopied, telegraphed, telexed or
cabled, be effective when deposited in the mails, telecopied, delivered to
the telegraph company, confirmed by telex answerback or delivered to the
cable company, respectively.
SECTION 17. Continuing Security Interest. This Agreement shall
create a continuing security interest in the Collateral and shall (a) remain
in full force and effect until the later of (i) the payment in full of the
Obligations and all other amounts payable under the Loan Documents and (ii)
the Termination Date, (b) be binding upon the Pledgor, its successors and
assigns and (c) inure to the benefit of, and be enforceable by, the Pledgee
and its successors, transferees and assigns.
<PAGE>
10
SECTION 18. Release and Termination. The security interest
granted hereby shall terminate and all rights to the Collateral shall revert
to the Pledgor upon the later of (a) the payment in full of the Obligations
and all other amounts payable under the Loan Documents and (b) the
Termination Date. Upon such termination, the Pledgee will, at its expense,
execute and deliver to the Pledgor such documents as the Pledgor shall
reasonably request to evidence such termination.
SECTION 19. Governing Law; Terms. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of New York.
Unless otherwise defined herein, terms used in Article 8 or Article 9 of the
Code are used herein as therein defined.
IN WITNESS WHEREOF, the Pledgor has duly executed and delivered this
Agreement, and the Pledgee has caused this Agreement to be duly executed and
delivered by its officer thereunto duly authorized, as of the date first
above written.
__________________________
JAMES L. DONALD, as Pledgor
Address: 26 Carriage Place
Edison, New Jersey
08820
PATHMARK STORES, INC.,
as Pledgee
By_________________________
Title:
<PAGE>
Schedule I
PART I
PLEDGED SHARES
<TABLE>
<CAPTION>
Stock Number Percentage of
Class of Certificate Par of Outstanding
Debtor Issuer Stock No(s). Value Shares Shares
- ------ ------ -------- ----------- ----- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
James L. Donald SMG-II Holdings Common 71 0.01 19,851 2%
Corporation
James L. Donald SMG-II Holdings Preferred 1 $200 8,520 2%
Corporation
</TABLE>
PART II
PLEDGED OPTIONS
<TABLE>
<CAPTION>
Class of Percentage of
Pledgor Issuer Stock Number of Shares Outstanding Shares
- ------- ------ -------- ---------------- ------------------
<S> <C> <C> <C> <C>
James L. Donald SMG-II Holdings Common 100,000 6.5%
Corporation
</TABLE>
<PAGE>
EXHIBIT A TO THE SECURITY AGREEMENT
FORM OF CONSENT AND AGREEMENT
The undersigned hereby acknowledges notice of, and consents to the
terms and provisions of, the Pledge, Assignment and Security Agreement, dated
as of November 8, 1996 (the "Security Agreement"; terms defined therein being
used herein as therein defined) from James L. Donald (the "Pledgor") to
Pathmark Stores, Inc. (the "Pledgee"), and hereby agrees with the Pledgee
that:.
(a) Upon notice from the Pledgee, the undersigned will make all payments
and distributions to be made by it under or in connection with the Assigned
Agreements between the undersigned and the Pledgor in accordance with the
instructions of the Pledgee.
(b) All payments and other distributions referred to in paragraph (a)
above shall be made by the undersigned irrespective of, and without deduction
for, any counterclaim, defense, recoupment or set-off and shall be final, and
the undersigned will not seek to recover from the Pledgee for any reason any
such payment or other distribution once made.
(c) The Pledgee shall be entitled to exercise any and all rights and
remedies of the Pledgor under the Assigned Agreements in accordance with the
terms of the Security Agreement, and the undersigned shall comply in all
respects with such exercise.
(d) The undersigned will not, without the prior written consent of the
Pledgee, (i) cancel or terminate the Assigned Agreements or consent to or
accept any cancellation or termination thereof, or (ii) amend or otherwise
modify the Assigned Agreements
This Consent and Agreement shall be binding upon the undersigned and its
successors and assigns, and shall inure, together with the rights and
remedies of the Pledgee hereunder, to the benefit of the Pledgee and its
successors, transferees and assigns. This Consent and Agreement shall be
governed by, and construed in accordance with, the laws of the State of New
York.
<PAGE>
2
IN WITNESS WHEREOF, the undersigned has duly executed this Consent
and Agreement as of the date set opposite its name below.
Dated: November 8, 1996 SMG-II HOLDINGS CORPORATION
By___________________________
Title:
<PAGE>
November 8, 1996
SMG-II HOLDINGS CORPORATION
301 Blair Road
Woodbridge, New Jersey 07095
Notification and Confirmation
of Registration of Pledge
Dear Sir or Madam:
I, James L. Donald, as pledgor (the "Pledgor") have assigned and
pledged to Pathmark Stores, Inc. (the "Lender") pursuant to the Security
Agreement, dated November 8, 1996 (the "Security Agreement") made by me, as
the Pledgor, to the Lender all of my right, title and interest in and to,
among other things: (1) all my present and future interests in an option
(the "Option") to buy shares of common stock of SMG-II Holdings Corporation,
a Delaware corporation ("Holdings") and (2) the Option Agreement dated as of
October 8, 1996 (as the same may be amended, supplemented or otherwise
modified from time to time, the "Option Agreement"), between the Pledgor and
Holdings.
1. With the consent of the Lender, I hereby notify Holdings of the
assignment and pledge pursuant to the Security Agreement and instruct
Holdings to register such assignment and pledge by appropriate notations in
the books and records of Holdings, so that anyone examining such books and
records would be notified of such assignment and pledge.
2. Holdings hereby confirms that the assignment and pledge of the
Option of the Pledgor to the Lender was registered upon the books and records
of Holdings maintained for such purposes on behalf of the undersigned on
November 8, 1996 and certifies that attached hereto is a true and correct
excerpt from the books of Holdings.
3. Holdings hereby represents that as of the date hereof, such
books and records reflect no lien, restriction or adverse claim (other than
those created under the Security Agreement) with respect to the Option and
that it has no knowledge of any such lien, restriction or adverse claim
(other than those created under the Security Agreement).
<PAGE>
2
4. Holdings hereby confirms that the Pledgor is the registered
owner of the type and percentage of the Option described below:
Pledgor Type of Interest Percentage Interest
- ------- ---------------- -------------------
James L. Donald Option to buy 100,000 shares 6.5%
of Holdings common stock
The address and taxpayer identification number of the Pledgor and
the Lender are set forth below.
Registered Owner
Name: JAMES L. DONALD
Address: 26 Carriage Place
Edison, New Jersey 08820
Taxpayer I.D.: ###-##-####
Lender
Name: PATHMARK STORES, INC.
Address: 301 Blair Road
Woodbridge, New Jersey 07095
Taxpayer I.D.: 22-2879612
This letter agreement may be executed in any number of counterparts
and by any combination of parties hereto in separate counterparts, each of
which counterparts shall be an original and all of which taken together shall
constitute one and the same letter agreement. Delivery of an executed
counterpart of a signature page of this letter agreement by telecopier shall
be effective as the delivery of a manually executed counterpart of this
letter agreement.
<PAGE>
3
This letter agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
Very truly yours,
____________________________
JAMES L. DONALD
PATHMARK STORES, INC.,
as Lender
By__________________________
Name:
Title:
Acknowledged, Agreed and Confirmed to, and for
the benefit of, the Lender and the Pledgor, as of
the date first above written:
SMG-II HOLDINGS CORPORATION
By___________________________
Name:
Title:
<PAGE>
Exhibit E
ESCROW AGREEMENT
<PAGE>
ESCROW AGREEMENT
ESCROW AGREEMENT (this "Agreement") is entered into this 7th day of
November, 1996 among PATHMARK STORES, INC., a Delaware corporation, as Lender
(the "Lender") under the Notes referred to below, JAMES L. DONALD, as
Borrower (the "Borrower") under such Notes, and PNC Bank, N.A., as Escrow
Agent hereunder.
PRELIMINARY STATEMENTS
(1) On the date hereof, the Borrower has made various Notes to the
Lender numbered A1-A16 (each such Note, as it may hereafter be amended or
modified, being a "Note" and, collectively, the "Notes"; terms defined
therein and not otherwise defined herein being used herein as therein
defined).
(2) Simultaneously with the execution and delivery of the Notes,
the Borrower has entered into a Pledge Agreement (the "Pledge Agreement") in
favor of the Lender. The Borrower has entered into an employment agreement
(the "Employment Agreement") with the Lender.
(3) Pursuant to the Employment Agreement, the Lender may be
required under certain circumstances to cancel and return to the Borrower
marked "Paid in Full" a Note or Notes. To facilitate such cancellation and
return, the Lender has delivered to the Escrow Agent each original Note
executed by the Borrower for the cancellation and return to the Borrower,
pursuant to the terms of the Employment Agreement and this Agreement, each
such Note (all such Notes being, collectively, the "Escrowed Documents").
NOW, THEREFORE, in consideration of the premises, the parties hereto
hereby agree as follows:
SECTION 1. Appointment of Escrow Agent. Effective as of the date
above, the Lender and the Borrower hereby irrevocably appoint PNC Bank, N.A.
as escrow agent (in such capacity, the "Escrow Agent") to hold and release
the Escrowed Documents on the terms and conditions set forth below.
SECTION 2. Delivery of Escrowed Documents. The Escrow Agent hereby
accepts and confirms delivery from the Lender of the Escrowed Documents.
SECTION 3. Release of Escrowed Documents.
(a) The Lender hereby agrees to, on each interest payment date,
commencing on January 8, 1997 and quarterly thereafter or such later date on
which the Lender shall have received payment in full of all interest due and
payable under or pursuant to the Notes with respect to such interest payment
date, upon receipt in full of all such interest accrued and in accordance
with the terms of the Employment Agreement, request that the Escrow Agent
release such Note or Notes applicable to such period to the Borrower marked
"Paid in Full" and, as necessary, to report to the Escrow Agent that such
<PAGE>
2
interest has been paid and that the Borrower remains employed by the Lender,
or the term under which his employment terminated.
(b) On each interest payment date, commencing on January 8, 1997,
and quarterly thereafter or such later date as the Lender shall specify to
the Escrow Agent pursuant to the next succeeding clause, upon receipt by the
Escrow Agent of written notice from the Lender confirming receipt in full of
all interest due and payable under or pursuant to the Notes, and requesting
that the Escrow Agent release any Note or Notes, the Escrow Agent shall
release from escrow and date (the date of such release) the Note or Notes
applicable to such release. The Escrow Agent shall deliver by first class
mail to the address indicated herein each such released Escrowed Document to
the Borrower marked "Paid in Full".
(c) Upon receipt by the Escrow Agent of written notice from the
Lender that (i) the Borrower's employment with the Lender has been terminated
without Cause or the Borrower has resigned his employment with the Lender for
Good Reason or that there has occurred a Change in Control and (ii) the
Borrower has paid in full all interest due and payable pursuant to the Notes,
the Escrow Agent shall promptly return, marked "Paid in Full", all Notes not
previously delivered to the Borrower marked "Paid in Full".
SECTION 4. Concerning the Escrow Agent. To induce the Escrow Agent
to act hereunder, it is further agreed by the Lender and the Borrower that:
(a) The Escrow Agent shall not be liable for any error of judgment
or for any action taken or omitted by it in good faith, or for any mistake of
fact or law, or for anything which it may do or refrain from doing in
connection herewith except its own gross negligence or willful misconduct.
(b) The Lender and the Borrower agree to jointly and severally
indemnify the Escrow Agent and hold it harmless from and against any loss,
liability, expenses (including, without limitation, reasonable attorneys'
fees and expenses), claim or demand arising out of or in connection with the
performance of its obligations in accordance with the provisions of this
Escrow Agreement, except for the gross negligence or willful misconduct of
the Escrow Agent. These indemnities shall survive the resignation of the
Escrow Agent or the termination of this Escrow Agreement.
(c) The fee of the Escrow Agent for its services hereunder shall be
paid by the Lender in accordance with the standard schedule of charges in
effect when services are rendered. Such schedule will be furnished upon
request.
(d) This Escrow Agreement expressly sets forth all the duties of
the Escrow Agent with respect to any and all matters pertinent hereto. No
implied duties or obligations shall be read into this Agreement against the
Escrow Agent.
<PAGE>
3
(e) The Escrow Agent shall be entitled to rely upon any order,
judgment, certification, demand, notice, instrument or other writing
delivered to it hereunder without being required to determine the
authenticity or the correctness of any fact stated therein or the propriety
or validity or the services thereof. The Escrow Agent shall act in reliance
upon any instrument or signature believed by it to be genuine and may assume
that any person purporting to give notice, receipt or advice, make any
statement or execute any document in connection with the provisions hereof
has been duly authorized to do so.
(f) The Escrow Agent may act pursuant to the advice of its counsel
with respect to any matter relating to this Escrow Agreement and shall not be
liable for any action taken or omitted in good faith in accordance with such
advice.
(g) The Escrow Agent may at any time resign as escrow agent for any
reason by giving not less than 30 days' notice to the parties hereto and by
delivering the Escrowed Documents to any successor Escrow Agent agreed to in
writing and delivered to the Escrow Agent by the Borrower and the Lender
pursuant to the Employment Agreement, whereupon the resigning Escrow Agent
shall be discharged of and from any and all further obligations arising in
connection with this Escrow Agreement. If after 30 days no successor has
been appointed, the Escrow Agent shall deliver the Escrowed Documents to the
Lender.
(h) In the event that the Escrow Agent receives written notice of
any disagreement among any parties to the Loan Documents resulting in adverse
claims or demands being made in connection with the Escrowed Documents, or in
the event that the Escrow Agent in good faith is in doubt as to what action
it should take hereunder, the Escrow Agent shall be entitled to retain the
Escrowed Documents until the Escrow Agent shall have received a final
non-appealable order of a court of competent jurisdiction directing delivery
or other disposition of the Escrowed Documents. Any court order referred to
above shall be accompanied by a legal opinion by counsel for the presenting
party addressed to and satisfactory to the Escrow Agent to the effect that
said court order is final and non-appealable. The Escrow Agent shall act on
such court order and legal opinion without further question.
(i) The parties hereto hereby irrevocably submit to the
jurisdiction of any New York State or federal court sitting in New York City
in any action or proceeding arising out of or relating to this Escrow
Agreement, and irrevocably agree that all claims with respect to such action
or proceeding shall be heard and determined in such New York State or federal
court.
(j) This Escrow Agreement shall be binding upon and inure solely to
the benefit of the parties hereto and their respective successors, assigns,
and representatives, and shall not inure to the benefit of any third party.
Except as otherwise specifically provided herein, no party may assign any of
<PAGE>
4
its rights or obligations under this Escrow Agreement without the written
consent of the other parties.
SECTION 5. Notices. All notices and other communications provided
for hereunder shall be in writing (including facsimile communication) by
either the Borrower or the Corporate Secretary of the Lender and mailed,
telecopied, telegraphed, telexed, cabled or delivered, as follows:
If to the Lender:
Address: 301 Blair Road
Woodbridge, New Jersey 07095
Attention: Corporate Secretary
Telecopy No.: (908) 499-3460
Telephone No.: (908) 499-3930
If to the Borrower:
Address: 301 Blair Road
Woodbridge, New Jersey 07095
Telecopy No.: (908) 499-3100
Telephone No.: (908) 499-3535
If to the Escrow Agent:
Attention: Corporate Trust Department
Address: Metro Top Building
P.O. Box 600
Edison, New Jersey 08818
Telecopy No.: (908) 205-4525
Telephone No.: (908) 205-4542
or, as to each party, at such other address as shall be designated by such
party in a written notice to the other parties. All such notices and
communications shall, when mailed, telecopied, telegraphed, telexed or
cabled, be effective when deposited in the mails, telecopied, delivered to
the telegraph company, confirmed by telex answerback or delivered to the
cable company, respectively, except that notices and communications to the
Escrow Agent shall not be effective until received by the Escrow Agent.
SECTION 6. Binding Effect; Governing Law. This Agreement shall
become effective, as of the date first above written, when it shall have been
executed by each of the parties hereto and thereafter shall be binding upon
and inure to the benefit of the parties hereto and their respective
successors and assigns, and shall not inure to the benefit of any third
party. No party hereto may assign any of its rights or obligations under
this Escrow Agreement without the written consent of the other parties. This
<PAGE>
5
Escrow Agreement shall be governed by, and construed in accordance with, the
laws of the State of New York.
SECTION 7. Amendments, Etc. No amendment or waiver of any
provision of this Escrow Agreement shall in any event be effective unless the
same shall be in writing and signed by all parties hereto.
SECTION 8. Termination. The termination date of this Escrow
Agreement will be that same date indicated in Section 1.01 of the Notes.
SECTION 9. Execution in Counterparts.
(a) This Escrow Agreement may be executed in any number of
counterparts, and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which
taken together shall constitute but one and the same agreement.
(b) One or more counterparts of this Escrow Agreement may be
delivered via telecopier, with the intention that they shall have the same
effect as an original counterpart hereof.
<PAGE>
6
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Escrow Agreement to be executed by their respective officers or other
representatives hereunto duly authorized, as of the date first above written.
PATHMARK STORES, INC.
By: _______________________________
Name:
Title:
PNC BANK, N.A.
By: _______________________________
Name:
Title:
_______________________________
JAMES L. DONALD
<PAGE>
EXHIBIT 12.1
PATHMARK STORES, INC.
STATEMENTS REGARDING COMPUTATION OF RATIO
OF EARNINGS TO FIXED CHARGES
(Dollars in thousands except ratio)
<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
Income (loss) from continuing ------------ ----------- ---------- ------------ ------------
operations before taxes $ (34,369) $ 38,661 $ 28,196 $ (33,074) $(609,309)
------------ ----------- ---------- ------------ ------------
Fixed charges:
Interest expense 161,469 164,749 158,503 185,968 196,468
Interest portion of rental
expense (1) 15,789 15,819 16,520 15,155 12,630
------------ ----------- ---------- ------------ ------------
Total fixed charges 177,258 180,568 175,023 201,123 209,098
------------ ----------- ---------- ------------ ------------
Adjusted income (loss) before
fixed charges $142,889 $219,229 $203,219 $168,049 $(400,211)
------------ ----------- ---------- ------------ ------------
------------ ----------- ---------- ------------ ------------
Ratio of earnings to fixed
charges --- 1.21x 1.16x --- ---
------------ ----------- ---------- ------------ ------------
------------ ----------- ---------- ------------ ------------
Deficiency in earnings
available to cover fixed
charges $ 34,369 $ --- $ --- $ 33,074 $609,309
------------ ----------- ---------- ------------ ------------
------------ ----------- ---------- ------------ ------------
</TABLE>
- ----------------
(1) Represents the portion of rentals deemed representative of the
interest included therein.
<PAGE>
EXHIBIT 22.1
PATHMARK STORES, INC.
List of Subsidiaries
<TABLE>
<CAPTION>
Name State of Incorporation
- ----------------- -----------------------
<S> <C>
AAL Realty Corp....................................... New York
Bridge Stuart, Inc.................................... New York
Bucks Stuart, Inc..................................... Pennsylvania
Eatontown Stuart, Inc................................. New Jersey
GAW Properties Corp................................... New Jersey
Jersey Stuart, Inc.................................... New Jersey
Madison Stuart Corporation............................ New Jersey
Pathmark Risk Management Corporation.................. New Jersey
Pauls Trucking Corp................................... New Jersey
Pennsylvania Stuart, Inc.............................. Pennsylvania
Plainbridge, Inc...................................... Delaware
</TABLE>
<PAGE>
EXHIBIT 24A
PATHMARK STORES, INC.
POWER OF ATTORNEY
The undersigned, a director of Pathmark Stores, Inc. (the "Company"), a
Delaware corporation, which intends to file with the United States Securities
and Exchange Commission, under the provisions of the Securities Exchange Act
of 1934 (the "'34 Act"), as amended, each year an annual report on Form 10-K,
or such other form appropriate for the purpose, pursuant to Section 13 or
15(d) of the '34 Act, together with possible amendments thereto, constitutes
and appoints JOSEPH W. ADELHARDT and MARC A. STRASSLER, and each of them,
severally, as true and lawful attorney or attorneys, with full power of
substitution and resubstitution, for him and in his name, place and stead, to
sign in any and all capacities and file or cause to be filed said Annual
Report on Form 10-K, and any and all amendments thereto, and all instruments
necessary or incidental in connection therewith, and hereby grants to the
said attorneys, and each of them, severally, full power and authority to do
and perform in the name and on behalf of all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming the
acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
this 18th day of April, 1997
/s/ Matthias Bowman
_______________________________________
MATTHIAS BOWMAN
<PAGE>
EXHIBIT 24B
PATHMARK STORES, INC.
POWER OF ATTORNEY
The undersigned, a director of Pathmark Stores, Inc. (the "Company"), a
Delaware corporation, which intends to file with the United States Securities
and Exchange Commission, under the provisions of the Securities Exchange Act
of 1934 (the "'34 Act"), as amended, each year an annual report on Form 10-K,
or such other form appropriate for the purpose, pursuant to Section 13 or
15(d) of the '34 Act, together with possible amendments thereto, constitutes
and appoints JOSEPH W. ADELHARDT and MARC A. STRASSLER, and each of them,
severally, as true and lawful attorney or attorneys, with full power of
substitution and resubstitution, for him and in his name, place and stead, to
sign in any and all capacities and file or cause to be filed said Annual
Report on Form 10-K, and any and all amendments thereto, and all instruments
necessary or incidental in connection therewith, and hereby grants to the
said attorneys, and each of them, severally, full power and authority to do
and perform in the name and on behalf of all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming the
acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
this 18th day of April, 1997
/s/ Robert G. Miller
_______________________________________
ROBERT G. MILLER
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
PATHMARK STORES, INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE 52 WEEKS
ENDED FEBRUARY 1, 1997 AND CONSOLIDATED BALANCE SHEET AS OF FEBRUARY 1, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> FEB-01-1997
<CASH> 9,880
<SECURITIES> 0
<RECEIVABLES> 13,763
<ALLOWANCES> (1,271)
<INVENTORY> 216,931
<CURRENT-ASSETS> 291,196
<PP&E> 985,725
<DEPRECIATION> (382,148)
<TOTAL-ASSETS> 989,896
<CURRENT-LIABILITIES> 473,344
<BONDS> 1,185,639
0
0
<COMMON> 0
<OTHER-SE> (1,041,666)
<TOTAL-LIABILITY-AND-EQUITY> 989,896
<SALES> 3,710,523
<TOTAL-REVENUES> 3,710,523
<CGS> 2,619,277
<TOTAL-COSTS> 2,619,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> (161,469)
<INCOME-PRETAX> (34,369)
<INCOME-TAX> 14,411
<INCOME-CONTINUING> (19,958)
<DISCONTINUED> 0
<EXTRAORDINARY> (877)
<CHANGES> 0
<NET-INCOME> (20,835)
<EPS-PRIMARY> 0.0
<EPS-DILUTED> 0.0
</TABLE>
