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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended Commission File Number
January 30, 1999 1-5287
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Pathmark Stores, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2879612
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Milik Street 07008
Carteret, New Jersey (Zip Code)
(Address of principal executive offices)
(732) 499-3000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of
the Act:
Title of each Class Name of exchange on which registered
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Junior Subordinated Deferred New York Stock Exchange
Coupon Notes due 2003
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of April 1, 1999, there were outstanding 100 shares of Common Stock,
$0.10 par value, all of which are privately owned and not traded on a public
market.
Documents Incorporated by Reference: None
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<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"). Holdings is a wholly owned subsidiary of
SMG-II Holdings Corporation ("SMG-II"). In October 1987, Holdings acquired
Supermarkets General Corporation ("SGC"). In 1990, SGC was merged into the
registrant and the registrant retained the name SGC. In connection with the 1993
recapitalization referred to below, the registrant changed its name from SGC to
Pathmark Stores, Inc. ("Pathmark" or the "Company").
Pathmark consummated a recapitalization plan (the "Recapitalization") on
October 26, 1993. In connection with the Recapitalization, its former parent,
Holdings, transferred all of the capital stock of Pathmark to PTK Holdings, Inc.
("PTK"), a then newly formed, wholly owned subsidiary of Holdings. PTK was
incorporated in the State of Delaware in 1993 and owns 100% of the capital stock
of Pathmark.
Offer to Purchase
On March 15, 1999, Koninklijke Ahold N.V., a company organized under the
laws of the Netherlands ("Ahold") and Ahold Acquisition, Inc., a Delaware
corporation and an indirect wholly-owned subsidiary of Ahold ("Purchaser"),
commenced a tender offer to purchase all of the issued and outstanding shares
(the "Shares") of Holdings' $3.52 Cumulative Exchangeable Redeemable Preferred
Stock (the "Preferred Stock") at a price of $38.25 per Share, net to the seller
in cash, without interest thereon (the "Offer Price"), upon the terms and
subject to the conditions set forth in the Offer to Purchase dated March 15,
1999 (the "Offer to Purchase") and the related Letter of Transmittal (which,
together with the Offer to Purchase and all amendments and supplements thereto,
constitute the "Offer").
The Offer is an integral part of the transactions contemplated by, and is
being made pursuant to, an Agreement and Plan of Merger, dated as of March 9,
1999, among Ahold, the Purchaser and SMG-II (the "SMG-II Merger Agreement")
pursuant to which Ahold will be acquiring all of the issued and outstanding
shares of the capital stock of SMG-II, the indirect parent of the Company,
through the merger of the Purchaser with and into SMG-II (the "SMG-II Merger"),
subject to the terms and conditions contained in the SMG-II Merger Agreement for
aggregate consideration of $55,731,834. Pursuant to the SMG-II Merger Agreement,
the Offer is subject to certain conditions, including the condition that there
be validly tendered and not withdrawn prior to the expiration of the Offer a
number of Shares which, together with Shares previously acquired by Ahold, any
direct or indirect subsidiary of Ahold (including the Purchaser), Holdings, or
any direct or indirect subsidiary of Holdings, represent at least 66 2/3% of the
Shares on a fully diluted basis (the "Minimum Condition"). The Offer is also
conditioned upon, among other things, the expiration or termination of any
applicable waiting period under the antitrust laws and the receipt by Ahold of
an irrevocable letter from SMG-II stating that all of the conditions to the
obligations of SMG-II to effect the SMG-II Merger described below pursuant to
the SMG-II Merger Agreement have been satisfied or waived. The Offer has since
been extended until May 21, 1999.
The SMG-II Merger Agreement provides that, promptly upon consummation of
the SMG-II Merger, Ahold will cause Holdings to be merged with and into SMG-II
(the "Holdings Merger"), pursuant to a Merger Agreement (the "Holdings Merger
Agreement") to be entered into at such time between SMG-II and Holdings in the
form attached as an exhibit to the SMG-II Merger Agreement. At the effective
time of the Holdings Merger (the "Effective Time"), each of the Shares (other
than Shares held by any subsidiary of Holdings or in the treasury of Holdings,
or held, directly or indirectly, by Ahold or any direct or indirect subsidiary
of Ahold (including the Shares acquired by the Purchaser pursuant to the Offer),
which Shares will be cancelled, and other than Shares, if any, held by
stockholders who perfect their appraisal rights under Delaware General
Corporation Law) will be converted into the right to receive an amount in cash
equal to $38.25.
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* Except as otherwise indicated, information contained in this Item is given
as of January 30, 1999.
<PAGE>
The SMG-II Merger Agreement provides that, among other things, in the
event all of the conditions to the consummation of the SMG-II Merger (other than
the Minimum Condition and certain related conditions) have been satisfied or
waived, but the Minimum Condition and certain related conditions have not been
satisfied or waived, SMG-II is obligated, pursuant to the terms and conditions
of a Stock Purchase Agreement dated as of March 9, 1999 (the "Alternative Stock
Purchase Agreement"), by and among SMG-II, PTK (the parent of the Company),
Ahold and the Purchaser to cause PTK to sell all of the issued and outstanding
shares of the capital stock (the "Pathmark Stock") of Pathmark for a purchase
price, payable in cash, equal to $242,800,000 (the "Alternate Stock Purchase").
In such event, the only material asset of Holdings would be its ownership of all
of the issued and outstanding shares of the capital stock of PTK, the only
material asset of which in turn would be the net after tax proceeds from the
sale of the Pathmark Stock to the Purchaser pursuant to the Alternative Stock
Purchase Agreement.
Concurrent with the execution of the SMG-II Merger Agreement, as required
by Ahold and the Purchaser, ML Investors (as defined below), Equitable Investors
(as defined below) and James L. Donald (collectively, the "SMG-II
Stockholders"), entered into a stockholders agreement, dated March 9, 1999 (the
"Stockholders Agreement"), with Ahold and Purchaser. Pursuant to the
Stockholders Agreement, the SMG-II Stockholders have (i) agreed to vote the
shares of the capital stock of SMG-II owned by them in favor of the SMG-II
Merger, and (ii) granted the Purchaser an option to purchase, under certain
circumstances, the shares of the capital stock of SMG-II owned by them.
Business
At January 30, 1999, Pathmark operated 132 supermarkets primarily in the
densely populated New York-New Jersey and Philadelphia metropolitan areas. These
metropolitan areas contain over 10% of the population and grocery sales in the
United States. These supermarkets are located in New Jersey, New York,
Pennsylvania and Delaware and consist of 5.1 million selling square footage and
6.9 million total square footage. During the year ended January 30, 1999
("Fiscal 1998"), Pathmark closed three supermarkets, including its last two in
Connecticut.
Business Strategy
Pathmark's business strategy is to increase sales, profitability and
market penetration in its existing markets by focusing on the following five
operating priorities: concentrate on core business, Pathmark "GREAT" service,
lower operating costs, spend capital wisely and have the right management team.
By concentrating on and implementing these five priorities, the Company expects
to accomplish its strategic goals (i) by providing superior perishable and
non-perishable merchandise, value and service to its customers through its
marketing, merchandising and customer service programs; (ii) through increased
operating efficiencies; and (iii) through efficient use of capital to renovate
and enlarge its existing store base.
Marketing and Merchandising
o Super Center Format. Of Pathmark's 132 stores, 129 are Super Centers. The
average Pathmark Super Center is approximately 35% larger than the average
size supermarket in the United States and offers greater convenience by
providing one-stop shopping and a wider assortment of foods and general
merchandise than is offered by conventional supermarkets. The Pathmark
Super Center format is designed to provide Pathmark customers with a
substantially greater selection of quality perishable products and to be
more "customer friendly", with wider aisles, more accessible customer
service and information departments, improved signs and graphics, and
increased availability of Pathmark associates, particularly in the
perishable departments. Pathmark's only enlargement completed in Fiscal
1998 was a Super Center.
<PAGE>
o Flexible Merchandising. Pathmark believes that its large-store format
gives it considerable flexibility to respond to changing consumer demands
and competition by varying and enhancing its merchandise selection.
Pathmark's "Big Deals" program, currently consisting of over 500
merchandise items, offers large-sized merchandise at prices that Pathmark
believes are competitive with those available in "warehouse" and "club"
stores. Pathmark emphasizes competitive pricing plus weekly sales and
promotions supported by extensive advertising, primarily in print media.
Merchandising flexibility and effectiveness is enhanced through the
increased utilization of a category management approach. In addition,
Pathmark offers for sale over 3,000 items through its private label
program.
o Pharmacy. Pathmark provides full pharmacy services in virtually all of its
stores. Pathmark's broad market coverage within its marketing area has
enabled it to become a leading filler of third-party prescriptions.
Pathmark believes that its well-established pharmacy operations provide a
competitive advantage in attracting and retaining customers.
Store Expansion and Renovation Program
o New Stores, Enlargements and Renovations. During Fiscal 1998, Pathmark
opened no new Pathmark stores, closed three stores, and completed 13
renovations and one enlargement. During the fiscal year ending January 29,
2000 ("Fiscal 1999"), Pathmark plans to open up to four new supermarkets
and to complete up to an aggregate of 47 renovations and enlargements. Two
of the four planned supermarkets in Fiscal 1999 will be a smaller store of
approximately 30,000 to 35,000 square feet. Pathmark believes that this
new smaller supermarket will increase its ability to better penetrate
urban markets. Pathmark expects to open its first two new smaller
supermarket formats in Brooklyn, New York and Queens, New York.
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 1998, Pathmark derived
approximately 76% of its supermarket sales from stores that were opened,
enlarged or renovated during the last five years.
o Core Market Focus. Pathmark has identified over 50 potential locations for
new supermarkets within its current marketing areas and expects that all
new stores opened during the current and next two fiscal years will be
located in these areas. Pathmark believes that, by opening stores in its
current marketing areas, it can achieve additional operating economies and
other benefits from its store expansion program without the risks and
costs associated with opening stores in new marketing areas.
Operating Efficiencies
o Technology. Pathmark has made a significant and continuing investment in
information technology. All Pathmark supermarket checkout terminals have
third-generation IBM 4680 scanner systems supported by a RISC 6000
application processor in each store. These systems allow consumer credit
and electronic fund transfer ("EFT") transactions, greatly facilitate
system-wide promotion and merchandising programs, and improve the speed
and control of consumer transactions. In addition, all Pathmark
supermarkets utilize radio frequency technology for direct vendor
receivings and shelf labels.
o Cost Reduction. The Company is continuously evaluating its operations in
an effort to reduce operating costs consistent with its overall objective
of providing a high level of customer service. During Fiscal 1998, the
Company took several steps to accomplish this goal. Pathmark closed three
stores, which had experienced unprofitable operating results. The decision
in Fiscal 1997 to outsource its trucking business and hire a trucking
company to meet its transportation needs, and to sell its grocery, frozen
and perishable distribution centers to and enter into a 15-year supply
arrangement with C&S Wholesale Grocers, Inc. ("C&S"), resulted in lower
distribution costs in Fiscal 1998.
<PAGE>
o Demographic and Geographic Concentration. The Company's stores serve
densely populated communities. In addition, all Pathmark supermarkets are
located within 100 miles of its corporate headquarters in Carteret, New
Jersey and the principal warehousing facilities that serve them. The high
population density, as well as the geographic concentration of stores,
provide substantial economy of scale opportunities.
Pathmark Supermarkets
Pathmark operated 132 supermarkets at January 30, 1999. Super Centers
accounted for approximately 98% of Pathmark's supermarket sales for Fiscal 1998.
The following table presents selected data reflecting supermarket sales and
stores for the last five fiscal years.
<TABLE>
<CAPTION>
Fiscal Years
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1998 1997 1996 1995(a) 1994
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(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Supermarket sales ....................... $3,655 $3,696 $3,701 $3,853 $3,785
Average sales per Supermarket(b) ........ 27.8 27.5 26.1 26.4 25.9
Number of Supermarkets:
Renovations(c) .................... 13 5 16 14 14
Enlargements(d) ................... 1 8 5 4 11
Opened ............................ -- 2 4 5 4
Closed ............................ 3 11 4 4 6
Type of Supermarket(e):
Super Center ...................... 129 132 139 139 137
Conventional ...................... 3 3 5 5 6
Total Supermarkets Open at Year End 132 135 144 144 143
</TABLE>
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(a) Fiscal 1995 was a 53-week year.
(b) Computed on the basis of aggregate sales of stores open for the full year,
based on a 52-week period.
(c) Renovations involve an investment of $350,000 or more and in Fiscal 1998
averaged approximately $1.1 million per store.
(d) Enlargements involve the addition of selling space and in Fiscal 1998
averaged an investment in excess of $3.3 million.
(e) Includes two stores not wholly owned. The sales figures for these stores
are not included above.
By industry standards, Pathmark stores are large and productive, averaging
approximately 52,800 square feet in size and generating high average sales
volume of approximately $27.8 million per store ($715 per selling square foot)
for stores open for all of Fiscal 1998. Pathmark's 132 supermarkets at January
30, 1999 ranged from 26,008 to 66,463 square feet in size and included 121
supermarkets that are 40,000 square feet or larger in size. All Pathmark stores
carry a broad variety of food and drug store products, including an extensive
variety of the Pathmark, No Frills and Pathmark Preferred brands. All but five
supermarkets contained in-store pharmacy departments at the end of Fiscal 1998.
Pathmark pioneered the development of the large "superstore" in the Middle
Atlantic States, opening the first "Pathmark Super Center" in 1977, and
currently operates 129 such stores. The majority of Super Centers were created
through the enlargement or renovation of existing stores. In addition to the
broad variety of food and non-food items carried in conventional Pathmark
stores, a typical Super Center includes a customer service center, videotape
rental, a pharmacy, expanded produce department, meat department, cheese shop,
bakery, seafood, service delicatessen department and expanded health and beauty
care department. All Super Centers have EFT and credit transaction capability at
their checkout terminals, and 48 supermarkets also feature in-store automated
teller machines. During Fiscal 1996, the Company entered into master licensing
agreements with two regional banking institutions to place up to 98 in-store
banks in Pathmark supermarkets over the next two years. Each bank, which
occupies approximately 400 square feet, offers a full array of financial
services and is open seven days a week. The license agreements have an initial
term of five years with optional renewal periods. At the close of Fiscal 1998,
82 stores had in-store banks and Pathmark expects to have ten additional
in-store banks by the end of Fiscal 1999.
<PAGE>
Over the past several years, Pathmark stores have been designed to be more
"customer friendly", with wider aisles, more accessible customer service and
information departments, improved signs and graphics, and increased availability
of Pathmark associates. For example, Pathmark has introduced "GREAT" service, a
customer service program emphasizing proactive, inter-personal communication
between store associates and customers.
Pathmark's supermarket business is generally not seasonal, although sales
in the second and fourth quarters tend to be slightly higher than those in the
first and third quarters.
Store Expansion and Renovation Program
A key to Pathmark's business strategy has been, and will continue to be,
the expansion of the total selling square footage of its operations. Pathmark
believes, that by adding new stores and increasing the selling area of existing
stores, it can improve its competitive position and operating margins by
achieving economies of scale in merchandising, advertising, distribution and
supervision. During the five years ending with Fiscal 1998, Pathmark completed
91 renovations and enlargements and opened 15 new supermarkets. At the close of
Fiscal 1998, sales in these stores accounted for approximately 76% of its total
supermarket sales. Pathmark currently expects to open up to four non-replacement
Pathmarks and to complete up to 47 renovations and enlargements during Fiscal
1999. Two of the four new Pathmarks are expected to be a new smaller format
designed particularly for densely populated urban areas where building space is
at a premium.
Advertising and Promotion
As part of its marketing strategy, Pathmark emphasizes value through its
competitive pricing and weekly sales and promotions supported by extensive
advertising. Pathmark's advertising expenditures are concentrated on print
advertising, including advertisements and circulars in local and area newspapers
and advertising flyers distributed in stores, and radio. 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 an upgraded RlSC 6000 application
processor in each store. These systems allow consumer credit and EFT
transactions, greatly facilitate system-wide promotion and merchandising
programs, and improve the speed and control of customer transactions. This
technology and the data generated by scanning have not only led to lower labor
costs, improved price control and shelf allocation, and quicker customer
check-out, but have also assisted in the analysis of product movement, profit
contribution and demographic merchandising. Pathmark also has a
computer-assisted ordering system that enables it to replenish inventory to
avoid "out of stocks" at store level, while maintaining optimum overall
inventory levels. In addition, all Pathmark supermarkets utilize radio frequency
technology for direct vendor receivings and shelf labels.
<PAGE>
All of the pharmacies are equipped with pharmacy computers. In addition to
improving customer service, these computers aid pharmacists in detecting drug
interactions, improve the collection of third-party receivables and help to
attract third-party businesses, such as health maintenance organizations and
union welfare plans.
In August 1991, Pathmark entered into a ten year facilities management and
systems integration agreement with IBM. Under the agreement, IBM has taken over
Pathmark's data center operations, mainframe processing and information system
functions and is providing business applications and systems designed to enhance
Pathmark's customer service and efficiency.
Supply and Distribution
During the third quarter of Fiscal 1997, the Company, in order to help
reduce its transportation costs, decided to outsource its trucking operations
and retained a local trucking company to provide the requisite trucking
services.
Beginning on January 29, 1998, the Company began a 15-year supply
agreement (the "Supply Agreement") with C&S. Under the Supply Agreement, C&S
supplies to the Company and distributes from several warehouse facilities
previously operated by the Company and one additional warehouse (the
"Facilities") substantially all of the grocery, frozen and perishable (includes
meat, produce, seafood and delicatessen items) merchandise formerly owned and
warehoused by the Company. Management believes that the Supply Agreement with
C&S enhances the Company's ability to offer consistently fresh and high quality
products to its customers at a reduced distribution cost to the Company. Prior
to the Supply Agreement, products purchased for resale by the Company were
purchased directly from a large group of unaffiliated suppliers, including large
consumer products companies.
The Company continues to operate a 266,000 square foot leased general
merchandise, health and beauty care products and tobacco distribution center in
Edison, New Jersey (the "GMDC"), which opened in 1980. During Fiscal 1997, the
Company outsourced its pharmacy merchandise distribution requirements to a
pharmaceutical wholesaler.
Prior to the Supply Agreement with C&S, the Company operated, in addition
to the GMDC, four distribution centers and a banana ripening facility,
aggregating approximately 1.3 million square feet.
In addition to reducing the Company's distribution and transportation
costs, management believes that the logistics outsourcing will enhance its
ability to better concentrate on the core business of the Company.
Competition
The supermarket business is highly competitive and is characterized by
high asset turnover and narrow profit margins. Pathmark's earnings are primarily
dependent on the maintenance of relatively high sales volume per supermarket,
efficient product purchasing and distribution, and cost-effective store
operating and distribution techniques. Pathmark's main competitors are national,
regional and local supermarkets, drug stores, convenience stores, discount
merchandisers, "warehouse" and "club" stores and other local retailers in the
areas served. Principal competitive factors include price, store location,
advertising and promotion, product mix, quality and service.
Trade Names, Service Marks and Trademarks
Pathmark has registered a variety of trade names, service marks and
trademarks with the United States Patent and Trademark Office, each for an
initial period of 20 years, renewable for as long as the use thereof continues.
Pathmark considers its Pathmark service marks to be of material importance to
its business and actively defends and enforces such service marks.
<PAGE>
Regulation
Pathmark's food and drug business requires it to hold various licenses and
to register certain of its facilities with state and federal health, drug and
alcoholic beverage regulatory agencies. By virtue of these licenses and
registration requirements, Pathmark is obligated to observe certain rules and
regulations, and a violation of such rules and regulations could result in a
suspension or revocation of the licenses or registrations. In addition, most of
Pathmark's licenses require periodic renewals. Pathmark has experienced no
material difficulties with respect to obtaining, effecting or retaining its
licenses and registrations.
Employees
At January 30, 1999, the Company employed approximately 26,700 people, of
whom approximately 19,100 were employed on a part-time basis.
Approximately 85% of the Company's employees are covered by 15 collective
bargaining agreements (typically having three or four year terms) negotiated
with approximately 14 different local unions. During Fiscal 1999, three
contracts, covering approximately 2,000 Pathmark associates, will expire. The
Company does not anticipate any difficulty in renegotiating these contracts.
The Company believes that its relationship with its employees is generally
satisfactory.
<PAGE>
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 132 supermarkets have an aggregate selling area of
approximately 5.1 million square feet. Seventeen of the supermarkets are owned
by Pathmark and the remaining 115 are leased. These supermarkets are either
freestanding stores or are located in shopping centers. Thirty-three leases
expire during the current and next four calendar years and Pathmark has options
to renew all of them.
Pathmark leases its corporate headquarters in Carteret, NJ in premises
totaling approximately 150,000 square feet in size.
Most of the facilities owned by Pathmark are owned subject to mortgages.
Pathmark plans to acquire leasehold or fee interests in any property on which
new stores or other facilities are opened and will consider entering into
sale/leaseback or mortgage transactions with respect to owned properties if
Pathmark believes such transactions are financially advantageous.
ITEM 3. Legal Proceedings
On March 23, 1999, a purported holder of shares of Preferred Stock filed
an action in the Court of Chancery of the State of Delaware, purportedly on
behalf of the class of the holders of the Preferred Stock, against Holdings,
SMG-II, the Purchaser and the directors of Holdings (collectively, the
"Defendants"). The complaint, entitled Wolfson v. Supermarkets General Holdings
Corporation, et al., C.A. No. 17047, alleges, among other things, that (i)
certain of the Defendants have issued materially false and misleading
statements, and failed to disclose material information, in the Schedule 14D-9
in violation of their fiduciary duty of disclosure; (ii) SMG-II and the
directors of Holdings breached certain fiduciary duties owed to holders of the
Preferred Stock and (iii) the Purchaser knowingly aided and abetted SMG-II's and
the directors of Holdings alleged breaches of fiduciary duty. The complaint
demands, among other things, judgment (i) enjoining the Defendants preliminarily
and permanently from consummating the Offer and related transactions, (ii)
ordering the Defendants to issue corrective disclosures, (iii) ordering the
Defendants to retain an independent financial advisor to evaluate the fairness
of the Offer and the related transactions and (iv) awarding damages to the
holders of the Preferred Stock. Holdings believes that the claims against it,
its directors and SMG-II are without merit and intends to vigorously oppose
them. The Purchaser has informed Holdings that it believes that the claims
against it are without merit and it intends to vigorously oppose them.
The Company is a party to a number of other legal proceedings in the
ordinary course of business. Management believes that the ultimate resolution of
these proceedings will not, in the aggregate, have a material adverse impact on
the financial condition, results of operations, cash flows or business of the
Company.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
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** Except as otherwise indicated, information contained in this Item is given
as of January 30, 1999.
<PAGE>
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters (as of April 1, 1999)
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.
The authorized preferred stock of Holdings consists of 9,000,000 shares of
Preferred Stock, of which 4,890,671 shares were issued and outstanding at April
1, 1999. The 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. No
active public trading market currently exists for the Preferred Stock.
The Preferred Stock is non-voting, except that if an amount equal to six
quarterly dividends is in arrears in whole or in part, the 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 Preferred Stock and does not expect to
receive cash flow sufficient to permit payments of dividends on the Preferred
Stock in the foreseeable future. The holders of the Preferred Stock reelected
two persons to Holdings' Board of Directors at Holdings' 1998 annual meeting.
See Item 1, "Business" concerning a tender offer for the Preferred Stock.
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 748,476 and 320,000 shares, respectively, were issued and outstanding at
April 1, 1999, and 4,000,000 shares of SMG-II Preferred Stock, of which
1,500,000 shares are designated SMG-II Series A Preferred Stock, 1,500,000
shares are designated SMG-II Series B Preferred Stock, and 33,520 shares are
designated SMG-II Series C Preferred Stock (the three series of Preferred Stock
hereinafter collectively referred to as "SMG-II Preferred Stock").
At April 1, 1999, there were outstanding 236,731 shares of SMG-II Series A
Preferred Stock, 180,769 shares of SMG-II Series B Preferred Stock and 33,520
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 73 holders, including six affiliates of Merrill
Lynch & Co., Inc. (The "ML Common Investors"), Chemical Investments, Inc.
("CII"), an affiliate of Chase Manhattan Corp., and 66 current and former
members of the Company's management or their heirs (the "Management Investors");
(ii) SMG-II Series A Preferred Stock by five affiliates of Merrill Lynch & Co.,
Inc. (the "ML Preferred Investors", the ML Common Investors and ML Preferred
Investors hereinafter collectively referred to as the "ML Investors"); (iii)
SMG-II Class B Common Stock held by three holders, including CII, The Equitable
Life Assurance Society of the United States ("Equitable") and an affiliate of
Equitable (collectively, the "Equitable Investors"); (iv) SMG-II Series B
Preferred Stock held by three holders, including CII and the Equitable
Investors; and (v) SMG-II Series C Preferred Stock held by 25 Management
Investors. 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 "1991 Stockholders Agreement").
<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
restricted under the Credit Agreement dated as of June 30, 1997 by and among the
Company, Chase Manhattan Bank, as agent and the lenders parties thereto (the
"Credit Agreement") and in its other debt instruments. During Fiscal 1998, the
Company paid dividends of approximately $60,000 in the aggregate to its sole
stockholder. During Fiscal 1997, the Company paid no dividends to its sole
stockholder. The Company does not currently anticipate paying dividends during
Fiscal 1999 in excess of $100,000 as permitted by the Credit Agreement.
<PAGE>
ITEM 6. Selected Financial Data
The following table represents selected financial data for the last five
fiscal years and should be read in conjunction with the Company's Consolidated
Financial Statements in Item 8 of this report.
PATHMARK STORES, INC.
SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS
(in millions)
<TABLE>
<CAPTION>
Fiscal Years(a)
--------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Sales .................................................... $ 3,655 $ 3,696 $ 3,710 $ 3,972 $ 3,968
Cost of sales (exclusive of depreciation and
amortization shown separately below) .................. 2,612 2,652 2,619 2,838 2,866
------- ------- ------- ------- -------
Gross profit ............................................. 1,043 1,044 1,091 1,134 1,102
Selling, general and administrative expenses ............. 833 841 857 866 851
Depreciation and amortization(b) ......................... 76 84 89 80 75
Restructuring charge(c) .................................. -- -- 9 -- --
Lease commitment charge(d) ............................... -- -- 9 -- --
Gain on disposition of freestanding drug stores(e) ....... -- -- -- 16 --
------- ------- ------- ------- -------
Operating earnings ....................................... 134 119 127 204 176
Interest expense, net(f) ................................. (161) (164) (161) (165) (148)
------- ------- ------- ------- -------
Earnings (loss) from continuing operations before
income taxes, gain on disposal of home centers
segment and extraordinary items ........................ (27) (45) (34) 39 28
Income tax (provision) benefit ........................... (2) 17 14 (6) (4)
------- ------- ------- ------- -------
Earnings (loss) from continuing operations before
gain on disposal of home centers segment and
extraordinary items .................................... (29) (28) (20) 33 24
Loss from discontinued operations ........................ -- -- -- -- (2)
Gain on disposal of home centers segment, net of tax(g) .. -- -- -- -- 17
------- ------- ------- ------- -------
Earnings (loss) before extraordinary items ............... (29) (28) (20) 33 39
Extraordinary items, net of tax(h) ....................... -- (8) (1) -- --
------- ------- ------- ------- -------
Net earnings (loss) ...................................... $ (29) $ (36) $ (21) $ 33 $ 39
======= ======= ======= ======= =======
Ratio of earnings to fixed charges(i) .................... -- -- -- 1.22x 1.17x
======= ======= ======= ======= =======
Deficiency in earnings available to cover fixed charges(j) $ 27 $ 45 $ 34 $ -- $ --
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of
------------------------------------------
Jan. 30, Jan. 31, Feb. 1, Feb. 3, Jan. 28,
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets ............................ $ 825 $ 900 $ 990 $ 986 $1,018
Working capital deficiency .............. 42 109 182 173 122
Lease obligations, long-term ............ 161 170 175 140 127
Long-term debt, net of current maturities 1,259 1,178 1,186 1,215 1,273
Stockholder's deficiency ................ 1,132 1,077 1,042 1,024 1,030
</TABLE>
(footnotes on following page)
<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) 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 5 of the Notes to Consolidated Financial
Statements at Item 8, Part II of this Form 10-K.
(c) During Fiscal 1996, the Company recorded a pretax charge of $9 million for
reorganization and restructuring costs related to its administrative
operations. See Note 18 of the Notes to Consolidated Financial Statements
at Item 8, Part II of this Form 10-K.
(d) During Fiscal 1996, the Company recorded a pretax charge of $9 million
related to unfavorable lease commitments of certain unprofitable stores in
the Company's southern region. See Note 19 of the Notes to Consolidated
Financial Statements at Item 8, Part II of this Form 10-K.
(e) During Fiscal 1995, the Company recorded a pretax gain of $16 million
related to the disposition of its freestanding drug stores.
(f) Prior to Fiscal 1995, interest expense was net of interest charged to
discontinued operations.
(g) 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.
(h) During Fiscal 1997, the Company recorded an extraordinary charge of $8
million, net of an income tax benefit of $5 million and during Fiscal
1996, the Company recorded an extraordinary charge of $1 million, net of
an income tax benefit, both related to the early extinguishment of debt.
See Note 15 of the Notes to Consolidated Financial Statements at Item 8,
Part II of this Form 10-K.
(i) 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).
(j) 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).
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Fiscal 1998 v. Fiscal 1997
Sales: Sales in Fiscal 1998 were $3.66 billion compared to $3.70 billion
in Fiscal 1997. Same store sales increased 0.7% for the year. Sales in Fiscal
1998 compared to Fiscal 1997 were also impacted by closed and divested stores,
offset by new store openings in Fiscal 1997. During Fiscal 1998, the Company
opened no new stores, closed three stores and completed 14 renovations and
enlargements to existing supermarkets. The Company operated 132 and 135
supermarkets at the end of Fiscal 1998 and Fiscal 1997, respectively.
Gross Profit: Gross profit in Fiscal 1998 was $1.04 billion or 28.5% of
sales compared to $1.04 billion or 28.2% of sales for the prior year. The
increase in gross profit as a percentage of sales for Fiscal 1998 compared to
the prior year was due to the savings realized from the Company's outsourcing at
the end of Fiscal 1997 of certain of its distribution center operations, lower
shrink and improvements in the perishables mix. The cost of goods sold
comparisons were impacted by a pretax LIFO charge of $3.4 million and a pretax
LIFO credit of $5.4 million in Fiscal 1998 and Fiscal 1997, respectively. The
pretax LIFO charge for Fiscal 1998 is primarily due to inflation in dairy
related products and cigarettes. The pretax LIFO credit for Fiscal 1997 includes
a $2.0 million gain on a LIFO liquidation related to the sale of the Company's
pharmaceutical warehouse inventory and a $0.8 million gain on a LIFO liquidation
related to the sale of the Company's grocery, frozen and perishable merchandise
in connection with the C&S Supply Agreement (see Note 17 of the Notes to the
Consolidated Financial Statements at Item 8, Part II of this Form 10-K).
Selling, General and Administrative Expenses ("SG&A"): SG&A in Fiscal 1998
decreased $8.1 million or 1.0% compared to the prior year. As a percentage of
sales, SG&A was 22.8% in each of Fiscal 1998 and Fiscal 1997. The decrease in
SG&A for Fiscal 1998 compared to the prior year was primarily due to the gain
recognized on the sale of certain real estate, lower insurance and store labor
expenses, along with lower operating costs which resulted from sold and closed
stores, partially offset by higher incentive expense. Excluding the gain on the
sale of real estate, SG&A as a percentage of sales was 22.9% for Fiscal 1998.
Depreciation and Amortization: Depreciation and amortization of $76.7
million in Fiscal 1998 was $6.7 million lower than the prior year of $83.4
million. The decrease in depreciation and amortization expense in Fiscal 1998
compared to the prior year was primarily due to the sale of certain of the
Company's distribution center facilities at the end of Fiscal 1997, as part of
its transaction with C&S, partially offset by capital expenditures. Depreciation
and amortization excludes video tape amortization, which is recorded in cost of
goods sold, of $3.1 million and $3.4 million in Fiscal 1998 and Fiscal 1997,
respectively.
Operating Earnings: Operating earnings in Fiscal 1998 were $133.9 million
compared to the prior year of $119.3 million. The increase in operating earnings
in Fiscal 1998 compared to the prior year was primarily due to lower SG&A and
lower depreciation and amortization expense.
Interest Expense: Interest expense was $160.8 million in Fiscal 1998
compared to $164.2 million in the prior year. The decrease in interest expense
in Fiscal 1998 compared to the prior year was primarily due to reductions in the
term loan component of the Credit Agreement (the "Term Loan") and lease
obligations, lower amortization of debt issuance costs and the paydown of
certain mortgages, partially offset by the debt accretion on the Deferred Coupon
Notes (as defined in Note 8 of the Notes to the Consolidated Financial
Statements at Item 8, Part II of this Form 10-K).
Income Taxes: The income tax provision was $1.6 million in Fiscal 1998
compared to an income tax benefit of $16.7 million in Fiscal 1997. For Fiscal
1998, the Company recorded a valuation allowance primarily related to the income
tax benefit; therefore, no income tax benefit has been recognized. The 1997
income tax benefit is net of a $1.9 million increase in the valuation allowance
related to the Company's deferred income tax assets. The Company believes that
it is more likely than not that the net deferred income tax assets of $49.4
million at January 30, 1999 will be realized through the implementation of tax
strategies which could generate taxable income.
<PAGE>
During Fiscal 1998, the Company made income tax payments of $2.5 million
and received income tax refunds of $4.5 million. During Fiscal 1997, the Company
made income tax payments of $4.8 million and received income tax refunds of $4.3
million.
Extraordinary Items: During the second quarter of Fiscal 1997, in
connection with the Credit Agreement, the Company wrote off deferred financing
fees of $12.8 million related to the former bank credit agreement, resulting in
a net loss on early extinguishment of debt of $7.4 million. In addition, during
the second quarter of Fiscal 1997, in connection with the sale of certain
mortgaged property, the Company made a mortgage paydown of $2.9 million,
including accrued interest and debt premiums, resulting in a net loss on early
extinguishment of debt of $0.1 million.
Summary of Operations: For Fiscal 1998, the Company's net loss was $28.5
million compared to a net loss of $35.7 million for the prior year. The decrease
in net loss in Fiscal 1998 compared to the prior year was primarily due to
higher operating earnings and lower interest expense in Fiscal 1998 and the
extraordinary loss in Fiscal 1997, partially offset by a reduction in the income
tax benefit.
EBITDA-FIFO: EBITDA-FIFO was $212.5 million and $201.2 million in Fiscal
1998 and Fiscal 1997, respectively. EBITDA-FIFO represents net earnings before
interest expense, income taxes, depreciation, amortization, the gain on sale of
real estate, the LIFO charge (credit) and unusual transactions. EBITDA-FIFO is a
widely accepted financial indicator of a company's ability to service and/or
incur debt and should not be construed as an alternative to, or a better
indicator of, operating income or cash flows from operating activities, as
determined in accordance with generally accepted accounting principles.
Fiscal 1997 v. Fiscal 1996
Sales: Sales in Fiscal 1997 were $3.70 billion compared to $3.71 billion
in the prior year, a decrease of 0.4%. Same store sales increased 0.8% for the
year. Sales in Fiscal 1997 compared to Fiscal 1996 were also impacted by new
store openings and remodels, offset by sold and closed stores. During Fiscal
1997, the Company opened two new Pathmark stores, completed 13 major renovations
and enlargements to existing supermarkets, and sold four and closed seven
stores. The Company operated 135 and 144 supermarkets at the end of Fiscal 1997
and Fiscal 1996, respectively.
Gross Profit: Gross profit in Fiscal 1997 was $1.04 billion or 28.2% of
sales compared to $1.09 billion or 29.4% of sales for the prior year. The
decrease in gross profit in both dollars and as a percentage of sales for Fiscal
1997 compared to the prior year was due to the promotional pricing program
introduced during the first quarter of Fiscal 1997, as well as the
pre-Thanksgiving holiday promotions during the third quarter of Fiscal 1997. The
cost of goods sold comparisons were impacted by a pretax LIFO credit of $5.4
million and $1.3 million in Fiscal 1997 and Fiscal 1996, respectively. The
pretax LIFO credit for Fiscal 1997 includes a $2.0 million gain on a LIFO
liquidation related to the sale of the Company's pharmaceutical warehouse
inventory and a $0.8 million gain on a LIFO liquidation related to the sale of
the Company's grocery, frozen and perishable merchandise in connection with the
C&S Supply Agreement (see Note 17 of the Notes to the Consolidated Financial
Statements at Item 8, Part II of this Form 10-K).
Selling, General and Administrative Expenses ("SG&A"): SG&A in Fiscal 1997
decreased $16.4 million or 1.9% compared to the prior year. As a percentage of
sales, SG&A was 22.8% in Fiscal 1997, down from 23.1% in the prior year. The
decrease in SG&A as a percentage of sales in Fiscal 1997 compared to the prior
year was primarily due to lower administrative, advertising, claims and
utilities expenses, partially offset by higher store labor expenses.
Depreciation and Amortization: Depreciation and amortization of $83.4
million in Fiscal 1997 was $5.6 million lower than the prior year of $89.0
million. The decrease in depreciation and amortization expense in Fiscal 1997
compared to the prior year was primarily due to a pretax charge of $5.4 million
in Fiscal 1996 to write down fixed assets held for sale, principally in the
Company's southern region, partially offset by capital
<PAGE>
expenditures in Fiscal 1997. Depreciation and amortization excludes video tape
amortization, which is recorded in cost of goods sold, of $3.4 million and $3.1
million in Fiscal 1997 and Fiscal 1996, respectively.
Operating Earnings: Operating earnings in Fiscal 1997 were $119.3 million
compared to the prior year of $127.1 million. The decrease in operating earnings
in Fiscal 1997 compared to the prior year was primarily due to lower gross
profit, partially offset by lower SG&A and depreciation expense in Fiscal 1997
and the restructuring charge and the lease commitment charge in Fiscal 1996.
Interest Expense: Interest expense was $164.2 million in Fiscal 1997
compared to $161.5 million in the prior year. The increase in interest expense
in Fiscal 1997 compared to the prior year was primarily due to increases in
lease obligations and the debt accretion on the Deferred Coupon Notes, partially
offset by lower amortization of debt issuance costs.
Income Taxes: The income tax benefit was $16.7 million and $14.4 million
in Fiscal 1997 and Fiscal 1996, respectively. The 1997 benefit is net of a $1.9
million increase in the valuation allowance related to the Company's deferred
income tax assets.
During Fiscal 1997, the Company made income tax payments of $4.8 million
and received income tax refunds of $4.3 million. During Fiscal 1996, the Company
made income tax payments of $4.6 million and received income tax refunds of $5.5
million.
Extraordinary Items: During the second quarter of Fiscal 1997, in
connection with the then executed Credit Agreement, the Company wrote off
deferred financing fees of $12.8 million related to the former bank credit
agreement, resulting in a net loss on early extinguishment of debt of $7.4
million. In addition, during the second quarter of Fiscal 1997, in connection
with the sale of certain mortgaged property, the Company made a mortgage paydown
of $2.9 million, including accrued interest and debt premiums, resulting in a
net loss on early extinguishment of debt of $0.1 million.
During the second quarter of Fiscal 1996, in connection with the sale of
certain mortgaged property, the Company made a mortgage paydown of $5.3 million,
including accrued interest and debt premiums, resulting in a net loss on early
extinguishment of debt of $0.2 million. During the first quarter of Fiscal 1996,
in connection with the termination of the Plainbridge, Inc. credit agreement due
to the reacquisition of Plainbridge, Inc. by Pathmark, the Company wrote off
deferred financing fees resulting in a net loss on early extinguishment of debt
of $0.7 million.
Summary of Operations: For Fiscal 1997, the Company's net loss was $35.7
million compared to a net loss of $20.8 million for the prior year. The increase
in net loss in Fiscal 1997 compared to the prior year was primarily due to lower
operating earnings, the extraordinary loss on early extinguishment of debt and
higher interest expense, partially offset by a higher income tax benefit.
EBITDA-FIFO: EBITDA-FIFO was $201.2 million and $236.4 million in Fiscal
1997 and Fiscal 1996, respectively.
Financial Condition
Debt Service: During Fiscal 1998, total long-term debt increased $53.1
million from Fiscal 1997 year end primarily due to borrowings under the working
capital facility component of the Credit Agreement (the "Working Capital
Facility") and debt accretion on the Deferred Coupon Notes, partially offset by
reductions in the Term Loan and a net decrease in certain mortgages. Borrowings
under the Working Capital Facility were $43.0 million at January 30, 1999 and
$44.4 million at April 21, 1999. In addition, during Fiscal 1998, total lease
obligations decreased $12.0 million from Fiscal 1997 year end.
<PAGE>
During the third quarter of Fiscal 1998, the Company paid in full $20.1
million of mortgages, due December 1998, on six properties in conjunction with a
$23.3 million refinancing of four of these properties. The new mortgages are
payable in installments through Fiscal 2008, including a scheduled final payment
of $18.6 million.
During the second quarter of Fiscal 1998, in conjunction with the paydown
of debt by PTK, Pathmark loaned $26.5 million to PTK in the form of a 14 1/2%
discount note, due May 12, 2003, accreting to a maturity value of $53.3 million.
PTK is not required to pay cash interest on this note.
During Fiscal 1998, the Company sold certain real estate for $55.7
million, including $22.9 million related to the sale of the distribution center,
previously leased to Rickel Home Centers, Inc. ("Rickel") and recognized a gain
of $5.1 million. The proceeds were used to paydown the related mortgages and a
portion of the Working Capital Facility.
On June 30, 1997, the Company entered into the Credit Agreement with a
group of lenders led by The Chase Manhattan Bank. The Credit Agreement includes
a $300 million Term Loan and a $200 million Working Capital Facility. Under the
Credit Agreement, the Term Loan and Working Capital Facility bear interest at
floating rates, ranging from LIBOR plus 2.25% to LIBOR plus 2.50%. The Company
is required to repay a portion of its borrowings under the Term Loan each year,
so as to retire such indebtedness in its entirety by December 15, 2001. Under
the Working Capital Facility, which expires on June 15, 2001, the Company can
borrow or obtain letters of credit in an aggregate amount not to exceed $200
million, of which the maximum of $125 million can be in letters of credit. In
addition, pursuant to a Permitted Subordinated Debt Refinancing (as defined in
the Credit Agreement), the Working Capital Facility and a portion of the Term
Loan can be extended up to an additional two and one-half years and the
remainder of the Term Loan can be extended up to an additional three and
one-half years from the original expiration dates.
The Company is required to make sinking fund payments on the Subordinated
Notes (as defined in Note 8 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 8 of the
Notes to Consolidated Financial Statements at Item 8, Part II of this Form 10-K)
and the remaining Subordinated Notes mature on June 15, 2002. The Senior
Subordinated Notes (as defined in Note 8 of the Notes to Consolidated Financial
Statements at Item 8, Part II of this Form 10-K) and the Deferred Coupon Notes
mature in Fiscal 2003. The Company has no payment obligations, through
intercompany notes or otherwise, with respect to its parent's indebtedness.
The majority of the cash interest payments are scheduled in the second and
fourth quarters.
The amounts of principal payments required each year on outstanding
long-term debt (excluding the original issue discount with respect to the
Deferred Coupon Notes) are as follows (dollars in millions):
Principal
Fiscal Years Payments
------------ --------
1999................................ $ 15.9
2000................................ 78.8
2001................................ 307.4
2002................................ 196.3
2003................................ 654.5
Thereafter.......................... 21.5
--------
$ 1,274.4
========
Liquidity: The consolidated financial statements of the Company indicate
that, at January 30, 1999, current liabilities exceeded current assets by $42.1
million and stockholder's deficiency was $1.1 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 8 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.
<PAGE>
The Company believes that it will be able to make the scheduled payments
or refinance its obligations with respect to its indebtedness through a
combination of operating funds and borrowing facilities. Future refinancing will
be necessary if the Company's cash flow from operations is not sufficient to
meet its debt service requirements related to the maturity of a portion of the
Term Loan and Working Capital Facility in Fiscal 2001, and the maturity of the
Subordinated Notes and Subordinated Debentures in Fiscal 2002. The Company
expects that it will be necessary to refinance all or a portion of the Senior
Subordinated Notes and the Deferred Coupon Notes due in Fiscal 2003. The Company
may undertake a refinancing of some or all of such indebtedness sometime prior
to its maturity. The Company was in compliance with its various debt covenants
at January 30, 1999 and, based on management's operating projections for Fiscal
1999, the Company believes that it will continue to be in compliance with its
various debt covenants, as amended. The Company's ability to make scheduled
payments, to refinance or otherwise meet its obligations with respect to its
indebtedness depends on its financial and operating performance, which in turn,
is subject to prevailing economic conditions and to financial, business and
other factors beyond its control. Although the Company's cash flow from its
operations and borrowings has been sufficient to meet its debt service
obligations, there can be no assurance that the Company's operating results will
continue to be sufficient or that future borrowing facilities will be available
for payment or refinancing of the Company's indebtedness.
While it is the Company's intention to enter into other refinancings that
it considers advantageous, there can be no assurances that the prevailing market
conditions will be favorable to the Company. In the event the Company obtains
any future refinancing on less than favorable terms, the holders of outstanding
indebtedness could experience increased credit risk and could experience a
decrease in the market value of their investment, because the Company might be
forced to operate under terms that would restrict its operations and might find
its cash flow reduced.
Capital Expenditures: Capital expenditures for Fiscal 1998, including
property acquired under capital leases, were $53.5 million compared to $57.9
million for Fiscal 1997 and $94.1 million for Fiscal 1996. During Fiscal 1998,
the Company opened no new stores, closed three stores and completed 14
renovations and enlargements to existing supermarkets. During Fiscal 1999, the
Company plans to open up four new Pathmark stores and complete up to an
aggregate of 47 renovations and enlargements. Capital expenditures for Fiscal
1999, including property to be acquired under capital leases, are estimated to
be $99.0 million. Management believes that cash flows generated from operations,
supplemented by the unused borrowing capacity under the Working Capital Facility
and the availability of capital lease financing, will be sufficient to provide
for the Company's capital expenditure program.
Cash Flows: Cash used for operating activities amounted to $27.1 million
in Fiscal 1998 compared to cash provided by operating activities of $56.5
million in the prior year. The change in cash flow from operating activities was
primarily due to cash used for operating assets and liabilities, resulting from
the paydown of trade accounts payable, utilizing the proceeds received at the
end of Fiscal 1997 related to the C&S transaction, and an increase in due from
suppliers related to the C&S transition, partially offset by a decrease in the
net loss. Cash provided by investing activities was $15.1 million in Fiscal 1998
compared to $95.5 million in the prior year. The decrease in cash provided by
investing activities was primarily due to the proceeds related to the C&S
Purchase Agreement in Fiscal 1997 and an increase in expenditures of property
and equipment, partially offset by an increase in proceeds from property
dispositions. Cash used for financing activities was $40.4 million in Fiscal
1998 compared to $101.8 million in the prior year. The decrease in cash used for
financing activities was primarily due to a net increase in borrowings under the
Credit Agreement in Fiscal 1998, as compared to a net decrease in borrowings
under the credit agreements in Fiscal 1997; this change in borrowing activities
between Fiscal 1998 and Fiscal 1997 was primarily due to the impact of the C&S
transaction described above. The decrease in cash used for financing activities
was also due to a decrease in deferred financing fees related to the Credit
Agreement in Fiscal 1997, partially offset by the note receivable from PTK and
a decrease in book overdrafts related to the C&S transition.
<PAGE>
Cash provided by operating activities amounted to $56.5 million in Fiscal
1997 compared to $73.6 million in the prior year. The decrease in net cash
provided by operating activities was primarily due to an increase in the net
loss and an increase in cash used for operating assets and liabilities. Cash
provided by investing activities was $95.5 million in Fiscal 1997 compared to
cash used for investing activities of $46.8 million in the prior year. The
increase in cash provided by investing activities was primarily due to an
increase in proceeds related to the C&S Purchase Agreement, property
dispositions and a decrease in expenditures of property and equipment. Cash used
for financing activities was $101.8 million in Fiscal 1997 compared to $28.6
million in the prior year. The increase in cash used for financing activities
was primarily due to a decrease in borrowings in conjunction with the Credit
Agreement, net of repaying in full the former term loan and former working
capital facility in Fiscal 1997, the proceeds from the lease financing of three
supermarket locations in Fiscal 1996, a decrease in book overdrafts and an
increase in deferred financing fees related to the Credit Agreement in Fiscal
1997.
Year 2000 Readiness: This disclosure is a year 2000 ("Year 2000")
Readiness Disclosure within the meaning of the Year 2000 Information and
Readiness Disclosure Act of 1998 to the extent that the disclosure relates to
the Year 2000 processing of the Company.
The Company is preparing its computer systems and hardware to deal with
the issues related to the Year 2000. This is necessary because certain computer
programs have been written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process normal business transactions. In addition, many of the Company's
vendors and service providers are also faced with similar issues related to the
Year 2000.
In order to address the Year 2000 issues, the Company has formed a project
team of senior managers. This project team has assessed the Company's
information systems, including its hardware, software programs and embedded
systems contained in the Company's stores, distribution facilities and corporate
headquarters. Based on the findings of this assessment, the Company has
commenced a plan to upgrade or replace the Company's hardware and software
programs to ensure Year 2000 readiness, as well as to assess the Year 2000
readiness of the Company's vendors and service providers. In addition, the
Company's management is currently formulating contingency plans, which, in the
event that the Company is unable to fully achieve Year 2000 readiness in a
timely manner, or any of the Company's vendors or service providers fail to
achieve Year 2000 readiness, may be implemented to minimize the risks of
interruptions of the Company's business. The Audit Committee of the Board of
Directors is advised periodically on the status of the Company's Year 2000
readiness program.
The Company is communicating with its principal vendors to determine the
extent to which it will be vulnerable to third-party Year 2000 readiness
problems. Based on its assessment to date of the Year 2000 readiness of the
Company's key suppliers, including C&S, vendors, service providers and other
third parties on which the Company relies for business operations, the Company
believes that its principal vendors, service providers and other third parties
are taking action related to the Year 2000. The Company plans to test Year 2000
readiness with certain key suppliers; however, the Company has limited ability
to test and control such third parties' Year 2000 readiness, and the Company
cannot provide assurance that failure of such third parties to address the Year
2000 issue will not cause an interruption of the Company's business.
The Company has committed significant resources in connection with
resolving its Year 2000 issues. The Company expects that the principal costs
will be those associated with the remediation and testing of its computer
applications. Through IBM, this effort is under way across the Company and is
following a process of inventory, analysis, modification, testing and
implementation. A major portion of these costs will be met under the existing
agreement with IBM through a reprioritization of systems development projects,
with the remainder representing incremental costs. Those systems development
projects, which have been deferred due to the Year 2000 readiness program, are
not deemed to be critical to the Company's operations. As of
<PAGE>
April 21, 1999, the Company believes that approximately 54% of its mainframe
information systems are Year 2000 ready. The Company estimates that the total
costs associated with achieving Year 2000 readiness will be approximately $17.0
million (of which approximately $6.2 million has been expended through January
30, 1999), consisting of system remediation costs of $9.0 million and equipment
replacement of $8.0 million. The Company anticipates that it will finance the
cost of its Year 2000 remediation using its existing sources of liquidity.
The Company expects to complete its Year 2000 remediation by August 1999.
However, the Company's ability to execute its plan in a timely manner may be
adversely affected by a variety of factors, some of which are beyond the
Company's control, including turnover of key employees, availability and
continuity of IBM consultants and the potential for unforeseen implementation
problems. The Company's business could be interrupted if the Year 2000 plan is
not implemented in a timely manner, if the Company's vendors, service providers
or other third parties are not Year 2000 ready or if the Company's contingency
plans are not successful. Any such business interruptions could have a material
adverse effect on the Company's results of operation, liquidity or financial
condition by impairing its ability to process customer transactions, as well as
to order and receive merchandise for sale in a timely manner.
New Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"). SFAS No. 133 represents a comprehensive
framework of accounting rules that standardizes the accounting for all
derivatives. SFAS No. 133 applies to all entities and to all types of
derivatives, and is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The adoption of SFAS 133 is not expected to materially
affect the financial position or results of operations of the Company.
Forward-Looking Information
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, the
general economic conditions in the Company's trading areas and the ability of
the Company, its key suppliers, vendors and others with whom the Company has
significant business relationships to identify and remediate all Year 2000
issues.
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company due to
adverse changes in financial rates. The Company is exposed to market risk in the
area of interest rates. This exposure is directly related to its Term Loan and
borrowing activities under the Working Capital Facility. The Company does not
currently maintain any interest rate hedging arrangements due to the reasonable
risk that near-term interest rates will not rise significantly. The Company is
continuously evaluating this risk and will implement interest rate hedging
arrangements when deemed appropriate.
<PAGE>
ITEM 8. Consolidated Financial Statements.
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
52 Weeks Ended
-----------------------------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Sales .............................................. $ 3,655,211 $ 3,695,865 $ 3,710,523
Cost of sales (exclusive of depreciation and
amortization shown separately below) ............... 2,611,814 2,652,289 2,619,277
----------- ----------- -----------
Gross profit ....................................... 1,043,397 1,043,576 1,091,246
Selling, general and administrative expenses ....... 832,805 840,886 857,290
Depreciation and amortization ...................... 76,718 83,413 88,956
Restructuring charge ............................... -- -- 9,137
Lease commitment charge ............................ -- -- 8,763
----------- ----------- -----------
Operating earnings ................................. 133,874 119,277 127,100
Interest expense ................................... (160,794) (164,168) (161,469)
----------- ----------- -----------
Loss before income taxes and extraordinary items ... (26,920) (44,891) (34,369)
Income tax (provision) benefit ..................... (1,591) 16,705 14,411
----------- ----------- -----------
Loss before extraordinary items .................... (28,511) (28,186) (19,958)
Extraordinary items, net of an income tax benefit of
$5,456 in Fiscal 1997 and $613 in Fiscal 1996 ... -- (7,488) (877)
----------- ----------- -----------
Net loss ........................................... $ (28,511) $ (35,674) $ (20,835)
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ...................... $ 7,661 $ 60,076
Accounts receivable, net ....................... 13,792 10,928
Merchandise inventories ........................ 143,212 148,775
Income taxes receivable ........................ 1,493 --
Deferred income taxes, net ..................... 5,912 10,621
Prepaid expenses ............................... 21,522 21,449
Due from suppliers ............................. 49,600 13,027
Other current assets ........................... 11,202 11,331
----------- -----------
Total Current Assets ......................... 254,394 276,207
Property and Equipment, Net ....................... 470,726 529,542
Deferred Financing Costs, Net ..................... 15,723 18,547
Deferred Income Taxes, Net ........................ 43,481 43,389
Other Assets ...................................... 40,831 32,687
----------- -----------
$ 825,155 $ 900,372
=========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current Liabilities
Accounts payable ............................... $ 94,399 $ 128,484
Book overdrafts ................................ 4,541 26,330
Current maturities of long-term debt ........... 15,902 43,478
Income taxes payable ........................... -- 1,771
Accrued payroll and payroll taxes .............. 52,014 49,533
Current portion of lease obligations ........... 21,869 24,337
Accrued interest payable ....................... 21,325 18,300
Accrued expenses and other current liabilities . 86,413 93,297
----------- -----------
Total Current Liabilities .................... 296,463 385,530
----------- -----------
Long-Term Debt .................................... 1,258,539 1,177,898
----------- -----------
Lease Obligations, Long-Term ...................... 160,708 170,273
----------- -----------
Other Noncurrent Liabilities ...................... 241,351 244,011
----------- -----------
Commitments and Contingencies (Notes 11, 17 and 21)
Stockholder's Deficiency
Common Stock $.10 par value ....................... -- --
Authorized, issued and outstanding: 100 shares
Paid-in Capital ................................... 71,897 68,703
Accumulated Deficit ............................... (1,174,554) (1,146,043)
Note receivable from PTK Holdings, Inc. ........... (29,249) --
----------- -----------
Total Stockholder's Deficiency ............... (1,131,906) (1,077,340)
----------- -----------
$ 825,155 $ 900,372
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY
(in thousands)
<TABLE>
<CAPTION>
Note
Receivable Total
Common Paid-in Accumulated from PTK Stockholder's
Stock Capital Deficit Holdings, Inc. Deficiency
----- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, February 3, 1996 .......... $ -- $ 65,303 $(1,089,534) $ -- $(1,024,231)
Net loss ........................ -- -- (20,835) -- (20,835)
Capital contribution from SMG-II
Holdings Corporation .......... -- 3,400 -- -- 3,400
----- ----------- ----------- ----------- -----------
Balance, February 1, 1997 .......... -- 68,703 (1,110,369) -- (1,041,666)
Net loss ........................ -- -- (35,674) -- (35,674)
----- ----------- ----------- ----------- -----------
Balance, January 31, 1998 .......... -- 68,703 (1,146,043) -- (1,077,340)
Net loss ........................ -- -- (28,511) -- (28,511)
Note receivable from PTK
Holdings, Inc. ................. -- -- -- (26,471) (26,471)
Accretion on note receivable from
PTK Holdings, Inc. ............. -- 2,778 -- (2,778) --
Dividend to PTK Holdings, Inc. .. -- (60) -- -- (60)
Capital contribution from SMG-II
Holdings Corporation ........... -- 476 -- -- 476
----- ----------- ----------- ----------- -----------
Balance, January 30, 1999 .......... $ -- $ 71,897 $(1,174,554) $ (29,249) $(1,131,906)
===== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
52 Weeks Ended
-----------------------------------
January 30, January 31, February 1,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities
Net loss ............................................................. $ (28,511) $ (35,674) $ (20,835)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Extraordinary loss on early extinguishment of debt ................. -- 7,488 877
Depreciation and amortization ...................................... 80,375 87,341 92,485
Deferred income tax (benefit) expense .............................. 4,617 (24,053) (12,558)
Interest accruable but not payable ................................. 20,812 18,509 16,678
Amortization of original issue discount ............................ 355 354 354
Amortization of debt issuance costs ................................ 4,159 5,542 7,426
(Gain) loss on disposal of property and equipment .................. (4,332) 127 (5,347)
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net ......................................... (2,864) 1,564 (1,939)
Merchandise inventories .......................................... 5,563 22,170 8,517
Income taxes ..................................................... (3,264) 6,367 (2,584)
Prepaid expenses ................................................. (3,170) (861) (2,889)
Due from suppliers ............................................... (36,573) 896 (745)
Other current assets ............................................. 329 (4,749) (3,009)
Other assets ..................................................... (5,534) 9,700 2,309
Accounts payable ................................................. (34,085) (37,715) (17,883)
Accrued payroll and payroll taxes ................................ 2,481 (6,802) 2,013
Accrued interest payable ......................................... 2,934 (2,289) 1,403
Accrued expenses and other current liabilities ................... (6,981) 2,708 (1,867)
Other noncurrent liabilities ..................................... (23,432) 5,860 11,191
--------- --------- ---------
Cash provided by (used for) operating activities ............... (27,121) 56,483 73,597
--------- --------- ---------
Investing Activities
Property and equipment expenditures .................................. (41,332) (34,322) (54,963)
Proceeds from disposition of property and equipment .................. 56,436 26,132 8,170
Net proceeds in connection with the C&S Purchase Agreement ........... -- 103,728 --
--------- --------- ---------
Cash provided by (used for) investing activities ............... 15,104 95,538 (46,793)
--------- --------- ---------
Financing Activities
Increase (decrease) in working capital facilities borrowings ......... 43,000 (73,500) 27,500
Increase in other long-term debt ..................................... 26,652 1,956 2,052
Repayment of term loans .............................................. (7,566) (279,877) (44,828)
Repayment of other long-term debt .................................... (30,188) (6,136) (8,085)
Reduction in lease obligations ....................................... (22,641) (21,337) (20,032)
Decrease in book overdrafts .......................................... (21,789) (14,755) (2,635)
Deferred financing fees .............................................. (1,335) (8,044) (3,597)
Note receivable from PTK Holdings, Inc. .............................. (26,471) -- --
Dividend to PTK Holdings, Inc. ....................................... (60) -- --
Borrowings under Term Loan in connection with the new Credit Agreement -- 300,000 --
Premiums incurred in early extinguishment of debt .................... -- (132) (352)
Proceeds from lease financing ........................................ -- -- 21,405
--------- --------- ---------
Cash used for financing activities ............................. (40,398) (101,825) (28,572)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ........................ (52,415) 50,196 (1,768)
Cash and cash equivalents at beginning of period ........................ 60,076 9,880 11,648
--------- --------- ---------
Cash and cash equivalents at end of period .............................. $ 7,661 $ 60,076 $ 9,880
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Interest paid ........................................................ $ 132,547 $ 141,983 $ 135,536
========= ========= =========
Income taxes paid .................................................... $ 2,474 $ 4,755 $ 4,607
========= ========= =========
Noncash Investing and Financing Activities
Capital lease obligations ............................................ $ 12,200 $ 23,626 $ 39,167
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Business
Organization and Basis of Presentation:
Pathmark Stores, Inc. (the "Company") operated 132 supermarkets as of
January 30, 1999, primarily in the New York-New Jersey and Philadelphia
metropolitan areas and is a wholly owned subsidiary of PTK Holdings, Inc.
("PTK") and an indirect wholly owned subsidiary of Supermarkets General Holdings
Corporation ("Holdings"). Holdings is a wholly owned subsidiary of SMG-II
Holdings Corporation ("SMG-II").
Holdings was formed by Merrill Lynch Capital Partners, Inc., a wholly
owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."), to effect the
acquisition (the "Acquisition") of the Company. On June 15, 1987, Holdings
completed the first step in the Acquisition when it acquired 32.8 million shares
(approximately 85%) of the Company's common stock through a tender offer. The
remaining outstanding common stock of the Company was acquired by Holdings on
October 5, 1987 pursuant to a Merger Agreement dated April 22, 1987, as amended.
The Acquisition of the Company by Holdings was accounted for as a purchase and,
accordingly, Holdings recorded the assets and liabilities of the Company at
their fair values at the date of the Acquisition. The accompanying consolidated
financial statements of the Company reflect Holdings' basis. The tax basis for
the assets and liabilities acquired was retained.
During Fiscal 1993, the Board of Directors of Holdings authorized
management of the Company and Holdings to proceed with a recapitalization plan
(the "Recapitalization"), which included a refinancing of Holdings' debt and the
distribution to Holdings of certain of the Company's assets and liabilities. In
conjunction with the Recapitalization, the assets, liabilities and related
operations of the Company's home centers segment, as well as certain assets and
liabilities of the warehouse, distribution and processing facilities which
service the Company's supermarkets and drug stores, and certain inventories and
real property were contributed to Plainbridge, Inc. ("Plainbridge"), a then
newly formed wholly owned subsidiary of the Company and the shares of
Plainbridge were then distributed to PTK, a then newly formed wholly owned
subsidiary of Holdings (the "Plainbridge Spin-Off"). Following the Plainbridge
Spin-Off, PTK held 100% of the capital stock of both Plainbridge and the
Company. On May 3, 1993, the Company contributed total assets of $1.7 million
and total liabilities of $1.8 million, which represented the Chefmark deli food
preparation operations and the related warehouse and a leased banana ripening
warehouse to Chefmark, Inc. ("Chefmark"), a then newly formed Delaware
corporation, and distributed the shares of Chefmark to Holdings. On March 1,
1996, the Company reacquired all of the outstanding capital stock of Plainbridge
by means of a capital contribution from PTK. As a result, Plainbridge is a
wholly-owned subsidiary of the Company.
Management's Plan:
The consolidated financial statements of the Company indicated that, at
January 30, 1999, current liabilities exceeded current assets by $42.1 million
and the stockholder's deficiency was $1.1 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.
Note 2--Summary of Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All intercompany
transactions have been eliminated in consolidation.
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Summary of Significant Accounting Policies--(Continued)
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 7). While the Company believes that the amounts provided
are adequate to cover its self-insured liabilities, it is reasonably possible
that the final resolution of these claims may differ from the amounts provided.
Fiscal Year:
The Company's fiscal year ends on the Saturday nearest to January 31 of
the following calendar year. Normally, each fiscal year consists of 52 weeks,
but every five or six years the fiscal year consists of 53 weeks.
Statements of Cash Flows:
All investments and marketable securities with a maturity of three months
or less at date of purchase are considered to be cash equivalents. The Company
had no cash equivalent investments as of January 30, 1999 and $52.0 million cash
equivalent investments as of January 31, 1998.
Merchandise Inventories:
Merchandise inventories are valued at the lower of cost or market. Cost
for substantially all merchandise inventories is determined on a last-in,
first-out ("LIFO") basis.
Rental Video Tapes:
Video tapes purchased for rental purposes are capitalized and amortized
over their estimated useful lives. The amortization of video tapes, included in
cost of goods sold, approximated $3.1 million, $3.4 million and $3.1 million in
Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively.
Property and Equipment:
Property and equipment are stated at cost. Depreciation and amortization
expense on owned property and equipment is computed on the straight-line method
over the following useful lives: buildings, 40 years; fixtures and equipment,
3-10 years; and leasehold improvements, 8-15 years or lease term, whichever is
shorter. Capital leases are recorded at the present value of minimum lease
payments or fair market value of the related property, whichever is less.
Amortization of property under capital leases is computed on the straight-line
method over the term of the lease or the leased property's estimated useful
life, whichever is shorter.
Long-Lived Assets:
The carrying value of long-lived assets used in the Company's operations
are assessed for recoverability based upon groups of assets and the related
undiscounted cash flow generated by such assets. Assets held for sale are
reviewed for impairment based upon the estimated net realizable value of such
assets.
Deferred Financing Costs:
Deferred financing costs are amortized utilizing the interest method over
the life of the related indebtedness.
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Summary of Significant Accounting Policies--(Continued)
Book Overdraft:
Under the Company's cash management system, checks issued but not
presented to banks result in overdraft balances for accounting purposes and are
classified as book overdrafts.
Revenue Recognition:
Revenue is recognized at the point of sale to the customer.
Advertising Costs:
Advertising costs, net of vendor reimbursements, are expensed as incurred
and were $18.5 million, $18.9 million and $23.7 million in Fiscal 1998, Fiscal
1997 and Fiscal 1996, 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 7).
Income Taxes:
The Company joins in filing a consolidated federal income tax return with
its ultimate parent SMG-II. The Company's income taxes are computed based on a
tax sharing agreement with SMG-II, in which the Company computes a hypothetical
tax return as if the Company was not joined in a consolidated 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.
Software:
Externally purchased software is capitalized and amortized over three
years.
Beginning in Fiscal 1998, internally developed software is accounted for
in accordance with Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1
defines the types of costs that are capitalizable for computer software projects
and requires all other costs to be expensed in the period incurred. SOP 98-1
requires that in order for costs to be capitalizable they must be intended to
create a new system or add identifiable functionality to an existing system. The
early adoption of SOP 98-1 did not materially affect the financial condition or
results of operations of the Company. For Fiscal 1998, the amount capitalized
for internally developed software projects was $0.25 million, which is being
amortized over three years. Prior to Fiscal 1998, internally developed software
was expensed as incurred.
The amortization of capitalized software, included in selling, general and
administrative expenses, approximated $0.5 million in both Fiscal 1998 and
Fiscal 1997 and $0.4 million in Fiscal 1996.
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Summary of Significant Accounting Policies--(Continued)
Comprehensive Income:
Effective in Fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS No. 130").
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains, and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company, at this time,
has no items of comprehensive income other than net income and, accordingly, the
total comprehensive loss is the same as the reported net loss for all periods
presented.
Segment Reporting:
Effective in Fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("SFAS No. 131"). SFAS No. 131 redefines how operating
segments are determined and requires expanded quantitative disclosures relating
to a company's operating statements. The Company, at this time, has one
reportable segment (retail grocery), operates in one geographical area (United
States), and has no major customers representing 10% or more of sales.
New Accounting Standards Not Yet Adopted:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"). SFAS No. 133 represents a comprehensive
framework of accounting rules that standardizes the accounting for all
derivatives. SFAS No. 133 applies to all entities and to all types of
derivatives, and is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The adoption of SFAS 133 is not expected to materially
affect the financial condition or results of operations of the Company.
Reclassifications:
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the Fiscal 1998 presentation.
Note 3--Accounts Receivable
Accounts receivable are comprised of the following (dollars in thousands):
January 30, January 31,
1999 1998
------- -------
Prescription plans ................................. $13,431 $10,074
Other .............................................. 1,604 2,048
------- -------
Accounts receivable ................................ 15,035 12,122
Less: allowance for doubtful accounts .............. 1,243 1,194
------- -------
Accounts receivable, net ........................... $13,792 $10,928
======= =======
Note 4--Merchandise Inventories
Merchandise inventories are comprised of the following (dollars in
thousands):
January 30, January 31,
1999 1998
-------- --------
Merchandise inventories at FIFO cost ............. $182,679 $184,862
Less: LIFO reserve ............................... 39,467 36,087
-------- --------
Merchandise inventories at LIFO cost ............. $143,212 $148,775
======== ========
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4--Merchandise Inventories--(Continued)
The increase in the LIFO reserve in Fiscal 1998 is primarily due to
inflation in dairy related products and cigarettes. For Fiscal 1997, the
liquidation of LIFO layers resulted in a $2.8 million gain related to the sale
of the Company's pharmaceutical, grocery, frozen and perishable warehouse
inventory.
Note 5--Property and Equipment
Property and equipment are comprised of the following (dollars in
thousands):
January 30, January 31,
1999 1998
-------- --------
Land ............................................... $ 40,069 $ 54,065
Buildings and building improvements ................ 147,197 169,490
Fixtures and equipment ............................. 173,216 176,443
Leasehold costs and improvements ................... 268,092 279,386
Transportation equipment ........................... 12,551 19,820
-------- --------
Property and equipment, owned ...................... 641,125 699,204
Property and equipment under capital leases ........ 205,158 213,094
-------- --------
Property and equipment, at cost .................... 846,283 912,298
Less: accumulated depreciation and amortization .... 375,557 382,756
-------- --------
Property and equipment, net ........................ $470,726 $529,542
======== ========
During Fiscal 1998, the Company sold certain real estate for $55.7
million, including $22.9 million related to the sale of the distribution center
previously leased to Rickel Home Centers, Inc. ("Rickel") (see Note 21), and
recognized a gain of $5.1 million. The proceeds were used to paydown the related
mortgages and a portion of the Working Capital Facility.
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 6--Deferred Financing Costs, Net
Deferred financing costs are comprised of the following (dollars in
thousands):
January 30, January 31,
1999 1998
------- -------
Deferred financing costs ..................... $29,938 $28,599
Less: accumulated amortization ............... 14,215 10,052
------- -------
Deferred financing costs, net ................ $15,723 $18,547
======= =======
Note 7--Other Noncurrent Liabilities
Other noncurrent liabilities are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
-------- --------
<S> <C> <C>
Deferred income related to the C&S transaction (see Note 17) $ 55,448 $ 60,837
Self-insured liabilities ................................... 48,187 58,567
Pension and deferred compensation .......................... 21,906 20,296
Other postretirement and postemployment benefits ........... 37,813 39,942
Closed stores .............................................. 20,747 13,798
Lease commitments .......................................... 7,104 6,810
Other ...................................................... 50,146 43,761
-------- --------
Other noncurrent liabilities ............................... $241,351 $244,011
======== ========
</TABLE>
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--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 8--Long-Term Debt
Long-term debt is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
---------- ----------
<S> <C> <C>
Term Loan ("Term Loan") ............................................... $ 255,684 $ 263,250
Working Capital Facility .............................................. 43,000 --
9.625% Senior Subordinated Notes due 2003 ("Senior Subordinated Notes") 438,489 438,134
11.625% Subordinated Notes due 2002 ("Subordinated Notes") ............ 199,017 199,017
12.625% Subordinated Debentures due 2002 ("Subordinated Debentures") .. 95,750 95,750
10.75% Junior Subordinated Deferred Coupon Notes due 2003
("Deferred Coupon Notes") .......................................... 207,880 187,068
Debt payable to Holdings .............................................. 983 983
Industrial revenue bonds .............................................. 8,302 6,375
Other debt (primarily mortgages) ...................................... 25,336 30,799
---------- ----------
Total debt ............................................................ 1,274,441 1,221,376
Less: current maturities .............................................. 15,902 43,478
---------- ----------
Long-term portion ..................................................... $1,258,539 $1,177,898
========== ==========
</TABLE>
Scheduled Maturities of Debt:
Long-term debt principal payments are as follows (dollars in thousands):
Principal
Fiscal Years Payments
------------ -----------
1999................................................... $ 15,902
2000................................................... 78,844
2001................................................... 307,414
2002................................................... 196,288
2003................................................... 654,514
Thereafter............................................. 21,479
-----------
$ 1,274,441
===========
Bank Credit Agreement:
On June 30, 1997, the Company entered into a $500 million bank credit
agreement (the "Credit Agreement") with a group of lenders led by The Chase
Manhattan Bank. The Credit Agreement includes a $300 million Term Loan and a
$200 million Working Capital Facility. The Company repaid in full the former
term loan and former working capital facility with the borrowings obtained under
the Credit Agreement.
Under the Credit Agreement, the Term Loan and Working Capital Facility
bear interest at floating rates, ranging from LIBOR plus 2.25% to LIBOR plus
2.50%. The Company is required to repay a portion of its borrowings under the
Term Loan each year, so as to retire such indebtedness in its entirety by
December 15, 2001. Under the Working Capital Facility, which expires on June 15,
2001, the Company can borrow or obtain letters of credit in an aggregate amount
not to exceed $200 million, of which the maximum of $125 million can be in
letters of credit. In addition, pursuant to a Permitted Subordinated Debt
Refinancing (as defined in the Credit Agreement), the Working Capital Facility
and a portion of the Term Loan can be extended up to an additional two and
one-half years and the remainder of the Term Loan can be extended up to an
additional three and one-half years from the original expiration dates.
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8--Long-Term Debt--(Continued)
At January 30, 1999, the Company was in compliance with all of its debt
covenants. Based upon projected results for the upcoming fiscal year, the
Company believes it will be in compliance with its debt covenants, as amended,
which include financial covenants concerning levels of operating cash flow,
minimum interest and rent expense coverage, maximum leverage ratio, maximum
senior debt leverage ratio, maximum consolidated rental payments and maximum
capital expenditures. The Credit Agreement also contains other covenants,
including, but not limited to, covenants with respect to the following matters:
(i) limitation on indebtedness; (ii) limitation on liens; (iii) restriction on
mergers; (iv) restriction on investments, loans, advances, guarantees and
acquisitions; (v) restriction on assets sales and sale/leaseback transactions;
(vi) restriction on certain payments of indebtedness and incurrence of certain
agreements and (vii) restriction on transactions with affiliates.
The Company believes it has sufficient unused borrowing capacity under the
Working Capital Facility, which can be utilized for unforeseen or for seasonal
cash requirements. At January 30, 1999, the Company had $50.5 million in
outstanding letters of credit and $106.5 million in unused borrowing capacity
under its Working Capital Facility.
Senior Subordinated Notes:
The Senior Subordinated Notes accrete to a maturity value of $440.0
million in Fiscal 2003. These notes pay cash interest on a semiannual basis and
have no sinking fund requirements.
Subordinated Notes:
The Subordinated Notes mature in Fiscal 2002 and pay cash interest on a
semiannual basis. These notes contain a sinking fund provision that requires the
Company to deposit $49.8 million (25% of the original aggregate principal
amount) with the trustee of the Subordinated Notes on June 15 in each of Fiscal
2000 and Fiscal 2001 for the redemption of the Subordinated Notes, at a
redemption price equal to 100% of the principal amount thereof, plus accrued
interest to the redemption date and providing for the redemption of 50% of the
original aggregate principal amount of such notes prior to maturity.
Subordinated Debentures:
The Subordinated Debentures mature in Fiscal 2002. These debentures pay
cash interest on a semiannual basis and have no sinking fund requirements.
Deferred Coupon Notes:
The Deferred Coupon Notes accrete to a maturity value of $225.3 million in
Fiscal 2003. These notes begin paying cash interest on a semiannual basis on May
1, 2000 and have no sinking fund requirements.
Industrial Revenue Bonds:
Interest rates for the industrial revenue bonds range from 5.0% to 10.9%.
The industrial revenue bonds are payable in installments ending in Fiscal 2018.
Other Debt:
Other debt includes mortgage notes, which are secured by property and
equipment having a net book value of $37.4 million at January 30, 1999. During
the third quarter of Fiscal 1998, the Company paid in full $20.1 million of
mortgages, due December 1998, on six properties in conjunction with a $23.3
million refinancing of four of these properties. These borrowings, whose
interest rates averaged 7.4%, are payable in installments ending in Fiscal 2008,
including a scheduled final payment of $18.6 million.
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--Fair Value of Financial Instruments
The carrying amount and fair values of the Company's financial instruments
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Term Loan ...................... $ 255,684 $ 255,684 $ 263,250 $ 263,250
Working Capital Facility ....... 43,000 43,000 -- --
Senior Subordinated Notes ...... 438,489 442,200 438,134 421,344
Subordinated Notes ............. 199,017 199,017 199,017 181,782
Subordinated Debentures ........ 95,750 95,271 95,750 88,846
Deferred Coupon Notes .......... 207,880 195,968 187,068 133,596
Debt payable to Holdings ....... 983 983 983 898
Industrial revenue bonds ....... 8,302 8,302 6,375 6,375
Other debt (primarily mortgages) 25,336 25,336 30,799 30,799
---------- ---------- ---------- ----------
Total debt ..................... $1,274,441 $1,265,761 $1,221,376 $1,126,890
========== ========== ========== ==========
</TABLE>
The fair value of the Term Loan and Working Capital Facility at
January 30, 1999 and January 31, 1998 approximated their carrying value due to
their floating interest rates. The fair value of the notes and debentures are
based on the quoted market prices at January 30, 1999 and January 31, 1998,
since such instruments are publicly traded. The Company has evaluated its other
debt (primarily mortgages) and industrial revenue bonds and believes, based on
interest rates, related terms and maturities, that the fair value of such
instruments approximates their respective carrying amounts. As of January 30,
1999 and January 31, 1998, the carrying values of cash and cash equivalents,
accounts receivable, due from suppliers and accounts payable approximated their
fair values due to the short-term maturities of these accounts.
Note 10--Interest Expense
Interest expense is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Years
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Term loans ..................................... $ 21,021 $ 22,884 $ 22,616
Working capital facilities ..................... 5,098 4,969 5,444
Senior Subordinated Notes
Amortization of original issue discount ..... 355 354 354
Currently payable ........................... 42,350 42,350 42,350
Subordinated Notes ............................. 23,136 23,151 23,136
Subordinated Debentures ........................ 12,088 12,088 12,088
Deferred Coupon Notes, accruable but not payable 20,812 18,509 16,678
Debt payable to Holdings ....................... 114 114 114
Amortization of debt issuance costs ............ 4,159 5,542 7,426
Lease obligations .............................. 21,259 22,091 19,364
Mortgages payable .............................. 2,562 3,462 3,736
Other, net ..................................... 7,840 8,654 8,163
-------- -------- --------
Interest expense ............................... $160,794 $164,168 $161,469
======== ======== ========
</TABLE>
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11--Lease Obligations
At January 30, 1999, 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>
1999 .......................................................... $ 39,720 $ 35,659
2000 .......................................................... 38,076 35,329
2001 .......................................................... 29,373 34,018
2002 .......................................................... 24,293 32,742
2003 .......................................................... 20,861 31,818
Thereafter ..................................................... 231,910 308,010
-------- --------
Total minimum lease payments(a) ................................ 384,233 $477,576
========
Less: executory costs (such as taxes, maintenance and insurance) 1,852
--------
Net minimum lease payments ..................................... 382,381
Less: amounts representing interest ............................ 199,804
--------
Present value of net minimum lease payments (including current
installments of $21,869)(b) ................................. $182,577
========
</TABLE>
- ----------
(a) Net of sublease income of $0.2 million and $36.1 million for capital and
operating leases, respectively.
(b) Includes $20.8 million related to a sale and leaseback accounted for as a
financing.
Rent expense, under all operating leases having noncancellable terms of
more than one year, is summarized as follows (dollars in thousands):
Fiscal Years
------------------------------------
1998 1997 1996
-------- -------- --------
Minimum rentals ...................... $ 42,659 $ 44,396 $ 42,481
Less: rentals from subleases(a) ...... (5,253) (8,131) (9,691)
-------- -------- --------
Rent expense ......................... $ 37,406 $ 36,265 $ 32,790
======== ======== ========
- ----------
(a) The decrease in sublease rentals is attributable to properties sold, as
discussed in Note 5.
Note 12--Pension and Other Benefit Plans
Pension and Other Postretirement Benefit Plans:
Effective in Fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits ("SFAS No. 132"). SFAS No. 132 revises disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans.
The Company maintains a defined benefit pension plan, which covers
substantially all non-union and certain union associates. The Company also
maintains an unfunded supplemental retirement plan for participants in the
defined benefit pension plan to provide benefits in excess of amounts permitted
to be paid under the provisions of the tax law. Additionally, the Company has
entered into individual retirement agreements with certain current and retired
executives providing for unfunded supplemental pension benefits upon their
retirement after attainment of age 60.
In addition, the Company provides its associates other postretirement
benefits, principally health care for non-union associates who retired prior to
January 1, 1998, and life insurance benefits.
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12--Pension and Other Benefit Plans--(Continued)
The following tables provide a reconciliation of the benefit obligation,
plan assets and the funded status of the plans, along with the amounts
recognized in the consolidated balance sheets and the weighted average
assumptions used (dollars in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
---------------- -----------------------------
January 30, January 31, January 30, January 31,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Change in benefit obligations:
Benefit obligations at beginning of period .... $ 146,764 $ 137,976 $ 17,308 $ 19,858
Service cost .................................. 2,984 3,208 314 399
Interest cost ................................. 10,173 9,847 959 1,139
Plan amendment ................................ 1,880 215 (2,577) --
Benefits paid ................................. (8,239) (5,834) (379) (1,219)
Actuarial experience (gains) losses ........... 5,556 1,352 (217) (2,869)
--------- --------- --------- ---------
Benefit obligations at end of period .......... $ 159,118 $ 146,764 $ 15,408 $ 17,308
========= ========= ========= =========
Change in fair value of plan assets:
Fair value of plan assets at beginning of year $ 213,771 $ 171,717 $ -- $ --
Actual return on plan assets .................. 35,939 49,352 -- --
Employer contribution ......................... 9 102 -- --
Benefits or expenses paid ..................... (6,500) (7,400) -- --
--------- --------- --------- ---------
Fair value of plan assets at end of year ...... $ 243,219 $ 213,771 $ -- $ --
========= ========= ========= =========
Reconciliation of funded status at end of period:
Funded status ................................. $ 84,101 $ 67,007 $ (15,408) $ (17,308)
Unrecognized prior service cost ............... 2,488 689 (6,833) (5,748)
Unrecognized net actuarial gains or losses .... (80,933) (69,835) (8,276) (8,690)
--------- --------- --------- ---------
Prepaid (accrued) benefit cost ................ $ 5,656 $ (2,139) $ (30,517) $ (31,746)
========= ========= ========= =========
Amount recognized in the consolidated balance
sheets:
Prepaid benefit cost .......................... $ 25,361 $ 17,293 $ -- $ --
Accrued benefit liabilities ................... (23,881) (22,033) (30,517) (31,746)
Intangible asset .............................. 4,176 2,601 -- --
--------- --------- --------- ---------
Net amount recognized ......................... $ 5,656 $ (2,139) $ (30,517) $ (31,746)
========= ========= ========= =========
Weighted average assumption at the end of year:
Discount rate ................................. 6.75% 7.00% 6.75% 7.00%
Expected return on plan assets ................ 9.50% 9.50% -- --
Rate of compensation increases ................ 3.75% 4.00% -- --
</TABLE>
Net pension and other postretirement benefit (income) costs include the
following components (dollars in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
---------------- -----------------------------
Fiscal Years Fiscal Years
------------------------------------ ------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost ...................... $ 2,984 $ 3,208 $ 3,771 $ 314 $ 399 $ 545
Interest cost ..................... 10,173 9,847 10,182 959 1,139 1,640
Expected return on assets ......... (17,414) (14,035) (14,095) -- -- --
Amortization of prior service cost 82 89 214 (1,492) (1,276) (638)
Recognition of gains .............. (1,908) (471) (273) (631) (590) (2,293)
Recognition of plan amendment ..... -- 165 2,033 -- -- --
-------- -------- -------- -------- -------- --------
Net benefit (income) costs ......... $ (6,083) $ (1,197) $ 1,832 $ (850) $ (328) $ (746)
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12--Pension and Other Benefit Plans--(Continued)
The health-care cost trend rate at January 30, 1999 was 3.75% and is
expected to remain at this level. A 1% change in the assumed health care cost
trend rate would have the following effects at January 30, 1999 (dollars in
thousands):
<TABLE>
<CAPTION>
1% Increase 1% Decrease
------ ------
<S> <C> <C>
Total of service and interest cost components .......... $ 180 $ 174
Postretirement benefit obligation ...................... $1,760 $1,713
</TABLE>
Assets of the Company's defined benefit pension plan are invested in
marketable securities comprised primarily of equities of domestic corporations,
U.S. Government instruments and money market investments. The increase in other
assets in the consolidated balance sheet is primarily attributable to the
increase of the funded pension assets, resulting from favorable investment
experience during Fiscal 1998. The projected benefit obligation (included in the
above table) and the accumulated benefit obligation for the unfunded
supplemental retirement plans were $24.7 million and $23.9 million,
respectively, at January 30, 1999 and $22.5 million and $20.6 million,
respectively, at January 31, 1998.
The Company also contributes to several multi-employer plans, which
provide defined benefits to certain union associates. The Company's
contributions to these multi-employer plans were $16.5 million, $19.0 million
and $18.7 million in Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively.
Savings Plan:
The Company sponsors a savings plan for eligible non-union associates.
Contributions under the plan are based on specified percentages of associate
contributions. The Company's contributions to the savings plan were $3.1
million, $3.0 million and $3.6 million in Fiscal 1998, Fiscal 1997 and Fiscal
1996, respectively.
Other Postemployment Benefits:
The Company also provides its associates postemployment benefits,
primarily long-term disability and salary continuation. The obligation for these
benefits was determined by application of the provisions of the Company's
long-term disability plan and includes the age of active claimants at disability
and at valuation, the length of time on disability and the probability of the
claimant remaining on disability to maximum duration. These liabilities are
recorded at their present value utilizing a discount rate of 4%.
The accumulated postemployment benefit obligation as of January 30, 1999
and January 31, 1998 was $8.0 million and $8.9 million, respectively. The net
postemployment benefit cost consisted of the following components (dollars in
thousands):
Fiscal Years
------------------------
1998 1997 1996
---- ---- ----
Service cost of benefits earned during the year ...... $ 132 $1,412 $1,314
Interest cost on accumulated postemployment obligation 409 409 316
------ ------ ------
Net postemployment benefit cost ...................... $ 541 $1,821 $1,630
====== ====== ======
The decrease in the net postemployment benefit cost in Fiscal 1998
compared to the prior year is due to lower long-term disability expense,
resulting from favorable claims experience, and lower salary continuation
expense, resulting from a lower number of covered associates.
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13--Income Taxes
The income tax (provision) benefit is comprised of the following (dollars
in thousands):
Fiscal Years
------------------------------------
1998 1997 1996
---- ---- ----
Current
Federal ........................... $ 3,600 $ (4,629) $ 1,084
State ............................. (574) (2,719) 769
Deferred
Federal ........................... 6,020 18,755 9,626
State ............................. 3,466 7,198 2,932
Change in valuation allowance ..... (14,103) (1,900) --
-------- -------- --------
Income tax (provision) benefit ........ $ (1,591) $ 16,705 $ 14,411
======== ======== ========
The total income tax (provision) benefit differs from the expected federal
statutory income tax (provision) benefit as follows (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Years
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax benefit at statutory tax rate $ 9,422 $ 15,712 $ 12,029
State income taxes ............................. 1,879 2,911 2,406
Change in valuation allowance .................. (14,103) (1,900) --
Other .......................................... 1,211 (18) (24)
-------- -------- --------
Income tax (provision) benefit ................. $ (1,591) $ 16,705 $ 14,411
======== ======== ========
</TABLE>
Deferred income tax assets and liabilities consist of the following
(dollars in thousands):
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
--------------------- ---------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Property and equipment ..................... $ -- $ 37,344 $ -- $ 50,216
Merchandise inventory and gross profit ..... -- 11,817 -- 11,840
Prepaid expenses ........................... -- 5,609 -- 6,108
Self-insured liabilities ................... 31,253 -- 36,230 --
Benefit plans .............................. 1,866 -- 6,248 --
Lease capitalization ....................... 19,714 -- 19,290 --
Alternative minimum taxes .................. 3,893 -- 8,752 --
General business credits ................... 9,194 -- 9,019 --
Net operating loss carryforwards ........... 31,122 -- 9,223 --
Other postretirement and
postemployment benefits .................. 15,600 -- 17,306 --
Deferred income ............................ 23,097 -- 26,909 --
Closed stores reserves and accrued expenses 16,506 -- 15,402 --
Capital loss carryforward .................. 20,259 -- 29,732 --
Other ...................................... 770 7,258 683 8,870
-------- -------- -------- --------
Subtotal ................................... 173,274 62,028 178,794 77,034
Less: valuation allowance .................. 61,853 -- 47,750 --
-------- -------- -------- --------
Total ...................................... $111,421 $ 62,028 $131,044 $ 77,034
======== ======== ======== ========
</TABLE>
The balance sheet classification of the deferred income tax assets and
liabilities is as follows (dollars in thousands):
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
------------------------------------------ ------------------------------------------
Current Noncurrent Total Current Noncurrent Total
------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Assets .................. $ 33,961 $ 139,313 $ 173,274 $ 37,695 $ 141,099 $ 178,794
Liabilities ............. (20,645) (41,383) (62,028) (17,685) (59,349) (77,034)
---------- ---------- ---------- ---------- ---------- ----------
Subtotal ................ 13,316 97,930 111,246 20,010 81,750 101,760
Less: valuation allowance (7,404) (54,449) (61,853) (9,389) (38,361) (47,750)
---------- ---------- ---------- ---------- ---------- ----------
Total ................... $ 5,912 $ 43,481 $ 49,393 $ 10,621 $ 43,389 $ 54,010
========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13--Income Taxes--(Continued)
The Company's net deferred income tax assets were $49.4 million and $54.0
million, net of a valuation allowance of $61.9 million and $47.8 million at
January 30, 1999 and January 31, 1998, respectively. The Company believes that
it is more likely than not that the net deferred tax assets will be realized
through the implementation of tax strategies which could generate taxable
income.
During Fiscal 1998 and Fiscal 1997, the net increases in the valuation
allowance were $14.1 million and $1.9 million, respectively. These changes
reflect increases in the valuation allowance related to those deferred tax
assets which the Company has concluded are not likely to be realized, partially
offset in Fiscal 1997 by a decrease in the valuation allowance related to the
utilization of the Company's capital loss carryforwards. The Company will
continue to assess the recoverability of its deferred income tax assets and
further adjustments to the valuation allowance may be necessary based on the
evidence available at that time. Federal and state net operating loss
carryforwards expire in Fiscal 1999 through Fiscal 2018. General business
credits consist of federal jobs credits and expire in Fiscal 2004 through Fiscal
2012.
In Fiscal 1998, Fiscal 1997 and Fiscal 1996, the Company made income tax
payments of $2.5 million, $4.8 million and $4.6 million, respectively, and
received income tax refunds of $4.5 million, $4.3 million and $5.5 million,
respectively.
Note 14--Stockholder's Deficiency
During the second quarter of Fiscal 1998, in conjunction with the paydown
of debt by PTK, Pathmark loaned $26.5 million to PTK in the form of a 14 1/2%
discount note, due May 12, 2003, accreting to a maturity value of $53.3 million.
PTK is not required to pay cash interest on this note. The note receivable from
PTK has been reflected as a separate component of stockholder's deficiency and
Pathmark is not reflecting interest income in its consolidated statements of
operations related to this note. Accordingly, the accretion on this note is
offset by a corresponding credit of $2.8 million to paid-in capital.
During Fiscal 1998, SMG-II issued restricted stock grants to certain
officers and key employees of Pathmark, pursuant to the SMG-II Holdings
Corporation 1997 Restricted Stock Plan (the "RS Plan"). Each restricted stock
award consisted of shares of SMG-II Class A Common Stock and SMG-II Series C
Preferred Stock and will become nonforfeitable upon the earlier of (i) the
seventh anniversary of the date of grant, and (ii) thirty days prior to a
Realization Event (as defined in the RS Plan), provided the awardee is an
employee of the Company or subsidiary at the time such anniversary or
Realization Event occurs. Generally, a Realization Event would occur upon a sale
or merger transaction involving SMG-II and/or its subsidiaries and a
nonaffiliated entity, or a public offering of SMG-II Class A Common Stock as a
result of which the aggregate price for all shares sold in the public offering
exceeds $50.0 million. Each restricted stock award will be forfeited upon
termination of employment prior to both a Realization Event and the seventh
anniversary of any restricted stock award (i) 180 days after such termination if
the termination is without Cause (as defined), or by reason of death, retirement
or disability, and (ii) immediately in the case of a resignation or termination
for Cause. The restricted stock awards were valued at $5.0 million at the date
of issuance, based on an independent appraisal, and are being amortized as
compensation expense in the Company's consolidated statements of operations over
the seven-year vesting period, with a corresponding credit of $0.48 million to
paid-in capital.
During Fiscal 1998, the Company paid a dividend of $60.0 thousand to its
stockholder to pay for its administrative expenses. Such dividend is limited to
$100.0 thousand per year in accordance with the Credit Agreement.
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15--Extraordinary Items
The extraordinary items, representing losses on early extinguishment of
debt, consist of the following (dollars in thousands):
Fiscal Years
------------------------
1997 1996
---- ----
Loss before income taxes ....................... $(12,944) $ (1,490)
Income tax benefit ............................. 5,456 613
-------- --------
Extraordinary items, net of a tax benefit ...... $ (7,488) $ (877)
======== ========
During the second quarter of Fiscal 1997, in connection with the Credit
Agreement, the Company wrote off deferred financing fees of $12.8 million
related to the former bank credit agreement, resulting in a net loss on early
extinguishment of debt of $7.4 million, net of an income tax benefit of $5.4
million. In addition, during the second quarter of Fiscal 1997, in connection
with the sale of certain mortgaged property, the Company made a mortgage paydown
of $2.9 million, including accrued interest and debt premiums, resulting in a
net loss on early extinguishment of debt of $0.1 million, net of an income tax
benefit of $0.1 million.
During the second quarter of Fiscal 1996, in connection with the proceeds
from the sale of certain mortgaged property, the Company made a mortgage paydown
of $5.3 million, including accrued interest and debt premium, resulting in a net
loss on early extinguishment of debt of $0.2 million, net of an income tax
benefit of $0.1 million. During the first quarter of Fiscal 1996, in connection
with the termination of the Plainbridge credit agreement due to the
reacquisition of Plainbridge by Pathmark, the Company wrote off deferred
financing fees, resulting in a net loss on early extinguishment of debt of $0.7
million, net of an income tax benefit of $0.5 million.
Note 16--Related Party Transactions
The Company was a party to an agreement, which has since been terminated,
pursuant to which the Company provided certain administrative services to
Chefmark. Such services included, among other things, legal, human resources,
data processing, insurance, accounting, tax, treasury and property management
services. The cost of the services charged to Chefmark under this agreement was
approximately $0.50 million in Fiscal 1998 and approximately $1.4 million in
each of Fiscal 1997 and 1996.
During Fiscal 1996, in conjunction with the hiring of a Chief Executive
Officer (the "CEO"), SMG-II granted the CEO an equity package (the "Equity
Strip") independently valued at $3.4 million and consisting of restricted shares
of SMG-II Preferred Stock and restricted shares and options of SMG-II Common
Stock. The Company recorded the Equity Strip as deferred compensation by the
means of a capital contribution from SMG-II (see Notes 20 and 23).
In addition, the Company retained John W. Boyle, a Director of the
Company, to act as its interim Chairman & Chief Executive Officer for the period
of March 20, 1996 through October 7, 1996 (the "Transition Period"). Under the
terms of the consulting arrangement between the Company and Mr. Boyle, the
Company paid Mr. Boyle a consulting fee of $41,667 per month ($288,980 in the
aggregate) plus living and travel expenses during the Transition Period. In
addition, Mr. Boyle received a completion bonus of $100,000 when the CEO
commenced employment with the Company.
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'
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 16--Related Party Transactions--(Continued)
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, 1999, Mr. Rubenstein remained indebted to Holdings in the amount of
$100,000.
During Fiscal 1998, Pathmark and SMG-II retained ML&Co. to act as its
financial advisor in connection with any proposed business combination involving
SMG-II and its subsidiaries. Pursuant to the terms of ML&Co.'s engagement,
SMG-II and Pathmark have agreed to pay ML&Co. for its services a fee in an
amount equal to 0.6% of the aggregate purchase price paid in such business
combination, payable in cash upon the consummation of such business combination,
and to reimburse ML&Co. for reasonable out-of-pocket expenses.
Note 17--Supply and Distribution Agreements
On January 29, 1998, the Company sold its Woodbridge, New Jersey
distribution center and office complex and its leasehold interests in its two
distribution centers and its banana ripening facility in North Brunswick, New
Jersey, Dayton, New Jersey and Avenel, New Jersey, respectively (all of the
foregoing buildings are hereinafter referred to as, collectively the
"Facilities"), to C&S Wholesale Grocers, Inc. ("C&S"), including the fixtures,
equipment and inventory in each of those Facilities, for $104.5 million (the
"C&S Purchase Agreement"). The Company used $32.5 million of the net proceeds to
pay down a portion of the Term Loan. A portion of the net proceeds were used to
pay down the Working Capital Facility at the end of Fiscal 1997. The remainder
of the proceeds were invested in marketable securities and, during Fiscal 1998,
were utilized to pay down accounts payable related to the inventory sold in
connection with the C&S Purchase Agreement and other liabilities.
Simultaneously, the Company and C&S entered into a 15-year supply agreement (the
"Supply Agreement"), pursuant to which C&S will supply substantially all of the
Company's grocery, frozen and perishable merchandise requirements, formerly
owned and warehoused by the Company. As a result of these agreements, the
Company recorded deferred income of $60.8 million at January 31, 1998. Such
deferred income consisted of (i) $25.0 million received by the Company for
future trade discounts and rebates, which is being amortized to operations as it
is earned, and (ii) $35.8 million in net proceeds received in excess of the fair
value of the assets sold; such excess has been deferred and is being amortized
to operations over the life of the Supply Agreement. At January 30, 1999, the
deferred income balance was $55.4 million.
As a result of the Supply Agreement, due from supplier transactions are
primarily processed directly through C&S. Prior to the C&S transaction, the
Company netted certain due from supplier receivables against corresponding
vendor accounts payable, since it had the right of offset. This transition has
resulted in an increase in the due from suppliers balance at January 30, 1999.
In addition, the Company outsourced its trucking operations to a third
party trucking company, pursuant to a ten-year trucking services agreement
effective October 5, 1997, in which the trucking company will deliver
merchandise to all of the Company's stores.
Note 18--Restructuring Charge
During the fourth quarter of Fiscal 1996, the Company recorded a pretax
charge of $9.1 million for reorganization and restructuring costs related to its
administrative operations. The restructuring charge included $4.2 million for
the costs of a voluntary early retirement program, which was accepted by 142
employees, and $1.2 million for severance and termination benefits for 80
employees. The remaining charge of $3.7 million primarily related to consulting
fees incurred in connection with the restructuring and exit costs for facility
consolidation.
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 18--Restructuring Charge--(Continued)
As of January 30, 1999, $7.9 million has been expended, of which $4.2
million related to the early retirement program and severance benefits and $3.7
million related to consulting costs and the facility consolidation. The
remaining balance of $1.2 million relates to early retirement benefits which
will be expended over time; such balance is included in the respective pension
and postretirement liability accounts.
Note 19--Lease Commitment Charge
During the fourth quarter of Fiscal 1996, the Company decided to divest a
group of its southern region stores, certain of which had 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 5).
During Fiscal 1997, the Company sold four and closed seven stores that it
announced for divestiture at the end of Fiscal 1996. The results of operations
for these 11 stores were as follows (dollars in thousands):
Fiscal Years
-----------------------------
1997 1996
---- ----
Sales ................................ $ 42,877 $152,599
======== ========
Operating loss ....................... $ 10,590 $ 10,663
======== ========
Note 20--Chief Executive Officer 1996 Employment Agreement
On October 8, 1996, the Company hired a CEO pursuant to a five-year
employment agreement (the "Employment Agreement"). In conjunction with his
employment, SMG-II granted to the CEO an Equity Strip consisting of 8,520
restricted shares of a new series of SMG-II Preferred Stock and 19,851
restricted shares of SMG-II Common Stock and options to purchase 100,000 shares
of SMG-II Common Stock at an initial exercise price of $100 per share (the
"Options"), with the said exercise price increasing over time. The Equity Strip
was valued at $3.4 million at the date of issuance, based upon an independent
appraisal, and will vest over the term of the Employment Agreement or earlier
with the occurrence of an employment-related event, as defined, and will be
forfeited in its entirety upon the occurrence of a termination event, as
defined. The Equity Strip is being amortized as compensation expense in the
Company's statement of operations over the term of the Employment Agreement. The
Options were accounted for by SMG-II using the methods prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
as a result, no compensation expense was recorded. The Options will vest over
four years and expire one year after being fully vested, except for the portion
of the Options that vest on the day before the fifth year and has not yet become
exercisable, the expiration of which will be extended to year seven. If
employment with the Company should end as a result of a termination event, the
Options (whether or not then vested) will be immediately and irrevocably
forfeited, except in certain circumstances. Vested Options do not become
exercisable until the occurrence of certain events related generally to the
realization of a third-party sale of SMG-II Common Stock. The CEO also received
(a) a one-time signing bonus of $1.0 million, which is being amortized as
compensation expense in the Company's statement of operations over the term of
the Employment Agreement, and (b) a $4.5 million loan evidenced by sixteen
separate promissory notes. Under the terms of each note, if he is in full
employment of the Company on a quarterly anniversary of his hiring date, his
obligation to pay such note maturing on such date will be forgiven as to
principal, but not any then accrued and unpaid interest. The Company has and
will continue to record compensation expense upon the forgiveness of each note.
In the event his employment ends as a result of a termination event, prior to a
change in control, as defined, each note will become immediately due and payable
as to all outstanding principal and all accrued and unpaid interest. These
notes, which bear interest at a blended rate of approximately 6%, are on a
full-recourse basis and secured by the Equity Strip, the Options and any shares
acquired upon exercise of such Options. The balance of the loan was
approximately $2.0 million and $3.1 million at January 30, 1999 and January 31,
1998, respectively. In addition to the Employment Agreement, Pathmark and the
CEO entered into a sale and transition agreement dated March 8, 1999 (see Note
23).
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 21--Commitments and Contingencies
Rickel:
In connection with the sale of its home centers segment in Fiscal 1994,
the Company, as lessor, entered into ten leases for certain of the Company's
owned real estate properties, including a distribution center, with Rickel as
tenant. In addition, the Company assigned to Rickel 25 third party leases.
In 1996, Rickel filed for bankruptcy protection under Chapter 11 of the
United States Bankruptcy Code. Subsequent to the bankruptcy filing, of the 35
locations leased to Rickel, 16 leases have been assigned by Rickel in 1998 to
Staples, Inc., 12 leases have either been terminated or assigned to third
parties, including Rickel's distribution center which was sold by the Company
during Fiscal 1998, and seven leases were rejected and are being actively
marketed by the Company to other prospective tenants.
Management has assessed its exposure with respect to this matter and has
concluded that it has sufficient reserves to cover any resulting liability which
may occur, including the future rent and real estate taxes, net of expected
recoveries.
Information Services Outsourcing:
In August 1991, the Company entered into a ten-year agreement with IBM to
provide a wide range of information systems services. Under the agreement, IBM
has taken over the Company's data center operations and mainframe processing and
information system functions and is providing business applications and systems
designed to enhance the Company's customer service and efficiency. The charges
under this agreement are based upon the services requested at predetermined
rates. The Company may terminate the agreement upon 90 days notice with payment
of a specified termination charge. The amounts expensed under this agreement in
the accompanying consolidated statements of operations were $26.5 million, $23.7
million and $22.1 million during Fiscal 1998, Fiscal 1997 and Fiscal 1996,
respectively.
Other:
On March 23, 1999, a purported holder of shares of Preferred Stock (as
defined in Note 23) filed an action in the Court of Chancery of the State of
Delaware, purportedly on behalf of the class of the holders of the Preferred
Stock, against Holdings, SMG-II, Ahold Acquisition, Inc. (the "Purchaser") and
the directors of Holdings (collectively, the "Defendants"). The complaint,
entitled Wolfson v. Supermarkets General Holdings Corporation, et al., C.A. No.
17047, alleges, among other things, that (i) certain of the Defendants have
issued materially false and misleading statements, and failed to disclose
material information, in the Schedule 14D-9 in violation of their fiduciary duty
of disclosure; (ii) SMG-II and the directors of Holdings breached certain
fiduciary duties owed to holders of the Preferred Stock and (iii) the Purchaser
knowingly aided and abetted SMG-II's and the directors of Holdings alleged
breaches of fiduciary duty. The complaint demands, among other things, judgment
(i) enjoining the Defendants preliminarily and permanently from consummating the
Offer and related transactions, (ii) ordering the Defendants to issue corrective
disclosures, (iii) ordering the Defendants to retain an independent financial
advisor to evaluate the fairness of the Offer and the related transactions and
(iv) awarding damages to the holders of the Preferred Stock. Holdings believes
that the claims against it, its directors and SMG-II are without merit and
intends to vigorously oppose them. The Purchaser has informed Holdings that it
believes that the claims against it are without merit and it intends to
vigorously oppose them.
The Company is a party to a number of other legal proceedings in the
ordinary course of business. Management believes that the ultimate resolution of
these proceedings will not, in the aggregate, have a material adverse impact on
the financial condition, results of operations, cash flows or business of the
Company.
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 22--Quarterly Financial Data (Unaudited)
Financial data for the interim periods of Fiscal 1998 and Fiscal 1997 is
as follows (dollars in thousands):
<TABLE>
<CAPTION>
13 Weeks Ended
--------------------------------------------------------
May 2, August 1, October 31, January 30, Fiscal
1998 1998 1998 1999 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
52 Weeks Ended January 30, 1999
Sales ......................... $ 916,015 $ 922,909 $ 899,990 $ 916,297 $ 3,655,211
Gross profit(a) ............... 264,153 261,825 255,527 261,892 1,043,397
Selling, general and
administrative expenses(b) .. 211,065 204,339 210,383 207,018 832,805
Depreciation and amortization . 19,648 19,713 19,577 17,780 76,718
Operating earnings ............ 33,440 37,773 25,567 37,094 133,874
Interest expense .............. (40,874) (39,938) (39,801) (40,181) (160,794)
Loss before income taxes ...... (7,434) (2,165) (14,234) (3,087) (26,920)
Income tax provision .......... (27) (13) (34) (1,517) (1,591)
Net loss ...................... $ (7,461) $ (2,178) $ (14,268) $ (4,604) $ (28,511)
</TABLE>
<TABLE>
<CAPTION>
13 Weeks Ended
--------------------------------------------------------
May 3, August 2, November 1, January 31, Fiscal
1997 1997 1997 1997 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
52 Weeks Ended January 31, 1998
Sales ......................... $ 922,319 $ 931,833 $ 900,986 $ 940,727 $ 3,695,865
Gross profit(c) ............... 259,262 262,150 248,174 273,990 1,043,576
Selling, general and
administrative expenses ..... 212,341 213,095 205,292 210,158 840,886
Depreciation and amortization . 20,174 19,942 21,366 21,931 83,413
Operating earnings ............ 26,747 29,113 21,516 41,901 119,277
Interest expense .............. (41,290) (41,262) (40,368) (41,248) (164,168)
Earnings (loss) before income
taxes and extraordinary items (14,543) (12,149) (18,852) 653 (44,891)
Income tax benefit (provision) 5,701 4,836 7,630 (1,462) 16,705
Loss before extraordinary items (8,842) (7,313) (11,222) (809) (28,186)
Extraordinary items, net of an
income tax benefit .......... -- (7,488) -- -- (7,488)
Net loss ...................... $ (8,842) $ (14,801) $ (11,222) $ (809) $ (35,674)
</TABLE>
- ----------
(a) The pretax LIFO provision for Fiscal 1998 was $3.4 million consisting of
provisions of $0.35 million in each of the first three quarters, and $2.35
million in the fourth quarter, respectively.
(b) Selling, general and administrative expenses for Fiscal 1998 included a
second quarter gain of $5.1 million recognized on the sale of certain real
estate.
(c) The pretax LIFO credit for Fiscal 1997 was $5.4 million consisting of
provisions of $0.4 million and $0.5 million in the first and second
quarters, respectively, and credits of $1.7 million and $4.6 million in
the third and fourth quarters, respectively.
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 23--Subsequent Event
On March 15, 1999, Koninklijke Ahold N.V., a company organized under the
laws of the Netherlands ("Ahold") and the Purchaser, a Delaware corporation and
an indirect wholly-owned subsidiary of Ahold, commenced a tender offer to
purchase all of the issued and outstanding shares (the "Shares") of Holdings'
$3.52 Cumulative Exchangeable Redeemable Preferred Stock (the "Preferred Stock")
at a price of $38.25 per Share, net to the seller in cash, without interest
thereon (the "Offer Price"), upon the terms and subject to the conditions set
forth in the Offer to Purchase dated March 15, 1999 (the "Offer to Purchase")
and the related Letter of Transmittal (which, together with the Offer to
Purchase and all amendments and supplements thereto, constitute the "Offer").
The Offer is an integral part of the transactions contemplated by, and is
being made pursuant to, an Agreement and Plan of Merger, dated as of March 9,
1999, among Ahold, the Purchaser and SMG-II (the "SMG-II Merger Agreement")
pursuant to which Ahold will be acquiring all of the issued and outstanding
shares of the capital stock of SMG-II, the indirect parent of the Company,
through the merger of the Purchaser with and into SMG-II (the "SMG-II Merger"),
subject to the terms and conditions contained in the SMG-II Merger Agreement for
aggregate consideration of $55,731,834. Pursuant to the SMG-II Merger Agreement,
the Offer is subject to certain conditions, including the condition that there
be validly tendered and not withdrawn prior to the expiration of the Offer a
number of Shares which, together with Shares previously acquired by Ahold, any
direct or indirect subsidiary of Ahold (including the Purchaser), Holdings, or
any direct or indirect subsidiary of Holdings, represent at least 66 2/3% of the
Shares on a fully diluted basis (the "Minimum Condition"). The Offer is also
conditioned upon, among other things, the expiration or termination of any
applicable waiting period under the antitrust laws and the receipt by Ahold of
an irrevocable letter from SMG-II stating that all of the conditions to the
obligations of SMG-II to effect the SMG-II Merger described below pursuant to
the SMG-II Merger Agreement have been satisfied or waived. The Offer has since
been extended until May 21, 1999.
The SMG-II Merger Agreement provides that, promptly upon consummation of
the SMG-II Merger, Ahold will cause Holdings to be merged with and into SMG-II
(the "Holdings Merger"), pursuant to a Merger Agreement (the "Holdings Merger
Agreement") to be entered into at such time between SMG-II and Holdings in the
form attached as an exhibit to the SMG-II Merger Agreement. At the effective
time of the Holdings Merger (the "Effective Time"), each of the Shares (other
than Shares held by any subsidiary of Holdings or in the treasury of Holdings,
or held, directly or indirectly, by Ahold or any direct or indirect subsidiary
of Ahold (including the Shares acquired by the Purchaser pursuant to the Offer),
which Shares will be cancelled, and other than Shares, if any, held by
stockholders who perfect their appraisal rights under Delaware General
Corporation Law) will be converted into the right to receive an amount in cash
equal to $38.25.
The SMG-II Merger Agreement provides that, among other things, in the
event all of the conditions to the consummation of the SMG-II Merger (other than
the Minimum Condition and certain related conditions) have been satisfied or
waived, but the Minimum Condition and certain related conditions have not been
satisfied or waived, SMG-II is obligated, pursuant to the terms and conditions
of a Stock Purchase Agreement dated as of March 9, 1999 (the "Alternative Stock
Purchase Agreement"), by and among SMG-II, PTK (the parent of the Company),
Ahold and the Purchaser to cause PTK to sell all of the issued and outstanding
shares of the capital stock (the "Pathmark Stock") of Pathmark for a purchase
price, payable in cash, equal to $242.8 million (the "Alternate Stock
Purchase"). In such event, the only material asset of Holdings would be its
ownership of all of the issued and outstanding shares of the capital stock of
PTK, the only material asset of which in turn would be the net after tax
proceeds from the sale of the Pathmark Stock to the Purchaser pursuant to the
Alternative Stock Purchase Agreement.
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 23--Subsequent Event--(Continued)
Concurrent with the execution of the SMG-II Merger Agreement, as required
by Ahold and the Purchaser, ML Investors (as defined in Item 5, Part II of this
Form 10-K), Equitable Investors (as defined in Item 5, Part II of this Form
10-K) and James L. Donald (collectively, the "SMG-II Stockholders"), entered
into a stockholders agreement, dated March 9, 1999 (the "Stockholders
Agreement"), with Ahold and Purchaser. Pursuant to the Stockholders Agreement,
the SMG-II Stockholders have (i) agreed to vote the shares of the capital stock
of SMG-II owned by them in favor of the SMG-II Merger, and (ii) granted the
Purchaser an option to purchase, under certain circumstances, the shares of the
capital stock of SMG-II owned by them.
In addition to the Employment Agreement as described in Note 20, Pathmark
and the CEO entered into a sale and transition agreement dated March 8, 1999.
The sale and transition agreement is intended to provide the CEO with an
incentive to remain employed by Pathmark both before and after the SMG-II Merger
or any similar sale of the Company. Pursuant to the sale and transition
agreement, the CEO may elect to exchange his Equity Strip and Stock Options (as
such terms are defined in the Employment Agreement) for the potential to earn a
sale bonus and a supplemental sale bonus in connection with a sale of the
Company. If a sale of the Company is successfully consummated while the CEO
continues to be employed by Pathmark, the CEO will become entitled to receive
$2.0 million in a lump sum cash amount from Pathmark, less withholding taxes.
After the sale of the Company is successfully consummated, the CEO will become
eligible to receive a supplemental sale bonus on the second anniversary of the
sale if he continues to be employed by Pathmark or the purchaser on such date.
If the SMG-II Merger or the Alternative Stock Purchase is consummated, the
supplemental sale bonus would be $7.2 million, less withholding taxes. The CEO
will also become entitled to receive the supplemental sale bonus if his
employment with Pathmark is terminated for reason other than misconduct on the
part of the CEO during the two year period following the Sale of the Company, if
the purchaser declines to continue to employ the CEO after the date of the sale
of the Company or upon the CEO's death or disability after the date of the sale
of the Company. The CEO will forfeit the supplemental sale bonus if (i) he
refuses to continue to be employed by Pathmark after the purchaser offers the
CEO reasonable terms of employment, (ii) the CEO resigns from his employment
with Pathmark other than for "good reason" (as such term is defined in the
Employment Agreement) or he is terminated by Pathmark for "cause" (as such term
is defined in the Employment Agreement) or (iii) the CEO becomes deceased or
permanently disabled prior to the date of the sale of the Company. The sale and
transition agreement must be approved by a vote of 75% of the stockholders of
Pathmark and its parent companies within ninety days after March 9, 1999.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
Pathmark Stores, Inc.
Carteret, New Jersey
We have audited the accompanying consolidated balance sheets of Pathmark
Stores, Inc. and its subsidiaries (the "Company") as of January 30, 1999 and
January 31, 1998, and the related consolidated statements of operations,
stockholder's deficiency and cash flows for each of the three years in the
period ended January 30, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of January 30,
1999 and January 31, 1998, and the results of their operations and their cash
flows for each of the three years in the period ended January 30, 1999 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
April 9, 1999
<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, 1999)
(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 each of the Company, PTK, Holdings and
SMG-II.
Director of the
Company
Name, Age, Principal Occupation and Other Directorships Since
------------------------------------------------------- ------------
MATTHIAS BOWMAN, 50, Director of Merrill Lynch Capital 1997
Partners, Inc., ("MLCP"), an investment firm affiliated
with Merrill Lynch & Co., ("ML& Co."), the financial
services concern, since 1998; Chief Executive Officer of
MLCP from 1994 to 1998; Vice Chairman of Investment
Banking with ML&Co. since 1993; Managing Director of
Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPFS") since at least 1992. Mr. Bowman is also a
Director of U.S. Foodservice Corp.
JOHN W. BOYLE, 70, Chairman and Chief Executive Officer 1995
(retired) of the Company from March 1996 to October 1996;
Vice Chairman (retired), Eckerd Corporation, a drug store
chain, between 1983 and 1995. Mr. Boyle is also Chairman
of United Artists Theater Circuit, Inc.
JAMES J. BURKE, JR., 47, Partner and a Director of 1988
Stonington Partners, Inc. ("SPI"), a private investment
firm, since 1993, and a Director of MLCP since 1987;
Managing Partner of MLCP from 1993 to 1994; President and
Chief Executive Officer of MLCP from 1987 to 1993. Mr.
Burke was also a Managing Director of ML&Co. until 1994.
Mr. Burke is also a Director of Ann Taylor Stores Corp.,
Borg-Warner Security Corp., Education Management Corp. and
United Artists Theater Circuit, Inc.(1)
JAMES DONALD, 45, Chairman, President and Chief Executive 1996
Officer of the Company (since October 1996); Senior Vice
President and General Manager, Safeway, Inc., Eastern
Division from February 1994 until October 1996; Vice
President-Marketing, Wal-mart Corp. prior thereto.
U. PETER C. GUMMESON, 40, Senior Vice President, Albion 1996
Alliance LLC, an asset manager specializing in private
debt and equity securities (since 1996). Mr. Gummeson has
also been Managing Director of Alliance Corporate Finance
Group Incorporated, an asset manager specializing in
private debt and equity securities since 1984. Both firms
are affiliated with the Equitable Investors.
STEPHEN M. McLEAN, 41, General Partner of Arena Capital 1987
Partners, LLC, a private investment firm since March 1999;
Partner and a Director of SPI from 1993 to February 1999;
Partner of MLCP from 1993 to 1994; Senior Vice President
of MLCP from 1987 to 1993; Director of MLCP since 1987;
Managing Director of the Investment Banking Division of
ML&Co. until 1994. Mr. McLean is also a Director of CMI
Industries, Inc., Dictaphone Corporation, Merisel, Inc.
and Packard Bio Science Company.(1)
<PAGE>
Director of the
Company
Name, Age, Principal Occupation and Other Directorships Since
------------------------------------------------------- ------------
ROBERT G. MILLER, 55, Chief Executive Officer of Fred Meyer, 1997
Inc., a diversified retailer. Mr. Miller is also a
Director of PacifiCorp.
ROBERT J. MYLOD, JR., 32, Vice President of priceline.com 1998
Incorporated, an internet commerce company since January
1999; Principal of SPI from 1996 to February 1999;
Associate of SPI from November 1993 to December 1995;
Associate of MLCP prior thereto. Mr. Mylod was also an
associate of the Investment Banking Division of MLPFS from
1993 to 1994.
JERRY G. RUBENSTEIN, 69, Managing Partner, Omni Management 1996
Associates; Consultant to MLCP since 1988.
- -------
(1) Includes service with Pathmark's predecessor.
Pursuant to the 1991 Stockholders Agreement, the ML Investors are entitled
to designate seven directors, the Management Investors are entitled to designate
up to three directors and The Equitable Investors are entitled to designate one
director to both Holdings' and SMG-II's Board of Directors. Such agreement
furthermore entitles the ML Investors to designate a majority of Holdings' Board
of Directors at all times. By having the ability to designate a majority of
Holdings' and SMG-II's Board of Directors, the ML Investors have the ability to
control the Company. Currently, six of the persons serving as directors were
designated by the ML Investors (Messrs. Bowman, Boyle, Burke, McLean, Mylod and
Rubenstein), one was designated by the Management Investors (Mr. Donald) and one
was designated by the Equitable Investors (Mr. Gummeson). Mr. Miller was
designated by the other directors. No family relationship exists between any
director and any other director or executive officer of the Company.
(b) Executive Officers
The following table sets forth the name, principal occupation or
employment at the present time and during the last five years, and the name of
any corporation or other organization in which such occupation or employment is
or was conducted, of the executive officers of the Company, all of whom are
citizens of the United States unless otherwise indicated and serve at the
discretion of the Board of Directors of the Company. The executive officers of
the Company listed below were elected to office for an indefinite period of
time. No family relationship exists between any executive officer and any other
executive officer or director of the Company.
Officer of
the Company
Name Age Positions and Office Since
---- -------------------- -----------
JAMES DONALD 45 Chairman, President and Chief 1996
Executive Officer since October
1996.(1)
EILEEN SCOTT 46 Executive Vice President, Marketing 1998
and Distribution (since January 1998);
Vice President, Non-Foods
Merchandising and Pharmacy (November
1995 - December 1997); Vice President,
Sales & Advertising (August 1994 -
November 1995); Director of Grocery
Sales prior thereto. Ms. Scott joined
the Company in 1969.
JOHN SHEEHAN 41 Executive Vice President--Operations 1996
(since January 1998); Senior Vice
President--Operations (October 1996 to
December 1997); Director of
Operations, Albertsons, Inc., prior
thereto.
JOSEPH W. ADELHARDT 52 Senior Vice President and Controller 1987
since January 1996; Vice President and
Controller prior thereto. Mr.
Adelhardt joined the Company in 1976.
<PAGE>
Officer of
the Company
Name Age Positions and Office Since
---- -------------------- -----------
HARVEY M. GUTMAN 53 Senior Vice President--Retail 1990
Development. Mr. Gutman joined the
Company in 1976.
ROBERT JOYCE 53 Senior Vice President--Administration 1989
(since October 1996); Executive Vice
President--Operations (from January
1996 to October 1996); Senior Vice
President--Operations-- from March
1995 to January 1996; Senior Vice
President--Administration prior
thereto. Mr. Joyce joined the Company
in 1963.
MARC A. STRASSLER 50 Senior Vice President, Secretary and 1987
General Counsel since May 1998; Vice
President, Secretary and General
Counsel prior thereto. Mr. Strassler
joined the Company in 1974.
FRANK VITRANO 43 Senior Vice President, Chief Financial 1995
Officer and Treasurer since September
1998; Vice President and Treasurer
from December 1996 to September 1998;
Treasurer from July 1995 to December
1996; Director --Risk Management prior
thereto. Mr. Vitrano joined the
Company in 1972.
MYRON D. WAXBERG 65 Vice President and General 1991
Counsel--Real Estate. Mr. Waxberg
joined the Company in 1976.
- --------
(1) Member of the Company's Board of Directors.
ITEM 11. Executive Compensation.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
----------------------------------------- -------------------------
Other Securities
Annual Restricted Underlying All Other
Bonus Compensation Stock Awards Options/SARs Compensation
Name and Principal Position Year Salary ($) ($)(1) ($) (2) ($) (3) (#) ($) (4)
---- -------- ---------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
James L. Donald.................... 1998 600,000 750,000 1,125,000 -- -- 8,480
Chairman, President and Chief 1997 600,000 425,000 1,179,390 -- -- 3,632
Executive Officer 1996 193,846 1,175,000 340,021 3,400,000 100,000 16,821
Eileen Scott....................... 1998 220,000 182,600 -- 500,000 -- 5,600
Executive Vice President- 1997 153,846 80,707 -- -- -- 5,405
Merchandising & Distribution
John Sheehan....................... 1998 220,000 182,600 -- 500,000 -- --
Executive Vice President - 1997 186,312 52,537 80,793 -- -- --
Operations 1996 51,923 81,231 9,733 -- -- --
Robert Joyce....................... 1998 231,749 127,461 2,195 250,000 -- 5,600
Senior Vice President - 1997 230,062 63,267 2,195 -- -- 5,600
Administration 1996 223,846 26,862 2,195 -- -- 5,250
Harvey Gutman...................... 1998 210,641 115,853 3,811 250,000 -- 5,600
Senior Vice President 1997 200,103 32,011 3,841 -- -- 5,600
Retail Development 1996 192,850 19,285 3,841 -- -- 5,250
</TABLE>
- --------
(1) The amounts with respect to Fiscal 1998 in this column represent bonuses
awarded pursuant to the Company's executive incentive plan.
<PAGE>
(2) Represents in Fiscal 1998 (i) with respect to Mr. Donald, forgiveness of
loan payments due to the Company of $1,125,000; and (ii) with respect to
Messrs. Gutman 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.
(3) Other than with respect to Mr. Donald, the grants of restricted stock
reflected in the Summary Compensation Table were made pursuant to the SMG-II
Holdings Corporation 1997 Restricted Stock Plan (the "RS Plan"). Each award
consisted of shares of SMG-II Class A Common Stock and SMG-II Series C
Preferred Stock (collectively, the "Restricted Shares"). Under the terms of
the RS Plan, each restricted stock award will become nonforfeitable upon the
earlier of (i) the seventh anniversary of the date of grant and (ii) thirty
days prior to a Realization Event (as defined in RS Plan). Generally, a
Realization Event would occur upon a sale or merger transaction involving
SMG-II and/or it subsidiaries and a nonaffiliated entity, or a public
offering of SMG-II Class A Common Stock as a result of which the aggregate
price for all shares sold in the public offering exceeds $50 million
dollars. Since the shares of SMG-II are privately owned and not traded on
the public market, amounts shown in the Summary Compensation Table are based
on the Company's determination of the fair market value of the Restricted
Shares at the time of the grant. In determining the fair market value of the
Restricted Shares, SMG-II considered various factors such as SMG-II and its
subsidiaries' performance, financial condition and forecasts and projections
prepared by management with respect to the Company for the fiscal years 1998
through 2001 as well as the opinion of an independent advisory firm. Based
on the foregoing, SMG-II determined that the fair market value of its Class
A Common Stock and Series C Preferred Stock on the date of grant was $0 and
$200 per share, respectively. The value and number of restricted stock
holdings at January 30, 1999 for each of the named executives are as
follows: Mr. Donald - $1,704,000 (19,851 shares of SMG-II Class A Common
Stock and 8,520 shares of SMG-II Series C Preferred Stock); Mr. Gutman -
$250,000 (3,750 shares of SMG-II Class A Common Stock and 1,250 shares of
SMG-II Series C Preferred Stock); Mr. Joyce - $250,000 (3,750 shares of
SMG-II Class A Common Stock and 1,250 shares of SMG-II Series C Preferred
Stock); Ms. Scott - $500,000 (7,500 shares of SMG-II Class A Common Stock
and 2,500 shares of SMG-II Series C Preferred Stock); and Mr. Sheehan -
$500,000 (7,500 shares of SMG-II Class A Common Stock at 2,500 shares of
SMG-II Series C Preferred Stock).
(4) Represents in Fiscal 1998 (i) with respect to Mr. Donald, payments of $3,632
for a term life insurance premium on Mr. Donald's life and $4,858
representing the Company's matching contribution to the SGC Savings Plans
and (ii) with respect to the other named executive officers, the Company's
matching contribution under the SGC Savings Plan.
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values(1)
Number of Securities
Underlying Unexercised
Options/SARs at FY-End (#)
Exercisable/
Name Unexercisable
---- -------------
James Donald.......................................... 0/100,000
Robert Joyce.......................................... 2,360/0
Harvey Gutman......................................... 2,600/0
John Sheehan.......................................... 0/0
Eileen Scott.......................................... 150/260
- ----------
(1) Except with respect to Mr. Donald, options shown were granted pursuant to
the SMG-II 1987 Management Investors Stock Option Plan (the "Plan), relate
to shares of Class A Common Stock of SMG-II and have an exercise price of
$100 per share. No options were either granted to or exercised by any of
the above named executives in Fiscal 1998.
<PAGE>
Pension Plan Table(1)
Years of Service
----------------------------------------------------
Final Average Pay 10 15 20 25 30 or more
- ----------------- -- -- -- -- ----------
300,000................ 40,000 60,000 80,000 100,000 120,000
350,000................ 46,667 70,000 93,333 116,667 140,000
400,000................ 53,333 80,000 106,667 133,333 160,000
450,000................ 60,000 90,000 120,000 150,000 180,000
500,000................ 66,667 100,000 133,333 166,667 200,000
550,000................ 73,333 110,000 146,667 183,333 220,000
600,000................ 80,000 120,000 160,000 200,000 240,000
650,000................ 86,667 130,000 173,333 216,667 260,000
700,000................ 93,333 140,000 186,667 233,333 280,000
750,000................ 100,000 150,000 200,000 250,000 300,000
800,000................ 106,667 160,000 213,334 266,668 320,000
850,000................ 113,333 170,000 226,666 283,333 340,000
900,000................ 120,000 180,000 240,000 300,000 360,000
950,000................ 126,667 190,000 253,334 316,668 380,000
1,000,000................ 133,334 200,000 266,668 333,335 400,000
1,100,000................ 146,666 220,000 293,332 366,665 440,000
1,200,000................ 160,000 240,000 320,000 400,000 480,000
1,300,000................ 173,334 260,000 346,668 433,335 520,000
1,400,000................ 186,666 280,000 373,332 466,665 560,000
1,500,000................ 200,000 300,000 400,000 500,000 600,000
1,600,000................ 213,332 320,000 426,664 533,330 640,000
1,700,000................ 226,666 340,000 453,332 566,669 680,000
- ----------
(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
1999 after the indicated number of years of covered employment and if the
average of the participant's covered compensation for the five years out of
the last ten years of such employment yielding the highest such average
equaled the amounts indicated. The estimated annual benefits are based on
the assumption that the individual will receive retirement benefits in the
form of a single life annuity (married participants may elect a joint
survivorship option) and are before applicable deductions for social
security benefits in effect as of January 1999. As of December 31, 1998, the
following individuals had the number of years of credited service indicated
after their names: Mr. Donald, 2.2, Mr. Gutman, 22.8; Mr. Joyce, 28.7, Mr.
Sheehan, 2.2; and Ms. Scott, 23.8. As described below in "Compensation Plans
and Arrangements--Supplemental Retirement Agreements", certain of the named
executives are party to a Supplemental Retirement Agreement with Pathmark.
Compensation Plans and Arrangements
Supplemental Retirement Agreements. The Company has entered into
supplemental retirement agreements with Messrs. Gutman and Joyce, 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, 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
<PAGE>
Compensation based on 20 years of service, or (ii) $150,000, whichever is less.
"Compensation" includes base salary and bonus payments, but excludes Company
matching contributions under the Savings Plan. If the executive leaves the
Company prior to completing 20 years of service (other than for disability), the
supplemental benefit would be reduced proportionately. Should the executive die,
the surviving spouse then receiving or, if he or she was not then receiving a
supplemental pension benefit, the spouse would be entitled to a benefit equal to
two-thirds of the benefit to which the executive would have been entitled,
provided the executive has attained at least ten years of service with the
Company.
Employment Agreements:
Employment Agreement Among Pathmark, SMG-II and James L. Donald. On
October 8, 1996 (the "Effective Date"), the Company and SMG-II entered into an
employment agreement with Mr. James L. Donald (the "Donald Agreement") pursuant
to which Mr. Donald was elected Chairman, President and Chief Executive Officer
for a term of five years. The Donald Agreement provides Mr. Donald with an
initial annual base salary of $600,000 and provides that he shall participate in
the Pathmark Executive Incentive Plan, under which Mr. Donald may earn an annual
bonus of up to 125% of his annual salary based on performance targets that are
set by the Board. Under the Donald Agreement, Mr. Donald is guaranteed an annual
bonus for each of the second, third and fourth full fiscal years of the term of
at least 25% of his base salary. The Donald Agreement provides Mr. Donald with
the right to defer up to 50% of his annual bonus and salary, which shall be held
in a grantor trust established by the Company. During the term of the Donald
Agreement, in addition to the base salary, bonus eligibility and other customary
annual benefits and perquisites that the Company generally provides to its
executive officers, the Company will provide Mr. Donald with a company car and
term life insurance in the amount of $4.5 million during the first year and $3.2
million thereafter. The Company also reimbursed Mr. Donald for the legal
expenses incurred by him in the negotiation of the Donald Agreement. Mr. Donald
also received a one-time signing bonus of $1 million, which is being amortized
over the term of the Donald Agreement.
Furthermore, Mr. Donald received an equity package (the "Equity Strip"),
consisting of 8,520 restricted shares of a new series of SMG-II Preferred Stock
with a stated value of $200 per share and 19,851 restricted shares of SMG-II
Class A Common Stock, the terms of which are set forth in the stock award
agreement (the "Stock Award Agreement"). The Equity Strip, which as of the
Effective Date was valued by the Company at $3.4 million based upon an
independent appraisal, will vest in its entirety upon the occurrence of an
Employment-Related Event, as defined in the Stock Award Agreement, and will be
forfeited in its entirety upon the occurrence of a Termination Event, as defined
in the Donald Agreement. The valuation of $3.4 million is being amortized by the
Company over the term of the Donald Agreement. The SMG-II Preferred Stock ranks
pari passu with the existing SMG-II convertible preferred stock and will accrue
dividends at a rate of 10% per annum. The SMG-II Preferred Stock will be
convertible into Common Stock on a one-for-one basis.
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
<PAGE>
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 1991
Stockholders Agreement and the piggyback rights under Article VI of the
Stockholders Agreement, the Option shall not be exercisable (even though the
Option or a portion thereof is vested) unless and until it becomes exercisable
in accordance with the following provisions:
(i) The Exercisable Percentage (as defined below) of each component of
the Option will become exercisable if the ML Investors (as defined
in the Stockholders Agreement) have a Realization Event (as defined
below) in respect of the Common Stock at a per share price in excess
of the amounts (the "Target Prices") set forth below :
Target Price per Target Price per
Share/Option Share/Option
Period of Time 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
(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 1991
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 1991 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 1991 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.
<PAGE>
In the event of Mr. Donald's Involuntary Termination, Pathmark will pay
him (w) the full amount of any accrued but unpaid base salary, plus a cash
payment (calculated on the basis of the base salary then in effect) for all
unused vacation time which Mr. Donald may have accrued as of the date of
Involuntary Termination; (x) the amount of any earned but unpaid Annual Bonus
for any Fiscal Year of Pathmark ended on or prior to the date of Involuntary
Termination; (y) any unpaid reimbursement for business expenses; and (z) a
severance amount equal to four times Mr. Donald's annual rate of salary, based
upon the annual rate then in effect immediately prior to the date of
termination, payable in monthly installments over 24 months. In addition, in the
event of an Involuntary Termination, Mr. Donald and his eligible dependents
shall continue to be eligible to participate in the medical, dental, health and
life insurance plans applicable to Mr. Donald immediately prior to the
Involuntary Termination on the same terms and conditions in effect immediately
prior to such Involuntary Termination until the earliest to occur of (i) the end
of the 24-month period after the date of termination, the date Mr. Donald
becomes eligible to be covered under the benefit plans of a subsequent employer
and (iii) the date Mr. Donald breaches any of the protective covenants described
below. Furthermore, in the event of an Involuntary Termination, the Equity Strip
will automatically and without the need for further action or consent by
Pathmark become fully vested in the manner provided by the Stock Award
Agreement, and the Option will continue to remain outstanding to the extent
provided by the Option Agreement. All notes not previously delivered to Mr.
Donald will automatically and without the need for further action or consent by
Pathmark be delivered by the escrow agent to Mr. Donald marked "Paid in Full"
upon payment by Mr. Donald of any then accrued but unpaid interest on the Loan.
During the 30-day period beginning 6 months after a Change in Control, Mr.
Donald shall be eligible to resign from the Company for no stated reason and
receive all the amounts listed in clauses (w), (x), (y) and (z) above. Any such
resignation in such 30-day period following a Change in Control shall be treated
as an Involuntary Termination for all purposes of this Agreement.
In the event Mr. Donald's employment ends at any time during the term as a
result of a Termination Event, the Company shall pay him only the amounts
decried in clauses (w), (x) and (y) above, and Mr. Donald will immediately
forfeit the Equity Strip and the Option. In addition, each note will become
immediately due and payable as to all outstanding principal and all accrued and
unpaid interest if Mr. Donald's employment ends prior to a Change in Control as
a result of a Termination Event.
Although, in the event of an Involuntary Termination, Mr. Donald has no
duty to mitigate the severance amount by seeking new employment, any severance
amount payable during the second year of the severance period shall be reduced
by any compensation or benefits Mr. Donald earns in connection with any
employment by another employer.
The Donald Agreement includes protective covenants that prohibit Mr.
Donald from engaging (i) in any activity in competition with Pathmark, or any
parent or subsidiary thereof or (ii) in soliciting employees or customers of
Pathmark, or any parent or subsidiary thereof, during his term of employment and
up to two years thereafter. The Donald Agreement also includes a confidentiality
clause which prohibits Mr. Donald from disclosing any confidential information
regarding Pathmark.
The following definitions apply to the terms of the Donald Agreement:
"1991 Stockholders Agreement" shall mean the Stockholders Agreement, dated
as of February 4, 1991, as amended, among SMG-II and its stockholders.
"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.
<PAGE>
"Change in Control" means the acquisition by a person (other than a person
or group of persons that beneficially owns an equity interest in SMG-II or
Pathmark on the Effective Date or any person controlled thereby) of more
than 50% control of the voting securities of SMG-II as a result of a sale
of voting securities after the Effective Date by the persons who, on the
Effective Date, have a beneficial interest in such voting securities, but
shall not include any change in the ownership of Pathmark or SMG-II
resulting from a public offering.
"Common Stock" means SMG-II Class A Common Stock, par value $0.01 per
share.
"Exercisable Percentage" means (i) in connection with a Third Party Sale,
the percentage of the shares of Common Stock subject to the Option that
Mr. Donald is entitled to sell pursuant to the exercise of his "tag-along"
rights under the Stockholders Agreement and (ii) in connection with a
Public Offering, the percentage of the shares of Common Stock then
beneficially owned by the ML Investors (as defined in the Stockholders
Agreement) which are sold in the Public Offering.
"Good Reason" means Mr. Donald's resignation because of (i) the failure of
Pathmark to pay any material amount of compensation to Mr. Donald when
due, (ii) a material adverse reduction or material adverse diminution in
Mr. Donald's titles, duties, positions or responsibilities with Pathmark,
including, but not limited to, failure by Pathmark to elect Mr. Donald to
the office of Chief Executive Officer, or (iii) any other material breach
by Pathmark of the Donald Agreement. In order to assert Good Reason, Mr.
Donald must provide written notification of his intention to resign within
30 business days after he knows or has reason to know the occurrence of
any such event. After Mr. Donald provides such written notice to Pathmark,
Pathmark shall have 15 days from the date of receipt of such notice to
effect a cure of the condition constituting Good Reason.
"Involuntary Termination" means (i) the termination of Mr. Donald's
employment by Pathmark other than for Cause or disability or (ii) Mr.
Donald's resignation of employment with Pathmark for Good Reason.
"Minimum IPO" means a Public Offering of the Common Stock after the Date
of Grant at the conclusion of which the aggregate price for all the shares
of Common Stock having been sold to the public in such Public Offering,
plus the aggregate offering price for all shares of Common Stock sold in
all prior Public Offerings of Common Stock occurring after the date that
Mr. Donald is granted any Option, exceeds $50 million.
"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.
"SMG-II Preferred Stock" shall mean a new series of convertible preferred
stock that will be issued for purposes of the Donald Agreement.
"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 1991 Stockholders Agreement.
<PAGE>
In addition to the Donald Agreement, Pathmark and Mr. Donald entered into
a sale and transition agreement dated March 8, 1999. The sale and transition
agreement is intended to provide Mr. Donald with an incentive to remain employed
by Pathmark both before and after the SMG-II Merger (or any similar Sale of the
Company (as defined below). Pursuant to the sale and transition agreement, Mr.
Donald may elect to exchange his Equity Strip and Stock Options (as such terms
are defined in the Donald Agreement) for the potential to earn a sale bonus and
a supplemental sale bonus in connection with a Sale of the Company. If a Sale of
the Company is successfully consummated while Mr. Donald continues to be
employed by Pathmark, Mr. Donald will become entitled to receive $2.0 million in
a lump sum cash amount from Pathmark, less withholding taxes. After the Sale of
the Company is successfully consummated, Mr. Donald will become eligible to
receive a supplemental sale bonus on the second anniversary of the sale if he
continues to be employed by Pathmark or the purchaser on such date. If the
SMG-II Merger or the Alternative Stock Purchase is consummated, the supplemental
sale bonus would be $7.2 million, less withholding taxes. Mr. Donald will also
become entitled to receive the supplemental sale bonus if his employment with
Pathmark is terminated for reason other than misconduct on the part of Mr.
Donald during the two year period following the Sale of the Company, if the
purchaser declines to continue to employ Mr. Donald after the date of the Sale
of the Company or upon Mr. Donald's death or disability after the date of the
Sale of the Company. Mr. Donald will forfeit the supplemental sale bonus if (i)
he refuses to continue to be employed by Pathmark after the purchaser offers Mr.
Donald reasonable terms of employment, (ii) Mr. Donald resigns from his
employment with Pathmark other than for "good reason" (as such term is defined
in the Donald Agreement) or he is terminated by Pathmark for "cause" (as such
term is defined in the Donald Agreement) or (iii) Mr. Donald becomes deceased or
permanently disabled prior to the date of the Sale of the Company. The sale and
transition agreement must be approved by a vote of 75% of the stockholders of
Pathmark and its parent companies within ninety days after March 9, 1999.
For purposes of the sale and transition agreement, a "Sale of the Company"
will be deemed to have occurred on the date that SMG-II or any subsidiary
thereof consummates any of the transactions described below:
(i) any transaction through which a person that is engaged in any business
that is classified within Section 42, Section 44, or Section 45 of the 1997
edition of the U.S. government publication North American Industry
Classification System (such person, an "Independent Third Party") directly
acquires, in exchange for cash, stock or property, fifty percent or more of the
aggregate equity securities of SMG-II of which the MLCP Investors and the
Equitable Investors (each as defined below) (together, the "Stockholders") are
Beneficial Owners(as defined below) as of the date of the sale and transition
agreement; and
(ii) any transaction through which an Independent Party (A) becomes the
Beneficial Owner of fifty percent or more of the outstanding equity securities
of Pathmark in exchange for cash, stock or property or (B) acquires all or
substantially all of the assets of Pathmark.
"Beneficial Owner" has the meaning given to such term in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended: "MLCP Investors" means Merrill
Lynch Capital Appreciation Partnership No. IX, L.P., ML Offshore LBO Partnership
No. IX, ML Employees LBO Partnership No. I., L.P., ML IBK Positions, Inc.,
Merchant Banking L.P. No. I, Merrill Lynch KECALP L.P. 1987, Merrill Lynch
Capital Appreciation Partnership No. B-X, L.P., ML Offshore LBO Partnership No.
B-X, L.P., MLCP Associates, L.P. No. II, Merchant Banking L.P. No. IV, Merrill
Lynch KECALP L.P. 1989 and Merrill Lynch KECALP L.P. 1991: "Equitable Investors"
means Equitable Life Assurance Society of the United States and Equitable Deal
Flow Fund, L.P.; and "Independent Third Party" means any entity other any of the
Stockholders or any entity controlled by or under common control with any of the
Stockholders.
<PAGE>
Other Executive Employment Agreements
As of February 1, 1999, Pathmark entered into employment agreements with
each of Ms. Scott and Messrs. Sheehan, Gutman and Joyce. Each agreement has a
two-year term which renews automatically for an additional one-year term unless
proper notice is provided by either party to the others of such party's desire
to terminate the agreement. Each agreement provides for a certain minimum level
of compensation ($225,000 per annum base salary for Ms. Scott and Mr. Sheehan;
$231,749 per annum base salary for Mr. Joyce; and $213,665 per annum base salary
for Mr. Gutman) and benefits and a sale bonus, subject to each executive's
continuing employment with Pathmark on the date of the SMG-II Merger or any
other Sale of the Company (which is defined in the same manner as Sale of the
Company under Mr. Donald's sale and transition agreement). The sale bonus for
each of Ms. Scott and Mr. Sheehan will be equal to the greater of (i) his or her
current base salary multiplied by two and (ii) an amount equal to one percent of
the fair market value of the cash and property received by the equity holders of
both preferred and common stock of SMG-II as a result of the Sale of the
Company. The sale bonus for each of Messrs. Gutman and Joyce will be equal to
twice his maximum annual bonus potential.
Each of the employment agreements also provide that each executive shall
be entitled an annual bonus of up to 75% of his or her annual base salary with
respect to Mr. Sheehan and Ms. Scott, and up to 55% of his annual base salary
with respect to Messrs. Joyce and Gutman, 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 Pathmark without Cause (as defined in the employment agreements),
or by the executive for Good Reason (as defined in the employment agreements)
prior to a Sale of the Company, such executive will be entitled to continue to
receive his base salary and continued coverage under health and insurance plans
(the "Termination Benefits") for the period commencing on the date of such
termination or resignation through the date that the applicable employment
agreement would have expired had it not been automatically renewed but for said
termination or resignation. If, after a Sale of the Company, one of the four
above executives is terminated by Pathmark without Cause, or by the executive
for Good Reason, the executive is entitled to receive the Termination Benefits
for a period of two years from the date of such termination or resignation. The
employment agreements must be approved by a vote of 75% of the stockholders of
Pathmark and its parent companies within 180 days after February 1, 1999.
The employment agreements contain agreements by the executives not to
compete with Pathmark as long as they are receiving payments under an employment
agreement by the executives not to disclose confidential information.
Compensation Committee Interlocks and Insider Participation
Messrs. Burke, Boyle and McLean comprise the compensation committee of the
Board of Directors of SMG-II and are responsible for decisions concerning
compensation of the executive officers of the Company. Messrs. Burke and McLean
are directors of MLCP and have been retained by MLCP as consultants. MLCP is an
indirect wholly-owned subsidiary of ML&Co. See Item 12 "Security Ownership of
Certain Beneficial Ownership and Management."
Compensation of Directors
Each director who is not employed by the Company or one of its
subsidiaries, or employed or retained as a consultant by SPI, MLCP or the
Equitable Investors or its affiliates receives an aggregate annual retainer of
$20,000 per year, plus travel expenses, for service as a director on the Board
of Directors of SMG-II and its subsidiaries, including the Company.
<PAGE>
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
As of April 15, 1999, all shares of the Company's capital stock is held by
PTK. All of PTK's capital stock is held by Holdings. All shares of the Holdings
Common Stock are held by SMG-II. As of April 15, 1999, the number of shares of
SMG-II (i) Class A Common Stock, (ii) Class B Common Stock, (iii) Series A
Preferred Stock, (iv) Series B Preferred Stock and (v) Series C Preferred Stock,
beneficially owned by the persons known by management of the Company to be the
beneficial owners of more than 5% of the outstanding shares of any class as
"beneficial ownership" has been defined under Rule 13d-3, as amended, under the
Securities Exchange Act of 1934, are set forth in the following table:
<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 65.3
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
Chemical Investments, Inc.(4) ............................................ 30,000 4.0
270 Park Avenue
New York, NY 10017
James L. Donald .......................................................... 19,851 (1) 2.6
200 Milik Street
Carteret, NJ 07008
Management Investors (excluding Mr. Donald) and other employees (including
former employees of Pathmark) .......................................... 148,625 (1) 19.9
200 Milik Street
Carteret, NJ 07008
SMG-II Class B Common Stock
The Equitable Life Assurance Society of the United States(5) ............. 150,000 46.9
c/o Albion Alliance LLC
1345 Avenue of the Americas, 39th Floor
New York, NY 10005
Equitable Deal Flow Fund, L.P.(5) ........................................ 150,000 46.9
c/o Albion Alliance LLC
1345 Avenue of the Americas, 39th Floor
New York, NY 10005
Chemical Investments, Inc.(4) ............................................ 20,000 6.2
SMG-II Series A Preferred Stock(6)
Merrill Lynch Capital Appreciation Partnership No. B-X, L.P.(2) .......... 133,043 56.2
ML Offshore LBO Partnership No. B-X(2) ................................... 40,950 17.3
MLCP Associates, L.P. No. II(2) .......................................... 1,740 .7
ML IBK Positions, Inc.(3) ................................................ 46,344.5 19.6
Merchant Banking L.P. No. IV(3) .......................................... 3,779 1.6
Merrill Lynch KECALP L.P. 1989(3) ........................................ 7,000 3.0
Merrill Lynch KECALP L.P. 1991(3) ........................................ 3,874.5 1.6
SMG-II Series B Preferred Stock(6)
Chemical Investments, Inc.(4) ............................................ 12,500 7.0
The Equitable Life Assurance Society of the United States(5) ............. 84,134 46.5
Equitable Deal Flow Fund, L.P.(5) ........................................ 84,135 46.5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number % of
Name of Shares Class
---- --------- -----
<S> <C> <C>
SMG-II Series C Preferred Stock(6)............................................ 8,520 25.4
James Donald
Management Investors (excluding Mr. Donald) 25,000 74.6
</TABLE>
- ----------
(1) Excludes "out of the money" options (a) granted to Mr. Donald for 100,000
shares of SMG-II Class A Common Stock and (b) granted under the Plan for
53,889 shares of SMG-II Class A Common Stock held by Management Investors,
other than Mr. Donald.
(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.
Messrs. Burke, McLean and Mylod are consultants to MLCP. Mr. Bowman is a
director of MLCP.
(3) Merchant Banking L.P. No. 1, Merchant Banking L.P. No. IV, Merrill Lynch
KECALP L.P. 1987, Merrill Lynch KECALP L.P. 1989, Merrill Lynch KECALP L.P.
1991 and ML IBK Positions, Inc. are indirectly controlled by ML&Co. The
address of such entities is c/o James Caruso, Merrill Lynch & Co., Inc.,
World Financial Center, South Tower, New York, New York, 10080-6123.
(4) Chemical Investments, Inc. is an affiliate of Chase Manhattan Corp.
(5) The Equitable Investors are separate purchasers who are affiliates of each
other.
(6) SMG-II Preferred Stock may be converted into an equivalent number of shares
of common stock of SMG-II in accordance with its terms.
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 and SMG-II Series C Preferred Stock. As of April 15,
1999, the number of shares of SMG-II Class A Common Stock and SMG-II Series C
Preferred Stock beneficially owned by each director, by each of the executive
officers named in the Summary Compensation Table and by all directors and
executive officers as a group is as follows:
<TABLE>
<CAPTION>
SMG-II Class A SMG-II
Common Stock Series C
Name Number of Shares % of Class Preferred Stock % of Class
---- ---------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Matthias Bowman(1) .................. -- -- -- --
John W. Boyle(2) .................... -- -- -- --
James J. Burke, Jr.(1) .............. -- -- -- --
James Donald ........................ 19,851 2.6 8,520 25.4
Robert Miller ....................... -- -- -- --
Harvey Gutman(2) .................... 4,100 * 1,250 3.7
U. Peter C. Gummeson ................ -- -- -- --
Robert J. Mylod, Jr ................. -- -- -- --
Stephen M. McLean(1) ................ -- -- -- --
Jerry G. Rubenstein(2) .............. 1,500 * -- --
Robert Joyce(2) ..................... 4,450 * 1,250 3.7
John Sheehan ........................ 7,500 * 2,500 7.5
Eileen Scott(2) ..................... 7,500 * 2,500 7.5
Directors and executive officers as a
group(1)(2) ......................... 41,450 5.5 21,020 62.7
</TABLE>
- ----------
* Less than 1%
<PAGE>
(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) Excludes presently exercisable "out of the money" options granted under the
Plan to purchase shares of SMG-II Class A Common Stock, as follows: Mr.
Gutman, 2,600; Mr. Joyce, 2,420; Ms. Scott, 150; Mr. Rubenstein, 1,000; and
Mr. Boyle, 3,000 and all directors and executive officers as a group,
12,250.
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 1991 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 1991
Stockholders Agreement requires a vote of at least 80% of the members of the
Board of Directors to cause the Company to conduct any business other than that
engaged in by the Company in February of 1991 and the approval of stockholders
representing 662/3% of the number of shares of SMG-II voting capital stock
voting together as a single class for SMG-II to enter into any Significant
Transaction (as defined), including certain mergers, sales of assets,
acquisitions, sales or redemptions of stock, the amendment of the certificate of
incorporation or by-laws or the liquidation of SMG-II. The 1991 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 1991 Stockholders Agreement also contains an agreement of the
stockholders of SMG-II with respect to the composition of SMG-II's and Holdings'
Board of Directors. Under this agreement, the Merrill Lynch Investors will be
entitled to designate up to seven directors, the Management Investors will be
entitled to designate up to three directors and the Equitable Investors will be
entitled to designate one director to both of SMG-II's and Holdings' Board of
Directors. Such agreement furthermore entitles the ML Investors to designate a
majority of Holdings' Board of Directors at all times. By having the ability to
designate a majority of Holdings' Board of Directors, the ML Investors have the
ability to control the Company, since Holdings (through PTK) owns all of the
outstanding shares of the Company's Common Stock. The ML Investors are
controlled by ML&Co.
In addition to the foregoing, the 1991 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,
Chairman, President and Chief Executive Officer, was provided by Pathmark with a
four-year loan of $4.5 million. The foregoing indebtedness to Pathmark is
evidenced by 16 full recourse promissory notes for $281,250 each bearing
interest at the short-term or intermediate-term federal rate in effect as of the
date of each note (effective rate of 6%) and secured by the Equity Strip 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,
1999, Mr. Donald remained indebted to the Company in the amount of $1,968,750.
In March 1990, Jerry G. Rubenstein, a Director, borrowed from Holdings
$100,000 in order to help finance his purchase of Holdings' Class A Common
Stock. Subsequently, such shares of Holdings' Class A Common Stock were
exchanged for shares of SMG-II Class A Common Stock. The foregoing indebtedness
to Holdings is evidenced by a full recourse promissory note (the "Recourse
Note"). The Recourse Note is for a term of ten years and bears interest at the
rate of 8.02% per annum, payable annually. Except as otherwise provided in the
<PAGE>
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, 1999, Mr.
Rubenstein remained indebted to Holdings in the amount of $100,000.
During Fiscal 1998, Pathmark and SMG-II retained ML&Co. to act as its
financial advisor in connection with any proposed business combination involving
SMG-II and its subsidiaries. Pursuant to the terms of ML&Co.'s engagement,
SMG-II and Pathmark have agreed to pay ML&Co. for its services a fee in an
amount equal to 0.6% of the aggregate purchase price paid in such business
combination, payable in cash upon the consummation of such business combination
and to reimburse ML&Co. for reasonable out-of-pocket expenses.
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this Report.
1. Financial Statement Schedules: None required
2. Exhibits:
Incorporated herein by reference is a list of the Exhibits
contained in the Exhibit Index on Pages 62 through 64 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.
<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: April 29, 1999 PATHMARK STORES, INC.
By /s/ Frank Vitrano
-------------------------------------
(Frank Vitrano)
Senior Vice President and
Chief Financial Officer
By /s/ Joseph Adelhardt
-------------------------------------
(Joseph Adelhardt)
Senior Vice President and Controller,
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ JAMES DONALD Director, Chairman, President April 29, 1999
---------------- and Chief Executive Officer
(James Donald) (Principal Executive Officer)
/s/ FRANK VITRANO Senior Vice President and Chief April 29, 1999
----------------- Financial Officer
(Frank Vitrano) (Principal Financial Officer)
/s/ JOSEPH ADELHARDT Senior Vice President and April 29, 1999
-------------------- Controller
(Joseph Adelhardt) (Principal Accounting Officer)
MATTHIAS BOWMAN Director* April 29, 1999
---------------
(Matthias Bowman)
JOHN W. BOYLE Director* April 29, 1999
-------------
(John W. Boyle)
JAMES J. BURKE, JR. Director* April 29, 1999
-------------------
(James J. Burke, Jr.)
STEPHEN M. McLEAN Director* April 29, 1999
-----------------
(Stephen M. McLean)
ROBERT G. MILLER Director* April 29, 1999
----------------
(Robert G. Miller)
ROBERT MYLOD, JR. Director* April 29, 1999
-----------------
(Robert Mylod, Jr.)
U. PETER C. GUMMESON Director* April 29, 1999
--------------------
(U. Peter C. Gummeson)
JERRY G. RUBENSTEIN Director* April 29, 1999
-------------------
(Jerry G. Rubenstein)
*By: /s/ MARC A. STRASSLER
---------------------
Marc A. Strassler
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
Exhibit Page
No. Exhibit No.
- --------- ------ ----
2.1 --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)..................................
2.2 --Agreement and Plan of Merger dated March 9, 1999 among Ahold,
Purchaser and SMG-II (filed as an exhibit to the Purchaser's
Tender Offer Statement on Schedule 14D-1 dated March 15, 1999
(the "Tender Offer") and incorporated herein by reference.....
2.3 --Stock Purchase Agreement dated March 9, 1999 among Ahold,
Purchaser, SMG-II and PTK (filed as an exhibit to the
Tender Offer, and incorporated herein by reference............
2.4 --Stockholders Agreement dated March 9, 1999 among Ahold,
Purchaser and Stockholders listed on Exhibit I thereto
(filed as an exhibit to the Tender Offer, and incorporated
herein by reference). ........................................
3.1 --Restated Certificate of Incorporation of the Registrant
(incorporated by reference from the Annual Report on Form
10-K of Registrant for the year ended January 31, 1998 (the
"1997 10-K")) ................................................
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 "1993 10-K")) ..........................
3.3 --By-Laws of the Registrant (incorporated by reference from
Exhibit 3.3 to the Registration Statement on Form S-1 of
Registrant, File No. 33-59612, (the "October 1993 Registration
Statement") ..................................................
4.1 --Indenture between the Registrant and United States Trust
Company of New York, Trustee, relating to the Senior
Subordinated Notes due 2003 of the Registrant (incorporated by
reference from the 1993 10-K) ................................
4.1A --Senior Subordinated Note due 2003 of the Registrant (contained
in the Indenture filed as Exhibit 4.1) (incorporated by
reference from the 1993 10-K) ................................
4.2 --Indenture between the Registrant and NationsBank of Georgia,
National Association, Trustee, relating to the Junior
Subordinated Deferred Coupon Notes due 2003 of the Registrant
(incorporated by reference from the 1994 contained in the
Indenture filed as Exhibit 4.2) (incorporated by reference
from the 1993 10-K) ..........................................
4.2B --Indenture between the Registrant and Wilmington Trust Company,
Trustee, relating to the 115/8% Subordinated Notes due 2002 of
the Registrant (incorporated by reference from the 1993 10-K)
..............................................................
4.3 --Indenture between the Company and Wilmington Trust Company,
Trustee, relating to the 125/8% Subordinated Debentures due
2002 of the Registrant (incorporated by reference from the
1993 10-K) ...................................................
4.4A --Credit Agreement dated as of June 30, 1997 ("the Credit
Agreement") among the Registrant, the Lenders listed therein,
and Chase Manhattan Bank as Agent (incorporated by reference
from Registrant's Form 10-Q for the period ended August 2,
1997) ........................................................
4.4B* --Amendment No. 1 to the Credit Agreement dated as of November
27, 1998 .....................................................
<PAGE>
Exhibit Page
No. Exhibit No.
- --------- ------ ----
10.1 --First Amended and Restated Supply Agreement among Registrant,
Plainbridge and C&S Wholesale Grocers, Inc. dated as of
January 29, 1998 (incorporated by reference from the 1997
10-K) ........................................................
10.2 --Tax Sharing Agreement between the Registrant and SMG-II
(incorporated by reference from the 1993 10-K) ...............
10.3 --Tax Indemnity Agreement between the Registrant and Plainbridge
(incorporated by reference from the 1993 10-K) ...............
10.4 --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) ....................................................
10.5 --Supermarkets General Corporation Savings Plan (as Amended and
Registration Statement on Form S-1 of Holdings, File No.
33-16963) ....................................................
10.6 --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 ..................................
10.7A --Supplemental Retirement Agreement dated June 1, 1994 between
Pathmark and Harvey Gutman (incorporated by reference from the
Annual Report on Form 10-K of Pathmark for the year ended
January 28, 1995 (the "1994 10-K") ...........................
10.7B --Supplemental Retirement Agreement dated June 1, 1994 between
Pathmark and Robert Joyce (incorporated by reference from the
1994 10-K) ...................................................
10.8 --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).....
10.9 --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) ..................
10.11 --Stock Pledge Agreement dated October 5, 1987, between Holdings
and each Management Investor listed therein (incorporated by
reference from Exhibit 10.44 to Post-Effective Amendment No. 1
to the Registration Statement on Form S-1 of Holdings, File
No. 33-16963) ................................................
10.12 --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) .................................
10.13 --Form of Stock Option Agreement under the Option Plan
(incorporated by reference from Exhibit 10.16 to the October
1993 Registration Statement) .................................
10.14 --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) ...................................................
10.15 --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)...........................
<PAGE>
Exhibit Page
No. Exhibit No.
- --------- ------ ----
10.16A* --SMG-II Holdings Corporation 1997 Restricted Stock Plan (the
"Restricted Stock Plan") .....................................
10.16B* --Form of Restricted Stock Agreement under the Restricted Stock
Plan .........................................................
10.17 --Employment Agreement dated as of October 8, 1996 among
Registrant, SMG-II and James Donald (incorporated by reference
from Registrant's Annual Report on Form 10-K for the year
ended February 1, 1997) ......................................
10.18 --Sale and Transition Agreement between Pathmark and James J.
Donald dated March 8, 1999 (filed as an exhibit to Holdings
Solicitation/Recommendation Statement on Schedule 14D-9 dated
March 15, 1999 (the "Holdings 14D-9"), and incorporated herein
by reference) ................................................
10.19 --Employment Agreement between Pathmark and Eileen Scott dated
February 1, 1999 (filed as an Exhibit to the Holdings 14D-9,
and incorporated herein by reference) ........................
10.20 --Employment Agreement between Pathmark and John Sheehan dated
February 1, 1999 (filed as an Exhibit to the Holdings 14D-9,
and incorporated herein by reference) ........................
10.21 --Employment Agreement between Pathmark and Marc A. Strassler
dated February 1, 1999 (filed as an Exhibit to the Holdings
14D-9, and incorporated herein by reference) .................
10.22 --Employment Agreement between Pathmark and Frank Vitrano dated
February 1, 1999 (filed as an Exhibit to the Holdings 14D-9,
and incorporated herein by reference) ........................
10.23 --Employment Agreement between Pathmark and Joseph Adelhardt
dated February 1, 1999 (filed as an Exhibit to the Holdings
14D-9, and incorporated herein by reference) .................
10.24 --Employment Agreement between Pathmark and Harvey Gutman dated
February 1, 1999 (filed as an Exhibit to the Holdings 14D-9,
and incorporated herein by reference) ........................
10.25 --Employment Agreement between Pathmark and Robert Joyce dated
February 1, 1999 (filed as an Exhibit to the Holdings 14D-9,
and incorporated herein by reference) ........................
10.26 --Employment Agreement between Pathmark and Myron D. Waxberg
dated February 1, 1999 (filed as an Exhibit to the Holdings
14D-9, and incorporated herein by reference) .................
12.1* --Statements Regarding Computation of Ratio of Earnings to Fixed
Charges ......................................................
22.1* --List of Subsidiaries of the Registrant .......................
- ----------
* Filed herewith.
EXHIBIT 4.4B
AMENDMENT NO. 1 dated as of November 27, 1998 (this
"Amendment"), to the Credit Agreement dated as of June 30,
1997 (the "Credit Agreement"), among PATHMARK STORES, INC.
(the "Borrower"), the LENDERS party thereto (the "Lenders"),
THE CHASE MANHATTAN BANK, as Administrative Agent (the
"Administrative Agent"), and CIBC INC. and CORESTATES BANK,
N.A., as Co-Agents.
A. The Lenders have extended credit to the Borrower and have agreed
to extend credit to the Borrower, in each case on the terms and subject to the
conditions set forth in the Credit Agreement.
B. The Borrower has requested that the Lenders agree to amend
certain provisions of the Credit Agreement as provided herein.
C. The Lenders are willing to agree to such amendments, on the terms
and subject to the conditions set forth therein.
D. Capitalized terms used but not defined herein shall have the
meanings assigned to them in the Credit Agreement.
Accordingly, in consideration of the mutual agreements herein
contained and other good and valuable consideration, the sufficiency and receipt
of which are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. Amendments. (a) Section 1.01 of the Credit Agreement is
hereby amended as follows:
(i) by inserting the following definition in the appropriate
alphabetical order:
"'Permitted Other Dispositions Amount' shall mean (a) for the
1998 Fiscal Year, $50,000,000, (b) for the 1999 Fiscal Year,
$50,000,000 less the aggregate amount of Net Proceeds (up to but not
exceeding $50,000,000) resulting during the 1998 Fiscal Year from
dispositions referred to in clause (a)(iv) of the definition of the
term "Prepayment Event" and (c) for each other Fiscal Year,
$25,000,000."
(ii)by (A) inserting the phrase "during any Fiscal Year" immediately
following the phrase "other dispositions" in clause (a)(iv) of the
definition of the term "Prepayment Event", (B) deleting the phrase
"$25,000,000 during any Fiscal Year" in such clause and (C) inserting at
the end of such clause immediately before the semicolon the words "the
Permitted Other Dispositions Amount for such Fiscal Year".
(b) Section 6.04(i) of the Credit Agreement is hereby amended by
inserting the following at the end of such Section immediately before the
period:
"(provided that interest and dividends accreted, accrued or
paid-in-kind on instruments or securities of another Person held or
owned by the Borrower or a Subsidiary shall not increase the
aggregate amount deemed invested by the Borrower or such Subsidiary
in such instruments or securities and outstanding for purposes of
this Section 6.04(i))".
<PAGE>
SECTION 2. Fees. Each Lender that delivers an executed counterpart
of this Amendment prior to noon on the date this Amendment becomes effective
shall receive from the Borrower an amendment fee equal to 0.125% of the sum of
(a) the aggregate principal amount of such Lender's Loans to the Borrower and
(b) the aggregate amount of such Lender's available Commitments. The Borrower
shall pay, in immediately available funds, such amendment fees to the
Administrative Agent for distribution to such Lenders on the date this Amendment
becomes effective. Once paid, such fee shall not be refundable under any
circumstances.
SECTION 3. Representations and Warranties. The Borrower represents
and warrants to the Administrative Agent and to each of the Lenders that:
(a) This Amendment is within the Borrower's corporate powers and has
been duly authorized by all necessary corporate action. This Amendment has
been duly executed and delivered by the Borrower and constitutes its
legal, valid and binding obligation, enforceable in accordance with its
terms subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally and subject
to general principles of equity, regardless of whether such enforceability
is considered in a proceeding in equity or at law.
(b) Before and after giving effect to this Amendment, the
presentations and warranties set forth in Article III of the Credit
Agreement are true and correct in all material respects with the same
effect as if made on the date hereof, except to the extent such
representations and warranties expressly relate to an earlier date.
(c) Before and after giving effect to this Amendment, no Event of
Default or Default has occurred and is continuing or will result herefrom.
SECTION 4. Conditions to Effectiveness. This Amendment shall become
effective as of the date first above written when the Administrative Agent shall
have received (a) counterparts of this Amendment that, when taken together, bear
the signatures of the Borrower and the Required Lenders and (b) all fees and
expenses payable to the Administrative Agent pursuant to Sections 2 and 9.
SECTION 5. Credit Agreement. Except as specifically amended hereby,
the Credit Agreement shall continue in full force and effect in accordance with
the provisions thereof as in existence on the date hereof. After the date
hereof, any reference to the Credit Agreement shall mean the Credit Agreement as
amended hereby.
SECTION 6. Loan Document. This Amendment shall be a Loan Document
for all purposes.
SECTION 7. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 8. Counterparts. This Amendment may be executed in two or
more counterparts, each of which shall constitute an original but all of which
when taken together shall constitute but one agreement.
<PAGE>
SECTION 9. Expenses. The Borrower agrees to reimburse the
Administrative Agent for its out-of-pocket expenses in connection with this
Amendment, including the reasonable fees, charges and disbursements of Cravath,
Swaine & Moore, counsel for the Administrative Agent.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective authorized officers as of the day and year
first written above.
PATHMARK STORES, INC.,
by /s/ Frank Vitrano
-------------------------------------------
Name: Frank Vitrano
Title: Sr. VP, Treasurer & CFO
THE CHASE MANHATTAN BANK, individually, as
Issuing Bank and as Administrative Agent,
by /s/ William P. Rindfuss
-------------------------------------------
Name: William P. Rindfuss
Title: Vice President
<PAGE>
SIGNATURE PAGE TO
AMENDMENT NO. 1,
DATED AS OF
November 27, 1998
To approve the Amendment:
Name of Institution AERIES FINANCE LTD.
---------------------------------------------------
by
/s/ Andrew I. Wignall
---------------------------------------------------
Name: Andrew I. Wignall
Title: Director
Name of Institution AG CAPITAL FUNDING PARTNERS, L.P.
---------------------------------------------------
by Angelo, Gordon & Co., L.P. as Investment Adviser
/s/ Jeffrey H. Aronson
---------------------------------------------------
Name: JEFFREY H. ARONSON
Title: Managing Director
Name of Institution CERES FINANCE LTD.
---------------------------------------------------
by
/s/ John H. Cullinane
---------------------------------------------------
Name: John H. Cullinane
Title: Director
Name of Institution CIBC INC.
---------------------------------------------------
by
/s/ Katherine Bass
---------------------------------------------------
Name: Katherine Bass
Title: Executive Director
CIBC Oppenheimer Corp, AS AGENT
<PAGE>
SIGNATURE PAGE TO
AMENDMENT NO. 1,
DATED AS OF
November 27, 1998
To approve the Amendment:
Name of Institution COMMERCIAL LOAN FUNDING TRUST I
--------------------------------------------------------
by Lehman Commercial Paper Inc. Not its Individual
Capacity but solely as Administrative Agent
/s/ Michele Swanson
--------------------------------------------------------
Name: MICHELE SWANSON
Title: Authorized Signatory
Name of Institution CypressTree Investment Partners I, Ltd., by CypressTree
Investment Management Company, Inc. as Portfolio Manager
--------------------------------------------------------
by
/s/ Timothy M. Barns
--------------------------------------------------------
Name: TIMOTHY M. BARNS
Title: Managing Director
Name of Institution DLJ CAPITAL FUNDING, INC.
--------------------------------------------------------
by
/s/ Howard Shams
--------------------------------------------------------
Name: Howard Shams
Title: Vice President
<PAGE>
SIGNATURE PAGE TO
AMENDMENT NO. 1,
DATED AS OF
November 27, 1998
To approve the Amendment: First Union Bank, as successor by acquisition to
CoreStates Bank, N.A.
Name of Institution
--------------------------------------------------------
by
/s/ Thomas J. McDonnell
--------------------------------------------------------
Name: Thomas J. McDonnell
Title: Vice President
Name of Institution GENERAL ELECTRIC CAPITAL CORPORATION
--------------------------------------------------------
by
/s/ Janet K. Williams
--------------------------------------------------------
Name: Janet K. Williams
Title: Duly Authorized Signatory
Name of Institution GOLDMAN SACHS CREDIT PARTNERS L.P.
--------------------------------------------------------
by
/s/ Stephen B. King
--------------------------------------------------------
Name: Stephen B. King
Title: Authorized Signatory
Name of Institution KZH CNC LLC
--------------------------------------------------------
by
/s/ Virginia Conway
--------------------------------------------------------
Name: Virginia Conway
Title: Authorized Agent
<PAGE>
SIGNATURE PAGE TO
AMENDMENT NO. 1,
DATED AS OF
November 27, 1998
To approve the Amendment:
Name of Institution KZH CYPRESSTREE-i LLC.
--------------------------------------------------------
by
/s/ Virginia Conway
--------------------------------------------------------
Name: Virginia Conway
Title: Authorized Agent
Name of Institution KZH PAMCO LLC
--------------------------------------------------------
by
/s/ Virginia Conway
--------------------------------------------------------
Name: Virginia Conway
Title: Authorized Agent
Name of Institution MERRILL LYNCH PRIME RATE PORTFOLIO
--------------------------------------------------------
by Merrill Lynch Asset Management, L.P., as
Investment Advisor
/s/ Paul Travers
--------------------------------------------------------
Name: Paul Travers
Title: Authorized Signatory
<PAGE>
SIGNATURE PAGE TO
AMENDMENT NO. 1,
DATED AS OF
November 27, 1998
To approve the Amendment:
Name of Institution METROPOLITAN LIFE INSURANCE COMPANY
--------------------------------------------------------
by
/s/ James R. Dingler
--------------------------------------------------------
Name: James R. Dingler
Title: Director
Name of Institution THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
--------------------------------------------------------
by
/s/ Jerome R. Baier
--------------------------------------------------------
Name: Jerome R. Baier
Title: Its Authorized Representative
Name of Institution PAM CAPITAL FUNDING, L.P.
--------------------------------------------------------
by Highland Capital Management as Collateral Manager
/s/ Mark K. Okada
--------------------------------------------------------
Name: Mark K. Okada CFA
Title: Executive Vice President
Highland Capital Management L.P.
Name of Institution PAMCO CAYMAN LTD.
--------------------------------------------------------
by Highland Capital Management as Collateral Manager
/s/ Mark K. Okada
--------------------------------------------------------
Name: Mark K. Okada CFA
Title: Executive Vice President
Highland Capital Management L.P.
<PAGE>
SIGNATURE PAGE TO
AMENDMENT NO. 1,
DATED AS OF
November 27, 1998
To approve the Amendment:
Name of Institution PILGRIM HIGH INCOME INVESTMENTS LTD.
--------------------------------------------------------
by Pilgrim Investments, Inc. as its Investment Manager
/s/ Michel Prince
--------------------------------------------------------
Name: Michel Prince, CFA
Title: Vice President
Name of Institution PILGRIM PRIME RATE TRUST
--------------------------------------------------------
by Pilgrim Investments, Inc. as its Investment Manager
/s/ Michel Prince
--------------------------------------------------------
Name: MICHEL PRINCE, CFA
Title: VICE PRESIDENT
Name of Institution PNC BANK, N.A.
--------------------------------------------------------
by
/s/ Michael Richards
--------------------------------------------------------
Name: Michael Richards
Title: Vice President
Name of Institution STRATA FUNDING LTD.
--------------------------------------------------------
by
/s/ John H. Cullinane
--------------------------------------------------------
Name: John H. Cullinane
Title: Director
<PAGE>
SIGNATURE PAGE TO
AMENDMENT NO. 1,
DATED AS OF
November 27, 1998
To approve the Amendment:
Name of Institution SUMMIT BANK
--------------------------------------------------------
by
/s/ Edward M. Tessalone
--------------------------------------------------------
Name: Edward M. Tessalone
Title: Vice President
Name of Institution TORONTO DOMINION (TEXAS), INC.
--------------------------------------------------------
by
/s/ Anne C. Favoriti
--------------------------------------------------------
Name: Anne C. Favoriti
Title: Vice President
Name of Institution TRANSAMERICA BUSINESS CREDIT CORPORATION
--------------------------------------------------------
by
/s/ Perry Vavoules
--------------------------------------------------------
Name: Perry Vavoules
Title: Senior Vice President
Name of Institution VAN KAMPEN AMERICAN CAPITAL PRIME
RATE INCOME TRUST
--------------------------------------------------------
by
/s/ Jeffrey W. Maillet
--------------------------------------------------------
Name: Jeffrey W. Maillet
Title: Senior Vice President & Director
<PAGE>
SIGNATURE PAGE TO
AMENDMENT NO. 1,
DATED AS OF
November 27, 1998
To approve the Amendment:
Name of Institution VAN KAMPEN CLO I, LIMITED
--------------------------------------------------------
by Van Kampen American Capital Management Inc.,
/s/ Jeffrey W. Maillet
--------------------------------------------------------
Name: Jeffrey W. Maillet
Title: Senior Vice President & Director
EXHIBIT 10.16A
SMG-II HOLDINGS CORPORATION
1997 RESTRICTED STOCK PLAN
1. Purpose. The SMG-II Holdings Corporation 1997 Restricted Stock
Plan (the "Plan") is intended to attract, retain and motivate officers and key
employees of SMG-II Holdings Corporation, a Delaware corporation, or any
successor corporation thereto (the "Company") and its Subsidiaries (as
hereinafter defined), to compensate them for their contributions to the growth
and profits of the Company and its Subsidiaries and to encourage ownership by
them of stock of the Company.
2. Definitions. For purposes of the Plan, the following terms shall
be defined as follows:
"Award Agreement" means a written agreement granting a Restricted
Stock Award, which is executed by the Participant and by an officer on
behalf of the Company, and containing such terms and conditions as the
Committee deems appropriate and that are not inconsistent with the terms
of the Plan.
"Beneficial Owner" has the meaning ascribed to such term in Rule
13d-3 promulgated under the Exchange Act.
"Board" means the Board of Directors of the Company.
"Cause" shall either (i) have the meaning set forth in any
employment agreement, if any, between a Participant and the Company or any
of its Subsidiaries or (ii) if a Participant does not have an employment
agreement with the Company or any of its Subsidiaries, mean the
termination of a Participant's employment with the Company or its
Subsidiaries because of (X) the Participant's willful failure (other than
by reason of incapacity due to physical or mental illness) to perform the
material duties of such Participant's employment with the Company or its
Subsidiaries, (Y) the Participant's conviction of either a felony or a
misdemeanor, if such misdemeanor involves dishonesty or the Participant's
plea of no contest to a felony or such a misdemeanor, or (Z) perpetration
by the Participant of a material dishonest act or fraud against the
Company or any Subsidiary.
"Code" means the Internal Revenue Code of 1986, as amended, and the
applicable rulings and regulations thereunder.
"Committee" means the Compensation Committee of the Board, any
successor committee thereto or any other committee appointed by the Board
to administer the Plan.
<PAGE>
2
"Common Stock" means Company Class A Common Stock, par value $.01
per share.
"Effective Date" means the date the Plan is approved by the majority
of the stockholders of the Company.
"Eligible Individuals" means the individuals described in Section 6
who are eligible for Restricted Stock Awards under the Plan.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the applicable rulings and regulations thereunder.
"Minimum IPO" means a Public Offering after the Effective Date at
the conclusion of which, as determined in good faith by the Committee, the
aggregate price for all shares of Common Stock, or common stock of a
Subsidiary, having been sold to the public in such Public Offering, plus
the aggregate offering price for all shares of Common Stock, or common
stock of a Subsidiary, sold in all prior Public Offerings of Common Stock
occurring after the date of any such award, exceeds $50 million.
"Participant" means an Eligible Individual to whom a Restricted
Stock Award has been made and remains outstanding under the Plan.
"Pool A" shall have the meaning set forth in Section 5(a) hereof.
"Pool B" shall have the meaning set forth in Section 5(b) hereof.
"Preferred Stock" means the Company's Class C Preferred Stock.
"Public Offering" means a public offering of Common Stock, or common
stock of any Subsidiary, pursuant to an effective registration statement
under the Securities Act.
"Realization Event" shall mean either (i) the acquisition of an
aggregate of at least 50% of the outstanding shares of Common Stock or the
outstanding shares of common stock of any Subsidiary by any entity or
group of entities that was not a stockholder of record in the Company on
the Effective Date, (ii) a Minimum IPO, (iii) a sale of all or
substantially all of the assets of the Company or any Subsidiary to any
entity or group of entities that is not affiliated with the Company on the
Effective Date, (iv) a merger of the Company with any entity or group of
entities that is not affiliated with the Company on the Effective Date or
(v) a liquidation or dissolution of the Company.
<PAGE>
3
"Restricted Common Stock" means the Common Stock included in any
Restricted Stock Award.
"Restricted Preferred Stock" means the Preferred Stock included in
any Restricted Stock Award.
"Restricted Stock Award" means an award made pursuant to the terms
of the Plan to an Eligible Individual that may consist of either (i)
shares of Restricted Common Stock awarded from Pool A or (ii) shares of
Restricted Common Stock and Restricted Preferred Stock awarded from Pool B
in a ratio of three shares of Restricted Common Stock to one share of
Restricted Preferred Stock, subject to adjustment as provided in Section
10 hereof.
"Security 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 the Company and its
stockholders.
"Subsidiary" means Supermarkets General Holdings Corporation, PTK
Holdings, Inc. or Pathmark Stores, Inc. or any successor to any of the
preceding companies.
3. Administration of the Plan.
(a) The Plan shall be administered by the Committee, and the
Committee shall make the determinations set forth in this Section 3(a), based on
the recommendations of the Company's management. The Committee shall have full
power and authority, subject to the express provisions of the Plan, (i) to
select Participants from the Eligible Individuals, (ii) to make Restricted Stock
Awards in accordance with the Plan, (iii) to determine the number of shares of
Restricted Common Stock and Restricted Preferred Stock subject to each
Restricted Stock Award, (iv) to determine the terms and conditions of each
Restricted Stock Award, including the authority to amend the terms and
conditions of a Restricted Stock Award after the granting thereof to a
Participant in a manner that is not prejudicial to the rights of such
Participant in such Restricted Stock Award, (v) to specify and approve the
provisions of the Award Agreements delivered to Participants in connection with
their Restricted Stock Awards, (vi) to construe and interpret any Award
Agreement delivered under the Plan, (vii) to prescribe, amend and rescind rules
and procedures relating to the Plan, (viii) to vary the terms of Restricted
Stock Awards to take account of tax, securities laws and other regulatory
requirements of foreign jurisdictions and (ix) to make all other determinations
and to formulate such procedures as may be necessary or advisable for the
administration of the Plan.
<PAGE>
4
(b) The Committee shall have full power and authority, subject to
the express provisions hereof, to construe and interpret the Plan.
(c) All determinations by the Committee in carrying out and
administering the Plan and in construing and interpreting the Plan shall be
final, binding and conclusive for all purposes and upon all persons interested
herein.
(d) No member of the Committee shall be liable for anything
whatsoever in connection with the administration of the Plan except such
person's own willful misconduct. Under no circumstances shall any member of the
Committee be liable for any act or omission of any other member of the
Committee. In the performance of its functions with respect to the Plan, the
Committee shall be entitled to rely upon information and advice furnished by the
Company's officers, the Company's accountants, the Company's counsel and any
other party the Committee deems necessary, and no member of the Committee shall
be liable for any action taken or not taken in reliance upon any such advice.
4. Duration of the Plan. The Plan shall remain in effect until
terminated by the Board and thereafter until all Restricted Stock Awards granted
under the Plan either vest with respect to all shares subject to such Restricted
Stock Award or are terminated under the terms of the Plan or under the Award
Agreement entered into in connection with the grant thereof. Notwithstanding the
foregoing, no Restricted Stock Awards may be granted under the Plan after the
tenth anniversary of the Effective Date.
5. Shares of Stock Subject to the Plan. The following is a
description of the two pools of shares from which Restricted Stock Awards may be
made under the Plan. Shares of Common Stock subject to such awards may be either
authorized but unissued shares, treasury shares or any combination thereof.
Shares of Preferred Stock subject to such awards shall be authorized but
unissued shares.
(a) Pool A. Subject to adjustment as provided in Section 10 hereof,
the number of shares of Restricted Common Stock that may be issued from Pool A
("Pool A") as Restricted Stock Awards shall equal (i) the number of shares of
Common Stock subject to stock options granted under the SMG-II Holdings
Corporation Management Investors 1987 Stock Option Plan (the "1987 Plan") that
have expired unexercised as of the Effective Date plus (ii) after the Effective
Date and beginning as of the date such stock options expire, the number of
shares of Common Stock subject to stock options granted under the 1987 Plan that
expire unexercised.
(b) Pool B. Subject to adjustment as provided in Section 10 hereof,
the number of shares in Pool B ("Pool B") shall equal (i) 75,000 shares of
Restricted Common Stock and (ii) 25,000 shares of Restricted Preferred Stock.
<PAGE>
5
6. Eligible Individuals. Restricted Stock Awards may be granted by
the Committee to Eligible Individuals who are officers or key employees of the
Company or a Subsidiary and who have the potential to contribute to the future
success of the Company or its Subsidiaries. Restricted Stock Awards shall not be
affected by any change of duties or positions so long as the holder continues to
be an employee of the Company or of a Subsidiary.
7. Restricted Stock Awards. Restricted Stock Awards granted under
the Plan shall be subject to the following terms and conditions and shall
contain such additional terms and conditions as the Committee shall deem
appropriate and that are not inconsistent with the Plan:
(a) Award Agreement. Restricted Stock Awards shall be evidenced by
an Award Agreement in such form and containing such restrictions, terms
and conditions as the Committee deems appropriate and which are not
inconsistent with the terms of the Plan, including, without limitation,
restrictions on the sale, assignment, transfer or other disposition of
such shares and provisions requiring that a Participant forfeit such
shares upon a termination of employment with the Company. Each Eligible
Individual receiving a Restricted Stock Award under the Plan shall enter
into an Award Agreement agreeing to the terms and conditions of the
Restricted Stock Award and such other matters as the Committee shall, in
its sole discretion, determine. In the event of any conflict or
inconsistency between the Plan and any such Award Agreement, the Plan
shall govern, and the Award Agreement shall be interpreted to minimize or
eliminate any such conflict or inconsistency.
(b) Agreement to Become Party to and Abide by the Terms of the
Stockholders Agreement. No Restricted Stock Award shall be granted to any
Participant unless such Participant 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 and Preferred Stock
acquired by a Participant will be subject to the terms of the Stockholders
Agreement. Participants shall hold and transfer the shares of Common Stock
and Preferred Stock such participant may receive under the Plan subject
to, and in accordance with, the terms, conditions and restrictions
applicable to shares of Common Stock or Preferred Stock owned by
Management Investors (as defined in the Stockholder Agreement) as provided
in the Stockholders Agreement.
(c) Terms of Restricted Stock Awards Generally. Subject to the terms
of the Plan, Restricted Stock Awards may be granted in such manner as the
Committee may from time to time approve. Restricted Stock Awards shall be
granted for no consideration. Subject to the terms of the Plan, the
Committee shall determine the number of shares of Restricted Common Stock
and Restricted Preferred Stock subject
<PAGE>
6
to each Restricted Stock Award granted to a Participant, and the Committee
may impose different terms and conditions on any particular Restricted
Stock Award granted to any Participant.
(d) Vesting. Each Restricted Stock Award will become nonforfeitable
upon the earlier of (i) the seventh anniversary of the date a Restricted
Stock Award is granted and (ii) thirty days prior to the occurrence of a
Realization Event, provided that either (i) the Participant is an employee
of the Company or a Subsidiary at the time such anniversary or Realization
Event occurs or (ii) an Extension Event occurs during the Post-Termination
Period as set forth in Section 8(a) below.
(e) Evidence of Ownership. Each Participant receiving a Restricted
Stock Award shall be issued a certificate or certificates in respect of
such shares of Restricted Common Stock and Restricted Preferred Stock at
the time of grant. Such certificate or certificates shall be registered in
the name of such Participant, and shall bear an appropriate legend
referring to the terms, conditions and restrictions applicable to such
Restricted Stock Award. The Committee shall require that the certificate
or certificates evidencing such shares be held in custody by the Company
until such time as a Participant makes a valid disposition of such shares
in accordance with the terms and provisions set forth herein and in the
Stockholders Agreement. The Committee may require, as a condition of any
Restricted Stock Award, that the Participant deliver a stock power,
endorsed in blank, relating to the Restricted Common Stock and Restricted
Preferred Stock covered by such Restricted Stock Award.
(f) Rights as Shareholder. A Participant shall have, with respect to
the shares of Restricted Preferred Stock and Restricted Common Stock
received under a Restricted Stock Award, all of the rights of a
shareholder of the Company, including the right to vote the shares and the
right to receive any cash dividends at the time such cash dividends are
paid. Stock dividends issued with respect to shares covered by a
Restricted Stock Award shall be treated as additional shares under the
Restricted Stock Award and shall be subject to the same restrictions and
other terms and conditions that apply to the shares with respect to which
such dividends are issued.
(g) Tag-Along Rights; Registration Rights. In the event that a
Participant becomes entitled to any tag-along rights under Section 5.6 of
the Stockholders Agreement or registration rights under Section 6.2 of the
Stockholders Agreement, and the occurrence that triggers such tag-along or
registration rights does not constitute a Realization Event, the
Participant will be permitted to exercise his or her sale or transfer
rights with respect to all Restricted Stock Awards such Participant has
been granted and such portion of the Restricted Stock Awards that become
saleable or transferrable pursuant to such tag-along or registration
rights shall be considered
<PAGE>
7
nonforfeitable with respect to the exercise of such rights; provided,
however, that if a Participant does not exercise his or her tag-along or
registration rights under the Stockholders Agreement, any portion of a
Restricted Stock Award that would have become nonforfeitable for purposes
of the exercise of such rights will remain forfeitable and restricted for
all other purposes. For purposes of Section 5.6(b) of the Stockholders
Agreement, 100 percent of the Restricted Stock Awards granted will be
considered vested in order to determine the number of shares to be
included under Section 5.6(b) of the Stockholders Agreement.
(h) Duration of the Restricted Stock Awards. Each Restricted Stock
Award will be effective for such term as shall be determined by the
Committee and set forth in the pertinent Award Agreement; provided,
however, that the term of any Restricted Stock Award shall not exceed ten
years from the date such Restricted Stock Award is granted.
8. Termination of Employment. (a) If a Participant's employment with
the Company and its Subsidiaries terminates without Cause or by reason of death,
retirement or disability and such termination is prior to both (i) a Realization
Event and (ii) the seventh anniversary of any Restricted Stock Award, the
Restricted Common Stock and the Restricted Preferred Stock subject to all
Restricted Stock Awards to such Participant shall be forfeited 180 days after
such termination of employment (the "Post-Termination Period"); provided,
however, that in the event that, during the Post-Termination Period, either (i)
a preliminary registration statement in connection with a Minimum IPO is
submitted to the Securities and Exchange Commission or (ii) a written agreement
to effect a Realization Event is executed (each, an "Extension Event"), the
Award shall remain in effect until either (i) such Extension Event results in a
Realization Event, in which case the Award shall vest according to the terms
herein, (ii) the Minimum IPO is withdrawn, in which case the Award shall be
forfeited by the Participant or (iii) the written agreement to effect a
Realization Event terminates without the consummation of such Realization Event,
in which case the Award shall be forfeited by the Participant.
(b) In the event that a Participant's employment with the Company
and its Subsidiaries terminates for Cause or the Participant resigns from such
employment prior to a Realization Event and prior to the seventh anniversary of
any Restricted Stock Award, such Participant shall immediately forfeit all
Restricted Stock Awards.
(c) Upon termination of a Participant's employment with the Company
and its Subsidiaries for any reason after the occurrence of a Realization Event,
such Participant shall retain all Common Stock and Preferred Stock that such
Participant was granted pursuant to any Restricted Stock Award.
<PAGE>
8
(d) Upon termination of a Participant's employment with the Company
and its Subsidiaries for any reason after the seventh anniversary of the date of
a Restricted Stock Award, such Participant will retain all nonforfeitable
Restricted Stock Awards.
9. Nontransferability. No Restricted Common Stock or Restricted
Preferred Stock or any rights or interests therein shall be sold, transferred,
assigned, pledged or otherwise encumbered or disposed of except by will or by
the laws of descent and distribution or pursuant to a "qualified domestic
relations order" as defined in the Code or Title I of the Employee Retirement
Income Security Act of 1974, as amended, and the rules and regulations
thereunder; provided, however, that the Committee may, subject to such terms and
conditions as the Committee shall specify, permit the transfer of Restricted
Common Stock or Restricted Preferred Stock to a Participant's family members or
to one or more trusts established in whole or in part for the benefit of one or
more of such family members; and provided further that the restrictions in this
sentence shall not apply to the shares received in connection with a Restricted
Stock Award after the date that the restrictions on transferability of such
shares set forth in the applicable Award Agreement have lapsed.
10. Recapitalization or Reorganization.
(a) The existence of the Plan, the Award Agreements and the
Restricted Stock Awards granted hereunder shall not affect or restrict in any
way the right or power of the Company or the shareholders of the Company to make
or authorize any adjustment, recapitalization, reorganization or other change in
the Company's capital structure or its business, any merger or consolidation of
the Company, 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 which affect the Common Stock or Preferred Stock or the
rights thereof or which are convertible into or exchangeable for Common Stock or
Preferred Stock, or the dissolution or liquidation of the Company, 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.
(b) Notwithstanding any provision of the Plan or any Award
Agreement, in the event of any change in the outstanding Common Stock or
Preferred Stock by reason of a stock dividend, recapitalization, reorganization,
merger, consolidation, stock split, combination or exchange of shares (i) the
Committee shall make such proportionate adjustments as may be necessary to
reflect such change and to prevent dilution or enlargement of the rights of
Participants under the Plan with respect to the aggregate number of shares of
Common Stock and Preferred Stock for which Restricted Stock Awards in respect
thereof may be granted under the Plan and with respect to the number of shares
of Restricted Common Stock and Restricted Preferred Stock covered by each
outstanding Restricted Stock Award and
<PAGE>
9
(ii) the Committee shall make such other adjustments, consistent with the
foregoing, as it deems appropriate.
11. Amendment of the Plan. The Board or Committee may at any time
and from time to time terminate, modify, suspend or amend the Plan in whole or
in part. No termination, modification, suspension or amendment of the Plan
shall, without the consent of a Participant to whom any Restricted Stock Awards
shall previously have been granted, adversely affect his or her rights under
such Restricted Stock Awards. Notwithstanding any provision herein to the
contrary, the Board or Committee shall have broad authority to amend the Plan or
any Restricted Stock Award to take into account changes in applicable tax laws,
securities laws, accounting rules and other applicable state and federal laws.
12. Miscellaneous.
(a) Tax Withholding. No later than the date as of which an amount
first becomes includable in the gross income of the Participant for applicable
income tax purposes with respect to any award under the Plan, the Participant
shall pay to the Company or make arrangements satisfactory to the Committee
regarding the payment of any federal, state or local taxes of any kind required
by law to be withheld with respect to such amount. The obligation of the Company
under the Plan shall be conditioned upon such payment or arrangements and the
Company shall, to the extent permitted by law, have the right to deduct any such
taxes from any payment of any kind otherwise due to the Participant.
(b) No Right to Grants or Employment. No Eligible Individual or
Participant shall have any claim or right to receive grants of Restricted Stock
Awards under the Plan. Nothing in the Plan or in any Restricted Stock Award or
Award Agreement shall confer upon any employee of the Company or any Subsidiary
any right to continued employment with the Company or any Subsidiary, as the
case may be, or interfere in any way with the right of the Company or a
Subsidiary to terminate the employment of any of its employees at any time, with
or without cause.
(c) Unfunded Plan. The Plan is intended to constitute an unfunded
plan for incentive compensation. With respect to any payments not yet made to a
Participant by the Company, nothing contained herein shall give any such
Participant any rights that are greater than those of a general creditor of the
Company. In its sole discretion, the Committee may authorize the creation of
trusts or other arrangements to meet the obligations created under the Plan to
deliver Common Stock and Preferred Stock with respect to Restricted Stock Awards
hereunder.
(d) Other Employee Benefit Plans. Payments received by a Participant
under any Restricted Stock Award made pursuant to the provisions of the Plan
shall not be
<PAGE>
10
included in, or have any effect on, the determination of benefits under any
other employee benefit plan or similar arrangement provided by the Company or
any Subsidiary.
(e) Securities Law Restrictions. The Committee may require each
Eligible Individual acquiring shares of Common Stock or Preferred Stock pursuant
to a Restricted Stock Award under the Plan to represent to and agree with the
Company in writing that such Eligible Individual is acquiring the shares for
investment and not with a view to the distribution thereof. All certificates for
shares of Common Stock and Preferred Stock delivered under the Plan shall be
subject to such stock-transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations, and other requirements of the
Securities and Exchange Commission and any exchange upon which the Common Stock
or the Preferred Stock is then listed, and any applicable federal or state
securities law, and the Committee may cause a legend or legends to be put on any
such certificates to make appropriate reference to such restrictions. No shares
of Common Stock or Preferred Stock shall be issued hereunder unless the Company
shall have determined that such issuance is in compliance with, or pursuant to
an exemption from, all applicable federal and state securities laws.
(f) Liability Under the Exchange Act. Notwithstanding anything
contained in the Plan or any Award Agreement to the contrary, if the
consummation of any transaction under the Plan would result in the possible
imposition of liability on a Participant pursuant to Section 16(b) of the
Exchange Act, the Committee shall have the right, in its sole discretion, but
shall not be obligated, to defer such transaction to the extent necessary to
avoid such liability, but in no event for a period in excess of 180 days.
(g) Expenses. The costs and expenses of administering the Plan shall
be borne by the Company.
(h) Applicable Law. The validity of the Plan and the construction
and interpretation of the Plan shall be determined in accordance with and
governed by the laws of the State of Delaware.
EXHIBIT 10.16B
RESTRICTED STOCK AGREEMENT
RESTRICTED STOCK AGREEMENT dated as of _____________ (the
"Agreement") between SMG-II HOLDINGS CORPORATION (the "Company"), and the other
party signatory hereto (the "Participant").
WHEREAS, pursuant to the SMG-II Holdings Corporation 1997 Restricted
Stock Plan (as the same may be amended from time to time, the "Plan"), the
Company desires to provide the Participant with an incentive to remain in its
employ and to increase the Participant's interest in the success of the Company
by granting to the Participant shares of Class A Common Stock, par value $.01
per share, of the Company (the "Restricted Common Stock") and shares of Class C
Convertible Preferred Stock of the Company (the "Restricted Preferred Stock")
(together, the "Restricted Shares"), subject to the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the covenants and agreements
herein contained, the parties hereto agree as follows:
1. Definitions; Incorporation of Plan Terms. Capitalized terms used
herein without definition shall have the meanings assigned to them in the Plan,
a copy of which has been delivered to the Participant. This Agreement and the
Restricted Shares shall be subject to the Plan, the terms of which are hereby
incorporated herein by reference, and in the event of any conflict or
inconsistency between the Plan and this Agreement, the Plan shall govern. The
"Date of Grant" with respect to the Restricted Shares shall be the date of this
Agreement as specified above.
2. Grant of Restricted Shares. Subject to the terms and conditions
contained herein and in the Plan, the Company hereby grants to the Participant,
effective as of the Date of Grant, the number of Restricted Shares specified on
the signature page hereof (the "Award"). The Participant shall not be required
to pay any additional consideration for the issuance of the Restricted Shares
granted pursuant to this Agreement.
3. Non-Transferability. No Restricted Common Stock or Restricted
Preferred Stock or any rights or interests therein shall be sold, transferred,
assigned, pledged or otherwise encumbered or disposed of except by will or by
the laws of descent and distribution or pursuant to a "qualified domestic
relations order" as defined in the Code or Title I of the Employee Retirement
Income Security Act of 1974, as amended, and the rules and regulations
thereunder; provided, however, that, with the written authorization of the
Committee, the Participant may transfer Restricted Shares to the Participant's
immediate family members or to one or more trusts established in whole or in
part for the benefit of one or more of such family members; and provided further
that the restrictions in this sentence shall not apply to the Restricted Shares
after the date that the restrictions on transferability of such shares as set
forth herein have lapsed. Written authorization by the Committee of any such
transfer to one or more
<PAGE>
members of the Participant's immediate family shall be conditioned upon the
written agreement of such family member or members to be bound by the terms of
this Agreement, including, without limitation, the execution of the agreement to
become party to the Stockholders Agreement described in Section 9 hereof.
4. Vesting. The Award will become nonforfeitable upon the earlier of
(i) the seventh anniversary of the Date of Grant and (ii) thirty days prior to
the occurrence of a Realization Event, provided that either (i) the Participant
is an employee of the Company or a Subsidiary at the time such anniversary or
Realization Event occurs or (ii) an Extension Event occurs during the
Post-Termination Period as set forth in Section 8 below. "Realization Event"
shall mean either (i) the acquisition of an aggregate of at least 50% of the
outstanding shares of Common Stock or the outstanding shares of common stock of
any Subsidiary by any entity or group of entities that was not a stockholder of
record in the Company on the effective date of the Plan, (ii) a Minimum IPO,
(iii) a sale of all or substantially all of the assets of the Company or any
Subsidiary to any entity or group of entities that is not affiliated with the
Company on the effective date of the Plan, (iv) a merger of the Company with any
entity or group of entities that is not affiliated with the Company on the
effective date of the Plan or (v) a liquidation or dissolution of the Company.
"Minimum IPO" means a Public Offering after the effective date of the Plan at
the conclusion of which, as determined in good faith by the Committee, the
aggregate price for all shares of Common Stock, or common stock of a Subsidiary,
having been sold to the public in such Public Offering, plus the aggregate
offering price for all shares of Common Stock, or common stock of a Subsidiary,
sold in all prior Public Offerings of Common Stock occurring after the date of
any such award, exceeds $50 million. "Public Offering" means a public offering
of Common Stock, or common stock of any Subsidiary, pursuant to an effective
registration statement under the Securities Act of 1933, as amended.
5. Rights as Shareholder. The Participant shall have, with respect
to the shares of Restricted Preferred Stock and Restricted Common Stock received
pursuant to the Award, all of the rights of a shareholder of the Company,
including the right to vote the shares and the right to receive any cash
dividends at the time such cash dividends are paid. Stock dividends issued with
respect to shares covered by the Award shall be treated as additional shares
under the Award and shall be subject to the same restrictions and other terms
and conditions that apply to the shares with respect to which such dividends are
issued.
6. Evidence of Ownership. A certificate shall be issued in the name
of the Participant with respect to the shares of Restricted Common Stock and
Restricted Preferred Stock granted pursuant to the Award. Such certificate shall
be registered in the name of such Participant, and shall bear an appropriate
legend referring to the terms, conditions and restrictions applicable to the
Award. Such certificate shall be held in custody by the Company until such time
as the Participant makes a valid disposition of such shares in accordance with
the terms and provisions set forth herein and in the Stockholders Agreement. In
addition, as a
<PAGE>
condition to the Award, the Participant shall deliver to the Company a stock
power, endorsed in blank, relating to the Restricted Common Stock and Restricted
Preferred Stock covered by the Award.
7. Tag-Along Rights; Registration Rights. In the event that the
Participant becomes entitled to any tag-along rights under Section 5.6 of the
Stockholders Agreement or registration rights under Section 6.2 of the
Stockholders Agreement, and the occurrence that triggers such tag-along or
registration rights does not constitute a Realization Event, the Participant
will be permitted to exercise his or her sale or transfer rights with respect to
the Award and such portion of the Award that becomes saleable or transferrable
pursuant to such tag-along or registration rights shall be considered
nonforfeitable with respect to the exercise of such rights; provided, however,
that if the Participant does not exercise his or her tag-along or registration
rights under the Stockholders Agreement, any portion of the Award that would
have become nonforfeitable for purposes of the exercise of such rights will
remain forfeitable and restricted for all other purposes. For purposes of
Section 5.6(b) of the Stockholders Agreement, 100 percent of the Award will be
considered vested in order to determine the number of shares to be included
under Section 5.6(b) of the Stockholders Agreement.
8. Termination of Employment. (a) If the Participant's employment
with the Company and its Subsidiaries terminates without Cause or by reason of
death, retirement or disability and such termination is prior to both (i) a
Realization Event and (ii) the seventh anniversary of the Date of Grant, the
Participant shall forfeit the Award 180 days after such termination of
employment (the "Post-Termination Period"); provided, however, that in the event
that, during the Post-Termination Period, either (i) a preliminary registration
statement in connection with a Minimum IPO is submitted to the Securities and
Exchange Commission or (ii) a written agreement to effect a Realization Event is
executed (each, an "Extension Event"), the Award shall remain in effect until
either (i) such Extension Event results in a Realization Event, in which case
the Award shall vest according to the terms herein, (ii) the Minimum IPO is
withdrawn, in which case the Award shall be forfeited by the Participant or
(iii) the written agreement to effect a Realization Event terminates without the
consummation of such Realization Event, in which case the Award shall be
forfeited by the Participant.
(b) In the event that the Participant's employment with the Company
and its Subsidiaries terminates for Cause or the Participant resigns from such
employment prior to a Realization Event and prior to the seventh anniversary of
the Date of Grant, the Participant shall immediately forfeit the Award.
(c) Upon termination of the Participant's employment with the
Company and its Subsidiaries for any reason after the occurrence of a
Realization Event or after the seventh anniversary of the Date of Grant, the
Participant shall retain all Common Stock and Preferred Stock that the
Participant was granted pursuant to the Award.
<PAGE>
9. Agreement to Become Party to and Abide by the Terms of the
Stockholders Agreement. The Participant hereby acknowledges and agrees that the
Award described herein is contingent upon the Participant's execution of the
agreement attached hereto as Exhibit A by and through which the Participant
shall become a party to and agree to abide by the terms and conditions of the
Stockholders Agreement. All shares of Common Stock and Preferred Stock acquired
by the Participant will be subject to the terms of the Stockholders Agreement.
The Participant shall hold and transfer the shares of Common Stock and Preferred
Stock such Participant may receive under the Plan subject to, and in accordance
with, the terms, conditions and restrictions applicable to shares of Common
Stock or Preferred Stock owned by Management Investors (as defined in the
Stockholder Agreement) as provided in the Stockholders Agreement.
10. Miscellaneous. (a) Representation by the Participant. The
Participant hereby represents and agrees with the Company that the Participant
is acquiring the Restricted Shares without a view to distribution or other
disposition thereof.
(b) No Rights to Grants or Continued Employment. The Participant
shall not have any claim or right to receive grants of Restricted Shares under
the Plan. Neither the Plan nor this Agreement nor any action taken or omitted to
be taken hereunder or thereunder shall be deemed to create or confer on the
Participant any right to be retained in the employ of the Company or any
Subsidiary, or to interfere with or to limit in any way the right of the Company
or any Subsidiary to terminate the employment of the Participant at any time.
(c) Tax Withholding. No later than the date as of which an amount
first becomes includable in the gross income of the Participant for applicable
income tax purposes with respect to the Restricted Shares, the Participant shall
pay to the Company or make arrangements satisfactory to the Board regarding the
payment of any federal, state or local taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the Board,
in accordance with rules and procedures established by the Board, the minimum
required withholding obligations may be settled with Common Stock, including
Common Stock that is part of the award that gives rise to the withholding
requirement. The obligation of the Company under this Agreement shall be
conditional upon such payment or arrangements and the Company shall, to the
extent permitted by law, have the right to deduct any such taxes from any
payment of any kind otherwise due to the Participant.
(d) Applicable Law. This Agreement shall be governed by and subject
to the laws of the State of Delaware and to all applicable laws and to the
approval of any governmental or regulatory agency as may be required.
(e) Severability. If any provision of this Agreement shall be held
illegal or
<PAGE>
invalid for any reason, such illegality or invalidity shall not affect the
remaining provisions of this Agreement, but this Agreement shall be construed
and enforced as if such illegal or invalid provision had never been included
herein.
11. Survival; Assignment. (a)All agreements, representations and
warranties made herein and in any certificates delivered pursuant hereto shall
survive the issuance to the Participant of the Restricted Shares and,
notwithstanding any investigation heretofore or hereafter made by the
Participant or the Company or on the Participant's or the Company's behalf,
shall continue in full force and effect.
(b) The Company shall have the right to assign to any of its
affiliates any of its rights, or to delegate to any of its affiliates any of its
obligations, under this Agreement.
12. Notices. All notices and other communications provided for
herein shall be in writing and shall be delivered by hand or sent by certified
or registered mail, return receipt requested, postage prepaid, addressed, if to
the Participant, to his attention at the mailing address set forth at the foot
of this Agreement (or to such other address as the Participant shall have
specified to the Company in writing) and, if to the Company, to it at its
principal offices which are currently located at 200 Milik St., Carteret, New
Jersey, 07008, telecopier: (732) 499-3460, Attention: Secretary. All such
notices shall be conclusively deemed to be received and shall be effective, if
sent by hand delivery, upon receipt, or if sent by registered or certified mail,
on the fifth day after the day on which such notice is mailed.
13. Waiver. The waiver by either party of compliance with any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any other provision of this Agreement, or of any subsequent
breach by such party of a provision of this Agreement.
<PAGE>
14. Entire Agreement. This Agreement and the Plan set forth the
entire agreement and understanding between the parties hereto with respect to
the matters covered herein, and supersede all prior agreements and
understandings concerning such matters. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same agreement. 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.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Participant has executed this
Agreement, both as of the day and year first above written.
SMG-II HOLDINGS CORPORATION
By:
Name:
Title:
PARTICIPANT
_________________________________
Name:
Address:
Restricted Shares Granted Hereby:
Restricted Common Stock: _______________________ Shares
Restricted Preferred Stock: _______________________ Shares
<PAGE>
EXHIBIT A
<PAGE>
AGREEMENT
AGREEMENT, dated as of this ______th day of _____________, 1998
between SMG-II Holdings Corporation, a Delaware corporation ("Holdings"), and
____________ ("Participant").
W I T N E S S E T H:
WHEREAS, Holdings and Participant are parties to a restricted stock
agreement, dated ________________ (the "Restricted Stock Agreement") pursuant to
the SMG-II Holdings Corporation 1997 Restricted Stock Plan (the "Plan"), which
contemplates that Holdings will grant to Participant an equity interest in
Holdings consisting of a specified number of shares of restricted Class C
Convertible Preferred Stock of Holdings, with a stated value of $200 and a
specified number of restricted shares of Holdings Class A Common Stock, par
value $0.01 per share (together, the "Restricted Stock"); and
WHEREAS, the award of the Restricted Stock pursuant to the
Restricted Stock Agreement is contingent upon the execution by Participant of
this Agreement; and
WHEREAS, Holdings now desires to award Participant the Restricted
Stock and Participant desires to accept such award; and
WHEREAS, the Stockholders Agreement between Holdings and its
stockholders dated as of February 4, 1991 (the "Stockholders Agreement") was
amended prior to the adoption of the Plan to permit awards of Restricted Stock
pursuant to the Plan; and
WHEREAS, according to the terms of the Stockholders Agreement, in
order to receive the Restricted Stock, Participant 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 Participant
shall become a Management Investor upon his receipt of the Restricted Stock.
3. Agreement to Become Party to and Abide by the Terms of the
Stockholders Agreement. The parties hereby irrevocably agree that Participant
shall be subject to the terms and conditions of the Stockholders Agreement in
its entirety. The parties further agree that all shares of Restricted Stock,
Class C Convertible Preferred Stock of Holdings ("Preferred Stock") or Holdings
Class A Common Stock ("Common Stock") awarded to or
<PAGE>
acquired by Participant pursuant to the Restricted Stock Agreement will be
subject to the terms of the Stockholders Agreement. Participant shall hold and
transfer all shares of Common Stock and Preferred Stock that he receives
pursuant to the Restricted Stock Agreement 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 awarded pursuant to the Restricted Stock Agreement without any
other action on the part of Holdings or Participant.
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 Participant has executed this
Agreement, both as of the day and year first above written.
SMG-II HOLDINGS CORPORATION
By:
---------------------------------
Title:
--------------------------------
[PARTICIPANT]
-------------------------------------
EXHIBIT 12.1
PATHMARK STORES, INC.
STATEMENTS REGARDING COMPUTATION OF RATIO
OF EARNINGS TO FIXED CHARGES
(in thousands)
<TABLE>
<CAPTION>
Fiscal Years
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings (loss) from continuing
operations before taxes........ $ (26,920) $ (44,891) $ (34,369) $ 38,661 $ 28,196
---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest expense............. 160,794 164,168 161,469 164,749 158,503
Interest portion of rental
expense(1)................. 12,469 12,088 10,930 10,533 12,263
---------- ---------- ---------- ---------- ----------
Total fixed charges..... 173,263 176,256 172,399 175,282 170,766
---------- ---------- ---------- ---------- ----------
Adjusted earnings before
fixed charges.................. $ 146,343 $ 131,365 $ 138,030 $ 213,943 $ 198,962
========== ========== ========== ========== ==========
Ratio of earnings to fixed
charges........................ -- -- -- 1.22x 1.17x
========== ========== ========== ========== ==========
Deficiency in earnings available
to cover fixed charges......... $ 26,920 $ 44,891 $ 34,369 $ -- $ --
========== ========== ========== ========== ==========
</TABLE>
- ----------
(1) Represents the portion of rentals deemed representative of the interest
included therein.
EXHIBIT 22.1
PATHMARK STORES, INC.
List of Subsidiaries
Name State of Incorporation
---- ----------------------
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
Upper Darby Stuart, LLC.......................... Delaware
Lancaster Pike Stuart, LLC....................... Delaware
East Brunswick Stuart, LLC....................... Delaware
Glenolden Stuart, LLC............................ Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Pathmark Stores, Inc. Consolidated Statement of Operations for the 52 weeks
ended January 30, 1999 and Consolidated Balance Sheet as of January 30, 1999 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> JAN-30-1999
<CASH> 7,661
<SECURITIES> 0
<RECEIVABLES> 15,035
<ALLOWANCES> (1,243)
<INVENTORY> 143,212
<CURRENT-ASSETS> 254,394
<PP&E> 846,283
<DEPRECIATION> (375,557)
<TOTAL-ASSETS> 825,155
<CURRENT-LIABILITIES> 296,463
<BONDS> 1,258,539
0
0
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<INCOME-TAX> (1,591)
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</TABLE>
