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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 29, 2000 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, 2000, there were outstanding 100 shares of Common Stock,
$0.10 par value, all of which are privately owned and not traded on a public
market.
Documents Incorporated by Reference: None
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PART I
ITEM 1. Business*
General
The predecessor of the registrant was incorporated in the state of
Delaware in June 1987 as a wholly owned subsidiary of Supermarkets General
Holdings Corporation ("Holdings"). 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.
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 (subsequently
increased to $39.85 per Share), net to the seller in cash, without interest
thereon (the "Offer Price"), upon the terms and subject to the conditions set
forth in the Offer to Purchase dated March 15, 1999 (the "Offer to Purchase")
and the related Letter of Transmittal (which, together with the Offer to
Purchase and all amendments and supplements thereto, constitute the "Offer").
The Offer was an integral part of the transactions contemplated by 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 was
to have acquired all of the issued and outstanding shares of the capital stock
of SMG-II, the indirect parent of the Company, through the merger of the
Purchaser with and into SMG-II (the "SMG-II Merger"), subject to the terms and
conditions contained in the SMG-II Merger Agreement. On December 16, 1999, Ahold
terminated the SMG-II Merger Agreement. SMG-II believes Ahold's termination
constitutes a breach of said Agreement and is actively pursuing its legal
remedies against Ahold. See Item 3. "Legal Proceedings."
The Company announced on March 22, 2000 that it has retained the
investment banking firm of Wasserstein Perella & Co. ("WP&Co.") in order to
assist it in developing a financial restructuring plan and that an ad hoc
committee of its bondholders has been formed. The Company has commenced
discussions with this committee towards developing a consensual financial
restructuring plan to deleverage the Company's capital structure. The Company is
seeking to restructure its bond debt and the preferred stock of Holdings, and
does not intend to impair in any way its trade creditors or implement layoffs as
part of its financial restructuring plan. Discussion with this committee is in
its preliminary stages, and there can be no assurance that a financial
restructuring will be completed.
Business
At January 29, 2000, Pathmark operated 135 supermarkets primarily in the
densely populated New York-New Jersey and Philadelphia metropolitan areas. These
metropolitan areas contain over 10% of the population and grocery sales in the
United States. These supermarkets are located in New Jersey, New York,
Pennsylvania and Delaware and consist of 5.2 million selling square footage and
7.1 million total square footage.
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* Except as otherwise indicated, information contained in this Item is given as
of January 29, 2000.
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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 135 stores, 133 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.
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 the fiscal year ended
January 29, 2000 ("Fiscal 1999"), Pathmark opened three new Pathmark
stores, and completed 26 renovations and three enlargements. During the
fiscal year ending February 3, 2001 ("Fiscal 2000"), Pathmark plans to
open up to four new supermarkets and to complete up to an aggregate of 28
renovations and enlargements. Two of the four planned supermarkets in
Fiscal 2000 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 opened
its first new smaller supermarket format in Queens, New York in Fiscal
1999.
Pathmark recognizes the importance of keeping its stores looking fresh and
up-to-date; thus, each store typically receives a renovation or
enlargement every five years. At the end of Fiscal 1999, Pathmark derived
approximately 76% of its supermarket sales from stores that were opened,
enlarged or renovated during the last five years.
o Core Market Focus. Pathmark has identified over 40 potential locations for
new supermarkets within its current marketing areas and expects that all
new stores opened during the current and next two fiscal years will be
located in these areas. Pathmark believes that, by opening stores in its
current marketing areas, it can
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achieve additional operating economies and other benefits from its store
expansion program without the risks and costs associated with opening
stores in new marketing areas.
Operating Efficiencies
o Technology. All Pathmark supermarket checkout terminals have
third-generation IBM 4680 scanner systems supported by a RISC 6000
application processor in each store. These systems allow 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 the last two years,
the Company took several steps to accomplish this goal. Pathmark's "Stop
Shrink" program, implemented in the latter part of Fiscal 1998, resulted
in lower inventory shrinkage in Fiscal 1999. In addition, the Company has
implemented a program entitled "Best Ball", which is designed to identify
the best operating practices in use by certain stores and implement these
best practices throughout the Company.
o Demographic and Geographic Concentration. The Company's stores serve
densely populated communities. In addition, all Pathmark supermarkets are
located within 100 miles of its corporate headquarters in Carteret, New
Jersey and the principal warehousing facilities that serve them. The high
population density, as well as the geographic concentration of stores,
provide substantial economy of scale opportunities.
Pathmark Supermarkets
Pathmark operated 135 supermarkets at January 29, 2000. 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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1999 1998 1997 1996 1995(a)
---- ---- ---- ---- -------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Supermarket sales .................... $3,698 $3,655 $3,696 $3,701 $3,853
Average sales per Supermarket(b) ..... 28.0 27.8 27.5 26.1 26.4
Number of Supermarkets:
Renovations(c) ................... 26 13 5 16 14
Enlargements(d) .................. 3 1 8 5 4
Opened ........................... 3 -- 2 4 5
Closed ........................... -- 3 11 4 4
Total Supermarkets Open at Year End(e) 135 132 135 144 144
</TABLE>
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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 1999
averaged approximately $1.0 million per store.
(d) Enlargements involve the addition of selling space and in Fiscal 1999
averaged an investment in excess of $4.0 million.
(e) Includes two stores not wholly owned. The sales figures for these stores
are not included above.
By industry standards, Pathmark stores are large and productive, averaging
approximately 52,800 square feet in size and generating high average sales
volume of approximately $28.0 million per store ($723 per selling square foot)
for stores open for all of Fiscal 1999. Pathmark's 135 supermarkets at January
29, 2000 ranged from 26,008 to 66,463 square feet in size and included 124
supermarkets that are 40,000 square feet or larger in size. All Pathmark stores
carry a broad variety of food and drug store products, including an extensive
variety of the Pathmark brand. All but five supermarkets contained in-store
pharmacy departments at the end of Fiscal 1999.
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Pathmark pioneered the development of the large "superstore" in the Middle
Atlantic States, opening the first "Pathmark Super Center" in 1977, and
currently operates 133 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 supermarkets 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. 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 1999, 89 stores had in-store banks and
Pathmark expects to have five additional in-store banks by the end of Fiscal
2000.
Over the past several years, Pathmark stores have been designed to be more
"customer friendly" with wider aisles, 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 1999, Pathmark completed
95 renovations and enlargements and opened 14 new supermarkets. At the close of
Fiscal 1999, sales in these renovated, enlarged and opened stores accounted for
approximately 76% of its total supermarket sales. Pathmark currently expects to
open one replacement and up to three non-replacement supermarkets and to
complete up to 28 renovations and enlargements during Fiscal 2000. Two of the
four new supermarkets (Brooklyn, NY and Philadelphia, PA) will be a new smaller
format designed specifically 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. Pathmark's website, www.pathmark.com, offers promotional discounts and
on-line services and the Company participates with the www.priceline.com
WebHouse Club internet business. Further, the Company is currently testing a
customer loyalty program, which will reward loyal Pathmark customers with
savings and improved service exclusive to the cardholder.
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
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projects is used to evaluate consumers' attitudes and purchasing patterns and
helps shape Pathmark's marketing programs.
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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.
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
Since Fiscal 1997, the Company, in order to help reduce its transportation
costs, has outsourced 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 Wholesale Grocers, Inc. ("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, which opened in 1980. Since Fiscal 1997, the Company has
purchased its pharmacy merchandise requirements from a pharmaceutical wholesaler
instead of directly from the manufacturer.
Competition
The supermarket business is highly competitive and is characterized by
high 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, "warehouse" and "club" stores, drug stores,
convenience stores, discount merchandisers, and other local retailers in the
areas served. Principal competitive factors include price, store location,
advertising and promotion, product mix, quality and service.
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Trade Names, Service Marks and Trademarks
Pathmark has registered a variety of trade names, service marks and
trademarks with the United States Patent and Trademark Office, each for an
initial period of 20 years, renewable for as long as the use thereof continues.
Pathmark considers its Pathmark service marks to be of material importance to
its business and actively defends and enforces such service marks.
Regulation
Pathmark's food and drug business requires it to hold various licenses and
to register certain of its facilities with state and federal health, drug and
alcoholic beverage regulatory agencies. By virtue of these licenses and
registration requirements, Pathmark is obligated to observe certain rules and
regulations, and a violation of such rules and regulations could result in a
suspension or revocation of the licenses or registrations. In addition, most of
Pathmark's licenses require periodic renewals. Pathmark has experienced no
material difficulties with respect to obtaining, effecting or retaining its
licenses and registrations.
Employees
At January 29, 2000, the Company employed approximately 27,000 people, of
whom approximately 19,000 were employed on a part-time basis.
Approximately 85% of the Company's employees are covered by 15 collective
bargaining agreements (typically having three or four year terms) negotiated
with approximately 13 different local unions. During Fiscal 2000, two contracts,
covering approximately 2,200 Pathmark associates, will expire. The Company does
not anticipate any difficulty in renegotiating these contracts.
The Company believes that its relationship with its employees is generally
satisfactory.
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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 are
located. See "Supply and Distribution" in Item 1 of this report for information
concerning the Company's methods of supply and distribution facilities.
Pathmark's 135 supermarkets have an aggregate selling area of
approximately 5.2 million square feet. Seventeen of the supermarkets are owned
by Pathmark and the remaining 118 are leased. These supermarkets are either
freestanding stores or are located in shopping centers. Forty-four leases expire
during the current and next four calendar years and Pathmark has options to
renew all of them.
Pathmark leases its corporate headquarters in Carteret, NJ in premises
totaling approximately 150,000 square feet in size.
Most of the facilities owned by Pathmark are subject to mortgages.
Pathmark plans to acquire leasehold or fee interests in any property on which
new stores or other facilities are opened and will consider entering into
sale/leaseback or mortgage transactions with respect to owned properties if
Pathmark believes such transactions are financially advantageous.
ITEM 3. Legal Proceedings
As previously described in the Company's Annual Report on Form 10-K for
the year ended January 30, 1999, and its periodic reports on Form 10-Q for the
periods ended May 1, 1999, July 31, 1999 and October 30, 1999, respectively,
Holdings, its parent, SMG-II and the directors of Holdings are defendants
(collectively, the "Defendants") in a purported stockholder class action lawsuit
filed in the court of Chancery of the State of Delaware (the "Court") entitled
Wolfson v. Supermarkets General Holdings Corporation, et al., C.A. No. 17047
(the "Action"), in which the Plaintiff alleged, among other things, that the
defendant directors of Holdings and SMG-II breached their fiduciary duties to
the holders of Holdings' Preferred Stock (the "Preferred Stock"). The Plaintiff,
by his counsel, entered into a Settlement Agreement, dated June 9, 1999, (the
"Settlement Agreement") with the Defendants (by their counsel) pursuant to which
the parties agreed to settle the Action.
The Settlement Agreement provides for, among other things, the
certification of the action as a class action under the rules of the Court,
which class would consist of all holders of the Preferred Stock from and
including March 9, 1999 (the "Class") through and including the consummation of
the SMG-II Merger or, if the SMG-II Merger fails to close, the stock purchase
pursuant to the Stock Purchase Agreement, dated March 9, 1999, by and among
Ahold, the Purchaser, SMG-II and PTK (the "Alternative Transaction"). In
addition, pursuant to the terms of the Settlement Agreement, the Defendants
agreed, subject to Final Court Approval (as defined below), that the Purchaser
increase its tender offer price to $40.25 per share of Preferred Stock (from
$38.25), less the total amount awarded as fees and expenses to Plaintiff's
counsel by the Court divided by the total number of outstanding shares of
Preferred Stock (the "New Offer Price"). Plaintiff's counsel applied to the
Court for an award of fees and expenses in an aggregate amount of $1,956,268, or
$0.40 per share of Preferred Stock.
The Settlement Agreement also provides, among other things, that any of
the Defendants shall have the right to withdraw from the proposed settlement in
the event that (i) any claims related to the SMG-II Merger, the Alternative
Transaction, or the subject matter of the Action are commenced by any member of
the Class against any Defendants or certain others employed by, affiliated with,
or retained by the Defendants in any court prior to Final Court Approval of the
settlement, and the court in which such claims are pending denies Defendants'
application to dismiss or stay such action in contemplation of dismissal, or
(ii) any of the other conditions to the consummation of the settlement described
below shall not have been satisfied. The consummation of the settlement is
subject to (i) Final Court Approval of the settlement; (ii) dismissal of the
Action by the Court with prejudice and without awarding fees or costs to any
party; and (iii) the Purchaser closing (A) its tender offer and the SMG-II
Merger, or (B) the Alternative Transaction.
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** Except as otherwise indicated, information contained in this Item is given as
of January 29, 2000.
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After notice and a hearing, on July 22, 1999, the Court approved the
settlement and the fee application of the Plaintiff's attorneys. As of August
23, 1999, all applicable appeal periods expired, thus constituting Final Court
Approval. As a result of the settlement, the New Offer Price was $39.85 per
share of Preferred Stock. However, on December 16, 1999, Purchaser and Ahold
terminated the SMG-II Merger Agreement. On January 5, 2000, Plaintiff moved to
enforce the Settlement Agreement against Purchaser, which motion is pending.
As previous disclosed, on December 16, 1999, Ahold terminated the SMG-II
Merger Agreement claiming that despite its best efforts, it could not obtain
necessary antitrust clearance from government regulators. That same day, Ahold
filed a complaint in the Supreme Court, State of New York, County of New York
against SMG-II seeking a declaratory judgement that Ahold had used its "best
efforts" under the SMG-II Merger Agreement. On January 18, 2000, SMG-II filed
its Answer and Counterclaims, denying Ahold's assertion that it used its best
efforts to consummate the SMG-II Merger Agreement. Additionally, SMG-II asserted
counterclaims against Ahold for (i) breach of contract by failure to use best
efforts; (ii) breach of the covenant of good faith and fair dealing; and (iii)
unfair competition. SMG-II has requested compensatory damages in an unspecified
amount.
On February 7, 2000, Ahold answered SMG-II's counterclaims and denied the
allegations contained therein, and filed an Amended Compliant seeking
declarations that (i) the "best efforts" clause in the SMG-II Merger Agreement
is unenforceable; (ii) if the "best efforts" clause is enforceable, Ahold did
not breach that clause; and (iii) Ahold properly terminated the SMG-II Merger
Agreement. Additionally, Ahold alleged that SMG-II breached the best efforts
clause of the SMG-II Merger Agreement and has requested compensatory damages in
an unspecified amount. SMG-II filed its amended answer and the amended complaint
and amended counterclaims on February 27, 2000. At this juncture, discovery is
proceeding.
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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PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters (as of April 1, 2000)
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, 2000. 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.
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, 2000, 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, 2000, 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-share 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").
10
<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 1991 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 1999, the Company paid no dividends to its sole
stockholder. The Company does not currently anticipate paying dividends during
Fiscal 2000 in excess of $100,000 as permitted by the Credit Agreement.
11
<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)
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Sales .................................. $ 3,698 $ 3,655 $ 3,696 $ 3,710 $ 3,972
Cost of sales (exclusive of
depreciation and amortization shown
separately below) .................... 2,639 2,612 2,652 2,619 2,838
------- ------- ------- ------- -------
Gross profit ........................... 1,059 1,043 1,044 1,091 1,134
Selling, general and administrative
expenses ............................. 850 833 841 857 866
Depreciation and amortization(b) ....... 75 76 84 89 80
Restructuring charge(c) ................ -- -- -- 9 --
Lease commitment charge(d) ............. -- -- -- 9 --
Gain on disposition of freestanding
drug stores(e) ....................... -- -- -- -- 16
------- ------- ------- ------- -------
Operating earnings ..................... 134 134 119 127 204
Interest expense, net .................. (163) (161) (164) (161) (165)
------- ------- ------- ------- -------
Earnings (loss) before income taxes and
extraordinary items .................. (29) (27) (45) (34) 39
Income tax (provision) benefit ......... (2) (2) 17 14 (6)
------- ------- ------- ------- -------
Earnings (loss) before extraordinary
items ................................ (31) (29) (28) (20) 33
Extraordinary items, net of tax(f) ..... -- -- (8) (1) --
------- ------- ------- ------- -------
Net earnings (loss) .................... $ (31) $ (29) (36) $ (21) $ 33
======= ======= ======= ======= =======
Ratio of earnings to fixed charges(g) .. -- -- -- -- 1.22x
======= ======= ======= ======= =======
Deficiency in earnings available to
cover fixed charges(h) ................. $ 29 $ 27 $ 45 $ 34 $ --
======= ======= ======= ======= =======
</TABLE>
As of
-----------------------------------------------
Jan. 29, Jan. 30, Jan. 31, Feb. 1, Feb. 3,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Balance Sheet Data:
Total assets ................. $ 842 $ 825 $ 900 $ 990 $ 986
Working capital deficiency ... 81 42 109 182 173
Lease obligations, long-term . 173 161 170 175 140
Long-term debt, net of current
maturities ................... 1,264 1,259 1,178 1,186 1,215
Stockholder's deficiency ..... 1,163 1,132 1,077 1,042 1,024
(footnotes on following page)
12
<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.
(c) During Fiscal 1996, the Company recorded a pretax charge of $9 million for
reorganization and restructuring costs related to its administrative
operations.
(d) During Fiscal 1996, the Company recorded a pretax charge of $9 million
related to unfavorable lease commitments of certain unprofitable stores in
the Company's southern region.
(e) During Fiscal 1995, the Company recorded a pretax gain of $16 million
related to the disposition of its freestanding drug stores.
(f) During Fiscal 1997 and Fiscal 1996, respectively, the Company recorded
extraordinary charges related to the early extinguishment of debt of $8
million and $1 million , net of an income tax benefit. See Note 15 of the
Notes to Consolidated Financial Statements at Item 8, Part II of this Form
10-K related to the Fiscal 1997 extraordinary charge.
(g) 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).
(h) 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).
13
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Fiscal 1999 v. Fiscal 1998
Sales: Sales in Fiscal 1999 were $3.70 billion compared to $3.66 billion
in Fiscal 1998, an increase of 1.2%. Same store sales increased 0.6% for the
year. Sales in Fiscal 1999 compared to Fiscal 1998 were also impacted by new
store openings in Fiscal 1999, partially offset by stores which were closed or
divested in Fiscal 1998. During Fiscal 1999, the Company opened three new
stores, closed no stores and completed 29 renovations and enlargements to
existing supermarkets. The Company operated 135 and 132 supermarkets at the end
of Fiscal 1999 and Fiscal 1998, respectively.
Gross Profit: Gross profit in Fiscal 1999 was $1.06 billion or 28.6% of
sales compared to $1.04 billion or 28.5% of sales for the prior year. The
increase in gross profit dollars of $15.4 million for Fiscal 1999 compared to
the prior year was primarily due to higher sales and lower shrink. The cost of
goods sold comparisons were also impacted by a pretax LIFO credit of $0.03
million and a pretax LIFO charge of $3.4 million in Fiscal 1999 and Fiscal 1998,
respectively.
Selling, General and Administrative Expenses ("SG&A"): SG&A in Fiscal 1999
increased $17.6 million or 2.1% compared to the prior year. The increase in SG&A
for Fiscal 1999 compared to the prior year was primarily due to higher insurance
and medical expenses, along with expenses incurred related to the terminated
acquisition of the Company by Ahold, partially offset by lower workers
compensation expense. Fiscal 1998 SG&A is net of a gain of $5.1 million on the
sale of certain real estate. As a percentage of sales, SG&A was 23.0% in Fiscal
1999, up from 22.8% in the prior year. Excluding the gain on the sale of real
estate, SG&A as a percentage of sales was 22.9% for Fiscal 1998.
Depreciation and Amortization: Depreciation and amortization of $74.7
million in Fiscal 1999 was $2.0 million lower than the prior year of $76.7
million. The decrease in depreciation and amortization expense in Fiscal 1999
compared to the prior year was primarily due to property and equipment
dispositions during Fiscal 1998, partially offset by capital expenditures.
Depreciation and amortization excludes video tape amortization, which is
recorded in cost of goods sold, of $3.3 million and $3.1 million in Fiscal 1999
and Fiscal 1998, respectively.
Operating Earnings: Operating earnings in Fiscal 1999 were $133.7 million
compared to the prior year of $133.9 million. The decrease in operating earnings
in Fiscal 1999 compared to the prior year was primarily due to higher SG&A,
partially offset by higher gross profit and lower depreciation and amortization
expense.
Interest Expense: Interest expense was $163.1 million in Fiscal 1999
compared to $160.8 million in the prior year. The increase in interest expense
in Fiscal 1999 compared to the prior year was primarily due to higher levels of
borrowing under the working capital component of the Credit Agreement (the
"Working Capital Facility") and the debt accretion on the 10.75% Junior
Subordinated Deferred Coupon Notes (the "Deferred Coupon Notes"), partially
offset by reductions in the term loan component of the Credit Agreement (the
"Term Loan") and the paydown of certain mortgages and lease obligations.
Income Taxes: The income tax provision was $2.1 million and $1.6 million
in Fiscal 1999 and Fiscal 1998, respectively. For both Fiscal 1999 and Fiscal
1998, the Company recorded a valuation allowance primarily related to the income
tax benefit; therefore, no income tax benefit has been recognized. The Company
believes that it is more likely than not that the net deferred income tax assets
of $47.1 million at January 29, 2000 will be realized through the implementation
of tax strategies which could generate taxable income.
During Fiscal 1999, the Company made income tax payments of $0.4 million
and received income tax refunds of $1.9 million. During Fiscal 1998, the Company
made income tax payments of $2.5 million and received income tax refunds of $4.5
million.
14
<PAGE>
Summary of Operations: For Fiscal 1999, the Company's net loss was $31.4
million compared to a net loss of $28.5 million for the prior year. The increase
in net loss in Fiscal 1999 compared to the prior year was primarily due to
higher interest expense.
EBITDA-FIFO: EBITDA-FIFO was $211.7 million and $212.5 million in Fiscal
1999 and Fiscal 1998, respectively. EBITDA-FIFO represents net earnings before
interest expense, income taxes, depreciation, amortization, the gain on sale of
real estate and the LIFO charge (credit). 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 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).
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 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.
15
<PAGE>
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.
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.
Financial Condition
Debt Service: During Fiscal 1999, total long-term debt increased $5.6
million from Fiscal 1998 year end primarily due to 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 $109.8 million at January 29, 2000 and $97.5 million at April 19, 2000.
Outstanding letters of credit under the Working Capital Facility were $43.0
million at January 29, 2000 and $39.0 million at April 19, 2000. In addition,
during Fiscal 1999, total lease obligations increased $15.9 million from Fiscal
1998 year end.
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 2.75% to LIBOR plus 3.00%. The Company
is required to repay a portion of its borrowings under the Term Loan each year,
so as to retire such indebtedness in its entirety by December 15, 2001. Under
the Working Capital Facility, which expires on June 15, 2001, the Company can
borrow an amount up to $200 million, including a maximum of $125 million 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 indebtedness under the Working Capital Facility and the Term Loan bear
interest at floating rates and, therefore, cash interest payments on that
indebtedness may vary in future years. The Company does not currently maintain
any interest rate hedging arrangements due to the reasonable risk that near term
interest rates will not rise significantly. The Company is continuously
evaluating this risk and will implement interest rate hedging arrangements if
deemed appropriate.
16
<PAGE>
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
------------ --------
2000....................................... $ 79.0
2001....................................... 374.2
2002....................................... 196.3
2003....................................... 672.1
2004....................................... 0.6
Thereafter................................. 20.9
--------
$1,343.1
========
Liquidity: The consolidated financial statements of the Company indicate
that, at January 29, 2000, current liabilities exceeded current assets by $80.7
million and the stockholder's deficiency was $1.2 billion. Historically, cash
flows generated from operations, supplemented by the unused borrowing capacity
under the Working Capital Facility and the availability of capital lease
financing have been sufficient to pay the Company's debts as they come due,
provide for its capital expenditure program and meet its other cash
requirements.
Management has evaluated its Fiscal 2000 cash flow projections and debt
service requirements and based upon this evaluation, the Company does not
anticipate making all of its scheduled debt service payments. The Company's
Fiscal 2000 debt requirements increase substantially over the prior year due
primarily to the semi-annual interest payments of $12.1 million on the Deferred
Coupon Notes which, for the first time, must be paid in cash beginning on May 1,
2000 and the sinking fund payment of $50.0 million on the Subordinated Notes on
June 15, 2000.
The Company does not anticipate making its May 1, 2000 interest payments
of $21.2 million on the Senior Subordinated Notes and $12.1 million on the
Deferred Coupon Notes. The failure to make these scheduled interest payments
would constitute a default under the Indentures governing the applicable bonds,
subject to a 30-day grace period, and would also constitute an Event of Default
pursuant to Article VII(f) of the Credit Agreement relating to a failure to make
any payments in respect of Material Indebtedness (as defined in the Credit
Agreement). In addition, although the Company was in compliance with its various
debt covenants at January 29, 2000, the Company believes that it mostly likely
will not comply with such debt covenants throughout Fiscal 2000 based on
management's projections. The Company and its lenders under the Credit Agreement
have entered into a Waiver Agreement dated April 18, 2000 pursuant to which said
lenders have agreed to waive compliance by the Company with certain provisions
of the Credit Agreement through July 29, 2000, including certain debt covenants
and any Event of Default to the extent arising out of a failure to pay any
Material Indebtedness. Upon the occurrence of an Event of Default resulting from
the failure to pay any Material Indebtedness, the Company's long-term debt in
the amount of $1.3 billion would become due currently.
As previously disclosed, the Company announced on March 22, 2000 that it
has retained WP&Co. in order to assist it in developing a financial
restructuring plan and that an ad hoc committee of its bondholders has been
organized. The Company has commenced discussions with this committee towards
developing a consensual financial restructuring plan to deleverage the Company's
capital structure. The Company is seeking to restructure its bond debt and the
preferred stock of Holdings, and does not intend to impair in any way its trade
creditors or implement layoffs as part of its financial restructuring plan.
Discussion with this committee is in its preliminary stages, and there can be no
assurance that a financial restructuring will be completed.
The consolidated financial statements of the Company presented herein do
not reflect any adjustments which could result from the Company's financial
restructuring plan.
17
<PAGE>
Capital Expenditures: Capital expenditures for Fiscal 1999, including
property acquired under capital leases, were $86.8 million compared to $53.5
million for Fiscal 1998 and $57.9 million for Fiscal 1997. During Fiscal 1999,
the Company opened three new stores and completed 29 renovations and
enlargements to existing supermarkets. During Fiscal 2000, the Company plans to
open four new Pathmark stores and complete up to an aggregate of 28 renovations
and enlargements. For Fiscal 2000, capital expenditures, including property to
be acquired under capital leases, and software development costs are estimated
to be $124.0 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, subject to
the successful completion of its financial restructuring plan.
Cash Flows: Cash provided by operating activities amounted to $21.6
million in Fiscal 1999 compared to cash used for operating activities of $27.1
million in the prior year. The change in cash flow from operating activities was
primarily due to cash provided by operating assets and liabilities. Cash used
for operating activities in the prior year was impacted by the transition to
C&S. Cash used for investing activities was $39.3 million in Fiscal 1999
compared to cash provided by investing activities of $15.1 million in the prior
year. The increase in cash used for investing activities was due to an increase
in expenditures of property and equipment, offset by a decrease in proceeds from
property dispositions. Cash provided by financing activities was $25.9 million
in Fiscal 1999 compared to cash used for financing activities of $40.4 million
in the prior year. The increase in cash provided by financing activities was
primarily due to an increase in Working Capital Facility borrowings and a
decrease in book overdrafts, partially offset by a reduction in the Term Loan
and a reduction in lease obligations. Cash used for financing activities in
Fiscal 1998 included the payoff of $30.4 million of the PTK Exchangeable
Guaranteed Debentures. Cash increased from $7.7 million at January 30, 1999 to
$16.0 million at January 29, 2000 due to higher store cash funds at January 29,
2000 resulting from increased sales at year end.
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 payoff of $30.4 million of the
PTK Exchangeable Guaranteed Debentures and a decrease in book overdrafts related
to the C&S transition.
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 did not experience any adverse effect as a result of the
impact of Year 2000 issues on the information systems, including hardware,
software programs and embedded systems contained in the Company's stores,
distribution facility and corporate headquarters. The total costs associated
with achieving Year 2000 readiness approximates $17.0 million (of which
approximately $14.4 million has been expended through January 29, 2000),
consisting of system remediation costs of $10.7 million and equipment
replacement of $6.3 million. The remaining $2.6 million in costs is being
expended primarily through the IBM information systems service agreement.
18
<PAGE>
New Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 represents a
comprehensive framework of accounting rules that standardizes the accounting for
all derivatives. SFAS No. 133 applies to all entities and to all types of
derivatives. In June 1999, the FASB issued SFAS No.137, "Accounting for
Derivative Instruments and Hedging Activities - Deferred of the Effectual Date
of FASB Statement No. 133", which delayed the effectual date of SFAS No. 133 for
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
has not determined the impact, if any, that the adoption of SFAS No. 133 will
have on its financial position or results of operations.
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 and
the general economic conditions in the Company's trading areas.
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.
19
<PAGE>
ITEM 8. Consolidated Financial Statements.
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
52 Weeks Ended
-------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Sales .................................... $ 3,698,084 $ 3,655,211 $ 3,695,865
Cost of sales (exclusive of depreciation
and amortization shown separately below) 2,639,254 2,611,814 2,652,289
----------- ----------- -----------
Gross profit ............................. 1,058,830 1,043,397 1,043,576
Selling, general and administrative
expenses ............................... 850,421 832,805 840,886
Depreciation and amortization ............ 74,667 76,718 83,413
----------- ----------- -----------
Operating earnings ....................... 133,742 133,874 119,277
Interest expense ......................... (163,103) (160,794) (164,168)
----------- ----------- -----------
Loss before income taxes and
extraordinary items .................... (29,361) (26,920) (44,891)
Income tax (provision) benefit ........... (2,065) (1,591) 16,705
----------- ----------- -----------
Loss before extraordinary items .......... (31,426) (28,511) (28,186)
Extraordinary items, net of an income tax
benefit of $5,456 in Fiscal 1997 ....... -- -- (7,488)
----------- ----------- -----------
Net loss ................................. $ (31,426) $ (28,511) $ (35,674)
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash .......................................... $ 15,906 $ 7,661
Accounts receivable, net ...................... 15,787 13,792
Merchandise inventories ....................... 141,559 143,212
Income taxes receivable ....................... 707 1,493
Deferred income taxes, net .................... 3,223 5,912
Prepaid expenses .............................. 21,183 21,522
Due from suppliers ............................ 53,975 49,600
Other current assets .......................... 18,254 11,202
----------- -----------
Total Current Assets ....................... 270,594 254,394
Property and Equipment, Net ..................... 472,157 470,726
Deferred Financing Costs, Net ................... 11,805 15,723
Deferred Income Taxes, Net ...................... 43,870 43,481
Other Assets .................................... 43,953 40,831
----------- -----------
$ 842,379 $ 825,155
=========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current Liabilities
Accounts payable and book overdrafts .......... $ 89,434 $ 98,940
Current maturities of long-term debt .......... 78,982 15,902
Accrued payroll and payroll taxes ............. 50,766 52,014
Current portion of lease obligations .......... 25,192 21,869
Accrued interest payable ...................... 26,850 21,325
Accrued expenses and other current liabilities 80,067 86,413
----------- -----------
Total Current Liabilities .................. 351,291 296,463
----------- -----------
Long-Term Debt .................................. 1,264,103 1,258,539
----------- -----------
Lease Obligations, Long-Term .................... 173,289 160,708
----------- -----------
Other Noncurrent Liabilities .................... 216,739 241,351
----------- -----------
Commitments and Contingencies
Stockholder's Deficiency
Common stock $.10 par value ................... -- --
Authorized, issued and outstanding: 100 shares
Paid-in capital ............................... 76,579 71,897
Accumulated deficit ........................... (1,205,980) (1,174,554)
Note receivable from PTK Holdings, Inc. ....... (33,642) (29,249)
----------- -----------
Total Stockholder's Deficiency ............. (1,163,043) (1,131,906)
----------- -----------
$ 842,379 $ 825,155
=========== ===========
</TABLE>
See notes to consolidated financial statements.
21
<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 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)
Net loss ..................... -- -- (31,426) -- (31,426)
Accretion on note receivable
from PTK Holdings, Inc. ..... -- 4,393 -- (4,393) --
Capital contribution from
SMG-II Holdings Corporation . -- 289 -- -- 289
---- ----------- ----------- ----------- -----------
Balance, January 29, 2000 ...... $ -- $ 76,579 $(1,205,980) $ (33,642) $(1,163,043)
==== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
PATHMARK STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
52 Weeks Ended
----------------------------------------
January 29, January 29, January 29,
2000 1999 1998
------- ------ -------
<S> <C> <C> <C>
Operating Activities
Net loss ........................................... $ (31,426) $ (28,511) $ (35,674)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Extraordinary loss on early extinguishment of debt -- -- 7,488
Depreciation and amortization ..................... 78,347 80,375 87,341
Deferred income tax (benefit) expense ............. 2,300 4,617 (24,053)
Interest accruable but not payable ................ 17,253 20,812 18,509
Amortization of original issue discount ........... 355 355 354
Amortization of debt issuance costs ............... 4,441 4,159 5,542
(Gain) loss on disposal of property and equipment . (546) (4,332) 127
Cash provided by (used for) operating assets and
liabilities:
Accounts receivable, net ........................ (1,995) (2,864) 1,564
Merchandise inventories ......................... 1,653 5,563 22,170
Income taxes .................................... 786 (3,264) 6,367
Prepaid expenses ................................ (2,926) (3,170) (861)
Due from suppliers .............................. (4,375) (36,573) 896
Other current assets ............................ (4,770) 329 (4,749)
Other assets .................................... (6,696) (5,534) 9,700
Accounts payable ................................ (5,165) (34,085) (37,715)
Accrued payroll and payroll taxes ............... (1,248) 2,481 (6,802)
Accrued interest payable ........................ 5,661 2,934 (2,289)
Accrued expenses and other current liabilities .. (6,346) (6,981) 2,708
Other noncurrent liabilities .................... (23,694) (23,432) 5,860
--------- --------- ---------
Cash provided by (used for) operating activities 21,609 (27,121) 56,483
--------- --------- ---------
Investing Activities
Property and equipment expenditures ................ (48,782) (41,332) (34,322)
Proceeds from disposition of property and equipment 9,515 56,436 26,132
Net proceeds in connection with the C&S Purchase
Agreement ............................................ -- -- 103,728
--------- --------- ---------
Cash provided by (used for) investing activities (39,267) 15,104 95,538
--------- --------- ---------
Financing Activities
Increase (decrease) in working capital facilities
borrowings ......................................... 66,800 43,000 (73,500)
Repayment of term loans ............................ (14,242) (7,566) (279,877)
Repayment of other long-term debt .................. (1,522) (30,188) (6,136)
Decrease in book overdrafts ........................ (4,541) (21,789) (14,755)
Reduction in lease obligations ..................... (20,069) (22,641) (21,337)
Deferred financing fees ............................ (523) (1,335) (8,044)
Increase in other long-term debt ................... -- 26,652 1,956
Note receivable from PTK Holdings, Inc. ............ -- (26,471) --
Dividend to PTK Holdings, Inc. ..................... -- (60) --
Borrowings under Term Loan ......................... -- -- 300,000
Premiums incurred in early extinguishment of debt .. -- -- (132)
--------- --------- ---------
Cash provided by (used for) financing activities 25,903 (40,398) (101,825)
--------- --------- ---------
Increase (decrease) in cash .......................... 8,245 (52,415) 50,196
Cash at beginning of period .......................... 7,661 60,076 9,880
--------- --------- ---------
Cash at end of period ................................ $ 15,906 $ 7,661 $ 60,076
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Interest paid ...................................... $ 135,405 $ 132,547 $ 141,983
========= ========= =========
Income taxes paid .................................. $ 445 $ 2,474 $ 4,755
========= ========= =========
Noncash Investing and Financing Activities
Capital lease obligations .......................... $ 38,035 $ 12,200 $ 23,626
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Management's Plan
The consolidated financial statements of Pathmark Stores, Inc. (the
"Company") indicated that, at January 29, 2000, current liabilities exceeded
current assets by $80.7 million and the stockholder's deficiency was $1.2
billion. Historically, cash flows generated from operations, supplemented by the
unused borrowing capacity under the Company's working capital facility (the
"Working Capital Facility") and the availability of capital lease financing have
been sufficient to pay the Company's debts as they came due, provided for its
capital expenditure program and met its other cash requirements.
Management has evaluated its Fiscal 2000 cash flow projections and debt
service requirements and based upon this evaluation, the Company does not
anticipate making all of its scheduled debt service payments. The Company's
Fiscal 2000 debt requirements increase substantially over the prior year due
primarily to the semi-annual interest payments of $12.1 million on the Deferred
Coupon Notes which, for the first time, must be paid in cash beginning on May 1,
2000 and the sinking fund payment of $50.0 million on the Subordinated Notes on
June 15, 2000.
The Company does not anticipate making its May 1, 2000 interest payments
of $21.2 million on the Senior Subordinated Notes and $12.1 million on the
Deferred Coupon Notes. The failure to make these scheduled interest payments
would constitute a default under the Indentures governing the applicable bonds,
subject to a 30-day grace period, and would also constitute an Event of Default
pursuant to Article VII(f) of the Credit Agreement (see Note 8) relating to a
failure to make any payments in respect of Material Indebtedness (as defined in
the Credit Agreement). In addition, although the Company was in compliance with
its various debt covenants at January 29, 2000, the Company believes that it
most likely will not comply with such debt covenants throughout Fiscal 2000
based on management's projections. The Company and its lenders under the Credit
Agreement have entered into a Waiver Agreement dated April 18, 2000 pursuant to
which said lenders have agreed to waive compliance by the Company with certain
provisions of the Credit Agreement through July 29, 2000, including certain debt
covenants and any Event of Default to the extent arising out of a failure to pay
any Material Indebtedness. Upon the occurrence of an Event of Default resulting
from the failure to pay any Material Indebtedness, the Company's long-term debt
in the amount of $1.3 billion would become due currently.
As previously disclosed, the Company announced on March 22, 2000 that it
has retained Wasserstein Perella & Co. ("WP&Co.") in order to assist it in
developing a financial restructuring plan and that an ad hoc committee of its
bondholders has been organized. The Company has commenced discussions with this
committee towards developing a consensual financial restructuring plan to
deleverage the Company's capital structure. The Company is seeking to
restructure its bond debt and the preferred stock of its indirect parent,
Supermarkets General Holdings Corporation ("Holdings"), and does not intend to
impair in any way its trade creditors or implement layoffs as part of its
financial restructuring plan. Discussion with this committee is in its
preliminary stages, and there can be no assurance that a financial restructuring
will be completed.
The consolidated financial statements of the Company presented herein do
not reflect any adjustments which could result from the Company's financial
restructuring plan.
Note 2--Summary of Significant Accounting Policies
Basis of Presentation:
The Company operated 135 supermarkets as of January 29, 2000, 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 Holdings. Holdings is a wholly owned subsidiary of SMG-II Holdings
Corporation ("SMG-II").
24
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Summary of Significant Accounting Policies--(Continued)
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.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All intercompany
transactions have been eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The accompanying consolidated balance sheets include reserves for
self-insured claims relating to customer, employee and vehicle accidents and
covered employee medical benefits. The liabilities for customer and employee
accident claims are recorded at present value, due to the long-term payout of
these claims (see Note 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 which will
occur in Fiscal 2000.
Cash:
All investments and marketable securities with a maturity of three months
or less at date of purchase are considered to be cash equivalents. The Company
had no cash equivalent investments as of January 29, 2000 and January 30, 1999.
Merchandise Inventories:
Merchandise inventories are valued at the lower of cost or market. Cost
for substantially all merchandise inventories is determined on a last-in,
first-out ("LIFO") basis.
Rental Video Tapes:
Video tapes purchased for rental purposes are capitalized and amortized
over their estimated useful lives. The amortization of video tapes, included in
cost of goods sold, approximated $3.3 million, $3.1 million and $3.4 million in
Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively.
25
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Summary of Significant Accounting Policies--(Continued)
Property and Equipment:
Property and equipment are stated at cost. Depreciation and amortization
expense on owned property and equipment is computed on the straight-line method
over the following useful lives: buildings, 40 years; fixtures and equipment,
3-10 years; and leasehold improvements, 8-15 years or lease term, whichever is
shorter. Capital leases are recorded at the present value of minimum lease
payments or fair market value of the related property, whichever is less.
Amortization of property under capital leases is computed on the straight-line
method over the term of the lease or the leased property's estimated useful
life, whichever is shorter.
Long-Lived Assets:
The carrying value of long-lived assets used in the Company's operations
are assessed for recoverability based upon groups of assets and the related
undiscounted cash flow generated by such assets. Assets held for sale are
reviewed for impairment based upon the estimated fair value of such assets.
Deferred Financing Costs:
Deferred financing costs are amortized utilizing the interest method over
the life of the related indebtedness.
Book Overdraft:
Under the Company's cash management system, checks issued but not
presented to banks result in overdraft balances for accounting purposes and are
classified as book overdrafts.
Revenue Recognition:
Revenue is recognized at the point of sale to the customer.
Advertising Costs:
Advertising costs, net of vendor reimbursements, are expensed as incurred
and were $18.8 million, $18.5 million and $18.9 million in Fiscal 1999, Fiscal
1998 and Fiscal 1997, respectively.
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:
Internally developed software, which creates a new system or adds
identifiable functionality to an existing system, and externally purchased
software are capitalized and amortized over three years. Prior to Fiscal 1998,
26
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Summary of Significant Accounting Policies--(Continued)
internally developed software was expensed as incurred. The amortization of
capitalized software, included in selling, general and administrative expenses,
approximated $0.4 million in Fiscal 1999 and $0.5 million in both Fiscal 1998
and Fiscal 1997.
Comprehensive Income:
The Company has no items of comprehensive income other than net income
and, accordingly, the total comprehensive loss is the same as the reported net
loss for all periods presented.
Segment Reporting:
The Company has one reportable segment (retail grocery), operates in one
geographical area (United States), and has no major customers representing 10%
or more of sales.
New Accounting Standards Not Yet Adopted:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 represents a
comprehensive framework of accounting rules that standardizes the accounting for
all derivatives. SFAS No. 133 applies to all entities and to all types of
derivatives. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133", which delayed the effective date of SFAS No. 133 for
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
has not determined the impact, if any, that the adoption of SFAS No. 133 will
have on its financial condition or results of operations.
Reclassifications:
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the Fiscal 1999 presentation.
Note 3--Accounts Receivable
Accounts receivable are comprised of the following (dollars in thousands):
January 29, January 30,
2000 1999
------- -------
Prescription plans ............................. $14,672 $13,431
Other .......................................... 2,129 1,604
------- -------
Accounts receivable ............................ 16,801 15,035
Less: allowance for doubtful accounts .......... 1,014 1,243
------- -------
Accounts receivable, net ....................... $15,787 $13,792
======= =======
Note 4--Merchandise Inventories
Merchandise inventories are comprised of the following (dollars in
thousands):
January 29, January 30,
2000 1999
-------- --------
Merchandise inventories at FIFO cost ......... $180,996 $182,679
Less: LIFO reserve ........................... 39,437 39,467
-------- --------
Merchandise inventories at LIFO cost ......... $141,559 $143,212
======== ========
In Fiscal 1999, Fiscal 1998 and Fiscal 1997, cost of goods sold were
impacted by a pretax LIFO credit of $0.03 million, a pretax LIFO charge of $3.4
million and a pretax LIFO credit of $5.4 million, respectively.
27
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4--Merchandise Inventories--(Continued)
The pretax LIFO charge for Fiscal 1998 was primarily due to inflation in dairy
related products and cigarettes. The pretax LIFO credit for Fiscal 1997 included
a $2.0 million gain on a LIFO liquidation related to the sale of the Company's
pharmaceutical warehouse inventory and a $0.8 million gain on a LIFO liquidation
related to the sale of the Company's grocery, frozen and perishable merchandise
in connection with a 15-year supply agreement with C&S Wholesale Grocers, Inc.
("C&S")(see Note 17).
Note 5--Property and Equipment
Property and equipment are comprised of the following (dollars in
thousands):
January 29, January 30,
2000 1999
-------- --------
Land ............................................... $ 35,731 $ 40,069
Buildings and building improvements ................ 142,575 147,197
Fixtures and equipment ............................. 166,260 173,216
Leasehold costs and improvements ................... 272,951 268,092
Transportation equipment ........................... 11,415 12,551
-------- --------
Property and equipment, owned ...................... 628,932 641,125
Property and equipment under capital leases ........ 225,546 205,158
-------- --------
Property and equipment, at cost .................... 854,478 846,283
Less: accumulated depreciation and amortization .... 382,321 375,557
-------- --------
Property and equipment, net ........................ $472,157 $470,726
======== ========
During Fiscal 1999, the Company sold certain real estate for $4.8 million
and recognized a gain of $0.5 million. During Fiscal 1998, the Company sold
certain real estate for $55.7 million, including $22.9 million related to the
sale of the distribution center previously leased to Rickel Home Centers, Inc.
("Rickel") (see Note 20), 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.
Note 6--Deferred Financing Costs, Net
Deferred financing costs are comprised of the following (dollars in
thousands):
January 29, January 30,
2000 1999
------- -------
Deferred financing costs ................... $29,800 $29,938
Less: accumulated amortization ............. 17,995 14,215
------- -------
Deferred financing costs, net .............. $11,805 $15,723
======= =======
Note 7--Other Noncurrent Liabilities
Other noncurrent liabilities are comprised of the following (dollars in
thousands):
January 29, January 30,
2000 1999
-------- --------
Deferred income related to the C&S transaction
(see Note 17) ...................................... $ 50,059 $ 55,448
Self-insured liabilities ............................. 42,877 48,187
Pension and deferred compensation (see Note 12) ...... 18,636 21,906
Other postretirement and postemployment benefits (see
Note 12) ........................................... 35,203 37,813
Closed stores ........................................ 15,691 20,747
Lease commitments .................................... 6,989 7,104
Other ................................................ 47,284 50,146
-------- --------
Other noncurrent liabilities ......................... $216,739 $241,351
======== ========
28
<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 29, January 30,
2000 1999
---------- ----------
<S> <C> <C>
Term Loan ("Term Loan") .................................. $ 241,442 $ 255,684
Working Capital Facility ("Working Capital Facility") .... 109,800 43,000
9.625% Senior Subordinated Notes due 2003 ("Senior
Subordinated Notes") ..................................... 438,844 438,489
11.625% Subordinated Notes due 2002 ("Subordinated Notes") 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") ............................. 225,133 207,880
Debt payable to Holdings ................................. 983 983
Industrial revenue bonds ................................. 8,217 8,302
Other debt (primarily mortgages) ......................... 23,899 25,336
---------- ----------
Total debt ............................................... 1,343,085 1,274,441
Less: current maturities ................................. 78,982 15,902
---------- ----------
Long-term portion ........................................ $1,264,103 $1,258,539
========== ==========
</TABLE>
Management has evaluated its Fiscal 2000 cash flow projections and debt
service requirements and based upon this evaluation, the Company does not
anticipate making all of its scheduled debt service payments. The Company's
Fiscal 2000 debt requirements increase substantially over the prior year due
primarily to the semi-annual interest payments of $12.1 million on the Deferred
Coupon Notes which, for the first time, must be paid in cash beginning on May 1,
2000 and the sinking fund payment of $50.0 million on the Subordinated Notes on
June 15, 2000. The Company does not anticipate making its May 1, 2000 interest
payments of $21.2 million on the Senior Subordinated Notes and $12.1 million on
the Deferred Coupon Notes (see Note 1).
Scheduled Maturities of Debt:
Long-term debt principal payments are as follows (dollars in thousands):
Principal
Fiscal Years Payments
------------ ----------
2000 ............................................... $ 78,982
2001 ............................................... 374,214
2002 ............................................... 196,288
2003 ............................................... 672,122
2004 ............................................... 552
Thereafter ......................................... 20,927
----------
$1,343,085
==========
Bank Credit Agreement:
On June 30, 1997, the Company entered into a Credit Agreement with a group
of lenders led by The Chase Manhattan Bank (the "Credit Agreement"). The Credit
Agreement includes a $300 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 2.75% to LIBOR plus
3.00%. The Company is required to repay a portion of its borrowings under the
Term Loan each year, so as to retire such indebtedness in its entirety by
December 15,
29
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8--Long-Term Debt--(Continued)
2001. Under the Working Capital Facility, which expires on June 15, 2001, the
Company can borrow an amount up to $200 million, including a maximum of
$125 million in letters of credit. Outstanding letters of credit were $43.0
million at January 29, 2000 and $39.0 million at April 19, 2000. In addition,
pursuant to Permitted Subordinated Debt Refinancing (as defined in the Credit
Agreement), the Working Capital Facility and a portion of the Term Loan can be
extended up to an additional two and one-half years and the remainder of the
Term Loan can be extended up to an additional three and one-half years from the
original expiration dates.
Senior Subordinated Notes:
The Senior Subordinated Notes accrete to a maturity value of $440.0
million in Fiscal 2003. These notes pay cash interest on a semiannual basis and
have no sinking fund requirements.
Subordinated Notes:
The Subordinated Notes mature in Fiscal 2002 and pay cash interest on a
semiannual basis. These notes contain a sinking fund provision that requires the
Company to deposit approximately $50.0 million (25% of the original aggregate
principal amount) with the trustee of the Subordinated Notes on June 15 in each
of Fiscal 2000 and Fiscal 2001 for the redemption of the Subordinated Notes, at
a redemption price equal to 100% of the principal amount thereof, plus accrued
interest to the redemption date and providing for the redemption of 50% of the
original aggregate principal amount of such notes prior to maturity.
Subordinated Debentures:
The Subordinated Debentures mature in Fiscal 2002. These debentures pay
cash interest on a semiannual basis and have no sinking fund requirements.
Deferred Coupon Notes:
The Deferred Coupon Notes accrete to a maturity value of $225.3 million in
Fiscal 2003. These notes begin paying cash interest on a semiannual basis on May
1, 2000 and have no sinking fund requirements.
Industrial Revenue Bonds:
Interest rates for the three industrial revenue bonds range from 5.0% to
10.9%. The industrial revenue bonds are payable in installments ending in Fiscal
2003, Fiscal 2008 and Fiscal 2018.
Other Debt:
Other debt includes mortgage notes, which are secured by property and
equipment having a net book value of $27.0 million at January 29, 2000. These
borrowings, whose interest rates averaged 7.4%, are payable in installments
ending in Fiscal 2008, including a scheduled final payment of $18.6 million.
30
<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 29, 2000 January 30, 1999
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Term Loan ...................... $ 241,442 $ 241,442 $ 255,684 $ 255,684
Working Capital Facility ....... 109,800 109,800 43,000 43,000
Senior Subordinated Notes ...... 438,844 332,860 438,489 442,200
Subordinated Notes ............. 199,017 53,735 199,017 199,017
Subordinated Debentures ........ 95,750 22,980 95,750 95,271
Deferred Coupon Notes .......... 225,133 24,778 207,880 195,968
Debt payable to Holdings ....... 983 265 983 983
Industrial revenue bonds ....... 8,217 8,217 8,302 8,302
Other debt (primarily mortgages) 23,899 23,899 25,336 25,336
---------- ---------- ---------- ----------
Total debt ..................... $1,343,085 $ 817,976 $1,274,441 $1,265,761
========== ========== ========== ==========
</TABLE>
The fair value of the Term Loan and Working Capital Facility at January
29, 2000 and January 30, 1999 approximated their carrying value due to their
floating interest rates. The fair value of the notes and debentures are based on
the quoted market prices at January 29, 2000 and January 30, 1999, since such
instruments are publicly traded. The Company believes that the fair value of the
notes and debentures were adversely affected by the termination of the Agreement
and Plan of Merger dated as of March 9, 1999 among Koninklijke Ahold N.V.
("Ahold"), Ahold Acquisition, Inc. ("Purchaser") and SMG-II (the "SMG-II Merger
Agreement") (see Note 20). The Company has evaluated its other debt (primarily
mortgages) and industrial revenue bonds and believes, based on interest rates,
related terms and maturities, that the fair value of such instruments
approximates their respective carrying amounts. As of January 29, 2000 and
January 30, 1999, the carrying values of accounts receivable, due from
suppliers and accounts payable approximated their fair values due to the
short-term maturities of these accounts.
Note 10--Interest Expense
Interest expense is comprised of the following (dollars in thousands):
Fiscal Years
----------------------------------
1999 1998 1997
-------- -------- --------
Term loans .............................. $ 19,709 $ 21,021 $ 22,884
Working capital facilities .............. 7,057 5,098 4,969
Senior Subordinated Notes
Amortization of original issue discount 355 355 354
Currently payable ..................... 42,350 42,350 42,350
Subordinated Notes ...................... 23,136 23,136 23,151
Subordinated Debentures ................. 12,088 12,088 12,088
Deferred Coupon Notes
Accruable but not payable ............. 17,253 20,812 18,509
Currently payable ..................... 6,054 -- --
Debt payable to Holdings ................ 114 114 114
Amortization of debt issuance costs ..... 4,441 4,159 5,542
Lease obligations ....................... 21,338 21,259 22,091
Mortgages payable ....................... 1,782 2,562 3,462
Other, net .............................. 7,426 7,840 8,654
-------- -------- --------
Interest expense ........................ $163,103 $160,794 $164,168
======== ======== ========
31
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11--Lease Obligations
At January 29, 2000, the Company was liable under terms of noncancellable
leases for the following minimum lease commitments (dollars in thousands):
Capital Operating
Fiscal Years Leases Leases
-------- --------
2000 ................................................. $ 44,149 $ 37,359
2001 ................................................. 36,234 36,544
2002 ................................................. 32,150 34,911
2003 ................................................. 26,344 33,780
2004 ................................................. 22,279 32,484
Thereafter ........................................... 246,407 294,198
-------- --------
Total minimum lease payments(a) ...................... 407,563 $469,276
========
Less: executory costs (such as taxes, maintenance and
insurance) ......................................... 1,746
--------
Net minimum lease payments ........................... 405,817
Less: amounts representing interest .................. 207,336
--------
Present value of net minimum lease payments (including
current installments of $25,192)(b) ................ $198,481
========
- ----------
(a) Net of sublease income of $0.1 million and $33.1 million for capital and
operating leases, respectively.
(b) Includes $20.5 million related to a sale and leaseback accounted for as a
financing.
Rent expense, under all operating leases having noncancellable terms of
more than one year, is summarized as follows (dollars in thousands):
Fiscal Years
-------------------------------------
1999 1998 1997
-------- -------- --------
Minimum rentals ...................... $ 43,692 $ 42,659 $ 44,396
Less: rentals from subleases(a) ...... (4,944) (5,253) (8,131)
-------- -------- --------
Rent expense ......................... $ 38,748 $ 37,406 $ 36,265
======== ======== ========
- ----------
(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:
The Company maintains a defined benefit pension plan, which covers
substantially all non-union and certain union associates. The Company also
maintains an unfunded supplemental retirement plan for participants in the
defined benefit pension plan to provide benefits in excess of amounts permitted
to be paid under the provisions of the tax law. Additionally, the Company has
entered into individual retirement agreements with certain current and retired
executives providing for unfunded supplemental pension benefits upon their
retirement after attainment of age 60.
In addition, the Company provides its associates other postretirement
benefits, principally health care for non-union associates who retired prior to
January 1, 1998 and certain associates for whom benefits are a subject of
collective bargaining and life insurance benefits.
32
<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 29, January 30, January 29, January 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Change in benefit obligations:
Benefit obligations at beginning
of period ..................................... $ 159,118 $ 146,764 $ 15,408 $ 17,308
Service cost .................................. 2,962 2,984 348 314
Interest cost ................................. 10,352 10,173 949 959
Plan amendment ................................ (32) 1,880 -- (2,577)
Benefits paid ................................. (7,543) (8,239) (712) (379)
Actuarial experience (gains) losses ........... (17,032) 5,556 (868) (217)
--------- --------- --------- ---------
Benefit obligations at end of
period ........................................ $ 147,825 $ 159,118 $ 15,125 $ 15,408
========= ========= ========= =========
Change in fair value of plan assets:
Fair value of plan assets at
beginning of year ............................. $ 243,219 $ 213,771 $ -- $ --
Actual return on plan assets .................. (4,487) 35,939 -- --
Employer contribution ......................... -- 9 -- --
Benefits or expenses paid ..................... (5,649) (6,500) -- --
--------- --------- --------- ---------
Fair value of plan assets at end
of year ....................................... $ 233,083 $ 243,219 $ -- $ --
========= ========= ========= =========
Reconciliation of funded status at end of period:
Funded status ................................. $ 85,258 $ 84,101 $ (15,125) $ (15,408)
Unrecognized prior service cost ............... 2,233 2,488 (5,341) (6,833)
Unrecognized net actuarial gains .............. (69,983) (80,933) (8,564) (8,276)
--------- --------- --------- ---------
Prepaid (accrued) benefit cost ................ $ 17,508 $ 5,656 $ (29,030) $ (30,517)
========= ========= ========= =========
Amount recognized in the
consolidated balance
sheets:
Prepaid benefit cost .......................... $ 37,296 $ 25,361 $ -- $ --
Accrued benefit liabilities ................... (20,518) (23,881) (29,030) (30,517)
Intangible asset .............................. 730 4,176 -- --
--------- --------- --------- ---------
Net amount recognized ......................... $ 17,508 $ 5,656 $ (29,030) $ (30,517)
========= ========= ========= =========
Weighted average assumption at the end of year:
Discount rate ................................. 8.00% 6.75% 8.00% 6.75%
Expected return on plan assets ................ 9.50% 9.50% -- --
Rate of compensation increases ................ 5.00% 3.75% -- --
</TABLE>
Net pension and other postretirement benefits include the following cost
(cost reduction) components (dollars in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
---------------- -----------------------------
Fiscal Years Fiscal Years
------------------------------------ ------------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Service cost ............. $ 2,962 $ 2,984 $ 3,208 $ 348 $ 314 $ 399
Interest cost ............ 10,352 10,173 9,847 949 959 1,139
Expected return on assets (20,523) (17,414) (14,035) -- -- --
Amortization of prior
service cost ........... 223 82 89 (1,492) (1,492) (1,276)
Recognition of gains ..... (2,972) (1,908) (471) (580) (631) (590)
Recognition .............. of plan
amendment ................ -- -- 165 -- -- --
-------- -------- -------- -------- -------- --------
Net benefit cost reduction $ (9,958) $ (6,083) $ (1,197) $ (775) $ (850) $ (328)
======== ======== ======== ======== ======== ========
</TABLE>
33
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12--Pension and Other Benefit Plans--(Continued)
Assets of the Company's defined benefit pension plan are invested in
marketable securities comprised primarily of equities of domestic corporations,
U.S. Government instruments and money market investments. The increase in other
assets in the consolidated balance sheet is primarily attributable to the
increase in the pension plan's funded status. The projected benefit obligation
(included in the above table) and the accumulated benefit obligation for the
unfunded supplemental retirement plans were $21.6 million and $20.5 million,
respectively at January 29, 2000 and $24.7 million and $23.9 million,
respectively, at January 30, 1999.
The health-care cost trend rate at January 29, 2000 was 5.00% and is
expected to remain at this level. A 1% change in the assumed health care cost
trend rate would have the following effects at January 29, 2000 (dollars in
thousands):
1%
--------------------
Increase Decrease
-------- --------
Total of service and interest cost components........... $ 210 $ 170
Postretirement benefit obligation....................... $1,920 $1,580
The Company also contributes to several multi-employer plans, which
provide defined benefits to certain union associates. The Company's
contributions to these multi-employer plans were $15.7 million, $16.5 million
and $19.0 million in Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively.
Savings Plan:
The Company sponsors a savings plan for eligible non-union associates.
Contributions under the plan are based on specified percentages of associate
contributions. The Company's contributions to the savings plan were $3.0
million, $3.1 million and $3.0 million in Fiscal 1999, Fiscal 1998 and Fiscal
1997, respectively.
Other Postemployment Benefits:
The Company also provides its associates postemployment benefits,
primarily long-term disability and salary continuation. The obligation for these
benefits was determined by application of the provisions of the Company's
long-term disability plan and includes the age of active claimants at disability
and at valuation, the length of time on disability and the probability of the
claimant remaining on disability to maximum duration. These liabilities are
recorded at their present value utilizing a discount rate of 4%.
The accumulated postemployment benefit obligation as of January 29, 2000
and January 30, 1999 was $6.8 million and $8.0 million, respectively.
Note 13--Income Taxes
The income tax (provision) benefit is comprised of the following (dollars
in thousands):
Fiscal Years
------------------------------------
1999 1998 1997
-------- -------- --------
Current
Federal ..................... $ 400 $ 3,600 $ (4,629)
State ....................... (165) (574) (2,719)
Deferred
Federal ..................... 9,568 6,020 18,755
State ....................... 2,730 3,466 7,198
Change in valuation allowance (14,598) (14,103) (1,900)
-------- -------- --------
Income tax (provision) benefit . $ (2,065) $ (1,591) $ 16,705
======== ======== ========
34
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13--Income Taxes--(Continued)
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
------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax benefit at statutory tax
rate .................................... $ 10,276 $ 9,422 $ 15,712
State income taxes ........................ 1,668 1,879 2,911
Change in valuation allowance ............. (14,598) (14,103) (1,900)
Other ..................................... 589 1,211 (18)
-------- -------- --------
Income tax (provision) benefit ............ $ (2,065) $ (1,591) $ 16,705
======== ======== ========
</TABLE>
Deferred income tax assets and liabilities consist of the following
(dollars in thousands):
<TABLE>
<CAPTION>
January 29, 2000 January 30, 1999
------------------------- ------------------------
Assets Liabilities Assets Liabilities
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Property and equipment ......... $ -- $ 32,408 $ -- $ 37,344
Merchandise inventory and gross
profit ......................... -- 12,672 -- 11,817
Prepaid expenses ............... -- 6,154 -- 5,609
Self-insured liabilities ....... 28,124 -- 31,253 --
Lease capitalization ........... 20,726 -- 19,714 --
Alternative minimum taxes ...... 3,101 -- 3,893 --
General business credits ....... 10,169 -- 9,194 --
Net operating loss carryforwards 53,267 -- 31,122 --
Benefit plans and other
postretirement and
postemployment benefits ...... 11,299 -- 17,466 --
Deferred income ................ 20,304 -- 23,097 --
Closed stores reserves and
accrued expenses ............... 13,136 -- 16,506 --
Capital loss carryforward ...... 17,818 -- 20,259 --
Other .......................... 3,396 6,562 770 7,258
--------- --------- --------- ---------
Subtotal ....................... 181,340 57,796 173,274 62,028
Less: valuation allowance ...... (76,451) -- (61,853) --
--------- --------- --------- ---------
Total .......................... $ 104,889 $ 57,796 $ 111,421 $ 62,028
========= ========= ========= =========
</TABLE>
The balance sheet classification of the deferred income tax assets and
liabilities is as follows (dollars in thousands):
<TABLE>
<CAPTION>
January 29, 2000 January 30, 1999
----------------------------------- -----------------------------------
Current Noncurrent Total Current Noncurrent Total
------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Assets ........ $ 30,444 $ 150,896 $ 181,340 $ 33,961 $ 139,313 $ 173,274
Liabilities ... (21,988) (35,808) (57,796) (20,645) (41,383) (62,028)
--------- --------- --------- --------- --------- ---------
Subtotal ...... 8,456 115,088 123,544 13,316 97,930 111,246
Less: valuation
allowance ..... (5,233) (71,218) (76,451) (7,404) (54,449) (61,853)
--------- --------- --------- --------- --------- ---------
Total ......... $ 3,223 $ 43,870 $ 47,093 $ 5,912 $ 43,481 $ 49,393
========= ========= ========= ========= ========= =========
</TABLE>
The Company's net deferred income tax assets were $47.1 million and $49.4
million, net of a valuation allowance of $76.5 million and $61.9 million at
January 29, 2000 and January 30, 1999, respectively. The Company believes that
it is more likely than not that the net deferred tax assets will be realized
through the implementation of tax strategies which could generate taxable
income.
During Fiscal 1999 and Fiscal 1998, the net increases in the valuation
allowance were $14.6 million and $14.1 million, respectively. These changes
reflect increases in the valuation allowance related to those deferred tax
assets which the Company has concluded are not likely to be realized. The
Company will continue to assess the recoverability of its deferred income tax
assets and further adjustments to the valuation allowance may be necessary based
on the evidence available at that time. Federal and state net operating loss
carryforwards expire in Fiscal 2000 through Fiscal 2019. General business
credits consist of federal jobs credits and expire in Fiscal 2004 through Fiscal
2013. Capital loss carryforwards expire in Fiscal 2001.
35
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13--Income Taxes--(Continued)
In Fiscal 1999, Fiscal 1998 and Fiscal 1997, the Company made income tax
payments of $0.4 million, $2.5 million and $4.8 million, respectively, and
received income tax refunds of $1.9 million, $4.5 million and $4.3 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 $4.4 million and $2.8 million to paid-in
capital, in Fiscal 1999 and Fiscal 1998, respectively.
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 $3.2 million and are being
amortized as compensation expense in the Company's consolidated statements of
operations over the seven-year vesting period, with a corresponding credit to
paid-in capital.
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.
Note 15--Extraordinary Items
The extraordinary items, representing losses on early extinguishment of
debt, consist of the following (dollars in thousands):
Fiscal Year
1997
--------
Loss before income taxes..................... $(12,944)
Income tax benefit........................... 5,456
--------
Extraordinary items, net of a tax benefit.... $ (7,488)
========
During the second quarter of Fiscal 1997, in connection with the Credit
Agreement, the Company wrote off deferred financing fees of $12.8 million
related to the former bank credit agreement, resulting in a net loss on early
extinguishment of debt of $7.4 million, net of an income tax benefit of $5.4
million. In addition, during the second quarter of Fiscal 1997, in connection
with the sale of certain mortgaged property, the Company made a mortgage paydown
of $2.9 million, including accrued interest and debt premiums, resulting in a
net loss on early extinguishment of debt of $0.1 million, net of an income tax
benefit of $0.1 million.
36
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 16--Related Party Transactions
During Fiscal 1998, the Company and SMG-II retained ML&Co. to act as its
exclusive financial advisor in connection with any proposed business combination
involving SMG-II, Holdings, PTK and the Company and any successors thereto
(collectively the "Company Group"). During Fiscal 2000, said agreement was
amended to permit the Company Group to engage WP&Co. as its financial advisor.
Pursuant to the terms of ML&Co.'s amended engagement, if, during the period
ML&Co. is retained by the Company or within one year thereafter, but in no event
following the consummation of a Restructuring (as defined) in which a Business
Combination (as defined) is not involved or contemplated (such period, including
the term of this engagement, the "Fee Period") (a) a Business Combination is
consummated or (b) a member of the Company Group enters into an agreement which
subsequently results in a Business Combination, the Company agrees to pay ML&Co.
a fee equal to:
(i) 0.6% of the aggregate purchase price paid in such Business
Combination, payable in cash upon the closing of such Business
Combination, if such aggregate purchase price at least equals the
indebtedness of Pathmark as of the date of approval of the Business
Combination by the Board of Directors of the pertinent company in
the SMG Group or
(ii) if such aggregate purchase price is less than the indebtedness of
Pathmark as of the date of approval of the Business Combination by
the applicable Board of Directors, the fee due ML&Co. will be an
amount equal to 0.65% of the sum of (i) the aggregate principal
amount of Pathmark's funded indebtedness, (ii) the liquidation
preference of Holdings preferred stock, and (iii) the face value of
other obligations, restructured in a Restructuring, plus an amount
equal to the sum of (a) 0.1625% of the aggregate purchase price up
to and including $500.0 million; (b) 0.125% of the aggregate
purchase price in excess of $500.0 million and up to $1.0 billion,
and (c) 0.0875% of such aggregate purchase price equal to or
exceeding $1.0 billion or
(iii) in the event no Business Combination shall occur during the Fee
Period, the Company shall pay ML&Co. a fee of $1 million.
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, including the fixtures, equipment and inventory in each
of those Facilities, for $104.5 million (the "C&S Purchase Agreement"). The
Company used $32.5 million of the net proceeds to pay down a portion of the Term
Loan. A portion of the net proceeds were used to pay down the Working Capital
Facility at the end of Fiscal 1997. The remainder of the proceeds were invested
in marketable securities and, during Fiscal 1998, were utilized to pay down
accounts payable related to the inventory sold in connection with the C&S
Purchase Agreement and other liabilities. Simultaneously, the Company and C&S
entered into a 15-year supply agreement (the "Supply Agreement"), pursuant to
which C&S will supply substantially all of the Company's grocery, frozen and
perishable merchandise requirements, formerly owned and warehoused by the
Company. As a result of these agreements, the Company recorded deferred income
of $60.8 million at January 31, 1998. Such deferred income consisted of (i)
$25.0 million received by the Company for future trade discounts and rebates,
which is being amortized to operations as it is earned, and (ii) $35.8 million
in net proceeds received in excess of the fair value of the assets sold; such
excess has been deferred and is being amortized to operations over the life of
the Supply Agreement. The deferred income balance was $50.1 million and $55.4
million at January 29, 2000 and January 30, 1999, respectively.
37
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 18--Divested Stores
During Fiscal 1997, the Company sold four and closed seven stores that it
announced for divestiture at the end of Fiscal 1996. The results of operations
for these 11 stores were as follows (dollars in thousands):
Fiscal Year
1997
----
Sales....................................... $42,877
=======
Operating loss.............................. $10,590
=======
Note 19--Chief Executive Officer Employment Arrangements
On October 8, 1996, the Company hired a Chief Executive Officer (the
"CEO") pursuant to a five-year employment agreement (the "Employment
Agreement"). In conjunction with his employment, SMG-II granted to the CEO an
equity package (the "Equity Strip") consisting of 8,520 restricted shares of a
new series of SMG-II Preferred Stock and 19,851 restricted shares of SMG-II
Common Stock and options to purchase 100,000 shares of SMG-II Common Stock at an
initial exercise price of $100 per share (the "Options"), with the said exercise
price increasing over time. The Equity Strip was valued at $3.4 million at the
date of issuance, based upon an independent appraisal, and will vest over the
term of the Employment Agreement or earlier with the occurrence of an
employment-related event, as defined, and will be forfeited in its entirety upon
the occurrence of a termination event, as defined. The Equity Strip is being
amortized as compensation expense in the Company's statements of operations over
the term of the Employment Agreement. The Options were accounted for by SMG-II
using the methods prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and as a result, no compensation
expense was recorded. The Options will vest over four years and expire one year
after being fully vested, except for the portion of the Options that vest on the
day before the fifth year and has not yet become exercisable, the expiration of
which will be extended to year seven. If employment with the Company should end
as a result of a termination event, the Options (whether or not then vested)
will be immediately and irrevocably forfeited, except in certain circumstances.
Vested Options do not become exercisable until the occurrence of certain events
related generally to the realization of a third-party sale of SMG-II Common
Stock. The CEO also received (a) a one-time signing bonus of $1.0 million, which
is being amortized as compensation expense in the Company's statements of
operations over the term of the Employment Agreement, and (b) a $4.5 million
loan evidenced by sixteen separate promissory notes. Under the terms of each
note, if he is in full employment of the Company on a quarterly anniversary of
his hiring date, his obligation to pay such note maturing on such date will be
forgiven as to principal, but not any then accrued and unpaid interest. The
Company has and will continue to record compensation expense upon the
forgiveness of each note. In the event his employment ends as a result of a
termination event, prior to a change in control, as defined, each note will
become immediately due and payable as to all outstanding principal and all
accrued and unpaid interest. These notes, which bear interest at a blended rate
of approximately 6%, are on a full-recourse basis and secured by the Equity
Strip, the Options and any shares acquired upon exercise of such Options. The
balance of the loan was approximately $0.8 million and $2.0 million at January
29, 2000 and January 30, 1999, respectively.
In addition to the Employment Agreement, Pathmark and the CEO entered into
a retention bonus and sale bonus agreement in March 2000. The retention bonus
and sale bonus agreement provides that under the circumstances described below,
the CEO shall receive a retention bonus and a sale bonus. The retention bonus is
intended to encourage the CEO to remain employed by Pathmark until at least July
31, 2000. If the CEO is so employed on that date, Pathmark will pay the CEO a
retention bonus equal to $4.0 million in a lump sum cash amount as soon as
practicable after July 31, 2000, but in no event more than thirty days
thereafter.
In addition to the retention bonus, under certain circumstances, the CEO
will become entitled to receive the sale bonus. The CEO will become entitled to
receive the sale bonus in the event that an event could result in a change in
control (defined as a "Triggering Event" in the Agreement) occurs during the
term of the agreement, and (ii) a change in control contemplated by such
Triggering Event occurs thereafter. The amount of the sale bonus shall be equal
to 0.0043 multiplied by an amount equal to the sum of the aggregate fair market
value of any
38
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 19--Chief Executive Officer Employment Arrangements--(Continued)
securities issued and any other non-cash consideration delivered, and any cash
consideration paid to the Company Group or their security holders in connection
with a change in control, plus the amount of all indebtedness of the Company
Group which is assumed or acquired by any Purchaser in connection with a change
in control or retired or defeased in connection with such change in control.
Note 20--Commitments and Contingencies
Ahold Acquisition:
On March 15, 1999, Ahold, a company organized under the laws of the
Netherlands and Purchaser, a Delaware corporation and an indirect wholly-owned
subsidiary of Ahold, commenced a tender offer to purchase all of the issued and
outstanding shares (the "Shares") of Holdings' $3.52 Cumulative Exchangeable
Redeemable Preferred Stock (the "Preferred Stock") at a price of $38.25 per
Share (subsequently increased to $39.85 per Share), net to the seller in cash,
without interest thereon (the "Offer Price"), upon the terms and subject to the
conditions set forth in the Offer to Purchase dated March 15, 1999 (the "Offer
to Purchase") and the related Letter of Transmittal (which, together with the
Offer to Purchase and all amendments and supplements thereto, constitute the
"Offer").
The Offer was an integral part of the transactions contemplated by the
SMG-II Merger Agreement pursuant to which Ahold was to have acquired all of the
issued and outstanding shares of the capital stock of SMG-II, the indirect
parent of the Company, through the merger of the Purchaser with and into SMG-II
(the "SMG-II Merger"), subject to the terms and conditions contained in the
SMG-II Merger Agreement.
The Company's indirect parent corporations, Holdings and SMG-II and the
directors of Holdings are defendants (collectively, the "Defendants") in a
purported stockholder class action lawsuit filed in the Court of Chancery of the
State of Delaware (the "Court") entitled Wolfson v. Supermarkets General
Holdings Corporation, et al., C.A. No. 17047 (the "Action"), in which the
Plaintiff alleged, among other things, that the defendant directors of Holdings
and SMG-II breached their fiduciary duties to the holders of Preferred Stock.
The Plaintiff, by his counsel, entered into a Settlement Agreement, dated June
9, 1999, (the "Settlement Agreement") with the Defendants (by their counsel)
pursuant to which the parties agreed to settle the Action.
The Settlement Agreement provides for, among other things, the
certification of the action as a class action under the rules of the Court,
which class would consist of all holders of the Preferred Stock from and
including March 9, 1999 (the "Class") through and including the consummation of
the SMG-II Merger or, if the SMG-II Merger fails to close, the stock purchase
pursuant to the Stock Purchase Agreement, dated March 9, 1999, by and among
Ahold, the Purchaser, SMG-II and PTK (the "Alternative Transaction"). In
addition, pursuant to the terms of the Settlement Agreement, the Defendants
agreed, subject to Final Court Approval (as defined below), that the Purchaser
increase its tender offer price to $40.25 per share of Preferred Stock (from
$38.25), less the total amount awarded as fees and expenses to Plaintiff's
counsel by the Court divided by the total number of outstanding shares of
Preferred Stock (the "New Offer Price"). Plaintiff's counsel applied to the
Court for an award of fees and expenses in an aggregate amount of $1,956,268, or
$0.40 per share of Preferred Stock.
The Settlement Agreement also provides, among other things, that any of
the Defendants shall have the right to withdraw from the proposed settlement in
the event that (i) any claims related to the SMG-II Merger, the Alternative
Transaction, or the subject matter of the Action are commenced by any member of
the Class against any Defendants or certain others employed by, affiliated with,
or retained by the Defendants in any court prior to Final Court Approval of the
settlement, and the court in which such claims are pending denies Defendants'
application to dismiss or stay such action in contemplation of dismissal, or
(ii) any of the other
39
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 20--Commitments and Contingencies--(Continued)
conditions to the consummation of the settlement described below shall not have
been satisfied. The consummation of the settlement is subject to (i) Final Court
Approval of the settlement; (ii) dismissal of the Action by the Court with
prejudice and without awarding fees or costs to any party; and (iii) the
Purchaser closing (A) its tender offer and the SMG-II Merger, or (B) the
Alternative Transaction.
After notice and a hearing on July 22, 1999, the Court approved the
Settlement Agreement and the fee application of the Plaintiff's attorneys. As of
August 23, 1999, all applicable appeal periods expired, thus constituting Final
Court Approval. As a result of the settlement, the New Offer Price was $39.85
per share of Preferred Stock, had Ahold not terminated the SMG-II Merger
Agreement and the SMG-II Merger had been consummated. With the termination of
the SMG-II Merger Agreement by Ahold on December 16, 1999, Plaintiff moved on
January 5, 2000, to enforce the Settlement Agreement against Purchaser, which
motion is pending.
On December 16, 1999, Ahold terminated the SMG-II Merger Agreement
claiming that despite its best efforts, it could not obtain necessary antitrust
clearance from government regulators. That same day, Ahold filed a complaint in
the Supreme Court, State of New York, County of New York seeking a declaratory
judgement that Ahold had used its "best efforts" under the SMG-II Merger
Agreement. On January 18, 2000, SMG-II filed its Answer and Counterclaims,
denying Ahold's assertion that it used its best efforts to consummate the SMG-II
Merger Agreement. Additionally, SMG-II asserted counterclaims against Ahold for
(i) breach of contract by failure to use best efforts; (ii) breach of the
covenant of good faith and fair dealing; and (iii) unfair competition. SMG-II
requested compensatory damages in an unspecified amount.
On February 7, 2000, Ahold answered SMG-II's counterclaims and denied the
allegations contained therein, and filed an Amended Compliant seeking
declarations that (i) the "best efforts" clause in the SMG-II Merger Agreement
is unenforceable; (ii) if the "best efforts" clause is enforceable, Ahold did
not breach that clause; and (iii) Ahold properly terminated the SMG-II Merger
Agreement. Additionally, Ahold alleged that SMG-II breached the "best efforts"
clause of the SMG-II Merger Agreement and requested compensatory damages in an
unspecified amount. SMG-II filed its amended answer to the amended compliant and
amended counterclaims on February 27, 2000. At this juncture, discovery is
proceeding.
Rickel:
In connection with the sale of its home centers segment in Fiscal 1994,
the Company, as lessor, entered into ten leases for certain of the Company's
owned real estate properties, including a distribution center, with Rickel as
tenant. In addition, the Company assigned 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., 13 leases have either been terminated, sold or assigned to third
parties, including Rickel's distribution center which was sold by the Company
during Fiscal 1998, and six leases, which were rejected, 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
40
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 20--Commitments and Contingencies--(Continued)
payment of a specified termination charge. The amounts expensed under this
agreement in the accompanying consolidated statements of operations were $28.7
million, $26.5 million and $23.7 million during Fiscal 1999, Fiscal 1998 and
Fiscal 1997, respectively.
Other:
The Company is a party to a number of other legal proceedings in the
ordinary course of business. Management believes that the ultimate resolution of
these proceedings will not, in the aggregate, have a material adverse impact on
the financial condition, results of operations, cash flows or business of the
Company.
41
<PAGE>
PATHMARK STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 21--Quarterly Financial Data (Unaudited)
Financial data for the interim periods of Fiscal 1999 and Fiscal 1998 is
as follows (dollars in thousands):
<TABLE>
<CAPTION>
13 Weeks Ended
--------------------------------------------------------
May 1, July 31, October 30, January 29, Fiscal
1999 1999 1999 2000 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
52 Weeks Ended January 29, 2000
Sales ......................... $ 894,457 $ 922,728 $ 924,854 $ 956,045 $ 3,698,084
Cost of sales ................. 639,473 657,838 663,795 678,148 2,639,254
----------- ----------- ----------- ----------- -----------
Gross profit(a) ............... 254,984 264,890 261,059 277,897 1,058,830
Selling, general and
administrative expenses ..... 206,509 212,235 214,806 216,871 850,421
Depreciation and
amortization ................ 18,203 18,358 19,085 19,021 74,667
----------- ----------- ----------- ----------- -----------
Operating earnings ............ 30,272 34,297 27,168 42,005 133,742
Interest expense .............. (39,504) (40,397) (41,057) (42,145) (163,103)
----------- ----------- ----------- ----------- -----------
Loss before income taxes ...... (9,232) (6,100) (13,889) (140) (29,361)
Income tax provision .......... (9) (9) (9) (2,038) (2,065)
----------- ----------- ----------- ----------- -----------
Net loss ...................... $ (9,241) $ (6,109) $ (13,898) $ (2,178) $ (31,426)
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
13 Weeks Ended
-------------------------------------------------------
May 2, August 1, October 31, January 30, Fiscal
1998 1998 1998 1999 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
52 Weeks Ended January 30, 1999
Sales ......................... $ 916,015 $ 922,909 $ 899,990 $ 916,297 $ 3,655,211
Cost of sales ................. 651,862 661,084 644,463 654,405 2,611,814
----------- ----------- ----------- ----------- -----------
Gross profit(b) ............... 264,153 261,825 255,527 261,892 1,043,397
Selling, general and
administrative expenses(c) .. 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>
- ----------
(a) The pretax LIFO credit for Fiscal 1999 was $0.03 million consisting of
provisions of $0.4 million in each of the first three quarters and $1.23
million LIFO credit in the fourth quarter.
(b) 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.
(c) Selling, general and administrative expenses for Fiscal 1998 included a
second quarter gain of $5.1 million recognized on the sale of certain real
estate.
42
<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 29, 2000 and
January 30, 1999, and the related consolidated statements of operations,
stockholder's deficiency and cash flows for each of the three years in the
period ended January 29, 2000. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of January 29,
2000 and January 30, 1999, and the results of their operations and their cash
flows for each of the three years in the period ended January 29, 2000 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company is
experiencing difficulty in generating sufficient cash flow to meet its
obligations and sustain its operations, which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Deloitte & Touche LLP
Parsippany, New Jersey
April 27, 2000
43
<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, 2000)
(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.
<TABLE>
<CAPTION>
Director of the
Company
Name, Age, Principal Occupation and Other Directorships Since
------------------------------------------------------- ---------------
<S> <C>
JOHN W. BOYLE, 71, Chairman and Chief Executive Officer (retired) 1995
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. since 1997.
JAMES J. BURKE, JR., 48, Partner and a Director of Stonington 1988
Partners, Inc. ("SPI"), a private investment firm, since 1993,
and a Director of Merrill Lynch Capital Partners, Inc. ("MLCP")
since 1987; Vice Chairman of MLCP since 1999. Mr. Burke is also
a Director of Ann Taylor Stores Corp., Burns International
Services Corp., Education Management Corp. and United Artists
Theater Circuit, Inc.
FREDERICK J. C. BUTLER, 58, Chairman of Butler, Chapman & Co. 2000
LLC, an investment banking firm. Mr. Butler is also a director
of Merrill Lynch Life Insurance Corporation of New York.
DUNCAN A. CHAPMAN, 47, President of Butler, Chapman & Co. LLC, an 2000
investment banking firm since 1991. Mr. Chapman is also a
director of Trident Rowan Group, Inc.
JAMES DONALD, 46, Chairman, President and Chief Executive Officer 1996
of the Company (since October 1996); Senior Vice President and
General Manager, Safeway, Inc., Eastern Division prior thereto.
STEPHEN M. McLEAN, 42, Managing Director of Arena Capital 1987
Partners, LLC, a private investment firm since March 1999;
Partner and a Director of SPI prior thereto. Mr. McLean is also
a Director of CMI Industries, Inc.
</TABLE>
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, five of the persons serving as directors were
designated by the ML Investors (Messrs. Butler, Boyle, Burke, Chapman, McLean),
one was designated by the Management Investors (Mr. Donald) and none was
designated by the Equitable Investors. No family relationship exists between any
director and any other director or executive officer of the Company.
44
<PAGE>
(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 46 Chairman, President and Chief Executive 1996
Officer since October 1996.(1)
ROBERT JOYCE 54 Executive Vice
President--Administration since January 1989
2000; Senior Vice
President--Administration (from October
1996 to January 2000); Executive Vice
President--Operations prior thereto.
Mr. Joyce joined the Company in 1963.
EILEEN SCOTT 47 Executive Vice President, Marketing and 1998
Distribution (since January 1998); Vice
President, Non-Foods Merchandising and
Pharmacy (November 1995 - December
1997); Vice President, Sales &
Advertising prior thereto. Ms. Scott
joined the Company in 1969.
JOHN SHEEHAN 42 Executive Vice President--Operations 1996
(since January 1998); Senior Vice
President--Operations (October 1996 to
December 1997); Director of Operations,
Albertsons, Inc., prior thereto.(2)
FRANK VITRANO 44 Executive Vice President, Chief 1995
Financial Officer and Treasurer since
January 2000; Senior Vice President,
Chief Financial Officer and Treasurer
from September 1998 to January 2000;
Vice President and Treasurer from
December 1996 to September 1998;
Treasurer prior thereto. Mr. Vitrano
joined the Company in 1972.
JOSEPH ADELHARDT 53 Senior Vice President and Controller 1987
since January 1996; Vice President and
Controller prior thereto. Mr. Adelhardt
joined the Company in 1976.
HARVEY GUTMAN 54 Senior Vice President--Retail 1990
Development. Mr. Gutman joined the
Company in 1976.
MARC STRASSLER 51 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.
MYRON WAXBERG 66 Vice President and General 1991
Counsel--Real Estate. Mr. Waxberg
joined the Company in 1976.
- --------
(1) Member of the Company's Board of Directors.
(2) Mr. Sheehan resigned from the employ of the Company
effective April 18, 2000.
45
<PAGE>
ITEM 11. Executive Compensation.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards
------------------------------------------------ -------------------------
Securities
Other Annual Restricted Underlying All Other
Compensation Stock Awards Options/SARs Compensation
Name and Principal Position Year Salary ($) Bonus ($)(1) ($)(2) ($)(3) (#) ($)(4)
--------------------------- ---- ---------- ------------ ------ ------ --- ------
<S> <C> <C> <C> <C> <C> <C> <C>
James Donald....................... 1999 600,000 750,000 1,125,000 -- -- 8,422
Chairman, President and Chief 1998 600,000 750,000 1,125,000 -- -- 8,480
Executive Officer 1997 600,000 425,000 1,179,390 -- -- 3,632
Robert Joyce....................... 1999 231,749 173,811 2,195 -- -- 5,600
Executive Vice President - 1998 231,749 127,461 2,195 250,000 -- 5,600
Administration 1997 230,062 63,267 2,195 -- -- 5,600
Eileen Scott....................... 1999 231,075 173,306 -- -- -- 5,600
Executive Vice President- 1998 220,000 182,600 -- 500,000 -- 5,600
Merchandising & Distribution 1997 153,846 80,707 -- -- -- 5,405
John Sheehan....................... 1999 231,075 173,306 -- -- -- --
Executive Vice President - 1998 220,000 182,600 -- 500,000 -- --
Operations 1997 186,312 52,537 80,793 -- -- --
Frank Vitrano...................... 1999 209,272 174,825 -- -- -- 5,600
Executive Vice President and 1998 161,284 110,000 -- 300,000 -- 5,600
Chief Financial Officer 1997 122,700 61,350 -- -- -- 4,609
</TABLE>
- --------
(1) The amounts with respect to Fiscal 1999 in this column represent bonuses
awarded pursuant to the Company's executive incentive plan.
(2) Represents in Fiscal 1999 (i) with respect to Mr. Donald, forgiveness of
loan payments due to the Company of $1,125,000; and (ii) with respect to
Mr. Joyce, payments as reimbursement for interest paid to Holdings for a
loan, of less than $60,000, from Holdings in connection with the purchase
of 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 at the time of
the award, SMG-II considered various factors such as SMG-II and its
subsidiaries' performance, financial condition and forecasts and
projections prepared by management with respect to the Company for the
fiscal years 1998 through 2001 as well as the opinion of an independent
advisory firm. Based on the foregoing, SMG-II determined that the fair
market value of its Class A Common Stock and Series C Preferred Stock on
the date of grant was $0 and $200 per share, respectively. With respect to
the value at the end of Fiscal 1999, SMG-II determined that, based on
various factors such as SMG-II and its subsidiaries performance, financial
condition and forecasts and projections prepared by management with
respect to the fiscal years 2000 through 2004, the fair market value of
the Restricted Shares at January 29, 2000 is zero dollars. The value and
number of restricted stock holdings at January 29, 2000 for each of the
named executives are as follows: Mr. Donald - $0 (19,851 shares of SMG-II
Class A Common Stock and 8,520 shares of SMG-II Series C Preferred Stock);
Mr. Vitrano - $0 (4,500 shares of SMG-II Class
46
<PAGE>
A Common Stock and 1,500 shares of SMG-II Series C Preferred Stock); Mr.
Joyce - $0 (3,750 shares of SMG-II Class A Common Stock and 1,250 shares
of SMG-II Series C Preferred Stock); Ms. Scott - $0 (7,500 shares of
SMG-II Class A Common Stock and 2,500 shares of SMG-II Series C Preferred
Stock); and Mr. Sheehan - $0 (7,500 shares of SMG-II Class A Common Stock
at 2,500 shares of SMG-II Series C Preferred Stock). For a discussion of
Mr. Donald's award of Restricted Shares, see "Employment Agreements"
below.
(4) Represents in Fiscal 1999 (i) with respect to Mr. Donald, payments of
$3,622 for a term life insurance premium on Mr. Donald's life and $4,800
representing the Company's matching contribution to the SGC Savings Plan
and (ii) with respect to the other named executive officers, the Company's
matching contribution under the SGC Savings Plan.
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.................................................. 2,300/0
Eileen Scott.................................................. 150/0
John Sheehan.................................................. 0/0
Frank Vitrano................................................. 160/0
- ----------
(1) Except with respect to Mr. Donald, options shown were granted pursuant to
the SMG-II 1987 Management Investors Stock Option Plan (the "Plan"),
relate to shares of Class A Common Stock of SMG-II and have an exercise
price of $100 per share. No options were either granted to or exercised by
any of the above named executives in Fiscal 1999.
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
47
<PAGE>
retirement benefit is reduced by 3.33% for every year of credited service
less than 30. Covered compensation under the Pension Plans includes all
cash compensation subject to withholding plus amounts deferred under the
Savings Plan pursuant to Section 401(k) of the Internal Revenue Code of
1986, as amended, and as to individuals identified in the Summary
Compensation Table, would be the amount set forth in that table under the
headings "Salary" and "Bonus". The table shows the estimated annual
benefits an individual would be entitled to receive if normal retirement
at age 65 occurred in January 2000 after the indicated number of years of
covered employment and if the average of the participant's covered
compensation for the five years out of the last ten years of such
employment yielding the highest such average equaled the amounts
indicated. The estimated annual benefits are based on the assumption that
the individual will receive retirement benefits in the form of a single
life annuity (married participants may elect a joint survivorship option)
and are before applicable deductions for social security benefits in
effect as of January 2000. As of December 31, 1999, the following
individuals had the number of years of credited service indicated after
their names: Mr. Donald, 3.2, Mr. Vitrano, 22.2; Mr. Joyce, 29.7, Mr.
Sheehan, 3.2; and Ms. Scott, 24.8. As described below in "Compensation
Plans and Arrangements--Supplemental Retirement Agreements", each of the
named executive officers is a party to a Supplemental Retirement Agreement
with Pathmark.
Compensation Plans and Arrangements
Supplemental Retirement Agreements. The Company has entered into
supplemental retirement agreements with Messrs. Vitrano, Sheehan and Joyce and
Ms. Scott and Mr. Donald, which provide that said executive officers will be
paid upon termination of employment after attainment of age 60 a supplemental
pension benefit in such an amount as to assure him or her an annual amount of
pension benefits payable under the supplemental retirement agreement, the
Company's qualified pension plans and certain other plans of the Company,
including Savings Plan balances as of March 31, 1983, (A) with respect to Ms.
Scott and Messrs. Joyce, Sheehan and Vitrano, equal to (i) 30% (20% with respect
to Mr. Sheehan) of his or her final average Compensation based on ten years of
service with the Company and increasing 1% (2% for Mr. Sheehan) per year for
each year of service thereafter, to a maximum of 40%, of his or her final
average Compensation based on 20 years of service, or (ii) $250,000 ($150,000
with respect to Mr. Joyce), whichever is less and (B) with respect to Mr.
Donald, equal to (i) 30% of his final average compensation based on ten years of
service with the Company and increasing 2% per year for each year of service
thereafter, to a maximum of 50% of his final average compensation based on 20
years of service, or (ii) $600,000, whichever is less. "Compensation" includes
base salary and bonus payments, but excludes Company matching contributions
under the Savings Plan. If the executive leaves the Company prior to completing
20 years of service (other than for disability), the supplemental benefit would
be reduced proportionately. Should the executive die, the surviving spouse then
receiving or, if he or she was not then receiving a supplemental pension
benefit, the spouse would be entitled to a benefit equal to two-thirds of the
benefit to which the executive would have been entitled, provided the executive
has attained at least ten years of service with the Company. With respect to
Messrs. Donald and Sheehan, seven years have been added to each of their
respective actual 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 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
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<PAGE>
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 SMG-II Series C 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 Series C Preferred Stock ranks pari passu with the
SMG-II Series A and Series B 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 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 1991
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:
49
<PAGE>
(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.
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
50
<PAGE>
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.
"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 1991 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 1991
Stockholders Agreement) which are sold in the Public Offering.
51
<PAGE>
"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 1991 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.
Other Executive Employment Agreements
As of February 1, 1999, Pathmark entered into employment agreements with
each of Ms. Scott and Messrs. Sheehan, Vitrano and Joyce. 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 other of such party's desire to
terminate the agreement. Each agreement provides for a certain minimum level of
compensation ($233,100 per annum base salary for Ms. Scott, Mr. Sheehan and Mr.
Vitrano, and $231,749 per annum base salary for Mr. Joyce), and benefits.
Each of the employment agreements also provide that each executive shall
be entitled an annual bonus of up to 75% of his or her annual base salary and
shall be provided the opportunity to participate in pension and welfare plans,
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.
52
<PAGE>
In the event any 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),
that executive is entitled to receive his or her base salary and continued
coverage under health and insurance plans for a period of two years from the
date of such termination or resignation.
The employment agreements contain agreements by the executives not to
compete with Pathmark as long as they are receiving payments under the
employment agreement.
Retention Agreements
The Company has entered into agreements with certain of its key
executives, including each of the named executives officers, providing for the
payment under specified conditions of a retention bonus and a sale bonus.
Mr. Donald's Agreement. Mr. Donald's Agreement, provides that under the
circumstances described below, Mr. Donald shall receive a Retention Bonus and a
Sale Bonus. The Retention Bonus is intended to encourage Mr. Donald to remain
employed by Pathmark until at least July 31, 2000. If he is so employed on that
date, Pathmark will pay Mr. Donald a Retention Bonus equal to $4.0 million in a
lump sum cash amount as soon as practicable after July 31, 2000, but in no event
more than thirty days thereafter. In addition to the Retention Bonus, under
certain circumstances, Mr. Donald will become entitled to receive the Sale
Bonus. Mr. Donald will become entitled to receive the Sale Bonus in the event
that an event could result in a Change in Control (defined as a "Triggering
Event" in the Agreement) occurs during the term of the Agreement, and (ii) a
Change in Control contemplated by such Triggering Event occurs thereafter. The
amount of the Sale Bonus shall be equal to 0.0043 multiplied by an amount equal
to the sum of the aggregate fair market value of any securities issued and any
other non-cash consideration delivered, and any cash consideration paid to
SMG-II, Holdings, PTK and the Company, and any successors thereto (the "Company
Group") or their security holders in connection with a Change in Control, plus
the amount of all indebtedness of the Company Group which is assumed or acquired
by any Purchaser in connection with a Change in Control or retired or defeased
in connection with such Change in Control (which amount is defined as the
"Aggregate Consideration").
Joyce, Scott, Vitrano, Sheehan Agreements. Mr. Joyce, Ms. Scott, Mr.
Vitrano and Mr. Sheehan (the "Class 1 Executives") all have essentially the same
terms in their Agreements. Like Mr. Donald, the Class 1 Executives' Agreements
provide that under the circumstances described below, each Class 1 Executive
will receive a Retention Bonus and a Sale Bonus. The Retention Bonus is intended
to encourage the Class 1 Executives to remain employed by Pathmark until at
least July 31, 2000. Each Class 1 Executive who is so employed on that date will
receive a Retention Bonus equal to the annual rate of his or her base salary, as
in effect on such date, in a lump sum cash amount as soon as practicable after
July 31, 2000, but in no event more than thirty days thereafter. In addition to
the Retention Bonus, under certain circumstances, the Class 1 Executives will
become entitled to receive the Sale Bonus. The Class 1 Executives will become
entitled to receive the Sale Bonus in the event that a Triggering Event occurs
during the term of the Agreement, and (ii) a Change in Control contemplated by
such Triggering Event occurs thereafter. The amount of the Sale Bonus will be
equal to a specified number (.002 for Mr. Vitrano, .001 for Mr. Sheehan and Ms.
Scott, and .00075 for Mr. Joyce) multiplied by an amount equal to the Aggregate
Consideration.
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. Mr. Burke is a Vice
Chairman of MLCP and he, as well as Mr. McLean 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."
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<PAGE>
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.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
As of April 15, 2000, 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, 2000, 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
</TABLE>
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<PAGE>
Number % of
Name of Shares Class
---- --------- -----
Chemical Investments, Inc.(4) .......................... 12,500 7.0
The Equitable Life Assurance Society of the United
States(5) .............................................. 84,134 46.5
Equitable Deal Flow Fund, L.P.(5) ...................... 84,135 46.5
SMG-II Series C Preferred Stock(6)
James Donald ........................................... 8,520 25.4
Management Investors (excluding Mr. Donald) ............ 25,000 74.6
- ----------
(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
45,659 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, Butler, Chapman and McLean are consultants to MLCP.
(3) Merchant Banking L.P. No. 1, Merchant Banking L.P. No. IV, Merrill Lynch
KECALP L.P. 1987, Merrill Lynch KECALP L.P. 1989, Merrill Lynch KECALP
L.P. 1991 and ML IBK Positions, Inc. are indirectly controlled by ML&Co.
The address of such entities is c/o James Caruso, Merrill Lynch & Co.,
Inc., World Financial Center, South Tower, New York, New York, 10080-6123.
(4) Chemical Investments, Inc. is an affiliate of Chase Manhattan Corp.
(5) The Equitable Investors are separate purchasers who are affiliates of each
other.
(6) SMG-II Preferred Stock may be converted into an equivalent number of
shares of common stock of SMG-II in accordance with its terms.
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,
2000, 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
Number of Preferred
Name Shares % of Class Stock % of Class
---- ------ ---------- ----- ----------
<S> <C> <C> <C> <C>
James J. Burke, Jr.(1)....... -- -- -- --
John W. Boyle(2)............. -- -- -- --
Frederick J. C. Butler....... -- -- -- --
Duncan Chapman............... -- -- -- --
James Donald................. 19,851 2.6 8,520 25.4
Robert Joyce(2).............. 4,450 * 1,250 3.7
Stephen M. McLean............ -- -- -- --
Eileen Scott(2).............. 7,500 * 2,500 7.5
John Sheehan................. 7,500 * 2,500 7.5
Frank Vitrano(2)............. 4,500 * 1,500 4.5
Directors and executive
officers as a group(1)(2).... 41,450 5.5 21,020 62.7
</TABLE>
- ----------
* Less than 1%
(1) Does not include 550,000 shares of SMG-II Class A Common Stock or
236,731.5 shares of SMG-II Series A Preferred Stock owned beneficially by
a group of which MLCP is a part. Mr. Burke, a Vice Chairman of MLCP,
disclaims beneficial ownership in all such shares.
55
<PAGE>
(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. Vitrano, 160; Mr. Joyce, 2,300; Ms. Scott, 150; 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 ML 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 15,
2000, Mr. Donald remained indebted to the Company in the amount of $562,500.
During Fiscal 1998, Pathmark and SMG-II retained ML&Co. to act as its
exclusive financial advisor in connection with any proposed business combination
involving the Company Group. During Fiscal 2000, said agreement was amended to
permit the Company Group to engage WP&Co. as its financial advisor. Pursuant to
the terms of ML&Co.'s amended engagement, if, during the period ML&Co. is
retained by the Company or within one year thereafter, but in no event following
the consummation of a Restructuring (as defined) in which a Business Combination
(as defined) is not involved or contemplated (such period, including the term of
this engagement, the "Fee Period") (a) a Business Combination is consummated or
(b) the Company enters into an agreement which subsequently results in a
Business Combination, the Company agrees to pay ML&Co. a fee equal to:
56
<PAGE>
(i) 0.6% of the aggregate purchase price paid in such Business Combination,
payable in cash upon the closing of such Business Combination, if such
aggregate purchase price at least equals the indebtedness of Pathmark as
of the date of approval of the Business Combination by the applicable
Board of Directors of the Company Group or
(ii) if such aggregate purchase price is less than the indebtedness of Pathmark
as of the date of approval of the Business Combination by the applicable
Board of Directors of the Company Group, the fee due ML&Co. be in an
amount equal to 0.65% of the sum of (i) the aggregate principal amount of
Pathmark's funded indebtedness, (ii) the liquidation preference of the
Preferred Stock, and (iii) the face value of other obligations,
restructured in a Restructuring, plus an amount equal to the sum of (a)
0.1625% of the aggregate purchase price up to and including $500.0
million; (b) 0.125% of the aggregate purchase price in excess of $500.0
million and up to $1.0 billion, and (c) 0.0875% of such aggregate purchase
price equal to or exceeding $1.0 billion or
(iii) in the event no Business Combination shall occur during the Fee Period,
the Company shall pay ML&Co. a fee of $1 million.
57
<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 59 through 61 of this
Report.
(b) Reports on Form 8-K.
On December 16, 1999, the Company filed a report on Form 8-K
pursuant to Item 5 thereof with respect to the termination of the
SMG-II Merger Agreement by Royal Ahold N.V.
(c) Exhibits required by Item 601 of Regulation S-K.
See item 14(a) above.
58
<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 28, 2000 PATHMARK STORES, INC.
By /s/ FRANK VITRANO
--------------------------------------
(Frank Vitrano)
Executive Vice President and
Chief Financial Officer
By /s/ JOSEPH ADELHARDT
--------------------------------------
(Joseph Adelhardt)
Senior Vice President and Controller,
Chief Accounting Officer
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JAMES DONALD Director, Chairman, President and Chief April 28, 2000
- ----------------------------------- Executive Officer
(James Donald) (Principal Executive Officer)
/s/ FRANK VITRANO Executive Vice President and Chief Financial Officer April 28, 2000
- ----------------------------------- (Principal Financial Officer)
(Frank Vitrano)
/s/ JOSEPH ADELHARDT Senior Vice President and Controller April 28, 2000
- ----------------------------------- (Principal Accounting Officer)
(Joseph Adelhardt)
JOHN W. BOYLE Director* April 28, 2000
- -----------------------------------
(John W. Boyle)
JAMES J. BURKE, JR. Director* April 28, 2000
- -----------------------------------
(James J. Burke, Jr.)
FREDERICK J. C. BUTLER. Director* April 28, 2000
- -----------------------------------
(Frederick J. C. Butler)
DUNCAN A. CHAPMAN Director* April 28, 2000
- -----------------------------------
(Duncan A. Chapman)
STEPHEN M. McLEAN Director* April 28, 2000
- -----------------------------------
(Stephen M. McLean)
*By: /s/ MARC A. STRASSLER
-------------------------------
Marc A. Strassler
Attorney-in-Fact
</TABLE>
59
<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)...................................
3.1 --Restated Certificate of Incorporation of the Registrant
(incorporated by reference from the Annual Report on Form
10-K of the Registrant for the year ended January 31, 1998
(the "1997 Form
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 the Registrant for the year
ended January 29, 1994 (the "1993 Form
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 the
Registrant, File No. 33-59612, (the "October 1993
Registration
Statement")....................................................
4.1A--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 Form
10-K)..........................................................
4.1B--Senior Subordinated Note due 2003 of the Registrant
(contained in the Indenture filed as Exhibit 4.1)
(incorporated by reference from the 1993 Form
10-K)..........................................................
4.2A--Indenture between the Registrant and NationsBank of
Georgia, National Association, Trustee, relating to the
Junior Subordinated Deferred Coupon Notes due 2003 of the
Registrant contained in the Indenture filed as Exhibit 4.2)
(incorporated by reference from the 1993 Form
10-K)..........................................................
4.2B--Indenture between the Registrant and Wilmington Trust
Company, Trustee, relating to the 11 5/8% Subordinated Notes
due 2002 of the Registrant (incorporated by reference from
the 1993 Form
10-K)..........................................................
4.3 --Indenture between the Company and Wilmington Trust
Company, Trustee, relating to the 12 5/8% Subordinated
Debentures due 2002 of the Registrant (incorporated by
reference from the 1993 Form
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 Form 10-Q of the Registrant for the period
ended August 2, 1997)..........................................
4.4B--Amendment No. 1 to the Credit Agreement dated as of
November 27, 1998 (incorporated by reference from Form 10-K
for the fiscal year ended January 30, 1998 (the "1998 Form
10-K"))........................................................
4.4C--Amendment No. 2 to the Credit Agreement dated as of March
16, 1999....................................................... *
4.4D--Waiver Agreement to the Credit Agreement dated as of April
18, 2000....................................................... *
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 Form
10-K)..........................................................
10.2--Tax Sharing Agreement between the Registrant and SMG-II
(incorporated by reference from the 1993 Form
10-K)..........................................................
- ---------
* Filed herewith.
60
<PAGE>
Exhibit Page
No. Exhibit No.
- ------- ------- ----
10.3 --Tax Indemnity Agreement between the Registrant and
Plainbridge (incorporated by reference from the 1993 Form
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 March 1, 2000
between Pathmark and James Donald.............................. *
10.7B--Supplemental Retirement Agreement dated June 1, 1994
between Pathmark and Robert Joyce (incorporated by reference
from the Annual Report on Form 10-K of the Registrant for
the year ended January 28, 1995 (the "1994 Form
10-K").........................................................
10.7C--Supplemental Retirement Agreement dated March 1, 2000
between Pathmark and Eileen Scott.............................. *
10.7D--Supplemental Retirement Agreement dated March 1, 2000
between Pathmark and John Sheehan.............................. *
10.7E--Supplemental Retirement Agreement dated March 1, 2000
between Pathmark and Frank Vitrano (incorporated by
reference from the 1999 Form 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)......................................................
10.10--Intentionally left blank.
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)........................................
61
<PAGE>
Exhibit Page
No. Exhibit No.
- ------- ------- ----
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)......................................................
10.16A--SMG-II Holdings Corporation 1997 Restricted Stock Plan
(the "Restricted Stock Plan") (incorporated by reference
from the 1998 Form 10-K).......................................
10.16B--Form of Restricted Stock Agreement under the Restricted
Stock Plan (incorporated by reference from the 1998 Form 10-K).
10.17 --Employment Agreement dated as of October 8, 1996 among
Registrant, SMG-II and James Donald (incorporated by
reference from the Annual Report of the Registrant on Form
10-K for the year ended February 1, 1997)......................
10.18 --Sale and Retention Bonus Agreement between Pathmark and
James Donald dated February 1, 2000............................ *
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 Frank Vitrano
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 Robert Joyce
dated February 1, 1999 (filed as an Exhibit to the Holdings
14D-9, and incorporated herein by reference)...................
10.23 --Sale and Retention Bonus Agreement between Pathmark and
Eileen Scott dated February 1, 2000............................ *
10.24 --Sale and Retention Bonus Agreement between Pathmark and
John Sheehan dated February 1, 2000............................ *
10.25 --Sale and Retention Bonus Agreement between Pathmark and
Frank Vitrano dated February 1, 2000........................... *
10.26 --Sale and Retention Bonus Agreement between Pathmark and
Robert Joyce dated February 1, 2000............................ *
12.1 --Statements Regarding Computation of Ratio of Earnings to
Fixed Charges.................................................. *
22.1 --List of Subsidiaries of the
Registrant..................................................... *
27 --Financial Data Schedule........................................ *
62
Exhibit 4.4C
AMENDMENT NO. 2 dated as of March 16, 1999 (this
"Amendment"), to the Credit Agreement dated as of June 30,
1997 as amended (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 as Issuing Bank, and CIBC
INC. and FIRST UNION NATIONAL BANK, as successor by
acquisition to 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 financial covenants of the Credit Agreement as provided herein.
C. The Required Lenders are willing to agree to such amendments, on
the terms and subject to the conditions set forth herein.
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 6.16 of the Credit Agreement is
hereby amended by substituting the following table contained therein:
"Period Amount
------ ------
Closing Date through First Fiscal Quarter
of 1998 Fiscal Year 7.50 to 1.00
Second Fiscal Quarter of 1998 Fiscal Year 7.25 to 1.00
Third and Fourth Fiscal Quarters of 1998
Fiscal Year 7.00 to 1.00
First Fiscal Quarter of 1999 Fiscal Year 7.50 to 1.00
Second and Third Fiscal Quarters of 1999
Fiscal Year 7.75 to 1.00
Fourth Fiscal Quarter of 1999 Fiscal Year 7.50 to 1.00
First Fiscal Quarter of 2000 Fiscal Year 6.25 to 1.00
Second Fiscal Quarter of 2000 Fiscal Year 6.00 to 1.00
Third Fiscal Quarter of 2000 Fiscal Year 5.75 to 1.00
Fourth Fiscal Quarter of 2000 Fiscal Year 5.50 to 1.00
Thereafter 5.00 to 1.00"
<PAGE>
2
(b) Section 6.17 of the Credit Agreement is hereby amended by
substituting the following table for the table contained therein:
"Period Ratio
------ -----
Closing Date through Fourth Fiscal
Quarter of 1999 Fiscal Year 1.20 to 1.00
First Fiscal Quarter of 2000 Fiscal Year
through Fourth Fiscal Quarter
of 2000 Fiscal Year 1.35 to 1.00
Thereafter 1.40 to 1.00"
(c) Section 6.19 of the Credit Agreement is hereby amended by
substituting the following table for the table contained therein:
"Period Ratio
------ -----
Closing Date through First Fiscal Quarter
of 1998 Fiscal Year 3.15 to 1.00
Second Fiscal Quarter of 1998 Fiscal Year
through Fourth Fiscal Quarter of
1999 Fiscal Year 3.00 to 1.00
Thereafter 2.50 to 1.00"
SECTION 2. Fees. Each Lender that delivers an executed counterpart
of this Amendment to the Administrative Agent on or prior to the Effective Date
(as defined below) shall receive from the Borrower an amendment fee equal to
0.05%, calculated as of the Effective Date, of the sum of (a) the aggregate
principal amount of such Lender's outstanding 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 the applicable Lenders and, once paid, such fees 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 Effective Date, except to the extent such
representations and warranties expressly relate to an earlier date.
<PAGE>
3
(c) Before and after giving effect to this Amendment, no Event of
Default or Default has occurred and is continuing.
SECTION 4. Conditions to Effectiveness. This Amendment shall become
effective as of the first Business Day that the Administrative Agent shall have
received counterparts of this Amendment that, when taken together, bear the
signatures of the Borrower and the Required Lenders; provided, however, that
this Amendment shall not become effective (i) prior to March 29, 1999, and (ii)
until all fees and expenses payable to the Administrative Agent in connection
with this Amendment have been paid in immediately available funds. Such date is
referred to herein as the "Effective Date".
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>
4
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/ Lawrence Palumbo, Jr.
--------------------------------------
Name: Lawrence Palumbo, Jr.
Title: Vice President
CIBC INC.,
individually and as Co-Agent,
by /s/ Gerald Girardi
--------------------------------------
Name: Gerald Girardi
Title: Executive Director
FIRST UNION NATIONAL BANK,
as successor by acquisition to
CORESTATES BANK, N.A.,
individually and as Co-Agent,
by /s/ Thomas McDonnell
--------------------------------------
Name: Thomas McDonnell
Title: Vice President
<PAGE>
5
AG CAPITAL FUNDING PARTNERS, L.P.,
by /s/ Jeffrey H. Aronson
--------------------------------------
Name: Jeffrey H. Aronson
Title: Authorized Signatory
AERIES FINANCE LTD.
by /s/ Andrew Ian Wignall
--------------------------------------
Name: Andrew Ian Wignall
Title: Director
BLACK DIAMOND CLO 1998-1 LTD.,
by /s/ Jim Zenni
--------------------------------------
Name: Jim Zenni
Title: Director
CERES FINANCE LTD.,
by /s/ John Cullinane
--------------------------------------
Name: John Cullinane
Title: Director
COMMERCIAL LOAN FUNDING TRUST I
By: Lehman Commercial Paper Inc., not in
its individual capacity but solely
as Administrative Agent,
by /s/ Michele Swanson
--------------------------------------
Name: Michele Swanson
Title: Authorized Signatory
<PAGE>
6
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
CYPRESSTREE INVESTMENT
PARTNERS II, LTD.,
By: CypressTree Investment Management
Company, Inc., as Portfolio Manager,
by /s/ Timothy M. Barns
--------------------------------------
Name: Timothy M. Barns
Title: Managing Director
DEEPROCK & CO.,
By: Eaton Vance Management as Investment
Advisor,
by /s/ Scott H. Page
--------------------------------------
Name: Scott H. Page
Title: Vice President
EATON VANCE SENIOR INCOME TRUST,
By: Eaton Vance Management as Investment
Advisor,
by /s/ Scott H. Page
--------------------------------------
Name: Scott H. Page
Title: Vice President
<PAGE>
7
GENERAL ELECTRIC CAPITAL CORPORATION,
by /s/ William S. Richardson
--------------------------------------
Name: William S. Richardson
Title: Duly Authorized Signatory
KZH CNC LLC,
by /s/ Virginia Conway
--------------------------------------
Name: Virginia Conway
Title: Authorized Signatory
KZH CYPRESSTRESS-1 LLC,
by /s/ Virginia Conway
--------------------------------------
Name: Virginia Conway
Title: Authorized Signatory
KZH PAMCO LLC,
by /s/ Virginia Conway
--------------------------------------
Name: Virginia Conway
Title: Authorized Signatory
MERRILL LYNCH GLOBAL INVESTMENT SERIES:
INCOME STRATEGIES PORTFOLIO,
By: Merrill Lynch Asset Management,
L.P., as Investment Advisor,
by /s/ George D. Pelose
--------------------------------------
Name: George D. Pelose
Title: Authorized Signatory
<PAGE>
8
MERRILL LYNCH PRIME RATE PORTFOLIO,
By: Merrill Lynch Asset Management,
L.P., as Investment Advisor,
by /s/ George D. Pelose
--------------------------------------
Name: George D. Pelose
Title: Authorized Signatory
METROPOLITAN LIFE INSURANCE COMPANY,
by /s/ James R. Dingler
--------------------------------------
Name: James R. Dingler
Title: Director
ML CLO XX STERLING (CAYMAN) LTD.,
By: Sterling Asset Management, L.L.C.,
as its Investment Advisor,
by /s/ Louis Pistecchia
--------------------------------------
Name: Louis Pistecchia
Title: EVP
NORSE CBO, LTD., as Assignee,
By: Peterson Capital Management, LLC as
its Investment Advisor,
By: Peterson Capital Advisors, LLC, its
Manager and pursuant to delegated
authority,
by /s/ Timothy S. Peterson
--------------------------------------
Name: Timothy S. Peterson
Title: President
<PAGE>
9
THE NORTHWESTERN MUTUAL LIFE INSURANCE
COMPANY,
by /s/ Richard A. Strait
--------------------------------------
Name: Richard A. Strait
Title: Its Authorized
Representative
PAM CAPITAL FUNDING, L.P.,
By: Highland Capital Management, L.P. as
Collateral Manager,
by /s/ Mark K. Okada, CFA
--------------------------------------
Name: Mark K. Okada, CFA
Title: Executive Vice President
PAMCO CAYMAN LTD.,
By: Highland Capital Management, L.P. as
Collateral Manager,
by /s/ Mark K. Okada, CFA
--------------------------------------
Name: Mark K. Okada, CFA
Title: Executive Vice President
PILGRIM AMERICA HIGH INCOME INVESTMENTS,
LTD.,
By: Pilgrim Investments, Inc., as its
Investment Manager,
by /s/ Michel Prince, CFA
--------------------------------------
Name: Michel Prince, CFA
Title: Vice President
<PAGE>
10
PILGRIM PRIME RATE TRUST,
By: Pilgrim Investments, Inc., as its
Investment Manager,
by /s/ Michel Prince, CFA
--------------------------------------
Name: Michel Prince, CFA
Title: Vice President
PNC BANK, N.A.,
by /s/ Michael Richards
--------------------------------------
Name: Michael Richards
Title: Vice President
SENIOR DEBT PORTFOLIO,
By: Boston Management and Research as
Investment Advisor,
by /s/ Scott H. Page
--------------------------------------
Name: Scott H. Page
Title: Vice President
STRATA FUNDING LTD.,
by /s/ John Cullinane
--------------------------------------
Name: John Cullinane
Title: Director
SUMMIT BANK,
by /s/ Wayne Trotman
--------------------------------------
Name: Wayne Trotman
Title: Senior Vice President
<PAGE>
11
TRANSAMERICA BUSINESS CREDIT
CORPORATION,
by /s/ Perry Vavoules
--------------------------------------
Name: Perry Vavoules
Title: Senior Vice President
UBS AG,
by /s/ James J. Duplessie
--------------------------------------
Name: James J. Duplessie
Title: Executive Director
/s/ Herbert Seif
--------------------------------------
Name: Herbert Seif
Title: Managing Director
VAN KAMPEN CLO I, LIMITED,
By: Van Kampen American Management Inc.,
as Collateral Manager,
by /s/ Jeffrey W. Maillet
--------------------------------------
Name: Jeffrey W. Maillet
Title: Senior Vice President &
Director
VAN KAMPEN PRIME RATE INCOME TRUST,
by /s/ Jeffrey W. Maillet
--------------------------------------
Name: Jeffrey W. Maillet
Title: Senior Vice President &
Director
Exhibit 4.4D
WAIVER AGREEMENT
WAIVER AGREEMENT dated as of April 18, 2000, among: PATHMARK STORES,
INC., a Delaware corporation (the "Borrower"); the Subsidiary Loan Parties
identified under the caption "Subsidiary Loan Parties" on the signature pages
hereto (the "Subsidiary Loan Parties" and together with the Borrower, the "Loan
Parties"); and THE CHASE MANHATTAN BANK, as administrative agent for the
below-referenced Lenders (in such capacity, the "Administrative Agent").
The Borrower, certain lenders (the "Lenders"), the Administrative
Agent and CIBC Inc. and First Union National Bank (as successor by acquisition
to Corestates Bank, N.A.), as co-agents, are party to a Credit Agreement dated
as of June 30, 1997 (as amended by Amendment No. 1 thereto dated as of November
27, 1998 and Amendment No. 2 thereto dated as of March 16, 1999, the "Credit
Agreement"), providing for loans to be made by the Lenders in an aggregate
principal amount up to but not exceeding $500,000,000.
The Borrower and the Subsidiary Loan Parties have requested that the
Administrative Agent and the Lenders waive compliance by the Borrower with
certain of the provisions of the Credit Agreement and the Administrative Agent,
having been previously authorized by Lenders constituting the "Required Lenders"
under the Credit Agreement, is willing, on behalf of itself and the Lenders, to
so agree on the terms and conditions provided below. Accordingly, the parties
hereto agree as follows:
Section 1. Definitions. Unless otherwise defined herein, terms
defined in the Credit Agreement are used herein as defined therein. In addition,
as used herein the following terms shall have the following meanings:
"Budget" means the cash budget covering the Budget Period of
expenditure items for which the Borrower desires that the proceeds of
Loans under the Credit Agreement be available during the Budget Period,
broken down by category of expenses on a week-by-week basis, which budget
has been previously delivered to each of the Lenders and identified as the
"Budget" for purposes of this Waiver Agreement.
"Budget Period" means the period commencing on March 30, 2000 and
ending on July 29, 2000.
"Specified Period" means the period from and including the Specified
Period Effective Date to but excluding the Specified Period Termination
Date.
"Specified Period Effective Date" means the date (not later than
April 18, 2000) on which each of the conditions precedent set forth in
Section 4 hereof shall have been satisfied (or if not satisfied, waived by
the Administrative Agent and the Required Lenders).
Waiver Agreement
<PAGE>
"Specified Period Termination Date" has the meaning set forth in
Section 5 hereof.
"Specified Provisions" means (i) the obligation set forth in Section
5.01(a) of the Credit Agreement to deliver audited financial statements
within 90 days after the end of each Fiscal Year (to the extent requiring
that such financial statements be delivered without a "going concern" or
like qualification or exception), (ii) the Payment Obligations covenant
set forth in Section 5.05 of the Credit Agreement to the extent requiring
payment of Material Indebtedness, (iii) the Leverage Ratio covenant set
forth in Section 6.16 of the Credit Agreement, (iv) the Consolidated
Interest and Rental Expense Coverage Ratio covenant set forth in Section
6.17 of the Credit Agreement, (v) the Minimum Consolidated EBITDA covenant
set forth in Section 6.18 of the Credit Agreement, (vi) the Senior Debt
Leverage Ratio covenant set forth in Section 6.19 of the Credit Agreement
and (vii) any Event of Default set forth in clauses (f) or (g) of Article
VII of the Credit Agreement to the extent arising out of a failure to pay
any Material Indebtedness (but not to the extent arising out of a
declaration by any holder of Material Indebtedness that such Material
Indebtedness is to become due and payable, or to the extent the
Administrative Agent shall receive a notice of acceleration from any
holder of such Material Indebtedness, or a trustee on behalf of any such
holder).
Section 2. Certain Matters Relating to Remedies; Applicable Rate.
(a) Waiver in Respect of Specified Provisions. The Administrative
Agent and the Lenders agree, on the terms and subject to the conditions hereof,
during the Specified Period to waive compliance by the Borrower with the
Specified Provisions. Notwithstanding such waiver, it is understood by the
Borrower that the Administrative Agent and the Lenders retain the right to
exercise, and have not waived, any rights or remedies with respect to any
Default or Event of Default or any rights or remedies in respect thereof under
the Credit Agreement or otherwise, other than with respect to the Events of
Default arising out of the Specified Provisions. During the Specified Period
(and thereafter), the Administrative Agent and the Lenders shall be permitted to
exercise all of their rights and remedies under the Credit Agreement, except as
may be expressly limited or otherwise provided in this Waiver Agreement.
(b) Waiver of Certain Representations. The Administrative Agent and
the Lenders agree that, during the Specified Period, Section 4.02 and clause (c)
of Article VII of the Credit Agreement shall not apply to any representation or
warranty made by the Borrower in Section 3.04(c) of the Credit Agreement.
Waiver Agreement
<PAGE>
(c) Applicable Rate. The Borrower agrees that, commencing on the
Specified Period Effective Date, the "Applicable Rate" with respect to each Loan
shall be 0.50% plus the Applicable Rate that would otherwise be applicable to
such Loan under the Credit Agreement.
Section 3. Representations and Warranties. Each Loan Party
represents and warrants to the Lenders and the Administrative Agent that:
(a) This Waiver Agreement is within each Loan Party's corporate or
other powers, has been duly authorized by all necessary corporate or other
action and constitutes a legal, valid and binding obligation of each Loan
Party, enforceable against each Loan Party in accordance with its terms.
(b) Both immediately prior to the effectiveness of this Waiver
Agreement and also after giving effect thereto, (i) no Default shall have
occurred and be continuing and (ii) the representations and warranties set
forth in Article III of the Credit Agreement (other than in Section
3.04(c) thereof) are true and correct as if made on and as of the date
hereof and as if each reference in said Article III to "this Agreement" or
words of similar import included reference to the Credit Agreement as
amended hereby (or, to the extent such representations and warranties are
stated to have been made solely as of an earlier date, such
representations and warranties were true and correct on and as of such
earlier date).
(c) The Budget is based upon good faith estimates and assumptions
that are (and are believed by management of the Borrower to be) reasonable
as of the date hereof. No Default or Event of Default other than the
Events of Default referred to in the definition of "Specified Provisions"
is anticipated to occur during the Specified Period.
(d) The Credit Agreement and the other Loan Documents are legal,
valid and binding obligations of each Loan Party party thereto,
enforceable in accordance with their terms (and each Loan Party hereby
reaffirms, reconfirms and restates, all such obligations to the Lenders
and the Administrative Agent).
(e) The information, reports, financial statements, exhibits and
schedules furnished in writing by or on behalf of the Borrower to the
Administrative Agent or any Lender in connection with the negotiation,
preparation or delivery of this Waiver Agreement or included herein
delivered pursuant hereto, do not contain any untrue statement of material
fact or omit to state any material fact necessary to make the statements
herein or therein, in light of the circumstances under which they were
made, not misleading. All written information furnished after the date
hereof by the Borrower or any of its Subsidiaries to the Administrative
Agent and the Lenders in connection with this Waiver Agreement and the
Loan Documents and the transactions contemplated hereby and thereby will
be true and correct in every material respect, or (in the case of
Waiver Agreement
<PAGE>
projections) based on reasonable estimates, on the date as of which such
information is stated or certified.
Section 4. Conditions Precedent. The waivers set forth in Section 2
above shall become effective, as of the Specified Period Effective Date, upon
satisfaction of the following conditions (and any documents required to be
delivered under this Section 4 shall be in form and substance satisfactory to
the Administrative Agent):
(a) Agreement. Receipt by the Administrative Agent of one or more
counterparts of this Waiver Agreement, duly executed and delivered by the
Borrower and each Subsidiary Loan Party (or other evidence satisfactory to
the Administrative Agent of such execution and delivery).
(b) Payment of Fees. Payment by the Borrower of (i) a waiver fee in
such amount as the Borrower shall have agreed in writing to pay to the
Lenders in connection herewith and (ii) all costs and other expenses of
the Administrative Agent (including, but not limited to, the fees,
expenses and costs of external legal counsel for the Administrative Agent
in connection with the Credit Agreement and herewith) which the Borrower
is obligated to pay pursuant to Section 9.03(a) of the Credit Agreement or
otherwise, to the extent that written invoices therefor shall have been
submitted to the Borrower.
(c) Other Documents. Such other documents relating to the
transactions contemplated hereby as the Administrative Agent or any Lender
(acting through the Administrative Agent) may reasonably request.
Section 5. Termination. The waivers set forth in Section 2 above
shall terminate and be of no further force or effect on the date (the "Specified
Period Termination Date") which is the earlier of:
(a) July 29, 2000; and
(b) the date the Administrative Agent gives notice to the Borrower
(which notice shall be given by the Administrative Agent if so instructed
by the Required Lenders) of the termination of the temporary waiver set
forth in Section 2 above by reason of the occurrence of any one or more of
the following events:
(i) a breach in any material respect by any of the Loan
Parties of any of the representations or warranties set forth in
this Waiver Agreement;
(ii) a breach by any of the Loan Parties of any of the
certifications, covenants or other provisions set forth in this
Waiver Agreement or in any officer's certificate delivered pursuant
hereto;
Waiver Agreement
<PAGE>
(iii) any Event of Default under the Credit Agreement, other
than an Event of Default arising out of any Specified Provision,
shall occur and be continuing; or
(iv) the Borrower shall have delivered a certificate pursuant
to Section 6(a) hereof in connection with any borrowing, but shall
not have applied the proceeds thereof to the expenditures, in the
amounts and for the purposes, described in said certificate.
From and after the Specified Period Termination Date, the Administrative Agent
and the Lenders shall be entitled to immediately exercise and enforce any and
all rights and remedies available to the Administrative Agent and the Lenders as
a consequence of the occurrence of any Event of Default arising out of any
Specified Provision (or any other Event of Default) that has occurred prior to,
during or after the Specified Period and is continuing.
Section 6. Additional Covenants. Without prejudice to the covenants
and agreements set forth in the Credit Agreement or the other Loan Documents,
the Borrower covenants and agrees as follows:
(a) Not later than 2 Business Days prior to any borrowing of a
Revolving Loan during the Specified Period, the proceeds of which will be
used in whole or in part to make expenditures that are of a type not
expressly contemplated by the Budget and that will exceed $1,250,000 for
the week in which such borrowing is to occur, the Borrower will deliver to
the Administrative Agent evidence satisfactory to the Administrative Agent
that, after making such borrowing (and taking into account the Borrower's
good faith estimate of the net increase in aggregate borrowings to occur
during such week) the aggregate unused Revolving Commitments will be at
least equal to the amount set forth in Annex I opposite the respective
week in which such borrowing is being made, together with a certificate of
the chief financial officer of the Borrower setting forth in reasonable
detail the proposed use of such proceeds and a calculation of such
aggregate unused Revolving Commitment amount, it being understood that,
unless the provisions of this paragraph (a) are satisfied with respect to
each requested borrowing of a Revolving Loan during the Specified Period,
the proceeds of which are to be applied as described above, the Lenders
shall not be obligated to make such Loan anything in the Credit Agreement
to the contrary notwithstanding; and
(b) Not later than April 30, 2000, the Borrower shall relocate its
concentration account to an account at The Chase Manhattan Bank, and shall
execute and deliver such control agreements and other documents relating
to such concentration account, and take such action as shall be necessary
to perfect of the security interest of the Lenders therein, as the
Administrative Agent shall request.
Waiver Agreement
<PAGE>
Section 7. Continuing Effect. Except as expressly provided herein,
the Credit Agreement and the other Loan Documents shall remain unchanged and in
full force and effect, and all rights, powers and remedies of the Administrative
Agent and the Lenders thereunder are hereby expressly reserved. Without in any
way limiting the generality of the foregoing, the Borrower and the Subsidiary
Loan Parties shall be liable in accordance with the Credit Agreement and the
other Loan Documents for any and all sums and charges due pursuant thereto. The
Borrower and the Subsidiary Loan Parties shall timely pay, during the Specified
Period, all their respective obligations coming due and payable under the Credit
Agreement and the other Loan Documents, including without limitation, as
applicable, any interest, fees and the reimbursement of costs and expenses.
Except to the extent expressly waived herein, the Borrower and the Subsidiary
Loan Parties remain obligated by their respective representations, warranties,
covenants and agreements, and by the other provisions set forth in the Credit
Agreement and the other Loan Documents.
Section 8. No Commitment or Waiver. Neither this Waiver Agreement
nor any action or inaction on the part of the Administrative Agent or any of the
Lenders shall be construed to constitute or represent (i) a commitment by the
Administrative Agent or any Lender, either in their capacities under the Credit
Agreement or in any other capacity, to restructure any Indebtedness of the
Borrower, or (ii) an intention by the Administrative Agent, any Lender or the
Borrower, either in their capacities under the Credit Agreement or in any other
capacity, except as expressly provided in Section 2 above with respect to
Specified Provisions, to waive, modify or, not exercise any of their rights,
powers, privileges or remedies under the Credit Agreement, any other Loan
Document or any other document or agreement, at law, in equity or otherwise, and
each Loan Party acknowledges, agrees and confirms, except as expressly provided
in Section 2 above with respect to the Specified Provisions, that no such
commitment, waiver, modification or agreement not to exercise has been offered,
granted, extended or agreed to by the Administrative Agent or the Lenders,
either in their capacities under the Credit Agreement or in any other capacity.
Nothing set forth in this Waiver Agreement shall be construed so as to require
the Administrative Agent or the Lenders, either in their capacities under the
Credit Agreement or in any other capacity, to agree to the terms of any
modification proposed by the Borrower to the Credit Agreement or any other
document or agreement to which the Administrative Agent or any Lender is a
party.
Section 9. Miscellaneous.
9.01 Successors and Assigns; Benefit of Agreement. This Waiver
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns. This Waiver Agreement is solely for
the benefit of the signatories hereto (and their respective successors and
assigns), and no other Person (including without limitation any other creditor
of or claimant against any Loan Party) shall have any rights under, or because
of the existence of, this Waiver Agreement.
Waiver Agreement
<PAGE>
9.02 Submission to Jurisdiction, Waiver of Jury Trial, Etc. Sections
9.09(b), (c) and (d) and 9.10 of the Credit Agreement and Sections 18 and 19 of
the Guarantee Agreement are hereby incorporated by reference herein, as if set
forth in full herein, mutatis mutandis, and as if each reference therein to
"this Agreement" included reference to this Waiver Agreement.
9.03. Remedies. No failure on the part of the Administrative Agent
or the Lenders to exercise, and no course of dealing with respect to, and no
delay in exercising, any right, power or remedy hereunder or under the Credit
Agreement or any other Loan Documents shall operate as a waiver thereof; nor
shall any single or partial exercise by the Administrative Agent or the Lenders
of any right, power or remedy hereunder, under the Credit Agreement or under any
other Loan Documents preclude any other or further exercise thereof or the
exercise of any other right, power or remedy.
9.04. Voluntary Agreement. Each Loan Party represents and warrants
that it is represented by legal counsel of its choice, is fully aware of the
terms contained in this Waiver Agreement and has voluntarily and without
coercion or duress of any kind entered into this Waiver Agreement, and the
documents and agreements executed and to be executed in connection with this
Waiver Agreement.
9.05. Further Assurances. Each Loan Party shall execute all
additional documents and do all acts not specifically referred to herein which
are reasonably necessary to fully effectuate the intent of this Waiver
Agreement.
9.06. Time of Essence. TIME IS STRICTLY OF THE ESSENCE OF THIS
WAIVER AGREEMENT AND FULL AND COMPLETE PERFORMANCE OF EACH AND EVERY PROVISION
HEREOF.
9.07. Waiver and Release. No Loan Party has, and, in any event, each
Loan Party hereby waives and releases, any claim, counterclaim, demand (other
than notices required under the Loan Documents), action, defense or offset
against any of its indebtedness and other obligations (and the enforcement
thereof) under the Credit Agreement or the other Loan Documents or against the
Administrative Agent or the Lenders or their respective employees, agents and
representatives, by reason of any matter, cause or thing whatsoever occurring on
or before the date hereof which relates or arises out of the Credit Agreement or
the other Loan Documents or any obligations or responsibilities of the Lenders
or the Administrative Agent under or in respect of the Credit Agreement, the
other Loan Documents, or any credit heretofore extended to the Borrower
thereunder. In addition, each Loan Party agrees not to commence, join in,
assist, cooperate, prosecute or participate (other than as a defendant) in any
suit or other proceeding in a position that is materially adverse to the Lenders
or the Administrative Agent concerning matters within the scope of the waiver
and release contained above. Each Loan Party hereby expressly acknowledges and
agrees that nothing in this Waiver Agreement or in any document or instrument
executed in connection with or pursuant to this Waiver Agreement shall
constitute a satisfaction as to all or any portion of the Borrower's
indebtedness or obligations
Waiver Agreement
<PAGE>
under the Credit Agreement and the other Loan Documents. It is understood and
agreed that the provisions of this Section 9.07 shall not be binding upon third
parties, but shall be binding solely upon the Loan Parties and their respective
successors and assigns.
9.08. Severability. Any provision of this Waiver Agreement that is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining provisions of this Waiver
Agreement or affecting the validity or enforceability of any provisions of this
Waiver Agreement in any other jurisdiction.
9.09. Counterparts; Section Headings. This Waiver Agreement may be
executed in any number of counterparts, all of which taken together shall
constitute one and the same agreement and any of the parties hereto may execute
this Waiver Agreement by signing any such counterpart. Section or other headings
contained in this Waiver Agreement are for reference purposes only and shall not
in any way effect the meaning or interpretation of this Waiver Agreement.
9.10. Governing Law; Loan Document. This Waiver Agreement shall be
governed by, and construed in accordance with, the law of the State of New York.
This Waiver Agreement shall be considered a "Loan Document" for all purposes.
Waiver Agreement
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Waiver
Agreement to be duly executed and delivered as of the day and year first above
written.
BORROWER
PATHMARK STORES, INC.
By /s/ Frank Vitrano
--------------------------------------
Title: Executive Vice President
SUBSIDIARY LOAN PARTIES
AAL REALTY CORP. BRIDGE STUART, INC.
By /s/ Frank Vitrano By /s/ Frank Vitrano
--------------------------------- --------------------------------------
Title: Executive Vice President Title: Executive Vice President
BUCKS STUART, INC. GAW PROPERTIES CORP.
By /s/ Frank Vitrano By /s/ Frank Vitrano
--------------------------------- --------------------------------------
Title: Executive Vice President Title: Executive Vice President
PATHMARK RISK MANAGEMENT CORP. PAULS TRUCKING CORP.
By /s/ Frank Vitrano By /s/ Frank Vitrano
--------------------------------- --------------------------------------
Title: Executive Vice President Title: Executive Vice President
Waiver Agreement
<PAGE>
PLAINBRIDGE, INC.
By /s/ Frank Vitrano
---------------------------------
Title: Executive Vice President
ADMINISTRATIVE AGENT
THE CHASE MANHATTAN BANK,
as Administrative Agent
By /s/ Barry K. Bergman
-----------------------------
Title: Vice President
Waiver Agreement
<PAGE>
ANNEX I
Minimum Weekly Availability Amounts
Week Ending Minimum Amount
- ----------- --------------
April 8, 2000 $90,213,000
April 15, 2000 $84,727,000
April 22, 2000 $89,209,000
April 29, 2000 $75,496,000
May 6, 2000 $70,661,000
May 13, 2000 $76,642,000
May 20, 2000 $69,842,000
May 27, 2000 $67,427,000
June 3, 2000 $62,831,000
June 10, 2000 $73,239,000
June 17, 2000 $77,702,000
June 24, 2000 $74,438,000
July 1, 2000 $71,823,000
July 8, 2000 $75,231,000
July 15, 2000 $87,073,000
July 22, 2000 $79,983,000
July 29, 2000 $75,755,000
Waiver Agreement
Exhibit 10.7A
SUPPLEMENTAL RETIREMENT AGREEMENT
AGREEMENT, made and entered into as of the 1st day of March, 2000, by and
between PATHMARK STORES, INC., a Delaware corporation (the "Company"), and James
L. Donald (the "Executive"), residing at 16 Buttonwood Lane, Rumson, New Jersey
07760.
WHEREAS, to induce the Executive to continue employment with the Company,
the Company desires to provide a minimum retirement income for the Executive on
the terms hereinafter set forth;
WHEREAS, the Company considers the Executive as one of a select group of
management or highly compensated employees of the Company, to be of unique value
to the Company.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Definitions
The following terms whenever used in this Agreement shall have the
meanings set forth in this Section 1. Each capitalized term used in this
Agreement and not defined in this Section 1 shall be deemed to have such meaning
as in the SGC Pension Plan (as defined below).
1.1 "Actuarial Equivalent" means a benefit of equivalent value to the
benefit that would otherwise be payable when computed on the basis of the rate
of interest specified by the Pension Benefit Guaranty Corporation for the
<PAGE>
period after payment begins for purposes of determining the value of lump sum
payments as of the date of the Executive's termination of employment and using
the 1983 Basic Group Annuity Mortality Table projected to 1988 with Scale H. For
purposes of determining Actuarial Equivalent, male mortality shall be used for
the Executive and female mortality shall be used for any Beneficiary.
1.2 "Agreement" means this Supplemental Retirement Agreement by and
between the Company and the Executive dated as of the 1st day of March, 2000.
1.3 "Average Final Compensation" shall mean the highest average annual
Compensation (whether or not consecutive) paid to the Executive for the five (5)
full calendar years within the most recent ten (10) consecutive calendar years
during which the Executive received Compensation, ending with the December 31
coincident with or next preceding the date of Termination of Employment,
Retirement, date of death or Disability, whichever is applicable, provided,
however, that an Executive whose Retirement or death occurs on or after December
1 of his/her final Plan Year shall be deemed to have a full calendar year of
Compensation. Notwithstanding the foregoing, if an Executive is employed less
than 12 full months in his/her final calendar year of employment, Compensation
earned in such year shall, if higher than the lowest year's Compensation used in
determining Average Final Compensation, be substituted for such lowest year's
Compensation and the determination of Average Final Compensation shall be made
based on the most recent eleven (11) consecutive calendar years during which the
Executive received Compensation.
2
<PAGE>
1.4 "Beneficiary" means the Executive's surviving spouse to whom the
Executive was married for the six-month period immediately preceding the earlier
of the date of commencement of the Executive's Supplemental Retirement Benefit
or the date of the Executive's death.
1.5 "Board of Directors" means the Board of Directors of the Company as
constituted from time to time.
1.6 "Code" means the Internal Revenue Code of 1986, as may be amended from
time to time.
1.7 "Company" means with respect to periods prior to October 22, 1993,
Supermarkets General Corporation, and with respect to periods on or after
October 22, 1993, Pathmark Stores, Inc., or Plainbridge, Inc., or any successor
thereto.
1.8 "Compensation" means Compensation as defined under the SGC Pension
Plan as in effect on the date of this Agreement, determined, however, without
regard to any dollar limitation imposed by Section 401(a)(17) of the Code on the
amount of compensation which may be taken into account under such Plan.
1.9 "Disability" means "Total and Permanent Disability" as defined under
the SGC Pension Plan.
1.10 "Disability Retirement" means the termination of the Executive's
employment with the Company by reason of Disability.
3
<PAGE>
1.11 "Pension Plan Benefit" means the annual retirement benefit payable to
or on account of the Executive pursuant to the SGC Pension Plan.
1.12 "SGC Pension Plan" means the SGC Pension Plan, as amended and
restated effective January 1, 1989, and as amended from time to time thereafter.
1.13 "SGC Profit Sharing Plan" means the SGC Profit Sharing Plan as in
effect immediately prior to April 1, 1983.
1.14 "SGC Savings Plan" means the SGC Savings Plan, as amended and
restated effective January 1, 1989, and as amended from time to time thereafter.
1.15 "Supplemental Retirement Benefit" means the Executive's benefit under
this Agreement.
1.16. "Vesting Service" means the Executive's "Vesting Service" as defined
in the SGC Pension Plan, but increased by seven (7) years.
2. Amount of Supplemental Retirement Benefit; Termination Of Employment After
Age 60
Except as provided in Sections 3 and 4 of this Agreement, the annual
amount of the Executive's Supplemental Retirement Benefit shall be equal to the
excess, if any, of the amount of the Executive's "Unreduced Supplemental
Retirement Benefit" as described in subparagraph (a) over the Executive's "Other
Company Plan Benefits" as described in subparagraph (b), where
4
<PAGE>
a. "Unreduced Supplemental Retirement Benefit" is equal to the sum of 30%
of the Executive's Average Final Compensation after completion of 10 years of
Vesting Service, plus 2% of the Executive's Average Final Compensation
multiplied by each additional year of Vesting Service in excess of 10; provided,
however, that in no event shall the Executive's Unreduced Supplemental
Retirement Benefit exceed the lesser of (i) 50% of his Average Final
Compensation, or (ii) $600,000; and
b. "Other Company Plan Benefits" are the amounts payable under the SGC
Pension Plan, the SGC Profit Sharing Plan, the Company's Excess Benefit Plan and
the Company's disability income plan (other than (i) amounts payable under group
life insurance, Retirement and Survivor's Insurance under the Federal Social
Security Act, Worker's Compensation and other Company plans required by any
governmental authority, (ii) amounts payable under the SGC Savings Plan to the
extent attributed to amounts paid or contributed by the Company or any
predecessor thereto, and any amounts payable after termination of employment as
retirement, death or disability benefits (other than severance benefits) under a
contract between the Company and the Executive.
If the Executive has a Beneficiary on the date Supplemental Retirement
Benefits commence under this Agreement, Other Company Plan Benefits shall be
determined, on a joint and two-thirds survivor annuity basis, except as
otherwise provided in this Agreement, as of such date, with the Executive's
Beneficiary as joint annuitant. The adjustment to the amount otherwise payable
under the applicable Company plan for the applicable joint survivor annuity form
of payment shall be made on the basis of the factors specified in such Company
plan or, if no such factors are set forth in such Company plan, on an Actuarial
Equivalent basis. If the Executive does not
5
<PAGE>
have a Beneficiary on the date Supplemental Retirement Benefits are to commence
under this Agreement, Other Company Plan Benefits shall be determined on a
single life annuity basis.
The Executive's Supplemental Retirement Benefit under this Section 2 shall
be payable monthly for life commencing on the first day of the month following
the Executive's termination of employment after attainment of age 60.
3. Termination of Employment Prior to Age 60
In the case of the Executive's termination of employment with the Company
prior to attaining age 60 (other than by reason of the Executive's death or
Disability) but after completing 10 years of Vesting Service, the amount of the
Executive's Supplemental Retirement Benefit shall be equal to the Executive's
Unreduced Supplemental Retirement Benefit (computed on the basis of the Vesting
Service which the Executive would have completed had the Executive remained in
the employ of the Company until attainment of age 60), multiplied by a fraction,
the numerator of which is the number of the Executive's years of Vesting Service
at termination of employment (up to a maximum of 20) and the denominator of
which is the number of years of Vesting Service (up to a maximum of 20) which
the Executive would have completed had the Executive remained in the employ of
the Company until attainment of age 60, offset by the amount of the Executive's
Other Company Plan Benefits; provided that Other Company Plan Benefits shall be
assumed to commence on the first day of the month after the Executive's
attainment of age 60 and to be paid in the form of a joint and two-thirds
survivor annuity unless Executive does not have a Beneficiary in which case
benefits shall be assumed paid in the form of a life annuity. The Executive's
Supplemental Retirement
6
<PAGE>
Benefit under this Section 3 shall be payable monthly for life commencing on the
first day of the month following the Executive's attainment of age 60.
4. Disability Retirement
In the case of the Executive's Disability Retirement, the amount of the
Executive's Supplemental Retirement Benefit shall be the amount determined under
Section 2 of this Agreement; provided, however, that the Executive's Unreduced
Supplemental Retirement Benefit shall be computed on the basis of the Vesting
Service which the Executive would have completed had the Executive remained in
the employ of the Company until attainment of age 60, and the Executive's
Unreduced Supplemental Retirement Benefit shall not be offset by Other Company
Plan Benefits prior to the date on which payment of such Other Company Plan
Benefits commence. The Executive's Supplemental Retirement Benefit under this
Section 4 shall be payable monthly for life commencing on the first day of the
month following the Executive's Disability Retirement.
5. Death Prior to Retirement
a. In the event that the Executive dies while in the employ of the Company
and has a Beneficiary on the date of his death, the Executive's Beneficiary
shall receive, beginning with the first day of the month following the
Executive's death and payable monthly, an annual amount equal to two-thirds of
the Executive's Unreduced Supplemental Retirement Benefit (computed on the basis
of the Vesting Service which the Executive would have completed had the
Executive remained in the employ of the Company until attainment of age 60)
offset by the Other Company Plan Benefits; provided, however, that such offset
shall be made at such time as Other Company Plan Benefits are payable
7
<PAGE>
(whether or not the Beneficiary has elected to defer payment to a later date)
and in an amount equal to (i) a life annuity payable to the Executive's
Beneficiary that is equal to the Actuarial Equivalent of the SGC Profit Sharing
Plan balance, and (ii) the survivor annuity actually payable to Executive's
Beneficiary pursuant to any Other Company Plan, each determined as of the
earliest date on which payments of Other Company Plan Benefits are payable to
the Beneficiary.
b. In the event that the Executive dies after termination of employment
with the Company but prior to commencement of Supplemental Retirement Benefit
payments under this Agreement, and has a Beneficiary on the date of his death,
the Executive's Beneficiary shall receive, beginning with the first day of the
month following the Executive's death and payable monthly, an annual amount
equal to two-thirds of the Executive's Unreduced Supplemental Retirement Benefit
offset by the amount of Other Company Plan Benefits; provided, however, that
such offset shall be made at such time as Other Company Plan Benefits are
payable (whether or not the Beneficiary has elected to defer payment to a later
date) and in an amount equal to the benefit that would have been payable to
Executive's Beneficiary had Executive retired on the date of his or her death
and commenced benefit payments in the form of a joint and two-thirds annuity on
such date.
6. Death After Retirement
In the event of the Executive's death after commencement of the
Executive's Supplemental Retirement Benefit, the Executive's Beneficiary shall
receive, beginning with the first day of the month following the Executive's
death and payable monthly, an annual amount equal to two-thirds of the
8
<PAGE>
Supplemental Retirement Benefit that was being paid to the Executive prior to
the Executive's death.
7. Limitation on Spouse's Benefits
Payment of Supplemental Retirement Benefits to the Executive's Beneficiary
under Sections 5 or 6 hereof shall terminate on the earlier of the date of death
or remarriage of such Beneficiary.
8. Benefits Payable by Company
All benefits payable under this Agreement shall constitute an unfunded
obligation of the Company. Payments shall be made, as due, from the general
funds of the Company. The Company may, in its sole and absolute discretion,
establish one or more accounts, funds or trusts to reflect its obligations under
this Agreement and may make such investments as it may deem desirable to assist
it in meeting such obligations. Any assets held in such accounts, funds or
trusts shall remain assets of the Company subject to claims of its creditors. No
person eligible for a benefit under this Agreement shall have any right, title
or interest in any such assets. This Agreement shall constitute solely an
unsecured promise by the Company to pay supplemental retirement benefits to the
extent provided herein.
9. Inalienability of Benefits
The right of any person to any benefit or payment under this Agreement
shall not be subject to voluntary or involuntary transfer, alienation or
assignment, and, to the fullest extent permitted by law, shall not be subject to
attachment, execution, garnishment, sequestration or other legal or equitable
9
<PAGE>
process or be transferable by operation of law in the event of bankruptcy or
insolvency of the Executive or any Beneficiary. In the event a person who is
receiving or is entitled to receive benefits under the Agreement attempts to
assign, transfer or dispose of such right, or if an attempt is made to subject
said right to such process, such assignment, transfer or disposition shall be
null and void.
10. Forfeiture of Benefits
The Executive shall forfeit his Supplemental Retirement Benefit in the
event of the Executive's conviction of a felony relating to the conduct of the
business of the Company or willful unauthorized disclosure of a trade secret of
the Company.
11. Payments to Minors and Incompetents
If the Executive or Beneficiary entitled to receive any benefits hereunder
is a minor or is deemed by the Company or is adjudged to be legally incapable of
giving valid receipt and discharge for such benefits, payment of benefits will
be made to the duly appointed guardian or legal representative of such minor or
incompetent or to such other legally appointed person as the Company may
designate. Such payment shall, to the extent made, be deemed a complete
discharge of any liability for such payment under this Agreement.
12. Withholding
The Company shall have the right to deduct from any payments due under
this Agreement any taxes required to be withheld with respect to such payments.
10
<PAGE>
13. Merger, Consolidation or Sale of Assets
In the event the Company shall, at any time, be merged or consolidated
with or into any corporation or corporations, or in the event that all or
substantially all of the assets of the Company shall be sold or otherwise
transferred to another corporation, the provisions of this Agreement, including
the provisions of this Section, shall be binding upon and inure to the benefit
of the successor of the Company resulting from such merger, consolidation or
sale of assets.
14. Governing Law
Except to the extent pre-empted by federal law, the provisions of this
Agreement will be construed according to the laws of the State of Delaware
(without giving effect to the provisions thereof relating to conflicts of law).
IN WITNESS WHEREOF, the Company and the Executive have caused this
Agreement to be executed effective as of the 1st day of March, 2000.
PATHMARK STORES, INC.
By /s/ Frank Vitrano
--------------------------------------
Title: Executive Vice President
ATTEST:
/s/ Marc A. Strassler
- -----------------------------------
Marc A. Strassler /s/ James L. Donald
Secretary -----------------------------------------
Executive
11
Exhibit 10.7C
SUPPLEMENTAL RETIREMENT AGREEMENT
AGREEMENT, made and entered into as of the 1st day of March, 2000, by and
between PATHMARK STORES, INC., a Delaware corporation (the "Company"), and
Eileen Scott (the "Executive"), residing at 17 Wellington Drive, Basking Ridge,
New Jersey 07920.
WHEREAS, to induce the Executive to continue employment with the Company,
the Company desires to provide a minimum retirement income for the Executive on
the terms hereinafter set forth;
WHEREAS, the Company considers the Executive as one of a select group of
management or highly compensated employees of the Company, to be of unique value
to the Company.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Definitions
The following terms whenever used in this Agreement shall have the
meanings set forth in this Section 1. Each capitalized term used in this
Agreement and not defined in this Section 1 shall be deemed to have such meaning
as in the SGC Pension Plan (as defined below).
1.1 "Actuarial Equivalent" means a benefit of equivalent value to the
benefit that would otherwise be payable when computed on the basis of the rate
of interest specified by the Pension Benefit Guaranty Corporation for the
<PAGE>
period after payment begins for purposes of determining the value of lump sum
payments as of the date of the Executive's termination of employment and using
the 1983 Basic Group Annuity Mortality Table projected to 1988 with Scale H. For
purposes of determining Actuarial Equivalent, male mortality shall be used for
the Executive and female mortality shall be used for any Beneficiary.
1.2 "Agreement" means this Supplemental Retirement Agreement by and
between the Company and the Executive dated as of the 1st day of March, 2000.
1.3 "Average Final Compensation" shall mean the highest average annual
Compensation (whether or not consecutive) paid to the Executive for the five (5)
full calendar years within the most recent ten (10) consecutive calendar years
during which the Executive received Compensation, ending with the December 31
coincident with or next preceding the date of Termination of Employment,
Retirement, date of death or Disability, whichever is applicable, provided,
however, that an Executive whose Retirement or death occurs on or after December
1 of his/her final Plan Year shall be deemed to have a full calendar year of
Compensation. Notwithstanding the foregoing, if an Executive is employed less
than 12 full months in his/her final calendar year of employment, Compensation
earned in such year shall, if higher than the lowest year's Compensation used in
determining Average Final Compensation, be substituted for such lowest year's
Compensation and the determination of Average Final Compensation shall be made
based on the most recent eleven (11) consecutive calendar years during which the
Executive received Compensation.
2
<PAGE>
1.4 "Beneficiary" means the Executive's surviving spouse to whom the
Executive was married for the six-month period immediately preceding the earlier
of the date of commencement of the Executive's Supplemental Retirement Benefit
or the date of the Executive's death.
1.5 "Board of Directors" means the Board of Directors of the Company as
constituted from time to time.
1.6 "Code" means the Internal Revenue Code of 1986, as may be amended from
time to time.
1.7 "Company" means with respect to periods prior to October 22, 1993,
Supermarkets General Corporation, and with respect to periods on or after
October 22, 1993, Pathmark Stores, Inc., or Plainbridge, Inc., or any successor
thereto.
1.8 "Compensation" means Compensation as defined under the SGC Pension
Plan as in effect on the date of this Agreement, determined, however, without
regard to any dollar limitation imposed by Section 401(a)(17) of the Code on the
amount of compensation which may be taken into account under such Plan.
1.9 "Disability" means "Total and Permanent Disability" as defined under
the SGC Pension Plan.
1.10 "Disability Retirement" means the termination of the Executive's
employment with the Company by reason of Disability.
3
<PAGE>
1.11 "Pension Plan Benefit" means the annual retirement benefit payable to
or on account of the Executive pursuant to the SGC Pension Plan.
1.12 "SGC Pension Plan" means the SGC Pension Plan, as amended and
restated effective January 1, 1989, and as amended from time to time thereafter.
1.13 "SGC Profit Sharing Plan" means the SGC Profit Sharing Plan as in
effect immediately prior to April 1, 1983.
1.14 "SGC Savings Plan" means the SGC Savings Plan, as amended and
restated effective January 1, 1989, and as amended from time to time thereafter.
1.15 "Supplemental Retirement Benefit" means the Executive's benefit under
this Agreement.
2. Amount of Supplemental Retirement Benefit; Termination Of Employment After
Age 60
Except as provided in Sections 3 and 4 of this Agreement, the annual
amount of the Executive's Supplemental Retirement Benefit shall be equal to the
excess, if any, of the amount of the Executive's "Unreduced Supplemental
Retirement Benefit" as described in subparagraph (a) over the Executive's "Other
Company Plan Benefits" as described in subparagraph (b), where
a. "Unreduced Supplemental Retirement Benefit" is equal to the sum of 30%
of the Executive's Average Final Compensation after completion of 10 years of
Vesting Service, plus 1% of the Executive's Average Final
4
<PAGE>
Compensation multiplied by each additional year of Vesting Service in excess of
10; provided, however, that in no event shall the Executive's Unreduced
Supplemental Retirement Benefit exceed the lesser of (i) 40% of her Average
Final Compensation, or (ii) $250,000; and
b. "Other Company Plan Benefits" are the amounts payable under the SGC
Pension Plan, the SGC Profit Sharing Plan, the Company's Excess Benefit Plan and
the Company's disability income plan (other than (i) amounts payable under group
life insurance, Retirement and Survivor's Insurance under the Federal Social
Security Act, Worker's Compensation and other Company plans required by any
governmental authority, (ii) amounts payable under the SGC Savings Plan to the
extent attributed to amounts paid or contributed by the Company or any
predecessor thereto, and any amounts payable after termination of employment as
retirement, death or disability benefits (other than severance benefits) under a
contract between the Company and the Executive.
If the Executive has a Beneficiary on the date Supplemental Retirement
Benefits commence under this Agreement, Other Company Plan Benefits shall be
determined, on a joint and two-thirds survivor annuity basis, except as
otherwise provided in this Agreement, as of such date, with the Executive's
Beneficiary as joint annuitant. The adjustment to the amount otherwise payable
under the applicable Company plan for the applicable joint survivor annuity form
of payment shall be made on the basis of the factors specified in such Company
plan or, if no such factors are set forth in such Company plan, on an Actuarial
Equivalent basis. If the Executive does not have a Beneficiary on the date
Supplemental Retirement Benefits are to commence under this Agreement, Other
Company Plan Benefits shall be determined on a single life annuity basis.
5
<PAGE>
The Executive's Supplemental Retirement Benefit under this Section 2 shall
be payable monthly for life commencing on the first day of the month following
the Executive's termination of employment after attainment of age 60.
3. Termination of Employment Prior to Age 60
In the case of the Executive's termination of employment with the Company
prior to attaining age 60 (other than by reason of the Executive's death or
Disability) but after completing 10 years of Vesting Service, the amount of the
Executive's Supplemental Retirement Benefit shall be equal to the Executive's
Unreduced Supplemental Retirement Benefit (computed on the basis of the Vesting
Service which the Executive would have completed had the Executive remained in
the employ of the Company until attainment of age 60), multiplied by a fraction,
the numerator of which is the number of the Executive's years of Vesting Service
at termination of employment (up to a maximum of 20) and the denominator of
which is the number of years of Vesting Service (up to a maximum of 20) which
the Executive would have completed had the Executive remained in the employ of
the Company until attainment of age 60, offset by the amount of the Executive's
Other Company Plan Benefits; provided that Other Company Plan Benefits shall be
assumed to commence on the first day of the month after the Executive's
attainment of age 60 and to be paid in the form of a joint and two-thirds
survivor annuity unless Executive does not have a Beneficiary in which case
benefits shall be assumed paid in the form of a life annuity. The Executive's
Supplemental Retirement Benefit under this Section 3 shall be payable monthly
for life commencing on the first day of the month following the Executive's
attainment of age 60.
6
<PAGE>
4. Disability Retirement
In the case of the Executive's Disability Retirement, the amount of the
Executive's Supplemental Retirement Benefit shall be the amount determined under
Section 2 of this Agreement; provided, however, that the Executive's Unreduced
Supplemental Retirement Benefit shall be computed on the basis of the Vesting
Service which the Executive would have completed had the Executive remained in
the employ of the Company until attainment of age 60, and the Executive's
Unreduced Supplemental Retirement Benefit shall not be offset by Other Company
Plan Benefits prior to the date on which payment of such Other Company Plan
Benefits commence. The Executive's Supplemental Retirement Benefit under this
Section 4 shall be payable monthly for life commencing on the first day of the
month following the Executive's Disability Retirement.
5. Death Prior to Retirement
a. In the event that the Executive dies while in the employ of the Company
and has a Beneficiary on the date of his death, the Executive's Beneficiary
shall receive, beginning with the first day of the month following the
Executive's death and payable monthly, an annual amount equal to two-thirds of
the Executive's Unreduced Supplemental Retirement Benefit (computed on the basis
of the Vesting Service which the Executive would have completed had the
Executive remained in the employ of the Company until attainment of age 60)
offset by the Other Company Plan Benefits; provided, however, that such offset
shall be made at such time as Other Company Plan Benefits are payable (whether
or not the Beneficiary has elected to defer payment to a later date) and in an
amount equal to (i) a life annuity payable to the Executive's
7
<PAGE>
Beneficiary that is equal to the Actuarial Equivalent of the SGC Profit Sharing
Plan balance, and (ii) the survivor annuity actually payable to Executive's
Beneficiary pursuant to any Other Company Plan, each determined as of the
earliest date on which payments of Other Company Plan Benefits are payable to
the Beneficiary.
b. In the event that the Executive dies after termination of employment
with the Company but prior to commencement of Supplemental Retirement Benefit
payments under this Agreement, and has a Beneficiary on the date of his death,
the Executive's Beneficiary shall receive, beginning with the first day of the
month following the Executive's death and payable monthly, an annual amount
equal to two-thirds of the Executive's Unreduced Supplemental Retirement Benefit
offset by the amount of Other Company Plan Benefits; provided, however, that
such offset shall be made at such time as Other Company Plan Benefits are
payable (whether or not the Beneficiary has elected to defer payment to a later
date) and in an amount equal to the benefit that would have been payable to
Executive's Beneficiary had Executive retired on the date of his or her death
and commenced benefit payments in the form of a joint and two-thirds annuity on
such date.
6. Death After Retirement
In the event of the Executive's death after commencement of the
Executive's Supplemental Retirement Benefit, the Executive's Beneficiary shall
receive, beginning with the first day of the month following the Executive's
death and payable monthly, an annual amount equal to two-thirds of the
Supplemental Retirement Benefit that was being paid to the Executive prior to
the Executive's death.
8
<PAGE>
7. Limitation on Spouse's Benefits
Payment of Supplemental Retirement Benefits to the Executive's Beneficiary
under Sections 5 or 6 hereof shall terminate on the earlier of the date of death
or remarriage of such Beneficiary.
8. Benefits Payable by Company
All benefits payable under this Agreement shall constitute an unfunded
obligation of the Company. Payments shall be made, as due, from the general
funds of the Company. The Company may, in its sole and absolute discretion,
establish one or more accounts, funds or trusts to reflect its obligations under
this Agreement and may make such investments as it may deem desirable to assist
it in meeting such obligations. Any assets held in such accounts, funds or
trusts shall remain assets of the Company subject to claims of its creditors. No
person eligible for a benefit under this Agreement shall have any right, title
or interest in any such assets. This Agreement shall constitute solely an
unsecured promise by the Company to pay supplemental retirement benefits to the
extent provided herein.
9. Inalienability of Benefits
The right of any person to any benefit or payment under this Agreement
shall not be subject to voluntary or involuntary transfer, alienation or
assignment, and, to the fullest extent permitted by law, shall not be subject to
attachment, execution, garnishment, sequestration or other legal or equitable
process or be transferable by operation of law in the event of bankruptcy or
insolvency of the Executive or any Beneficiary. In the event a person who is
receiving or is entitled to receive benefits under the Agreement attempts to
9
<PAGE>
assign, transfer or dispose of such right, or if an attempt is made to subject
said right to such process, such assignment, transfer or disposition shall be
null and void.
10. Forfeiture of Benefits
The Executive shall forfeit his Supplemental Retirement Benefit in the
event of the Executive's conviction of a felony relating to the conduct of the
business of the Company or willful unauthorized disclosure of a trade secret of
the Company.
11. Payments to Minors and Incompetents
If the Executive or Beneficiary entitled to receive any benefits hereunder
is a minor or is deemed by the Company or is adjudged to be legally incapable of
giving valid receipt and discharge for such benefits, payment of benefits will
be made to the duly appointed guardian or legal representative of such minor or
incompetent or to such other legally appointed person as the Company may
designate. Such payment shall, to the extent made, be deemed a complete
discharge of any liability for such payment under this Agreement.
12. Withholding
The Company shall have the right to deduct from any payments due under
this Agreement any taxes required to be withheld with respect to such payments.
10
<PAGE>
13. Merger, Consolidation or Sale of Assets
In the event the Company shall, at any time, be merged or consolidated
with or into any corporation or corporations, or in the event that all or
substantially all of the assets of the Company shall be sold or otherwise
transferred to another corporation, the provisions of this Agreement, including
the provisions of this Section, shall be binding upon and inure to the benefit
of the successor of the Company resulting from such merger, consolidation or
sale of assets.
14. Governing Law
Except to the extent pre-empted by federal law, the provisions of this
Agreement will be construed according to the laws of the State of Delaware
(without giving effect to the provisions thereof relating to conflicts of law).
IN WITNESS WHEREOF, the Company and the Executive have caused this
Agreement to be executed effective as of the 1st day of March, 2000.
PATHMARK STORES, INC.
By: /s/ James L. Donald
-------------------------------------
James L. Donald
Chairman, President
and Chief Executive Officer
ATTEST:
/s/ Marc A. Strassler
- -----------------------------------
Marc A. Strassler /s/ Eileen Scott
Secretary ----------------------------------------
Executive
11
Exhibit 10.7D
SUPPLEMENTAL RETIREMENT AGREEMENT
AGREEMENT, made and entered into as of the 1st day of March, 2000, by and
between PATHMARK STORES, INC., a Delaware corporation (the "Company"), and John
Sheehan (the "Executive"), residing at 7 Pheasant Drive, Colts Neck, New Jersey
07722.
WHEREAS, to induce the Executive to continue employment with the Company,
the Company desires to provide a minimum retirement income for the Executive on
the terms hereinafter set forth;
WHEREAS, the Company considers the Executive as one of a select group of
management or highly compensated employees of the Company, to be of unique value
to the Company.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Definitions
The following terms whenever used in this Agreement shall have the
meanings set forth in this Section 1. Each capitalized term used in this
Agreement and not defined in this Section 1 shall be deemed to have such meaning
as in the SGC Pension Plan (as defined below).
1.1 "Actuarial Equivalent" means a benefit of equivalent value to the
benefit that would otherwise be payable when computed on the basis of the rate
of interest specified by the Pension Benefit Guaranty Corporation for the
<PAGE>
period after payment begins for purposes of determining the value of lump sum
payments as of the date of the Executive's termination of employment and using
the 1983 Basic Group Annuity Mortality Table projected to 1988 with Scale H. For
purposes of determining Actuarial Equivalent, male mortality shall be used for
the Executive and female mortality shall be used for any Beneficiary.
1.2 "Agreement" means this Supplemental Retirement Agreement by and
between the Company and the Executive dated as of the 1st day of March, 2000.
1.3 "Average Final Compensation" shall mean the highest average annual
Compensation (whether or not consecutive) paid to the Executive for the five (5)
full calendar years within the most recent ten (10) consecutive calendar years
during which the Executive received Compensation, ending with the December 31
coincident with or next preceding the date of Termination of Employment,
Retirement, date of death or Disability, whichever is applicable, provided,
however, that an Executive whose Retirement or death occurs on or after December
1 of his/her final Plan Year shall be deemed to have a full calendar year of
Compensation. Notwithstanding the foregoing, if an Executive is employed less
than 12 full months in his/her final calendar year of employment, Compensation
earned in such year shall, if higher than the lowest year's Compensation used in
determining Average Final Compensation, be substituted for such lowest year's
Compensation and the determination of Average Final Compensation shall be made
based on the most recent eleven (11) consecutive calendar years during which the
Executive received Compensation.
2
<PAGE>
1.4 "Beneficiary" means the Executive's surviving spouse to whom the
Executive was married for the six-month period immediately preceding the earlier
of the date of commencement of the Executive's Supplemental Retirement Benefit
or the date of the Executive's death.
1.5 "Board of Directors" means the Board of Directors of the Company as
constituted from time to time.
1.6 "Code" means the Internal Revenue Code of 1986, as may be amended from
time to time.
1.7 "Company" means with respect to periods prior to October 22, 1993,
Supermarkets General Corporation, and with respect to periods on or after
October 22, 1993, Pathmark Stores, Inc., or Plainbridge, Inc., or any successor
thereto.
1.8 "Compensation" means Compensation as defined under the SGC Pension
Plan as in effect on the date of this Agreement, determined, however, without
regard to any dollar limitation imposed by Section 401(a)(17) of the Code on the
amount of compensation which may be taken into account under such Plan.
1.9 "Disability" means "Total and Permanent Disability" as defined under
the SGC Pension Plan.
1.10 "Disability Retirement" means the termination of the Executive's
employment with the Company by reason of Disability.
3
<PAGE>
1.11 "Pension Plan Benefit" means the annual retirement benefit payable to
or on account of the Executive pursuant to the SGC Pension Plan.
1.12 "SGC Pension Plan" means the SGC Pension Plan, as amended and
restated effective January 1, 1989, and as amended from time to time thereafter.
1.13 "SGC Profit Sharing Plan" means the SGC Profit Sharing Plan as in
effect immediately prior to April 1, 1983.
1.14 "SGC Savings Plan" means the SGC Savings Plan, as amended and
restated effective January 1, 1989, and as amended from time to time thereafter.
1.15 "Supplemental Retirement Benefit" means the Executive's benefit under
this Agreement.
1.16 "Vesting Service" means the Executive's "Vesting Service" as defined
in the SGC Pension Plan, but increased by seven (7) years.
2. Amount of Supplemental Retirement Benefit; Termination Of Employment After
Age 60
Except as provided in Sections 3 and 4 of this Agreement, the annual
amount of the Executive's Supplemental Retirement Benefit shall be equal to the
excess, if any, of the amount of the Executive's "Unreduced Supplemental
Retirement Benefit" as described in subparagraph (a) over the Executive's "Other
Company Plan Benefits" as described in subparagraph (b), where
4
<PAGE>
a. "Unreduced Supplemental Retirement Benefit" is equal to the sum of 20%
of the Executive's Average Final Compensation after completion of 10 years of
Vesting Service, plus 2% of the Executive's Average Final Compensation
multiplied by each additional year of Vesting Service in excess of 10; provided,
however, that in no event shall the Executive's Unreduced Supplemental
Retirement Benefit exceed the lesser of (i) 40% of his Average Final
Compensation, or (ii) $250,000; and
b. "Other Company Plan Benefits" are the amounts payable under the SGC
Pension Plan, the SGC Profit Sharing Plan, the Company's Excess Benefit Plan and
the Company's disability income plan (other than (i) amounts payable under group
life insurance, Retirement and Survivor's Insurance under the Federal Social
Security Act, Worker's Compensation and other Company plans required by any
governmental authority, (ii) amounts payable under the SGC Savings Plan to the
extent attributed to amounts paid or contributed by the Company or any
predecessor thereto, and any amounts payable after termination of employment as
retirement, death or disability benefits (other than severance benefits) under a
contract between the Company and the Executive.
If the Executive has a Beneficiary on the date Supplemental Retirement
Benefits commence under this Agreement, Other Company Plan Benefits shall be
determined, on a joint and two-thirds survivor annuity basis, except as
otherwise provided in this Agreement, as of such date, with the Executive's
Beneficiary as joint annuitant. The adjustment to the amount otherwise payable
under the applicable Company plan for the applicable joint survivor annuity form
of payment shall be made on the basis of the factors specified in such Company
plan or, if no such factors are set forth in such Company plan, on an Actuarial
Equivalent basis. If the Executive does not
5
<PAGE>
have a Beneficiary on the date Supplemental Retirement Benefits are to commence
under this Agreement, Other Company Plan Benefits shall be determined on a
single life annuity basis.
The Executive's Supplemental Retirement Benefit under this Section 2 shall
be payable monthly for life commencing on the first day of the month following
the Executive's termination of employment after attainment of age 60.
3. Termination of Employment Prior to Age 60
In the case of the Executive's termination of employment with the Company
prior to attaining age 60 (other than by reason of the Executive's death or
Disability) but after completing 10 years of Vesting Service, the amount of the
Executive's Supplemental Retirement Benefit shall be equal to the Executive's
Unreduced Supplemental Retirement Benefit (computed on the basis of the Vesting
Service which the Executive would have completed had the Executive remained in
the employ of the Company until attainment of age 60), multiplied by a fraction,
the numerator of which is the number of the Executive's years of Vesting Service
at termination of employment (up to a maximum of 20) and the denominator of
which is the number of years of Vesting Service (up to a maximum of 20) which
the Executive would have completed had the Executive remained in the employ of
the Company until attainment of age 60, offset by the amount of the Executive's
Other Company Plan Benefits; provided that Other Company Plan Benefits shall be
assumed to commence on the first day of the month after the Executive's
attainment of age 60 and to be paid in the form of a joint and two-thirds
survivor annuity unless Executive does not have a Beneficiary in which case
benefits shall be assumed paid in the form of a life annuity. The Executive's
Supplemental Retirement
6
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Benefit under this Section 3 shall be payable monthly for life commencing on the
first day of the month following the Executive's attainment of age 60.
4. Disability Retirement
In the case of the Executive's Disability Retirement, the amount of the
Executive's Supplemental Retirement Benefit shall be the amount determined under
Section 2 of this Agreement; provided, however, that the Executive's Unreduced
Supplemental Retirement Benefit shall be computed on the basis of the Vesting
Service which the Executive would have completed had the Executive remained in
the employ of the Company until attainment of age 60, and the Executive's
Unreduced Supplemental Retirement Benefit shall not be offset by Other Company
Plan Benefits prior to the date on which payment of such Other Company Plan
Benefits commence. The Executive's Supplemental Retirement Benefit under this
Section 4 shall be payable monthly for life commencing on the first day of the
month following the Executive's Disability Retirement.
5. Death Prior to Retirement
a. In the event that the Executive dies while in the employ of the Company
and has a Beneficiary on the date of his death, the Executive's Beneficiary
shall receive, beginning with the first day of the month following the
Executive's death and payable monthly, an annual amount equal to two-thirds of
the Executive's Unreduced Supplemental Retirement Benefit (computed on the basis
of the Vesting Service which the Executive would have completed had the
Executive remained in the employ of the Company until attainment of age 60)
offset by the Other Company Plan Benefits; provided, however, that such offset
shall be made at such time as Other Company Plan Benefits are payable
7
<PAGE>
(whether or not the Beneficiary has elected to defer payment to a later date)
and in an amount equal to (i) a life annuity payable to the Executive's
Beneficiary that is equal to the Actuarial Equivalent of the SGC Profit Sharing
Plan balance, and (ii) the survivor annuity actually payable to Executive's
Beneficiary pursuant to any Other Company Plan, each determined as of the
earliest date on which payments of Other Company Plan Benefits are payable to
the Beneficiary.
b. In the event that the Executive dies after termination of employment
with the Company but prior to commencement of Supplemental Retirement Benefit
payments under this Agreement, and has a Beneficiary on the date of his death,
the Executive's Beneficiary shall receive, beginning with the first day of the
month following the Executive's death and payable monthly, an annual amount
equal to two-thirds of the Executive's Unreduced Supplemental Retirement Benefit
offset by the amount of Other Company Plan Benefits; provided, however, that
such offset shall be made at such time as Other Company Plan Benefits are
payable (whether or not the Beneficiary has elected to defer payment to a later
date) and in an amount equal to the benefit that would have been payable to
Executive's Beneficiary had Executive retired on the date of his or her death
and commenced benefit payments in the form of a joint and two-thirds annuity on
such date.
6. Death After Retirement
In the event of the Executive's death after commencement of the
Executive's Supplemental Retirement Benefit, the Executive's Beneficiary shall
receive, beginning with the first day of the month following the Executive's
death and payable monthly, an annual amount equal to two-thirds of the
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Supplemental Retirement Benefit that was being paid to the Executive prior to
the Executive's death.
7. Limitation on Spouse's Benefits
Payment of Supplemental Retirement Benefits to the Executive's Beneficiary
under Sections 5 or 6 hereof shall terminate on the earlier of the date of death
or remarriage of such Beneficiary.
8. Benefits Payable by Company
All benefits payable under this Agreement shall constitute an unfunded
obligation of the Company. Payments shall be made, as due, from the general
funds of the Company. The Company may, in its sole and absolute discretion,
establish one or more accounts, funds or trusts to reflect its obligations under
this Agreement and may make such investments as it may deem desirable to assist
it in meeting such obligations. Any assets held in such accounts, funds or
trusts shall remain assets of the Company subject to claims of its creditors. No
person eligible for a benefit under this Agreement shall have any right, title
or interest in any such assets. This Agreement shall constitute solely an
unsecured promise by the Company to pay supplemental retirement benefits to the
extent provided herein.
9. Inalienability of Benefits
The right of any person to any benefit or payment under this Agreement
shall not be subject to voluntary or involuntary transfer, alienation or
assignment, and, to the fullest extent permitted by law, shall not be subject to
attachment, execution, garnishment, sequestration or other legal or equitable
9
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process or be transferable by operation of law in the event of bankruptcy or
insolvency of the Executive or any Beneficiary. In the event a person who is
receiving or is entitled to receive benefits under the Agreement attempts to
assign, transfer or dispose of such right, or if an attempt is made to subject
said right to such process, such assignment, transfer or disposition shall be
null and void.
10. Forfeiture of Benefits
The Executive shall forfeit his Supplemental Retirement Benefit in the
event of the Executive's conviction of a felony relating to the conduct of the
business of the Company or willful unauthorized disclosure of a trade secret of
the Company.
11. Payments to Minors and Incompetents
If the Executive or Beneficiary entitled to receive any benefits hereunder
is a minor or is deemed by the Company or is adjudged to be legally incapable of
giving valid receipt and discharge for such benefits, payment of benefits will
be made to the duly appointed guardian or legal representative of such minor or
incompetent or to such other legally appointed person as the Company may
designate. Such payment shall, to the extent made, be deemed a complete
discharge of any liability for such payment under this Agreement.
12. Withholding
The Company shall have the right to deduct from any payments due under
this Agreement any taxes required to be withheld with respect to such payments.
10
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13. Merger, Consolidation or Sale of Assets
In the event the Company shall, at any time, be merged or consolidated
with or into any corporation or corporations, or in the event that all or
substantially all of the assets of the Company shall be sold or otherwise
transferred to another corporation, the provisions of this Agreement, including
the provisions of this Section, shall be binding upon and inure to the benefit
of the successor of the Company resulting from such merger, consolidation or
sale of assets.
14. Governing Law
Except to the extent pre-empted by federal law, the provisions of this
Agreement will be construed according to the laws of the State of Delaware
(without giving effect to the provisions thereof relating to conflicts of law).
IN WITNESS WHEREOF, the Company and the Executive have caused this
Agreement to be executed effective as of the 1st day of March, 2000.
PATHMARK STORES, INC.
By: /s/ James L. Donald
-------------------------------------
James L. Donald
Chairman, President
and Chief Executive Officer
ATTEST:
/s/ Marc A. Strassler
- -----------------------------------
Marc A. Strassler /s/ John Sheehan
Secretary ----------------------------------------
Executive
11
Exhibit 10.7E
SUPPLEMENTAL RETIREMENT AGREEMENT
AGREEMENT, made and entered into as of the 1st day of March, 2000, by and
between PATHMARK STORES, INC., a Delaware corporation (the "Company"), and Frank
Vitrano (the "Executive"), residing at2 Thatchwood Court, North Brunswick, New
Jersey 08902.
WHEREAS, to induce the Executive to continue employment with the Company,
the Company desires to provide a minimum retirement income for the Executive on
the terms hereinafter set forth;
WHEREAS, the Company considers the Executive as one of a select group of
management or highly compensated employees of the Company, to be of unique value
to the Company.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Definitions
The following terms whenever used in this Agreement shall have the
meanings set forth in this Section 1. Each capitalized term used in this
Agreement and not defined in this Section 1 shall be deemed to have such meaning
as in the SGC Pension Plan (as defined below).
1.1 "Actuarial Equivalent" means a benefit of equivalent value to the
benefit that would otherwise be payable when computed on the basis of the rate
of interest specified by the Pension Benefit Guaranty Corporation for the
<PAGE>
period after payment begins for purposes of determining the value of lump sum
payments as of the date of the Executive's termination of employment and using
the 1983 Basic Group Annuity Mortality Table projected to 1988 with Scale H. For
purposes of determining Actuarial Equivalent, male mortality shall be used for
the Executive and female mortality shall be used for any Beneficiary.
1.2 "Agreement" means this Supplemental Retirement Agreement by and
between the Company and the Executive dated as of the 1st day of March, 2000.
1.3 "Average Final Compensation" shall mean the highest average annual
Compensation (whether or not consecutive) paid to the Executive for the five (5)
full calendar years within the most recent ten (10) consecutive calendar years
during which the Executive received Compensation, ending with the December 31
coincident with or next preceding the date of Termination of Employment,
Retirement, date of death or Disability, whichever is applicable, provided,
however, that an Executive whose Retirement or death occurs on or after December
1 of his/her final Plan Year shall be deemed to have a full calendar year of
Compensation. Notwithstanding the foregoing, if an Executive is employed less
than 12 full months in his/her final calendar year of employment, Compensation
earned in such year shall, if higher than the lowest year's Compensation used in
determining Average Final Compensation, be substituted for such lowest year's
Compensation and the determination of Average Final Compensation shall be made
based on the most recent eleven (11) consecutive calendar years during which the
Executive received Compensation.
2
<PAGE>
1.4 "Beneficiary" means the Executive's surviving spouse to whom the
Executive was married for the six-month period immediately preceding the earlier
of the date of commencement of the Executive's Supplemental Retirement Benefit
or the date of the Executive's death.
1.5 "Board of Directors" means the Board of Directors of the Company as
constituted from time to time.
1.6 "Code" means the Internal Revenue Code of 1986, as may be amended from
time to time.
1.7 "Company" means with respect to periods prior to October 22, 1993,
Supermarkets General Corporation, and with respect to periods on or after
October 22, 1993, Pathmark Stores, Inc., or Plainbridge, Inc., or any successor
thereto.
1.8 "Compensation" means Compensation as defined under the SGC Pension
Plan as in effect on the date of this Agreement, determined, however, without
regard to any dollar limitation imposed by Section 401(a)(17) of the Code on the
amount of compensation which may be taken into account under such Plan.
1.9 "Disability" means "Total and Permanent Disability" as defined under
the SGC Pension Plan.
1.10 "Disability Retirement" means the termination of the Executive's
employment with the Company by reason of Disability.
3
<PAGE>
1.11 "Pension Plan Benefit" means the annual retirement benefit payable to
or on account of the Executive pursuant to the SGC Pension Plan.
1.12 "SGC Pension Plan" means the SGC Pension Plan, as amended and
restated effective January 1, 1989, and as amended from time to time thereafter.
1.13 "SGC Profit Sharing Plan" means the SGC Profit Sharing Plan as in
effect immediately prior to April 1, 1983.
1.14 "SGC Savings Plan" means the SGC Savings Plan, as amended and
restated effective January 1, 1989, and as amended from time to time thereafter.
1.15 "Supplemental Retirement Benefit" means the Executive's benefit under
this Agreement.
2. Amount of Supplemental Retirement Benefit; Termination Of Employment After
Age 60
Except as provided in Sections 3 and 4 of this Agreement, the annual
amount of the Executive's Supplemental Retirement Benefit shall be equal to the
excess, if any, of the amount of the Executive's "Unreduced Supplemental
Retirement Benefit" as described in subparagraph (a) over the Executive's "Other
Company Plan Benefits" as described in subparagraph (b), where
a. "Unreduced Supplemental Retirement Benefit" is equal to the sum of 30%
of the Executive's Average Final Compensation after completion of 10 years of
Vesting Service, plus 1% of the Executive's Average Final
4
<PAGE>
Compensation multiplied by each additional year of Vesting Service in excess of
10; provided, however, that in no event shall the Executive's Unreduced
Supplemental Retirement Benefit exceed the lesser of (i) 40% of his Average
Final Compensation, or (ii) $250,000; and
b. "Other Company Plan Benefits" are the amounts payable under the SGC
Pension Plan, the SGC Profit Sharing Plan, the Company's Excess Benefit Plan and
the Company's disability income plan (other than (i) amounts payable under group
life insurance, Retirement and Survivor's Insurance under the Federal Social
Security Act, Worker's Compensation and other Company plans required by any
governmental authority, (ii) amounts payable under the SGC Savings Plan to the
extent attributed to amounts paid or contributed by the Company or any
predecessor thereto, and any amounts payable after termination of employment as
retirement, death or disability benefits (other than severance benefits) under a
contract between the Company and the Executive.
If the Executive has a Beneficiary on the date Supplemental Retirement
Benefits commence under this Agreement, Other Company Plan Benefits shall be
determined, on a joint and two-thirds survivor annuity basis, except as
otherwise provided in this Agreement, as of such date, with the Executive's
Beneficiary as joint annuitant. The adjustment to the amount otherwise payable
under the applicable Company plan for the applicable joint survivor annuity form
of payment shall be made on the basis of the factors specified in such Company
plan or, if no such factors are set forth in such Company plan, on an Actuarial
Equivalent basis. If the Executive does not have a Beneficiary on the date
Supplemental Retirement Benefits are to commence under this Agreement, Other
Company Plan Benefits shall be determined on a single life annuity basis.
5
<PAGE>
The Executive's Supplemental Retirement Benefit under this Section 2 shall
be payable monthly for life commencing on the first day of the month following
the Executive's termination of employment after attainment of age 60.
3. Termination of Employment Prior to Age 60
In the case of the Executive's termination of employment with the Company
prior to attaining age 60 (other than by reason of the Executive's death or
Disability) but after completing 10 years of Vesting Service, the amount of the
Executive's Supplemental Retirement Benefit shall be equal to the Executive's
Unreduced Supplemental Retirement Benefit (computed on the basis of the Vesting
Service which the Executive would have completed had the Executive remained in
the employ of the Company until attainment of age 60), multiplied by a fraction,
the numerator of which is the number of the Executive's years of Vesting Service
at termination of employment (up to a maximum of 20) and the denominator of
which is the number of years of Vesting Service (up to a maximum of 20) which
the Executive would have completed had the Executive remained in the employ of
the Company until attainment of age 60, offset by the amount of the Executive's
Other Company Plan Benefits; provided that Other Company Plan Benefits shall be
assumed to commence on the first day of the month after the Executive's
attainment of age 60 and to be paid in the form of a joint and two-thirds
survivor annuity unless Executive does not have a Beneficiary in which case
benefits shall be assumed paid in the form of a life annuity. The Executive's
Supplemental Retirement Benefit under this Section 3 shall be payable monthly
for life commencing on the first day of the month following the Executive's
attainment of age 60.
6
<PAGE>
4. Disability Retirement
In the case of the Executive's Disability Retirement, the amount of the
Executive's Supplemental Retirement Benefit shall be the amount determined under
Section 2 of this Agreement; provided, however, that the Executive's Unreduced
Supplemental Retirement Benefit shall be computed on the basis of the Vesting
Service which the Executive would have completed had the Executive remained in
the employ of the Company until attainment of age 60, and the Executive's
Unreduced Supplemental Retirement Benefit shall not be offset by Other Company
Plan Benefits prior to the date on which payment of such Other Company Plan
Benefits commence. The Executive's Supplemental Retirement Benefit under this
Section 4 shall be payable monthly for life commencing on the first day of the
month following the Executive's Disability Retirement.
5. Death Prior to Retirement
a. In the event that the Executive dies while in the employ of the Company
and has a Beneficiary on the date of his death, the Executive's Beneficiary
shall receive, beginning with the first day of the month following the
Executive's death and payable monthly, an annual amount equal to two-thirds of
the Executive's Unreduced Supplemental Retirement Benefit (computed on the basis
of the Vesting Service which the Executive would have completed had the
Executive remained in the employ of the Company until attainment of age 60)
offset by the Other Company Plan Benefits; provided, however, that such offset
shall be made at such time as Other Company Plan Benefits are payable (whether
or not the Beneficiary has elected to defer payment to a later date) and in an
amount equal to (i) a life annuity payable to the Executive's
7
<PAGE>
Beneficiary that is equal to the Actuarial Equivalent of the SGC Profit Sharing
Plan balance, and (ii) the survivor annuity actually payable to Executive's
Beneficiary pursuant to any Other Company Plan, each determined as of the
earliest date on which payments of Other Company Plan Benefits are payable to
the Beneficiary.
b. In the event that the Executive dies after termination of employment
with the Company but prior to commencement of Supplemental Retirement Benefit
payments under this Agreement, and has a Beneficiary on the date of his death,
the Executive's Beneficiary shall receive, beginning with the first day of the
month following the Executive's death and payable monthly, an annual amount
equal to two-thirds of the Executive's Unreduced Supplemental Retirement Benefit
offset by the amount of Other Company Plan Benefits; provided, however, that
such offset shall be made at such time as Other Company Plan Benefits are
payable (whether or not the Beneficiary has elected to defer payment to a later
date) and in an amount equal to the benefit that would have been payable to
Executive's Beneficiary had Executive retired on the date of his or her death
and commenced benefit payments in the form of a joint and two-thirds annuity on
such date.
6. Death After Retirement
In the event of the Executive's death after commencement of the
Executive's Supplemental Retirement Benefit, the Executive's Beneficiary shall
receive, beginning with the first day of the month following the Executive's
death and payable monthly, an annual amount equal to two-thirds of the
Supplemental Retirement Benefit that was being paid to the Executive prior to
the Executive's death.
8
<PAGE>
7. Limitation on Spouse's Benefits
Payment of Supplemental Retirement Benefits to the Executive's Beneficiary
under Sections 5 or 6 hereof shall terminate on the earlier of the date of death
or remarriage of such Beneficiary.
8. Benefits Payable by Company
All benefits payable under this Agreement shall constitute an unfunded
obligation of the Company. Payments shall be made, as due, from the general
funds of the Company. The Company may, in its sole and absolute discretion,
establish one or more accounts, funds or trusts to reflect its obligations under
this Agreement and may make such investments as it may deem desirable to assist
it in meeting such obligations. Any assets held in such accounts, funds or
trusts shall remain assets of the Company subject to claims of its creditors. No
person eligible for a benefit under this Agreement shall have any right, title
or interest in any such assets. This Agreement shall constitute solely an
unsecured promise by the Company to pay supplemental retirement benefits to the
extent provided herein.
9. Inalienability of Benefits
The right of any person to any benefit or payment under this Agreement
shall not be subject to voluntary or involuntary transfer, alienation or
assignment, and, to the fullest extent permitted by law, shall not be subject to
attachment, execution, garnishment, sequestration or other legal or equitable
process or be transferable by operation of law in the event of bankruptcy or
insolvency of the Executive or any Beneficiary. In the event a person who is
receiving or is entitled to receive benefits under the Agreement attempts to
9
<PAGE>
assign, transfer or dispose of such right, or if an attempt is made to subject
said right to such process, such assignment, transfer or disposition shall be
null and void.
10. Forfeiture of Benefits
The Executive shall forfeit his Supplemental Retirement Benefit in the
event of the Executive's conviction of a felony relating to the conduct of the
business of the Company or willful unauthorized disclosure of a trade secret of
the Company.
11. Payments to Minors and Incompetents
If the Executive or Beneficiary entitled to receive any benefits hereunder
is a minor or is deemed by the Company or is adjudged to be legally incapable of
giving valid receipt and discharge for such benefits, payment of benefits will
be made to the duly appointed guardian or legal representative of such minor or
incompetent or to such other legally appointed person as the Company may
designate. Such payment shall, to the extent made, be deemed a complete
discharge of any liability for such payment under this Agreement.
12. Withholding
The Company shall have the right to deduct from any payments due under
this Agreement any taxes required to be withheld with respect to such payments.
10
<PAGE>
13. Merger, Consolidation or Sale of Assets
In the event the Company shall, at any time, be merged or consolidated
with or into any corporation or corporations, or in the event that all or
substantially all of the assets of the Company shall be sold or otherwise
transferred to another corporation, the provisions of this Agreement, including
the provisions of this Section, shall be binding upon and inure to the benefit
of the successor of the Company resulting from such merger, consolidation or
sale of assets.
14. Governing Law
Except to the extent pre-empted by federal law, the provisions of this
Agreement will be construed according to the laws of the State of Delaware
(without giving effect to the provisions thereof relating to conflicts of law).
IN WITNESS WHEREOF, the Company and the Executive have caused this
Agreement to be executed effective as of the 1st day of March, 2000.
PATHMARK STORES, INC.
By: /s/ James L. Donald
--------------------------------------
James L. Donald
Chairman, President
and Chief Executive Officer
ATTEST:
/s/ Marc A. Strassler
- -----------------------------------
Marc A. Strassler
Secretary /s/ Frank Vitrano
----------------------------------------
Executive
11
Execution Copy
Pathmark Stores, Inc.
February 1, 2000
James Donald
c/o Pathmark Stores, Inc.
200 Milik Street
Carteret, New Jersey 07008
Sale and Retention Bonus Agreement
Dear Jim:
The following sets forth the agreement between you and Pathmark
Stores, Inc., a corporation organized under the laws of Delaware (the
"Company"), regarding the terms of the sale bonus (the "Sale Bonus") and the
retention bonus (the "Retention Bonus") that you may be eligible to receive in
accordance with the terms and conditions set forth below. This letter agreement
(the "Letter Agreement") is in addition to, and not in substitution for, any
other agreements between or among you and the Company Group (as defined below),
including without limitation the employment agreement between you and the
Company, dated February 1, 1999 (the "Employment Agreement"), and the Retention
Bonus and the Sale Bonus are in addition to, and not in substitution for, any
other pay or benefits to which you are eligible to earn from the Company Group.
1. Definitions. For purposes of this Letter Agreement, the following
capitalized words that are not otherwise defined in the text of the Letter
Agreement shall have the meanings set forth below:
"Aggregate Consideration" shall mean an amount equal to the sum of
the aggregate fair market value of any securities issued and any other
non-cash consideration delivered, and any cash consideration paid to the
Company Group or its security holders in connection with a Change in
Control, plus the amount of all indebtedness of the Company Group which is
assumed or acquired by any Purchaser in connection with a Change in
Control or retired or defeased in connection with such Change in Control.
The fair market value of any securities issued and any other non-cash
consideration delivered in connection with a Change in Control will be the
value determined in good faith by the Board.
"Beneficial Owner" shall have the meaning given to such term in Rule
13D-3 under the Securities and Exchange Act of 1934, as amended.
"Board" shall mean the Board of Directors of Holdings.
"Change in Control" shall mean the consummation of a Triggering
Event.
"Company" shall mean Pathmark Stores, Inc.
"Company Group" shall mean, individually and as a group, Holdings,
the Company, PTK Holdings, Inc. and Supermarkets General Holdings
Corporation, and any successors thereto.
1
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"Effective Date" shall mean February 1, 2000.
"Holdings" shall mean SMG-II Holdings Corporation, a corporation
organized under the laws of the State of Delaware.
"Independent Third Party" shall mean any entity other than a member
of the Company Group or any of the Stockholders or any entity controlled
by or under common control with any of the Stockholders or the Company
Group.
"Payment Date" shall mean July 31, 2000.
"Purchaser" shall mean any Independent Third Party that engages in a
Change in Control.
"Sellers" shall mean selling equity holders, which holders may be at
the level of any of the Company Group.
A "Triggering Event" shall be deemed to have occurred on the date
that any of he following shall have occurred:
(A) any member of the Company Group enters into a binding agreement
with one or more Independent Third Parties to directly acquire, in
exchange for cash, stock, claims, or property, fifty percent or more of
the aggregate equity securities of Holdings for which the MLCP Investors
and the Equitable Investors (as defined in the Amended and Restated
Stockholders Agreement among Holdings and its Stockholders, dated January
22, 1998) (together, the "Stockholders") are Beneficial Owners as of the
Effective Date;
(B) any member of the Company Group enters into a binding agreement
providing for a merger, consolidation, reorganization or other business
combination upon consummation of which one or more Independent Third
Parties would own or control fifty percent or more of either (i) the
aggregate voting securities of the Company Group, (ii) the aggregate
economic interest of the outstanding equity securities of the Company
Group or (iii) the aggregate value of the assets of the Company;
(C) any member of the Company Group enters into transaction upon
consummation of which an Independent Third Party would acquire in exchange
for cash, stock, claims or property fifty percent or more of either (I)
the aggregate equity securities of the Company, PTK Holdings, Inc. or
Supermarkets General Holdings Corporation, or (II) the Company's assets;
or
(D) any member of the Company Group files a plan of reorganization
or motion for relief in a case under title 11 of the United States Code
for the purpose of implementing an agreement or transaction of the type
described in any of the preceding clauses (A), (B) or (C); provided,
however, that a Triggering Event shall not include any change of ownership
resulting from a public offering of any of the securities of any of the
Company Group pursuant to an effective registration statement under the
Securities Act of 1933, as amended.
2. Term. The term of this Letter Agreement (the "Term") shall
commence on the Effective Date and shall continue until the later of (a) first
anniversary of the Effective Date if a Triggering Event does not occur prior to
such anniversary or (b) in the event that a Triggering Event occurs prior to the
first anniversary of the Effective Date, either the date of a Change in Control
2
<PAGE>
that occurs subsequent to a corresponding Triggering Event or the date the
Triggering Event is definitively canceled or otherwise becomes void.
3. Retention Bonus.
In consideration of, and subject to, your continued employment with
the Company during the period beginning on the Effective Date and ending on the
Payment Date, the Company will pay you a Retention Bonus equal to $4,000,000.
The Company will pay the Retention Bonus to you in a lump sum cash amount as
soon as practicable after the Payment Date but in no event more than thirty days
thereafter.
4. Sale Bonus.
(a) General Terms. You will become entitled to receive the Sale
Bonus in the event that (I) a Triggering Event occurs during the Term, and (ii)
a Change in Control contemplated by such Triggering Event occurs thereafter. The
amount of the Sale Bonus shall be equal to 0.0043 multiplied by the Aggregate
Consideration.
(b) Payment of Sales Bonus. (I) Change in Control--No Post-Closing
Adjustment. In the event that the transaction resulting in a Change in Control
does not include any provisions either (A) for an earn-out with respect to which
a part of the Aggregate Consideration will be paid to the Sellers either in full
or in part in one or more installments after the Change in Control or any
similar deferral of the payment of the Aggregate Consideration or (B) that would
potentially require the Sellers to reimburse any portion of the Sale Price to
the purchaser or require the purchaser to pay to the Sellers any amount in
addition to the Aggregate Consideration, as a result of a post-closing
adjustment or any other reason, after the Change in Control (either (A) or (B),
a "Post-Closing Adjustment"), the Company shall pay to you the Sale Bonus within
five days following the date of such Change in Control; provided, however, that
in no event shall the Sale Bonus be payable to you until the full amount of the
Aggregate Consideration has been paid to the Sellers.
(ii) Change in Control--Post-Closing Adjustment. In the event that
the Change in Control transaction includes provisions for any Post-Closing
Adjustment, the Company shall pay the Sale Bonus according to the terms of this
Section 4(b)(ii).
(A) In the event that the Change in Control transaction includes a
Post-Closing Adjustment described in Section 4(b)(I)(A) above, the Company
shall pay you a portion of the Sale Bonus within five days after the date
of such Change in Control equal to 0.0043 multiplied by the portion of the
Aggregate Consideration paid to the Sellers on or about the date of the
Change in Control. Thereafter, within five days after any additional
portion of the Aggregate Consideration is paid to the Sellers, the Company
shall pay you a portion of the Aggregate Consideration multiplied by
0.0043.
(B) In the event that the Change in Control transaction is a
Post-Closing Adjustment described in Section 4(b)(I)(B) that would
potentially require the Sellers to reimburse any portion of the Aggregate
Consideration to the purchaser after the Change in Control, within five
days after the date of such Change in Control, the Company shall pay you a
portion of the Sale Bonus determined in good faith by the Board
immediately prior to the consummation of the Change in Control, less an
amount that shall take into account the potential adjustment to the Sales
Price (the "Withheld Amount"). As soon as practicable after the Sellers
know with certainty the portion, if any, of the Sale Price that the
Sellers must reimburse to the purchaser and the Sellers make such
reimbursement, if any, the Company shall pay to you a prorated portion of
3
<PAGE>
the Withheld Amount corresponding to the portion of the maximum potential
amount that Sellers may have been required to reimburse to the purchaser
less the amount actually reimbursed.
(C) In the event that the Change in Control transaction is a
Post-Closing Adjustment described in Section 4(b)(I)(B) that would
potentially require the purchaser to pay to the Sellers any amount in
addition to the Sale Price after the Change in Control, within five days
after the date of such Change in Control, the Company shall pay you the
Sale Bonus. Thereafter, within five days after the purchaser knows with
certainty the additional amount that such purchaser must pay to the
Sellers, if any, and the purchaser makes such payment to the Sellers, the
Company shall pay to you an additional amount determined in good faith by
the Board that shall take into account the additional payment made by the
purchaser to the Sellers.
(c) Determination of the Board Final. The determination of whether a
Triggering Event or Change in Control has occurred, the amount of the Aggregate
Consideration and the amount of any Sale Bonus shall be made in good faith by
the Board (unless otherwise required by applicable law) and, absent manifest
error, shall be final and binding on you, the Company Group and all other
interested parties.
(d) Single Sales Bonus. The parties hereto acknowledge and agree
that you shall be entitled to receive only one Sale Bonus under this Letter
Agreement which shall become payable in connection with the first Triggering
Event that occurs during the Term and that in the event any additional
Triggering Event occurs during the Term, you will not be entitled to any Sale
Bonus as a consequence thereof.
4
<PAGE>
5. Effect of Termination of Employment.
(a) Involuntary Termination. In the event of your Involuntary
Termination (as defined in the Employment Agreement) prior to the Payment Date,
you shall be entitled to receive the Retention Bonus in accordance with the
terms of Section 3, as if your employment had continued until such Payment Date.
In the event of your Involuntary Termination on or after August 1, 2000 and
prior to a Triggering Event, you shall remain entitled to receive the Sale Bonus
in the event of a subsequent Triggering Event and a corresponding Change in
Control in the same manner as if your employment with the Company had continued
through the end of the Term.
(b) Other Termination. In the event that your employment terminates
for any reason other than an Involuntary Termination prior to the Payment Date,
you shall forfeit your right to the Retention Bonus in its entirety. Similarly,
in the event that your employment terminates for any reason other than an
Involuntary Termination at any time during the Term, you shall forfeit any right
you may have to receive the Sale Bonus.
6. Notice. For the purpose of this Letter Agreement, notices and all
other communications provided for in this Letter Agreement shall be in writing
and shall be deemed to have been duly given when delivered by hand, sent by
telecopier or mailed by United States registered mail, return receipt requested,
postage prepaid, addressed to the Chief Executive Officer, Pathmark Stores,
Inc., 200 Milik Street, Carteret, New Jersey 07008, telecopier: (732) 499-3460,
with a copy to the General Counsel of the Company, or to you at the address set
forth on the first page of this Letter Agreement or to such other address as
either party may have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon receipt.
7. Reduction of Payments if Reduction Would Result in Greater
After-Tax Amount. Notwithstanding anything herein to the contrary, if the
payment of the Retention Bonus or the Sale Bonus (together, the "Payments")
constitute a "parachute payment" (as defined in Section 280G(b)(2) of the
Internal Revenue Code of 1986, as amended (the "Code")), and the net after-tax
amount of the parachute payment is less than the net after-tax amount if the
aggregate Payments to be made to you were three times your "base amount" (as
defined in Section 280G(b)(3) of the Code), less $1.00, then the aggregate of
the amounts of the Sale Bonus and/or Retention Bonus constituting the parachute
payment shall be reduced to an amount that will equal three times your base
amount, less $1.00.
8. Miscellaneous.
(a) No Rights to Continued Employment. Neither this Letter Agreement
nor any of the rights or benefits evidenced hereby shall confer upon you any
right to continuance of employment by the Company or interfere in any way with
the right of the Company to terminate your employment, subject to the provisions
of Section 5 above, for any reason, with or without Cause.
(b) Amendments, Waivers. No provision of this Letter Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing by the parties hereto. No waiver by either party hereto
at any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Letter Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time.
(c) Counterparts. This Letter Agreement may be executed in
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
5
<PAGE>
(d) Withholding. Amounts paid to you hereunder shall be subject to
all applicable federal, state and local wage withholdings.
(e) Headings. The headings contained in this Letter Agreement are
intended solely for convenience of reference and shall not affect the rights of
the parties to this Letter Agreement.
(f) Stockholder Approval. This Letter Agreement shall become
effective only if it is approved by a majority of seventy-five percent of the
stockholders of Holdings, Supermarkets General Holdings Corporation, PTK
Holdings, Inc. and the Company within one-hundred and eighty days after date
first shown above. In the event that such stockholders do not approve this
Agreement on or before the one-hundred and eightieth day after the date of this
Letter Agreement, it shall automatically lapse and become void.
(g) Governing Law. The validity, interpretation, construction and
performance of this Letter Agreement shall be governed by the laws of the State
of New Jersey applicable to contracts entered into and performed in such state.
If this Letter Agreement sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy of this
letter, which will then constitute our agreement on this subject.
Sincerely,
PATHMARK STORES, INC.
By /s/ Frank Vitrano
--------------------------------------
Name: Frank Vitrano
Title: Executive Vice President
Agreed to as of this 15th
day of March, 2000.
/s/ James Donald
- -----------------------------------
James Donald
6
Execution Copy
Pathmark Stores, Inc.
February 1, 2000
Eileen Scott
c/o Pathmark Stores, Inc.
200 Milik Street
Carteret, New Jersey 07008
Sale and Retention Bonus Agreement
Dear Eileen:
The following sets forth the agreement between you and Pathmark
Stores, Inc., a corporation organized under the laws of Delaware (the
"Company"), regarding the terms of the sale bonus (the "Sale Bonus") and the
retention bonus (the "Retention Bonus") that you may be eligible to receive in
accordance with the terms and conditions set forth below. This letter agreement
(the "Letter Agreement") is in addition to, and not in substitution for, any
other agreements between or among you and the Company Group (as defined below),
including without limitation the employment agreement between you and the
Company, dated February 1, 1999 (the "Employment Agreement"), and the Retention
Bonus and the Sale Bonus are in addition to, and not in substitution for, any
other pay or benefits to which you are eligible to earn from the Company Group.
1. Definitions. For purposes of this Letter Agreement, the following
capitalized words that are not otherwise defined in the text of the Letter
Agreement shall have the meanings set forth below:
"Aggregate Consideration" shall mean an amount equal to the sum of
the aggregate fair market value of any securities issued and any other
non-cash consideration delivered, and any cash consideration paid to the
Company Group or its security holders in connection with a Change in
Control, plus the amount of all indebtedness of the Company Group which is
assumed or acquired by any Purchaser in connection with a Change in
Control or retired or defeased in connection with such Change in Control.
The fair market value of any securities issued and any other non-cash
consideration delivered in connection with a Change in Control will be the
value determined in good faith by the Board.
"Beneficial Owner" shall have the meaning given to such term in Rule
13D-3 under the Securities and Exchange Act of 1934, as amended.
"Board" shall mean the Board of Directors of Holdings.
"Change in Control" shall mean the consummation of a Triggering
Event.
"Company" shall mean Pathmark Stores, Inc.
"Company Group" shall mean, individually and as a group, Holdings,
the Company, PTK Holdings, Inc. and Supermarkets General Holdings
Corporation, and any successors thereto.
"Effective Date" shall mean February 1, 2000.
1
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"Holdings" shall mean SMG-II Holdings Corporation, a corporation
organized under the laws of the State of Delaware.
"Independent Third Party" shall mean any entity other than a member
of the Company Group or any of the Stockholders or any entity controlled
by or under common control with any of the Stockholders or the Company
Group.
"Payment Date" shall mean July 31, 2000.
"Purchaser" shall mean any Independent Third Party that engages in a
Change in Control.
"Sellers" shall mean selling equity holders, which holders may be at
the level of any of the Company Group.
A "Triggering Event" shall be deemed to have occurred on the date
that any of he following shall have occurred:
(A) any member of the Company Group enters into a binding agreement
with one or more Independent Third Parties to directly acquire, in
exchange for cash, stock, claims, or property, fifty percent or more of
the aggregate equity securities of Holdings for which the MLCP Investors
and the Equitable Investors (as defined in the Amended and Restated
Stockholders Agreement among Holdings and its Stockholders, dated January
22, 1998) (together, the "Stockholders") are Beneficial Owners as of the
Effective Date;
(B) any member of the Company Group enters into a binding agreement
providing for a merger, consolidation, reorganization or other business
combination upon consummation of which one or more Independent Third
Parties would own or control fifty percent or more of either (i) the
aggregate voting securities of the Company Group, (ii) the aggregate
economic interest of the outstanding equity securities of the Company
Group or (iii) the aggregate value of the assets of the Company;
(C) any member of the Company Group enters into transaction upon
consummation of which an Independent Third Party would acquire in exchange
for cash, stock, claims or property fifty percent or more of either (I)
the aggregate equity securities of the Company, PTK Holdings, Inc. or
Supermarkets General Holdings Corporation, or (II) the Company's assets;
or
(D) any member of the Company Group files a plan of reorganization
or motion for relief in a case under title 11 of the United States Code
for the purpose of implementing an agreement or transaction of the type
described in any of the preceding clauses (A), (B) or (C); provided,
however, that a Triggering Event shall not include any change of ownership
resulting from a public offering of any of the securities of any of the
Company Group pursuant to an effective registration statement under the
Securities Act of 1933, as amended.
2. Term. The term of this Letter Agreement (the "Term") shall
commence on the Effective Date and shall continue until the later of (a) first
anniversary of the Effective Date if a Triggering Event does not occur prior to
such anniversary or (b) in the event that a Triggering Event occurs prior to the
first anniversary of the Effective Date, either the date of a Change in Control
that occurs subsequent to a corresponding Triggering Event or the date the
Triggering Event is definitively canceled or otherwise becomes void.
2
<PAGE>
3. Retention Bonus.
In consideration of, and subject to, your continued employment with
the Company during the period beginning on the Effective Date and ending on the
Payment Date, the Company will pay you a Retention Bonus equal to the annual
rate of your base salary, as in effect on the Payment Date. The Company will pay
the Retention Bonus to you in a lump sum cash amount as soon as practicable
after the Payment Date but in no event more than thirty days thereafter.
4. Sale Bonus.
(a) General Terms. You will become entitled to receive the Sale
Bonus in the event that (I) a Triggering Event occurs during the Term, and (ii)
a Change in Control contemplated by such Triggering Event occurs thereafter. The
amount of the Sale Bonus shall be equal to 0.0010 multiplied by the Aggregate
Consideration.
(b) Payment of Sales Bonus. (I) Change in Control--No Post-Closing
Adjustment. In the event that the transaction resulting in a Change in Control
does not include any provisions either (A) for an earn-out with respect to which
a part of the Aggregate Consideration will be paid to the Sellers either in full
or in part in one or more installments after the Change in Control or any
similar deferral of the payment of the Aggregate Consideration or (B) that would
potentially require the Sellers to reimburse any portion of the Sale Price to
the purchaser or require the purchaser to pay to the Sellers any amount in
addition to the Aggregate Consideration, as a result of a post-closing
adjustment or any other reason, after the Change in Control (either (A) or (B),
a "Post-Closing Adjustment"), the Company shall pay to you the Sale Bonus within
five days following the date of such Change in Control; provided, however, that
in no event shall the Sale Bonus be payable to you until the full amount of the
Aggregate Consideration has been paid to the Sellers.
(ii) Change in Control--Post-Closing Adjustment. In the event that
the Change in Control transaction includes provisions for any Post-Closing
Adjustment, the Company shall pay the Sale Bonus according to the terms of this
Section 4(b)(ii).
(A) In the event that the Change in Control transaction includes a
Post-Closing Adjustment described in Section 4(b)(I)(A) above, the Company
shall pay you a portion of the Sale Bonus within five days after the date
of such Change in Control equal to 0.0010 multiplied by the portion of the
Aggregate Consideration paid to the Sellers on or about the date of the
Change in Control. Thereafter, within five days after any additional
portion of the Aggregate Consideration is paid to the Sellers, the Company
shall pay you a portion of the Aggregate Consideration multiplied by
0.0010.
(B) In the event that the Change in Control transaction is a
Post-Closing Adjustment described in Section 4(b)(I)(B) that would
potentially require the Sellers to reimburse any portion of the Aggregate
Consideration to the purchaser after the Change in Control, within five
days after the date of such Change in Control, the Company shall pay you a
portion of the Sale Bonus determined in good faith by the Board
immediately prior to the consummation of the Change in Control, less an
amount that shall take into account the potential adjustment to the Sales
Price (the "Withheld Amount"). As soon as practicable after the Sellers
know with certainty the portion, if any, of the Sale Price that the
Sellers must reimburse to the purchaser and the Sellers make such
reimbursement, if any, the Company shall pay to you a prorated portion of
the Withheld Amount corresponding to the portion of the maximum potential
amount that Sellers may have been required to reimburse to the purchaser
less the amount actually reimbursed.
3
<PAGE>
(C) In the event that the Change in Control transaction is a
Post-Closing Adjustment described in Section 4(b)(I)(B) that would
potentially require the purchaser to pay to the Sellers any amount in
addition to the Sale Price after the Change in Control, within five days
after the date of such Change in Control, the Company shall pay you the
Sale Bonus. Thereafter, within five days after the purchaser knows with
certainty the additional amount that such purchaser must pay to the
Sellers, if any, and the purchaser makes such payment to the Sellers, the
Company shall pay to you an additional amount determined in good faith by
the Board that shall take into account the additional payment made by the
purchaser to the Sellers.
(c) Determination of the Board Final. The determination of whether a
Triggering Event or Change in Control has occurred, the amount of the Aggregate
Consideration and the amount of any Sale Bonus shall be made in good faith by
the Board (unless otherwise required by applicable law) and, absent manifest
error, shall be final and binding on you, the Company Group and all other
interested parties.
(d) Single Sales Bonus. The parties hereto acknowledge and agree
that you shall be entitled to receive only one Sale Bonus under this Letter
Agreement which shall become payable in connection with the first Triggering
Event that occurs during the Term and that in the event any additional
Triggering Event occurs during the Term, you will not be entitled to any Sale
Bonus as a consequence thereof.
5. Effect of Termination of Employment.
(a) Involuntary Termination. In the event of your Involuntary
Termination (as defined in the Employment Agreement) prior to the Payment Date,
you shall be entitled to receive the Retention Bonus in accordance with the
terms of Section 3, as if your employment had continued until such Payment Date.
In the event of your Involuntary Termination on or after August 1, 2000 and
prior to a Triggering Event, you shall remain entitled to receive the Sale Bonus
in the event of a subsequent Triggering Event and a corresponding Change in
Control in the same manner as if your employment with the Company had continued
through the end of the Term.
(b) Other Termination. In the event that your employment terminates
for any reason other than an Involuntary Termination prior to the Payment Date,
you shall forfeit your right to the Retention Bonus in its entirety. Similarly,
in the event that your employment terminates for any reason other than an
Involuntary Termination at any time during the Term, you shall forfeit any right
you may have to receive the Sale Bonus.
6. Notice. For the purpose of this Letter Agreement, notices and all
other communications provided for in this Letter Agreement shall be in writing
and shall be deemed to have been duly given when delivered by hand, sent by
telecopier or mailed by United States registered mail, return receipt requested,
postage prepaid, addressed to the Chief Executive Officer, Pathmark Stores,
Inc., 200 Milik Street, Carteret, New Jersey 07008, telecopier: (732) 499-3460,
with a copy to the General Counsel of the Company, or to you at the address set
forth on the first page of this Letter Agreement or to such other address as
either party may have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon receipt.
7. Reduction of Payments if Reduction Would Result in Greater
After-Tax Amount. Notwithstanding anything herein to the contrary, if the
payment of the Retention Bonus or the Sale Bonus (together, the "Payments")
constitute a "parachute payment" (as defined in Section 280G(b)(2) of the
Internal Revenue Code of 1986, as amended (the "Code")), and the net after-tax
amount of the parachute payment is less than the net after-tax amount if the
aggregate Payments to be made to you were three times your "base amount"
4
<PAGE>
(as defined in Section 280G(b)(3) of the Code), less $1.00, then the aggregate
of the amounts of the Sale Bonus and/or Retention Bonus constituting the
parachute payment shall be reduced to an amount that will equal three times your
base amount, less $1.00.
8. Miscellaneous.
(a) No Rights to Continued Employment. Neither this Letter Agreement
nor any of the rights or benefits evidenced hereby shall confer upon you any
right to continuance of employment by the Company or interfere in any way with
the right of the Company to terminate your employment, subject to the provisions
of Section 5 above, for any reason, with or without Cause.
(b) Amendments, Waivers. No provision of this Letter Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing by the parties hereto. No waiver by either party hereto
at any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Letter Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time.
(c) Counterparts. This Letter Agreement may be executed in
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
(d) Withholding. Amounts paid to you hereunder shall be subject to
all applicable federal, state and local wage withholdings.
(e) Headings. The headings contained in this Letter Agreement are
intended solely for convenience of reference and shall not affect the rights of
the parties to this Letter Agreement.
(f) Stockholder Approval. This Letter Agreement shall become
effective only if it is approved by a majority of seventy-five percent of the
stockholders of Holdings, Supermarkets General Holdings Corporation, PTK
Holdings, Inc. and the Company within one-hundred and eighty days after date
first shown above. In the event that such stockholders do not approve this
Agreement on or before the one-hundred and eightieth day after the date of this
Letter Agreement, it shall automatically lapse and become void.
(g) Governing Law. The validity, interpretation, construction and
performance of this Letter Agreement shall be governed by the laws of the State
of New Jersey applicable to contracts entered into and performed in such state.
If this Letter Agreement sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy of this
letter, which will then constitute our agreement on this subject.
Sincerely,
PATHMARK STORES, INC.
By /s/ James L. Donald
--------------------------------------
Name: James L. Donald
Title: President
5
<PAGE>
Agreed to as of this 11th day of April, 2000.
/s/ Eileen R. Scott
- -----------------------------------
Eileen Scott
6
Execution Copy
Pathmark Stores, Inc.
February 1, 2000
John Sheehan
c/o Pathmark Stores, Inc.
200 Milik Street
Carteret, New Jersey 07008
Sale and Retention Bonus Agreement
Dear John:
The following sets forth the agreement between you and Pathmark
Stores, Inc., a corporation organized under the laws of Delaware (the
"Company"), regarding the terms of the sale bonus (the "Sale Bonus") and the
retention bonus (the "Retention Bonus") that you may be eligible to receive in
accordance with the terms and conditions set forth below. This letter agreement
(the "Letter Agreement") is in addition to, and not in substitution for, any
other agreements between or among you and the Company Group (as defined below),
including without limitation the employment agreement between you and the
Company, dated February 1, 1999 (the "Employment Agreement"), and the Retention
Bonus and the Sale Bonus are in addition to, and not in substitution for, any
other pay or benefits to which you are eligible to earn from the Company Group.
1. Definitions. For purposes of this Letter Agreement, the following
capitalized words that are not otherwise defined in the text of the Letter
Agreement shall have the meanings set forth below:
"Aggregate Consideration" shall mean an amount equal to the sum of
the aggregate fair market value of any securities issued and any other
non-cash consideration delivered, and any cash consideration paid to the
Company Group or its security holders in connection with a Change in
Control, plus the amount of all indebtedness of the Company Group which is
assumed or acquired by any Purchaser in connection with a Change in
Control or retired or defeased in connection with such Change in Control.
The fair market value of any securities issued and any other non-cash
consideration delivered in connection with a Change in Control will be the
value determined in good faith by the Board.
"Beneficial Owner" shall have the meaning given to such term in Rule
13D-3 under the Securities and Exchange Act of 1934, as amended.
"Board" shall mean the Board of Directors of Holdings.
"Change in Control" shall mean the consummation of a Triggering
Event.
"Company" shall mean Pathmark Stores, Inc.
"Company Group" shall mean, individually and as a group, Holdings,
the Company, PTK Holdings, Inc. and Supermarkets General Holdings
Corporation, and any successors thereto.
"Effective Date" shall mean February 1, 2000.
1
<PAGE>
"Holdings" shall mean SMG-II Holdings Corporation, a corporation
organized under the laws of the State of Delaware.
"Independent Third Party" shall mean any entity other than a member
of the Company Group or any of the Stockholders or any entity controlled
by or under common control with any of the Stockholders or the Company
Group.
"Payment Date" shall mean July 31, 2000.
"Purchaser" shall mean any Independent Third Party that engages in a
Change in Control.
"Sellers" shall mean selling equity holders, which holders may be at
the level of any of the Company Group.
A "Triggering Event" shall be deemed to have occurred on the date
that any of he following shall have occurred:
(A) any member of the Company Group enters into a binding agreement
with one or more Independent Third Parties to directly acquire, in
exchange for cash, stock, claims, or property, fifty percent or more of
the aggregate equity securities of Holdings for which the MLCP Investors
and the Equitable Investors (as defined in the Amended and Restated
Stockholders Agreement among Holdings and its Stockholders, dated January
22, 1998) (together, the "Stockholders") are Beneficial Owners as of the
Effective Date;
(B) any member of the Company Group enters into a binding agreement
providing for a merger, consolidation, reorganization or other business
combination upon consummation of which one or more Independent Third
Parties would own or control fifty percent or more of either (i) the
aggregate voting securities of the Company Group, (ii) the aggregate
economic interest of the outstanding equity securities of the Company
Group or (iii) the aggregate value of the assets of the Company;
(C) any member of the Company Group enters into transaction upon
consummation of which an Independent Third Party would acquire in exchange
for cash, stock, claims or property fifty percent or more of either (I)
the aggregate equity securities of the Company, PTK Holdings, Inc. or
Supermarkets General Holdings Corporation, or (II) the Company's assets;
or
(D) any member of the Company Group files a plan of reorganization
or motion for relief in a case under title 11 of the United States Code
for the purpose of implementing an agreement or transaction of the type
described in any of the preceding clauses (A), (B) or (C); provided,
however, that a Triggering Event shall not include any change of ownership
resulting from a public offering of any of the securities of any of the
Company Group pursuant to an effective registration statement under the
Securities Act of 1933, as amended.
2. Term. The term of this Letter Agreement (the "Term") shall
commence on the Effective Date and shall continue until the later of (a) first
anniversary of the Effective Date if a Triggering Event does not occur prior to
such anniversary or (b) in the event that a Triggering Event occurs prior to the
first anniversary of the Effective Date, either the date of a Change in Control
that occurs subsequent to a corresponding Triggering Event or the date the
Triggering Event is definitively canceled or otherwise becomes void.
2
<PAGE>
3. Retention Bonus.
In consideration of, and subject to, your continued employment with
the Company during the period beginning on the Effective Date and ending on the
Payment Date, the Company will pay you a Retention Bonus equal to the annual
rate of your base salary, as in effect on the Payment Date. The Company will pay
the Retention Bonus to you in a lump sum cash amount as soon as practicable
after the Payment Date but in no event more than thirty days thereafter.
4. Sale Bonus.
(a) General Terms. You will become entitled to receive the Sale
Bonus in the event that (I) a Triggering Event occurs during the Term, and (ii)
a Change in Control contemplated by such Triggering Event occurs thereafter. The
amount of the Sale Bonus shall be equal to 0.0010 multiplied by the Aggregate
Consideration.
(b) Payment of Sales Bonus. (I) Change in Control--No Post-Closing
Adjustment. In the event that the transaction resulting in a Change in Control
does not include any provisions either (A) for an earn-out with respect to which
a part of the Aggregate Consideration will be paid to the Sellers either in full
or in part in one or more installments after the Change in Control or any
similar deferral of the payment of the Aggregate Consideration or (B) that would
potentially require the Sellers to reimburse any portion of the Sale Price to
the purchaser or require the purchaser to pay to the Sellers any amount in
addition to the Aggregate Consideration, as a result of a post-closing
adjustment or any other reason, after the Change in Control (either (A) or (B),
a "Post-Closing Adjustment"), the Company shall pay to you the Sale Bonus within
five days following the date of such Change in Control; provided, however, that
in no event shall the Sale Bonus be payable to you until the full amount of the
Aggregate Consideration has been paid to the Sellers.
(ii) Change in Control--Post-Closing Adjustment. In the event that
the Change in Control transaction includes provisions for any Post-Closing
Adjustment, the Company shall pay the Sale Bonus according to the terms of this
Section 4(b)(ii).
(A) In the event that the Change in Control transaction includes a
Post-Closing Adjustment described in Section 4(b)(I)(A) above, the Company
shall pay you a portion of the Sale Bonus within five days after the date
of such Change in Control equal to 0.0010 multiplied by the portion of the
Aggregate Consideration paid to the Sellers on or about the date of the
Change in Control. Thereafter, within five days after any additional
portion of the Aggregate Consideration is paid to the Sellers, the Company
shall pay you a portion of the Aggregate Consideration multiplied by
0.0010.
(B) In the event that the Change in Control transaction is a
Post-Closing Adjustment described in Section 4(b)(I)(B) that would
potentially require the Sellers to reimburse any portion of the Aggregate
Consideration to the purchaser after the Change in Control, within five
days after the date of such Change in Control, the Company shall pay you a
portion of the Sale Bonus determined in good faith by the Board
immediately prior to the consummation of the Change in Control, less an
amount that shall take into account the potential adjustment to the Sales
Price (the "Withheld Amount"). As soon as practicable after the Sellers
know with certainty the portion, if any, of the Sale Price that the
Sellers must reimburse to the purchaser and the Sellers make such
reimbursement, if any, the Company shall pay to you a prorated portion of
the Withheld Amount corresponding to the portion of the maximum potential
amount that Sellers may have been required to reimburse to the purchaser
less the amount actually reimbursed.
3
<PAGE>
(C) In the event that the Change in Control transaction is a
Post-Closing Adjustment described in Section 4(b)(I)(B) that would
potentially require the purchaser to pay to the Sellers any amount in
addition to the Sale Price after the Change in Control, within five days
after the date of such Change in Control, the Company shall pay you the
Sale Bonus. Thereafter, within five days after the purchaser knows with
certainty the additional amount that such purchaser must pay to the
Sellers, if any, and the purchaser makes such payment to the Sellers, the
Company shall pay to you an additional amount determined in good faith by
the Board that shall take into account the additional payment made by the
purchaser to the Sellers.
(c) Determination of the Board Final. The determination of whether a
Triggering Event or Change in Control has occurred, the amount of the Aggregate
Consideration and the amount of any Sale Bonus shall be made in good faith by
the Board (unless otherwise required by applicable law) and, absent manifest
error, shall be final and binding on you, the Company Group and all other
interested parties.
(d) Single Sales Bonus. The parties hereto acknowledge and agree
that you shall be entitled to receive only one Sale Bonus under this Letter
Agreement which shall become payable in connection with the first Triggering
Event that occurs during the Term and that in the event any additional
Triggering Event occurs during the Term, you will not be entitled to any Sale
Bonus as a consequence thereof.
5. Effect of Termination of Employment.
(a) Involuntary Termination. In the event of your Involuntary
Termination (as defined in the Employment Agreement) prior to the Payment Date,
you shall be entitled to receive the Retention Bonus in accordance with the
terms of Section 3, as if your employment had continued until such Payment Date.
In the event of your Involuntary Termination on or after August 1, 2000 and
prior to a Triggering Event, you shall remain entitled to receive the Sale Bonus
in the event of a subsequent Triggering Event and a corresponding Change in
Control in the same manner as if your employment with the Company had continued
through the end of the Term.
(b) Other Termination. In the event that your employment terminates
for any reason other than an Involuntary Termination prior to the Payment Date,
you shall forfeit your right to the Retention Bonus in its entirety. Similarly,
in the event that your employment terminates for any reason other than an
Involuntary Termination at any time during the Term, you shall forfeit any right
you may have to receive the Sale Bonus.
6. Notice. For the purpose of this Letter Agreement, notices and all
other communications provided for in this Letter Agreement shall be in writing
and shall be deemed to have been duly given when delivered by hand, sent by
telecopier or mailed by United States registered mail, return receipt requested,
postage prepaid, addressed to the Chief Executive Officer, Pathmark Stores,
Inc., 200 Milik Street, Carteret, New Jersey 07008, telecopier: (732) 499-3460,
with a copy to the General Counsel of the Company, or to you at the address set
forth on the first page of this Letter Agreement or to such other address as
either party may have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon receipt.
7. Reduction of Payments if Reduction Would Result in Greater
After-Tax Amount. Notwithstanding anything herein to the contrary, if the
payment of the Retention Bonus or the Sale Bonus (together, the "Payments")
constitute a "parachute payment" (as defined in Section 280G(b)(2) of the
Internal Revenue Code of 1986, as amended (the "Code")), and the net after-tax
amount of the parachute payment is less than the net after-tax amount if the
aggregate Payments to be made to you were three times your "base amount"
4
<PAGE>
(as defined in Section 280G(b)(3) of the Code), less $1.00, then the aggregate
of the amounts of the Sale Bonus and/or Retention Bonus constituting the
parachute payment shall be reduced to an amount that will equal three times your
base amount, less $1.00.
8. Miscellaneous.
(a) No Rights to Continued Employment. Neither this Letter Agreement
nor any of the rights or benefits evidenced hereby shall confer upon you any
right to continuance of employment by the Company or interfere in any way with
the right of the Company to terminate your employment, subject to the provisions
of Section 5 above, for any reason, with or without Cause.
(b) Amendments, Waivers. No provision of this Letter Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing by the parties hereto. No waiver by either party hereto
at any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Letter Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time.
(c) Counterparts. This Letter Agreement may be executed in
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
(d) Withholding. Amounts paid to you hereunder shall be subject to
all applicable federal, state and local wage withholdings.
(e) Headings. The headings contained in this Letter Agreement are
intended solely for convenience of reference and shall not affect the rights of
the parties to this Letter Agreement.
(f) Stockholder Approval. This Letter Agreement shall become
effective only if it is approved by a majority of seventy-five percent of the
stockholders of Holdings, Supermarkets General Holdings Corporation, PTK
Holdings, Inc. and the Company within one-hundred and eighty days after date
first shown above. In the event that such stockholders do not approve this
Agreement on or before the one-hundred and eightieth day after the date of this
Letter Agreement, it shall automatically lapse and become void.
(g) Governing Law. The validity, interpretation, construction and
performance of this Letter Agreement shall be governed by the laws of the State
of New Jersey applicable to contracts entered into and performed in such state.
If this Letter Agreement sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy of this
letter, which will then constitute our agreement on this subject.
Sincerely,
PATHMARK STORES, INC.
By /s/ James L. Donald
--------------------------------------
Name: James L. Donald
Title: President
5
<PAGE>
Agreed to as of this 5th day of April, 2000.
/s/ John Sheehan
- -----------------------------------
John Sheehan
6
Execution Copy
Pathmark Stores, Inc.
February 1, 2000
Frank Vitrano
c/o Pathmark Stores, Inc.
200 Milik Street
Carteret, New Jersey 07008
Sale and Retention Bonus Agreement
Dear Frank:
The following sets forth the agreement between you and Pathmark
Stores, Inc., a corporation organized under the laws of Delaware (the
"Company"), regarding the terms of the sale bonus (the "Sale Bonus") and the
retention bonus (the "Retention Bonus") that you may be eligible to receive in
accordance with the terms and conditions set forth below. This letter agreement
(the "Letter Agreement") is in addition to, and not in substitution for, any
other agreements between or among you and the Company Group (as defined below),
including without limitation the employment agreement between you and the
Company, dated February 1, 1999 (the "Employment Agreement"), and the Retention
Bonus and the Sale Bonus are in addition to, and not in substitution for, any
other pay or benefits to which you are eligible to earn from the Company Group.
1. Definitions. For purposes of this Letter Agreement, the following
capitalized words that are not otherwise defined in the text of the Letter
Agreement shall have the meanings set forth below:
"Aggregate Consideration" shall mean an amount equal to the sum of
the aggregate fair market value of any securities issued and any other
non-cash consideration delivered, and any cash consideration paid to the
Company Group or its security holders in connection with a Change in
Control, plus the amount of all indebtedness of the Company Group which is
assumed or acquired by any Purchaser in connection with a Change in
Control or retired or defeased in connection with such Change in Control.
The fair market value of any securities issued and any other non-cash
consideration delivered in connection with a Change in Control will be the
value determined in good faith by the Board.
"Beneficial Owner" shall have the meaning given to such term in Rule
13D-3 under the Securities and Exchange Act of 1934, as amended.
"Board" shall mean the Board of Directors of Holdings.
"Change in Control" shall mean the consummation of a Triggering
Event.
"Company" shall mean Pathmark Stores, Inc.
"Company Group" shall mean, individually and as a group, Holdings,
the Company, PTK Holdings, Inc. and Supermarkets General Holdings
Corporation, and any successors thereto.
"Effective Date" shall mean February 1, 2000.
1
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"Holdings" shall mean SMG-II Holdings Corporation, a corporation
organized under the laws of the State of Delaware.
"Independent Third Party" shall mean any entity other than a member
of the Company Group or any of the Stockholders or any entity controlled
by or under common control with any of the Stockholders or the Company
Group.
"Payment Date" shall mean July 31, 2000.
"Purchaser" shall mean any Independent Third Party that engages in a
Change in Control.
"Sellers" shall mean selling equity holders, which holders may be at
the level of any of the Company Group.
A "Triggering Event" shall be deemed to have occurred on the date
that any of he following shall have occurred:
(A) any member of the Company Group enters into a binding agreement
with one or more Independent Third Parties to directly acquire, in
exchange for cash, stock, claims, or property, fifty percent or more of
the aggregate equity securities of Holdings for which the MLCP Investors
and the Equitable Investors (as defined in the Amended and Restated
Stockholders Agreement among Holdings and its Stockholders, dated January
22, 1998) (together, the "Stockholders") are Beneficial Owners as of the
Effective Date;
(B) any member of the Company Group enters into a binding agreement
providing for a merger, consolidation, reorganization or other business
combination upon consummation of which one or more Independent Third
Parties would own or control fifty percent or more of either (i) the
aggregate voting securities of the Company Group, (ii) the aggregate
economic interest of the outstanding equity securities of the Company
Group or (iii) the aggregate value of the assets of the Company;
(C) any member of the Company Group enters into transaction upon
consummation of which an Independent Third Party would acquire in exchange
for cash, stock, claims or property fifty percent or more of either (I)
the aggregate equity securities of the Company, PTK Holdings, Inc. or
Supermarkets General Holdings Corporation, or (II) the Company's assets;
or
(D) any member of the Company Group files a plan of reorganization
or motion for relief in a case under title 11 of the United States Code
for the purpose of implementing an agreement or transaction of the type
described in any of the preceding clauses (A), (B) or (C); provided,
however, that a Triggering Event shall not include any change of ownership
resulting from a public offering of any of the securities of any of the
Company Group pursuant to an effective registration statement under the
Securities Act of 1933, as amended.
2. Term. The term of this Letter Agreement (the "Term") shall
commence on the Effective Date and shall continue until the later of (a) first
anniversary of the Effective Date if a Triggering Event does not occur prior to
such anniversary or (b) in the event that a Triggering Event occurs prior to the
first anniversary of the Effective Date, either the date of a Change in Control
that occurs subsequent to a corresponding Triggering Event or the date the
Triggering Event is definitively canceled or otherwise becomes void.
2
<PAGE>
3. Retention Bonus.
In consideration of, and subject to, your continued employment with
the Company during the period beginning on the Effective Date and ending on the
Payment Date, the Company will pay you a Retention Bonus equal to the annual
rate of your base salary, as in effect on the Payment Date. The Company will pay
the Retention Bonus to you in a lump sum cash amount as soon as practicable
after the Payment Date but in no event more than thirty days thereafter.
4. Sale Bonus.
(a) General Terms. You will become entitled to receive the Sale
Bonus in the event that (I) a Triggering Event occurs during the Term, and (ii)
a Change in Control contemplated by such Triggering Event occurs thereafter. The
amount of the Sale Bonus shall be equal to 0.0020 multiplied by the Aggregate
Consideration.
(b) Payment of Sales Bonus. (I) Change in Control--No Post-Closing
Adjustment. In the event that the transaction resulting in a Change in Control
does not include any provisions either (A) for an earn-out with respect to which
a part of the Aggregate Consideration will be paid to the Sellers either in full
or in part in one or more installments after the Change in Control or any
similar deferral of the payment of the Aggregate Consideration or (B) that would
potentially require the Sellers to reimburse any portion of the Sale Price to
the purchaser or require the purchaser to pay to the Sellers any amount in
addition to the Aggregate Consideration, as a result of a post-closing
adjustment or any other reason, after the Change in Control (either (A) or (B),
a "Post-Closing Adjustment"), the Company shall pay to you the Sale Bonus within
five days following the date of such Change in Control; provided, however, that
in no event shall the Sale Bonus be payable to you until the full amount of the
Aggregate Consideration has been paid to the Sellers.
(ii) Change in Control--Post-Closing Adjustment. In the event that
the Change in Control transaction includes provisions for any Post-Closing
Adjustment, the Company shall pay the Sale Bonus according to the terms of this
Section 4(b)(ii).
(A) In the event that the Change in Control transaction includes a
Post-Closing Adjustment described in Section 4(b)(I)(A) above, the Company
shall pay you a portion of the Sale Bonus within five days after the date
of such Change in Control equal to 0.0020 multiplied by the portion of the
Aggregate Consideration paid to the Sellers on or about the date of the
Change in Control. Thereafter, within five days after any additional
portion of the Aggregate Consideration is paid to the Sellers, the Company
shall pay you a portion of the Aggregate Consideration multiplied by
0.0020.
(B) In the event that the Change in Control transaction is a
Post-Closing Adjustment described in Section 4(b)(I)(B) that would
potentially require the Sellers to reimburse any portion of the Aggregate
Consideration to the purchaser after the Change in Control, within five
days after the date of such Change in Control, the Company shall pay you a
portion of the Sale Bonus determined in good faith by the Board
immediately prior to the consummation of the Change in Control, less an
amount that shall take into account the potential adjustment to the Sales
Price (the "Withheld Amount"). As soon as practicable after the Sellers
know with certainty the portion, if any, of the Sale Price that the
Sellers must reimburse to the purchaser and the Sellers make such
reimbursement, if any, the Company shall pay to you a prorated portion of
the Withheld Amount corresponding to the portion of the maximum potential
amount that Sellers may have been required to reimburse to the purchaser
less the amount actually reimbursed.
3
<PAGE>
(C) In the event that the Change in Control transaction is a
Post-Closing Adjustment described in Section 4(b)(I)(B) that would
potentially require the purchaser to pay to the Sellers any amount in
addition to the Sale Price after the Change in Control, within five days
after the date of such Change in Control, the Company shall pay you the
Sale Bonus. Thereafter, within five days after the purchaser knows with
certainty the additional amount that such purchaser must pay to the
Sellers, if any, and the purchaser makes such payment to the Sellers, the
Company shall pay to you an additional amount determined in good faith by
the Board that shall take into account the additional payment made by the
purchaser to the Sellers.
(c) Determination of the Board Final. The determination of whether a
Triggering Event or Change in Control has occurred, the amount of the Aggregate
Consideration and the amount of any Sale Bonus shall be made in good faith by
the Board (unless otherwise required by applicable law) and, absent manifest
error, shall be final and binding on you, the Company Group and all other
interested parties.
(d) Single Sales Bonus. The parties hereto acknowledge and agree
that you shall be entitled to receive only one Sale Bonus under this Letter
Agreement which shall become payable in connection with the first Triggering
Event that occurs during the Term and that in the event any additional
Triggering Event occurs during the Term, you will not be entitled to any Sale
Bonus as a consequence thereof.
5. Effect of Termination of Employment.
(a) Involuntary Termination. In the event of your Involuntary
Termination (as defined in the Employment Agreement) prior to the Payment Date,
you shall be entitled to receive the Retention Bonus in accordance with the
terms of Section 3, as if your employment had continued until such Payment Date.
In the event of your Involuntary Termination on or after August 1, 2000 and
prior to a Triggering Event, you shall remain entitled to receive the Sale Bonus
in the event of a subsequent Triggering Event and a corresponding Change in
Control in the same manner as if your employment with the Company had continued
through the end of the Term.
(b) Other Termination. In the event that your employment terminates
for any reason other than an Involuntary Termination prior to the Payment Date,
you shall forfeit your right to the Retention Bonus in its entirety. Similarly,
in the event that your employment terminates for any reason other than an
Involuntary Termination at any time during the Term, you shall forfeit any right
you may have to receive the Sale Bonus.
6. Notice. For the purpose of this Letter Agreement, notices and all
other communications provided for in this Letter Agreement shall be in writing
and shall be deemed to have been duly given when delivered by hand, sent by
telecopier or mailed by United States registered mail, return receipt requested,
postage prepaid, addressed to the Chief Executive Officer, Pathmark Stores,
Inc., 200 Milik Street, Carteret, New Jersey 07008, telecopier: (732) 499-3460,
with a copy to the General Counsel of the Company, or to you at the address set
forth on the first page of this Letter Agreement or to such other address as
either party may have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon receipt.
7. Reduction of Payments if Reduction Would Result in Greater
After-Tax Amount. Notwithstanding anything herein to the contrary, if the
payment of the Retention Bonus or the Sale Bonus (together, the "Payments")
constitute a "parachute payment" (as defined in Section 280G(b)(2) of the
Internal Revenue Code of 1986, as amended (the "Code")), and the net after-tax
amount of the parachute payment is less than the net after-tax amount if the
aggregate Payments to be made to you were three times your "base amount"
4
<PAGE>
(as defined in Section 280G(b)(3) of the Code), less $1.00, then the aggregate
of the amounts of the Sale Bonus and/or Retention Bonus constituting the
parachute payment shall be reduced to an amount that will equal three times your
base amount, less $1.00.
8. Miscellaneous.
(a) No Rights to Continued Employment. Neither this Letter Agreement
nor any of the rights or benefits evidenced hereby shall confer upon you any
right to continuance of employment by the Company or interfere in any way with
the right of the Company to terminate your employment, subject to the provisions
of Section 5 above, for any reason, with or without Cause.
(b) Amendments, Waivers. No provision of this Letter Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing by the parties hereto. No waiver by either party hereto
at any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Letter Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time.
(c) Counterparts. This Letter Agreement may be executed in
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
(d) Withholding. Amounts paid to you hereunder shall be subject to
all applicable federal, state and local wage withholdings.
(e) Headings. The headings contained in this Letter Agreement are
intended solely for convenience of reference and shall not affect the rights of
the parties to this Letter Agreement.
(f) Stockholder Approval. This Letter Agreement shall become
effective only if it is approved by a majority of seventy-five percent of the
stockholders of Holdings, Supermarkets General Holdings Corporation, PTK
Holdings, Inc. and the Company within one-hundred and eighty days after date
first shown above. In the event that such stockholders do not approve this
Agreement on or before the one-hundred and eightieth day after the date of this
Letter Agreement, it shall automatically lapse and become void.
(g) Governing Law. The validity, interpretation, construction and
performance of this Letter Agreement shall be governed by the laws of the State
of New Jersey applicable to contracts entered into and performed in such state.
If this Letter Agreement sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy of this
letter, which will then constitute our agreement on this subject.
Sincerely,
PATHMARK STORES, INC.
By /s/ James L. Donald
--------------------------------------
Name: James L. Donald
Title: President
5
<PAGE>
Agreed to as of this 4th day of February, 2000.
/s/ Frank Vitrano
- -----------------------------------
Frank Vitrano
6
Execution Copy
Pathmark Stores, Inc.
February 1, 2000
Robert Joyce
c/o Pathmark Stores, Inc.
200 Milik Street
Carteret, New Jersey 07008
Sale and Retention Bonus Agreement
Dear Robert:
The following sets forth the agreement between you and Pathmark
Stores, Inc., a corporation organized under the laws of Delaware (the
"Company"), regarding the terms of the sale bonus (the "Sale Bonus") and the
retention bonus (the "Retention Bonus") that you may be eligible to receive in
accordance with the terms and conditions set forth below. This letter agreement
(the "Letter Agreement") is in addition to, and not in substitution for, any
other agreements between or among you and the Company Group (as defined below),
including without limitation the employment agreement between you and the
Company, dated February 1, 1999 (the "Employment Agreement"), and the Retention
Bonus and the Sale Bonus are in addition to, and not in substitution for, any
other pay or benefits to which you are eligible to earn from the Company Group.
1. Definitions. For purposes of this Letter Agreement, the following
capitalized words that are not otherwise defined in the text of the Letter
Agreement shall have the meanings set forth below:
"Aggregate Consideration" shall mean an amount equal to the sum of
the aggregate fair market value of any securities issued and any other
non-cash consideration delivered, and any cash consideration paid to the
Company Group or its security holders in connection with a Change in
Control, plus the amount of all indebtedness of the Company Group which is
assumed or acquired by any Purchaser in connection with a Change in
Control or retired or defeased in connection with such Change in Control.
The fair market value of any securities issued and any other non-cash
consideration delivered in connection with a Change in Control will be the
value determined in good faith by the Board.
"Beneficial Owner" shall have the meaning given to such term in Rule
13D-3 under the Securities and Exchange Act of 1934, as amended.
"Board" shall mean the Board of Directors of Holdings.
"Change in Control" shall mean the consummation of a Triggering
Event.
"Company" shall mean Pathmark Stores, Inc.
"Company Group" shall mean, individually and as a group, Holdings,
the Company, PTK Holdings, Inc. and Supermarkets General Holdings
Corporation, and any successors thereto.
"Effective Date" shall mean February 1, 2000.
1
<PAGE>
"Holdings" shall mean SMG-II Holdings Corporation, a corporation
organized under the laws of the State of Delaware.
"Independent Third Party" shall mean any entity other than a member
of the Company Group or any of the Stockholders or any entity controlled
by or under common control with any of the Stockholders or the Company
Group.
"Payment Date" shall mean July 31, 2000.
"Purchaser" shall mean any Independent Third Party that engages in a
Change in Control.
"Sellers" shall mean selling equity holders, which holders may be at
the level of any of the Company Group.
A "Triggering Event" shall be deemed to have occurred on the date
that any of he following shall have occurred:
(A) any member of the Company Group enters into a binding agreement
with one or more Independent Third Parties to directly acquire, in
exchange for cash, stock, claims, or property, fifty percent or more of
the aggregate equity securities of Holdings for which the MLCP Investors
and the Equitable Investors (as defined in the Amended and Restated
Stockholders Agreement among Holdings and its Stockholders, dated January
22, 1998) (together, the "Stockholders") are Beneficial Owners as of the
Effective Date;
(B) any member of the Company Group enters into a binding agreement
providing for a merger, consolidation, reorganization or other business
combination upon consummation of which one or more Independent Third
Parties would own or control fifty percent or more of either (i) the
aggregate voting securities of the Company Group, (ii) the aggregate
economic interest of the outstanding equity securities of the Company
Group or (iii) the aggregate value of the assets of the Company;
(C) any member of the Company Group enters into transaction upon
consummation of which an Independent Third Party would acquire in exchange
for cash, stock, claims or property fifty percent or more of either (I)
the aggregate equity securities of the Company, PTK Holdings, Inc. or
Supermarkets General Holdings Corporation, or (II) the Company's assets;
or
(D) any member of the Company Group files a plan of reorganization
or motion for relief in a case under title 11 of the United States Code
for the purpose of implementing an agreement or transaction of the type
described in any of the preceding clauses (A), (B) or (C); provided,
however, that a Triggering Event shall not include any change of ownership
resulting from a public offering of any of the securities of any of the
Company Group pursuant to an effective registration statement under the
Securities Act of 1933, as amended.
2. Term. The term of this Letter Agreement (the "Term") shall
commence on the Effective Date and shall continue until the later of (a) first
anniversary of the Effective Date if a Triggering Event does not occur prior to
such anniversary or (b) in the event that a Triggering Event occurs prior to the
first anniversary of the Effective Date, either the date of a Change in Control
that occurs subsequent to a corresponding Triggering Event or the date the
Triggering Event is definitively canceled or otherwise becomes void.
2
<PAGE>
3. Retention Bonus.
In consideration of, and subject to, your continued employment with
the Company during the period beginning on the Effective Date and ending on the
Payment Date, the Company will pay you a Retention Bonus equal to the annual
rate of your base salary, as in effect on the Payment Date. The Company will pay
the Retention Bonus to you in a lump sum cash amount as soon as practicable
after the Payment Date but in no event more than thirty days thereafter.
4. Sale Bonus.
(a) General Terms. You will become entitled to receive the Sale
Bonus in the event that (I) a Triggering Event occurs during the Term, and (ii)
a Change in Control contemplated by such Triggering Event occurs thereafter. The
amount of the Sale Bonus shall be equal to 0.00075 multiplied by the Aggregate
Consideration.
(b) Payment of Sales Bonus. (I) Change in Control--No Post-Closing
Adjustment. In the event that the transaction resulting in a Change in Control
does not include any provisions either (A) for an earn-out with respect to which
a part of the Aggregate Consideration will be paid to the Sellers either in full
or in part in one or more installments after the Change in Control or any
similar deferral of the payment of the Aggregate Consideration or (B) that would
potentially require the Sellers to reimburse any portion of the Sale Price to
the purchaser or require the purchaser to pay to the Sellers any amount in
addition to the Aggregate Consideration, as a result of a post-closing
adjustment or any other reason, after the Change in Control (either (A) or (B),
a "Post-Closing Adjustment"), the Company shall pay to you the Sale Bonus within
five days following the date of such Change in Control; provided, however, that
in no event shall the Sale Bonus be payable to you until the full amount of the
Aggregate Consideration has been paid to the Sellers.
(ii) Change in Control--Post-Closing Adjustment. In the event that
the Change in Control transaction includes provisions for any Post-Closing
Adjustment, the Company shall pay the Sale Bonus according to the terms of this
Section 4(b)(ii).
(A) In the event that the Change in Control transaction includes a
Post-Closing Adjustment described in Section 4(b)(I)(A) above, the Company
shall pay you a portion of the Sale Bonus within five days after the date
of such Change in Control equal to 0.00075 multiplied by the portion of
the Aggregate Consideration paid to the Sellers on or about the date of
the Change in Control. Thereafter, within five days after any additional
portion of the Aggregate Consideration is paid to the Sellers, the Company
shall pay you a portion of the Aggregate Consideration multiplied by
0.00075.
(B) In the event that the Change in Control transaction is a
Post-Closing Adjustment described in Section 4(b)(I)(B) that would
potentially require the Sellers to reimburse any portion of the Aggregate
Consideration to the purchaser after the Change in Control, within five
days after the date of such Change in Control, the Company shall pay you a
portion of the Sale Bonus determined in good faith by the Board
immediately prior to the consummation of the Change in Control, less an
amount that shall take into account the potential adjustment to the Sales
Price (the "Withheld Amount"). As soon as practicable after the Sellers
know with certainty the portion, if any, of the Sale Price that the
Sellers must reimburse to the purchaser and the Sellers make such
reimbursement, if any, the Company shall pay to you a prorated portion of
the Withheld Amount corresponding to the portion of the maximum potential
amount that Sellers may have been required to reimburse to the purchaser
less the amount actually reimbursed.
3
<PAGE>
(C) In the event that the Change in Control transaction is a
Post-Closing Adjustment described in Section 4(b)(I)(B) that would
potentially require the purchaser to pay to the Sellers any amount in
addition to the Sale Price after the Change in Control, within five days
after the date of such Change in Control, the Company shall pay you the
Sale Bonus. Thereafter, within five days after the purchaser knows with
certainty the additional amount that such purchaser must pay to the
Sellers, if any, and the purchaser makes such payment to the Sellers, the
Company shall pay to you an additional amount determined in good faith by
the Board that shall take into account the additional payment made by the
purchaser to the Sellers.
(c) Determination of the Board Final. The determination of whether a
Triggering Event or Change in Control has occurred, the amount of the Aggregate
Consideration and the amount of any Sale Bonus shall be made in good faith by
the Board (unless otherwise required by applicable law) and, absent manifest
error, shall be final and binding on you, the Company Group and all other
interested parties.
(d) Single Sales Bonus. The parties hereto acknowledge and agree
that you shall be entitled to receive only one Sale Bonus under this Letter
Agreement which shall become payable in connection with the first Triggering
Event that occurs during the Term and that in the event any additional
Triggering Event occurs during the Term, you will not be entitled to any Sale
Bonus as a consequence thereof.
5. Effect of Termination of Employment.
(a) Involuntary Termination. In the event of your Involuntary
Termination (as defined in the Employment Agreement) prior to the Payment Date,
you shall be entitled to receive the Retention Bonus in accordance with the
terms of Section 3, as if your employment had continued until such Payment Date.
In the event of your Involuntary Termination on or after August 1, 2000 and
prior to a Triggering Event, you shall remain entitled to receive the Sale Bonus
in the event of a subsequent Triggering Event and a corresponding Change in
Control in the same manner as if your employment with the Company had continued
through the end of the Term.
(b) Other Termination. In the event that your employment terminates
for any reason other than an Involuntary Termination prior to the Payment Date,
you shall forfeit your right to the Retention Bonus in its entirety. Similarly,
in the event that your employment terminates for any reason other than an
Involuntary Termination at any time during the Term, you shall forfeit any right
you may have to receive the Sale Bonus.
6. Notice. For the purpose of this Letter Agreement, notices and all
other communications provided for in this Letter Agreement shall be in writing
and shall be deemed to have been duly given when delivered by hand, sent by
telecopier or mailed by United States registered mail, return receipt requested,
postage prepaid, addressed to the Chief Executive Officer, Pathmark Stores,
Inc., 200 Milik Street, Carteret, New Jersey 07008, telecopier: (732) 499-3460,
with a copy to the General Counsel of the Company, or to you at the address set
forth on the first page of this Letter Agreement or to such other address as
either party may have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon receipt.
7. Reduction of Payments if Reduction Would Result in Greater
After-Tax Amount. Notwithstanding anything herein to the contrary, if the
payment of the Retention Bonus or the Sale Bonus (together, the "Payments")
constitute a "parachute payment" (as defined in Section 280G(b)(2) of the
Internal Revenue Code of 1986, as amended (the "Code")), and the net after-tax
amount of the parachute payment is less than the net after-tax amount if the
aggregate Payments to be made to you were three times your "base amount"
4
<PAGE>
(as defined in Section 280G(b)(3) of the Code), less $1.00, then the aggregate
of the amounts of the Sale Bonus and/or Retention Bonus constituting the
parachute payment shall be reduced to an amount that will equal three times your
base amount, less $1.00.
8. Miscellaneous.
(a) No Rights to Continued Employment. Neither this Letter Agreement
nor any of the rights or benefits evidenced hereby shall confer upon you any
right to continuance of employment by the Company or interfere in any way with
the right of the Company to terminate your employment, subject to the provisions
of Section 5 above, for any reason, with or without Cause.
(b) Amendments, Waivers. No provision of this Letter Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing by the parties hereto. No waiver by either party hereto
at any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Letter Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time.
(c) Counterparts. This Letter Agreement may be executed in
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
(d) Withholding. Amounts paid to you hereunder shall be subject to
all applicable federal, state and local wage withholdings.
(e) Headings. The headings contained in this Letter Agreement are
intended solely for convenience of reference and shall not affect the rights of
the parties to this Letter Agreement.
(f) Stockholder Approval. This Letter Agreement shall become
effective only if it is approved by a majority of seventy-five percent of the
stockholders of Holdings, Supermarkets General Holdings Corporation, PTK
Holdings, Inc. and the Company within one-hundred and eighty days after date
first shown above. In the event that such stockholders do not approve this
Agreement on or before the one-hundred and eightieth day after the date of this
Letter Agreement, it shall automatically lapse and become void.
(g) Governing Law. The validity, interpretation, construction and
performance of this Letter Agreement shall be governed by the laws of the State
of New Jersey applicable to contracts entered into and performed in such state.
If this Letter Agreement sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy of this
letter, which will then constitute our agreement on this subject.
Sincerely,
PATHMARK STORES, INC.
By /s/ James L. Donald
--------------------------------------
Name: James L. Donald
Title: President
5
<PAGE>
Agreed to as of this 7th day of April, 2000.
/s/ Robert Joyce
- -----------------------------------
Robert Joyce
6
EXHIBIT 12.1
PATHMARK STORES, INC.
STATEMENTS REGARDING COMPUTATION OF RATIO
OF EARNINGS TO FIXED CHARGES
(in thousands)
<TABLE>
<CAPTION>
Fiscal Years
-------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Earnings (loss) before taxes ..... $ (29,361) $ (26,920) $ (44,891) $ (34,369) $ 38,661
--------- --------- --------- --------- ---------
Fixed charges:
Interest expense .............. 163,103 160,794 164,168 161,469 164,749
Interest portion of
rentalexpense(1) .............. 12,916 12,469 12,088 10,930 10,533
--------- --------- --------- --------- ---------
Total fixed charges ...... 176,019 173,263 176,256 172,399 175,282
--------- --------- --------- --------- ---------
Adjusted earnings before
fixed charges .................. $ 146,658 $ 146,343 $ 131,365 $ 138,030 $ 213,943
========= ========= ========= ========= =========
Ratio of earnings to
fixed charges .................. -- -- -- -- 1.22x
========= ========= ========= ========= =========
Deficiency in earnings
available to cover fixed charges $ 29,361 $ 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
Pathmark Risk Management Corporation... New Jersey
Pauls Trucking Corp.................... New Jersey
Plainbridge, Inc....................... Delaware
Upper Darby Stuart, LLC................ Delaware
Lancaster Pike Stuart, LLC............. Delaware
East Brunswick Stuart, Inc............. Delaware
Glenolden Stuart, Inc.................. 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 29, 2000 and Consolidated Balance Sheet as January
29, 2000 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> JAN-29-2000
<CASH> 15,906
<SECURITIES> 0
<RECEIVABLES> 16,801
<ALLOWANCES> (1,014)
<INVENTORY> 141,559
<CURRENT-ASSETS> 270,594
<PP&E> 854,478
<DEPRECIATION> (382,321)
<TOTAL-ASSETS> 842,379
<CURRENT-LIABILITIES> 351,291
<BONDS> 1,264,103
0
0
<COMMON> 0
<OTHER-SE> (1,163,043)
<TOTAL-LIABILITY-AND-EQUITY> 842,379
<SALES> 3,698,084
<TOTAL-REVENUES> 3,698,084
<CGS> 2,639,254
<TOTAL-COSTS> 2,639,254
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (163,103)
<INCOME-PRETAX> (29,361)
<INCOME-TAX> (2,065)
<INCOME-CONTINUING> (31,426)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,426)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
