Exhibit (a)(7)
Disclosure on pages 58-63 of the Annual Report on Form 10-K, filed by the
Company on April 28, 1998
Employment Agreement Among Pathmark, SMG-II and James L. Donald. On
October 8, 1996 (the "Effective Date"), Pathmark and SMG-II entered into an
employment agreement with Mr. James L. Donald (the "Donald Agreement") pursuant
to which Mr. Donald was elected Chairman, President and Chief Executive Officer
for a term of five years. The Donald Agreement provides Mr. Donald with an
initial annual base salary of $600,000 and provides that he shall participate in
the Pathmark Executive Incentive Plan, under which Mr. Donald may earn an annual
bonus of up to 125% of his annual salary based on performance targets that are
set by the Board. For the first full fiscal year during the term of the Donald
Agreement, Mr. Donald shall receive a minimum annual bonus of $425,000.
Furthermore, under the Donald Agreement, Mr. Donald is guarantied an annual
bonus for each of the second, third and fourth full fiscal years of the term of
at least 25% of his base salary. The Donald Agreement provides Mr. Donald with
the right to defer up to 50% of his annual bonus and salary, which shall be held
in a grantor trust established by Pathmark. During the term of the Donald
Agreement, in addition to the base salary, bonus eligibility and other customary
annual benefits and perquisites that Pathmark generally provides to its
executive officers, Pathmark will provide Mr. Donald with a company car and term
life insurance in the amount of $4.5 million during the first year and $3.2
million thereafter. Pathmark also reimbursed Mr. Donald for the legal expenses
incurred by him in the negotiation of the Donald Agreement. Mr. Donald also
received a one-time signing bonus of $1 million, which is being amortized over
the term of the Donald Agreement.
Furthermore, Mr. Donald received an equity package (the "Equity Strip"),
consisting of 8,520 restricted shares of a new series of SMG-II Preferred Stock
with a stated value of $200 per share and 19,851 restricted shares of SMG-II
Class A Common Stock, the terms of which are set forth in the stock award
agreement (the "Stock Award Agreement"). The Equity Strip, which as of the
Effective Date was valued by the Company at $3.4 million based upon an
independent appraisal, will vest in its entirety upon the occurrence of an
Employment-Related Event, as defined in the Stock Award Agreement, and will be
forfeited in its entirety upon the occurrence of a Termination Event, as defined
in the Donald Agreement. The valuation of $3.4 million is being amortized by
the Company over the term of the Donald Agreement. The Preferred Stock ranks
pari passu with the existing SMG-II convertible preferred stock and will accrue
dividends at a rate of 10% per annum. The Preferred Stock will be convertible
into Common Stock on a one-for-one basis. As of the Effective Date, the
Preferred Stock had accumulated dividends of approximately $122 per share.
In addition, Mr. Donald received a stock option (the "Option") to purchase
an aggregate of 100,000 shares of SMG-II Class A Common Stock. The Option
consists of component A ("Option Component A") covering 50,000 shares of SMG-II
Class A Common
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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 Year 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 a Termination Event (as defined
below). If Mr. Donald's employment with the Company should end as a result of a
Termination Event, then, as of the applicable date of termination, the entire
Option (whether or not then vested) will be immediately and irrevocably
forfeited.
Except for purposes of tag-along rights under Article V of the Stockholders
Agreement and the piggyback rights under Article VI of the Stockholders
Agreement, the Option shall not be exercisable (even though the Option or a
portion thereof is vested) unless and until it becomes exercisable in accordance
with the following provisions:
(i) The Exercisable Percentage (as defined below) of each component of the
Option will become exercisable if the ML Investors (as defined in the
Stockholders Agreement) have a Realization 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:
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Period of Time Target Price per Target Price per
Share/Option Share/Option
Component A Component B
------------------------------------
Prior to 2/1/00 $ 100 $ 150
2/1/00 to 1/31/01 $ 125 $ 250
2/1/01 and after $ 150 $ 350
(ii) Notwithstanding the above, if the ML Investors have a Realization
Event for more than 15% of the shares of Common Stock beneficially
owned by them on the date of grant and Option at a per share price in
excess of the Target Price described above applicable to the date when
such Realization Event occurs, then the components of the Option for
which such Target Prices have been achieved shall become immediately
vested and exercisable and the exercise price shall not thereafter
increase.
In the event that Mr. Donald becomes entitled to any tag-along rights under
Section 5.6 or registration rights under Section 6.2 of the Stockholders
Agreement, he will be permitted to exercise his sale or transfer rights with
respect to the portion of the Option for which the Target Price has been met.
For purposes of Section 5.6(b) of the Stockholders Agreement, 100% of the
portion of the Option for which the Target Amount has been realized will be
considered exercisable in order to determine the number of shares to be included
under Section 5.6(b) of the Stockholders Agreement. If, prior to the Expiration
Date, the Board determines that it is necessary or desirable to list, register
or qualify the shares of Common Stock subject to the Option, and if such
listing, registration or qualification is delayed beyond the Expiration Date,
the vested and exercisable portion of the Option will remain exercisable until
30 days after such listing, registration, or qualification is accomplished.
Pursuant to the Donald Agreement, Pathmark 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.
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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, (ii) the date Mr. Donald becomes eligible to be
covered under the benefit plans of a subsequent employer and (iii) the date Mr.
Donald breaches any of the protective covenants described below. Furthermore,
in the event of an Involuntary Termination, the Equity Strip will automatically
and without the need for further action or consent by Pathmark become fully
vested in the manner provided by the Stock Award Agreement, and the Option will
continue to remain outstanding to the extent provided by the Option Agreement.
All notes not previously delivered to Mr. Donald will automatically and without
the need for further action or consent by Pathmark be delivered by the escrow
agent to Mr. Donald marked "Paid in Full" upon payment by Mr. Donald of any then
accrued but unpaid interest on the Loan. During the 30-day period beginning 6
months after a Change in Control, Mr. Donald shall be eligible to resign from
Pathmark 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, Pathmark shall pay him only the amounts described
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
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or (ii) in soliciting employees or customers of Pathmark, or any parent or
subsidiary thereof, during his term of employment and up to two years
thereafter. The Donald Agreement also includes a confidentiality clause which
prohibits Mr. Donald from disclosing any confidential information regarding
Pathmark.
The following definitions apply to the terms of the Donald Agreement:
"Cause" means the termination of Mr. Donald's employment with Pathmark
because of (i) his willful and repeated failure (other than by reason of
incapacity due to physical or mental illness) to perform the material
duties of his employment after notice from Pathmark of such failure and his
inability or unwillingness to correct such failure within 30 days of such
notice, (ii) his conviction of a felony or plea of no contest to a felony
or (iii) perpetration by Mr. Donald of a material dishonest act or fraud
against Pathmark or any parent or subsidiary thereof; provided, however,
that, before Pathmark may terminate Mr. Donald for Cause, the Board shall
deliver to him a written notice of Pathmark's intent to terminate him for
Cause, including the reasons for such termination, and Pathmark must
provide him an opportunity to meet once with the Board prior to such
termination.
"Change in Control" means the acquisition by a person (other than a
person or group of persons that beneficially owns an equity interest in
SMG-II or Pathmark on the Effective Date or any person controlled thereby)
of more than 50% control of the voting securities of SMG-II as a result of
a sale of voting securities after the Effective Date by the persons who, on
the Effective Date, have a beneficial interest in such voting securities,
but shall not include any change in the ownership of Pathmark or SMG-II
resulting from a public offering.
"Common Stock" means SMG-II Class A Common Stock, par value $0.01 per
share.
"Exercisable Percentage" means (i) in connection with a Third Party
Sale, the percentage of the shares of Common Stock subject to the Option
that Mr. Donald is entitled to sell pursuant to the exercise of his "tag-
along" rights under the Stockholders Agreement and (ii) in connection with
a Public Offering, the percentage of the shares of Common Stock then
beneficially owned by the ML Investors (as defined in the Stockholders
Agreement) which are sold in the Public Offering.
"Good Reason" means Mr. Donald's resignation because of (i) the
failure of Pathmark to pay any material amount of compensation to Mr.
Donald when due, (ii) a material adverse reduction or 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
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Reason, Mr. Donald must provide written notification of his intention to
resign within 30 business days after he knows or has reason to know of 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
shares of Common Stock having been sold to the public in such Public
Offering, plus the aggregate offering price for all shares of Common Stock
sold in all prior Public Offerings of Common Stock occurring after the date
that Mr. Donald is granted any Option, exceeds $50 million.
"Preferred Stock" shall mean a new series of convertible preferred
stock that will be issued for purposes of the Donald Agreement.
"Public Offering" means a public offering of the Common Stock pursuant
to an effective registration statement under the Securities Act.
"Realization Event" means the receipt by the ML Investors (as defined
in the Stockholders Agreement) of cash or property from an unrelated
third party as consideration for the sale of shares of Common Stock then
beneficially owned by the ML Investors. For purposes of the Donald
Agreement, any property other than cash received by the ML Investors in the
Realization Event shall have the value ascribed to such property by the
parties to such sale.
"Securities Act" means the Securities Act of 1933, as amended.
"Stockholders Agreement" shall mean the Stockholders Agreement, dated
as of February 4, 1991, as amended, among SMG-II and its stockholders.
"Termination Event" shall mean Mr. Donald's resignation without Good
Reason or a termination by Pathmark for Cause.
"Third Party Sale" means a sale of Common Stock subject to Section 5.6
of the Stockholders Agreement.