-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I5DhECxfCrKKuBctxA3PmfXgliUobbQqSTnMZGNQJxHt1M+64rLqdSSImPmL1KBj 49qv2yYHTOgSKP6xVHkd9g== 0000912057-97-015277.txt : 19970505 0000912057-97-015277.hdr.sgml : 19970505 ACCESSION NUMBER: 0000912057-97-015277 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970201 FILED AS OF DATE: 19970502 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUPERMARKETS GENERAL HOLDINGS CORP CENTRAL INDEX KEY: 0000821139 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 133408704 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-16404 FILM NUMBER: 97594200 BUSINESS ADDRESS: STREET 1: 301 BLAIR RD STREET 2: P.O. BOX 5301 CITY: WOODBRIDGE STATE: NJ ZIP: 07095-0915 BUSINESS PHONE: 9084993000 MAIL ADDRESS: STREET 1: 301 BLAIR RD STREET 2: P.O. BOX 5301 CITY: WOODBRIDGE STATE: NJ ZIP: 07095-0915 10-K405 1 FORM 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------- FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER FEBRUARY 1, 1997 0-16404
------------------------ SUPERMARKETS GENERAL HOLDINGS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-3408704 (State of other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 301 BLAIR ROAD, P.O. BOX 5301 07095-0915 WOODBRIDGE, NEW JERSEY (Zip Code) (Address of principal executive offices)
908-499-3000 (Registrant's telephone number, including area code) ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: $3.52 CUMULATIVE EXCHANGEABLE REDEEMABLE PREFERRED STOCK (TITLE OF CLASS) ------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO _ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of April 1, 1997, there were outstanding 650,675 shares of $0.01 par value Class A Common Stock (voting) and 320,000 shares of $0.01 par value Class B Common Stock (non-voting), all of which are privately owned and not traded on a public market. Documents Incorporated by Reference: None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS* GENERAL Registrant was incorporated in the State of Delaware in April 1987 as SMG Holdings Corporation. Subsequently, registrant's name was changed to Supermarkets General Holdings Corporation (the "Company"). The Company acquired Supermarkets General Corporation ("Old Supermarkets"), in October 1987 (the "Acquisition"). References to the Company in this Report refer to the Company and its subsidiaries on a consolidated basis, except where the context requires otherwise. In October 1989, Old Supermarkets adopted an amended and restated Plan of Liquidation pursuant to which it was liquidated into three wholly owned subsidiaries of the Company. In November 1989, pursuant to such Plan, Old Supermarkets transferred substantially all of the assets of its Purity Supreme division to two of the three above mentioned wholly owned subsidiaries of the Company, Purity Supreme, Inc. ("Purity") and Li'l Peach Corp. ("Li'l Peach", and together with Purity, the "Purity Operations"), and said subsidiaries assumed substantially all of the liabilities of Old Supermarkets related to such division. Old Supermarkets completed the liquidation just prior to the year ended February 3, 1990 by merging with the third of the above mentioned wholly owned subsidiaries of the Company, which retained the name Supermarkets General Corporation. In connection with the Recapitalization referred to below, Supermarkets General Corporation changed its name to Pathmark Stores, Inc. ("Pathmark"). On December 17, 1991, the Company completed the sale of the Purity Operations for approximately $257.0 million (as adjusted), including the assumption of certain indebtedness of Purity and Li'l Peach. The Company retained a 10% common equity interest in Purity Supreme and a new issue of Purity Supreme exchangeable preferred stock. During the fiscal year ended February 3, 1996 ("Fiscal 1995"), the Company sold its investment in Purity for $16.4 million in connection with the sale of Purity to Stop & Shop Companies, Inc. and used the proceeds of the sale to repay a portion of the PTK Holdings, Inc. Exchangeable Guaranteed Debentures due 2003 (the "PTK Exchangeable Guaranteed Debentures"), including accrued interest and debt premiums. PTK Holdings, Inc. ("PTK") is a wholly owned subsidiary of the Company formed in 1993. The Company consummated a recapitalization plan (the "Recapitalization") on October 26, 1993. In connection with the Recapitalization, the Company transferred all of the capital stock of Pathmark to PTK. Pathmark distributed the capital stock of Plainbridge, Inc. ("Plainbridge") to PTK in the Plainbridge Spin-Off (as defined below). In connection with the Recapitalization, Pathmark contributed warehouse, distribution and transportation operations and the inventory therein that service the Pathmark supermarkets and drug stores and certain other assets to Plainbridge, and distributed the shares of Plainbridge to PTK (the "Plainbridge Spin-Off"). In addition, Pathmark contributed to Chefmark, Inc., a newly formed Delaware corporation ("Chefmark"), the Chefmark deli food preparation operations and a related warehouse and a leased banana ripening warehouse, and distributed the shares of Chefmark to Holdings (the "Chefmark Spin-Off", and, together with the Plainbridge Spin-Off, the "Spin-Offs"). In connection with the Plainbridge Spin-Off, Pathmark entered into a logistical services agreement with Plainbridge (the "Logistical Services Agreement") that provided for the continuing supply of merchandise to Pathmark supermarkets and for the provision of warehousing, distribution and logistical services relating to the supply of such merchandise. During the fiscal year ended February 1, 1997 ("Fiscal 1996"), PTK contributed 100% of the capital stock of Plainbridge to Pathmark, making Plainbridge a wholly owned subsidiary of Pathmark. On November 4, 1994, the Company completed the sale of its home centers segment for approximately $88.7 million, plus the assumption of certain indebtedness. The Company used approximately $66.6 - ------------------------ * Except as otherwise indicated, information contained in this Item is given as of February 1, 1997. 1 million before January 28, 1995 and $4.7 million during Fiscal 1995 of its net proceeds to pay down the PTK Exchangeable Guaranteed Debentures, including accrued interest and debt premium. During Fiscal 1996, Pathmark twice amended its existing bank credit agreement dated as of October 26, 1993, as amended, (the "Bank Credit Agreement") by prospectively modifying certain of its financial covenants (interest coverage, leverage and consolidated adjusted earnings before interest, taxes, depreciation and amortization) and, in connection with the contribution of Plainbridge shares to Pathmark, by increasing the Pathmark working capital facility (the "Working Capital Facility") under the Bank Credit Agreement by $25 million to $200 million. Also, Pathmark and Plainbridge terminated the Logistical Services Agreement. As part of its continuing policy to examine the productivity of its assets, Pathmark has decided to divest 12 supermarkets, all but one of which is located in its southern region. BUSINESS OF THE COMPANY The Company's primary business activity is the management of its interests in Pathmark and Chefmark. The Company holds all of the capital stock of PTK and all of the capital stock of Chefmark. Through PTK, the Company owns all of the capital stock of Pathmark. Chefmark's primary business is to supply Pathmark with deli food preparation services and merchandise from the banana ripening facility. BUSINESS At February 1, 1997, Pathmark operated 144 supermarkets primarily in the New York--New Jersey and Philadelphia metropolitan areas. These metropolitan areas contain over 10% of the population and grocery sales in the United States. The following table presents the market area, number of stores, selling and total square footage for Pathmark's supermarkets.
SELLING MARKET NUMBER OF SQ. FT TOTAL SQ. FT AREA STORES (000'S) (000'S) - ------------------------ ------------- ----------- ------------- NJ, NY, PA, DE, CT 144 5,475 7,467
BUSINESS STRATEGY Pathmark's business strategy is to increase sales, profitability and market penetration in its existing markets by focusing on the following five operating priorities: concentrate on core business, Pathmark "smart" service, lower operating costs, spend capital wisely and have the right management team. By concentrating on and implementing these five priorities, the Company expects to accomplish its strategic goals (i) by providing superior perishable and non-perishable merchandise, value and service to its customers through its marketing, merchandising and customer service programs; (ii) through efficient use of capital to renovate and enlarge its existing store base; and (iii) through increased operating efficiencies. MARKETING AND MERCHANDISING - SUPER CENTER FORMAT. The average Pathmark Super Center is approximately 39% larger than the average size supermarket in the United States and offers greater convenience by providing one-stop shopping and a wider assortment of foods and general merchandise than is offered by conventional supermarkets. - PATHMARK 2000. Pathmark 2000 is a new, larger Super Center format designed to provide Pathmark customers with a substantially greater selection of quality perishable products. Pathmark 2000 stores are also designed to be more "customer friendly", with wider aisles, more accessible customer 2 service and information departments, improved signs and graphics, and increased availability of Pathmark associates, particularly in the perishable departments. All of Pathmark's new supermarkets and enlargements completed in Fiscal 1996 employed the Pathmark 2000 concept, and Pathmark expects that all new stores and enlargements thereafter will employ the same concept. At February 1, 1997, 53 of Pathmark's supermarkets were Pathmark 2000s. - FLEXIBLE MERCHANDISING. Pathmark believes that its large-store format gives it considerable flexibility to respond to changing consumer demands and competition by varying and enhancing its merchandise selection. Pathmark's "Big Deals" program, currently consisting of over 500 merchandise items offers large-sized merchandise at prices which Pathmark believes are competitive with those available in "warehouse" and "club" stores. Pathmark emphasizes competitive pricing plus weekly sales and promotions supported by extensive advertising, both in print and electronic media. Merchandising flexibility and effectiveness is enhanced through the increased utilization of a category management approach. In addition, Pathmark offers for sale over 3,000 items through its private label program. - PHARMACY. Pathmark provides full pharmacy services in virtually all of its stores. Pathmark's broad market coverage within its marketing area has enabled it to become a leading filler of third-party prescriptions in this area. Pathmark believes that its well-established pharmacy operations provide a competitive advantage in attracting and retaining customers. STORE EXPANSION AND RENOVATION PROGRAM - NEW STORES, ENLARGEMENTS AND RENOVATIONS. During Fiscal 1996, Pathmark opened four new Pathmark 2000s (two of which replaced smaller stores), closed two other smaller stores, and completed 16 renovations and five enlargements. During the fiscal year ending January 31, 1998 ("Fiscal 1997"), Pathmark plans to open up to three new Pathmark 2000s (one of which has already opened), and to complete up to an aggregate of ten renovations and enlargements. - Pathmark recognizes the importance of keeping its stores looking fresh and up-to-date; thus, each store typically receives a renovation or enlargement every five years. At the end of Fiscal 1996, Pathmark derived approximately 76% of its supermarket sales from stores that were opened, enlarged or renovated during the last five years. - CORE MARKET FOCUS. Pathmark has identified over 50 potential locations for new supermarkets within its current marketing areas and expects that all new stores opened during the current and next two fiscal years will be located in these areas. Pathmark believes that, by opening stores in its current marketing areas, it can achieve additional operating economies and other benefits from its store expansion program without the risks and costs associated with opening stores in new marketing areas. OPERATING EFFICIENCIES - TECHNOLOGY. Pathmark has made a significant and continuing investment in information technology. All Pathmark supermarket checkout terminals have third-generation IBM 4680 scanner systems supported by a RISC 6000 application processor in each store. These systems allow consumer credit and electronic fund transfer ("EFT") transactions, greatly facilitate system-wide promotion and merchandising programs, and improve the speed and control of customer transactions. In addition, all Pathmark supermarkets utilize radio frequency technology for direct vendor receivings and shelf labels. - GEOGRAPHIC CONCENTRATION. All Pathmark supermarkets are located within 100 miles of the Pathmark headquarters and principal warehousing facilities that service them. This allows for more efficient management supervision, increased speed of delivery and reduced transportation costs. All 3 of the stores, which Pathmark expects to open in the current fiscal year, will be within this 100 mile radius. - COST REDUCTION. During the fourth quarter of Fiscal 1996, Pathmark, in an effort to reduce its costs, effectuated a 25% reduction in administrative headcount and held for divestiture 12 supermarkets, principally in its southern region. PATHMARK SUPERMARKETS Pathmark operated 144 supermarkets at February 1, 1997. Super Centers accounted for approximately 97% of Pathmark's supermarket sales for Fiscal 1996. The following table presents selected data respecting supermarket sales and stores for the last five fiscal years.
FISCAL YEARS ----------------------------------------------------- 1996 1995(A) 1994 1993 1992 --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS) Supermarket sales................................................ $ 3,701 $ 3,853 $ 3,785 $ 3,839 $ 3,942 Average sales per Supermarket.................................... 26.1 26.4(b) 25.9 25.4 24.7 Number of Supermarkets: Renovations(c)................................................. 16 14 14 12 8 Enlargements(d)................................................ 5 4 11 5 10 Opened......................................................... 4 5 4 4 3 Closed......................................................... 4 4 6 5 3 Type of Supermarket(e): Pathmark 2000.................................................. 53 44 29 10 2 Super Center................................................... 86 95 108 128 137 Conventional................................................... 5 5 6 7 7 Total Supermarkets Open at Year End............................ 144 144 143 145 146
- ------------------------ (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 1996 averaged nearly $1.5 million per store. (d) Enlargements involve the addition of selling space and in Fiscal 1996 averaged an investment in excess of $3.7 million. (e) Includes two stores not wholly owned. The sales figures for these stores are not included above. By industry standards, Pathmark stores are large and productive, averaging approximately 51,900 square feet in size and generating high average sales volume of approximately $26.1 million per store ($690 per selling square foot) for stores open for all of Fiscal 1996. Pathmark's 144 supermarkets at February 1, 1997 ranged from 26,000 to 66,500 square feet in size and included 132 supermarkets that are 40,000 square feet or larger in size. All Pathmark stores carry a broad variety of food and drug store products, including an extensive variety of the Pathmark, No Frills and Pathmark Preferred brands. All but seven supermarkets contained in-store pharmacy departments at year end. Pathmark pioneered the development of the large "superstore" in the Middle Atlantic States, opening the first "Pathmark Super Center" in 1977, and currently operates 139 such stores, including 53 "Pathmark 2000" stores. The majority of Super Centers were created through the enlargement or renovation of existing stores. In addition to the broad variety of food and non-food items carried in conventional Pathmark stores, a typical Super Center includes a customer service center, videotape rental, a pharmacy, expanded produce department, meat department, cheese shop, bakery, seafood, service delicatessen 4 department, expanded health and beauty care department and book department. All Super Centers have EFT and credit transaction capability at their checkout terminals, and 130 supermarkets also feature in-store automated teller machines. During 1996, the Company entered into master licensing agreements with two regional banking institutions to place up to 114 in-store banks in Pathmark supermarkets over the next three years. Each bank, which occupies approximately 400 square feet, offers a full array of financial services and is open seven days a week. The license agreements have an initial term of five years with optional renewal periods. At the close of Fiscal 1996, 13 stores had in-store banks within them and Pathmark expects to have 50 additional in-store banks by the end of Fiscal 1997. Pathmark has developed a new, larger Super Center format called "Pathmark 2000" designed to provide Pathmark customers with a substantially greater selection of perishable products, particularly produce. The average weekly sales for Pathmark 2000 stores in Fiscal 1996 was $28.5 million compared to $25.2 million for the balance of the chain. Pathmark 2000 stores are also designed to be more "customer friendly", with wider aisles, more accessible customer service and information departments, improved signs and graphics, and increased availability of Pathmark associates. For example, Pathmark has recently introduced "GREAT" service, a customer service program emphasizing proactive inter-personal communication between store associates and customers. All of Pathmark's new supermarkets and a majority of supermarket enlargements completed in Fiscal 1996 employed the Pathmark 2000 concept and Pathmark expects that virtually all new stores and enlargements will employ the same concept. Pathmark's supermarket business is generally not seasonal, although sales in the second and fourth quarters tend to be slightly higher than those in the first and third quarters. STORE EXPANSION AND RENOVATION PROGRAM A key of Pathmark's business strategy has been, and will continue to be, the expansion of the total selling square footage of its operations. Pathmark believes, that by adding new stores and increasing the selling area of existing stores, it can improve its competitive position and operating margins by achieving economies of scale in merchandising, advertising, distribution and supervision. During the five years ending with Fiscal 1996, Pathmark completed 99 renovations and enlargements and opened 20 new supermarkets. At the close of Fiscal 1996, sales in these stores accounted for approximately 76% of its total supermarket sales. Pathmark currently expects to open up to three new Pathmark "2000" Super Centers during Fiscal 1997 (one of which has already opened), none of which will replace smaller stores, and to complete up to ten renovations and enlargements. ADVERTISING AND PROMOTION As part of its marketing strategy, Pathmark emphasizes value through its competitive pricing and weekly sales and promotions supported by extensive advertising. Additional savings are offered each week through Pathmark "super coupons" in newspapers and circulars. Pathmark's advertising expenditures are concentrated on print advertising, including advertisements and circulars in local and area newspapers and advertising flyers distributed in stores, radio and television. Several years ago, Pathmark introduced "Smart Coupons" in its advertisements. With "Smart Coupons", customers no longer are required to cut out Pathmark coupons from its advertisement and physically present them at the cash registers. Rather, when a coupon item is scanned during the check-out process, the coupon savings is automatically deducted from the price. Pathmark believes that its "Smart Coupons" greatly convenience its customers and improve customer service at the checkout. CONSUMER RESEARCH Pathmark conducts numerous ongoing and special consumer research projects. These typically involve customer surveys (both in-store and by telephone) as well as focus groups. The information derived from 5 these projects is used to evaluate consumers' attitudes and purchasing patterns and helps shape Pathmark's marketing programs. TECHNOLOGY Pathmark has made a significant and continuing investment in information technology. All Pathmark supermarket checkout terminals have third-generation IBM 4680 scanner systems supported by a RlSC 6000 application processor in each store. These systems allow consumer credit and EFT transactions, greatly facilitate system-wide promotion and merchandising programs, and improve the speed and control of customer transactions. This technology and the data generated by scanning have not only led to lower labor costs, improved price control, shelf allocation and quicker customer check-out, but have also assisted in the analysis of product movement, profit contribution and demographic merchandising. Pathmark also has a computer-assisted ordering system which enables it to replenish inventory to avoid "out of stocks" at store level while maintaining optimum overall inventory levels. In addition, all Pathmark supermarkets utilize radio frequency technology for direct vendor receivings and shelf labels. All of the pharmacies are equipped with pharmacy computers. In addition to improving customer service, these computers aid pharmacists in detecting drug interactions, improve the collection of third-party receivables and help to attract third-party businesses such as health maintenance organizations and union welfare plans. In August 1991, Pathmark entered into a long-term facilities management and systems integration agreement with IBM Company. Under the agreement, IBM has taken over Pathmark's data center operations, mainframe processing and information system functions, (formerly performed by approximately 150 employees) and is providing business applications and systems designed to enhance Pathmark's customer service and efficiency. SUPPLY AND DISTRIBUTION Most of the merchandise sold in Pathmark's supermarkets is supplied through its distribution facilities located in New Jersey. In addition, pursuant to a supply agreement between Chefmark and Pathmark (the "Chefmark Supply Agreement"), Chefmark supplies Pathmark with merchandise from its banana ripening and deli food preparation operations. The Chefmark Supply Agreement provides that, for a period of seven years, such services are to be performed by Chefmark in substantially the same manner as they have been performed by Pathmark's banana ripening and deli food preparation operations prior to the Chefmark Spin-Off. All of Pathmark's stores are located within 100 miles of the principal Pathmark and Chefmark distribution centers. The following table presents information concerning the distribution and processing facilities through which Pathmark is supplied, and the product lines relevant to each. DISTRIBUTION FACILITIES
SQUARE YEAR LOCATION PRODUCT LINE FOOTAGE OPENED - --------------------------------------- ---------------------------------------------------- --------- ----------- Woodbridge, NJ(1)...................... Dry Grocery 475,000 1968 Edison, NJ(2).......................... General Merchandise, 266,000 1980 Health and Beauty Care Products, Pharmaceuticals, Tobacco Woodbridge, NJ(1)...................... Meat, Dairy, Deli, Produce 255,000 1970 Dayton, NJ(2).......................... Frozen Food Distribution Center 112,000 1994 No. Brunswick, NJ(2)................... Dry Grocery 425,000 1996
6 PROCESSING FACILITIES
SQUARE YEAR LOCATION PRODUCT LINE FOOTAGE OPENED - --------------------------------------- ----------------------------------------------------- --------- ----------- Somerset, NJ(3)........................ Delicatessen Products 16,000 1976 Avenel, NJ(4).......................... Banana Ripening 30,000 1984
- ------------------------ (1) Owned by Pathmark. (2) Leased by Pathmark. (3) Owned by Chefmark. (4) Leased by Chefmark. COMPETITION The supermarket business is highly competitive and is characterized by high asset turnover and narrow profit margins. Pathmark's earnings are primarily dependent on the maintenance of relatively high sales volume per supermarket, efficient product purchasing and distribution, and cost-effective store operating and distribution techniques. Pathmark's main competitors are national and regional supermarkets, drug stores, convenience stores, discount merchandisers, "warehouse" and "club" stores and other local retailers in the areas served. Principal competitive factors include price, store location, advertising and promotion, product mix, quality and service. TRADE NAMES, SERVICE MARKS AND TRADEMARKS Pathmark has registered a variety of trade names, service marks and trademarks with the United States Patent and Trademark Office, each for an initial period of 20 years, renewable for as long as the use thereof continues. Pathmark considers its Pathmark service marks to be of material importance to its business and actively defends and enforces such service marks. REGULATION Pathmark's food and drug business requires it to hold various licenses and to register certain of its facilities with state and federal health, drug and alcoholic beverage regulatory agencies. By virtue of these licenses and registration requirements, Pathmark is obligated to observe certain rules and regulations, and a violation of such rules and regulations could result in a suspension or revocation of the licenses or registrations. In addition, most of Pathmark's licenses require periodic renewals. Pathmark has experienced no material difficulties with respect to obtaining, effecting or retaining its licenses and registrations. EMPLOYEES At February 1, 1997, the Company employed approximately 29,700 people, of whom approximately 20,200 were employed on a part-time basis. Approximately 89% of the Company's employees are covered by 28 collective bargaining agreements (typically having three or four year terms) negotiated with approximately 17 different local unions. During Fiscal 1997, eight contracts, covering approximately 13,000 Pathmark associates in 92 stores, will expire. The Company does not anticipate any difficulty in renegotiating these contracts. The Company believes that its relationship with its employees is generally satisfactory. 7 ITEM 2. PROPERTIES** Reference is made to the answer to Item 1, "Business" of this report for information concerning the states in which the Company's supermarkets and distribution and processing facilities are located. See "Business of Pathmark-Supply and Distribution" in Item 1 of this report for information concerning the Company's distribution and processing facilities. Pathmark's 144 supermarkets have an aggregate selling area of approximately 5.5 million square feet. Twenty of the supermarkets are owned by Pathmark and the remaining 124 are leased. These supermarkets either are freestanding stores or are located in shopping centers. Thirty leases expire during the current and next four calendar years and Pathmark has options to renew all of them. Pathmark owns its corporate headquarters in Woodbridge, NJ and maintains administrative and accounting offices in Carteret, New Jersey in leased premises totaling approximately 150,000 square feet in size. Most of the facilities owned by Pathmark are owned subject to mortgages. Pathmark plans to acquire leasehold or fee interests in any property on which new stores or other facilities are opened and will consider entering into sale/leaseback or mortgage transactions with respect to owned properties if Pathmark believes such transactions are financially advantageous. - ------------------------ ** Except as otherwise indicated, information contained in this Item is given as of February 1, 1997. 8 ITEM 3. LEGAL PROCEEDINGS The Company is a party to a number of legal proceedings in the ordinary course of business. Management believes that the ultimate resolution of these proceedings will not in the aggregate have a material adverse impact on the financial condition, results of operations or business of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (AS OF APRIL 1, 1997) Neither the Company's Class A Common Stock nor its Class B Common Stock, each $0.01 par value, is publicly traded on any market. All of registrant's outstanding Common Stock is held by SMG-II Holdings Corporation ("SMG-II"). The authorized preferred stock of the Company consists of 9,000,000 shares of $3.52 Cumulative Exchangeable Redeemable Preferred Stock (the "Holdings Preferred Stock"), of which 4,890,671 shares were issued and outstanding at April 1, 1997. The Holdings 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 the Company. No active public trading market currently exists for the Holdings Preferred Stock. The Holdings 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 the Company. The Company is currently in arrears on payment of more than six quarterly dividends on the Holdings Preferred Stock and does not expect to receive cash flow sufficient to permit payments of dividends on the Holdings Preferred Stock in the foreseeable future. The holders of the Holdings Preferred Stock reelected two persons to the Company's Board of Directors at its 1996 annual meeting. The payment of dividends to holders of the Company's Common Stock is subject to restrictions by the Certificate of Designation of Rights, Preferences and Privileges under which the Holdings Preferred Stock was issued. The Company has not paid any dividends on its Common Stock and does not anticipate paying cash dividends on its Common Stock during Fiscal 1997. The authorized capital stock of SMG-II consists of 3,000,000 shares of SMG-II Class A Common Stock, 3,000,000 shares of SMG-II Class B Common Stock, of which 672,476 and 320,000 shares, respectively, were issued and outstanding at April 1, 1997, and 4,000,000 shares of SMG-II Preferred Stock, of which 1,500,000 shares are designated SMG-II Series A Preferred Stock, 1,500,000 shares are designated SMG-II Series B Preferred Stock, and 8,520 shares are designated SMG-II Series C Preferred Stock (the three series of Preferred Stock hereinafter collectively referred to as "SMG-II Preferred Stock"). At April 1, 1997, there were outstanding 236,731 shares of SMG-II Series A Preferred Stock, 180,769 shares of SMG-II Series B Preferred Stock and 8,520 shares of SMG-II Series C Preferred Stock. SMG-II's capital stock is held beneficially as follows: (i) SMG-II Class A Common Stock by approximately 56 holders, including six affiliates of Merrill Lynch & Co., Inc. (The "ML Common Investors"), CBC Capital Partners, Inc. ("CBC"), an affiliate of Chase Manhattan Corp., and 49 current and former members of the Company's management (the "Management Investors"); (ii) SMG-II Series A 9 Preferred Stock by five affiliates of Merrill Lynch & Co., Inc. (the "ML Preferred Investors", the ML Common Investors and ML Preferred Investors hereinafter collectively referred to as the "ML Investors"); (iii) SMG-II Class B Common Stock held by three holders, including CBC, The Equitable Life Assurance Society of the United States ("Equitable") and an affiliate of Equitable (collectively, the "Equitable Investors"); (iv) SMG-II Series B Preferred Stock held by three holders, including CBC and the Equitable Investors; and (v) SMG-II Series C Preferred Stock held by one Management Investor. Holders of shares of SMG-II Class A Common Stock are entitled to one vote per share on all matters to be voted on by stockholders. Holders of shares of SMG-II Class B Common Stock are not entitled to any voting rights, except as required by law or as otherwise provided in the Restated Certificate of Incorporation of SMG-II. Subject to compliance with certain procedures, holders of shares of SMG-II Class B Common Stock may exchange their shares for shares of SMG-II Class A Common Stock and holders of shares of SMG-II Class A Common Stock may exchange their shares for shares of SMG-II Class B Common Stock, in each case on a share-for-shares basis. All holders of SMG-II capital stock are parties to a Stockholders Agreement dated as of February 4, 1991, as amended, with SMG-II (the "Stockholders Agreement"). SMG-II Preferred Stock has a stated value and liquidation preference of $200 per share and bears dividends at the rate of 10% of the stated value per annum, payable annually. At the option of SMG-II, dividends are payable in cash or may accumulate (and the amount thereof shall compound annually). Holders of shares of SMG-II Series A Preferred Stock and SMG-II Series C Preferred Stock are entitled to one vote per share of SMG-II Class A Common Stock into which such SMG-II Series A Preferred Stock and SMG-II Series C Preferred Stock are convertible on all matters to be voted on by SMG-II stockholders, subject to increase to 1.11 votes per share upon the occurrence of certain events. Holders of shares of SMG-II Series B Preferred Stock are entitled to one vote per share of SMG-II Class B Common Stock into which such SMG-II Series B Preferred Stock is convertible for the purpose of voting on any consolidation or merger, sale, lease or exchange of substantially all of the assets or any liquidation, dissolution or winding up of SMG-II. Additionally, holders of SMG-II Preferred Stock have separate voting rights with respect to alteration in the voting powers, rights and preferences and certain other terms affecting the SMG-II Preferred Stock. Subject to compliance with certain procedures, holders of SMG-II Series B Preferred Stock may exchange their shares for shares of SMG-II Series A Preferred Stock and holders of SMG-II Series A Preferred Stock may exchange their shares for shares of SMG-II Series B Preferred Stock, on a share-for-share basis. Each series of SMG-II Preferred Stock ranks pari passu with each other series. At the option of the holder, SMG-II Preferred Stock is convertible into SMG-II Common Stock at any time, on or prior to the occurrence of certain events, including an initial public offering of in excess of 25% of the number of outstanding shares of common stock of SMG-II, at a conversion ratio of one share of the corresponding class of SMG-II Common Stock for each share of SMG-II Preferred Stock, subject to adjustment upon the occurrence of certain events. Holders of SMG-II Preferred Stock are party with the holders of SMG-II Common Stock to the Stockholders Agreement which, among other things, restricts the transferability of SMG-II capital stock and relates to the corporate governance of SMG-II. None of SMG-II's capital stock is publicly traded on any market. See item 12, "Security Ownership of Certain Beneficial Owners and Management." 10 ITEM 6. SELECTED FINANCIAL DATA The following table represents selected financial data for the last five fiscal years and should be read in conjunction with the Company's Consolidated Financial Statements in Item 8 of this report. SUPERMARKETS GENERAL HOLDINGS CORPORATION SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS (IN MILLIONS)
FISCAL YEARS(A) ----------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- STATEMENTS OF OPERATIONS DATA: Sales(b)................................................................ $ 3,711 $ 3,972 $ 3,969 $ 4,022 $ 4,110 Cost of sales(b) (exclusive of depreciation and amortization shown separately below)..................................................... 2,620 2,838 2,866 2,952 3,031 --------- --------- --------- --------- --------- Gross profit............................................................ 1,091 1,134 1,103 1,070 1,079 Selling, general and administrative expenses(b)......................... 857 866 851 837 817 Depreciation and amortization(c)........................................ 89 80 76 70 69 Restructuring charge(d)................................................. 9 -- -- -- -- Lease commitment charge(e).............................................. 9 -- -- -- -- Recapitalization expense(f)............................................. -- -- -- 17 -- Provision for store closings(g)......................................... -- -- -- 6 -- Amortization of goodwill................................................ -- -- -- -- 18 Goodwill write-off...................................................... -- -- -- -- 601 --------- --------- --------- --------- --------- Operating earnings (loss)............................................... 127 188 176 140 (426) Interest expense, net(h)................................................ (164) (171) (160) (177) (185) Gain on disposition of freestanding drug stores(i)...................... -- 16 -- -- -- Gain on disposal of Purity(j)........................................... -- 16 -- -- 2 --------- --------- --------- --------- --------- Earnings (loss) from continuing operations before income taxes, gain on disposal of home centers segment, extraordinary items and cumulative effect on accounting changes.......................................... (37) 49 16 (37) (609) Income tax benefit (provision).......................................... 18 30 (4) 21 (7) --------- --------- --------- --------- --------- Earnings (loss) from continuing operations before gain on disposal of home centers segment, extraordinary items and cumulative effect on accounting changes.................................................... (19) 79 12 (16) (616) Loss from discontinued operations....................................... -- -- (2) (1) (1) Gain on disposal of home centers segment, net of tax(k)................. -- -- 17 -- -- --------- --------- --------- --------- --------- Earnings (loss) before extraordinary items and cumulative effect on accounting changes.................................................... (19) 79 27 (17) (617) Extraordinary items, net of tax(l)...................................... (1) (2) (4) (106) (5) --------- --------- --------- --------- --------- Earnings (loss) before cumulative effect of accounting changes.......... (20) 77 23 (123) (622) Cumulative effect of accounting changes, net of tax(m).................. -- -- -- (40) -- --------- --------- --------- --------- --------- Net earnings (loss)..................................................... (20) 77 23 (163) (622) Less: non-cash preferred stock accretion and dividend requirements...... (19) (19) (19) (19) (18) --------- --------- --------- --------- --------- Net earnings (loss) attributable to common stockholder(n)............... $ (39) $ 58 $ 4 $ (182) $ (640) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Ratio of earnings to fixed charges(o)................................... -- 1.26x 1.09x -- -- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Deficiency in earnings available to cover fixed charges(p).............. $ 37 $ -- $ -- $ 37 $ 609 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
AS OF --------------------------------------------------------------- FEB. 1, FEB. 3, JAN. 28, JAN. 29, JAN. 30, 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- BALANCE SHEET DATA: Total assets....................................................... $ 1,017 $ 1,009 $ 1,029 $ 1,138 $ 1,114 Working capital deficiency......................................... 176 164 124 108 83 Obligations under capital leases, long-term........................ 176 140 127 132 127 Other long-term debt, net of current maturities.................... 1,213 1,242 1,353 1,415 1,278 Cumulative exchangeable redeemable preferred stock................. 105 104 102 100 99 Stockholder's deficit.............................................. 1,258 1,222 1,280 1,285 1,103
11 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS (a) The Company's fiscal year ends on the Saturday nearest to January 31 of the following calendar year. Fiscal years consist of 52 weeks, except for 53 weeks in Fiscal 1995. (b) Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the Fiscal 1996 presentation, the most significant of which was the Company's change in reporting of Pathmark coupon expenses (excluding manufacturers' coupons). Prior to this change, Pathmark coupon expenses, net of any vendor reimbursements, were recorded in selling, general and administrative expenses. As a result of this change, Pathmark gross coupon expenses have now been recorded as a reduction of sales with any vendor reimbursements being recorded as a reduction of cost of goods sold. (c) In Fiscal 1996, depreciation and amortization includes a $5 million pretax charge to write down certain fixed assets held for sale to their estimated net realizable values. See Note 7 of the Notes to Consolidated Financial Statements at Item 8, Part II of this Form 10-K. (d) During Fiscal 1996, the Company recorded a pretax charge of $9 million for reorganization and restructuring costs related to its administrative operations. See Note 3 of the Notes to Consolidated Financial Statements at Item 8, Part II of this Form 10-K. (e) During Fiscal 1996, the Company recorded a pretax charge of $9 million related to unfavorable lease commitments of certain unprofitable stores in the Company's southern region. See Note 4 of the Notes to Consolidated Financial Statements at Item 8, Part II of this Form 10-K. (f) In connection with the Recapitalization in Fiscal 1993, the Company recorded a pretax charge of $17 million related to reorganization and restructuring costs. (g) During Fiscal 1993, the Company decided to close or dispose of five stores and recorded a pretax charge of $6 million. (h) Prior to Fiscal 1995, interest expense was net of interest charged to discontinued operations. (i) During Fiscal 1995, the Company decided to dispose of its 36 freestanding drug stores. See Note 22 of the Notes to Consolidated Financial Statements at Item 8, Part II of this Form 10-K. (j) During Fiscal 1995, the Company sold its remaining investment in Purity for a gain of $16 million in connection with the sale of Purity to the Stop & Shop Companies, Inc. See Note 23 of the Notes to Consolidated Financial Statements at Item 8, Part II of this Form 10-K. During Fiscal 1992, the Company recorded a gain of $2 million related to the disposal of the Purity Operations. (k) During Fiscal 1994, the Company sold its home centers segment, which resulted in a gain on sale of $17 million, net of $2 million of income taxes. See Note 24 of the Notes to Consolidated Financial Statements at Item 8, Part II of this Form 10-K. (l) During Fiscal 1996, Fiscal 1995 and Fiscal 1994, the Company recorded extraordinary charges of $1 million, $2 million and $4 million, respectively, net of an income tax benefit, related to the early extinguishment of debt. See Note 18 of the Notes to Consolidated Financial Statements at Item 8, Part II of this Form 10-K. During Fiscal 1993, in connection with the Recapitalization, the Company recorded an extraordinary charge of $106 million, net of an income tax benefit of $9 million, related to the early extinguishment of debt. During Fiscal 1992, the Company recorded an extraordinary charge of $5 million, net of an income tax benefit of $3 million, related to the early extinguishment of debt. (m) The cumulative effect of accounting changes in Fiscal 1993 of $40 million, net of an income tax benefit of $29 million, reflects the adoption of Statement of Financial Accounting Standards No. 106, 12 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS "Employers' Accounting for Postretirement Benefits other than Pensions"; the adoption of Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits"; the change in the method utilized to calculate last-in-first-out (LIFO) inventories; and the change in the determination of the discount rate utilized to record the present value of certain noncurrent liabilities. All of the accounting changes were made as of the beginning of Fiscal 1993. (n) On February 4, 1991, the Company became a wholly owned subsidiary of SMG-II through the consummation of an exchange offer whereby the then existing stockholders exchanged on a one-for-one basis shares of the Company's common stock for shares of common stock of SMG-II. Since the Company is a wholly owned subsidiary, earnings (loss) per share information is not presented. (o) 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). In addition, for Fiscal 1995, the inclusion of preferred stock dividend requirements results in a ratio of earnings to fixed charges and preferred stocks dividends of 1.09x. For Fiscal 1994, the inclusion of preferred stock dividend requirements results in a deficiency in earnings available to cover fixed charges and preferred stock dividends of approximately $7 million. (p) 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 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The matters discussed herein, with the exception of historical information, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, the competitive environment in which the Company operates and the general economic conditions in the Company's trading areas. RESULTS OF OPERATIONS RECLASSIFICATIONS: Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the Fiscal 1996 presentation, the most significant of which was the Company's change in reporting of Pathmark coupon expenses (excluding manufacturers' coupons). Prior to this change, Pathmark coupon expenses, net of any vendor reimbursements, were recorded in selling, general and administrative expenses. As a result of this change, Pathmark gross coupon expenses have now been recorded as a reduction of sales, with any vendor reimbursements being recorded as a reduction of cost of goods sold. Prior periods have been reclassified to conform to the current presentation. FISCAL 1996 (52-WEEK YEAR) V. FISCAL 1995 (53-WEEK YEAR) SALES: Sales in Fiscal 1996 were $3.71 billion compared to $3.97 billion in Fiscal 1995. Sales comparisons were impacted by the extra week in the prior year and the disposition of the freestanding drug stores during Fiscal 1995. Sales generated by the freestanding drug stores were $110.8 million in Fiscal 1995. Same store sales from supermarkets decreased 2.8% for the year primarily due to a significant increase in competitive new store openings and remodels, particularly in the Company's southern region. During Fiscal 1996, the Company opened four new Pathmark 2000 format stores, two of which replaced smaller stores, and completed 21 major renovations and enlargements to existing supermarkets. Two stores were closed and not replaced during the year. At Fiscal 1996 year end, the Company operated 144 supermarkets, including 53 Pathmark 2000 format stores, compared with the end of Fiscal 1995 when the Company operated 144 supermarkets, including 44 Pathmark 2000 format stores. GROSS PROFIT: Gross profit in Fiscal 1996 was $1.09 billion or 29.4% of sales compared with $1.13 billion or 28.6% of sales in Fiscal 1995. Excluding the impact of the disposition of the freestanding drug stores, gross profit as a percentage of sales was 28.8% in Fiscal 1995. The improvement in gross profit, as a percentage of sales in Fiscal 1996 compared to Fiscal 1995, was primarily due to increased focus on merchandising programs, the impact of the disposition of the freestanding drug stores, as well as the Company's continuing emphasis on the Pathmark 2000 format stores which allow expanded variety in all departments particularly high margin perishables. The decrease in gross profit was primarily attributable to the lower sales. The cost of goods sold comparisons were affected by a pretax LIFO credit of $1.3 million and a pretax LIFO charge of $1.1 million in Fiscal 1996 and Fiscal 1995, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"): SG&A decreased $8.5 million or 1.0% for Fiscal 1996 compared with Fiscal 1995. SG&A, on a proforma basis eliminating the SG&A impact of the freestanding drug stores, increased 2.0% in Fiscal 1996 compared to Fiscal 1995. As a percentage of sales, SG&A were 23.1% in Fiscal 1996, up from 21.8% in Fiscal 1995 due to the impact of lower sales, higher labor and labor related expenses, claims expenses and occupancy costs, partially offset by lower advertising expenses and the impact of the disposition of the freestanding drug stores in Fiscal 1995. SG&A for Fiscal 1996 also included a first quarter provision of $5.8 million representing the termination costs for two former executives of the Company, a first quarter gain of $5.6 million recognized on the sale of certain real estate and a second quarter curtailment gain of $2.0 million due to the elimination of postretirement medical coverage for active non-union associates. SG&A for Fiscal 1995 also included a fourth quarter gain of $3.4 million recognized on the sale of a former warehouse of Purity, a previously divested company. 14 DEPRECIATION AND AMORTIZATION: Depreciation and amortization of $89.1 in Fiscal 1996 was $8.6 million higher than $80.5 million in Fiscal 1995. The increase for Fiscal 1996 was primarily due to a pretax charge of $5.4 million to write down certain fixed assets held for sale, principally in the Company's southern region, to their estimated net realizable values and capital expenditures. Depreciation and amortization excludes video tape amortization, which is recorded in cost of goods sold, of $3.1 million and $2.8 million in Fiscal 1996 and Fiscal 1995, respectively. RESTRUCTURING CHARGE: During the fourth quarter of Fiscal 1996, the Company recorded a pretax charge of $9.1 million for reorganization and restructuring costs related to its administrative operations. The restructuring charge included $4.2 million for the costs of a voluntary early retirement program and $1.2 million for severance and termination benefits. The remaining charge of $3.7 million primarily relates to consulting fees incurred in connection with the restructuring and exit costs for facility consolidation. LEASE COMMITMENT CHARGE: During the fourth quarter of Fiscal 1996, the Company decided to divest a group of its southern region stores, certain of which have experienced unprofitable operating results. The Company concluded that the operating losses being experienced by these stores were other than temporary and that the projected operating results of such stores would not be sufficient to recover their long-lived assets and their contractual lease commitments. Further, the Company believes that these lease costs will not be significantly recoverable through any future sublease. Therefore, the Company recorded a $8.8 million pretax charge related to these unfavorable lease commitments in, addition to writing down the long-lived assets of these stores (see "DEPRECIATION AND AMORTIZATION" above). OPERATING EARNINGS: Operating earnings for Fiscal 1996 were $127.2 million compared with $188.0 million for Fiscal 1995. The decrease in operating earnings during Fiscal 1996 compared to Fiscal 1995 was due to lower sales, higher depreciation and amortization expense, the restructuring charge and the lease commitment charge, partially offset by lower SG&A. INTEREST EXPENSE: Interest expense was $164.1 million for Fiscal 1996 compared to $171.0 million in Fiscal 1995 primarily due to reductions in the Term Loan and the reduction in the amortization of PTK Exchangeable Guaranteed Debentures original issue discount, as a result of their early paydown, along with lower interest rates. INCOME TAXES: The income tax benefit for Fiscal 1996 was $17.7 million. The income tax benefit for Fiscal 1995 was $29.8 million, reflecting the reversal of the valuation allowance of $26.8 million related to the Company's deferred income tax assets. The reversal was recorded in conjunction with the Company's continuing evaluation of its deferred income tax assets. In the opinion of management, sufficient evidence continues to exists, which indicates that it is more likely than not, that the Company will be able to realize its deferred income tax assets. During Fiscal 1996, the Company made income tax payments of $4.7 million and received income tax refunds of $8.1 million. During Fiscal 1995, the Company made income tax payments of $3.9 million and received income tax refunds of $10.3 million. EXTRAORDINARY ITEMS: During the first quarter of Fiscal 1996, in connection with the termination of the Plainbridge credit agreement due to the reacquisition of Plainbridge by Pathmark, the Company wrote off deferred financing fees, resulting in a net loss on early extinguishment of debt of $0.7 million. During the first quarter of Fiscal 1996, the Company also made a paydown of $3.2 million of PTK Exchangeable Guaranteed Debentures, including premium and original issue discount, resulting in a net loss on early extinguishment of debt of $0.1 million. During the second quarter of Fiscal 1996, in connection with the proceeds from the sale of certain mortgaged property, the Company made a mortgage paydown of $5.3 million, including accrued interest and debt premiums, resulting in a net loss on early extinguishment of debt of $0.2 million. 15 NET EARNINGS: The Company's net loss in Fiscal 1996 was $20.1 million compared to net earnings of $76.5 million in Fiscal 1995. The decrease in net earnings for Fiscal 1996 compared to Fiscal 1995 was due to lower operating earnings in Fiscal 1996, the gain on disposition of the freestanding drug stores, the gain on the disposal of Purity and a higher income tax benefit in Fiscal 1995, partially offset by lower interest expense in Fiscal 1996. FISCAL 1995 (53-WEEK YEAR) V. FISCAL 1994 (52-WEEK YEAR) SALES: Sales were $3.97 billion in both Fiscal 1995 and Fiscal 1994. The decrease in sales, due to the sale of the freestanding drug stores on July 28, 1995, was offset by sales for the extra week in Fiscal 1995. Same store sales from supermarkets decreased 0.3% for the year. During Fiscal 1995, the Company opened five supermarkets, of which three replaced older, smaller stores and completed 18 renovations and enlargements. One store was closed and not replaced during the year. At Fiscal 1995 year end, the Company operated 144 supermarkets, including 44 Pathmark 2000 format stores, compared with the end of Fiscal 1994 when the Company operated 143 supermarkets, including 29 Pathmark 2000 format stores. The Company operated one freestanding drug store at Fiscal 1995 year end compared to 36 freestanding drug stores at the end of Fiscal 1994 (see "DISPOSITION OF FREESTANDING DRUG STORES" below). GROSS PROFIT: Gross profit in Fiscal 1995 was $1.13 billion or 28.6% of sales compared with $1.10 billion or 27.8% of sales in Fiscal 1994. The improvement in gross profit, as a percentage of sales for Fiscal 1995 compared to Fiscal 1994, was primarily due to increased focus on merchandising programs as well as to the Company's continuing emphasis on the Pathmark 2000 format stores, which allow expanded variety in all departments, particularly higher margin perishables and lower inventory shrink. The cost of goods sold comparisons were affected by a pretax LIFO charge of $1.1 million and a pretax LIFO credit of $0.7 million for Fiscal 1995 and Fiscal 1994, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"): SG&A increased $14.7 million or 1.7% in Fiscal 1995 compared with Fiscal 1994. SG&A, on a proforma basis eliminating the SG&A impact of the freestanding drug stores in last year's third and fourth quarter, increased 4.0% in Fiscal 1995 compared to Fiscal 1994. As a percentage of sales, SG&A were 21.8% in Fiscal 1995, up from 21.4% in Fiscal 1994, due to higher claims expenses, occupancy costs and supplies, partially offset by lower promotional costs and labor and labor related expenses, along with weather related expenses that adversely affected the first quarter of Fiscal 1994. SG&A for Fiscal 1995 also included a fourth quarter gain of $3.4 million recognized on the sale of a former warehouse of Purity, a previously divested company. DEPRECIATION AND AMORTIZATION: Depreciation and amortization of $80.5 million in Fiscal 1995 was $4.9 million higher than the $75.6 million in Fiscal 1994. The increase in depreciation and amortization expense for Fiscal 1995 was primarily due to capital expenditures. Depreciation and amortization excludes video tape amortization, which is recorded in cost of goods sold, of $2.8 million and $2.6 million in Fiscal 1995 and Fiscal 1994, respectively. OPERATING EARNINGS: Operating earnings for Fiscal 1995 were $188.0 million compared with the $175.9 million in Fiscal 1994. The increase in operating earnings in Fiscal 1995 compared to Fiscal 1994 was due to higher gross profit, partially offset by higher SG&A and depreciation and amortization expenses. INTEREST EXPENSE: Interest expense was $171.0 million for Fiscal 1995 compared to $170.8 million in Fiscal 1994 due to the higher interest rates on the Company's floating rate bank debt and higher interest related to the Pathmark Deferred Coupon Notes and obligations under capital leases, partially offset by the reduction in the amortization of PTK Exchangeable Guaranteed Debentures original issue discount as a result of the paydown of such debt. During Fiscal 1994, the Company allocated $11.0 million of interest expense to discontinued operations. 16 DISPOSITION OF FREESTANDING DRUG STORES: During the second quarter of Fiscal 1995, the Company made a decision to dispose of its 36 freestanding drug stores and, on July 28, 1995, through its Pathmark subsidiary, completed the sale of 30 of its freestanding drug stores to Rite Aid Corporation, including merchandise inventory, for $59.9 million. The Company recorded a pretax gain on the disposition of its freestanding drug stores of $15.5 million, net of a $19.0 million charge related to the estimated exit costs of the remaining six freestanding drug stores. Five of the remaining six freestanding drug stores were closed during Fiscal 1995 and the sixth store closed during the second quarter of Fiscal 1996. DISPOSAL OF PURITY SUPREME, INC.: During Fiscal 1995, in connection with the sale of Purity to the Stop & Shop Companies, Inc., the Company sold its remaining investment in Purity for $16.4 million, the proceeds of which were used to repay a portion of its PTK Exchangeable Guaranteed Debentures. This transaction resulted in a gain of $16.4 million. INCOME TAXES: The income tax benefit of $29.8 million for Fiscal 1995 is net of reversals through July 29, 1995 of the deferred income tax valuation allowance totaling $26.8 million related to the Company's deferred income tax assets. The reversal was recorded in conjunction with the Company's continuing evaluation of its deferred income tax assets. In the opinion of management, sufficient evidence exists, such as the positive trend in earnings, which indicates that it is more likely than not that the Company will be able to realize its deferred income tax assets. The income tax provision was $4.1 million for Fiscal 1994. As a result of the sale of the Company's investment in Purity, the Company generated a capital loss of approximately $69.5 million, due to a stock basis differential of its investment. During Fiscal 1995, the Company utilized $42.9 million of these capital losses, primarily from the sale of the freestanding drug stores, resulting in a capital loss carryforward at February 3, 1996 of $26.6 million (a $9.3 million tax benefit). The Company has reserved a valuation allowance of $8.3 million related to the deferred tax capital loss carryforward of $9.3 million after giving effect to certain tax planning strategies expected to be implemented in Fiscal 1996. During Fiscal 1995, the Company made income tax payments of $3.9 million and received income tax refunds of $10.3 million. During Fiscal 1994, the Company made income tax payments of $6.5 million and received income tax refunds of $25.9 million. SUMMARY OF CONTINUING OPERATIONS: Earnings from continuing operations before extraordinary items were $78.7 million compared to $12.0 million for Fiscal 1994. The increase in earnings from continuing operations for Fiscal 1995 was primarily due to the gain on disposition of freestanding drug stores, the gain on the disposal of Purity, higher operating earnings and the tax benefit due to the reversal of the valuation allowance related to the Company's net deferred income tax assets. EXTRAORDINARY ITEMS: During Fiscal 1995, in connection with the proceeds from the sale of the remaining Purity investment, the sale of the freestanding drug stores and the sale of the home centers segment, the Company was required to make a paydown of PTK DIB's. The premium paid, including original issue discount, resulted in a net loss on early extinguishment of debt of $2.2 million. NET EARNINGS: Net earnings were $76.5 million in Fiscal 1995 compared to $23.2 million in Fiscal 1994. Fiscal 1995 and Fiscal 1994 included an extraordinary item related to the net loss on early extinguishment of debt of $2.2 million and $3.7 million, respectively. Fiscal 1994 included the gain on disposal of home centers segment of $17.0 million and a loss from discontinued operations of $2.1 million. FINANCIAL CONDITION DEBT SERVICE: During Fiscal 1996, total debt decreased $6.6 million from Fiscal 1995 year end primarily due to Pathmark term loan repayments under the Bank Credit Agreement (the "Term Loan") of $44.8 million, and the paydown of the PTK Exchangeable Guaranteed Debentures, partially offset by 17 borrowings under the Pathmark Working Capital Facility and debt accretion on Pathmark Deferred Coupon Notes (as defined in Note 10 of the Notes of Consolidated Financial Statements at Item 8, Part II of this Form 10-K) and PTK Exchangeable Guaranteed Debentures. Borrowings under the Pathmark Working Capital Facility were $73.5 million at February 1, 1997 and have increased to $79.0 million at April 29, 1997. During the third quarter of Fiscal 1996, the Company sold three of its supermarket properties for $19.3 million, net of fees of $1.4 million and income taxes of $0.7 million and simultaneously leased back the properties. The net proceeds were used to paydown debt, primarily the Working Capital Facility. During Fiscal 1996, Pathmark twice amended its existing Bank Credit Agreement. In conjunction with the reacquisition of the Plainbridge capital stock, the outstanding obligations of Plainbridge under its bank credit agreement were satisfied by the Company and the Plainbridge bank credit agreement was terminated. Pathmark simultaneously entered into an amendment to its Bank Credit Agreement with its existing lenders increasing the Pathmark's Working Capital Facility from $175 million to $200 million (of which the maximum of $125.0 million can be in letters of credit) to satisfy any additional liquidity needs and prospectively modifying certain of its financial covenants to take into account the operations of Plainbridge. In December 1996, Pathmark amended its Bank Credit Agreement with existing lenders modifying certain of its covenants, including those concerning the generation of minimum levels of cash flow (as defined), minimum interest coverage and maximum leverage rates. The Company is required to repay a portion of its borrowings under the Term Loan each year, so as to retire such indebtedness in its entirety by Fiscal 1999. The Company is also required to make sinking fund payments on the Subordinated Notes (as defined in Note 10 of the Notes to Consolidated Financial Statements at Item 8, Part II of this Form 10-K) in the amount of 25% of the original aggregate principal amount of the Subordinated Notes on each of June 15, 2000 and June 15, 2001. The Subordinated Debentures (as defined in Note 10 of the Notes to Consolidated Financial Statements at Item 8, Part II of this Form 10-K) and the remaining Subordinated Notes mature on June 15, 2002. The Senior Subordinated Notes (as defined in Note 10 of the Notes to Consolidated Financial Statements at Item 8, Part II of this Form 10-K) and the Deferred Coupon Notes mature in Fiscal 2003. The Company has no payment obligations, through intercompany notes or otherwise, with respect to its parent's indebtedness. The indebtedness under the Working Capital Facility and the Pathmark Term Loan bear interest at floating rates and cash interest payments on such indebtedness may vary in future years. The Company does not currently maintain any interest rate hedging arrangements due to the reasonable risk that 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. 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 Pathmark Deferred Coupon Notes and the PTK Exchangeable Guaranteed Debentures) are as follows (dollars in millions):
PRINCIPAL FISCAL YEARS PAYMENTS - ----------------------------------------------------------------------------------- ----------- 1997............................................................................... $ 74.4 1998............................................................................... 155.7 1999............................................................................... 127.2 2000............................................................................... 50.6 2001............................................................................... 50.0 2002............................................................................... 195.8 2003............................................................................... 633.8
18 LIQUIDITY: The consolidated financial statements of the Company indicate that, at February 1, 1997, current liabilities exceeded current assets by $175.8 million and stockholder's deficit was $1.26 billion. Management believes that cash flows generated from operations, supplemented by the unused borrowing capacity under the Working Capital Facility (refer to Notes 1 and 10 of the Notes to Consolidated Financial Statements at Item 8, Part II of this Form 10-K) and the availability of capital lease financing will be sufficient to pay the Company's debts as they come due, provide for its capital expenditure program and meet its other cash requirements. The Company believes that it will be able to make the scheduled payments or refinance its obligations with respect to its indebtedness through a combination of operating funds and borrowing facilities. Future refinancing will be necessary if cash flow from operations is not sufficient to meet its debt service requirements related to the maturity of a portion of the Pathmark Term Loan, the Pathmark Working Capital Facility and certain mortgages in Fiscal 1998, the amortization and subsequent maturity of the Pathmark Term Loan in Fiscal 1999 and the maturity of the Pathmark Subordinated Notes and Pathmark Subordinated Debentures in Fiscal 2002. The Company expects that it will be necessary to refinance all or a portion of the Pathmark Senior Subordinated Notes, the Pathmark Deferred Coupon Notes due in Fiscal 2003 and the PTK Exchangeable Guaranteed Debentures due in Fiscal 2003. The Company may undertake a refinancing of some or all of such indebtedness sometime prior to its maturity. The Bank Credit Agreement includes an annual cleandown provision requiring borrowings under the Company's Working Capital Facility not to exceed $60.0 million for a period of 30 consecutive days. The Company was in compliance with its various debt covenants at February 1, 1997 and, based on management's operating projections for Fiscal 1997, the Company believes that it will be able to satisfy this cleandown provision and continue to be in compliance with its other debt covenants. The Company's ability to make scheduled payments, to refinance or otherwise meet its obligations with respect to its indebtedness depends on its financial and operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond its control. Although the Company's cash flow from its operations and borrowings has been sufficient to meet its debt service obligations, there can be no assurance that the Company's operating results will continue to be sufficient or that future borrowing facilities will be available for payment or refinancing of Pathmark's and PTK's indebtedness or that future borrowing facilities will be available. The Company is currently holding discussions with its lenders with respect to refinancing its Bank Credit Agreement. The Pathmark Working Capital Facility expires in July 1998 and the Pathmark Term Loan matures in Fiscal 1999. Management believes it will successfully refinance this debt, however, there can be no assurances that the refinancing will occur or that the terms associated with any such new agreement will be more favorable to the Company. While it is the Company's intention to enter into other refinancings that it considers advantageous, there can be no assurances that the prevailing market conditions will be favorable to the Company. In the event the Company obtains any future refinancing on less than favorable terms, the holders of outstanding indebtedness could experience increased credit risk and could experience a decrease in the market value of their investment, because the Company might be forced to operate under terms that would restrict its operations and might find its cash flow reduced. PREFERRED STOCK DIVIDENDS: The terms of the Exchangeable Preferred Stock provide for cumulative quarterly dividends at an annual rate of $3.52 per share when, and if declared by the Board of Directors of Holdings. Dividends for the first 20 quarterly dividend periods (through October 15, 1992) were paid at the Company's option in additional shares of Exchangeable Preferred Stock. Since January 15, 1993 dividends not paid in cash will cumulate at the rate of $3.52 per share per annum, without interest, until declared and paid. As of February 1, 1997, unpaid dividends of $73.2 million were accrued and included in other noncurrent liabilities. CAPITAL EXPENDITURES: Capital expenditures for Fiscal 1996, including property acquired under capital leases, were $94.7 million compared to $110.7 million for Fiscal 1995 and $105.3 million for Fiscal 1994. During Fiscal 1996, the Company opened four new Pathmark 2000 format stores, two of which replaced 19 smaller stores, and completed 21 major renovations and enlargements. During Fiscal 1997, the Company plans to open up to three new Pathmark 2000 format stores (one of which has already opened), and to complete up to an aggregate of ten major renovations and enlargements. CASH FLOWS: Cash provided by operating activities amounted to $77.6 million in Fiscal 1996 compared to $136.6 million in Fiscal 1995. The decrease in net cash provided by operating activities was primarily due to a decline in net earnings and by a decrease in cash provided by operating assets and liabilities. Cash used for investing activities in Fiscal 1996 was $47.0 million due to expenditures of property and equipment, partially offset by proceeds from property dispositions. Cash provided by investing activities in Fiscal 1995 was $15.6 million, primarily due to the net proceeds from the disposition of the freestanding drug stores of $59.9 million, the net proceeds from the disposal of Purity of $16.4 million, the net proceeds from the sale of real estate of $3.4 million and the proceeds of $4.7 million related to the disposal of the home centers segment, partially offset by expenditures of property and equipment of $69.6 million. Cash used for financing activities in Fiscal 1996 was $32.1 million compared to $162.9 million in the prior-year period. The decrease in cash used for financing activities is primarily due to an increase in borrowings under the Working Capital Facility, the proceeds from the lease financing of three supermarket locations, a decrease in the repayment of PTK Exchangeable Guaranteed Debentures and a paydown of $25.0 million on the Term Loan in Fiscal 1995 in conjunction with the disposition of the freestanding drug stores. Cash provided by operating activities amounted to $136.6 million in Fiscal 1995 compared to $111.1 million in Fiscal 1994. The increase in net cash provided by operating activities was primarily due to an increase in net earnings, partially offset by a decrease in cash provided by operating assets and liabilities. Cash provided by investing activities in Fiscal 1995 was $15.6 million, primarily due to the net proceeds from the disposition of the freestanding drug stores of $59.9 million, the net proceeds from the disposal of Purity of $16.4 million, the net proceeds from the sale of real estate of $3.4 million and the proceeds of $4.7 million related to the disposal of the home centers segment, partially offset by expenditures of property and equipment of $69.6 million, compared to cash used for investing activities of $1.6 million in Fiscal 1994, primarily reflecting the expenditures for property and equipment of $84.0 million, net of the proceeds of the home centers segment of $81.1 million. Cash used for financing activities in Fiscal 1995 was $162.9 million compared to $92.5 million in the prior-year period. The increase in cash used for financing activities is primarily due to a decrease in borrowings under the Working Capital Facilities and a paydown of $25.0 million on the Pathmark Term Loan. 20 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS. SUPERMARKETS GENERAL HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
52 WEEKS 53 WEEKS 52 WEEKS ENDED ENDED ENDED FEBRUARY 1, FEBRUARY 3, JANUARY 28, 1997 1996 1995 ------------ ------------ ------------ Sales................................................................... $ 3,710,990 $ 3,972,070 $ 3,968,511 Cost of sales (exclusive of depreciation and amortization shown separately below)..................................................... 2,619,329 2,837,687 2,865,817 ------------ ------------ ------------ Gross profit............................................................ 1,091,661 1,134,383 1,102,694 Selling, general and administrative expenses............................ 857,374 865,851 851,128 Depreciation and amortization........................................... 89,139 80,535 75,632 Restructuring charge.................................................... 9,137 -- -- Lease commitment charge................................................. 8,763 -- -- ------------ ------------ ------------ Operating earnings...................................................... 127,248 187,997 175,934 Interest expense........................................................ (164,118) (170,969) (170,848) Interest charged to discontinued operations............................. -- -- 11,035 Gain on disposition of freestanding drug stores......................... -- 15,535 -- Gain on disposal of Purity.............................................. -- 16,381 -- ------------ ------------ ------------ Earnings (loss) from continuing operations before income taxes, gain on disposal of home centers segment and extraordinary items.............. (36,870) 48,944 16,121 Income tax benefit (provision).......................................... 17,723 29,763 (4,146) ------------ ------------ ------------ Earnings (loss) from continuing operations before gain on disposal of home centers segment and extraordinary items.......................... (19,147) 78,707 11,975 Loss from discontinued operations....................................... -- -- (2,099) Gain on disposal of home centers segment, net of an income tax provision of $2,324............................................................. -- -- 17,044 ------------ ------------ ------------ Earnings (loss) before extraordinary items.............................. (19,147) 78,707 26,920 Extraordinary items, net of an income tax benefit of $695 in Fiscal 1996, $1,506 in Fiscal 1995 and $-- in Fiscal 1994.................... (997) (2,180) (3,687) ------------ ------------ ------------ Net earnings (loss)..................................................... (20,144) 76,527 23,233 Less: non-cash preferred stock accretion and dividend requirements...... (18,954) (18,889) (18,828) ------------ ------------ ------------ Net earnings (loss) attributable to common stockholder.................. $ (39,098) $ 57,638 $ 4,405 ------------ ------------ ------------ ------------ ------------ ------------
See notes to consolidated financial statements. 21 SUPERMARKETS GENERAL HOLDINGS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AMOUNTS)
FEBRUARY 1, FEBRUARY 3, 1997 1996 ----------- ----------- ASSETS Current Assets Cash and cash equivalents............................................................. $ 10,967 $ 12,526 Accounts receivable, net.............................................................. 12,799 10,840 Merchandise inventories............................................................... 217,440 225,780 Income taxes receivable............................................................... 2,120 1,163 Deferred income taxes................................................................. 9,969 8,254 Prepaid expenses...................................................................... 24,970 25,211 Due from suppliers.................................................................... 13,950 13,178 Other current assets.................................................................. 5,942 5,868 ----------- ----------- Total Current Assets................................................................ 298,157 302,820 Property and Equipment, Net............................................................. 604,955 603,832 Deferred Financing Costs, Net........................................................... 28,743 33,685 Deferred Income Taxes................................................................... 39,530 26,805 Other Assets............................................................................ 45,200 41,628 ----------- ----------- $1,016,585 $1,008,770 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDER'S DEFICIT Current Liabilities Accounts payable...................................................................... $ 167,446 $ 185,328 Book overdrafts....................................................................... 41,086 43,989 Current maturities of long-term debt.................................................. 74,431 51,753 Accrued payroll and payroll taxes..................................................... 56,414 54,427 Current portion of lease obligations.................................................. 23,208 20,684 Accrued interest payable.............................................................. 20,712 19,309 Accrued expenses and other current liabilities........................................ 90,629 91,318 ----------- ----------- Total Current Liabilities........................................................... 473,926 466,808 ----------- ----------- Long-Term Debt.......................................................................... 1,213,081 1,242,324 ----------- ----------- Lease Obligations, Long-Term............................................................ 175,628 140,166 ----------- ----------- Other Noncurrent Liabilities............................................................ 306,733 278,296 ----------- ----------- Redeemable Securities Exchangeable Preferred Stock, $.01 par value.......................................... 105,372 103,633 Authorized: 9,000,000 shares Issued and outstanding: 4,890,671 shares Liquidation preference, $25 per share: $122,267 ----------- ----------- Total Redeemable Securities......................................................... 105,372 103,633 ----------- ----------- Commitments and Contingencies (Notes 13 and 26) Stockholder's Deficit Class A Common Stock $.01 par value..................................................... 7 7 Authorized: 1,075,000 shares Issued and outstanding: 650,675 shares Class B Common Stock $.01 par value..................................................... 3 3 Authorized: 1,000,000 shares Issued and outstanding: 320,000 shares Paid-in Capital......................................................................... 199,332 197,671 Accumulated Deficit..................................................................... (1,457,497) (1,420,138) ----------- ----------- Total Stockholder's Deficit......................................................... (1,258,155) (1,222,457) ----------- ----------- $1,016,585 $1,008,770 ----------- ----------- ----------- -----------
See notes to consolidated financial statements. 22 SUPERMARKETS GENERAL HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
CLASS A CLASS B TOTAL COMMON COMMON PAID-IN ACCUMULATED STOCKHOLDER'S STOCK STOCK CAPITAL DEFICIT DEFICIT ------------- ------------- ---------- ------------- ------------- Balance, January 29, 1994......................... $ 7 $ 3 $ 200,748 $ (1,485,468) $ (1,284,710) Net earnings.................................... -- -- -- 23,233 23,233 Accrued dividends on preferred stock ($3.52 per share)........................................ -- -- -- (17,215) (17,215) Accretion on preferred stock.................... -- -- (1,613) -- (1,613) --- --- ---------- ------------- ------------- Balance, January 28, 1995......................... 7 3 199,135 (1,479,450) (1,280,305) Net earnings.................................... -- -- -- 76,527 76,527 Accrued dividends on preferred stock ($3.52 per share)........................................ -- -- -- (17,215) (17,215) Accretion on preferred stock.................... -- -- (1,674) -- (1,674) Capital contribution from SMG-II Holdings Corporation................................... -- -- 210 -- 210 --- --- ---------- ------------- ------------- Balance, February 3, 1996......................... 7 3 197,671 (1,420,138) (1,222,457) Net loss........................................ -- -- -- (20,144) (20,144) Accrued dividends on preferred stock ($3.52 per share)........................................ -- -- -- (17,215) (17,215) Accretion on preferred stock.................... -- -- (1,739) -- (1,739) Capital contribution from SMG-II Holdings Corporation................................... -- -- 3,400 -- 3,400 --- --- ---------- ------------- ------------- Balance, February 1, 1997......................... $ 7 $ 3 $ 199,332 $ (1,457,497) $ (1,258,155) --- --- ---------- ------------- ------------- --- --- ---------- ------------- -------------
See notes to consolidated financial statements. 23 SUPERMARKETS GENERAL HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
52 WEEKS 53 WEEKS 52 WEEKS ENDED ENDED ENDED FEBRUARY 1, FEBRUARY 3, JANUARY 28, 1997 1996 1995 ----------- ----------- ----------- Operating Activities Net earnings (loss)............................................................ $ (20,144) $ 76,527 $ 23,233 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization................................................ 92,668 83,390 78,220 Deferred income tax benefit.................................................. (14,674) (30,726) (3,815) Interest accruable but not payable........................................... 16,678 15,028 13,541 Amortization of original issue discount...................................... 3,124 6,646 12,855 Amortization of debt issuance costs.......................................... 7,426 7,140 7,028 (Gain) loss on disposal of property and equipment............................ (5,347) 200 (252) Extraordinary loss on early extinguishment of debt........................... 997 2,180 3,687 Gain on disposition of freestanding drug stores.............................. -- (15,535) -- Gain on disposal of Purity................................................... -- (16,381) -- Gain on sale of real estate.................................................. -- (3,371) -- Gain on disposal of home centers segment..................................... -- -- (17,044) Loss from discontinued operations............................................ -- -- 2,099 Cash provided by (used for) operating assets and liabilities: Accounts receivable, net................................................... (1,959) 2,540 1,627 Merchandise inventories.................................................... 8,340 15,671 2,551 Income taxes............................................................... (262) 8,099 14,666 Prepaid expenses........................................................... (2,886) (1,630) (10,724) Due from suppliers......................................................... (772) 5,078 482 Other current assets....................................................... (1,789) 6,362 (9,778) Other assets............................................................... 1,351 (4,535) (2,554) Accounts payable........................................................... (17,882) (9,038) (21,985) Accrued payroll and payroll taxes.......................................... 1,987 789 (944) Accrued interest payable................................................... 1,403 (363) 3,039 Accrued expenses and other current liabilities............................. (1,919) (6,972) 1,595 Other noncurrent liabilities............................................... 11,222 (4,487) 13,598 ----------- ----------- ----------- Cash provided by operating activities.................................... 77,562 136,612 111,125 ----------- ----------- ----------- Investing Activities Property and equipment expenditures............................................ (55,184) (69,615) (83,981) Proceeds from disposition of property and equipment............................ 8,170 896 1,262 Net proceeds from disposition of freestanding drug stores...................... -- 59,876 -- Net proceeds from disposal of Purity........................................... -- 16,381 -- Net proceeds from sale of real estate.......................................... -- 3,371 -- Net proceeds from disposal of home centers segment............................. -- 4,706 81,147 ----------- ----------- ----------- Cash provided by (used for) investing activities......................... (47,014) 15,615 (1,572) ----------- ----------- ----------- Financing Activities Increase (decrease) in Pathmark Working Capital Facility borrowings............ 27,500 (17,000) 25,500 Decrease in Pathmark Term Loan................................................. (44,828) (60,295) (36,750) Increase (decrease) in book overdrafts......................................... (2,903) (1,397) 5,458 Increase in other borrowings................................................... 2,052 895 3,676 Repayment of other long-term borrowings........................................ (8,085) (5,207) (5,527) Reduction in lease obligations................................................. (20,090) (18,224) (17,275) Proceeds from lease financing.................................................. 21,405 -- -- Repayment of PTK Exchangeable Guaranteed Debentures............................ (3,007) (57,870) (62,892) Premiums incurred in redemption of PTK Exchangeable Guaranteed Debentures and other borrowings............................................................. (554) (3,686) (3,687) Deferred financing fees........................................................ (3,597) (374) (977) Capital contribution from SMG II Holdings Corporation.......................... -- 210 -- ----------- ----------- ----------- Cash used for financing activities....................................... (32,107) (162,948) (92,474) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents................................. (1,559) (10,721) 17,079 Cash and cash equivalents at beginning of period................................. 12,526 23,247 6,168 ----------- ----------- ----------- Cash and cash equivalents at end of period....................................... $ 10,967 $ 12,526 $ 23,247 ----------- ----------- ----------- ----------- ----------- -----------
See notes to consolidated financial statements. 24 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--BUSINESS ORGANIZATION AND BASIS OF PRESENTATION: Supermarkets General Holdings Corporation (the "Company" or "Holdings"), through its indirect wholly owned subsidiary Pathmark Stores, Inc. ("Pathmark"), operated 144 supermarkets as of February 1, 1997, primarily in the New York-New Jersey and Philadelphia metropolitan areas, and is a wholly owned subsidiary of SMG-II Holdings Corporation ("SMG-II"). Holdings and its wholly owned subsidiary, SMG Acquisition Corporation ("SMG"), were 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 Supermarkets General Corporation ("Old Supermarkets"). On June 15, 1987, Holdings completed the first step in the Acquisition when it acquired 32,800,000 shares (approximately 85%) of Old Supermarkets' common stock through a tender offer by SMG. The remaining outstanding common stock of Old Supermarkets was acquired by Holdings on October 5, 1987 when SMG was merged with and into Old Supermarkets pursuant to a merger agreement dated April 22, 1987, as amended. The Acquisition was accounted for as a purchase, and accordingly, Holdings recorded the assets and liabilities of Old Supermarkets at their fair values at the date of the Acquisition. The tax basis for the assets and liabilities acquired was retained. In October 1989, Old Supermarkets adopted a plan of liquidation pursuant to which it was liquidated into three wholly owned subsidiaries of Holdings. In November 1989, pursuant to such plan, Old Supermarkets transferred substantially all of the assets of its Purity Supreme division to two of the three above-mentioned wholly owned subsidiaries, Purity Supreme, Inc. and Li'l Peach Corp., and said subsidiaries assumed substantially all of the liabilities of Old Supermarkets related to such division. Old Supermarkets completed the liquidation just prior to the year ended February 3, 1990, by merging with the third of the above-mentioned wholly owned subsidiaries, which retained the name Supermarkets General Corporation ("Supermarkets"). On December 17, 1991, Purity Supreme, Inc. and Li'l Peach Corp. (collectively, "Purity") were sold. The Company retained a 10% common equity in Purity and a new issue of Purity exchangeable preferred stock, and such securities, were sold in Fiscal 1995 (see Note 23). On November 15, 1990, SMG-II Holdings Corporation, a then newly incorporated Delaware corporation ("SMG-II"), commenced offers to purchase for cash up to $155.5 million principal amount of the Company's Junior Subordinated Discount Debentures (the "Discount Debenture Offer") and up to 1.7 million shares of the Company's Cumulative Exchangeable Redeemable Preferred Stock (the "Exchangeable Preferred Stock Offer"). Concurrently with the Discount Debenture Offer and the Exchangeable Preferred Stock Offer, SMG-II commenced an exchange offer (the "Exchange Offer", together with the Discount Debenture Offer and the Exchangeable Preferred Stock Offer, the "Offers") pursuant to which the then existing common stockholders of the Company could exchange, on a one-for-one basis, shares of the Company's common stock for shares of SMG-II's common stock. The Offers were subsequently amended to provide for offers to purchase up to $110.0 million principal amount of the Company's Junior Subordinated Discount Debentures (the "Discount Debentures") and up to 3.4 million shares of the Company's Cumulative Exchangeable Redeemable Preferred Stock (the "Exchangeable Preferred Stock"). In February 1991, SMG-II purchased approximately $74.1 million principal amount of the Discount Debentures at 33% of their principal amount and 2.7 million shares of Exchangeable Preferred Stock at $7.00 net per share, pursuant to the Discount Debenture Offer and the Exchangeable Preferred Stock Offer, respectively. In addition, all outstanding shares of the Company's common stock were exchanged 25 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--BUSINESS (CONTINUED) pursuant to the Exchange Offer. As a result of the Exchange Offer, SMG-II owns all of the Company's common stock and is effectively a holding company for the operations of the Company. SMG-II financed these purchases by selling 417,500 shares of its Cumulative Convertible Preferred Stock (the "SMG-II Preferred Stock") for an aggregate purchase price of $83.5 million to various institutional investors. The holders of SMG-II's voting and non-voting common stock and SMG-II Preferred Stock include certain limited partnerships controlled directly or indirectly by Merrill Lynch Capital Partners, Inc. and certain indirectly wholly owned subsidiaries of ML & Co. ML & Co. beneficially owns approximately 88.6% of the outstanding stock of SMG-II, and accordingly, controls SMG-II and, indirectly, the Company. Subsequent to the completion of the Offers in Fiscal 1991, SMG-II acquired, through open market transactions,approximately $21.3 million principal amount of Discount Debentures, $9.8 million principal amount of the Company's 14.5% Senior Subordinated Notes due 1997 (the "Senior Subordinated Notes") and 94,900 shares of Exchangeable Preferred Stock, and made a capital contribution to the Company of such securities together with the amounts of the Discount Debentures and the Exchangeable Preferred Stock purchased pursuant to the Discount Debenture Offer and the Exchangeable Preferred Stock Offer, respectively, as well as cash sufficient to pay associated taxes. The Company has retired the Senior Subordinated Notes, the Discount Debentures and the Exchangeable Preferred Stock contributed by SMG-II (see Note 19). During Fiscal 1993, the Board of Directors of Holdings authorized management of Holdings to proceed with a recapitalization plan (the "Recapitalization"), which included a refinancing of Holdings' debt. In conjunction with the recapitalization, the assets, liabilities and related operations of the home centers segment, as well as, certain assets and liabilities of the warehouse, distribution and processing facilities which service the Pathmark supermarkets and drug stores and certain inventories and real property, were contributed to Plainbridge, Inc. ("Plainbridge"), a then newly formed indirect wholly owned subsidiary of Holdings and the shares of Plainbridge were then distributed to PTK Holdings, Inc. ("PTK"), a then newly formed wholly owned subsidiary of Holdings (the "Plainbridge Spin-Off"). Following the Plainbridge Spin-Off, PTK held 100% of the capital stock of both Plainbridge and Pathmark. On May 3, 1993, Pathmark contributed total assets of $1.7 million and total liabilities of $1.8 million, which represented the Chefmark deli food preparation operations and the related warehouse and a leased banana ripening warehouse to Chefmark, Inc. ("Chefmark"), a then newly formed Delaware corporation, and distributed the shares of Chefmark to Holdings. On March 1, 1996, Pathmark reacquired all of the outstanding capital stock of Plainbridge by means of a capital contribution from PTK. On November 4, 1994, the Company completed the sale of its home centers segment for approximately $88.7 million in cash, plus the assumption of certain indebtedness. The Company used the net proceeds to pay down PTK debt, including accrued interest and debt premium (see Note 24). MANAGEMENT'S PLAN: The consolidated financial statements of the Company indicated that, at February 1, 1997, current liabilities exceeded current assets by $175.8 million and the stockholder's deficit was $1.26 billion. Management believes that cash flows generated from operations, supplemented by the unused borrowing capacity under its Pathmark working capital facility (the "Working Capital Facility") and the availability of capital lease financing, will be sufficient to pay the Company's debts as they come due, provide for its capital expenditure program and meet its other cash requirements. 26 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--BUSINESS (CONTINUED) The Company was in compliance with its various debt covenants at February 1, 1997. In December 1996, the Company, through its Pathmark subsidiary, amended its bank credit agreement (the "Bank Credit Agreement") with existing lenders modifying certain of its covenants, including those concerning the generation of minimum levels of cash flow (as defined), minimum interest coverage and maximum leverage rates. Such convenants also include an annual cleandown provision requiring borrowings under Pathmark's Working Capital Facility not to exceed $60.0 million for a period of 30 consecutive days. Based on management's operating projections for Fiscal 1997, the Company believes that it will be able to satisfy this cleandown provision and continue to be in compliance with its other debt covenants. The Company is currently holding discussions with its lenders with respect to refinancing its Bank Credit Agreement. The Pathmark Working Capital Facility expires in July 1998 and the Pathmark term loan (the "Term Loan") matures in Fiscal 1999 (see Note 10). Management believes it will successfully refinance its debt, however, there can be no assurances that the refinancing will occur or that the terms associated with any such new agreement will be more favorable to the Company. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its subsidiaries, all of whom are wholly owned. All intercompany transactions have been eliminated in consolidation. The accompanying consolidated statement of operations for Fiscal 1994 includes the operating results of the Company's home centers segment as discontinued operations through the date of disposal. USE OF ESTIMATES: The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions. These estimates affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accompanying consolidated balance sheets include reserves for self-insured claims relating to customer, employee and vehicle accidents and covered employee medical benefits. The liabilities for customer and employee accident claims are recorded at present value, due to the long-term payout of these claims (see Note 9). While the Company believes that the amounts provided are adequate to cover its self-insured liabilities, it is reasonably possible that the final resolution of these claims may differ from the amounts provided. RECLASSIFICATIONS: Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the Fiscal 1996 presentation, the most significant of which was the Company's change in reporting of Pathmark coupon expenses (excluding manufacturers' coupons). Prior to this change, Pathmark coupon expenses, net of any vendor reimbursements, were recorded in selling, general and administrative expenses. As a result of this change, Pathmark gross coupon expenses have now been recorded as a reduction of sales, with any vendor reimbursements being recorded as a reduction of cost of goods sold. 27 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FISCAL YEAR: The Company's fiscal year ends on the Saturday nearest to January 31 of the following calendar year. Normally, each fiscal year consists of 52 weeks, but every five or six years the fiscal year consists of 53 weeks. Fiscal 1995 consists of 53 weeks. STATEMENTS OF CASH FLOWS: All investments and marketable securities with a maturity of three months or less are considered to be cash equivalents. The Company had $1.1 million of cash equivalent investments as of February 1, 1997 and $0.4 million of cash equivalent investments as of February 3, 1996. MERCHANDISE INVENTORIES: Merchandise inventories are valued at the lower of cost or market. Cost for substantially all merchandise inventories is determined on a last-in, first-out ("LIFO") basis. RENTAL VIDEO TAPES: Video tapes purchased for rental purposes are capitalized and amortized over their estimated useful lives. The amortization of video tapes, included in cost of goods sold, approximate $3.1 million, $2.8 million and $2.6 million in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively. SOFTWARE: Externally purchased software is capitalized and amortized as part of selling, general and administrative expenses over a three year period. Internally developed software, including software developed by IBM (see Note 26), is expensed as incurred. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation and amortization expense on owned property and equipment is computed on the straight-line method over the following useful lives: buildings, 40 years; fixtures and equipment, 3-10 years; and leasehold improvements, 8-15 years or lease term, whichever is shorter. Capital leases are recorded at the present value of minimum lease payments or fair market value of the related property, whichever is less. Amortization of property under capital leases is computed on the straight-line method over the term of the lease or the leased property's estimated useful life, whichever is shorter. LONG-LIVED ASSETS: Effective February 4, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). SFAS No. 121 establishes accounting standards for the measurement of the impairment of long-lived assets, certain intangibles and goodwill related to those assets. SFAS No. 121 requires that an asset to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying value of long-lived assets, which are being used in the Company's operations, are assessed for recoverability based 28 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) upon groups of assets and the related cash flow generated by such assets. Assets held for sale are reviewed for impairment based upon the estimated net realizable value of such assets. The adoption of SFAS No. 121 had no effect on the Company's financial condition or results of operations. DEFERRED FINANCING COSTS: Deferred financing costs are amortized utilizing the interest method over the life of the related indebtedness. BOOK OVERDRAFT: Under the Company's cash management system, checks issued but not presented to banks result in overdraft balances for accounting purposes and are classified as book overdrafts. REVENUE RECOGNITION: Revenue is recognized at the point of sale to the customer. ADVERTISING COSTS: Advertising costs, net of vendor reimbursements, are expensed as incurred and were $23.7 million, $30.6 million and $32.4 million in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively. STORE PREOPENING AND CLOSING COSTS: Store preopening costs are expensed as incurred. Store closing costs, such as future rent and real estate taxes subsequent to the actual store closing, net of expected sublease recovery, are recorded at present value, when management makes a decision to close a store (See Note 9). INCOME TAXES: The Company's income taxes are computed based on a tax sharing agreement with its ultimate parent, SMG-II Holdings Corporation ("SMG-II"), in which the Company computes a hypothetical tax return as if the Company was not joined in a consolidated or combined return with SMG-II. The Company must pay SMG-II the positive amount of any such hypothetical tax. If the hypothetical tax return shows entitlement to a refund, including any refund attributable to a carryback, then SMG-II will pay to the Company the amount of such refund. EARNINGS (LOSS) PER COMMON SHARE: Since the Company is a wholly owned subsidiary, earnings (loss) per share is not presented. NOTE 3--RESTRUCTURING CHARGE During the fourth quarter of Fiscal 1996, the Company recorded a pretax charge of $9.1 million for reorganization and restructuring costs related to its administrative operations. The restructuring charge included $4.2 million for the costs of a voluntary early retirement program which was accepted by 142 employees and $1.2 million for severance and termination benefits for 80 employees. The remaining charge of $3.7 million primarily relates to consulting fees incurred in connection with the restructuring and 29 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--RESTRUCTURING CHARGE (CONTINUED) exit costs for facility consolidation. As of February 1, 1997, $3.2 million has been expended, of which $1.6 million relates to the early retirement program and severance benefits and $1.6 million relates to consulting costs and the facility consolidation. The Company estimates that it will expend $4.7 million in Fiscal 1997. The remaining $1.2 million relates to early retirement benefits which will be expended over time. NOTE 4--LEASE COMMITMENT CHARGE During the fourth quarter of Fiscal 1996, the Company decided to divest a group of its southern region stores, certain of which have experienced unprofitable operating results. The Company concluded that the operating losses being experienced by these stores were other than temporary and that the projected operating results of such stores would not be sufficient to recover their long-lived assets and their contractual lease commitments. Further, the Company believes that these lease costs will not be significantly recoverable through any future sublease. Therefore, the Company recorded a $8.8 million pretax charge related to these unfavorable lease commitments, in addition to writing down the long-lived assets of these stores (see Note 7). NOTE 5--ACCOUNTS RECEIVABLE Accounts receivable are comprised of the following (dollars in thousands):
FEBRUARY 1, FEBRUARY 3, 1997 1996 ----------- ----------- Prescription plans.................................................. $ 10,397 $ 9,250 Other............................................................... 3,673 2,527 ----------- ----------- Accounts receivable................................................. 14,070 11,777 Less: allowance for doubtful accounts(a)............................ 1,271 937 ----------- ----------- Accounts receivable, net............................................ $ 12,799 $ 10,840 ----------- ----------- ----------- -----------
- ------------------------ (a) Fiscal 1996 includes a provision of $0.1 million and a recovery of $0.3 million. Fiscal 1995 includes a provision of $1.3 million and a write off of $1.3 million. NOTE 6--MERCHANDISE INVENTORIES Merchandise inventories are comprised of the following (dollars in thousands):
FEBRUARY 1, FEBRUARY 3, 1997 1996 ----------- ----------- Merchandise inventories at FIFO cost................................ $ 258,926 $ 268,544 Less: LIFO reserve.................................................. 41,486 42,764 ----------- ----------- Merchandise inventories at LIFO cost................................ $ 217,440 $ 225,780 ----------- ----------- ----------- -----------
Liquidation of LIFO layers in the periods reported did not have a significant effect on the results of continuing operations. The decrease in the LIFO reserve was primarily due to a decrease in the inventory levels of the distribution centers. 30 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--PROPERTY AND EQUIPMENT Property and equipment are comprised of the following (dollars in thousands):
FEBRUARY 1, FEBRUARY 3, 1997 1996 ----------- ----------- Land................................................................ $ 61,512 $ 62,847 Buildings and building improvements................................. 201,804 200,039 Fixtures and equipment.............................................. 203,602 203,020 Leasehold costs and improvements.................................... 293,697 279,473 Transportation equipment............................................ 19,706 18,448 ----------- ----------- Property and equipment, owned....................................... 780,321 763,827 Property and equipment under capital leases......................... 207,227 188,596 ----------- ----------- Property and equipment, at cost..................................... 987,548 952,423 Less: accumulated depreciation and amortization..................... 382,593 348,591 ----------- ----------- Property and equipment, net......................................... $ 604,955 $ 603,832 ----------- ----------- ----------- -----------
During the fourth quarter of Fiscal 1996, the Company recorded a pretax charge of $5.4 million to write down fixed assets held for sale, principally in its southern region, to their estimated net realizable values. This charge is included in depreciation and amortization expense in the accompanying consolidated statement of operations for Fiscal 1996. NOTE 8--DEFERRED FINANCING COSTS, NET Deferred financing costs, primarily related to the Recapitalization, are comprised of the following dollars in thousands):
FEBRUARY 1, FEBRUARY 3, 1997 1996 ----------- ----------- Deferred financing costs............................................ $ 51,378 $ 50,377 Less: accumulated amortization...................................... 22,635 16,692 ----------- ----------- Deferred financing costs, net....................................... $ 28,743 $ 33,685 ----------- ----------- ----------- -----------
31 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9--OTHER NONCURRENT LIABILITIES Other noncurrent liabilities are comprised of the following (dollars in thousands):
FEBRUARY 1, FEBRUARY 3, 1997 1996 ----------- ----------- Self-insured liabilities............................................ $ 62,526 $ 65,183 Pension and deferred compensation................................... 20,227 17,003 Other postretirement and postemployment benefits.................... 41,399 41,025 Accrued dividends................................................... 73,164 55,949 Closed stores....................................................... 20,117 23,871 Lease commitments................................................... 7,107 -- Other............................................................... 82,193 75,265 ----------- ----------- Other noncurrent liabilities........................................ $ 306,733 $ 278,296 ----------- ----------- ----------- -----------
Certain noncurrent liabilities, such as self-insured liabilities for incurred but unpaid claims relating to customer, employee and vehicle accidents and closed store liabilities, are recorded at present value utilizing a 4% discount rate based on the projected payout of these claims. NOTE 10--LONG-TERM DEBT Long-term debt is comprised of the following (dollars in thousands):
FEBRUARY 1, FEBRUARY 3, 1997 1996 ------------ ------------ Pathmark Term Loan.................................................................... $ 243,127 $ 287,955 Pathmark Working Capital Facility..................................................... 73,500 46,000 10.25% PTK Exchangeable Guaranteed Debentures due 2003 ("PTK Exchangeable Guaranteed Debentures")........................................................................ 27,442 27,679 9.625% Pathmark Senior Subordinated Notes due 2003 ("Pathmark Senior Subordinated Notes")............................................................................. 437,780 437,426 10.75% Pathmark Deferred Coupon Notes due 2003 ("Pathmark Deferred Coupon Notes")..... 168,559 151,881 12.625% Pathmark Subordinated Debentures due 2002 ("Pathmark Subordinated Debentures")........................................................................ 95,750 95,750 11.625% Pathmark Subordinated Notes due 2002 ("Pathmark Subordinated Notes").......... 199,017 199,017 11.625% Holdings Subordinated Notes due 2002 ("Holdings Subordinated Notes").......... 983 983 Industrial revenue bonds.............................................................. 6,375 6,375 Other debt (primarily mortgages)...................................................... 34,979 41,011 ------------ ------------ Total debt............................................................................ 1,287,512 1,294,077 Less: current maturities.............................................................. 74,431 51,753 ------------ ------------ Long-term portion..................................................................... $ 1,213,081 $ 1,242,324 ------------ ------------ ------------ ------------
32 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10--LONG-TERM DEBT (CONTINUED) SCHEDULED MATURITIES OF DEBT: Long-term debt principal payments are as follows (dollars in thousands):
PRINCIPAL FISCAL YEARS PAYMENTS - -------------------------------------------------------------------------------- ------------ 1997............................................................................ $ 74,431 1998............................................................................ 155,688 1999............................................................................ 127,219 2000............................................................................ 50,643 2001............................................................................ 50,000 Thereafter...................................................................... 829,531 ------------ $ 1,287,512 ------------ ------------
BANK CREDIT AGREEMENT: Under the Bank Credit Agreement, the Pathmark Working Capital Facility and the Pathmark Term Loan bear interest at floating rates. At February 1, 1997, the interest rates for the Pathmark Term Loan and Pathmark Working Capital Facility were 8.4% and 8.9%, respectively. At February 3, 1996, the interest rates for the Pathmark Term Loan and Pathmark Working Capital Facility were 8.4% and 9.2%, respectively and the interest rate on the Plainbridge working capital facility was 10.3%. Pathmark is required to repay a portion of its borrowings under the Pathmark Term Loan each year, so as to retire such indebtedness in its entirety by October 31, 1999. In conjunction with the Pathmark reacquisition of the Plainbridge capital stock by the Company, the outstanding obligations of Plainbridge under its bank credit agreement were satisfied by Pathmark, and the Plainbridge bank credit agreement, which allowed for $40.0 million of availability, was terminated. The Company, through its Pathmark subsidiary, simultaneously entered into an amendment to its Bank Credit Agreement, with its existing lenders, increasing Pathmark's Working Capital Facility, from $175 million to $200 million (of which the maximum of $125.0 million can be in letters of credit), to satisfy any additional liquidity needs and prospectively modifying certain of its financial covenants to take into account the operations of Plainbridge. The Pathmark Working Capital Facility is subject to an annual cleandown provision. Under the terms of the cleandown provision, in each fiscal year, loans cannot exceed $60.0 million (formerly $50.0 million) under the Pathmark Working Capital Facility for a period of 30 consecutive days. The Company satisfied the terms of the cleandown provision through Fiscal 1996. The Company believes it has sufficient unused borrowing capacity under the Pathmark Working Capital Facility, which can be utilized for unforeseen or for seasonal cash requirements. At February 1, 1997, the Company had approximately $70.2 million in outstanding letters of credit and approximately $56.3 million in unused borrowing capacity under its Pathmark Working Capital Facility. In December 1996, the Company amended its Bank Credit Agreement with its existing lenders modifying certain of its covenants, including those financial covenants concerning levels of operating cash flow (as defined), minimum interest coverage and maximum leverage ratio. At February 1, 1997, the Company was in compliance with all of its debt covenants as amended. Based upon projected results for the upcoming fiscal year, the Company believes it will be in compliance with its debt covenants which includes certain levels of operating cash flow (as defined), minimum interest coverage and a maximum leverage ratio, throughout the upcoming fiscal year, as well as satisfying its cleandown provision (see above). The Bank Credit Agreement and the indentures for certain debt also contain covenants, including, 33 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10--LONG-TERM DEBT (CONTINUED) but not limited to, covenants with respect to the following matters: (i) limitation on indebtedness; (ii) limitation on restricted payments; (iii) limitation on transactions with affiliates; (iv) limitation on liens; (v) limitation on the issuance of preferred stock by subsidiaries; (vi) limitation on issuances of guarantees of indebtedness by subsidiaries; (vii) limitation on transfer of assets to subsidiaries; (viii) limitation on dividends and other payment restrictions affecting subsidiaries; and (ix) restriction on mergers and transfers of assets. PTK EXCHANGEABLE GUARANTEED DEBENTURES: The PTK Exchangeable Guaranteed Debentures were originally formulated to accrete to a maturity value of $218.3 million in Fiscal 2003. The Company used the net cash proceeds of $3.2 million in Fiscal 1996, $56.5 million in Fiscal 1995 and $66.6 million in Fiscal 1994 to paydown PTK Exchangeable Guaranteed Debentures, including accrued interest and debt premium. The PTK Exchangeable Guaranteed Debentures begin paying cash interest on a semiannual basis on June 30, 1999 and have no sinking fund requirements. At February 1, 1997, the maturity value of the outstanding debentures is $34.2 million. PATHMARK SENIOR SUBORDINATED NOTES: The Pathmark 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. PATHMARK DEFERRED COUPON NOTES: The Pathmark 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. PATHMARK SUBORDINATED DEBENTURES: The Pathmark Subordinated Debentures mature in Fiscal 2002. These debentures pay cash interest on a semiannual basis and have no sinking fund requirements. PATHMARK SUBORDINATED NOTES: The Pathmark Subordinated Notes mature in Fiscal 2002 and pay cash interest on a semiannual basis. These notes contain a sinking fund provision that requires Pathmark to deposit $49.8 million (25% of the original aggregate principal amount) with the trustee of the Pathmark Subordinated Notes on June 15 in each of Fiscal 2000 and Fiscal 2001 for the redemption of the Pathmark 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. HOLDINGS SUBORDINATED NOTES: As a result of the Recapitalization, $199.0 million principal amount of the Holdings Subordinated Notes have been exchanged for $199.0 million principal amount of Pathmark Subordinated Notes. Approximately $1.0 million principal amount of the Holdings Subordinated Notes remain outstanding. Interest on the Holdings Subordinated Notes is payable semi-annually. 34 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10--LONG-TERM DEBT (CONTINUED) INDUSTRIAL REVENUE BONDS: Interest rates for the industrial revenue bonds range from 10.5%-10.9%. The industrial revenue bonds are payable in Fiscal 2003. OTHER DEBT: Other debt includes mortgage notes, which are secured by property and equipment, having a net book value of $54.5 million at February 1, 1997 and $65.4 million at February 3, 1996. These borrowings, whose interest rates averaged 10.5%, are payable in installments ending in Fiscal 2000, including a scheduled payment of $30.1 million in Fiscal 1998. NOTE 11--FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount and fair values of the Company's financial instruments are as follows (dollars in thousands):
FEBRUARY 1, 1997 FEBRUARY 3, 1996 -------------------------- -------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------------ ------------ ------------ ------------ Debt: Pathmark Term Loan....................................... $ 243,127 $ 243,127 $ 287,955 $ 287,955 Pathmark Working Capital Facility........................ 73,500 73,500 46,000 46,000 PTK Exchangeable Guaranteed Debentures................... 27,442 27,442 27,679 27,679 Pathmark Senior Subordinated Notes....................... 437,780 415,015 437,426 419,929 Pathmark Deferred Coupon Notes........................... 168,559 142,471 151,881 135,578 Pathmark Subordinated Debentures......................... 95,750 96,353 95,750 100,959 Pathmark Subordinated Notes.............................. 199,017 202,340 199,017 206,220 Holdings Subordinated Notes.............................. 983 999 983 1,017 Industrial revenue bonds................................. 6,375 6,375 6,375 6,375 Other debt (primarily mortgages)......................... 34,979 34,979 41,011 41,011 ------------ ------------ ------------ ------------ Total debt......................................... $ 1,287,512 $ 1,242,601 $ 1,294,077 $ 1,272,723 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Redeemable Preferred Stock: Cumulative Exchangeable Redeemable Preferred Stock....... $ 105,372 $ 117,376 $ 103,633 $ 113,708 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
The fair value of the Pathmark Term Loan and Pathmark Working Capital Facility at February 1, 1997 and February 3, 1996 approximated their carrying value due to their floating interest rates. The fair value of the notes, debentures and Exchangeable Preferred Stock are based on the quoted market prices at February 1, 1997 and February 3, 1996, since such instruments are publicly traded. The Company has evaluated its PTK Exchangeable Guaranteed Debentures, 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 February 1, 1997 and February 3, 1996, the carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate fair values due to the short-term maturities of these instruments. 35 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12--INTEREST EXPENSE Interest expense is comprised of the following (dollars in thousands):
FISCAL YEARS ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- Pathmark Term Loan........................................................... $ 22,616 $ 29,067 $ 27,281 Pathmark Working Capital Facility............................................ 5,444 5,601 4,996 Pathmark Senior Subordinated Notes Amortization of original issue discount.................................... 354 354 354 Currently payable.......................................................... 42,350 42,350 42,350 Pathmark Deferred Coupon Notes Accrued but not payable.................................................... 16,678 15,028 13,541 Pathmark Subordinated Debentures............................................. 12,088 12,088 12,088 Pathmark Subordinated Notes.................................................. 23,136 23,136 23,136 PTK Exchangeable Guaranteed Debentures Amortization of original issue discount.................................... 2,770 6,292 12,501 Amortization of debt issuance costs.......................................... 7,426 7,140 7,028 Obligations under capital leases............................................. 18,027 16,647 15,694 Mortgages payable............................................................ 3,736 4,210 4,398 Holdings Subordinated Notes.................................................. 114 114 149 Other, net................................................................... 9,379 8,942 7,332 ---------- ---------- ---------- Interest expense............................................................. $ 164,118 $ 170,969 $ 170,848 ---------- ---------- ---------- ---------- ---------- ----------
The Company made cash interest payments of $130.5 million, $135.2 million and $129.6 million in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively. 36 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13--LEASES At February 1, 1997, the Company was liable under terms of noncancellable leases for the following minimum lease commitments (dollars in thousands):
CAPITAL OPERATING FISCAL YEARS LEASES LEASES - ------------------------------------------------------------------------------------------ ---------- ---------- 1997...................................................................................... $ 42,657 $ 30,732 1998...................................................................................... 40,983 30,268 1999...................................................................................... 34,294 29,659 2000...................................................................................... 32,269 29,430 2001...................................................................................... 23,006 27,727 Later years............................................................................... 245,108 311,106 ---------- ---------- Total minimum lease payments(a)........................................................... 418,317 $ 458,922 ---------- ---------- Less: executory costs (such as taxes, maintenance and insurance).......................... 2,221 ---------- Net minimum lease payments................................................................ 416,096 Less: amounts representing interest....................................................... 217,260 ---------- Present value of net minimum lease payments (including current installments of $23,208)... $ 198,836 ---------- ----------
- ------------------------ (a) Net of sublease income of $1,147 and $134,010 for capital and operating leases, respectively. During Fiscal 1996, Fiscal 1995 and Fiscal 1994, the Company incurred capital lease obligations of $39.6 million, $41.1 million and $21.3 million, respectively, in connection with property and equipment lease agreements. These capital lease amounts are non-cash and, accordingly, have been excluded from the consolidated statements of cash flows. During the third quarter of Fiscal 1996, the Company sold three of its supermarket properties for $19.3 million, net of fees of $1.4 million and income taxes of $0.7 million, and simultaneously leased back such properties. The net proceeds were used to paydown debt, primarily the Working Capital Facility. Due to the Company's continuing involvement in such properties, no gain has been recorded and the transaction has been accounted for as a financing, with the associated liability of $21.4 million included in lease obligations in the consolidated balance sheet. Rent expense, included in continuing operations, under all operating leases having noncancellable terms of more than one year is summarized as follows (dollars in thousands):
FISCAL YEARS ------------------------------- 1996 1995 1994 --------- --------- --------- Minimum rentals.................................................................. $ 47,495 $ 47,589 $ 49,694 Contingent rentals(b)............................................................ -- -- 318 Less: rentals from subleases..................................................... (14,576) (15,802) (13,092) --------- --------- --------- Rent expense..................................................................... $ 32,919 $ 31,787 $ 36,920 --------- --------- --------- --------- --------- ---------
- ------------------------ (b) Primarily based on sales. 37 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14--RELATED PARTY TRANSACTIONS As discussed in Note 20, certain Management Investors issued Recourse Notes to the Company related to the purchase of the Company's Class A common stock. These Management Investors have pledged shares of SMG-II Class A common stock to secure the repayment of the Recourse Notes. Recourse Notes in the amount of $1.7 million were outstanding at February 1, 1997 and February 3, 1996. During Fiscal 1995, the Company paid ML & Co. fees of approximately $0.6 million related to the sale of the freestanding drug stores. During Fiscal 1994, the Company paid ML & Co. fees of approximately $1.0 million related to the disposal of the home centers segment. NOTE 15--RETIREMENT AND BENEFIT PLANS The Company has several noncontributory defined benefit pension plans, the most significant of which is the SGC Pension Plan, which covers substantially all non-union and certain union associates. Pension benefits to retired and to terminated vested associates are primarily based upon their length of service and upon a percentage of qualifying compensation. The Company's funding policy, which is consistent with federal funding requirements, is intended to provide not only for benefits attributed to service to date but also for those benefits expected to be earned in the future. Due to the overfunding status of the SGC Pension Plan, no contributions were required during the last three fiscal years. 38 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15--RETIREMENT AND BENEFIT PLANS (CONTINUED) The following table sets forth the funded status of the pension plans and the amounts recognized in the Company's financial statements (dollars in thousands):
FEBRUARY 1, 1997 FEBRUARY 3, 1996 -------------------------- -------------------------- ASSETS ACCUMULATED ASSETS ACCUMULATED EXCEED BENEFITS EXCEED BENEFITS ACCUMULATED EXCEED ACCUMULATED EXCEED BENEFITS ASSETS BENEFITS ASSETS ------------ ------------ ------------ ------------ Actuarial present value of accumulated benefit obligation: Vested........................................................ $ (84,116) $ (20,922) $ (94,802) $ (17,929) Unvested...................................................... (6,018) (215) (5,779) (250) ------------ ------------ ------------ ------------ Total......................................................... (90,134) (21,137) (100,581) (18,179) Plan assets at fair value....................................... 171,549 447 164,684 265 ------------ ------------ ------------ ------------ Plan assets higher (lower) than accumulated benefit obligation.................................................... $ 81,415 $ (20,690) $ 64,103 $ (17,914) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Actuarial present value of projected benefit obligation......... $ (115,009) $ (23,200) $ (119,152) $ (20,894) Plan assets at fair value....................................... 171,549 447 164,684 265 ------------ ------------ ------------ ------------ Plan assets higher (lower) than projected benefit obligation.... 56,540 (22,753) 45,532 (20,629) Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions................. (43,371) (90) (33,250) (90) Unrecongized prior service cost................................. 1,117 955 1,215 1,671 ------------ ------------ ------------ ------------ Prepaid (accrued) pension cost.................................. $ 14,286 $ (21,888) $ 13,497 $ (19,048) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Assets of the Company's pension plans are invested in marketable securities, comprised primarily of equities of domestic corporations, U.S. Government instruments and money market investments. During the fourth quarter of Fiscal 1996, the Company recorded a restructuring charge (see Note 3) which included $2.1 million for the costs of a voluntary early retirement program. The liability related to this charge is included as part of the net accrued pension cost. The decrease in the vested benefit obligation in Fiscal 1996 compared to Fiscal 1995 was primarily due to the recognition of the lump sum payment option in the voluntary early retirement program, which also resulted in a corresponding offset in the plan assets. The following table provides the assumptions used in determining the actuarial present value of the projected benefit obligation:
FEBRUARY 1, FEBRUARY 3, 1997 1996 --------------- ------------- Weighted average discount rate...................................... 7.5% 7.25% Rate of increase in future compensation levels...................... 4.5 4.25% Expected long-term rate of return on plan assets.................... 9.5 9.5
39 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15--RETIREMENT AND BENEFIT PLANS (CONTINUED) The change in the weighted average discount rate, which is used in determining the actuarial present value of the projected benefit obligation, will not have a material impact on the Company's net pension cost in Fiscal 1997. The net periodic pension cost (income) included in continuing operations is comprised of the following components (dollars in thousands):
FISCAL YEARS ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- Service cost of benefits earned during the year............................... $ 3,787 $ 3,416 $ 4,425 Interest cost on projected benefit obligation................................. 10,204 9,551 9,103 Actual gain on plans' assets.................................................. (28,174) (40,622) (61) Net amortization and deferral................................................. 16,019 27,811 (10,884) ---------- ---------- ---------- Net periodic pension cost..................................................... $ 1,836 $ 156 $ 2,583 ---------- ---------- ---------- ---------- ---------- ----------
The Company also contributes to many multi-employer plans which provide defined benefits to certain union associates. The Company's contributions to these multi-employer plans were $20.1 million, $18.9 million and $18.0 million in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively. The Company sponsors a savings plan for eligible non-union associates. Contributions under the plan are based on specified percentages of associate contributions. The Company's contributions to the savings plan were $3.6 million, $3.7 million and $3.5 million in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively. NOTE 16--OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS The Company provides its associates other postretirement benefits, principally health care and life insurance benefits. The accumulated postretirement benefit obligation was determined utilizing an assumed discount rate of 7.5% at February 1, 1997 and 7.25% at February 3, 1996 and by applying the provisions of the Company's medical plans, the established maximums and sharing of costs, the relevant actuarial assumptions and the health-care cost trend rates, which are projected at 6.75% and grade down to 4.5% in Fiscal 2000. The effect of a 1% change in the assumed cost trend rate would change the accumulated postretirement benefit obligation by approximately $1.2 million as of February 1, 1997 and would change the net periodic postretirement benefit income by $0.2 million for Fiscal 1996. The net postretirement benefit cost (income) included in continuing operations is comprised of the following components (dollars in thousands):
FISCAL YEARS ------------------------------- 1996 1995 1994 --------- --------- --------- Service cost of benefits earned during the year..................................... $ 546 $ 614 $ 700 Interest cost on accumulated postretirement benefit obligation...................... 1,640 2,268 2,052 Net amortization and deferral....................................................... (931) (460) (182) Curtailment gain.................................................................... (2,026) -- -- --------- --------- --------- Net postretirement benefit cost (income)............................................ $ (771) $ 2,422 $ 2,570 --------- --------- --------- --------- --------- ---------
40 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16--OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED) During the second quarter of Fiscal 1996, the Company eliminated postretirement medical coverage for active non-union associates who retire after December 31, 1997. This change resulted in a pretax curtailment gain of $2.0 million. The following table provides information on the status of the postretirement plans (dollars in thousands):
FEBRUARY 1, FEBRUARY 3, 1997 1996 ----------- ----------- Accumulated postretirement benefit obligation: Retirees.......................................................... $ 9,678 $ 14,276 Other active plan participants.................................... 10,180 13,874 ----------- ----------- Total......................................................... 19,858 28,150 Unrecognized prior service cost..................................... 7,026 -- Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions..................... 6,798 4,675 ----------- ----------- Accrued postretirement cost......................................... $ 33,682 $ 32,825 ----------- ----------- ----------- -----------
During the fourth quarter of Fiscal 1996, the Company recorded a restructuring charge (see Note 3) which included $2.1 million for the estimated costs of a voluntary early retirement program. The liability related to this charge is included as part of the accrued postretirement cost. The decrease in the accumulated postretirement benefit obligation and the recording of an unrecognized prior service cost are due to the elimination of postretirement medical coverage for active non-union associates. The Company also provides its associates postemployment benefits, primarily long-term disability and salary continuation. The obligation for these benefits was determined by application of the provisions of the Company's long-term disability plan and includes the age of active claimants at disability and at valuation, the length of time on disability and the probability of the claimant remaining on disability to maximum duration. These liabilities are recorded at their present value utilizing a discount rate of 4%. The accumulated postemployment benefit obligation as of February 1, 1997 and February 3, 1996 was $8.5 million and $8.3 million, respectively. The net postemployment benefit cost included in continuing operations consisted of the following components (dollars in thousands):
FISCAL YEARS ------------------------------- 1996 1995 1994 --------- --------- --------- Service cost of benefits earned during the year...................................... $ 1,314 $ 997 $ 1,644 Interest cost on accumulated postemployment obligation............................... 316 296 304 --------- --------- --------- Net postemployment benefit cost...................................................... $ 1,630 $ 1,293 $ 1,948 --------- --------- --------- --------- --------- ---------
41 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17--INCOME TAXES The income tax benefit (provision) included in continuing operations is comprised of the following (dollars in thousands):
FISCAL YEARS ------------------------------- 1996 1995 1994 --------- --------- --------- Current Federal........................................................................ $ 2,357 $ 4,018 $ (3,079) State.......................................................................... 692 (4,981) (4,882) Deferred Federal........................................................................ 9,808 (1,233) (2,534) State.......................................................................... 3,178 1,238 (1,613) Change in valuation allowance.................................................... 1,688 30,721 7,962 --------- --------- --------- Income tax benefit (provision)................................................... $ 17,723 $ 29,763 $ (4,146) --------- --------- --------- --------- --------- ---------
The effective tax rate applicable to continuing operations for the income tax benefit (provision) differs from the federal statutory tax rate as follows:
FISCAL YEARS ------------------------------- 1996 1995 1994 --------- --------- --------- Federal statutory tax rate............................................................ 35.0% (35.0)% (35.0)% State income taxes.................................................................... 6.8 (5.0) (40.3) Tax credits........................................................................... -- 1.2 6.3 Change in valuation allowance......................................................... 4.6 62.8 49.4 Utilization of capital loss........................................................... -- 32.8 -- Other................................................................................. 1.7 4.0 (6.1) --- --------- --------- Effective tax rate.................................................................... 48.1% 60.8% (25.7)% --- --------- --------- --- --------- ---------
42 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17--INCOME TAXES (CONTINUED) Deferred income tax assets and liabilities consist of the following (dollars in thousands):
FEBRUARY 1, 1997 FEBRUARY 3, 1996 ----------------------- ---------------------- ASSETS LIABILITIES ASSETS LIABILITIES ---------- ----------- ---------- ---------- Depreciation and amortization..................................... $ -- $ 65,599 $ -- $ 71,794 Merchandise inventory and gross profit............................ -- 20,443 -- 19,571 Prepaid expenses.................................................. -- 6,999 -- 5,988 Self-insured liabilities.......................................... 39,596 -- 43,399 -- Benefit plans..................................................... 10,039 -- 9,128 -- Lease capitalization.............................................. 17,933 -- 16,990 -- Closed store reserves............................................. 15,459 -- 12,386 -- Alternative minimum taxes......................................... 9,108 -- 8,212 -- General business credits.......................................... 9,019 -- 8,821 -- Net operating loss carryforwards.................................. 19,821 -- 11,193 -- Other postretirement and postemployment benefits.................. 17,791 -- 18,480 -- Capital loss carryforward......................................... 52,455 -- 9,293 -- Other............................................................. 8,097 4,323 8,808 6,005 ---------- ----------- ---------- ---------- Subtotal.......................................................... 199,318 97,364 146,710 103,358 Less: valuation allowance......................................... 52,455 -- 8,293 -- ---------- ----------- ---------- ---------- Total............................................................. $ 146,863 $ 97,364 $ 138,417 $ 103,358 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
The balance sheet classification of the deferred income tax assets and liabilities is as follows (dollars in thousands):
FEBRUARY 1, 1997 FEBRUARY 3, 1996 ---------------------- ---------------------- CURRENT NONCURRENT CURRENT NONCURRENT --------- ----------- --------- ----------- Assets............................................................ $ 39,304 $ 160,014 $ 34,513 $ 112,197 Liabilities....................................................... (29,335) (68,029) (26,259) (77,099) --------- ----------- --------- ----------- Subtotal.................................................... 9,969 91,985 8,254 35,098 Less: valuation allowance......................................... -- 52,455 -- 8,293 --------- ----------- --------- ----------- Total....................................................... $ 9,969 $ 39,530 $ 8,254 $ 26,805 --------- ----------- --------- ----------- --------- ----------- --------- -----------
The Company's net deferred income tax assets were $49.5 million and $35.1 million at February 1, 1997 and February 3, 1996, respectively. At February 1, 1997, management believes that sufficient evidence exists which indicates that it is more likely than not that the Company will be able to realize these net deferred income tax assets. In addition, during Fiscal 1996, as a result of a sale of a minority interest in a special purpose subsidiary of Pathmark to an unrelated party, the Company recorded a tax capital loss of $131.0 million (a $45.9 million tax benefit) due to a basis differential in such stock. The Company also generated a capital loss in Fiscal 1995 of approximately $69.5 million as a result of the sale of the Company's investment in Purity. During Fiscal 1995, the Company utilized $42.9 million of these capital losses, primarily from the sale of the freestanding drug stores, and in Fiscal 1996 utilized $2.7 million of capital losses from the sale of property. A valuation allowance was recorded to fully reserve the deferred income tax capital loss carryforwards which expire from Fiscal 2000 to Fiscal 2001. Reversal of the 43 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17--INCOME TAXES (CONTINUED) valuation allowance will occur when and if the Company is able to generate capital gains. Federal and state net operating loss carryforwards expire from Fiscal 1998 to Fiscal 2012. General business credits consist of federal jobs credits and expire from Fiscal 2001 to Fiscal 2011. During Fiscal 1995, in conjunction with the Company's evaluation of its deferred income tax assets, the Company reversed the valuation allowance related to its net deferred income tax assets. Such reversals of the valuation allowance totaled $26.8 million and have been included as a component of the Fiscal 1995 income tax benefit. The Fiscal 1994 state income tax provision includes the recording of state income taxes for certain issues related to prior years. In Fiscal 1996, Fiscal 1995 and Fiscal 1994, the Company made income tax payments of $4.7 million, $3.9 million and $6.5 million, respectively, and received income tax refunds of $8.1 million, $10.3 million and $25.9 million, respectively. NOTE 18--EXTRAORDINARY ITEMS The extraordinary items, representing the loss on early extinguishment of indebtedness, consist of the following (dollars in thousands):
FISCAL YEARS ------------------------------- 1996 1995 1994 --------- --------- --------- Loss before income taxes.......................................................... $ (1,692) $ (3,686) $ (3,687) Income tax benefit................................................................ 695 1,506 -- --------- --------- --------- Extraordinary items, net of a tax benefit......................................... $ (997) $ (2,180) $ (3,687) --------- --------- --------- --------- --------- ---------
During the first quarter of Fiscal 1996, in connection with the termination of the Plainbridge credit agreement due to the reacquisition of Plainbridge by Pathmark, the Company wrote off deferred financing fees, resulting in a net loss on early extinguishment of debt of $0.7 million, net of an income tax benefit of $0.5 million. During the first quarter of Fiscal 1996, the Company also made a paydown of $3.2 million of PTK Exchangeable Guaranteed Debentures, including premium and original issue discount, resulting in a net loss on early extinguishment of debt of $0.1 million, net of an income tax benefit of $0.1 million. During the second quarter of Fiscal 1996, in connection with the proceeds from the sale of certain mortgaged property, the Company made a mortgage paydown of $5.3 million, including accrued interest and debt premiums, resulting in a net loss on early extinguishment of debt of $0.2 million, net of an income tax benefit of $0.1 million. During the first quarter of Fiscal 1995, in connection with the final proceeds received related to the disposition of the home centers segment, the Company was required to paydown $4.7 million of PTK Exchangeable Guaranteed Debentures; the premium paid, including original issue discount, resulted in a net loss on early extinguishment of debt of $0.2 million. During the second quarter of Fiscal 1995, in connection with the proceeds received related to the sale of 30 of its freestanding drug stores, the Company was required to paydown $21.8 million of PTK Exchangeable Guaranteed Debentures; the premium paid, including original issue discount, resulted in a net loss on early extinguishment of debt of $0.7 million. During the fourth quarter of Fiscal 1995, in connection with the proceeds received from the sale of the Purity investment and the sale of 30 of its freestanding drug stores, the Company was required 44 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 18--EXTRAORDINARY ITEMS (CONTINUED) to paydown $30.0 million of PTK Exchangeable Guaranteed Debentures; the premium paid, including original issue discount, resulted in a net loss on early extinguishment of debt of $1.3 million. During Fiscal 1994, in connection with the disposal of the home centers segment, the Company was required to pay down $62.9 million of PTK Exchangeable Guaranteed Debentures. The premium paid, including original issue discount, resulted in a net loss on early extinguishment of indebtedness of $3.7 million. NOTE 19--CUMULATIVE EXCHANGEABLE REDEEMABLE PREFERRED STOCK The Company's Exchangeable Preferred Stock, which has a maturity date of December 31, 2007, consists of 9,000,000 authorized shares, of which 4,890,671 shares are issued and outstanding at February 1, 1997 and February 3, 1996. The fair market value of the Exchangeable Preferred Stock, at date of original issuance of October 5, 1987, was $20 per share and the liquidation preference is $25 per share. Due to its mandatory redemption requirements, the Exchangeable Preferred Stock has been stated on the balance sheet as redeemable securities. The difference between fair market value at date of issue and liquidation preference is being accreted quarterly. In the event of any liquidation, dissolution or winding up of the Company, holders of the Exchangeable Preferred Stock will be entitled to receive their full liquidation preference per share, together with accrued and unpaid dividends, before the distribution of any assets of the Company to the holders of shares of the Company's common stock or other shares, which would rank junior to the Exchangeable Preferred Stock. The Exchangeable Preferred Stock may be redeemed, at the option of the Company, in whole or in part, at liquidation preference, together with all accrued and unpaid dividends to the redemption date. Optional redemption of the Exchangeable Preferred Stock will be subject to restricted payments and other similar provisions of the Company's debt instruments. Commencing December 31, 2004, the Company is required to redeem in each year 20% of the highest amount at any time outstanding of the Exchangeable Preferred Stock. The redemption process is calculated to retire 60% of the issue prior to final maturity with the remaining amount of the issue to be redeemed at maturity. The Company has the option to require holders to exchange the Exchangeable Preferred Stock on any dividend payment date, in whole or in part, for exchange debentures (the "Exchange Debentures") of the Company. Such option is available at any time if (a) no event of default exists under any of the Company's loan agreements and (b) the exchange is allowed under the provisions of the limitation on the Company's indebtedness and other applicable provisions of the Company's loan agreements. Any such exchange will result in the issuance of Exchange Debentures in an amount equal to the aggregate liquidation preference of all shares of Exchangeable Preferred Stock being exchanged into Exchange Debentures and in an amount equal to all accrued but unpaid dividends. 45 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 19--CUMULATIVE EXCHANGEABLE REDEEMABLE PREFERRED STOCK (CONTINUED) Exchangeable Preferred Stock activity for the three years ended February 1, 1997 was as follows (dollars in thousands):
NUMBER OF SHARES AMOUNT ----------------- ---------- Balance, January 29, 1994...................................... 4,890,671 $ 100,346 Accretion...................................................... -- 1,613 ----------------- ---------- Balance, January 28, 1995...................................... 4,890,671 101,959 Accretion...................................................... -- 1,674 ----------------- ---------- Balance, February 3, 1996...................................... 4,890,671 103,633 Accretion...................................................... -- 1,739 ----------------- ---------- Balance, February 1, 1997...................................... 4,890,671 $ 105,372 ----------------- ---------- ----------------- ----------
The terms of the Exchangeable Preferred Stock 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 the Company. Dividends for the first 20 quarterly dividend periods (through October 15, 1992) were paid at the Company's option in additional shares of Exchangeable Preferred Stock. Prior to the Recapitalization, the Old Bank Credit Agreement and the terms of the indentures governing the Company's public debt restricted the payment of cash dividends on the Exchangeable Preferred Stock unless certain conditions were met, including tests relating to earnings and to cash flow ratios of the Company. Prior to the Recapitalization, the Company had not met the conditions permitting cash dividend payments on the Exchangeable Preferred Stock. Subsequent to the Recapitalization, Holdings does not expect to receive cash flow sufficient to permit payments of dividends on the Exchangeable Preferred Stock in the foreseeable future. All dividends not paid in cash will cumulate at the rate of $3.52 per share per annum, without interest, until declared and paid. As such, at February 1, 1997, the unpaid dividends of $73.2 million were accrued and included in other noncurrent liabilities. Pursuant to the Certificate of Stock Designation for the Exchangeable Preferred Stock (the "Certificate of Designation"), the Company was required to pay cash dividends to the Exchangeable Preferred Stockholders at an annual rate of $3.52 per share beginning on January 15, 1993. The Certificate of Designation provides that the Exchangeable Preferred Stock is non-voting except that if an amount equal to six quarterly dividends is in arrears in whole, or in part, the Exchangeable Preferred Stockholders voting as a class are entitled to elect an additional two members to the Board of Directors of the Company. The Company is currently in arrears on the payment of 17 quarterly dividends. Accordingly, the holders of the Exchangeable Preferred Stock reelected two members of the Company's Board of Directors at its 1996 annual meeting. Dividends on the Exchangeable Preferred Stock must be paid in full for all prior periods as of the most recent dividend payment date before any dividends, other than dividends payable in shares of the Company's common stock or in any other class of the Company's capital stock ranking junior to the Exchangeable Preferred Stock, can be paid or can be set apart for payment to holders of common stock or to holders of any other shares, which would rank junior to the Exchangeable Preferred Stock. In addition, dividends on the Exchangeable Preferred Stock must be paid in full for all prior periods before the redemption or purchase by the Company of shares of common stock or any other shares, which would rank junior to the Exchangeable Preferred Stock. 46 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 20--COMMON STOCK The Company's authorized common stock, par value $.01 per share, consists of 1,075,000 shares of Class A common stock and 1,000,000 shares of Class B common stock, of which 650,675 shares and 320,000 shares, respectively, were issued and outstanding at February 1, 1997 and at February 3, 1996. Holders of shares of Class A common stock are entitled to one vote per share on all matters to be voted on by stockholders. Holders of shares of 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 the Company. Subject to compliance with certain procedures, holders of Class B common stock may exchange their shares for shares of Class A common stock and holders of Class A common stock may exchange their shares for shares of Class B common stock on a share-for-share basis. Upon liquidation or dissolution of the Company, holders of the Company's common stock are entitled to share ratably in all assets available for distribution to stockholders. Payment of all prior claims, including liquidation rights of any Exchangeable Preferred Stock outstanding, must be made before the holders of the Company's common stock are entitled to any distribution. Holders of the Company's common stock have no preemptive or subscription rights. On February 4, 1991, as a result of the consummation of the Exchange Offer, all shares of the Company's Class A common stock and Class B common stock were owned directly by SMG-II. SMG-II is effectively a holding company for the operations of the Company (see Note 1). The Company and certain executives of Supermarkets (collectively, "Management Investors") entered into a management subscription agreement under which, on October 5, 1987, the Management Investors purchased an aggregate of 100,000 shares of Class A common stock for consideration of $100 per share. In connection with the Exchange Offer, the Management Investors entered into an agreement (the "Management Investors Exchange Agreement") with respect to the SMG-II common stock which was received in exchange for the Company's Class A common stock. Prior to the Exchange Offer, all of the Class A common stock held by Management Investors was classified as Redeemable Securities. Certain Management Investors, who purchased shares of Class A common stock, borrowed a portion of the purchase price from the Company and were required to deliver a note to the Company ("Recourse Note") in the principal amount of the loan (see Note 14). Interest on the Recourse Note is to be paid annually and the principal is to be paid on the tenth anniversary of the date of issue. Each Management Investor who issued a Recourse Note was required to enter into a stock pledge agreement ("Stock Pledge Agreement") with the Company, pursuant to which the Management Investor pledged shares of Class A common stock to secure the repayment of the Recourse Note. In connection with the Exchange Offer, each Management Investor who issued a Recourse Note was required to execute an amendment to the Stock Pledge Agreement, which provided for the substitution of the SMG-II common stock received in the Exchange Offer for the Company Class A common stock, in order to secure the repayment of the Recourse Note. Recourse Notes in the amount of approximately $1.7 million were outstanding at February 1, 1997 and February 3, 1996. The Recourse Notes were included in other assets at February 1, 1997 and February 3, 1996. NOTE 21--STOCK OPTION PLANS The Management Investors 1987 Stock Option Plan (the "Management Plan") and the 1987 Employee Stock Option Plan (the "Employee Plan") were approved by the Board of Directors of the Company on November 24, 1987 and by the Stockholders on December 21, 1987. Under the terms of the 47 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 21--STOCK OPTION PLANS (CONTINUED) Management and the Employee Plans, associates receive either incentive stock options or nonqualified stock options, the duration of which may not exceed ten years from the date of grant, to purchase shares of the Company's Class A common stock. In connection with the Exchange Offer, adjustments to outstanding options under the Management and the Employee Plans were made. As a result of these adjustments, each option under the Management and the Employee Plans, which were outstanding on February 4, 1991, became an option for the purchase of an equal number of shares of SMG-II Class A common stock. NOTE 22--DISPOSITION OF FREESTANDING DRUG STORES During the second quarter of Fiscal 1995, the Company made a decision to dispose of its 36 freestanding drug stores and, on July 28, 1995, through its Pathmark subsidiary, completed the sale of 30 of its freestanding drug stores, including merchandise inventory, to Rite Aid Corporation for $59.9 million. The Company used $25.0 million of the proceeds to repay a portion of its existing Pathmark Term Loan and $21.8 million of the proceeds to repay a portion of its PTK Exchangeable Guaranteed Debentures. The Company recorded a pretax gain on the disposition of its freestanding drug stores of $15.5 million, net of a $19.0 million charge related to the estimated exit costs of the remaining six freestanding drug stores. Five of the remaining six freestanding drug stores closed during Fiscal 1995 and the sixth store closed during the second quarter of Fiscal 1996. NOTE 23--DISPOSAL OF PURITY During Fiscal 1995, in connection with the sale of Purity to the Stop & Shop Companies, Inc., the Company sold its remaining investment in Purity for $16.4 million, the proceeds of which were used to repay a portion of its PTK Exchangeable Guaranteed Debentures. As a result of the sale, a capital tax loss of approximately $69.5 million was generated (see Note 17). This transaction resulted in a pretax gain of $16.4 million. NOTE 24--GAIN ON DISPOSAL OF HOME CENTERS SEGMENT AND DISCONTINUED OPERATIONS On November 4, 1994, the Company's Plainbridge subsidiary completed the sale of its home centers segment to Rickel Home Centers, Inc. ("Rickel") for approximately $88.7 million in cash, plus the assumption of certain indebtedness. During Fiscal 1994, the Company recognized a gain of $17.0 million on the sale of the home centers segment, net of an income tax provision of $2.3 million. Such gain included a pension plan curtailment gain of $6.2 million and a reduction in the deferred tax valuation allowance of $5.1 million, resulting from the utilization of tax loss carryforwards for which reserves had previously been provided. The Company used net cash proceeds of $66.6 million in Fiscal 1994 and $4.7 million in Fiscal 1995 to pay down the PTK Exchangeable Guaranteed Debentures, including accrued interest and debt premium. 48 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 24--GAIN ON DISPOSAL OF HOME CENTERS SEGMENT AND DISCONTINUED OPERATIONS (CONTINUED) Through the date of the sale, the Company reported the home centers segment as discontinued operations. Operating results of such discontinued operations were as follows (dollars in thousands):
FISCAL 1994(A) ---------- Sales............................................................................. $ 271,989 ---------- ---------- Loss before income taxes(b)....................................................... $ (2,383) Income tax benefit................................................................ 284 ---------- Loss from discontinued operations................................................. $ (2,099) ---------- ----------
- ------------------------ (a) Represents the results of operations related to the home centers segment from January 30, 1994 through November 3, 1994. (b) The Company charged the home centers segment interest expense, which related to a proportionate share of certain borrowings. This charge amounted to $11.0 million in Fiscal 1994 and is included in the results of the discontinued operations. NOTE 25--NEW CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT On October 8, 1996, the Company hired a new Chief Executive Officer (the "CEO") pursuant to a five-year employment agreement (the "Employment Agreement"). In conjunction with his employment, SMG-II granted to the CEO an equity package (the "Equity Strip") consisting of 8,520 restricted shares of a new series of SMG-II Preferred Stock and 19,851 restricted shares of SMG-II Common Stock and options to purchase 100,000 shares of SMG-II Common Stock at an initial exercise price of $100 per share (the "Options") with the said exercise price increasing over time. The Equity Strip was valued at $3.4 million at the date of issuance, based upon an independent appraisal, and will vest over the term of the employment agreement or earlier with the occurrence of an employment-related event, as defined, and will be forfeited in its entirety upon the occurrence of a termination event, as defined. The Equity Strip is being amortized as compensation expense in the Company's statement of operations over the term of the Employment Agreement. The Options were accounted for by SMG-II using the methods prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and as a result, no compensation expense was recorded. The Options will vest over four years and expire one year after being fully vested, except for the portion of the Options that vest on the day before the fifth year and has not yet become exercisable, the expiration of which will be extended to year seven. If employment with the Company should end as a result of a termination event, the Options (whether or not then vested) will be immediately and irrevocably forfeited, except in certain circumstances. Vested Options do not become exercisable until the occurrence of certain events related generally to the realization of a third-party sale of SMG-II Common Stock. The CEO also received (a) a one-time signing bonus of $1 million, which is being amortized as compensation expense in the Company's statement of operations over the term of the Employment Agreement, and (b) a $4.5 million loan evidenced by sixteen separate promissory notes. Under the terms of each note, if he is in full employment of the Company on a quarterly anniversary of his hiring date, his obligation to pay such note maturing on such date will be forgiven as to principal, but not any then accrued and unpaid interest. The Company will record compensation expense upon the forgiveness of each note. In the event his employment ends, as a result of a termination event, prior to a change in control, as defined, each note will become immediately due and payable as to all outstanding principal and 49 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 25--NEW CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT (CONTINUED) all accrued and unpaid interest. These notes, which bear interest at a blended rate of approximately 6%, are on a full-recourse basis and secured by the Equity Strip, the Options and any shares acquired upon exercise of such Options. NOTE 26--COMMITMENTS AND CONTINGENCIES RICKEL: In connection with the sale of its home centers segment in Fiscal 1994, the Company, as lessor, entered into leases for certain real estate properties with Rickel, as tenant (the "Leases"), pursuant to which the Company is entitled to receive annual aggregate rentals of approximately $4.5 million. In addition, as part of the sale, the Company assigned to Rickel, and Rickel assumed, various liabilities of the home centers segment, primarily third party leases (the "Assumed Liabilities"). As of February 1, 1997, the estimated present value of obligations under the Assumed Liabilities approximated $29.0 million. In January 1996, Rickel filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. In April 1996, the Company filed its proofs of claim in connection with the bankruptcy proceedings. In August 1996, Rickel filed an order with the Bankruptcy Court to reject a third party lease. The estimated present value of this lease obligation is approximately $4.5 million. In November 1996, Rickel filed an order with the Bankruptcy Court to reject four Leases related to property owned by the Company, with aggregate annual rentals of approximately $2.4 million. The Company is actively marketing these properties to other prospective tenants. In February 1997, Rickel filed an order with the Bankruptcy Court to reject one additional third party lease, which the Company has settled with the landlord. Management has evaluated its exposure with respect to these rejected Leases and has concluded that the Company has sufficient reserves to cover any resulting liability which may occur with respect to these rejected Leases. Since the bankruptcy is not concluded, the Company cannot determine whether Rickel will reject any additional Leases or the extent to which the Company may become liable with respect to the Assumed Liabilities in the event of Rickel's nonpayment thereof. OUTSOURCING: In August 1991, the Company entered into a long-term agreement with IBM, to provide a wide range of information systems services. Under the agreement, IBM has taken over the Company's data center operations and mainframe processing and information system functions and is providing business applications and systems designed to enhance the Company's customer service and efficiency. The charges under this agreement are based upon the services requested at predetermined rates. The Company may terminate the agreement upon 90 days notice with payment of a specified termination charge. The amounts expensed under this agreement in the accompanying consolidated statements of operations were $22.1 million, $21.0 million and $16.0 million during Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively. OTHER: The Company is also a party to a number of legal proceedings in the ordinary course of business. Management believes that the ultimate resolution of these proceedings will not, in the aggregate, have a material adverse impact on the financial condition, results of operations or business of the Company. 50 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 27--QUARTERLY FINANCIAL DATA (UNAUDITED) Financial data for the interim periods of Fiscal 1996 and Fiscal 1995 is as follows (dollars in thousands):
13 WEEKS ENDED ---------------------------------------------- MAY 4, AUGUST 3, NOVEMBER 2, FEBRUARY 1, FISCAL 1996 1996 1996 1997 1996 --------- --------- ----------- ----------- ----------- 52 WEEKS ENDED FEBRUARY 1, 1997 Sales............................................................ $ 912,972 $ 931,363 $ 911,221 $ 955,434 $ 3,710,990 Gross profit(a).................................................. 266,023 274,951 266,801 283,886 1,091,661 Selling, general and administrative expenses(b).................. 213,710 214,987 211,821 216,856 857,374 Depreciation and amortization.................................... 20,674 21,458 20,536 26,471 89,139 Restructuring charge............................................. -- -- -- 9,137 9,137 Lease commitment charge.......................................... -- -- -- 8,763 8,763 Operating earnings............................................... 31,639 38,506 34,444 22,659 127,248 Interest expense................................................. (40,589) (41,106) (40,951) (41,472) (164,118) Loss from operations before income taxes and extraordinary items.......................................................... (8,950) (2,600) (6,507) (18,813) (36,870) Income tax benefit............................................... 3,625 878 2,567 10,653 17,723 Loss from operations before extraordinary items.................. (5,325) (1,722) (3,940) (8,160) (19,147) Extraordinary items, net of an income tax benefit................ (793) (204) -- -- (997) Net loss......................................................... $ (6,118) $ (1,926) $ (3,940) $ (8,160) $ (20,144)
13 WEEKS ENDED 14 WEEKS --------------------------------- ENDED APRIL 29, JULY 29, OCTOBER 28, FEBRUARY 3, FISCAL 1995 1995 1995 1996 1995 --------- --------- ----------- ----------- ----------- 53 WEEKS ENDED FEBRUARY 3, 1996 Sales............................................................. $ 982,014 $ 972,363 $ 939,864 $ 1,077,829 $ 3,972,070 Gross profit(c)................................................... 277,637 276,587 261,246 318,913 1,134,383 Selling, general and administrative expenses(b)................... 213,807 215,474 208,173 228,397 865,851 Depreciation and amortization..................................... 19,979 20,117 20,134 20,305 80,535 Operating earnings................................................ 43,851 40,996 32,939 70,211 187,997 Interest expense.................................................. (43,170) (43,750) (41,879) (42,170) (170,969) Gain on disposition of freestanding drug stores................... -- 15,535 -- -- 15,535 Gain on disposal of Purity........................................ -- -- -- 16,381 16,381 Earnings (loss) from operations before income taxes and extraordinary items............................................. 681 12,781 (8,940) 44,422 48,944 Income tax benefit (provision).................................... (101) 19,941 4,294 5,629 29,763 Earnings (loss) from operations before extraordinary items........ 580 32,722 (4,646) 50,051 78,707 Extraordinary items, net of an income tax benefit................. (252) (675) -- (1,253) (2,180) Net earnings (loss)............................................... $ 328 $ 32,047 $ (4,646) $ 48,798 $ 76,527
- ------------------------ (a) The pretax LIFO provision for Fiscal 1996 was $0.85 million in the first and second quarter with no provision in the third quarter. The annual credit was $1.3 million, resulting in a $3.0 million credit in the fourth quarter. (b) Selling, general and administrative expenses ("SG&A") for Fiscal 1996 included a first quarter provision of $5.8 million representing the termination costs of two former executives of the Company, a first quarter gain of $5.6 million recognized on the sale of certain real estate and a second quarter curtailment gain of $2.0 million due to the elimination of postretirement medical coverage for active non-union associates. SG&A for Fiscal 1995 also included a fourth quarter gain of $3.4 million recognized on the sale of a former warehouse of Purity, a previously divested company. (c) The pretax LIFO provision for Fiscal 1995 was $0.8 million in the first quarter, $0.5 million in the second quarter and $0.8 million in the third quarter. The annual provision was $1.1 million, resulting in a $1.0 million credit in the fourth quarter. 51 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholder Supermarkets General Holdings Corporation Woodbridge, New Jersey We have audited the accompanying consolidated balance sheets of Supermarkets General Holdings Corporation and its subsidiaries (the "Company") as of February 1, 1997 and February 3, 1996, and the related consolidated statements of operations, stockholder's deficit and cash flows for each of the three years in the period ended February 1, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of February 1, 1997 and February 3, 1996, and the results of their operations and their cash flows for each of the three years in the period ended February 1, 1997 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Parsippany, New Jersey April 23, 1997 52 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (AS OF APRIL 15, 1997) (A) DIRECTORS OF THE COMPANY The following table sets forth the name, principal occupation or employment at the present time and during the last five years, and the name and principal business of any corporation or other organization in which such occupation or employment is or was conducted, of the directors of the Company, all of whom are citizens of the United States unless otherwise indicated. Each individual named below is a director of both the Company and Pathmark, except for Messrs. Upchurch and Volla.
DIRECTOR OF THE COMPANY NAME, AGE, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS SINCE (1) - ------------------------------------------------------------------------------------------------- --------------- MATTHIAS BOWMAN, 48, Chief Executive Officer of Merrill Lynch Capital Partners, Inc., ("MLCP"), 1997 an investment firm affiliated with Merrill Lynch & Co., ("ML& Co."), the financial services concern, since 1994; Vice Chairman of Investment Banking with ML&Co. since 1993; Managing Director of Merrill Lynch, Pierce, Fenner & Smith Incorporated since at least 1992. Mr. Bowman is also a Director of Rykoff-Sexton, Inc. JOHN W. BOYLE, 68, Chairman and Chief Executive Officer of the Company from March 1996 to October 1996 1996 (Retired); Vice Chairman (retired), Eckerd Corporation, a drug store chain, between 1983 and 1995. Mr. Boyle is also a Director of United Artists Theater Circuit, Inc.(2) JAMES J. BURKE, JR., 45, Managing Partner and a Director of Stonington Partners, Inc. ("SPI"), a 1988 private investment firm, since 1993, and a Director of MLCP since 1987; Partner of MLCP from 1993 to 1994; President and Chief Executive Officer of MLCP from 1987 to 1993. Mr. Burke was also a Managing Director of ML&Co. until 1994. Mr. Burke is also a Director of Ann Taylor Stores Corp., Borg-Warner Security Corp., Education Management Corp. and United Artists Theater Circuit, Inc. JAMES DONALD, 43, Chairman, President and Chief Executive Officer of the Company (since October 1996 1996); Senior Vice President and General Manager, Safeway, Inc., Eastern Division from February 1994 until October 1996; Vice President-Marketing, Wal-mart Corp. prior thereto(3). U. PETER C. GUMMESON, 38, Managing Director of Alliance Corporate Finance Group, Incorporated, an 1996 investment firm affiliated with the Equitable Life Assurance Society of the United States (the "Equitable") and an investment officer of the Equitable. SUNIL C. KHANNA, 40, Principal of SPI since 1993; Principal of MLCP from 1993 to 1994; Vice 1987 President of MLCP from 1989 to 1993; a Director of the Investment Banking Division of ML&Co. from 1993 to 1994, and a Vice President thereof prior thereto. Mr. Khanna is also a Director of Rykoff-Sexton, Inc.
53
DIRECTOR OF THE COMPANY NAME, AGE, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS SINCE (1) - ------------------------------------------------------------------------------------------------- --------------- STEPHEN M. McLEAN, 39, Partner and a Director of SPI since 1993; Partner of MLCP from 1993 to 1987 1994; Senior Vice President of MLCP from 1987 to 1993; Director of MLCP since 1987; Managing Director of the Investment Banking Division of ML&Co. until 1994. Mr. McLean is also a Director of CMI Industries, Inc. and Dictaphone Corporation. ROBERT G. MILLER, 53, Chairman and Chief Executive Officer of Fred Meyer, Inc., a diversified 1997 retailer. Mr. Miller is also a Director of PacifiCorp. JERRY G. RUBENSTEIN, 67, Managing Partner, Omni Management Associates; Consultant to MLCP since 1988 1988. JAMES B. UPCHURCH, 38, President and Chief Operating Officer of Libra Investments, Inc., an NASD 1995 licensed broker/dealer. STEVEN L. VOLLA, 50, Chairman and Chief Executive Officer of Primary Health Systems, L.P., a 1995 hospital management company, since June 1994; Chairman, President and Chief Executive Officer of American Health Care Management, Inc., prior thereto.
- ------------------------ (1) Includes service with Pathmark's predecessor. (2) Mr. Boyle was retained on March 20, 1996 to act as the Company's interim Chairman and Chief Executive Officer. He resigned said position on October 7, 1996. (3) Mr. Donald was elected as Chairman, President and Chief Executive Officer of the Company effective October 8, 1996. Pursuant to the Stockholders Agreement, the ML Investors are entitled to designate seven directors, the Management Investors are entitled to designate three directors and The Equitable Investors are entitled to designate one director to Holdings' Board of Directors. By having the ability to designate a majority of Holdings' Board of Directors, the Merrill Lynch Investors have the ability to control the Company. Currently, six of the persons serving as directors were designated by the Merrill Lynch Investors (Messrs. Bowman, Boyle, Burke, Khanna, McLean and Rubenstein), one was designated by the Management Investors (Mr. Donald) and one was designated by the Equitable Investors (Mr. Gummeson). Mr. Miller was designated by the three investor groups. Messrs. Upchurch and Volla were elected by the holders of Holdings Preferred Stock. No family relationship exists between any director and any other director or executive officer of the Company. 54 (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(1) - ---------------------------------------------- --- ---------------------------------------------- --------------- JAMES DONALD.................................. 43 Chairman, President and Chief Executive 1996 Officer since October 1996(2) NEILL CROWLEY................................. 54 Executive Vice President--Retail Services 1994 since October 1996; Executive Vice President--Distribution since May 1995; Executive Vice President-- Marketing from May 1994 to May 1995; Executive Vice President--Marketing and Store Support, The Vons Companies, Inc. (a supermarket chain) prior thereto. RON MARSHALL.................................. 43 Executive Vice President and Chief Financial 1994 Officer since October 1994. Senior Vice President and Chief Financial Officer of Dart Group Corporation (a diversified retailer) prior thereto. JOSEPH W. ADELHARDT........................... 50 Senior Vice President and Controller since 1987 January 1996; Vice President and Controller prior thereto. Mr. Adelhardt joined the Company in 1976. HARVEY M. GUTMAN.............................. 51 Senior Vice President--Retail Development. Mr. 1990 Gutman joined the Company in 1976. ROBERT JOYCE.................................. 51 Senior Vice President (since October 1996); 1989 Executive Vice President-- Operations (from January 1996 to October 1996; Senior Vice President-- Operations--from March 1995 to January 1996; Senior Vice President-- Administration prior thereto. Mr. Joyce joined the Company in 1963.
55
OFFICER OF THE COMPANY NAME AGE POSITIONS AND OFFICE SINCE(1) - ---------------------------------------------- --- ---------------------------------------------- --------------- RONALD RALLO.................................. 59 Senior Vice President--Merchandising (since 1993 October 1996); Executive Vice President--Merchandising (from May 1995 to October 1996); Senior Vice President--Merchandising from July 1993 to May 1995); Senior Vice President--Merchandising Pathmark division (from September 1992 to July 1993); Senior Vice President--Perishable Merchandising, Pathmark division prior thereto. Mr. Rallo joined the Company in 1962. MARC A. STRASSLER............................. 48 Vice President, Secretary and General Counsel. 1987 Mr. Strassler joined the Company in 1974. MYRON D. WAXBERG.............................. 63 Vice President and General Counsel-- Real 1991 Estate Mr. Waxberg joined the Company in 1976.
- ------------------------ (1) Includes service with Pathmark's predecessor. (2) Member of the Company's Board of Directors. 56 ITEM 11. EXECUTIVE COMPENSATION. 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) - ------------------------------- --------- ----------- ---------- ------------- ------------ ------------- ------------- James L. Donald(5)............. 1996 193,846 1,175,000 340,021 3,400,000 100,000 16,821 Chairman, President and Chief Executive Officer Jack Futterman(6).............. 1996 70,673 -- -- -- -- 2,545,000 Retired Chairman, President 1995 526,442 332,658 -- -- -- 5,250 and CEO 1994 491,346 92,127 -- -- -- 5,250 John W. Boyle(5)............... 1996 -- -- -- -- 3,000 388,980 Retired Interim Chairman, President and CEO Ron Marshall................... 1996 300,000 36,000 49,177 -- -- 5,250 Executive Vice President and 1995 280,289 168,173 -- -- -- -- Chief Financial Officer 1994 89,904 53,942 -- -- 2,000 -- Neill Crowley.................. 1996 253,750 30,450 -- -- -- 5,250 Executive Vice 1995 247,212 112,241 -- -- -- 4,341 President--Retail Services 1994 168,712 21,089 -- -- 1,000 -- Ronald Rallo................... 1996 245,000 29,400 4,389 -- -- 5,250 Senior Vice President-- 1995 227,500 113,585 4,399 -- -- 5,250 Merchandising 1994 200,385 21,141 4,265 -- -- 5,250 Robert Joyce................... 1996 223,846 26,862 2,195 -- -- 5,250 Senior Vice President 1995 205,437 84,650 2,200 -- 250 5,250 1994 169,125 21,141 2,133 -- -- 5,250
- ------------------------ (1) Represents (i) with respect to Mr. Donald, payment of $58,771 to Mr. Donald as reimbursement of legal expenses in connection with the negotiation of his employment agreement and forgiveness of a loan payment due to the Company of $281,250; (ii) with respect to Mr. Marshall, reimbursement of relocation expenses; and (iii) with respect to Messrs. Rallo and Joyce, payments as reimbursement for interest paid to Holdings for loans each of less than $60,000 from Holdings in connection with the purchase of SMG-II Class A Common Stock, and includes an amount sufficient to pay any income taxes resulting therefrom after taking into account the value of any deductions available as a result of the payment of such interest and taxes. (2) Includes accumulated dividends of $1,039,440 with respect to an award of 8,520 restricted shares of SMG-II Series C Preferred Stock. (3) Stock options shown were granted (i) to Mr. Donald pursuant to the Employment Agreement dated October 8, 1996 among the Company, SMG-II and Mr. Donald (the "Donald Agreement"); and (ii) to Messrs. Boyle, Marshall, Crowley and Joyce pursuant to the Management Investors 1987 Stock Option Plan of SMG-II (the "Plan"). All options relate to shares of SMG-II Class A Common Stock. 57 (4) Represents (i) with respect to Mr. Donald, payments of $11,756 on behalf of Mr. Donald for temporary housing and $5,065 for a term life insurance premium on Mr. Donald's life; (ii) with respect to Mr. Futterman, payments of $4,594 representing the Company's matching contribution to the SGC Savings Plan, $2,128,150 paid to Mr. Futterman pursuant to a Retirement Agreement dated March 20, 1996 among Mr. Futterman, the Company and SMG-II (the "Retirement Agreement"), and $412,256 paid pursuant to Mr. Futterman's Supplemental Retirement Agreement; (iii) with respect to Mr. Boyle, payments of $288,980 representing a consulting fee for acting as the Company's interim Chief Executive Officer payable pursuant to a Consulting Agreement dated March 20, 1996 between the Company and Mr. Boyle, and a completion bonus of $100,000 in connection with the identification and hiring of Mr. Donald as Chief Executive Officer; and (iv) with respect to the other four named executive officers, the Company's matching contribution under the SGC Savings Plan. (5) Mr. Donald was employed by the Company on October 8, 1996 as Chairman, President and CEO replacing Mr. Boyle who acted as interim Chairman and CEO from March 20, 1996 to October 7, 1996. (6) Mr. Futterman retired on March 20, 1996. OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION INDIVIDUAL GRANTS TERM ------------------------------------------------------------ ------------------------ % OF TOTAL OPTIONS/ SARS GRANTED EXERCISE OR OPTIONS/SARS TO EMPLOYEES BASE PRICE EXPIRATION NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($) - -------------------------------- ------------- --------------- --------------- ----------- ---------- ------------ James L. Donald................. 100,000 95.7 (1) (2) 6,288,946 15,937,425 John W. Boyle................... 3,000(3) 2.9 100 5/02/06 188,668 478,123
- ------------------------ (1) The stock option to purchase an aggregate of 100,000 shares of SMG-II Class A Common Stock granted to Mr. Donald by SMG-II consists of component A ("Option Component A") covering 50,000 shares of SMG-II Class A Common Stock and component B ("Option Component B") covering the remaining 50,000 shares of Common Stock. Subject to the vesting terms described below, Option Component A has an initial per share exercise price of $100 per share. The per share exercise price of Option Component A will increase to $125 per share on the first day of the Fiscal Year beginning in calendar year 2000 ("Fiscal Year 2000") and to $150 per share on the first day of the Fiscal Year beginning in calendar year 2001 ("Fiscal Year 2001"). Subject to the vesting terms described below, Option Component B has an initial per share exercise price of $100 per share. The per share exercise price of Option Component B will increase to $150 per share on the first day of the Fiscal Year beginning in calendar year 1999; to $250 per share on the first day of Fiscal Year 2000; and to $350 per share on the first day of Fiscal Year 2001. Mr. Donald will vest in 25% of the Option Component A and in 25% of the Option Component B on the Effective Date and on each of the first through third anniversaries of the Effective Date, provided that the Optionee is in the employ of the Company on each such date. Upon the occurrence of a Minimum IPO (as defined below) while the Optionee is in the employ of the Company, the entire Option shall immediately and fully vest. In addition, the Option will immediately and fully vest upon the occurrence of a Change in Control occurring prior to a Termination Event. Except for purposes of tag-along rights and piggyback rights under the Stockholders Agreement, the Option shall not be exercisable (even though the Option or a portion thereof is vested) unless and until it becomes exercisable in accordance with the following provisions: 58 (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 SMG-II Class A 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 SMG-II Class A Common Stock beneficially owned by them on the date Mr. Donald is granted an Option at a per share price in excess of the Target Price described above applicable to the date when such Realization Event occurs, then the components of the Option for which such Target Prices have been achieved shall become immediately vested and exercisable and the exercise price shall not thereafter increase. (2) The Option will expire on October 8, 2001 to the extent not previously exercised (the "Expiration Date"); provided, however, that the Expiration Date for the portion of Option Component A and Option Component B which is vested prior to such Expiration Date will be extended until October 8, 2003 if such vested portion of Option Component A and Option Component B, as the case may be, has not become exercisable by such initial Expiration Date. During the period of such extension, the per share exercise price of Option Component A and Option Component B, as the case may be (to the extent not previously exercised), will increase at the end of each month during such extension period at an annual rate of 10%. (3) Options shown were granted pursuant to the Plan, and relate to shares of Class A Common Stock of SMG-II. Options are fully vested and exercisable at the time of grant, provided that no exercise may occur unless a registration statement has been filed under the Securities Act of 1933 with respect to the shares subject to the option or the Compensation Committee of the Board of Directors of SMG-II determines that an exemption from registration is available. 59 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 - ------------------------------------------------------------------------------- ------------- John W. Boyle.................................................................. 3,000/0 Jack Futterman................................................................. 13,000/0 James Donald................................................................... 0/100,000 Neill Crowley.................................................................. 1,000/0 Ron Marshall................................................................... 2,000/0 Ronald Rallo................................................................... 2,850/0 Robert Joyce................................................................... 2,500/0
- ------------------------ (1) Options shown were granted pursuant to the Plan (except with respect to Mr. Donald) and relate to shares of Class A Common Stock of SMG-II. No options were exercised in Fiscal 1996 by any of the above named executives.
PENSION PLAN TABLE(1) YEARS OF SERVICE ---------------------------------------------------------------- FINAL AVERAGE PAY 10 15 20 25 30 35 - ------------------------------------------------ --------- --------- --------- --------- --------- --------- $150,000........................................ $ 20,000 $ 30,000 $ 40,000 $ 50,000 $ 60,000 $ 60,000 200,000........................................ 26,667 40,000 53,333 66,667 80,000 80,000 225,000........................................ 30,000 45,000 60,000 75,000 90,000 90,000 250,000........................................ 33,333 50,000 66,667 83,333 100,000 100,000 300,000........................................ 40,000 60,000 80,000 100,000 120,000 120,000 350,000........................................ 46,667 70,000 93,333 116,667 140,000 140,000 400,000........................................ 53,333 80,000 106,667 133,333 160,000 160,000 450,000........................................ 60,000 90,000 120,000 150,000 180,000 180,000 500,000........................................ 66,667 100,000 133,333 166,667 200,000 200,000 550,000........................................ 73,333 110,000 146,667 183,333 220,000 220,000 600,000........................................ 80,000 120,000 160,000 200,000 240,000 240,000 650,000........................................ 86,667 130,000 173,333 216,667 260,000 260,000 700,000........................................ 93,333 140,000 186,667 233,333 280,000 280,000 750,000........................................ 100,000 150,000 200,000 250,000 300,000 300,000
- ------------------------ (1) The table above illustrates the aggregate annual pension benefits payable under the SGC Pension Plan and Excess Benefit Plan (collectively, the "Pension Plans"). The retirement benefit for individuals with 30 years of credited service is 40% of the individual's average compensation during his or her highest five compensation years in the last ten years before retirement, less one-half of the social security benefit received. The retirement benefit is reduced by 3.33% for every year of credited service less than 30. Covered compensation under the Pension Plans includes all cash compensation subject to withholding plus amounts deferred under the Savings Plan pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended, and as to individuals identified in the Summary Compensation Table, would be the amount set forth in that table under the headings "Salary" and "Bonus". The (FOOTNOTES CONTINUED ON FOLLOWING PAGE) 60 (FOOTNOTES CONTINUED FROM PRECEDING PAGE) table shows the estimated annual benefits an individual would be entitled to receive if normal retirement at age 65 occurred in January 1997 after the indicated number of years of covered employment and if the average of the participant's covered compensation for the five years out of the last ten years of such employment yielding the highest such average equaled the amounts indicated. The estimated annual benefits are based on the assumption that the individual will receive retirement benefits in the form of a single life annuity (married participants may elect a joint survivorship option) and are before applicable deductions for social security benefits in effect as of January 1997. As of December 31, 1996, the following individuals had the number of years of credited service indicated after their names: Mr. Futterman, 22.8; Mr. Crowley, 1.5; Mr. Rallo, 30, Mr. Joyce, 26.7 and Mr. Marshall, 1.0. Neither Mr. Donald nor Mr. Boyle had any credited service. As described below in "Compensation Plans and Arrangements--SUPPLEMENTAL RETIREMENT AGREEMENTS", certain of the named executives is party to a Supplemental Retirement Agreement with Pathmark. COMPENSATION PLANS AND ARRANGEMENTS SUPPLEMENTAL RETIREMENT AGREEMENTS. The Company has entered into supplemental retirement agreements with certain key executives, including certain of the executive officers named in the Summary Compensation Table, and set forth below, which provide that said executive officers will be paid upon termination of employment after attainment of age 60 a supplemental pension benefit in such an amount as to assure him or her an annual amount of pension benefits payable under the supplemental retirement agreement, the Company's qualified pension plans and certain other plans of the Company, including Savings Plan balances as of March 31, 1983, (a) in the case of Mr. Futterman, equal to $525,000, (b) in the case of Messrs. Joyce and Rallo equal to (i) 30% of his final average Compensation based on ten years of service with the Company and increasing 1% per year for each year of service thereafter, to a maximum of 40%, of his final average Compensation based on 20 years of service, or (ii) $150,000, whichever is less, and (d) in the case of Messrs. Crowley and Marshall, equal to 12.5% of his final average Compensation based on five years of service with the Company and increasing 2.5% per year for each year of service thereafter to a maximum of 35% of his final average Compensation based on 14 years of service. "Compensation" includes base salary and payments under the Executive Incentive Plan, but excludes Company matching contributions under the Savings Plan. If the executive leaves the Company prior to completing 20 years of service (other than for disability), the supplemental benefit would be reduced proportionately. Should the executive die, the surviving spouse then receiving or, if he or she was not then receiving a supplemental pension benefit, the spouse would be entitled, provided the executive has attained at least ten years of service with the Company. EMPLOYMENT AGREEMENTS: EMPLOYMENT AGREEMENT AMONG PATHMARK, SMG-II AND JAMES L. DONALD. On October 8, 1996 (the "Effective Date"), the Company entered into the Donald Agreement with Mr. James L. Donald pursuant to which Mr. Donald was elected Chairman, President and Chief Executive Officer for a term of five years. The Donald Agreement provides Mr. Donald with an initial annual base salary of $600,000 and provides that he shall participate in the Pathmark Executive Incentive Plan, under which Mr. Donald may earn an annual bonus of up to 125% of his annual salary based on performance targets that are set by the Board. For the partial fiscal year commencing on the Effective Date and ending on February 1, 1997, the Donald Agreement guaranties Mr. Donald a minimum bonus of $175,000 and, for the first full fiscal year during the term of the Donald Agreement, Mr. Donald shall receive a minimum annual bonus of $425,000. Furthermore, under the Donald Agreement, Mr. Donald is guaranteed an annual bonus for each of the second, third and fourth full fiscal years of the term of at least 25% of his base salary. The Donald Agreement provides Mr. Donald with the right to defer up to 50% of his annual bonus and salary, which shall be held in a grantor trust established by the Company. During the term of the Donald Agreement, in 61 addition to the base salary, bonus eligibility and other customary annual benefits and perquisites that the Company generally provides to its executive officers, the Company will provide Mr. Donald with a company car and term life insurance in the amount of $4.5 million during the first year and $3.2 million thereafter. The Company also reimbursed Mr. Donald for the legal expenses incurred by him in the negotiation of the Donald Agreement. Mr. Donald also received a one-time signing bonus of $1 million, which is being amortized over the term of the Donald Agreement. Furthermore, Mr. Donald received an equity package (the "Equity Strip"), consisting of 8,520 restricted shares of a new series of SMG-II Preferred Stock with a stated value of $200 per share and 19,851 restricted shares of SMG-II Class A Common Stock, the terms of which are set forth in the stock award agreement (the "Stock Award Agreement"). The Equity Strip, which as of the Effective Date was valued by the Company at $3.4 million, based upon an independent appraisal, will vest in its entirety upon the occurrence of an Employment-Related Event, as defined in the Stock Award Agreement, and will be forfeited in its entirety upon the occurrence of a Termination Event, as defined in the Donald Agreement. The valuation of $3.4 million is being amortized by the Company over the term of the Donald Agreement. The Preferred Stock ranks pari passu with the existing SMG-II convertible preferred stock and will accrue dividends at a rate of 10% per annum. The Preferred Stock will be convertible into Common Stock on a one-for-one basis. As of the Effective Date, the Preferred Stock had accumulated dividends of approximately $122 per share. In addition, Mr. Donald received a stock option (the "Option") to purchase an aggregate of 100,000 shares of SMG-II Class A Common Stock. The Option consists of component A ("Option Component A") covering 50,000 shares of SMG-II Class A Common Stock and component B ("Option Component B") covering the remaining 50,000 shares of SMG-II Class A Common Stock. Any terms used herein not otherwise defined shall have the meanings assigned to them in the Donald Agreement. Option Component A shall have an initial per share exercise price of $100 per share. The per share exercise price of Option Component A will increase to $125 per share on the first day of the Fiscal Year beginning in calendar year 2000 ("Fiscal Year 2000") and to $150 per share on the first day of the Fiscal Year beginning in calendar year 2001 ("Fiscal Year 2001"). Option Component B will have an initial per share exercise price of $100 per share. The per share exercise price of Option Component B will increase to $150 per share on the first day of the Fiscal Year beginning in calendar year 1999; to $250 per share on the first day of Fiscal Year 2000; and to $350 per share on the first day of Fiscal 2001. The Option will expire on the fifth anniversary of the Effective Date to the extent not previously exercised (the "Expiration Date"); provided, however, that the Expiration Date for the portion of Option Component A and Option Component B which is vested (as explained below) immediately prior to such Expiration Date will be extended until the seventh anniversary of the Effective Date if such vested portion of Option Component A and Option Component B, as the case may be, has not become exercisable by such initial Expiration Date. During the period of such extension, the per share exercise price of Option Component A and Option Component B, as the case may be (to the extent not previously exercised), will increase at the end of each month during such extension period at an annual rate of 10%. Mr. Donald will vest in 25% of Option Component A and in 25% of Option Component B on the Effective Date and on each of the first through third anniversaries of the Effective Date, provided that the Optionee is in the employ of Pathmark on each such date. Upon the occurrence of a Minimum IPO (as defined below) while the Optionee is in the employ of the Company, the entire Option shall immediately and fully vest. In addition, the Option will immediately and fully vest upon the occurrence of a Change in Control (as defined below) occurring prior to the Termination Event (as defined below). If Mr. Donald's employment with the Company should end as a result of a Termination Event, then, as of the applicable date of termination, the entire Option (whether or not then vested) will be immediately and irrevocably forfeited. Except for purposes of tag-along rights under Article V of the Stockholders Agreement and the piggyback rights under Article VI of the Stockholders Agreement, the Option shall not be exercisable 62 (even though the Option or a portion thereof is vested) unless and until it becomes exercisable in accordance with the following provisions: (i) The Exercisable Percentage (as defined below) of each component of the Option will become exercisable if the ML Investors (as defined in the Stockholders Agreement) have a Realization Event (as defined below) in respect of the Common Stock at a per share price in excess of the amounts (the "Target Prices") set forth below :
TARGET PRICE TARGET PRICE PER 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 Stockholders Agreement, he will be permitted to exercise his sale or transfer rights with respect to the portion of the Option for which the Target Price has been met. For purposes of Section 5.6(b) of the Stockholders Agreement, 100% of the portion of the Option for which the Target Amount has been realized will be considered exercisable in order to determine the number of shares to be included under Section 5.6(b) of the Stockholders Agreement. If, prior to the Expiration Date, the Board determines that it is necessary or desirable to list, register or qualify the shares of Common Stock subject to the Option, and if such listing, registration or qualification is delayed beyond the Expiration Date, the vested and exercisable portion of the Option will remain exercisable until 30 days after such listing, registration, or qualification is accomplished. Pursuant to the Donald Agreement, the Company lent Mr. Donald $4.5 million (the "Loan") evidenced by 16 separate promissory notes. Under the terms of each note, if Mr. Donald is in full employment of the Company on a quarterly anniversary of the Effective Date, Mr. Donald's obligation to pay such note maturing on such date will be forgiven as to principal, but not any then accrued and unpaid interest. In the event his employment ends at any time during the term of the Donald Agreement prior to a Change in Control as a result of a Termination Event, each note will become immediately due and payable as to all outstanding principal and all accrued and unpaid interest. These notes bear interest at an effective rate of 6%. The Loan is on a full recourse basis and secured by the Equity Strip, the Option and any shares acquired upon exercise of the Option. In the event of Mr. Donald's Involuntary Termination, Pathmark will pay him (w) the full amount of any accrued but unpaid base salary, plus a cash payment (calculated on the basis of the base salary then in effect) for all unused vacation time which Mr. Donald may have accrued as of the date of Involuntary Termination; (x) the amount of any earned but unpaid Annual Bonus for any Fiscal Year of Pathmark ended on or prior to the date of Involuntary Termination; (y) any unpaid reimbursement for business expenses; and (z) a severance amount equal to four times Mr. Donald's annual rate of salary, based upon the annual rate then in effect immediately prior to the date of termination, payable in monthly installments over 24 months. In addition, in the event of an Involuntary Termination, Mr. Donald and his eligible dependents shall continue to be eligible to participate in the medical, dental, health and life insurance 63 plans applicable to Mr. Donald immediately prior to the Involuntary Termination on the same terms and conditions in effect immediately prior to such Involuntary Termination until the earliest to occur of (i) the end of the 24-month period after the date of termination, the date Mr. Donald becomes eligible to be covered under the benefit plans of a subsequent employer and (iii) the date Mr. Donald breaches any of the protective covenants described below. Furthermore, in the event of an Involuntary Termination, the Equity Strip will automatically and without the need for further action or consent by Pathmark become fully vested in the manner provided by the Stock Award Agreement, and the Option will continue to remain outstanding to the extent provided by the Option Agreement. All notes not previously delivered to Mr. Donald will automatically and without the need for further action or consent by Pathmark be delivered by the escrow agent to Mr. Donald marked "Paid in Full" upon payment by Mr. Donald of any then accrued but unpaid interest on the Loan. During the 30-day period beginning 6 months after a Change in Control, Mr. Donald shall be eligible to resign from the Company for no stated reason and receive all the amounts listed in clauses (w), (x), (y) and (z) above. Any such resignation in such 30-day period following a Change in Control shall be treated as an Involuntary Termination for all purposes of this Agreement. In the event Mr. Donald's employment ends at any time during the term as a result of a Termination Event, the Company shall pay him only the amounts decried in clauses (w), (x) and (y) above, and Mr. Donald will immediately forfeit the Equity Strip and the Option. In addition, each note will become immediately due and payable as to all outstanding principal and all accrued and unpaid interest if Mr. Donald's employment ends prior to a Change in Control as a result of a Termination Event. Although, in the event of an Involuntary Termination, Mr. Donald has no duty to mitigate the severance amount by seeking new employment, any severance amount payable during the second year of the severance period shall be reduced by any compensation or benefits Mr. Donald earns in connection with any employment by another employer. The Donald Agreement includes protective covenants that prohibit Mr. Donald from engaging (i) in any activity in competition with Pathmark, or any parent or subsidiary thereof or (ii) in soliciting employees or customers of Pathmark, or any parent or subsidiary thereof, during his term of employment and up to two years thereafter. The Donald Agreement also includes a confidentiality clause which prohibits Mr. Donald from disclosing any confidential information regarding Pathmark. The following definitions apply to the terms of the Donald Agreement: "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 64 exercise of his "tag-along" rights under the Stockholders Agreement and (ii) in connection with a Public Offering, the percentage of the shares of Common Stock then beneficially owned by the ML Investors (as defined in the Stockholders Agreement) which are sold in the Public Offering. "GOOD REASON" means Mr. Donald's resignation because of (i) the failure of Pathmark to pay any material amount of compensation to Mr. Donald when due, (ii) a material adverse reduction or material adverse diminution in Mr. Donald's titles, duties, positions or responsibilities with Pathmark, including, but not limited to, failure by Pathmark to elect Mr. Donald to the office of Chief Executive Officer, or (iii) any other material breach by Pathmark of the Donald Agreement. In order to assert Good Reason, Mr. Donald must provide written notification of his intention to resign within 30 business days after he knows or has reason to know the occurrence of any such event. After Mr. Donald provides such written notice to Pathmark, Pathmark shall have 15 days from the date of receipt of such notice to effect a cure of the condition constituting Good Reason. "INVOLUNTARY TERMINATION" means (i) the termination of Mr. Donald's employment by Pathmark other than for Cause or disability or (ii) Mr. Donald's resignation of employment with Pathmark for Good Reason. "MINIMUM IPO" means a Public Offering of the Common Stock after the Date of Grant at the conclusion of which the aggregate price for all the shares of Common Stock having been sold to the public in such Public Offering, plus the aggregate offering price for all shares of Common Stock sold in all prior Public Offerings of Common Stock occurring after the date that Mr. Donald is granted any Option, exceeds $50 million. "PREFERRED STOCK" shall mean a new series of convertible preferred stock that will be issued for purposes of the Donald Agreement. "PUBLIC OFFERING" means a public offering of the Common Stock pursuant to an effective registration statement under the Securities Act. "REALIZATION EVENT" means the receipt by the ML Investors (as defined in the Stockholders Agreement) of cash or property from an unrelated third party as consideration for the sale of shares of Common Stock then beneficially owned by the ML Investors. For purposes of the Donald Agreement, any property other than cash received by the ML Investors in the Realization Event shall have the value ascribed to such property by the parties to such sale. "SECURITIES ACT" means the Securities Act of 1933, as amended. "STOCKHOLDERS AGREEMENT" shall mean the Stockholders Agreement, dated as of February 4, 1991, as amended, among SMG-II and its stockholders. "TERMINATION EVENT" shall mean Mr. Donald's resignation without Good Reason or a termination by Pathmark for Cause. "THIRD PARTY SALE" means a sale of Common Stock subject to Section 5.6 of the Stockholders Agreement. 65 OTHER EXECUTIVE AGREEMENTS As of May 23, 1994, the Company entered into an employment agreement with Mr. Crowley. As of September 9, 1994, the Company entered into an employment agreement with Mr. Marshall. As of June 1, 1995, the Company entered into an employment agreement with Mr. Rallo and Mr. Joyce, respectively. The four above mentioned employment agreements are hereinafter referred to collectively as the "Employment Agreements". Each of the Employment Agreements is for an initial term of two years. The term of each Employment Agreement is automatically extended for an additional year on (a) August 1, 1997 for Mr. Crowley and on each successive August 1st thereafter; (b) February 1, 1998 for Mr. Marshall and on each successive February 1st thereafter, and (c) June 1, 1997 for Mr. Rallo and Mr. Joyce and on each successive June 1st thereafter. Under the terms of his respective Employment Agreement, each executive is entitled to a minimum annual base salary of (a) $280,000 for Mr. Crowley; (b) $300,000 for Mr. Marshall, (c) $245,000 for Mr. Rallo, and (d) $225,000 for Mr. Joyce, which salary is subject to upward adjustment by the Company. The Employment Agreements also provide that each executive shall be entitled to receive an annual bonus of up to 66% of his annual base salary with respect to Messrs. Crowley and Marshall and upto 55% of his annual base salary with respect to Messrs. Joyce and Rallo, and shall be provided the opportunity to participate in pension and welfare plans, programs and arrangements that are generally made available to executives of Pathmark or as may be deemed appropriate by the Compensation Committee of the Board of Directors of SMG-II. In the event one of the four above named executives' employment is terminated by the Company without Cause (as defined in the Employment Agreements), or by the executive for Good Reason (as defined in the Employment Agreements) prior to the termination of the applicable Employment Agreement, such executive will be entitled to continue to receive his base salary and continued coverage under health and insurance plans for the period commencing on the date of such termination or resignation through the date of applicable Employment Agreement would have expired had it not been automatically renewed but for said termination or resignation, reduced by any compensation or benefits which the executive is entitled to receive in connection with his employment by another employer during said period. The Employment Agreements contain agreements by the executives not to compete with the Company as long as they are receiving payments under an employment agreement and an agreement by the executives not to disclose confidential information. On March 20, 1996 (the "Retirement Date"), Mr. Futterman retired as Chairman and Chief Executive Officer of the Company. Pursuant to the Retirement Agreement, Mr. Futterman will be entitled to receive his base salary at the annual rate of $525,000 per year during the period, commencing on the day following the Retirement Date and ending on July 31, 1998, or the date of his death, if earlier (the "Benefit Period"), plus the bonus or bonuses attributable to the financial targets set forth for the Company under its Executive Incentive Plan ("EIP") that he would have earned (a maximum of 75% of base salary) had his employment continued through the Benefit Period, subject to the Company reaching the applicable financial targets set under the EIP or any other bonus plan; provided however, that the minimum bonus paid for each fiscal year of the Company ending during the Benefit Period, subject to the Company reaching the applicable financial targets set under the EIP or any other bonus plan; shall not be less than 25% of the 75% target amount. Additionally, Mr. Futterman will be entitled to receive continued health coverage through the Benefit Period under the Company's health and insurance plans applicable to him immediately prior to the Retirement Date. Each of the above described payments and benefits shall be reduced by any compensation or benefits he is entitled to receive in connection with any employment by another employer during the Benefit Period; provided, however, that such reduction shall not apply to the first $100,000 of compensation and benefits earned by Mr. Futterman for any calendar year during the Benefit Period. The Retirement Agreement also provides that Mr. Futterman shall be entitled to be reimbursed by the Company for secretarial and office expenses incurred by him during the two year period beginning September 1, 1996, up to $30,000 per year (or an aggregate reimbursement of $60,000). Additionally, pursuant to the terms of the Retirement Agreement, the Company made a cash lump sum payment to Mr. Futterman of $1.5 million on April 1, 1996. 66 The Company retained John W. Boyle, a Director of the Company, to act as its interim Chairman and Chief Executive Officer for the period of March 20, 1996 through October 7, 1996 (the "Transition Period"). Under the terms of the consulting arrangement between the Company and Mr. Boyle, the Company paid Mr. Boyle a consulting fee of $41,667 per month plus living and travel expenses during the Transition Period. In addition, Mr. Boyle received a completion bonus of $100,000 when Mr. Donald commenced employment with the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to January 10, 1997, Messrs. Burke, Khanna and McLean comprised the compensation committee of the Board of Directors of SMG-II, and were responsible for decisions concerning compensation of the executive officers of the Company. Messrs. Burke and McLean are directors of MLCP and they, along with Mr. Khanna, have been retained by MLCP as consultants. MLCP is an indirect wholly-owned subsidiary of ML&Co. See "Security Ownership of Certain Beneficial Ownership and Management." On January 10, 1997, Mr. Boyle became a member of the Compensation Committee. COMPENSATION OF DIRECTORS Each director who is not employed by the Company or one of its subsidiaries, SPI, MLCP or the Equitable Investors or its affiliates receives an annual retainer of $20,000 per year, plus travel expenses. 67 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Since February 4, 1991, all shares of the Holdings Common Stock are held by SMG-II. As of April 15, 1997, the number of shares of Holdings Preferred Stock and SMG-II (i) Class A Common Stock, (ii) Class B Common Stock, (iii) Series A Preferred Stock, (iv) Series B Preferred Stock and (v) Series C Preferred Stock, beneficially owned by the persons known by management of the Company to be the beneficial owners of more than 5% of the outstanding shares of any class as "beneficial ownership" has been defined under Rule 13d-3, as amended, under the Securities Exchange Act of 1934, are set forth in the following table:
NUMBER % OF NAME OF SHARES CLASS - ----------------------------------------------------------------------------------------- --------------- --------- SMG-II Class A Common Stock Merrill Lynch Capital Appreciation Partnership No. IX, L.P.(2)......................... 488,704.8 65.2 ML Offshore LBO Partnership No. IX(2).................................................. 12,424.7 1.7 Barfield House St. Julians Avenue St. Peter Port Guernsey Channel Islands ML Employees LBO Partnership No. I, L.P.(2)............................................ 12,148.6 1.6 ML IBK Positions, Inc.(3).............................................................. 21,258.9 2.8 Merchant Banking L.P. No. 1(3)......................................................... 8,119 1.1 Merrill Lynch KECALP L.P. 1987(3)...................................................... 7,344 1.0 CBC Capital Partners, Inc.(4).......................................................... 30,000 4.0 270 Park Avenue New York, NY 10017 Management and other employees (including former employees of Pathmark)................ 169,419(1) 22.6 301 Blair Road Woodbridge, NJ 07095 SMG-II Class B Common Stock The Equitable Life Assurance Society of the United States(5)........................... 114,000 35.6 c/o Alliance Corporate Finance Group Incorporated 1345 Avenue of the Americas, 39th Floor New York, NY 10005 Equitable Deal Flow Fund, L.P.(5)...................................................... 150,000 46.9 c/o Alliance Corporate Finance Group Incorporated 1345 Avenue of the Americas, 39th Floor New York, NY 10005 Equitable Variable Life Insurance Company(5)........................................... 36,000 11.3 c/o Alliance Corporate Finance Group Incorporated 1345 Avenue of the Americas, 39th Floor New York, NY 10005 CBC Capital Partners, Inc.(4).......................................................... 20,000 6.2 SMG-II Series A Preferred Stock(6) Merrill Lynch Capital Appreciation Partnership No. B-X, L.P.(2)........................ 133,043 56.2 ML Offshore LBO Partnership No. B-X(2)................................................. 40,950 17.3 MLCP Associates, L.P. No. II(2)........................................................ 1,740 .7 ML IBK Positions, Inc.(3).............................................................. 46,344.5 19.6 Merchant Banking L.P. No. IV(3)........................................................ 3,779 1.6 Merrill Lynch KECALP L.P. 1989(3)...................................................... 7,000 3.0 Merrill Lynch KECALP L.P. 1991(3)...................................................... 3,874.5 1.6 SMG-II Series B Preferred Stock(6) CBC Capital Partners, Inc.(4).......................................................... 12,500 7.0 The Equitable Life Assurance Society of the United States(5)........................... 84,134 46.5 Equitable Deal Flow Fund, L.P.(5)...................................................... 84,135 46.5
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NUMBER % OF NAME OF SHARES CLASS - ----------------------------------------------------------------------------------------- --------------- --------- SMG-II Series C Preferred Stock(6)....................................................... 8,520 100.0 James Donald 301 Blair Road Woodbridge, NJ 07095 Holdings Preferred Stock(7)(8) Fidelity Management & Research Company(9).............................................. 978,425 20.0 82 Devonshire Street Boston, MA 02109 Sun America, Inc....................................................................... 641,785 13.1 1 Sun American Center Century City Los Angeles, CA 90067-6022........................................................... Massachusetts Financial Services Company(10)........................................... 591,925 12.1 500 Boylston Street Boston, MA 02116 State Street Research & Management Company(11)......................................... 453,540 9.3 One Financial Center, 38th Floor Boston, MA 02111 IDS Financial Services, Inc.(12)....................................................... 275,000 5.6 80 South 8th Street Minneapolis, MN 55440 Van Kampen American Capital(13)........................................................ 331,251 6.8 2800 Post Oak Blvd. Houston, Texas 77056
- ------------------------ (1) Includes presently exercisable options granted under the Plan for 76,943 shares of SMG-II Class A Common Stock held by Management Investors. (2) MLCP and its affiliates are the direct or indirect managing partners of ML Offshore LBO Partnership No. IX, Merrill Lynch Capital Appreciation Partnership No. IX, L.P., ML Employees LBO Partnership No. 1, L.P., Merrill Lynch Capital Appreciation Partnership No. B-x, L.P., ML Offshore LBO Partnership No. B-X and MLCP Associates, L.P. No. II. Such entities and those disclosed in footnote (3) below, are referred to herein as the ML Investors. The address of such entities is c/o Merrill Lynch Capital Partners, Inc., in care of Stonington Partners, Inc., 767 Fifth Avenue, New York, New York 10153. MLCP is an indirect wholly owned subsidiary of ML&Co. The partners and principals of SPI (including Messrs. Burke, McLean and Khanna) are consultants to MLCP. Mr. Bowman is Chief Executive Officer of MLCP. (3) Merchant Banking L.P. No. 1, Merchant Banking L.P. No. IV, Merrill Lynch KECALP L.P. 1987, Merrill Lynch KECALP L.P. 1989, Merrill Lynch KECALP L.P. 1991 and ML IBK Positions, Inc. are indirectly controlled by ML&Co. The address of such entities is c/o James Caruso, Merrill Lynch & Co., Inc., World Financial Center, South Tower, New York, New York, 10080-6123. (4) CBC Capital Partners, Inc. is an affiliate of Chase Manhattan Corp. (5) The Equitable Investors are separate purchasers who are affiliates of each other. (6) SMG-II Preferred stock may be converted into an equivalent number of shares of common stock of SMG-II in accordance with its terms. (7) Voting rights are limited to the election of two directors to the Board of Holdings. (8) The information with respect to State Street Research & Management Company, IDS Financial Services, Inc., Massachusetts Financial Services Company, Van Kampen American Capital and Fidelity Management & Research Company was derived from investment information filed with the Commission in 1996. (9) To the best of the Company's knowledge, shares of Holdings Preferred Stock are owned by five funds managed by Fidelity Management & Research Company. Such shares are owned of record as follows: 366,933 shares by Fidelity Capital & Income Fund, 324,488 shares by Fidelity Spartan High Income 69 Fund, 100,562 shares by Fidelity Equity-Income Fund, 70,123 shares by Fidelity Asset Manager, and 116,319 shares by Fidelity Advisor High Yield Fund. (10) To the best of the Company's knowledge, shares of Holdings Preferred Stock are owned by two funds managed by Massachusetts Financial Services Company. Such shares are owned of record as follows: 569,098 shares by MFS High Income Fund and 22,827 shares by MFS Multimarket Income Trust. (11) To the best of the Company's knowledge, shares of Holdings Preferred Stock are owned by one fund managed by State Street Research and Management Company. Such shares are owned of record as follows: 453,540 shares by State Street Research High Income Fund. (12) To the best of the Company's knowledge, shares of Holdings Preferred Stock are owned by one fund managed by American Express Financial Advisors. Such shares are owned of record as follows: 275,000 shares by IDS Extra Income Fund. (13) To the best of the Company's knowledge, shares of Holdings Preferred Stock are owned by one fund managed by Van Kampen American Capital. No officer or director claims beneficial ownership of any share of Holdings Common Stock, or of SMG-II stock other than SMG-II Class A Common Stock, except Mr. Donald who claims beneficial ownership of 8,520 (100%) shares of SMG-II Series C Preferred Stock. As of April 15, 1997 the number of shares of SMG-II Class A Common Stock and Holdings 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:
SMG-II CLASS A COMMON STOCK HOLDINGS PREFERRED NAME NUMBER OF SHARES % OF CLASS NUMBER OF SHARES % OF CLASS - --------------------------------------------------- ----------------- --------------- --------------------- --------------- Matthias Bowman(1)................................. -- -- -- -- John W. Boyle(2)................................... 3,000 * -- -- James J. Burke, Jr.(1)............................. -- -- -- -- James Donald....................................... 19,851 2.6 -- -- Jack Futterman(2).................................. 23,000 3.0 -- -- Neill Crowley(2)................................... 1,000 * -- -- U. Peter C. Gummeson............................... -- -- -- -- Sunil C. Khanna.................................... 700 * -- -- Stephen M. McLean(1)............................... -- -- -- -- Ron Marshall(2).................................... 2,000 * -- -- Ronald Rallo(2).................................... 3,250 * 966 * Jerry G. Rubenstein(2)............................. 2,500 * -- -- Robert Joyce(2).................................... 3,200 * -- -- James B. Upchurch.................................. -- -- -- -- Steven L. Volla.................................... -- -- -- -- Directors and named executive officers as a group(1)(2)...................................... 66,011 8.8 966 *
- ------------------------ * Less than 1% (1) Does not include 550,000 shares of SMG-II Class A Common Stock or 236,731.5 shares of SMG-II Series A Preferred Stock owned beneficially by a group of which MLCP is a part. Messrs. Burke, McLean and Bowman, directors of MLCP, disclaim beneficial ownership in all such shares. (2) Includes presently exercisable options granted under the Plan to purchase shares of SMG-II Class A Common Stock, as follows: Mr. Futterman, 13,000; Mr. Crowley, 1,000; Mr. Marshall, 2,000; Mr. Joyce, 2,500; Mr. Rallo, 2,850, Mr. Rubenstein, 1,000; and Mr. Boyle, 3,000 and all directors and executive officers as a group, 31,110. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The holders of SMG-II Preferred Stock are a party with the holders of SMG-II Common Stock to the Stockholders Agreement, which, among other things, restricts the transferability of SMG-II capital stock and relates to the corporate governance of SMG-II and Holdings. Among other provisions, the Stockholders Agreement requires a vote of at least 80% of the members of the Board of Directors to cause the 70 Company to conduct any business other than that engaged in by the Company in February of 1991 and the approval of stockholders representing 66 2/3% of the number of shares of SMG-II voting capital stock voting together as a single class for SMG-II to enter into any Significant Transaction (as defined), including certain mergers, sales of assets, acquisitions, sales or redemptions of stock, the amendment of the certificate of incorporation or by-laws or the liquidation of SMG-II. The Stockholders Agreement also provides that SMG-II must obtain the prior written consent of the Equitable Investors with respect to certain of these transactions and that the Equitable Investors have certain preemptive rights with respect to the sale of capital stock of Holdings or the Company. The Stockholders Agreement also contains an agreement of the stockholders of SMG-II with respect to the composition of SMG-II's and Holdings' Board of Directors. Under this agreement, the Merrill Lynch Investors will be entitled to designate up to seven directors, the Management Investors will be entitled to designate up to three directors and the Equitable Investors will be entitled to designate one director to both of SMG-II's and Holdings' Board of Directors. Such agreement furthermore entitles the ML Investors to designate a majority of Holdings' Board of Directors at all times. Since Holdings (through PTK) owns all of the outstanding shares of the Company's Common Stock, by having the ability to designate a majority of Holdings' Board of Directors, the ML Investors have the ability to control the Company. The ML Investors are controlled by ML&Co. In addition to the foregoing, the Stockholders Agreement contains terms restricting the transfer of SMG-II Common Stock and SMG-II Preferred Stock (collectively, the "SMG-II Stock") by the stockholders of SMG-II, and providing to the stockholders of SMG-II rights of first offer with respect to resales of SMG-II Stock, rights of first refusal with respect to certain issuances of shares of SMG-II Stock, certain rights to demand or participate in registrations of shares of SMG-II Stock under the Securities Act and certain "tag-along" rights. In October 1996, pursuant to the Donald Agreement, James L. Donald, an Officer and Director, was provided by Pathmark with a four-year loan of $4.5 million. The foregoing indebtedness to Pathmark is evidenced by 16 full recourse promissory notes for $281,250 each bearing interest at the short-term or intermediate-term federal rate in effect as of the date of each note (effective rate of 6%) and secured by the Equity Strip and the Option. Under the Donald Agreement, one promissory note will be forgiven at the end of each quarter of a year during which Mr. Donald remains employed by Pathmark. In the event that Mr. Donald resigns his employment without Good Reason or is terminated for Cause or in the event of his death, the outstanding portion of the loan will become immediately due and payable. As of April 1, 1997, Mr. Donald remained indebted to the Company in the amount of $4,218,750. The Company retained John W. Boyle, a Director of the Company, to act as its interim Chairman and Chief Executive Officer for the Transition Period. Under the terms of the consulting arrangement between the Company and Mr. Boyle, the Company paid Mr. Boyle a consulting fee of $41,667 per month ($288,980 in the aggregate) plus living and travel expenses during the Transition Period. In addition, Mr. Boyle received a completion bonus of $100,000 when Mr. Donald commenced employment with the Company. In March 1990, Jerry G. Rubenstein, a Director, borrowed from Holdings $100,000 in order to help finance his purchase of Holdings' Class A Common Stock. Subsequently, such shares of Holdings' Class A Common Stock were exchanged for shares of SMG-II Class A Common Stock. The foregoing indebtedness to Holdings is evidenced by a full recourse promissory note (the "Recourse Note"). The Recourse Note is for a term of ten years and bears interest at the rate of 8.02% per annum, payable annually. Except as otherwise provided in the Recourse Note, no principal on such recourse loan shall be due and payable until the tenth anniversary of the date of issue of such Recourse Note. Under the terms of the agreement pursuant to which the shares of Holdings' Class A Common Stock were exchanged for shares of SMG-II Class A Common Stock, the Company is obligated to pay to each Management Investor who pays interest on his Recourse Note (except under certain circumstances) an amount equal to such interest, plus an amount sufficient to pay any income taxes resulting from the above prescribed payment after taking into 71 account the value of any deduction available to him as a result of the payment of such interest or taxes. As of April 1, 1997, Mr. Rubenstein remained indebted to Holdings in the amount of $100,000. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of this Report. 1. Financial Statements Schedules: None required 2. Exhibits: Incorporated herein by reference is a list of the Exhibits contained in the Exhibit Index on Pages 75 through 77 of this Report. (b) Reports on Form 8-K. None. (c) Exhibits required by Item 601 of Regulation S-K. See item 14(a) above.
72 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: May 2, 1997 SUPERMARKETS GENERAL HOLDINGS CORPORATION By: /s/ RON MARSHALL ----------------------------------------- Ron Marshall EXECUTIVE VICE PRESIDENT Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- Director, Chairman, /s/ JAMES DONALD President and Chief - ------------------------------ Executive Officer May 2, 1997 (James Donald) (Principal Executive Officer) Executive Vice President /s/ RON MARSHALL and Chief Financial - ------------------------------ Officer (Principal May 2, 1997 (Ron Marshall) Financial Officer) /s/ JOSEPH ADELHARDT Senior Vice President and - ------------------------------ Controller (Principal May 2, 1997 (Joseph Adelhardt) Accounting Officer) MATTHIAS BOWMAN Director* - ------------------------------ May 2, 1997 (Matthias Bowman) JOHN W. BOYLE Director* - ------------------------------ May 2, 1997 (John W. Boyle) JAMES J. BURKE, JR. Director* - ------------------------------ May 2, 1997 (James J. Burke, Jr.) SUNIL C. KHANNA Director* - ------------------------------ May 2, 1997 (Sunil C. Khanna) STEPHEN M. MCLEAN Director* - ------------------------------ May 2, 1997 (Stephen M. Mclean) ROBERT G. MILLER Director* - ------------------------------ May 2, 1997 (Robert G. Miller) U. PETER C. GUMMESON Director* - ------------------------------ May 2, 1997 (U. Peter C. Gummeson) 73 SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- JERRY G. RUBENSTEIN Director* - ------------------------------ May 2, 1997 (Jerry G. Rubenstein) JAMES B. UPCHURCH Director* - ------------------------------ May 2, 1997 (James B. Upchurch) STEVEN L. VOLLA Director* - ------------------------------ May 2, 1997 (Steven L. Volla) *By: /s/ MARC A. STRASSLER ------------------------ Marc A. Strassler ATTORNEY-IN-FACT 74 EXHIBIT INDEX
EXHIBIT PAGE NO. EXHIBIT NO. - ---------- ------------------------------------------------------------------------------------------------------- ----- 2.1 -- Distribution and Transfer Agreement among the Registrant, PTK and Plainbridge............... 2.2 -- Distribution and Transfer Agreement dated as of May 3, 1993 among the Registrant, Holdings and Chefmark (incorporated by reference from Exhibit 2.2 to the Registration Statement on Form S-1 of the Registrant and Holdings, File No. 33-59616)................................. 2.3 -- Agreement and Plan of Merger dated as of April 22, 1987 by and among Old Supermarkets, SMG Acquisition Corporation and Holdings, as amended and restated (incorporated by reference from Exhibit 2 to the Registration Statement on Form S-1 of Holdings, File No. 33-16963).... 3.1 -- Restated Certificate of Incorporation of the Registrant, as amended (incorporated by reference from Exhibit 3.1 to the Registration Statement on Form S-1 of Pathmark, File No. 33-59612, the "October 1993 Registration Statement")........................................ 3.2 -- Amendment to the Restated Certificate of Incorporation of the Registrant, as amended (incorporated by reference from Annual Report on Form 10-K of Registrant for the year ended January 29, 1994 (the "1994 10-K)........................................................... 3.3 -- By-Laws of the Registrant (incorporated by reference from Exhibit 3.3 to the October 1993 Registration Statement)..................................................................... 4.1 -- Indenture between the Registrant and United States Trust Company of New York, Trustee, relating to the Senior Subordinated Notes due 2003 of the Registrant (incorporated by reference from the 1994 10-K)............................................................... 4.1A -- Senior Subordinated Note due 2003 of the Registrant (contained in the Indenture filed as Exhibit 4.1) (incorporated by reference from the 1994 10-K)................................. 4.2 -- Indenture between the Registrant and NationsBank of Georgia, National Association, Trustee, relating to the Junior Subordinated Deferred Coupon Notes due 2003 of the Registrant (incorporated by reference from the 1994 contained in the Indenture filed as Exhibit 4.2) (incorporated by reference from the 1994 10-K).............................................. 4.2B -- Indenture between the Registrant and Wilmington Trust Company, Trustee, relating to the 115/8% Subordinated Notes due 2002 of the Registrant (incorporated by reference from the 1994 10-K).................................................................................. 4.3 -- Indenture between the Company and Wilmington Trust Company, Trustee, relating to the 125/8% Subordinated Debentures due 2002 of the Registrant (incorporated by reference from the 1994 10-K)....................................................................................... 4.4 -- Credit Agreement dated as of October 26, 1993 ("the Credit Agreement") among the Registrant, the Lenders listed therein, and Bankers Trust Company as Agent (incorporated by reference from the 1994 10-K)......................................................................... 4.4A -- First Amendment to the Credit Agreement (incorporated by reference from the registrant's Form 8-K dated March 15, 1996 (the "March 1996 8-K")........................................ 4.4B -- Second Amendment to the Credit Agreement (incorporated by reference from the March 1996 8-K)........................................................................................ 4.4C -- Third Amendment to the Credit Agreement (incorporated by reference from the March 1996 8-K)........................................................................................ 4.4D* -- Fourth Amendment to the Credit Agreement (incorporated by reference from the March 1996 8-K)........................................................................................ 4.4E -- Fifth Amendment to the Credit Agreement (incorporated by reference from the March 1996 8-K)........................................................................................ 4.4F -- Sixth Amendment to the Credit Agreement (incorporated by reference from the Registrant's Form 10-Q, as amended, for the period ended November 2, 1996................................
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EXHIBIT PAGE NO. EXHIBIT NO. - ---------- ------------------------------------------------------------------------------------------------------- ----- 10.4 -- Services Agreement dated as of May 3, 1993 between the Registrant and Chefmark (incorporated by reference from Exhibit 10.4 to the Registration Statement on Form S-1 of the Registrant and Holdings, File No. 33-59616)............................................................ 10.5 -- Chefmark Supply Agreement, dated May 3, 1993, between the Registrant and Chefmark (incorporated by reference from Exhibit 10.5 to the Registrant Statement on Form S-1 of the Registrant, and Holdings, File No. 33-59616)................................................ 10.6 -- Tax Sharing Agreement between the Registrant and SMG-II (incorporated by reference from the 1994 10-K).................................................................................. 10.7 -- Tax Indemnity Agreement between the Registrant and Plainbridge (incorporated by reference from the 1994 10-K)......................................................................... 10.8 -- Supermarkets General Corporation Pension Plan (as Amended and Restated effective January 1, 1979) as amended through May 29, 1987 (incorporated by reference from Exhibit 10.21 to the Registration Statement on Form S-1 of Holdings, File No. 33-16963).......................... 10.9 -- Supermarkets General Corporation Savings Plan (as Amended and Registration Statement on Form S-1 of Holdings, File No. 33-16963)......................................................... 10.10 -- Supermarkets General Corporation Management Incentive Plan effective June 17, 1971 (incorporated by reference from Exhibit 10.23 to the Registration Statement on Form S-1 of Holdings, File No. 33-16963................................................................. 10.11 -- Supplemental Retirement Agreements dated as of March 9, 1987 between Old Supermarkets and Jack Futterman, (incorporated by reference from Exhibit 10.25 to the Registration Statement on Form S-1 of Holdings, File No. 33-16963)................................................. 10.12 -- Excess Benefit Plan of Supermarkets General Corporation, effective as of March 9, 1987 (incorporated by reference from Exhibit 10.12 to the October 1993 Registration Statement)... 10.13 -- Recourse Secured Promissory Note, dated October 5, 1987, given to Holdings from each Management Investor listed therein (incorporated by reference from Exhibit 10.43 to Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 of Holdings, File No. 33-16963)............................................................................... 10.14 -- Stock Pledge Agreement dated October 5, 1987, between Holdings and each Management Investor listed therein (incorporated by reference from Exhibit 10.44 to Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 of Holdings, File No. 33-16963)................. 10.15 -- SMG-II Holdings Corporation Management Investors Stock Option Plan, as amended and restated May 17, 1991 (the "Option Plan") (incorporated by reference from Exhibit 10.15 to the October 1993 Registration Statement)........................................................ 10.16 -- Form of Stock Option Agreement under the Option Plan (incorporated by reference from Exhibit 10.16 to the October 193 Registration Statement)............................................ 10.17 -- SMG-II Holdings Corporation Employees 1987 Stock Option Plan, as amended and restated May 17, 1991 (incorporated by reference from Exhibit 10.17 to the October 1993 Registration Statement).................................................................................. 10.18 -- Agreement dated as of March 20, 2996 among Registrant, Jack Futterman, Holdings and SMG-II (incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended February 3, 1996)........................................................................... 10.20 -- Agreement dated as of April 10, 1996 between the Registrant, Anthony Cuti and SMG-II (incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended February 3, 1996)...........................................................................
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EXHIBIT PAGE NO. EXHIBIT NO. - ---------- ------------------------------------------------------------------------------------------------------- ----- 10.21 -- Management Investors Exchange Agreement dated as of February 4, 1991 among SMG-II Holdings Corporation, Holdings and each of the Management Investors party thereto (incorporated by reference from Exhibit 10.53 to the Registration Statement on Form S-1 of Holdings, No. 33-16963)................................................................................... 10.22 -- Supplemental Retirement Agreement dated as of March 12, 1993 between the Registrant and Anthony Cuti (incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended January 28, 1995)............................................................ 10.24 -- Supplemental Retirement Agreement dated June 1, 1994, between the Registrant and Neill Crowley (incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended February 3, 1996)..................................................................... 10.25 -- Supplemental Retirement Agreement dated October 3, 1994 between the Registrant and Ron Marshall (incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended February 3, 1996)................................................................ 10.26 -- Interim Agreement dated March 20, 1996 between the Registrant and John W. Boyle (incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended February 3, 1996)........................................................................... 10.27 -- Employment Agreement dated as of May 23, 1994 between Registrant and Neill Crowley (incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended February 3, 1996)........................................................................... 10.28 -- Employment Agreement dated as of September 9, 1994 between Registrant and Ron Marshall (incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended February 3, 1996)........................................................................... 10.29 -- Employment Agreement dated as of June 1, 1995 between Registrant and Ron Rallo (incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended February 3, 1996)....................................................................................... 10.30* -- Employment Agreement dated as of October 8, 1996, among Pathmark Stores, Inc., SMG-II and James Donald................................................................................ 12.1* -- Statements Regarding Computation of Rates of Earnings to Fixed Charges...................... 22.1* -- List of Subsidiaries of the Registrant...................................................... 24A. * -- Power of Attorney of Matthias Bowman........................................................ 24B. * -- Power of Attorney of Robert G. Miller.......................................................
- ------------------------ * Filed herewith. 77 EX-10.30 2 EX-10.30 Exhibit 10.30 Pathmark Stores, Inc. Mr. James L. Donald 26 Carriage Place Edison, New Jersey 08820 Employment Agreement Dear Mr. Donald: The following sets forth the agreement among Pathmark Stores, Inc. (the "Company"), SMG-II Holdings Corporation ("Holdings") and you regarding the terms and provisions of your employment as an officer and employee of the Company and as a director of Holdings during the Term. Capitalized words which are not otherwise defined herein shall have the meanings assigned to such words in Section 9 of this Agreement. This Agreement consists of the text hereof and each of the Exhibits attached hereto. 1. Term of Employment Under the Agreement. The Term of your employment under this Agreement (the "Term") shall commence on October 8, 1996 (the "Effective Date") and shall continue until the fifth anniversary of the Effective Date. For purposes of this Agreement, "Fiscal Year" means the Company's fiscal year. Subject to the provisions of Section 6 below, either party may terminate your employment under this Agreement at any time. 2. Employment During the Term. During the Term, you shall be employed as the Chairman, President and Chief Executive Officer of the Company and shall report directly to the Board of Directors of the Company (the "Board"), and your duties and responsibilities to the Company shall be consistent in all respects with such positions. During the Term, the Company will take all reasonable steps to assure that you continue to be elected or appointed to the Board of Directors of Holdings. In addition, pursuant to this Agreement and for no additional consideration, you agree to serve as an officer and director of any subsidiary or parent corporation of the Company, including, without limitation, PTK Holdings, Inc., Supermarkets General Holdings Corporation and Holdings. You shall devote substantially all of your business time, attention, skills and efforts exclusively to the business and affairs of the Company, other than de minimis amounts of time devoted by you to the management of your personal finances or to engaging in charitable or community services. Your principal place of employment shall be the executive offices of the Company as 2 established from time to time, although you understand and agree that you will be required to travel from time to time for business purposes. 3. Compensation During the Term. (a) Base Salary. As compensation to you for all services rendered to the Company, the Company will pay you a base salary (the "Salary") at the rate of $600,000 per annum, which will be reviewed annually by the Board and may be increased but not decreased by the Board on the basis of such review. Your Salary will be paid to you in accordance with the Company's regular payroll practices applicable to its executive officers. (b) Bonuses. (i) Annual Bonus. During the Term, you shall be eligible to participate in the Company's Executive Incentive Plan (the "EIP"). Under the EIP, for each full twelve-month Fiscal Year occurring during the Term, you will be eligible to earn an annual bonus (the "Annual Bonus") of up to 125% of your Salary, at the rate in effect at the beginning of the applicable Fiscal Year, based on targets set by the Board for your Annual Bonus for such Fiscal Year. The target for your Annual Bonus for any partial Fiscal Year occurring during the Term shall be prorated by multiplying the target by a fraction (not greater than one), the numerator of which shall be the number of days in such Fiscal Year occurring during the Term and the denominator of which shall be 365. Notwithstanding the foregoing, the minimum Annual Bonus paid to you for the partial Fiscal Year that includes the Effective Date shall be $175,000 and the minimum annual bonus for the first full Fiscal Year during the Term shall be $425,000. Annual Bonus payments for each of the second, third and fourth full Fiscal Years during the Term will not be less than 25% of the Salary paid to you for such Fiscal Year at the rate in effect at the start of such Fiscal Year. The Annual Bonus earned by you for any Fiscal Year will be paid to you within 120 days following the end of such Fiscal Year. (ii) Signing Bonus. In addition to any amounts payable under Section 3(b)(i) above, the Company will pay you within five (5) business days following the Effective Date a one-time signing bonus of $1,000,000. The signing bonus shall be paid to you in a lump sum cash payment, subject to applicable withholding taxes. (c) Deferral Arrangement. (i) Right to Defer. You will be permitted to defer some or all the Annual Bonus and up to 50% of the Salary payable to you hereunder. Any deferral of an Annual Bonus shall be irrevocable and must be requested by you in writing prior to the start of the Fiscal Year to which such Annual Bonus relates (except that any deferral election for the Fiscal Year that includes the Effective Date may be made within thirty (30) days following the Effective Date). Any deferral of Salary shall be irrevocable and must be requested by you in writing prior to the start of the calendar year to which such Salary relates (except that the deferral election for the calendar year that includes the Effective Date may be made within thirty (30) days following the Effective Date, but will 3 relate only to amounts payable after the election is received by the Company). An election for a given Fiscal Year or calendar year shall be deemed a continuing election for each subsequent Fiscal Year or calendar year, as the case may be, unless a subsequent election to defer (or not to defer) is provided to the Company by you prior to the start of such Fiscal Year or calendar year. (ii) Bookkeeping Account and Grantor Trust. Any amounts deferred by you hereunder will be credited to a bookkeeping account established on the books and records of the Company for this purpose. In addition, the Company will deposit in a separate, irrevocable grantor trust established by the Company an amount in cash equal to the amounts deferred by you. Such amounts will be deposited in the trust within thirty (30) days following the date such amount would otherwise have been payable to you but for the deferral election. In connection with the deferral election, you shall have the right to specify general investment categories for the investment of the amounts deposited in the trust, and the Company shall cause the trustee to invest the assets of the trust in one or more publicly-traded mutual funds, government securities, or other similar investment vehicles corresponding to the investment categories selected by you. Thereafter the value of your account with the Company will be adjusted to reflect income, gains and losses on the assets of the trust. The parties hereto agree that to the extent that any investment vehicle that you select results in a loss to the bookkeeping account, the Company will have no obligation to compensate you for such loss or to make any compensatory adjustment to the bookkeeping account to make up for such loss. (iii) Distributions. The timing of the payment of all amounts deferred by you shall be specified in your initial deferral election and may not be subsequently changed by you without the prior written approval of the Board. Your initial deferral may specify a lump sum payment or up to five (5) annual installment payments to be paid out in their entirety by no later than the sixth anniversary of the Date of Termination; provided, however, that, notwithstanding your deferral election, all amounts will be paid to you within thirty (30) days following a Change in Control or the date of your Involuntary Termination. (d) Benefits. During the Term, you shall be eligible to participate in each pension, welfare and fringe benefit program made available generally to executives of the Company in accordance with the terms and provisions of each such program; provided, however, that the Company shall not be obligated to provide any supplemental retirement plan or any similar arrangement to you. In addition, the Company will provide you with (i) a company car and (ii) $4.5 million in term life insurance during the first twelve (12) months of the Term and $3.2 million of life insurance thereafter during the Term, subject to your insurability. In the event that such life insurance is not available to the Company, you will be provided with an alternative arrangement which will provide amounts equal to the benefits contemplated herein, the details of which will be negotiated between you and the Company in good faith. The Company will also provide you with relocation benefits in 4 accordance with its current policies for executive employees; provided, however, that the Company will have no obligation to purchase your current residence. (e) Business Expenses. The Company will reimburse you upon presentation by you of appropriate documentation for business expenses reasonably incurred by you in connection with the performance of your duties under this Agreement. (f) Legal Expenses. The Company will pay reasonable legal fees and expenses incurred by you in the current negotiation of this Agreement. 4. Long-Term Incentive Compensation. In order to align your interests more closely with those of the Company, the following long-term incentive compensation arrangements will be offered to you, subject to the terms and conditions set forth below. (a) Equity Award. Subject to the terms and conditions set forth herein, in the Stockholders Agreement and in the stock award agreement (the "Stock Award Agreement") attached hereto as Exhibit A, as soon as practicable after the Effective Date, Holdings will award you 8,520 shares of a new series of Preferred Stock with a stated value of $200 per share, and 19,851 shares of Common Stock (together, the "Equity Strip"), which together constitute approximately 2% of the issued and outstanding equity securities of Holdings as of the Effective Date. The Preferred Stock will be pari passu with the existing Holdings convertible preferred stock and will accrue dividends at a rate of 10% per annum. The Preferred Stock will be convertible into Common Stock on a one-for-one basis. The parties agree that as of the Effective Date, the shares have already accrued dividends of approximately $122 a share in accordance with Holdings' normal dividend accrual policy. The grant of the Equity Strip is expressly conditioned upon your signing the Stock Award Agreement and your agreement to be bound by the terms thereof. (b) The Option. Subject to the terms and conditions set forth herein, in the Stockholders Agreement and in the option agreement (the "Option Agreement") attached hereto as Exhibit B, as soon as practicable after the Effective Date, Holdings will grant you an option (the "Option") to purchase 100,000 shares of Common Stock. The Option will consist of component A covering 50,000 shares of Common Stock and component B covering the remaining 50,000 shares of Common Stock. The grant of the Option is expressly conditioned upon your signing the Option Agreement and your agreement to be bound by the terms thereof. (c) The Stockholders Agreement. As a condition precedent to the award of the Equity Strip and the grant of the Options, you must become a party to the Stockholders Agreement and agree to be bound by the terms and conditions of the Stockholders Agreement. 5 5. Loan. (a) Terms. Within 30 days following the Effective Date, the Company will lend you $4.5 million (the "Loan"). The parties acknowledge that the Company is providing the Loan to you, according to the terms herein, as consideration for the loss of value incurred by you as a consequence of the termination of your employment with your prior employer, which value is evidence of a portion of the value to the Company of your agreement to be employed by the Company. The Loan will be on a full recourse basis and secured in accordance with the terms of the Security Agreement (attached hereto as Exhibit D) by (i) the Equity Strip, (ii) the Option and (iii) the shares acquired upon exercise of the Option. The Loan will bear interest at the minimum statutory interest rate necessary for tax purposes. Interest on the Loan will be payable quarterly in arrears. (b) Notes. The Loan will be payable according to the terms of this Agreement and 16 separate promissory notes, the form of which is attached hereto as Exhibit C, delivered by you to the Company (collectively, the "Notes"). Each Note will have an initial principal amount of $281,250.00. The Notes will be contemporaneously delivered to an escrow agent designated by mutual agreement of the parties and shall be held by the escrow agent pursuant to the terms of the Escrow Agreement attached hereto as Exhibit E. If you are in the full-time employment of the Company on a quarterly anniversary of the Effective Date, your obligation to pay the Note maturing on such date will automatically and without the need for further action or consent by the Company be forgiven as to principal (but not any then accrued and unpaid interest) and will automatically and without the need for further action or consent by the Company be delivered by the escrow agent to you marked "Paid in Full." The sole condition to such delivery is your payment of any then accrued but unpaid interest on the Loan. 6. Effect of Termination of Employment. (a) Involuntary Termination. (i) Subject to Sections 6(f) and 6(g) below, in the event of your Involuntary Termination, the Company shall pay you (w) the full amount of the accrued but unpaid Salary you have earned through the date of such Involuntary Termination, plus a cash payment (calculated on the basis of your rate of Salary then in effect) for all unused vacation time which you may have accrued as of the date of Involuntary Termination; (x) the amount of any earned but unpaid Annual Bonus for any Fiscal Year of the Company ended on or prior to the Date of Termination; (y) any unpaid reimbursement for business expenses you are entitled to receive under Section 3(e) above; and (z) a Severance Amount equal to four times your annual rate of Salary, based upon the annual rate then in effect immediately prior to the Date of Termination, payable in monthly installments over the Severance Period. 6 (ii) In the event of your Involuntary Termination, you and your eligible dependents shall continue to be eligible to participate during the Benefit Continuation Period in the medical, dental, health and life insurance plans applicable to you immediately prior to your Involuntary Termination on the same terms and conditions in effect for you and your dependents immediately prior to such Involuntary Termination. (iii) In the event of your Involuntary Termination, the Equity Strip will automatically and without the need for further action or consent by the Company become fully vested in the manner provided by the Stock Award Agreement, and the Option will continue to remain outstanding to the extent provided by the Option Agreement. (iv) In the event of your Involuntary Termination, all Notes not previously delivered to you will automatically and without the need for further action or consent by the Company be delivered by the escrow agent to you marked "Paid in Full." The sole condition to such delivery is your payment of any then accrued but unpaid interest on the Loan. (v) Except as otherwise provided in this Section 6(a) or the provisions of any employee benefit plan in which you are a participant, in the event of your Involuntary Termination, as of the Date of Termination, you will relinquish the right to any additional payments or benefits from the Company under this Agreement or otherwise. (b) Termination Event. In the event your employment ends at any time during the Term as a result of a Termination Event, the Company shall pay you the full amount of the accrued but unpaid Salary you have earned through the Date of Termination, plus a cash payment (calculated on the basis of your rate of Salary then in effect) for all unused vacation time which you may have accrued as of the Date of Termination and any unpaid reimbursement for business expenses you are entitled to receive under Section 3(e) above. In addition, the Company shall pay you the amount of any earned but unpaid Annual Bonus for any Fiscal Year of the Company ended on or prior to the Date of Termination. You will immediately forfeit as of the Date of Termination the Equity Strip and the Option, as provided in the Stock Award Agreement and the Option Agreement, respectively. In addition, each Note will become immediately due and payable as to all outstanding principal and all accrued and unpaid interest if your employment ends prior to a Change in Control as a result of a Termination Event. In addition, you shall immediately relinquish the right to any other payments or benefits from the Company under this Agreement or otherwise, except with respect to any employee benefit plan that provides otherwise. (c) Death or Disability. If your employment with the Company ends as a result of your death or Disability during the Term, the Company shall pay you (or, in the event of your death, your Beneficiary) the full amount of the accrued but unpaid Salary you have earned through the Date of Termination, plus a cash payment (calculated on the basis of 7 your rate of Salary then in effect) for all unused vacation time which you may have accrued as of the Date of Termination and any unpaid reimbursement for business expenses you are entitled to receive under Section 3(e) above. In addition, the Company shall pay you the amount of any earned but unpaid Annual Bonus for any Fiscal Year of the Company ended on or prior to the Date of Termination. In the event of your death or Disability, you (or in the event of your death, your Beneficiary) will retain the Equity Strip which will vest immediately upon the occurrence of your death or Disability in the manner provided by the Stock Award Agreement, and the Option will continue to remain outstanding to the extent provided in the Option Agreement. In addition, for purposes of Section 5(b), you will be deemed in the "employ" of the Company during any period of your Disability. If, following any period of Disability that ends during the Term, you do not return to full-time employment with the Company, then, as of the last day of such period of Disability, you shall be deemed to have resigned without Good Reason for purposes of the Loan. Except as otherwise provided in this Section 6(c) or the provisions of any employee benefit plan in which you are a participant, as of the Date of Termination, you will relinquish the right to any additional payments or benefits from the Company under this Agreement or otherwise. Each Note will become immediately due and payable as to all outstanding principal and all accrued and unpaid interest if your employment ends prior to a Change in Control as a result of your death. (d) Resignation After a Change in Control. "During the thirty-day period beginning six (6) months after a Change in Control, you shall be eligible to resign from the Company for no stated reason and receive the Severance Amounts, benefits and consideration described in Sections 6(a)(i) through 6(a)(v) above. Any such resignation by you in such thirty-day period following a Change in Control shall be treated as an Involuntary Termination for all purposes of this Agreement. In addition, as of the date of a Change in Control, all Notes not previously delivered to you will be delivered by the escrow agent to you marked "Paid in Full," subject to your payment of all accrued but unpaid interest on the Loan. (e) Date and Notice of Termination. Any termination of your employment by the Company or by you during the Term shall be communicated by a notice of termination to the other party hereto (the "Notice of Termination"). The Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. The date of your termination of employment with the Company (the "Date of Termination") shall be determined as follows: (i) if your employment is terminated for Disability, thirty (30) days after a Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty-day period); (ii) if your employment is terminated by the Company in an Involuntary Termination, the date specified in the Notice of Termination (or if no date is specified in the Notice of Termination, the date the Notice of 8 Termination is delivered to you); and (iii) if your employment is terminated by the Company for Cause, the later of (x) the date specified in the Notice of Termination and (y) the expiration of the applicable period set forth in the definition of Cause during which you may effect a cure or meet with the Board if such period expires without such cure being effected by you and without a reversal on the part of the Board regarding its decision to terminate you for Cause. If the basis for your Involuntary Termination is your resignation for Good Reason (which shall include your resignation for any reason or no stated reason after a Change in Control pursuant to Section 6(d) above), the Date of Termination shall be the later of (x) the date specified in the Notice of Termination and (y) the expiration of the applicable cure period set forth in the definition of Good Reason if such period expires without such cure being effected by the Company (it being understood that no cure period shall apply if your resignation is pursuant to Section 6(d) above). The Date of Termination for a resignation of employment other than for Good Reason shall be the date set forth in the applicable notice, which shall be no earlier than thirty (30) days after the date such notice is received by the Company. The Date of Termination in the event of your death shall be the date of your death. (f) Mitigation. You will have no duty to mitigate the Severance Amount. Notwithstanding the previous sentence, any Severance Amount payable during the second year of the Severance Period will be reduced by any compensation or benefits you earn in connection with any employment by another employer during the second year of the Severance Period. You agree promptly to provide the Company with any evidence of amounts received in connection with such other employment which the Company shall reasonably request. (g) Breach of Protective Covenants. If, following the Effective Date, you breach any of the provisions of Section 7 below, you shall not be eligible, as of the date of such breach, for any Severance Amount, and all obligations of the Company to pay any Severance Amount hereunder shall thereupon cease. 7. Protective Covenants. (a) No Competing Employment. During the Restricted Period, you shall not, without the prior written consent of the Board, directly or indirectly, whether as owner, consultant, employee, partner, venturer, or agent, through stock ownership, investment of capital, lending of money or property, rendering of services, or otherwise (except ownership of less than 5% of the number of shares outstanding of any securities which are publicly traded), compete with the retail supermarket business, or any other business contributing at least 15% of the consolidated revenues, of the Company or any parent or subsidiary of the Company (such businesses are hereinafter referred to as the "Business"), provide services to, whether as an employee or consultant, own, manage, operate, control, participate in or be connected with (as a stockholder, partner, or any similar ownership interest) any corporation, 9 firm, partnership, joint venture, sole proprietorship or other entity which so competes with the Business, except for the aforementioned 5% ownership of publicly traded securities. The restrictions imposed by this Section 7(a) shall not apply to any geographic area in which the Company, its parent or its subsidiaries are not engaged in the Business at the Date of Termination. (b) No Solicitation of Employees and Certain Other Persons. During the Restricted Period, you shall not, without the prior written consent of the Board, directly or indirectly (i) solicit in competition with the Business any person, group or class of persons who at any time either during the Term or during the Restricted Period have any business relationship with the Business, the loss, diminution or moderation of which would likely be detrimental to the Business; (ii) solicit or recruit, directly or indirectly, any employee or independent contractor of the Company for the purpose of being employed by you, directly or indirectly, or by any competitor of the Company on behalf of which you are acting as an agent, representative or employee; (iii) solicit, influence, or attempt to influence, for a purpose or in a manner that would likely be materially detrimental to the Business, any provider of services or products to the Business with respect to its relationship with the Business, including, without limitation, any person or entity which has been a provider of services or products to the Business during the Executive's employment with the Company, or take any action detrimental to the existing or prospective relationships between the Business and any provider of services; or (iv) assist or encourage any other person in carrying out, directly or indirectly, any activity that would be prohibited by the provisions of this Section 7(b) if such activity were carried out by you, and, in particular, you agree that you will not, directly or indirectly, induce any employee of the Business to carry out any such activity. (c) Confidentiality. You recognize that the services you perform for the Company are special, unique and extraordinary in that you may acquire confidential information and trade secrets concerning the operations of the Company, its parent and its subsidiaries, the use or disclosure of which could cause the Company substantial loss and damages which could not be readily calculated, and for which no remedy at law would be adequate. Accordingly, you covenant and agree with the Company that you will not at any time, except in performance of your obligations to the Company hereunder or with the prior written consent of the Board, directly or indirectly, disclose any secret or confidential information that you may learn by reason of your association with the Company. The term "confidential information" includes, without limitation, information not previously disclosed to the public or to the trade by the Company's management with respect to the Company or any of its parent's or subsidiaries' business plans, prospects and opportunities, the identity of any suppliers, proprietary information regarding customers, operational strengths and weaknesses, trade secrets, know-how and other intellectual property, systems, procedures, manuals, confidential reports, product price lists, marketing plans or strategies, and financial information. You understand and agree that the rights and obligations set forth in this 10 Section 7(b) are perpetual and, in any case, shall extend beyond the Restricted Period and the Severance Period. (d) Injunctive Relief. Without limiting the remedies available to the Company, you acknowledge that a breach of any of the covenants contained in this Section 7 may result in material irreparable injury to the Company for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, the Company shall be entitled to obtain a temporary restraining order or a preliminary or permanent injunction restraining you from engaging in activities prohibited by this Section 7 or such other relief as may be required to specifically enforce any of the covenants in this Section 7. 8. Successors; Binding Agreement. (a) Assumption by Successor. The Company and Holdings will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company or Holdings expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company and Holdings would be required to perform it if no such succession had taken place; provided, however, that no such assumption shall relieve the Company or Holdings of its obligations hereunder. (b) Enforceability; Beneficiaries. This Agreement shall be binding upon and inure to the benefit of you (and your personal representatives and heirs) and the Company and any organization which succeeds to substantially all of the business or assets of the Company, whether by means of merger, consolidation, acquisition of all or substantially all of the assets of the Company or otherwise, including, without limitation, as a result of a Change in Control or by operation of law. 9. Definitions. For purposes of this Agreement, the following capitalized words shall have the meanings set forth below: "Beneficiary" shall mean the person or persons designated by you in writing to receive any benefits payable to you hereunder in the event of your death or, if no such persons are so designated, your estate. No Beneficiary designation shall be effective unless it is in writing and received by the Company prior to the date of your death. "Benefit Continuation Period" shall mean, in connection with your Involuntary Termination, the period beginning on the Date of Termination and ending on the earliest to occur of (i) the end of the Severance Period, (ii) the date you are eligible to be covered under the benefit plans of a subsequent employer and (iii) the date of your breach of any provision of Section 7 hereof. 11 "Cause" shall mean the termination of your employment with the Company because of (i) your willful and repeated failure (other than by reason of incapacity due to physical or mental illness) to perform the material duties of your employment with the Company after notice from the Company of such failure and your inability or unwillingness to correct such failure within thirty (30) days of such notice, (ii) your conviction of a felony or your plea of no contest to a felony, or (iii) perpetration by you of a material dishonest act or fraud against the Company or any parent or subsidiary thereof; provided, however, that, before the Company may terminate you for Cause, the Board shall deliver to you a written notice of the Company's intent to terminate you for Cause, including the reasons for such termination, and the Company must provide you, and your legal counsel, an opportunity to meet once with the Board prior to such termination. "Change in Control" shall mean the acquisition by a person (other than a person or group of persons that beneficially own an equity interest in Holdings or the Company on the Effective Date or any person controlled thereby) of more than 50% control of the voting securities of Holdings as a result of a sale of voting securities after the Effective Date by the persons who, on the Effective Date, have a beneficial interest in such voting securities, but shall not include any change in the ownership of the Company or Holdings resulting from a public offering. "Common Stock" shall mean Holdings Class A Common Stock, par value $0.01 per share. "Disability" shall mean your absence from continuous full-time employment with the Company for a period of at least 180 consecutive days by reason of a mental or physical illness. "Good Reason" shall mean your resignation because of (i) the failure of the Company to pay any material amount of compensation to you when due, (ii) a material, adverse reduction or material, adverse diminution in your titles, duties, positions or responsibilities with the Company, including, but not limited to, failure by the Company to elect you to the office of Chief Executive Officer, or (iii) any other material breach by the Company of the Agreement (including a rejection or termination of the Agreement by the Company pursuant to any provision or section of the federal bankruptcy laws of the United States). In order to constitute Good Reason, you must provide written notification of your intention to resign within thirty (30) business days after you know or have reason to know of the occurrence of any such event. After you provide such written notice to the Company, the Company shall have fifteen (15) days from the date of receipt of such notice to effect a cure of the condition constituting Good Reason, and, upon cure thereof by the Company (which cure shall be retroactive with respect to any monetary matter), such event shall no longer constitute Good Reason. 12 "Involuntary Termination" shall mean (i) your termination of employment by the Company other than for Cause or Disability or (ii) your resignation of employment with the Company for Good Reason. "Preferred Stock" shall mean a new series of convertible preferred stock that will be issued for purposes of this Agreement. "Restricted Period" shall mean the period beginning on the Effective Date and ending on the second anniversary of the Date of Termination; provided, however, that, in the event of a Change in Control, the Restricted Period shall end upon the later to occur of (i) the Termination Date and (ii) the date of the Change in Control. "Security Agreement" shall mean the agreement set forth in Exhibit D. "Severance Amount" shall mean the cash amounts payable under Section 6(a)(i)(z). "Severance Period" shall mean, in the event of an Involuntary Termination, the 24-month period commencing on the Date of Termination. "Stockholders Agreement" shall mean the Stockholders Agreement, dated as of February 4, 1991, as amended, among Holdings and its stockholders. "Term Sheet" shall mean the initial agreement to the terms of employment between the Company, Holdings and you, dated as of October 2, 1996. "Termination Event" shall mean your resignation without Good Reason or a termination by the Company for Cause. 10. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand, sent by telecopier or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to Corporate Secretary, Pathmark Stores, Inc., 301 Blair Road, P.O. Box 5301, Woodbridge, New Jersey, 07095-0915, telecopier: (908) 499-3460, with a copy to the General Counsel of the Company, or to you at the address set forth on the first page of this Agreement or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 13 11. Miscellaneous. (a) No Rights to Continued Employment. Neither this Agreement nor any of the rights or benefits evidenced hereby shall confer upon you any right to continuance of employment by the Company or interfere in any way with the right of the Company to terminate your employment, subject to the provisions of Section 6 above, for any reason, with or without Cause. (b) Amendments, Waivers, Etc. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing by the parties hereto. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement, and this Agreement shall supersede all prior agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, with respect to the subject matter hereof, including, without limitation, the Term Sheet. (c) Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. (d) Representation. You hereby represent and warrant to the Company that the execution and delivery by you of this Agreement to the Company will not breach the terms of any contract, agreement or understanding to which you are a party. You further acknowledge and agree that a breach of this representation by you shall render this Agreement void ab initio and of no further force and effect. (e) Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. (f) Withholding. Amounts paid to you hereunder shall be subject to all applicable federal, state and local wage withholdings. (g) Source of Payments. All payments provided under this Agreement (other than payments made pursuant to a plan which provides otherwise or as otherwise expressly provided hereunder) shall be paid in cash from the general funds of the Company, and no special or separate fund shall be established, and no other segregation of assets made, to assure payment. You will have no right, title or interest whatsoever in or to any 14 investments which the Company may make to aid it in meeting its obligations hereunder. To the extent that any person acquires a right to receive payments from the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company. (h) Headings. The headings contained in this Agreement are intended solely for convenience of reference and shall not affect the rights of the parties to this Agreement. (i) Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York applicable to contracts entered into and performed in such state. 15 If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter, which will then constitute our agreement on this subject. Sincerely, PATHMARK STORES, INC. By______________________ Name: Title: SMG-II HOLDINGS CORPORATION By______________________ Name: Title: (For purposes of Section 4 only) Agreed to as of this 8th day of November, 1996. ____________________________ James L. Donald Exhibit A STOCK AWARD AGREEMENT STOCK AWARD AGREEMENT AGREEMENT, dated as of this 8th day of October, 1996, between SMG-II Holdings Corporation, a Delaware corporation ("Holdings"), and James L. Donald (the "Executive"). W I T N E S S E T H: WHEREAS, Holdings, Pathmark Stores, Inc. (the "Company") and the Executive are parties to an employment agreement, dated October 8, 1996 (the "Employment Agreement"), which contemplates that Holdings will grant the Executive an equity interest in Holdings consisting of a specified number of shares of a new series of Holdings convertible preferred stock, with a stated value of $200 ("Preferred Stock") and shares of Holdings Class A Common Stock, par value $0.01 per share ("Common Stock"), subject to the terms and conditions set forth herein; and WHEREAS, Holdings now desires to award the Executive the Equity Strip, and the Executive now desires to accept the award of the Equity Strip, in accordance with the terms and provisions hereof; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants hereinafter set forth, and for good and valuable consideration, the parties hereto hereby agree as follows: 1. Equity Award. Holdings hereby grants to the Executive, subject to the terms and conditions of this Agreement, an Equity Strip, consisting of an aggregate of 19,851 shares of Common Stock and an aggregate of 8,520 shares of Preferred Stock. The Preferred Stock will be pari passu with the existing SMG-II convertible preferred stock and will accrue dividends at a rate of 10% per annum. Each share of Preferred Stock will be convertible into one share of Common Stock. Capitalized words which are not otherwise defined in the text of this Agreement shall have the meanings assigned to such words in the Employment Agreement. 2. Issuance of Share Certificates. The Executive will enjoy full ownership rights in connection with the Equity Strip, including voting rights and the right to receive dividends when declared and paid. Share certificates for the shares of Common Stock and Preferred Stock subject to the Equity Strip will be issued in the name of the Executive but will be held by Holdings until such time as the Executive makes a valid disposition of such shares in accordance with the terms and provisions set forth herein and in the Stockholders Agreement and Security Agreement. Each such share certificate will contain a legend in the form below indicating that it has 2 not been registered under the Securities Act of 1933, as amended, and that the shares are subject to transfer restrictions set forth in the Stockholders Agreement and the Security Agreement: THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO, AND ARE TRANSFERABLE ONLY UPON COMPLIANCE WITH, THE PROVISIONS OF A STOCKHOLDERS AGREEMENT AMONG SMG-II HOLDINGS CORPORATION AND THE OTHER PARTIES THERETO AND THE SECURITY AGREEMENT BETWEEN THE HOLDER AND SMG-II HOLDINGS CORPORATION. COPIES OF THE ABOVE-REFERENCED AGREEMENTS ARE ON FILE AT THE OFFICES OF SMG-II HOLDINGS CORPORATION AT 301 BLAIR ROAD, WOODBRIDGE, NEW JERSEY. THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION FROM REGISTRATION UNDER SAID ACT. 3. Vesting. The Equity Strip will vest in its entirety upon the occurrence of an Employment-Related Event and will be forfeited in its entirety upon the occurrence of a Termination Event; provided, however, that no portion of the Equity Strip will be subject to forfeiture to the extent that it has been sold or otherwise transferred in accordance with Section 4 below prior to the occurrence of a Termination Event. 4. Sales and Transfers of the Equity Strip. (a) The award of the Equity Strip hereunder is expressly conditioned upon the Executive becoming a party to the Stockholders Agreement and agreeing to be bound by the terms thereof. (b) The shares of Common Stock and Preferred Stock subject to the Equity Strip shall be subject to all of the transfer restrictions set forth in the Stockholders Agreement and may be transferred by the Executive only in the manner and to the extent permitted by the Stockholders Agreement. Except as permitted by the Stockholders Agreement, the shares subject to the Equity Strip may not be transferred by the Executive until such time as they have vested in accordance with the provisions of Section 3 above. (c) Holdings shall cause the release of the shares from the Security Agreement to the extent necessary to permit the Executive to exercise his sale or transfer rights under Section 5.6 or 6.2 of the Stockholders Agreement; provided, however, that the cash or other proceeds received in connection with such sale or transfer shall be held as collateral for the Loan in accordance with the terms of the Security Agreement. 5. Investment Representation. The Executive hereby represents and warrants to Holdings that (i) the Equity Strip is being acquired by him for investment only and not for resale, (ii) he has such knowledge and experience in financial and business matters as to be capable of evaluating the merits of the acquisition of the interest in Holdings constituting the Equity Strip, (iii) he has carefully reviewed and understood the terms of this Agreement and the Stockholders Agreement and (iv) he is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act of 1933, as amended, by reason of (A) having a net worth (or joint net worth of the Executive and his spouse) on the date of this Agreement that exceeds 3 $1,000,000, or (B) having had individual income in excess of $200,000 in each of the two most recent years (or joint income of the Executive and his spouse in excess of $300,000 in each of those years) and having a reasonable expectation of reaching the same income level in the current year. 6. No Restriction on Right of Company to Effect Corporate Changes. The Equity Strip shall not affect in any way the right or power of Holdings or its stockholders to make or authorize any or all adjustments, recapitalization, reorganizations or other changes in Holdings' capital structure or its business, or any merger or consolidation of Holdings, or any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of Holdings, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. This Section 6 is not intended to constitute a waiver of any rights the parties may have under state law. 7. Interpretation and Construction. Holdings shall have full authority to interpret and construe this Agreement and any interpretation, construction or determination made by Holdings pursuant hereto shall be final and conclusive. 8. Headings. The headings of sections and subsections herein are included solely for convenience of reference and shall not affect the meaning of any of the provisions of this Agreement. 9. Notices. Any notice provided by either party hereto will be provided in accordance with the notice provision set forth in Section 10 of the Employment Agreement. 10. Governing Law. This Agreement and all rights hereunder shall be construed in accordance with and governed by the laws of the State of New York. 4 IN WITNESS WHEREOF, Holdings has caused this Agreement to be executed by its duly authorized officers and the Executive has executed this Agreement, both as of the day and year first above written. SMG-II HOLDINGS CORPORATION By: ____________________________________ Name:_______________________________ Title: _____________________________ EXECUTIVE __________________________________________ __________________________________________ __________________________________________ (address) SMG-II HOLDINGS CORPORATION March 7, 1997 Mr. James L. Donald Chairman, President and Chief Executive Officer Pathmark Stores, Inc. 301 Blair Road Woodbridge, New Jersey 07095 Amendment to the Stock Award Agreement Dear Mr. Donald: Reference is made to the Stock Award Agreement, dated October 8, 1996, between SMG-II Holdings Corporation ("Holdings") and you (the "Stock Award Agreement"). This will confirm our agreement that the following sentence is hereby added to the end of Section 3 of the Stock Award Agreement: "'Employment-Related Event' shall mean any of the following: (i) your termination of employment at the end of the full Term of employment, (ii) your Involuntary Termination or (iii) your death or Disability." This letter constitutes an amendment to your Stock Award Agreement. Please indicate your agreement by signing the attached copy of this letter. SMG-II HOLDINGS CORPORATION By:____________________ Title: ACCEPTED AND AGREED ______________________ James L. Donald ______________________ Date Exhibit B STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT AGREEMENT, dated as of this 8th day of October, 1996 (the "Date of Grant"), between SMG-II Holdings Corporation, a Delaware corporation (the "Holdings"), and James L. Donald (the "Optionee"). W I T N E S S E T H: WHEREAS, the Holdings, Pathmark Stores, Inc. (the "Company") and the Optionee are parties to an employment agreement, dated October 8, 1996 (the "Employment Agreement") which contemplates that Holdings will grant the Optionee a stock option consisting of an aggregate of 100,000 shares of Holdings Class A Common Stock, par value $0.01 per share (the "Common Stock"), subject to the terms and conditions set forth herein; and WHEREAS, Holdings now desires to grant the Optionee the Option, and the Optionee desires to accept the grant of the Option, in accordance with the terms and provisions hereof; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants hereinafter set forth, and for good and valuable consideration, the parties hereto hereby agree as follows: 1. Grant of Option. Holdings hereby grants to the Optionee, subject to the terms and conditions of this Stock Option Agreement (the "Agreement"), a stock option (the "Option") to purchase an aggregate of 100,000 shares of Common Stock. The Option will consist of component A ("Option Component A") covering 50,000 shares of Common Stock and component B ("Option Component B") covering the remaining 50,000 shares of Common Stock. Any terms used herein not otherwise defined shall have the meanings assigned to them in the Employment Agreement. 2. Terms and Conditions of Option. The Option shall be subject to the following terms and conditions: (a) Exercise Price of the Option Component A. Subject to Section 2(c) below, Option Component A shall have an initial per share exercise price of $100 per share. The per share exercise price of Option Component A will increase to $125 per share on the first day of the Fiscal Year beginning in calendar year 2000 ("Fiscal Year 2000") and to $150 per share on the first day of the Fiscal Year beginning in calendar year 2001 ("Fiscal Year 2001"). 2 (b) Exercise Price of the Option Component B. Subject to Section 2(c) below, Option Component B will have an initial per share exercise price of $100 per share. The per share exercise price of Option Component B will increase to $150 per share on the first day of the Fiscal Year beginning in calendar year 1999; to $250 per share on the first day of Fiscal Year 2000; and to $350 per share on the first day of Fiscal Year 2001. (c) Expiration Date. Subject to Section 2(e)(vi) below, the Option will expire on the fifth anniversary of the Effective Date to the extent not previously exercised (the "Expiration Date"); provided, however, that the Expiration Date for the portion of the Option Component A and the Option Component B which is vested in accordance with Section 2(d) immediately prior to such Expiration Date will be extended until the seventh anniversary of the Effective Date if such vested portion of the Option Component A and the Option Component B, as the case may be, has not become exercisable by such initial Expiration Date. During the period of such extension, the per share exercise price of the Option Component A and the Option Component B, as the case may be (to the extent not previously exercised), will increase at the end of each month during such extension period at an annual rate of 10%. (d) Vesting. Subject to Section 3, the Optionee will vest in 25% of the Option Component A and in 25% of the Option Component B on the Effective Date and on each of the first through third anniversaries of the Effective Date, provided that the Optionee is in the employ of the Company on each such date. Upon the occurrence of a Minimum IPO (as defined below) while the Optionee is in the employ of the Company, the entire Option shall immediately and fully vest. In addition, the Option will immediately and fully vest upon the occurrence of a Change in Control occurring prior to a Termination Event. (e) Exercisability. (i) Except for purposes of tag-along rights under Article V of the Stockholders Agreement and the piggy-back rights under Article VI of the Stockholders Agreement, the Option shall not be exercisable (even though the Option or a portion thereof is vested) unless and until it becomes exercisable in accordance with the provisions of this Section 2(e). (ii) The Exercisable Percentage (as defined below) of each component of the Option will become exercisable if the ML Investors (as defined in the Stockholders Agreement) have a Realization Event (as defined below) in respect of the Common Stock at a per share price in excess of the amounts (the "Target Prices") set forth below: 3 Period of Time Target Price per Target Price per Share/Option Share/Option Component A Component B -------------------------------------------------------------- Prior to 2/1/00 $ 100 $ 150 2/1/00 to 1/31/01 $ 125 $ 250 2/1/01 and after $ 150 $ 350 -------------------------------------------------------------- Notwithstanding the above, if the ML Investors (as defined in the Stockholders Agreement) have a Realization Event for more than 15% of the shares of Common Stock beneficially owned by them on the Date of Grant at a per share price in excess of the Target Price described above applicable to the date when such Realization Event occurs, then the components of the Option for which such Target Prices have been achieved shall become immediately vested and exercisable and the exercise price shall not thereafter increase. (iii) If the Optionee ceases for any reason to be in the employ of the Company, the provisions of Section 2(e)(ii) above will be applied only to the then vested portion of each component of the Option. (iv) Holdings and the Optionee agree to use all reasonable efforts to assure that the Optionee shall be permitted to exercise the portion of the Option that becomes exercisable pursuant to this Section 2(e) prior to the consummation of any applicable Third-Party Sale or Public Offering so that the Optionee will be able to participate in such Third-Party Sale or Public Offering to the extent permitted by the provisions of the Stockholders Agreement. (v) In the event that the Optionee becomes entitled to any tag-along rights under Section 5.6 or registration rights under Section 6.2 of the Stockholders Agreement, the Optionee will be permitted to exercise his sale or transfer rights with respect to the portion of the Option for which the Target Price has been met. For purposes of Section 5.6(b) of the Stockholders Agreement, one hundred percent of the portion of the option for which the Target Amount has been realized will be considered exercisable in order to determine the number of shares to be included under Section 5.6(b) of the Stockholders Agreement. (vi) If, prior to the Expiration Date, the Board determines that it is necessary or desirable to list, register, or qualify the shares of Common Stock subject to the Option in accordance with Section 5 (b) hereunder, and if such listing, registration, or qualification is delayed beyond the Expiration Date, the vested and 4 exercisable portion of the Option will remain exercisable until 30 days after such listing, registration, or qualification is accomplished. (f) Agreement to Become Party to and Abide by the Terms of the Stockholders Agreement. No shares of Common Stock shall be issued to the Optionee upon exercise of the Option unless the Optionee is then a party to the Stockholders Agreement or the Stockholders Agreement shall have previously expired in accordance with its terms. All shares of Common Stock acquired by the Optionee upon the exercise of any portion of the Option will be subject to the terms of the Stockholders Agreement. The Optionee shall hold and transfer the shares of Common Stock issuable upon the exercise of the Option subject to, and in accordance with, the terms, conditions and restrictions applicable to shares of Common Stock owned by Management Investors (as defined in the Stockholder Agreement) as provided in the Stockholders Agreement; provided such terms, conditions and restrictions contained in the Stockholders Agreement are then still in effect, and the agreements and restrictions contained therein will apply to the shares of Common Stock issuable upon exercise of the Option without any action on the part of Holdings or the Optionee. (g) Nontransferability; Nonassignability. The Option shall not be transferable or assignable, other than by will or the laws of descent and distribution and the Option may not be exercised by anyone other than the Optionee during the Optionee's lifetime, except in the event of the Optionee's Disability, the Options may be exercised by the Optionee's legal custodian or guardian. 3. Termination of Employment. (a) Termination Without Cause or by Reason of Death; Resignation for Good Reason. If the Optionee's employment with the Company is terminated by the Company without Cause or by reason of the Optionee's death, or if the Optionee should resign his employment with the Company for Good Reason, the Optionee shall be entitled to retain the portion of the Option which is vested as of the Date of Termination, and the remaining portion of the Option shall be immediately and irrevocably forfeited as of such date. (b) Disability In the event of the Optionee's Disability, the period of such Disability shall be treated as continuing employment with the Company for purposes of Section 2(d) above. If, following the expiration of such period of Disability during the Term, the Optionee does not return to the full-time employ of the Company, the last day of such period of Disability shall be treated for purposes hereof as a Termination Event. (c) Termination Event. If the Optionee's employment with the Company should end as a result of a Termination Event, then, as of the applicable Date of Termination, the entire Option (whether or not then vested) will be immediately and irrevocably forfeited as of such date. 5 (d) Exercisability After Termination of Employment. The vested portion of the Option retained by the Optionee (or in the event of the Optionee's death, by his estate or beneficiary) following the Optionee's termination of employment with the Company for any reason shall remain outstanding until the Expiration Date but shall become exercisable only to the extent provided in Section 2(e) above. 4. Method of Exercise. (a) Notice. Subject to the conditions set forth in Section 4(b) hereof, the Optionee may exercise any then exercisable portion of the Option by giving written notice to Holdings specifying the number of shares of Common Stock in respect of which the Option is being exercised. The date of exercise of the Option with respect to the shares of Common Stock specified in the notice shall be the later of (i) the date on which Holdings receives the written notice or (ii) the date on which all the conditions provided in Sections 4(b) and 4(c) hereof are satisfied. (b) Payment and Other Conditions. Prior to the issuance to the Optionee of any stock certificates evidencing shares of Common Stock in respect of which the Option shall have been exercised, the Optionee shall have paid to Holdings the aggregate exercise price for all shares of Common Stock for which the Option is then exercised in cash or in shares of Common Stock already owned by the Optionee with a fair market value on the date of exercise equal to the aggregate exercise price or any combination of cash and shares. In addition, the Optionee shall pay to Holdings an amount in cash equal to the federal, state and local taxes, if any, required to be withheld or paid by Holdings as a result of such exercise. (c) Issuance of Stock Certificates; Pledge of Shares Acquired. Subject to the terms of the Security Agreement, upon receipt of payment and satisfaction of the conditions pursuant to Section 4(b), Holdings shall issue to the Optionee a certificate or certificates for the number of shares of Common Stock in respect of which the Option shall have been exercised. Such certificates shall contain one or more legends indicating any then applicable transfer restrictions or limitations applicable to the shares. Holdings will bear all expenses in connection with the preparation, issuance and delivery of the stock certificates. 5. Registration of Shares and Limitations on Exercisability. (a) Notwithstanding anything contained herein to the contrary, the Option shall not be exercisable and no transfer of shares of Common Stock may be made to the Optionee, and any attempt to exercise the Option or to transfer any shares of Common Stock to the Optionee shall be void and of no effect, unless and until (i) a registration statement under the Securities Act has been duly filed and declared effective pertaining to the shares of Common Stock subject to this Option and the shares of Common Stock subject to this Option have been duly qualified under applicable state securities or blue sky laws or (ii) Holdings, in its sole discretion after securing the advice of counsel, determines, or the Optionee provides an opinion of counsel reasonably satisfactory to Holdings, that such registration or 6 qualification is not required as a result of the availability of an exemption from registration or qualification under such laws. (b) Without limiting the foregoing, if at any time the Board shall determine in its discretion that the listing, registration or qualification of the shares of Common Stock subject to this Option under any state or federal law or on any securities exchange, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, delivery or purchase of shares pursuant to the exercise of the Option, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board. (c) Following a Public Offering of the Common Stock, the Option and the shares subject to the Option shall be registered on a Form S-8, to the extent such form of registration statement is then available to Holdings, and, if necessary, Holdings will file a reoffering prospectus to facilitate the Optionee's resale of shares of Common Stock acquired upon exercise of the Option. 6. No Restriction on Right of Company to Effect Corporate Changes. Neither the Agreement nor the Option shall affect in any way the right or power of Holdings or its stockholders to make or authorize any or all adjustments, recapitalization, reorganizations or other changes in Holdings' capital structure or its business, or any merger or consolidation of Holdings, or any issue of stock or of options, warrants or rights to purchase stock, or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of Holdings, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. This Section 6 is not intended to constitute a waiver of any rights the parties may have under state law. 7. Dilution and Other Adjustments. In the event of any stock dividend or split, issuance or repurchase of stock or securities convertible into or exchangeable for shares of stock, grants of options, warrants or rights to purchase stock, recapitalization, combination, exchange or similar change affecting the Common Stock, Holdings shall make one or more of the following equitable adjustments to the Option: (i) adjust the aggregate number of shares of Common Stock which may be acquired upon exercise of the Option, (ii) adjust the exercise price to be paid for the shares subject to the Option, or (iii) make any other equitable adjustments or take such other equitable action as Holdings, in its discretion, shall deem appropriate. Such equitable adjustments or actions shall be negotiated in good faith by Holdings with the Optionee, and any agreement between the parties shall be conclusive and binding for all purposes. In the 7 event of a change in the Common Stock which is limited to a change in the designation thereof to "Capital Stock" or other similar designation, or to a change in the par value thereof, or from par value to no par value, without increase or decrease in the number of issued shares, the shares resulting from any such change shall be deemed to be Common Stock within the meaning of this Agreement. 8. Optionee Bound by the Agreement. The Optionee hereby agrees that he and any other person who may be entitled to any rights hereunder shall be bound by all the terms and conditions of this Agreement. 9. Headings. The headings of sections and subsections herein are included solely for convenience of reference and shall not affect the meaning of any of the provisions of this Agreement. 10. Definitions. "Exercisable Percentage" means (i) in connection with a Third Party Sale, the percentage of the shares of Common Stock subject to the Option that the Optionee is entitled to sell pursuant to the exercise of his "tag-along" rights under Section 5.6 of the Stockholders Agreement and (ii) in connection with a Public Offering, the percentage of the shares of Common Stock then beneficially owned by the ML Investors (as defined in the Stockholders Agreement) which are sold in the Public Offering. "Minimum IPO" means a Public Offering of the Common Stock after the Date of Grant at the conclusion of which the aggregate price for all shares of Common Stock having been sold to the public in such Public Offering, plus the aggregate offering price for all shares of Common Stock sold in all prior Public Offerings of Common Stock occurring after the Date of Grant, exceeds $50 million. "Public Offering" means a public offering of the Common Stock pursuant to an effective registration statement under the Securities Act. "Realization Event" means the receipt by the ML Investors (as defined in the Stockholders Agreement) of cash or property from an unrelated third party as consideration for the sale of shares of Common Stock then beneficially owned by the ML Investors. For purposes of this Agreement, any property other than cash received by the ML Investors in the Realization Event shall have the value ascribed to such property by the parties to such sale. "Securities Act" means the Securities Act of 1933, as amended. 8 "Third Party Sale" means a sale of Common Stock subject to Section 5.6 of the Stockholders Agreement. 11. Governing Law. This Agreement and all rights hereunder shall be construed in accordance with and governed by the laws of the State of Delaware. 12. Notices. Any notice provided by either party hereto will be provided in accordance with the notice provision set forth in Section 10 of the Employment Agreement. IN WITNESS WHEREOF, Holdings has caused this Agreement to be executed by its duly authorized officers and the Optionee has executed this Agreement, both as of the day and year first above written. SMG-II HOLDINGS CORPORATION By:____________________________________ Title:_________________________________ OPTIONEE _______________________________________ _______________________________________ _______________________________________ (address) SMG-II HOLDINGS CORPORATION AGREEMENT AGREEMENT, dated as of this 8th day of November, 1996 between SMG-II Holdings Corporation, a Delaware corporation ("Holdings"), and James L. Donald ("Donald"). W I T N E S S E T H: WHEREAS, Holdings, Pathmark Stores, Inc. (the "Company") and Donald are parties to an employment agreement, dated October 8, 1996 (the "Employment Agreement"), which contemplates that Holdings will grant to Donald an equity interest in Holdings consisting of a specified number of shares of a new series of Holdings convertible preferred stock, with a stated value of $200, shares of Holdings Class A Common Stock, par value $0.01 per share (the "Common Stock") (together, the "Equity Strip"), and a stock option (the "Option") consisting of an aggregate of 100,000 shares of Common Stock; and WHEREAS, Holdings now desires to grant Donald the Equity Strip and the Option, and Donald desires to accept the grant of the Equity Strip and the Option; WHEREAS, the Stockholders Agreement between Holdings and its stockholders dated as of February 4, 1991 (the "Stockholders Agreement") was amended prior to the execution of this Agreement by Amendment No. 1 to provide Donald with the Equity Strip and the Option and all the rights and obligations associated therewith; and WHEREAS, according to the terms of the Stockholders Agreement, in order to receive either grant of the Equity Strip or the Option, Donald must agree to become subject to the terms, conditions, rights, responsibilities and all other provisions of the Stockholders Agreement; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants hereinafter set forth, and for good and valuable consideration, the parties hereto hereby agree as follows: 1. Defined Terms. Any capitalized words which are not otherwise defined herein shall have the meanings assigned to such words in the Stockholders Agreement. 2. Management Investor. The parties hereby agree that Donald shall become a Management Investor upon his receipt of the Equity Strip, the Option or any portion thereof. 3. Agreement to Become Party to and Abide by the Terms of the Stockholders Agreement. The parties hereby irrevocably agree that Donald shall be subject 2 to the terms and conditions of the Stockholders Agreement in its entirety. The parties further agree that all shares of Common Stock or preferred stock acquired by Donald or granted to Donald by Holdings will be subject to the terms of the Stockholders Agreement. Donald shall hold and transfer all shares of Common Stock and preferred stock granted to him under the Equity Strip or issuable upon the exercise of the Option subject to, and in accordance with, the terms, conditions and restrictions applicable to shares of Common Stock and preferred stock owned by Management Investors as provided in the Stockholders Agreement for as long as such terms, conditions and restrictions contained in the Stockholders Agreement are then still in effect, and the agreements and restrictions contained therein will apply to the shares of Common Stock and preferred stock granted through the Equity Strip and issuable upon exercise of the Option without any other action on the part of Holdings or Donald. 4. All Provisions of the Stockholders Agreement. The parties agree that all the provisions of the Stockholders Agreement shall apply to this Agreement, including, without limitation, the notice provisions and the governing law provisions. IN WITNESS WHEREOF, Holdings has caused this Agreement to be executed by its duly authorized officers and Donald has executed this Agreement, both as of the day and year first above written. SMG-II HOLDINGS CORPORATION By: ___________________________________ Title: ____________________________ JAMES L. DONALD _______________________________________ _______________________________________ _______________________________________ (address) Exhibit C FORM OF NOTE THIS NOTE IS NON-NEGOTIABLE FORM OF PROMISSORY NOTE A-16 $281,250 Dated: November 8, 1996 FOR VALUE RECEIVED, the undersigned, JAMES L. DONALD, an individual residing at 26 Carriage Place; Edison, New Jersey; 08820 (the "Borrower"), HEREBY PROMISES TO PAY to PATHMARK STORES, INC. (the "Lender") on the Termination Date (as defined below) the principal amount of TWO HUNDRED AND EIGHTY ONE THOUSAND TWO HUNDRED AND FIFTY U.S. DOLLARS (US$281,250) in lawful money of the United States of America ("U.S. Dollars" or "US$") and in same day funds. ARTICLE I DEFINITIONS SECTION 1.01 Certain Defined Terms. As used in this Note, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Board" means the Board of Directors of the Lender. "Borrower" has the meaning specified in the recital of parties to this Note. "Business Day" means a day of the year on which banks are not required or authorized to close in New York City. "Employment Agreement" means the Employment Agreement between the Borrower and the Lender dated October 8, 1996 which sets forth the terms of the Borrower's employment with the Lender. 2 THIS NOTE IS NON-NEGOTIABLE "Federal Short-Term Rate" means the interest rate that is the Federal short-term rate which rate per annum shall at all times be equal to the rate of interest in effect on the date hereof and published by the Secretary of the Treasury, in accordance with Section 1274(d) of the Internal Revenue Code, as the monthly Federal short-term rate. "Holdings" means SMG-II Holdings Corporation, a Delaware corporation and the parent company of the Lender, together with any successors. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "Lender" has the meaning specified in the recital of parties to this Note. "Loan Documents" means this Note, the Security Agreement and any other Note of the Borrower payable to the order of the Lender, in each case as amended or modified from time to time. "Security Agreement" means a pledge, assignment and security agreement entered into by the Borrower for the benefit of the Lender, in substantially the form of Exhibit A hereto, as such agreement may be amended or modified from time to time. "Termination Date" means the earlier of (a) October 8, 2001 or (b) the date of the termination in whole of the Loan hereunder pursuant to Section 2.04 or 5.01. SECTION 1.02 Computation of Time Periods. In this Note in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding". SECTION 1.03 Other Terms. All other terms not defined in this Note shall have the meaning assigned such terms in the Employment Agreement. 3 THIS NOTE IS NON-NEGOTIABLE ARTICLE II AMOUNT AND TERMS OF THE LOAN SECTION 2.01. The Loan. The Lender agrees, on the terms and conditions hereinafter set forth, to make a loan (the "Loan") to the Borrower on the date hereof in the amount set forth above in U.S. Dollars and in same day funds. SECTION 2.02. Repayment. The Borrower shall repay the aggregate unpaid principal amount of the Loan on the Termination Date. SECTION 2.03. Interest. (a) Scheduled Interest. The Borrower shall pay interest on the unpaid principal amount of this Note from the date of this Note until this Note shall be paid in full at a rate per annum equal at all times to the Federal Mid-Term Rate in effect and applicable to this Note pursuant to the terms hereof, payable quarterly in arrears beginning on January 8, 1997 and on the Termination Date. (b) Default Interest. Upon the occurrence and during the continuance of an Event of Default (other than an Event of Default listed in Section 5.01(g) to which this Section 2.03(b) shall not apply until 60 days after the occurrence of such Event of Default), the Borrower shall pay interest on the unpaid principal amount of this Note, payable in arrears on the dates referred to in clause (a) above and on demand, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid on this Note pursuant to clause (a) above. SECTION 2.04. Mandatory Prepayments. The Borrower shall, on the next succeeding Business Day following the Borrower's failure to be in the Lender's employ as a result of a termination of employment for Cause or by reason of the Borrower's death or a resignation of employment other than for Good Reason, prepay the outstanding principal amount of the Loan and pay accrued interest to the date of such prepayment on the entire principal amount of the Loan outstanding as of such date; provided however that the Borrower shall be considered to be in the Lender's "employ" during any period of the Borrower's Disability. SECTION 2.05. Payments and Computations. The Borrower shall make each payment hereunder not later than 3:00 P.M. (New York City time) on the day when due in U.S. Dollars to the Lender at its address referred to in Section 6.02 in same day funds. All computations of interest shall be made by the Lender on the basis of a year of 365 or 366 4 THIS NOTE IS NON-NEGOTIABLE days, as the case may be, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. SECTION 2.06. Payment on Non-Business Days. Whenever any payment under any Loan Document shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest. ARTICLE III CONDITIONS OF LENDING SECTION 3.01. Conditions Precedent to the Loan. The obligation of the Lender to make the Loan hereunder is subject to the conditions precedent that the Lender shall have received on or before the date of such Loan the following, dated such day, in form and substance satisfactory to the Lender: (a) The Security Agreement, together with: (i) acknowledgment copies or stamped receipt copies of proper financing statements, duly filed under the Uniform Commercial Code of all jurisdictions that the Lender may deem necessary or desirable in order to perfect the security interests created by the Security Agreement, (ii) completed requests for information, listing the financing statements referred to in paragraph (i) above and all other effective financing statements filed in the jurisdictions referred to in paragraph (i) above that name the Borrower as debtor, together with copies of such other financing statements (none of which shall cover the collateral purported to be covered by the Security Agreement), (iii) evidence of the completion of all recordings and filings of or with respect to the collateral that the Lender may deem necessary or desirable in order to perfect the security interests created by the Security Agreement, and 5 THIS NOTE IS NON-NEGOTIABLE (iv) evidence that all other actions necessary or, in the opinion of the Lender, desirable to perfect and protect the security interests created by the Security Agreement have been taken; and (b) the Lender shall have received such other approvals or documents as the Lender may reasonably request. ARTICLE IV COVENANTS OF THE BORROWER SECTION 4.01. Affirmative Covenants. So long as this Note shall remain unpaid, the Borrower will, unless the Lender shall otherwise consent in writing: (a) Compliance with Laws, Etc. Comply in all material respects with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon the Borrower or upon the property of the Borrower except to the extent contested in good faith. (b) Reporting Requirements. Furnish to the Lender: (i) as soon as possible and in any event within five days after the occurrence of each Event of Default and each event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default, continuing on the date of such statement, a statement of the Borrower setting forth details of such Event of Default or event and the action which the Borrower has taken and proposes to take with respect thereto; and (ii) such other information respecting the condition or operations, financial or otherwise, of the Borrower as the Lender may from time to time reasonably request. 6 THIS NOTE IS NON-NEGOTIABLE ARTICLE V EVENTS OF DEFAULT SECTION 5.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) The Borrower shall fail to pay any principal of, or interest on, this Note or any other amount under any other Loan Document, including, but not limited to, any mandatory prepayments, within 30 days after the same becomes due and payable; (b) The Borrower shall fail to perform or observe (i) any term, covenant or agreement contained in Section 4.01 or (ii) any other term, covenant or agreement contained in any Loan Document on the part of the Borrower to be performed or observed if such failure shall remain unremedied for 30 days after written notice thereof shall have been given to the Borrower by the Lender; (c) The Borrower shall generally not pay his debts as such debts become due, or shall admit in writing his inability to pay his debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower seeking to adjudicate the Borrower a bankrupt or insolvent, or seeking liquidation, protection, relief, or composition of the Borrower or of his debts under any law relating to bankruptcy, insolvency or relief of debtors, or seeking the entry of an order for relief for the Borrower or for any substantial part of his property and, in the case of any such proceeding instituted against the Borrower (but not instituted by the Borrower), either such proceeding shall remain undismissed or unstayed for a period of 30 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against the Borrower or for any substantial part of his property) shall occur; (d) Any judgment or order for the payment of money in excess of $250,000 shall be rendered against the Borrower and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; 7 THIS NOTE IS NON-NEGOTIABLE (e) Any provision of the Security Agreement after delivery thereof pursuant to Section 3.01 shall for any reason cease to be valid and binding on the Borrower, or the Borrower shall so state in writing; (f) The Security Agreement after delivery thereof pursuant to Section 3.01 shall for any reason (other than pursuant to the terms thereof) cease to create a valid and perfected first priority security interest in any of the collateral purported to be covered thereby; (g) The Borrower shall die; or (h) The Borrower shall be terminated for Cause or resign without Good Reason, or shall give or receive notice of such termination or resignation; then, and in any such event, the Lender may, by notice to the Borrower, declare this Note, all interest thereon and all other amounts payable under the Loan Documents to be forthwith due and payable, whereupon this Note, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, that in the event of the death of the Borrower or in the event of an actual or deemed entry of an order for relief with respect to the Borrower under the Federal Bankruptcy Code, this Note, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. ARTICLE VI MISCELLANEOUS SECTION 6.01. Amendments, Etc. No amendment or waiver of any provision of this Note, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 6.02. Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telecopier, telegraphic, telex or cable 8 THIS NOTE IS NON-NEGOTIABLE communication) and mailed, telecopied, telegraphed, telexed, cabled or delivered, if to the Borrower, at its address as indicated in the recital of parties to this Note; and if to the Lender, at its address at 301 Blair Road; Woodbridge, New Jersey; 07095, Attn: Corporate Secretary; or, as to each party, at such other address and to such other individual as shall be designated by such party in a written notice to the other party. All such notices and communications shall, when mailed, telecopied, telegraphed, telexed or cabled, be effective when deposited in the mails, telecopied, delivered to the telegraph company, confirmed by telex answerback or delivered to the cable company, respectively. SECTION 6.03. No Waiver; Remedies. No failure on the part of the Lender to exercise, and no delay in exercising, any right under any Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law. SECTION 6.04. Binding Effect. This Note shall (a) be binding upon the Borrower and his personal representatives, estate, heirs, devisees, legatees and assigns, (b) inure to the benefit of the Borrower and his assigns and (c) be binding upon and inure to the benefit of the Lender and its respective successors and assigns, except that the Borrower shall not have the right to assign his rights hereunder or any interest herein without the prior written consent of the Lender. SECTION 6.05. Governing Law. This Note shall be governed by, and construed in accordance with, the laws of the State of New York. 9 THIS NOTE IS NON-NEGOTIABLE IN WITNESS WHEREOF, the Borrower has executed and the Lender has caused this Note to be executed by its officer thereunto duly authorized, in each case, as of the date first above written. ______________________________ JAMES L. DONALD, as Borrower CONSENTED TO AND ACKNOWLEDGED: PATHMARK STORES, INC., as Lender By:__________________________________ Name: Title: Exhibit D SECURITY AGREEMENT PLEDGE, ASSIGNMENT AND SECURITY AGREEMENT PLEDGE, ASSIGNMENT AND SECURITY AGREEMENT, dated as of November 8, 1996, made by the individual identified on the signature page hereof (the "Pledgor"), residing at the address indicated for the Pledgor on the signature page hereof, to PATHMARK STORES, INC. (the "Pledgee"), a Delaware corporation. PRELIMINARY STATEMENTS: (1) The Pledgor has made various Notes to the order of the Pledgee, each dated November 8, 1996 (each such Note, as it may hereinafter be amended or modified from time to time, being a "Note", and collectively, the "Notes", the terms defined therein and not otherwise defined herein being used herein as therein defined). (2) The Pledgor is the owner of the shares of stock set forth on Part I of Schedule I hereto and issued by the corporations indicated therein and the options set forth in Part II of Schedule I hereto and issued by the corporations indicated therein. (3) The Pledgor has entered into an Option Agreement relating to the options listed on Part II of Schedule I (said agreement, as amended or modified from to time, being the "Option Agreement") and a Stock Award Agreement relating to the shares listed on Part I of Schedule I (said agreement, as amended or modified from to time, being the "Stock Award Agreement"). (4) Each of the Notes requires that the Pledgor shall grant the security interest contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce the Pledgee to make the loans under the Notes, the Pledgor hereby agrees with the Pledgee as follows: SECTION 1. Grant of Security. The Pledgor hereby assigns, transfers and pledges to the Pledgee, and hereby grants to the Pledgee a security interest in, all of the Pledgor's right, title and interest in, to and under the following, in each case, as to each type of property described below, whether now owned or hereafter acquired, wherever located and whether now or hereafter existing (the "Collateral"): (a) (i) the shares of stock set forth in Part I of Schedule I hereto and issued by the corporations indicated therein (collectively referred to herein as the "Initial Pledged Shares", and together with the shares referred to in clause (ii) below, the "Pledged Shares"), together with the certificates 2 representing such Initial Pledged Shares and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Initial Pledged Shares; (ii) all additional shares of stock of any issuer of any Initial Pledged Shares from time to time acquired by the Pledgor in any manner, other than additional shares of stock acquired by the Pledgor in open market purchases, together with the certificates representing such additional shares and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares; (b) (i) the option set forth in Part II of Schedule I hereto and issued by the corporation indicated therein (referred to herein as the "Initial Pledged Option", and together with the options referred to in clause (ii) below, the "Pledged Options"; the Pledged Shares and Pledged Options being referred to herein as the "Security Collateral"), together with all shares, dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Initial Pledged Option, including, without limitation, the shares issued upon exercise of such Pledged Options; (ii) all additional options of the issuer of the Initial Pledged Option from time to time acquired by the Pledgor in any manner and all shares, dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such options; (c) the Option Agreement and the Stock Award Agreement (collectively, the "Assigned Agreements"), including, without limitation, (i) all rights of the Pledgor under or pursuant to the Assigned Agreements, (ii) all rights of the Pledgor to receive proceeds of any insurance, indemnity, warranty or guaranty with respect to the Assigned Agreements, (iii) all claims of the Pledgor for damages arising out of or for breach of or default under the Assigned Agreements and (iv) all rights of the Pledgor to terminate the Assigned Agreements, to perform thereunder and to compel performance and otherwise exercise all remedies thereunder (all such Collateral being the "Agreement Collateral"); and (d) all proceeds of any and all of the foregoing Collateral (including, without limitation, (i) proceeds which constitute property of the types described in clauses (a) through (c) of this Section 1 and (ii) cash) and, to the extent not 3 otherwise included, all payments under insurance (whether or not the Pledgee is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. SECTION 2. Security for Obligations. This Agreement secures the payment of all obligations of the Pledgor now or hereafter existing under the Loan Documents (all such obligations of the Pledgor being the "Obligations"). Without limiting the generality of the foregoing, this Agreement secures the payment of all amounts that constitute part of the Obligations and would be owed by the Pledgor to the Pledgee under any of the Notes but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving the Pledgor. SECTION 3. Pledgor Remains Liable. Anything herein to the contrary notwithstanding, (a) the Pledgor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Pledgee of any of the rights hereunder shall not release the Pledgor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) the Pledgee shall have no obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall the Pledgee be obligated to perform any of the obligations or duties of the Pledgor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 4. Delivery of Collateral. All certificates or instruments representing or evidencing the Collateral are being delivered to and will be held by or on behalf of the Pledgee pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Pledgee. The Pledgee shall have the right, at any time in its discretion and without notice to the Pledgor, to transfer to or to register in the name of the Pledgee (as pledgee hereunder) or any of its nominees any or all of the Collateral. In addition, the Pledgee shall have the right at any time to exchange certificates or instruments representing or evidencing the Collateral for certificates or instruments of smaller or larger denominations. SECTION 5. Representations and Warranties. The Pledgor represents and warrants as follows: (a) The residence of the Pledgor is located at the address specified on the signature page of this Agreement. A fully executed original counterpart of each of the Assigned Agreements has been delivered to the Pledgee. Each party to the Assigned 4 Agreements other than the Pledgor has executed and delivered to the Pledgee a consent, substantially in the form of Exhibit A, to the assignment of the Agreement Collateral to the Pledgee pursuant to this Agreement. (b) The Pledgor is the legal and beneficial owner of the Collateral free and clear of any lien, security interest, option or other charge or encumbrance, except for the security interests created by this Agreement. No effective financing statement or other document similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of the Pledgee relating to this Agreement. (c) This Agreement has been duly executed and delivered by the Pledgor and is a valid and binding obligation of the Pledgor, enforceable against the Pledgor in accordance with its terms. (d) The execution and delivery by the Pledgor of this Agreement and the performance of its obligations thereunder are within the Pledgor's authority and capacity and do not contravene any law, regulation, order or contractual restriction binding on or affecting the Pledgor. SECTION 6. Further Assurances. (a) The Pledgor agrees that from time to time, at the expense of the Pledgee, the Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Pledgee may reasonably request, in order to perfect and protect any pledge, assignment or security interest granted or purported to be granted hereby or to enable the Pledgee to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, the Pledgor will: (i) deliver and pledge to the Pledgee promptly upon receipt thereof all instruments or certificates representing or evidencing any of the Collateral duly indorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to the Pledgee; and (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as the Pledgee may request, in order to perfect and preserve the pledge, assignment and security interest granted or purported to be granted hereby. (b) The Pledgor hereby authorizes the Pledgee to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral without the signature of the Pledgor where permitted by law. A photocopy or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. 5 (c) The Pledgor will furnish to the Pledgee from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Pledgee may reasonably request, all in reasonable detail. (d) The Pledgor will give the Pledgee not less than 30 days' prior written notice of any change in his residence from the residence specified in Section 5(a) hereof (or any subsequent location). SECTION 7. As to the Assigned Agreements. The Pledgor shall at its expense (a) perform and observe all the terms and provisions of the Assigned Agreements to be performed or observed by it, enforce the Assigned Agreements in accordance with their respective terms, and take all such action to such end as may be from time to time reasonably requested by the Pledgee, (b) furnish to the Pledgee such information and reports regarding the Collateral as the Pledgee may reasonably request and (c) upon request of the Pledgee make to any other party to the Assigned Agreements such demands and requests for information and reports or for action as the Pledgor is entitled to make thereunder. SECTION 8. Voting Rights; Dividends; Etc. (a) So long as no Event of Default shall have occurred and be continuing: (i) The Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Security Collateral of the Pledgor or any part thereof for any purpose not inconsistent with the terms of this Agreement or the other Loan Documents. (ii) Any and all (A) dividends and interest paid or payable including cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Security Collateral, (B) dividends and other distributions paid or payable in cash in respect of any Security Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, (C) cash paid, payable or otherwise distributed in respect of principal of or in exchange for, any Security Collateral, and 6 (D) cash dividends paid or payable in violation of the terms of the Loan Documents, shall be, and shall be forthwith delivered to the Pledgee to hold as, Security Collateral and shall, if received by the Pledgor, be received in trust for the benefit of the Pledgee, be segregated from the other property or funds of the Pledgor and be forthwith delivered to the Pledgee as Security Collateral in the same form as so received (with any necessary indorsement). (iii) The Pledgee shall (A) execute and deliver (or cause to be executed and delivered) to the Pledgor all such proxies and other instruments as the Pledgor may reasonably request for the purpose of enabling the Pledgor to exercise the voting and other rights that it is entitled to exercise pursuant to paragraph (i) above and (B) release to the Pledgor amounts of the Collateral as the Pledgor may reasonably request, but solely to the extent necessary to permit the Pledgor to exercise the rights set forth in the Employment Agreement and Stockholder Agreement (the "Rights Agreements"); provided that such exercise shall comply with the terms and provisions of the Rights Agreements and provided further that upon the exercise by the Pledgor of any such rights, all proceeds resulting from such exercise shall be, and shall be forthwith delivered to the Pledgee to hold as, Collateral and shall, if received by the Pledgor, be received in trust for the benefit of the Pledgee, be segregated from the other property or funds of the Pledgor and be forthwith delivered to the Pledgee as Collateral in the same form as so received (with any necessary indorsement). (iv) The Pledgee shall release to the Pledgor amounts of the Collateral as the Pledgor may reasonably request, but solely to the extent necessary to pay all taxes due and payable by the Pledgor upon the exercise of the options under the Option Agreement, the inclusion of any income of shares received under the Stock Award Agreement, and any gain recognized upon the sale or exchange of any collateral, or on any dividends or distributions previously received by the Pledgor and pledged to the Pledgee pursuant to paragraph (ii) above. (b) Upon the occurrence and during the continuance of any Event of Default all rights of the Pledgor to exercise or refrain from exercising the consensual rights that it would otherwise be entitled to exercise pursuant to Section 8(a)(i) shall, upon notice to the Pledgor by the Pledgee, cease, and all such rights shall thereupon become vested in the Pledgee, which shall thereupon have the sole right to exercise or refrain from exercising such consensual rights. SECTION 9. Transfers and Other Liens. (a) The Pledgor shall not (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any 7 option with respect to, any of the Collateral or (ii) create or permit to exist any lien, security interest, option or other charge or encumbrance upon or with respect to any of the Collateral, except for the security interest under this Agreement. (b) The Pledgor agrees that it shall pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of each issuer of any Pledged Shares or Pledged Options. SECTION 10. Pledgee Appointed Attorney-in-Fact. The Pledgor hereby irrevocably appoints the Pledgee the Pledgor's attorney-in-fact, with full authority in the place and stead of the Pledgor and in the name of the Pledgor or otherwise, from time to time in the Pledgee's discretion, to take any action and to execute any instrument that the Pledgee may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation: (a) to ask for, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral, (b) to receive, indorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (a) above, and (c) to file any claims or take any action or institute any proceedings that the Pledgee may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Pledgee with respect to any of the Collateral. SECTION 11. Pledgee May Perform. If the Pledgor fails to perform any agreement contained herein, the Pledgee may itself perform, or cause performance of, such agreement, and the expenses of the Pledgee incurred in connection therewith shall be payable by the Pledgor under Section 14. SECTION 12. The Pledgee's Duties. The powers conferred on the Pledgee hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Pledgee shall have no duty as to any Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Pledgee has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. The Pledgee shall be deemed to have exercised reasonable care in the custody and preservation of any 8 Collateral in its possession if such Collateral is accorded treatment substantially equal to that which the Pledgee accords its own property. SECTION 13. Remedies. If any Event of Default shall have occurred and be continuing: (a) The Pledgee may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the State of New York at that time (the "Code") (whether or not the Code applies to the affected Collateral), and also may (i) require the Pledgor to, and the Pledgor hereby agrees that it will at its expense and upon request of the Pledgee forthwith, assemble all or part of the Collateral as directed by the Pledgee and make it available to the Pledgee at a place to be designated by the Pledgee which is reasonably convenient to both parties and (ii) without notice except as specified below, sell or, to the extent permitted by applicable law, purchase the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Pledgee's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Pledgee may deem commercially reasonable. The Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to the Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Pledgee shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Pledgee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) Any cash held by the Pledgee as Collateral and all cash proceeds received by the Pledgee in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Pledgee, be held by the Pledgee as collateral for, and then or at any time thereafter be applied (after payment of any amounts payable to the Pledgee pursuant to Section 14) in whole or in part by the Pledgee against, all or any part of the Obligations in such order as the Pledgee shall elect. Any surplus of such cash or cash proceeds held by the Pledgee and remaining after payment in full of all the Obligations shall be paid over to the Pledgor or to whomsoever may be lawfully entitled to receive such surplus. (c) The Pledgee may exercise any and all rights and remedies of the Pledgor under or in connection with the Assigned Agreements or otherwise in respect of the Collateral, including, without limitation, any and all rights of the 9 Pledgor to demand or otherwise require payment of any amount under, or performance of any provision of, the Assigned Agreements. (d) Subject to Section 8, all payments received by the Pledgor under or in connection with the Assigned Agreements or otherwise in respect of the Collateral shall be received in trust for the benefit of the Pledgee, shall be segregated from other funds of the Pledgor and shall be forthwith paid over to the Pledgee in the same form as so received (with any necessary indorsement). In exercising the remedies provided for herein, the Pledgee shall comply with all provisions of the Assigned Agreements and with applicable law, including without limitation the securities laws. SECTION 14. Expenses. The Pledgor will upon demand pay to the Pledgee the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Pledgee incurs in connection with the exercise or enforcement of any of its rights hereunder. SECTION 15. Amendments; Etc. No amendment or waiver of any provision of this Agreement, and no consent to any departure by the Pledgor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Pledgee, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 16. Addresses for Notices. All notices and other communications provided for hereunder shall be in writing (including telecopier, telegraphic, telex or cable communication) and mailed, telecopied, telegraphed, telexed, cabled or delivered to it, if to the Pledgor, at its address specified in the recital of parties to this Agreement, and if to the Pledgee, at its address specified in the Notes, or, as to either party, at such other address as shall be designated by such party in a written notice to the other party. All such notices and other communications shall, when mailed, telecopied, telegraphed, telexed or cabled, be effective when deposited in the mails, telecopied, delivered to the telegraph company, confirmed by telex answerback or delivered to the cable company, respectively. SECTION 17. Continuing Security Interest. This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the later of (i) the payment in full of the Obligations and all other amounts payable under the Loan Documents and (ii) the Termination Date, (b) be binding upon the Pledgor, its successors and assigns and (c) inure to the benefit of, and be enforceable by, the Pledgee and its successors, transferees and assigns. 10 SECTION 18. Release and Termination. The security interest granted hereby shall terminate and all rights to the Collateral shall revert to the Pledgor upon the later of (a) the payment in full of the Obligations and all other amounts payable under the Loan Documents and (b) the Termination Date. Upon such termination, the Pledgee will, at its expense, execute and deliver to the Pledgor such documents as the Pledgor shall reasonably request to evidence such termination. SECTION 19. Governing Law; Terms. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. Unless otherwise defined herein, terms used in Article 8 or Article 9 of the Code are used herein as therein defined. IN WITNESS WHEREOF, the Pledgor has duly executed and delivered this Agreement, and the Pledgee has caused this Agreement to be duly executed and delivered by its officer thereunto duly authorized, as of the date first above written. __________________________ JAMES L. DONALD, as Pledgor Address: 26 Carriage Place Edison, New Jersey 08820 PATHMARK STORES, INC., as Pledgee By_________________________ Title: Schedule I PART I PLEDGED SHARES
Stock Number Percentage of Class of Certificate Par of Outstanding Debtor Issuer Stock No(s). Value Shares Shares - ------ ------ -------- ----------- ----- ------ ------------- James L. Donald SMG-II Holdings Common 71 0.01 19,851 2% Corporation James L. Donald SMG-II Holdings Preferred 1 $200 8,520 2% Corporation
PART II PLEDGED OPTIONS
Class of Percentage of Pledgor Issuer Stock Number of Shares Outstanding Shares - ------- ------ -------- ---------------- ------------------ James L. Donald SMG-II Holdings Common 100,000 6.5% Corporation
EXHIBIT A TO THE SECURITY AGREEMENT FORM OF CONSENT AND AGREEMENT The undersigned hereby acknowledges notice of, and consents to the terms and provisions of, the Pledge, Assignment and Security Agreement, dated as of November 8, 1996 (the "Security Agreement"; terms defined therein being used herein as therein defined) from James L. Donald (the "Pledgor") to Pathmark Stores, Inc. (the "Pledgee"), and hereby agrees with the Pledgee that:. (a) Upon notice from the Pledgee, the undersigned will make all payments and distributions to be made by it under or in connection with the Assigned Agreements between the undersigned and the Pledgor in accordance with the instructions of the Pledgee. (b) All payments and other distributions referred to in paragraph (a) above shall be made by the undersigned irrespective of, and without deduction for, any counterclaim, defense, recoupment or set-off and shall be final, and the undersigned will not seek to recover from the Pledgee for any reason any such payment or other distribution once made. (c) The Pledgee shall be entitled to exercise any and all rights and remedies of the Pledgor under the Assigned Agreements in accordance with the terms of the Security Agreement, and the undersigned shall comply in all respects with such exercise. (d) The undersigned will not, without the prior written consent of the Pledgee, (i) cancel or terminate the Assigned Agreements or consent to or accept any cancellation or termination thereof, or (ii) amend or otherwise modify the Assigned Agreements This Consent and Agreement shall be binding upon the undersigned and its successors and assigns, and shall inure, together with the rights and remedies of the Pledgee hereunder, to the benefit of the Pledgee and its successors, transferees and assigns. This Consent and Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. 2 IN WITNESS WHEREOF, the undersigned has duly executed this Consent and Agreement as of the date set opposite its name below. Dated: November 8, 1996 SMG-II HOLDINGS CORPORATION By___________________________ Title: November 8, 1996 SMG-II HOLDINGS CORPORATION 301 Blair Road Woodbridge, New Jersey 07095 Notification and Confirmation of Registration of Pledge Dear Sir or Madam: I, James L. Donald, as pledgor (the "Pledgor") have assigned and pledged to Pathmark Stores, Inc. (the "Lender") pursuant to the Security Agreement, dated November 8, 1996 (the "Security Agreement") made by me, as the Pledgor, to the Lender all of my right, title and interest in and to, among other things: (1) all my present and future interests in an option (the "Option") to buy shares of common stock of SMG-II Holdings Corporation, a Delaware corporation ("Holdings") and (2) the Option Agreement dated as of October 8, 1996 (as the same may be amended, supplemented or otherwise modified from time to time, the "Option Agreement"), between the Pledgor and Holdings. 1. With the consent of the Lender, I hereby notify Holdings of the assignment and pledge pursuant to the Security Agreement and instruct Holdings to register such assignment and pledge by appropriate notations in the books and records of Holdings, so that anyone examining such books and records would be notified of such assignment and pledge. 2. Holdings hereby confirms that the assignment and pledge of the Option of the Pledgor to the Lender was registered upon the books and records of Holdings maintained for such purposes on behalf of the undersigned on November 8, 1996 and certifies that attached hereto is a true and correct excerpt from the books of Holdings. 3. Holdings hereby represents that as of the date hereof, such books and records reflect no lien, restriction or adverse claim (other than those created under the Security Agreement) with respect to the Option and that it has no knowledge of any such lien, restriction or adverse claim (other than those created under the Security Agreement). 2 4. Holdings hereby confirms that the Pledgor is the registered owner of the type and percentage of the Option described below: Pledgor Type of Interest Percentage Interest - ------- ---------------- ------------------- James L. Donald Option to buy 100,000 shares 6.5% of Holdings common stock The address and taxpayer identification number of the Pledgor and the Lender are set forth below. Registered Owner Name: JAMES L. DONALD Address: 26 Carriage Place Edison, New Jersey 08820 Taxpayer I.D.: ###-##-#### Lender Name: PATHMARK STORES, INC. Address: 301 Blair Road Woodbridge, New Jersey 07095 Taxpayer I.D.: 22-2879612 This letter agreement may be executed in any number of counterparts and by any combination of parties hereto in separate counterparts, each of which counterparts shall be an original and all of which taken together shall constitute one and the same letter agreement. Delivery of an executed counterpart of a signature page of this letter agreement by telecopier shall be effective as the delivery of a manually executed counterpart of this letter agreement. 3 This letter agreement shall be governed by, and construed in accordance with, the laws of the State of New York. Very truly yours, ____________________________ JAMES L. DONALD PATHMARK STORES, INC., as Lender By__________________________ Name: Title: Acknowledged, Agreed and Confirmed to, and for the benefit of, the Lender and the Pledgor, as of the date first above written: SMG-II HOLDINGS CORPORATION By___________________________ Name: Title: Exhibit E ESCROW AGREEMENT ESCROW AGREEMENT ESCROW AGREEMENT (this "Agreement") is entered into this 7th day of November, 1996 among PATHMARK STORES, INC., a Delaware corporation, as Lender (the "Lender") under the Notes referred to below, JAMES L. DONALD, as Borrower (the "Borrower") under such Notes, and PNC Bank, N.A., as Escrow Agent hereunder. PRELIMINARY STATEMENTS (1) On the date hereof, the Borrower has made various Notes to the Lender numbered A1-A16 (each such Note, as it may hereafter be amended or modified, being a "Note" and, collectively, the "Notes"; terms defined therein and not otherwise defined herein being used herein as therein defined). (2) Simultaneously with the execution and delivery of the Notes, the Borrower has entered into a Pledge Agreement (the "Pledge Agreement") in favor of the Lender. The Borrower has entered into an employment agreement (the "Employment Agreement") with the Lender. (3) Pursuant to the Employment Agreement, the Lender may be required under certain circumstances to cancel and return to the Borrower marked "Paid in Full" a Note or Notes. To facilitate such cancellation and return, the Lender has delivered to the Escrow Agent each original Note executed by the Borrower for the cancellation and return to the Borrower, pursuant to the terms of the Employment Agreement and this Agreement, each such Note (all such Notes being, collectively, the "Escrowed Documents"). NOW, THEREFORE, in consideration of the premises, the parties hereto hereby agree as follows: SECTION 1. Appointment of Escrow Agent. Effective as of the date above, the Lender and the Borrower hereby irrevocably appoint PNC Bank, N.A. as escrow agent (in such capacity, the "Escrow Agent") to hold and release the Escrowed Documents on the terms and conditions set forth below. SECTION 2. Delivery of Escrowed Documents. The Escrow Agent hereby accepts and confirms delivery from the Lender of the Escrowed Documents. SECTION 3. Release of Escrowed Documents. (a) The Lender hereby agrees to, on each interest payment date, commencing on January 8, 1997 and quarterly thereafter or such later date on which the Lender shall have received payment in full of all interest due and payable under or pursuant to the Notes with respect to such interest payment date, upon receipt in full of all such interest accrued and in accordance with the terms of the Employment Agreement, request that the Escrow Agent release such Note or Notes applicable to such period to the Borrower marked "Paid in Full" and, as necessary, to report to the Escrow Agent that such 2 interest has been paid and that the Borrower remains employed by the Lender, or the term under which his employment terminated. (b) On each interest payment date, commencing on January 8, 1997, and quarterly thereafter or such later date as the Lender shall specify to the Escrow Agent pursuant to the next succeeding clause, upon receipt by the Escrow Agent of written notice from the Lender confirming receipt in full of all interest due and payable under or pursuant to the Notes, and requesting that the Escrow Agent release any Note or Notes, the Escrow Agent shall release from escrow and date (the date of such release) the Note or Notes applicable to such release. The Escrow Agent shall deliver by first class mail to the address indicated herein each such released Escrowed Document to the Borrower marked "Paid in Full". (c) Upon receipt by the Escrow Agent of written notice from the Lender that (i) the Borrower's employment with the Lender has been terminated without Cause or the Borrower has resigned his employment with the Lender for Good Reason or that there has occurred a Change in Control and (ii) the Borrower has paid in full all interest due and payable pursuant to the Notes, the Escrow Agent shall promptly return, marked "Paid in Full", all Notes not previously delivered to the Borrower marked "Paid in Full". SECTION 4. Concerning the Escrow Agent. To induce the Escrow Agent to act hereunder, it is further agreed by the Lender and the Borrower that: (a) The Escrow Agent shall not be liable for any error of judgment or for any action taken or omitted by it in good faith, or for any mistake of fact or law, or for anything which it may do or refrain from doing in connection herewith except its own gross negligence or willful misconduct. (b) The Lender and the Borrower agree to jointly and severally indemnify the Escrow Agent and hold it harmless from and against any loss, liability, expenses (including, without limitation, reasonable attorneys' fees and expenses), claim or demand arising out of or in connection with the performance of its obligations in accordance with the provisions of this Escrow Agreement, except for the gross negligence or willful misconduct of the Escrow Agent. These indemnities shall survive the resignation of the Escrow Agent or the termination of this Escrow Agreement. (c) The fee of the Escrow Agent for its services hereunder shall be paid by the Lender in accordance with the standard schedule of charges in effect when services are rendered. Such schedule will be furnished upon request. (d) This Escrow Agreement expressly sets forth all the duties of the Escrow Agent with respect to any and all matters pertinent hereto. No implied duties or obligations shall be read into this Agreement against the Escrow Agent. 3 (e) The Escrow Agent shall be entitled to rely upon any order, judgment, certification, demand, notice, instrument or other writing delivered to it hereunder without being required to determine the authenticity or the correctness of any fact stated therein or the propriety or validity or the services thereof. The Escrow Agent shall act in reliance upon any instrument or signature believed by it to be genuine and may assume that any person purporting to give notice, receipt or advice, make any statement or execute any document in connection with the provisions hereof has been duly authorized to do so. (f) The Escrow Agent may act pursuant to the advice of its counsel with respect to any matter relating to this Escrow Agreement and shall not be liable for any action taken or omitted in good faith in accordance with such advice. (g) The Escrow Agent may at any time resign as escrow agent for any reason by giving not less than 30 days' notice to the parties hereto and by delivering the Escrowed Documents to any successor Escrow Agent agreed to in writing and delivered to the Escrow Agent by the Borrower and the Lender pursuant to the Employment Agreement, whereupon the resigning Escrow Agent shall be discharged of and from any and all further obligations arising in connection with this Escrow Agreement. If after 30 days no successor has been appointed, the Escrow Agent shall deliver the Escrowed Documents to the Lender. (h) In the event that the Escrow Agent receives written notice of any disagreement among any parties to the Loan Documents resulting in adverse claims or demands being made in connection with the Escrowed Documents, or in the event that the Escrow Agent in good faith is in doubt as to what action it should take hereunder, the Escrow Agent shall be entitled to retain the Escrowed Documents until the Escrow Agent shall have received a final non-appealable order of a court of competent jurisdiction directing delivery or other disposition of the Escrowed Documents. Any court order referred to above shall be accompanied by a legal opinion by counsel for the presenting party addressed to and satisfactory to the Escrow Agent to the effect that said court order is final and non-appealable. The Escrow Agent shall act on such court order and legal opinion without further question. (i) The parties hereto hereby irrevocably submit to the jurisdiction of any New York State or federal court sitting in New York City in any action or proceeding arising out of or relating to this Escrow Agreement, and irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in such New York State or federal court. (j) This Escrow Agreement shall be binding upon and inure solely to the benefit of the parties hereto and their respective successors, assigns, and representatives, and shall not inure to the benefit of any third party. Except as otherwise specifically provided herein, no party may assign any of 4 its rights or obligations under this Escrow Agreement without the written consent of the other parties. SECTION 5. Notices. All notices and other communications provided for hereunder shall be in writing (including facsimile communication) by either the Borrower or the Corporate Secretary of the Lender and mailed, telecopied, telegraphed, telexed, cabled or delivered, as follows: If to the Lender: Address: 301 Blair Road Woodbridge, New Jersey 07095 Attention: Corporate Secretary Telecopy No.: (908) 499-3460 Telephone No.: (908) 499-3930 If to the Borrower: Address: 301 Blair Road Woodbridge, New Jersey 07095 Telecopy No.: (908) 499-3100 Telephone No.: (908) 499-3535 If to the Escrow Agent: Attention: Corporate Trust Department Address: Metro Top Building P.O. Box 600 Edison, New Jersey 08818 Telecopy No.: (908) 205-4525 Telephone No.: (908) 205-4542 or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when mailed, telecopied, telegraphed, telexed or cabled, be effective when deposited in the mails, telecopied, delivered to the telegraph company, confirmed by telex answerback or delivered to the cable company, respectively, except that notices and communications to the Escrow Agent shall not be effective until received by the Escrow Agent. SECTION 6. Binding Effect; Governing Law. This Agreement shall become effective, as of the date first above written, when it shall have been executed by each of the parties hereto and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, and shall not inure to the benefit of any third party. No party hereto may assign any of its rights or obligations under this Escrow Agreement without the written consent of the other parties. This 5 Escrow Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. SECTION 7. Amendments, Etc. No amendment or waiver of any provision of this Escrow Agreement shall in any event be effective unless the same shall be in writing and signed by all parties hereto. SECTION 8. Termination. The termination date of this Escrow Agreement will be that same date indicated in Section 1.01 of the Notes. SECTION 9. Execution in Counterparts. (a) This Escrow Agreement may be executed in any number of counterparts, and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. (b) One or more counterparts of this Escrow Agreement may be delivered via telecopier, with the intention that they shall have the same effect as an original counterpart hereof. 6 IN WITNESS WHEREOF, the parties hereto have executed or caused this Escrow Agreement to be executed by their respective officers or other representatives hereunto duly authorized, as of the date first above written. PATHMARK STORES, INC. By: _______________________________ Name: Title: PNC BANK, N.A. By: _______________________________ Name: Title: _______________________________ JAMES L. DONALD EX-12.1 3 EX-12.1 EXHIBIT 12.1 SUPERMARKETS GENERAL HOLDINGS CORPORATION STATEMENTS REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in thousands except ratio)
FISCAL YEARS ----------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ----------- Income (loss) from continuing operations before taxes............................................. $ (36,870) $ 48,944 $ 16,121 $ (36,819) $ (608,614) ---------- ---------- ---------- ---------- ----------- Fixed charges: Interest expense.................................. 164,118 170,969 170,848 190,110 197,773 Interest portion of rental expense(1)............. 15,832 15,861 16,563 15,194 12,630 ---------- ---------- ---------- ---------- ----------- Total fixed charges............................. 179,950 186,830 187,411 205,304 210,403 ---------- ---------- ---------- ---------- ----------- Adjusted income (loss) before fixed charges......... $ 143,080 $ 235,774 $ 203,532 $ 168,845 $ (398,211) ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- Ratio of earnings to fixed charges(2)............... -- 1.26x 1.09x -- -- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- Deficiency in earnings available to cover fixed charges........................................... $ 36,870 $ -- $ -- $ 36,819 $ 608,614 ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- -----------
- ------------------------ (1) Represents the portion of rentals deemed representative of the interest included therein. (2) For Fiscal 1995, the inclusion of preferred stock dividend requirements results in a ratio of earnings to fixed charges and preferred stocks dividends of 1.09x. For Fiscal 1994, the inclusion of preferred stock dividend requirements results in a deficiency in earnings available to cover fixed charges and preferred stock dividends of approximately $7.0 million. EX-22.1 4 EX-22.1 EXHIBIT 22.1 SUPERMARKETS GENERAL HOLDINGS CORPORATION LIST OF SUBSIDIARIES
STATE OF NAME INCORPORATION - ----- ------------- AAL Realty Corp............................................. New York Bridge Stuart, Inc.......................................... New York Bucks Stuart, Inc........................................... Pennsylvania Chefmark, Inc............................................... Delaware Eatontown Stuart, Inc....................................... New Jersey GAW Properties Corp......................................... New Jersey Jersey Stuart, Inc.......................................... New Jersey Madison Stuart Corporation.................................. New Jersey Pathmark Risk Management Corporation........................ New Jersey Pathmark Stores, Inc........................................ Delaware Pauls Trucking Corp......................................... New Jersey Pennsylvania Stuart, Inc.................................... Pennsylvania Plainbridge, Inc............................................ Delaware PTK Holdings, Inc........................................... Delaware
EX-24.A 5 EX-24.A EXHIBIT 24A SUPERMARKETS GENERAL HOLDINGS CORPORATION POWER OF ATTORNEY The undersigned, a director of Pathmark Stores, Inc. (the "Company"), a Delaware corporation, which intends to file with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934 (the "'34 Act"), as amended, each year an annual report on Form 10-K, or such other form appropriate for the purpose, pursuant to Section 13 or 15(d) of the '34 Act, together with possible amendments thereto, constitutes and appoints JOSEPH W. ADELHARDT and MARC A. STRASSLER, and each of them, severally, as true and lawful attorney or attorneys, with full power of substitution and resubstitution, for him and in his name, place and stead, to sign in any and all capacities and file or cause to be filed said Annual Report on Form 10-K, and any and all amendments thereto, and all instruments necessary or incidental in connection therewith, and hereby grants to the said attorneys, and each of them, severally, full power and authority to do and perform in the name and on behalf of all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 18th day of April, 1997. /s/ Matthias Bowman ------------------------ MATTHIAS BOWMAN EX-24.B 6 EX-24.B EXHIBIT 24B SUPERMARKETS GENERAL HOLDINGS CORPORATION POWER OF ATTORNEY The undersigned, a director of Pathmark Stores, Inc. (the "Company"), a Delaware corporation, which intends to file with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934 (the "'34 Act"), as amended, each year an annual report on Form 10-K, or such other form appropriate for the purpose, pursuant to Section 13 or 15(d) of the '34 Act, together with possible amendments thereto, constitutes and appoints JOSEPH W. ADELHARDT and MARC A. STRASSLER, and each of them, severally, as true and lawful attorney or attorneys, with full power of substitution and resubstitution, for him and in his name, place and stead, to sign in any and all capacities and file or cause to be filed said Annual Report on Form 10-K, and any and all amendments thereto, and all instruments necessary or incidental in connection therewith, and hereby grants to the said attorneys, and each of them, severally, full power and authority to do and perform in the name and on behalf of all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 18th day of April, 1997 /s/ Robert G. Miller ------------------------- ROBERT G. MILLER EX-27 7 EX-27 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Supermarkets General Holdings Corporation's Consolidated Statement of Operations for the 52 weeks ended February 1, 1997 and Consolidated Balance Sheet as of February 1, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR FEB-01-1997 FEB-01-1997 10,967 0 14,070 (1,271) 217,440 298,157 987,548 (382,593) 1,016,585 473,926 1,213,081 0 105,372 10 (1,258,165) 1,016,585 3,710,990 3,710,990 2,619,329 2,619,329 0 100 (164,118) (36,870) 17,723 (19,147) 0 (997) 0 (20,144) 0.0 0.0
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