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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
JANUARY 28, 1995 0-16404
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SUPERMARKETS GENERAL HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3408704
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 BLAIR ROAD, P. O. BOX 5301 07095-0915
WOODBRIDGE, NJ (Zip Code)
(Address of principal executive office)
908-499-3000
(Registrant's telephone number, including area code)
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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)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of April 1, 1995 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
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<PAGE>
PART I
ITEM 1. BUSINESS*
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
recognized a loss of $228.0 million on the sale of the Purity Operations.
Included in the loss was a write-off of approximately $214.0 million of goodwill
related to the Purity Operations. The Company retains a 10% common equity
interest in Purity Supreme and a new issue of Purity Supreme exchangeable
preferred stock with an aggregate stated value of approximately $18.0 million.
Such preferred stock has a redemption price, including unpaid dividends, of
$14.5 million at January 28, 1995. These retained investments in Purity Supreme
are carried on the Company's books at zero value. Pathmark is contingently
liable for certain obligations of the Purity Operations under certain
instruments, primarily 60 leases for real property, in the event of default
thereunder by the Purity Operations. Prior to the sale of the Purity Operations,
three properties of Purity Supreme were transferred to Pathmark. See
"Properties".
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 of Rickel. The Company used approximately $66.6 million before
January 28, 1995 and $4.7 million after January 28, 1995 of its net proceeds to
pay down the PTK Exchangeable Guaranteed Debentures due 2003 (the "PTK DIB's"),
including accrued interest and debt premium.
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 Holdings, Inc. ("PTK"),
a newly formed, wholly owned subsidiary of the Company. The Recapitalization
reduced Pathmark's interest expense and has allowed Pathmark to devote its
capital to growing its core supermarket and drug store business.
PTK was incorporated in the State of Delaware in Fiscal 1993 and owns 100%
of the capital stock of Pathmark and also owns 100% of the capital stock of
Plainbridge, Inc., a newly formed Delaware corporation ("Plainbridge"). Pathmark
distributed the capital stock of Plainbridge to PTK in the Plainbridge Spin-Off
(as defined below).
In connection with the Recapitalization, Pathmark contributed its Rickel
home centers segment, the warehouse, distribution and transportation operations
and the inventory therein that service the
- ------------
* Except as otherwise indicated, information contained in this Item is given as
of January 28, 1995.
1
<PAGE>
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 provides for the continuing supply of
merchandise to the Pathmark supermarkets and drug stores and for the provision
of warehousing, distribution and logistical services relating to the supply of
such merchandise. Pursuant to such agreement, Pathmark directs the purchase of
such merchandise and negotiates the terms and conditions of its sale directly
with the applicable vendors. For a further description of the terms of the
Logistical Services Agreement see "--Logistical Services Agreement".
Current Borrowings. (a) In 1993 Pathmark borrowed $400.0 million from banks
under a term loan facility (the "Term Loan") and $50 million under a $175.0
million working capital facility (the "Working Capital Facility", and, together
with the Term Loan, the "Bank Credit Agreement"). Borrowings under the Working
Capital Facility were $33.5 million at April 24, 1995.
(b) In 1993 Pathmark issued $440.0 million aggregate principal amount of
9 5/8% Senior Subordinated Notes due 2003 (the "Senior Subordinated Notes").
(c) Pathmark issued $198.5 million of its 11 5/8% Subordinated Notes due
2002 (the "Subordinated Notes") for up to the $200.0 million aggregate
principal amount outstanding of Holdings' 11 5/8% Subordinated Notes due
2002 (the "Holdings Subordinated Notes"), in connection with an exchange
offer (the "11 5/8% Exchange Offer") in October 1993. During 1994, Pathmark
issued an additional $0.5 million of Subordinated Notes in exchange for $0.5
million of Holdings Subordinated Notes. Approximately $1.0 million aggregate
principal amount of Holdings Subordinated Notes remain outstanding at
January 28, 1995. An equivalent amount of subordinated Intercompany Notes
with terms corresponding to the terms of the Holdings Subordinated Notes
also remain outstanding.
(d) In 1993, Pathmark also issued $95.8 million aggregate principal
amount of its 12 5/8% Subordinated Debentures due 2002 (the "Subordinated
Debentures") in connection with an exchange (the "12 5/8% Exchange Offer")
for $95.8 million aggregate principal amount of the $415.0 million aggregate
principal amount outstanding of Holdings' 12 5/8% Subordinated Debentures
due 2002 (the "Holdings Subordinated Debentures") held by persons other than
certain affiliates of The Equitable Life Assurance Society of the United
States (the "Equitable Affiliates"). Holdings also purchased $4.2 million
aggregate principal amount of such Debentures for cash at a price of
112.125% of the aggregate principal amount thereof, together with accrued
interest to the date of purchase (the "Tender Offer", and, together with the
12 5/8% Exchange Offer, the "Tender and Exchange Offer"). Holdings solicited
consents from all holders of the Holdings Subordinated Debentures to certain
proposed amendments to delete certain restrictions in the indenture under
which the Holdings Subordinated Debentures were issued (the "Holdings
Subordinated Debenture Indenture") and paid related consent fees. Holders of
Holdings Subordinated Debentures (other than the Equitable Affiliates)
tendered $95.8 million aggregate principal amount of Holdings Subordinated
Debentures for Subordinated Debentures pursuant to the Tender and Exchange
Offer, and holders representing over 99% of the aggregate outstanding
principle amount of the Holdings Subordinated Debentures consented to the
proposed amendments. In addition, as part of the Recapitalization, Holdings
also purchased for cash $185.0 million aggregate principal amount of the
Holdings Subordinated Debentures from the Equitable Affiliates at the same
price offered in the Tender Offer and sold PTK's DIBs with an issue price of
$130.0 million to the Equitable Affiliates in exchange for the remaining
$130.0 million of Holdings Subordinated Debentures held by the Equitable
Affiliates as described below.
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(e) In 1993, Pathmark issued in (the "Deferred Coupon Notes Offering",
and, together with the Senior Subordinated Notes Offering, the "Debt
Offerings") $225.25 million aggregate principal amount at maturity of its
Junior Subordinated Deferred Coupon Notes due 2003 (the "Deferred Coupon
Notes") at an issue price of $532.74 per $1,000 principal amount at
maturity.
(f) In 1993, PTK issued $130.0 million aggregate principal amount of PTK
DIBs to Holdings that Holdings subsequently sold to the Equitable Affiliates
in a private placement (the "Private Placement") in exchange for $130.0
million aggregate principal amount of the Holdings Subordinated Debentures
held by the Equitable Affiliates. Such Holdings Subordinated Debentures were
cancelled and the related intercompany indebtedness of Pathmark to Holdings
(the "Intercompany Notes") was forgiven by Holdings resulting in a $130.0
million capital contribution to Pathmark.
BUSINESS OF THE COMPANY
The Company's primary business activity is the management of its interests
in Pathmark, Plainbridge 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 and Plainbridge.
The primary business activity of Plainbridge is to operate the warehouse,
distribution and transportation operations that service the Pathmark
supermarkets and drug stores. Chefmark's primary business is to supply Pathmark
with deli food preparation services and merchandise from the banana ripening
facility.
BUSINESS OF PATHMARK
Pathmark is the leading supermarket retailer, based on sales volume,
operating under a single trade name in the northeast United States and the
thirteenth largest in the United States. At January 28, 1995, Pathmark operated
143 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. At January 28, 1995, Pathmark also
operated 30 freestanding conventional drug stores, primarily in the New York
City metropolitan area, six "deep discount" drug stores in Connecticut and 136
pharmacies in its supermarkets, making it one of the leading drug store
retailers, based on sales volume, in the northeast United States.
The following table presents the market area, number of stores and selling
and total square footage for Pathmark's supermarkets and drug stores as of
January 28, 1995.
<TABLE>
<CAPTION>
SELLING
NUMBER OF SQ. FT. TOTAL SQ. FT.
TYPE OF STORE MARKET AREA STORES (000'S) (000'S)
- ------------------------------------------------ ------------ --------- ------- -------------
<S> <C> <C> <C> <C>
Supermarkets and Super Centers.................. NJ, NY, PA, 143 5,245 7,201
CT, DE
Drug Stores..................................... NY, NJ, CT 36 398 491
</TABLE>
BUSINESS STRATEGY
Pathmark's business strategy is to increase profitability and market
penetration in its existing markets (i) by providing superior value to its
customers through its marketing and merchandising programs, (ii) through store
openings, enlargements and renovations and (iii) through increased operating
efficiencies. In implementing this strategy, Pathmark has used and will continue
to use a large-store format to increase operating efficiencies and to expand its
offering of higher margin merchandise and services, most notably, perishable
products.
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Marketing and Merchandising
. Super Center Format. The average Pathmark Super Center is approximately 50%
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 expects that its new stores opened during the current and next two
fiscal years will average approximately 62,000 square feet.
. Pathmark 2000. Pathmark 2000 is a new, larger Super Center format designed to
provide Pathmark customers with a substantially greater selection of
perishable products, particularly produce. 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. Implementation of elements of
this format in certain stores has significantly enhanced sales and operating
margins in these stores. A majority of Pathmark's new supermarkets and
supermarket enlargements completed in Fiscal 1994 employed the Pathmark 2000
concept, and Pathmark expects that virtually all new stores and enlargements
thereafter will employ the same concept. At January 28, 1995, 29 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, primarily in print media. Merchandising flexibility and
effectiveness is enhanced through the increased utilization of a category
management approach.
. Pathmark Label. Pathmark believes that it is one of the leading supermarket
retailers of private label merchandise in the United States offering for sale
over 3,300 items through its private label program. Pathmark's private label
brands are called Pathmark, No Frills and its newest brand, Pathmark
Preferred.
. Pharmacy. Pathmark, which is the leading filler of prescriptions in the New
York metropolitan area, provides full pharmacy services in virtually all of
its Super Center stores and in all of its drug 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 1994, Pathmark opened
four new Pathmark 2000s, closed three smaller stores, converted four
supermarkets to "deep discount" drug stores and completed 25 major renovations
and enlargments. During Fiscal 1995, Pathmark plans to open an aggregate of up
to six new Pathmark 2000s, five of which will replace smaller Pathmark stores,
and to complete up to an aggregate of 32 major renovations and enlargements.
Pathmark recognizes the importance of keeping its stores looking fresh and
up-to-date; thus, each store typically receives a major renovation or
enlargement every five years. At the end of Fiscal 1994, Pathmark derived
approximately 80% of its supermarket sales from stores that were opened or
enlarged or underwent major renovations during the last five years.
. Core Market Focus. Pathmark has identified approximately 85 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.
4
<PAGE>
Operating Efficiencies
. Technology. Pathmark has made a significant and continuing investment in
information technology and believes it is a leader in the supermarket industry
in this area. All Pathmark supermarket checkout terminals have
third-generation "state of the art" 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.
. "Outsourcing" Agreement. In Fiscal 1991, Pathmark entered into a long-term
facilities management and systems integration agreement with a subsidiary of
IBM. This contract offers significant advantages to Pathmark in controlling
computer hardware and software costs and providing ongoing access to "state of
the art" information technology.
. Geographic Concentration. All but one of the Pathmark supermarkets and drug
stores are located within 100 miles of the Pathmark headquarters and principal
warehousing facilities that service them. This allows for more efficient
management supervision, increased speed of delivery and reduced transportation
costs. All of the stores which Pathmark expects to open in the current fiscal
year will be within this 100 mile radius.
PATHMARK SUPERMARKETS
Pathmark operated 143 supermarkets at January 28, 1995. Supermarkets
accounted for approximately 96% of Pathmark's sales for Fiscal 1994. The
following table presents selected data respecting supermarket sales and stores
for the last five fiscal years.
<TABLE>
<CAPTION>
FISCAL YEARS
----------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Supermarket sales................................. $4,006 $4,057 $4,143 $4,137 $4,237
Average sales per supermarket..................... 28.7 28.7 29.0 28.6 29.5
Number of Supermarkets:
Major Renovations(a)............................ 14 12 8 13 11
Enlargements(b)................................. 11 5 10 15 5
Opened(c)....................................... 6 4 3 1 2
Closed(d)....................................... 6 7 3 1 --
Type of Supermarket(e):
Super Center.................................... 108 126 137 139 135
Pathmark 2000................................... 29 10 2 -- --
Conventional Supermarket........................ 6 7 7 7 11
Total Stores Open at Year End............... 143 143 146 146 146
</TABLE>
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(a) Major renovations involve an investment of $350,000 or more and average
nearly $1.8 million per store.
(b) Enlargements involve the addition of selling space and average an investment
in excess of $2.5 million.
(c) Reflects the Company's decision in the fourth quarter of Fiscal 1994 to
reconsider its Fiscal 1993 decision to close or dispose of two stores.
(d) Includes three supermarkets converted to "deep discount" drug stores during
Fiscal 1994.
(e) Includes two stores not wholly owned, one of which opened in Fiscal 1990.
The sales figures for these stores are not included above.
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<PAGE>
By industry standards, Pathmark stores are large and productive, averaging
approximately 50,400 square feet in size and generating high average sales
volume of approximately $28.7 million per store ($781 per selling square foot)
for stores open for all of Fiscal 1994. Pathmark's 143 supermarkets at January
28, 1995 ranged from 26,000 to 66,000 square feet in size and included 130
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.
Pathmark pioneered the development of the large "superstore" in the
northeast United States, opening the first "Pathmark Super Center" in 1977, and
currently operates 137 such stores, including 29 "Pathmark 2000" stores. Super
Centers represented 96% of Pathmark supermarket sales for Fiscal 1994. The
majority of Super Centers were created through the enlargement or renovation of
existing stores. Super Centers average approximately 50,000 square feet in size.
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, pharmacy, additional food selections (including expanded perishables
departments, cheese shops, bakeries, fresh fish-on-ice and service delicatessen
departments), videotape rentals, book departments and expanded health and beauty
care departments. All Super Centers have EFT and credit transaction capability
at their checkout terminals and 128 supermarkets and drugstores also featured
in-store automated teller machines.
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. 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. Implementation of elements of
this format in certain stores has significantly enhanced sales and operating
margins in these stores. A majority of Pathmark's new supermarkets and
supermarket enlargements completed in Fiscal 1994 employed the Pathmark 2000
concept and Pathmark expects that virtually all new stores and enlargements will
employ the same concept.
Pathmark was the leader in its market areas in extending the operation of
supermarkets to 24 hours a day. Currently, almost all Pathmark supermarkets are
open seven days a week, 24 hours a day. Pathmark believes that these hours of
operation increase both customer convenience and operating efficiency.
PATHMARK DRUG STORES
Pathmark also operated 30 freestanding conventional drug stores primarily in
the New York City metropolitan area and six "deep-discount" drug stores in
Connecticut at January 28, 1995. These stores, which accounted for approximately
4% of Pathmark's sales for Fiscal 1994, average 13,600 square feet in size and
offer the full variety of products customarily offered by drug stores. In Fiscal
1994, Pathmark pharmacies, in both supermarkets and drug stores, filled
approximately ten million prescriptions, making Pathmark one of the leading
drugstore retailers, based on sales volume, in the northeast United States and
the leading filler of prescriptions in the New York metropolitan area. In Fiscal
1994, Pathmark renovated a total of five drug stores, four of which were
conventional drug stores. Pathmark's free-standing drug stores are generally
open seven days a week during conventional hours.
Pathmark's supermarket and drug store 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 feature 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 widen operating margins by
achieving economies of scale in merchandising, advertising, distribution and
supervision.
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<PAGE>
During the five years ending with Fiscal 1994, Pathmark completed 104 major
renovations and enlargements and opened 16 new supermarkets. At the close of
Fiscal 1994, sales in these stores accounted for approximately 80% of its total
supermarket sales.
Over the past five years, Pathmark has spent approximately $371.0 million on
store openings, enlargements and major renovations including properties acquired
under capital leases. In Fiscal 1994, Pathmark opened four new Pathmark 2000
super centers and completed 14 major renovations and 11 enlargements of its
existing supermarkets. Pathmark currently expects to open up to six new Pathmark
"2000" Super Centers during Fiscal 1995, five of which will replace smaller
stores, and to complete up to 32 major renovations and enlargements.
ADVERTISING AND PROMOTION
As part of its marketing strategy, Pathmark emphasizes its competitive
pricing through 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 by shopping malls. Most of the
remaining advertising expenses are for radio and television advertisements.
During Fiscal 1994, Pathmark introduced "Smart Coupons" in its advertisements.
With "Smart Coupons", customers no longer are required to actually cut out
Pathmark coupons from its advertisement and physically present them at the cash
registers. Rather, when a coupon item is scanned during the check-out process,
the coupon savings is automatically deducted from the price. Pathmark believes
that its "Smart Coupons" greatly convenience its customers and improve customer
service at the checkout.
CONSUMER RESEARCH
Pathmark conducts numerous ongoing and special consumer research projects.
These typically involve customer surveys (both in-store and by telephone) as
well as focus groups. The information derived from these projects is used to
evaluate consumers' attitudes and purchasing patterns and helps shape Pathmark's
marketing programs. Pathmark conducts approximately 300,000 customer interviews
per year.
TECHNOLOGY
Pathmark has made a significant and continuing investment in information
technology and believes it is a leader in the supermarket industry in this area.
All Pathmark supermarket checkout terminals have third-generation "state of the
art" 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 not only have led to lower labor costs, improved price
control and shelf allocation and quicker customer check-out, but also have
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.
All of the pharmacies are equipped with pharmacy computers. In addition to
improving customer service, these computers aid pharmacists in detecting drug
interaction, 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 Integrated Systems Solutions Corporation
("ISSC"), a subsidiary of IBM. Under the agreement, ISSC has taken over
Pathmark's data center operations and mainframe processing and information
system functions (formerly performed by approximately 150 employees) and is
providing
7
<PAGE>
business applications and "state of the art" systems designed to enhance
Pathmark's customer service and efficiency. ISSC developed Pathmark's recently
installed scanner and checkout terminals. Additionally, over the next several
years, ISSC has contracted to develop an integrated purchasing application, a
new financial system, and electronic data interchange capabilities that will
streamline communications between Pathmark and its primary suppliers.
SUPPLY AND DISTRIBUTION
Pursuant to the Logistical Services Agreement and subject to Pathmark's
direction, Plainbridge supplies Pathmark with most of the merchandise sold in
Pathmark's supermarkets and drug stores through Plainbridge distribution
facilities located in New Jersey, together with warehousing, distribution and
logistical services relating to the supply of such merchandise. See
"--Logistical Services Agreement". During Fiscal 1994, the Plainbridge
distribution facilities supplied approximately 81% of the merchandise sold in
Pathmark's supermarkets and drug stores. 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 but one of Pathmark's stores are located within 100 miles of the
principal Plainbridge and Chefmark distribution centers. The following table
presents information concerning the distribution and processing facilities
through which Plainbridge and Chefmark will supply Pathmark, and the product
lines relevant to each as of January 28, 1995:
DISTRIBUTION FACILITIES (1)
SQUARE YEAR
LOCATION PRODUCT LINE FOOTAGE OPENED
- ----------------------------- --------------------------- ------- ------
Woodbridge, NJ(2)............ Dry Grocery 475,000 1968
Edison, NJ(3)................ General Merchandise, Health 266,000 1980
and Beauty Care Products,
Pharmaceuticals, Tobacco
Woodbridge, NJ(2)............ Meat, Dairy, Deli, Produce 255,000 1970
Dayton, NJ(3)................ Frozen Food Distribution 112,000 1994
Center
PROCESSING FACILITIES
SQUARE YEAR
LOCATION PRODUCTS PROCESSED FOOTAGE OPENED
- ----------------------------- --------------------------- ------- ------
Somerset, NJ(4).............. Delicatessen Products 16,000 1976
Avenel, NJ(5)................ Banana Ripening 30,000 1984
- ------------
(1) Pathmark also stores and ships certain products from independent warehouses,
including a dry grocery storage facility in North Brunswick, New Jersey.
(2) Owned by Plainbridge.
(3) Leased by Plainbridge.
(4) Owned by Chefmark.
(5) Leased by Chefmark.
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<PAGE>
LOGISTICAL SERVICES AGREEMENT
In connection with the Plainbridge Spin-Off, Pathmark and Plainbridge
entered into the Logistical Services Agreement to provide for the supply by
Plainbridge to Pathmark of most of the merchandise sold in Pathmark's retail
stores and for the provision of warehousing, distribution and other logistical
services relating to the supply of such merchandise. Pursuant to the Logistical
Services Agreement, Pathmark directs the purchase of the merchandise to be
provided to it by Plainbridge. Pathmark negotiates directly with vendors
regarding the types of merchandise required, the quantities needed, delivery
schedules, pricing, and all other terms and conditions of sale. All merchandise
is ordered by Pathmark for the account of Plainbridge, which pays for, and
retains title to, such merchandise until it has been delivered to Pathmark. If
requested by a vendor, Pathmark, in its sole discretion, may guarantee payment
of such orders by Plainbridge. In general, the Logistical Services Agreement
also requires Plainbridge to perform the same services, in substantially the
same manner, that were performed by Pathmark's warehouse and distribution group
prior to the Plainbridge Spin-Off.
The Logistical Services Agreement requires, with certain exceptions and
subject to certain termination rights, Plainbridge to sell to Pathmark, for a
period of ten years, to the extent requested by Pathmark, all of Pathmark's
merchandise requirements for both its existing and future stores. In addition,
Pathmark has five one-year renewal options following the expiration of the
original ten-year term. The Logistical Services Agreement does not limit
Pathmark's ability to purchase goods from other suppliers, and merchandise that
Pathmark customarily obtains directly from vendors is excluded from the
Logistical Services Agreement.
The Logistical Services Agreement requires Plainbridge to store and deliver
to Pathmark all merchandise purchased at Pathmark's direction. Pathmark is
required in good faith to designate Plainbridge as its carrier with respect to
merchandise customarily shipped directly from vendors to the Pathmark stores.
Plainbridge may be required to maintain inventory with a book value of at least
$130.0 million for the exclusive use of Pathmark, and to the extent that the
inventory value falls below such level, Plainbridge may be asked by Pathmark to
purchase sufficient merchandise to maintain such level to the extent such
merchandise is ordered by Pathmark. Plainbridge is also required to accommodate
physical annual increases of up to five percent in the volume of the
Pathmark-directed purchases of merchandise to be handled by Plainbridge.
Pathmark reimburses Plainbridge for all reasonable incremental out-of-pocket
costs (but not capital costs) incurred by Plainbridge for the storage and
handling of merchandise that is in excess of the five percent annual capacity
increase, provided that such out-of-pocket costs do not exceed the costs of
storage and handling at local independent warehouses.
Upon the delivery of merchandise to the Pathmark stores by Plainbridge,
Pathmark will owe Plainbridge for the cost of the merchandise plus a specified
variable payment. This payment will vary according to the type and value of the
merchandise. A minimum guaranteed payment is payable by Pathmark to the extent
that the aggregate of the variable payments described above payable in any year
does not exceed the minimum guaranteed payment. The minimum guaranteed payment
for Fiscal 1995 is $136.1 million and such payment is adjusted upward (but not
downward) each fiscal year by the rate of inflation. Pathmark is obligated to
pay the minimum guaranteed payment to Plainbridge irrespective of whether
Pathmark purchases merchandise from other suppliers, except in cases of force
majeure or when Plainbridge shall have materially breached the Logistical
Services Agreement or shall have failed to obtain or maintain the licenses and
permits needed to operate its business. The minimum guaranteed payment will be
reduced to the extent that the volume of merchandise purchases decreases as a
result of any store dispositions by Pathmark and will also be reduced if the
volume of Pathmark-directed merchandise falls below 90% of the actual volume
achieved in Fiscal 1992, to the extent that Plainbridge is, as a result, able to
realize reductions in its operating costs. Plainbridge will grant Pathmark an
allowance, based on the amount of merchandise purchased by Plainbridge at
Pathmark's direction, which will be credited against the variable fees and
minimum guaranteed payment obligation. In addition, certain cost benefits
derived from increases in the volume of merchandise purchased from
9
<PAGE>
Plainbridge by Pathmark or third parties will be shared equally between Pathmark
and Plainbridge. Estimated payments are payable in weekly installments with an
annual reconciliation for the amount of payments that are actually payable for
such year. Pathmark will pay to Plainbridge the costs of the merchandise at the
time a vendor requires payment from Plainbridge.
The Logistical Services Agreement allows Plainbridge to sell merchandise and
provide logistical services to third parties, although it is not permitted to
sell merchandise to supermarkets, drug stores and other retail stores stocking
merchandise carried by Pathmark in Pathmark's current market areas, except for
retail stores that do not in the ordinary course of business engage to a
significant degree in the sale of food or pharmacy-related products, without
Pathmark's prior written consent, which consent may not be unreasonably
withheld. Plainbridge is also permitted to "piggyback" such third parties'
orders onto Pathmark's orders from vendors, so long as they do not interfere
with Pathmark's delivery schedules, quantity needs or other requirements.
Plainbridge and the Company are allowed to terminate the Logistical Services
Agreement if the other (i) materially breaches its terms and fails to cure such
breach for 60 days after written notice has been provided by the other party or
(ii) experiences certain insolvency events. Additionally, following the fourth
anniversary of the date of the Logistical Services Agreement, the Company has
the option of terminating it at will on six months notice. If the Company
terminates the Logistical Services Agreement because of a material breach by, or
insolvency of, Plainbridge, the Company has the right to purchase, within 30
days of the termination, that portion of the assets of Plainbridge which is
essential to the support of Plainbridge's obligations to the Company under the
Logistical Services Agreement (the "Pathmark Distribution Assets") at the lower
of (i) their net book value or (ii) their fair market value. If the Company
exercises its at will option to terminate the Logistical Services Agreement, the
Company is required to offer to purchase the Pathmark Distribution Assets at
their fair market value. If Plainbridge terminates the Logistical Services
Agreement because of a material breach by, or insolvency of the Company,
Plainbridge has the right to sell to the Company (and the Company will have the
obligation to buy) the Pathmark Distribution Assets at their fair market value
within 30 days of such termination.
Other than in the ordinary course of business, Plainbridge is not permitted
to sell any of the Pathmark Distribution Assets without Pathmark's prior written
consent. Additionally, in the event of a change in the ultimate beneficial
ownership of Plainbridge voting stock such that a person, other than Merrill
Lynch and Co., Inc. ("ML&Co.") or an affiliate of ML&Co., holds a majority of
such stock, Pathmark has, for a period of two years, the irrevocable and
exclusive right to purchase any or all of the Pathmark Distribution Assets at
their fair market value.
Other provisions of the Logistical Services Agreement include (i) that
Plainbridge will pass on to Pathmark all discounts and allowances made available
to it by vendors in respect of merchandise purchased for Pathmark, unless such
discounts or allowances were made available solely as a result of actions taken
or not taken by Plainbridge, (ii) that Plainbridge must ensure that merchandise
quality meets or exceeds the standards established by Pathmark for such
merchandise, and that Pathmark may place its representatives at the Distribution
Facilities to ensure that such quality is maintained, (iii) that Plainbridge
will deliver merchandise to Pathmark at a 98% or better level of service
measured in accordance with Pathmark's practices prior to the Plainbridge
Spin-Off, (iv) that Pathmark will pay Plainbridge for any use of trailers for
storage and (v) that each of Pathmark and Plainbridge will cooperate to reduce
costs and improve service levels.
Disputes between Pathmark and Plainbridge under the Logistical Services
Agreement will be submitted to an arbitration panel made up of representatives
of both parties. The President of Pathmark shall act as chairman of the dispute
panel and each party shall appoint two other members to the dispute panel, the
decision of which will be subject to the approval of the boards of directors of
each party. If the decision of the dispute panel is not approved by each board
of directors, the dispute will be required to be submitted to independent
arbitration.
10
<PAGE>
The Logistical Services Agreement is a result of a related party negotiation
between Pathmark and Plainbridge. Pathmark believes that the payments provided
for under the terms of the Logistical Services Agreement represent a reasonable
allocation of the costs and benefits for both companies. In addition, Pathmark
believes that the terms of the Logistical Services Agreement are no less
favorable to Pathmark than those which could be obtained from unaffiliated
parties and enable Pathmark to obtain substantially the same level of supply and
other logistical services as was available from the Distribution Facilities
prior to the Spin-Offs at substantially the same or a lower cost.
COMPETITION
The supermarket and drug store businesses are highly competitive and are
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 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 January 28, 1995, the Company employed approximately 30,500 people, of
whom approximately 20,400 were employed on a part-time basis.
Approximately 86% of the Company's employees are covered by 31 collective
bargaining agreements (typically having three or four year terms) negotiated
with approximately 18 different local unions. During Fiscal 1995, six contracts
covering approximately 2,100 Pathmark and Chefmark associates will expire. The
Company does not anticipate any difficulty in renegotiating these contracts.
The Company believes that its relationship with its employees is generally
satisfactory.
11
<PAGE>
ITEM 2. PROPERTIES**
Reference is made to the answer to Item 1, "Business" of this report for
information concerning the states in which the Company's supermarkets and drug
stores and its distribution facilities are located.
THE COMPANY
The Company's primary subsidiary, Pathmark, leases and owns a large group of
properties, as described below. In addition, Chefmark owns a 16,000 square foot
delicatessen products processing and distribution facility in Somerset, New
Jersey and leases a 30,000 foot banana ripening facility in Avenel, New Jersey.
These facilities supply Pathmark's supermarkets with delicatessen and produce
products.
PATHMARK
Pathmark's 143 supermarkets have an aggregate selling area of approximately
5.2 million square feet. The ownership interest in the buildings and real
property of ten supermarket locations (one of which is a closed store location)
and the headquarters in Woodbridge, New Jersey were contributed to Plainbridge
in the Spin-Offs and, except for the closed store location, were leased to
Pathmark. Thirteen of the supermarkets are owned by Pathmark (or its
subsidiaries) and the remaining 130 are leased. These supermarkets either are
freestanding stores or are located in shopping centers. Thirty-four leases
expire during the current and next four calendar years and Pathmark has options
to renew 33 of them.
Pathmark's 36 freestanding drug stores (those not located in supermarkets)
have an aggregate selling area of approximately 398,000 square feet. Two of the
drug stores are owned by Pathmark and the remaining 34 are leased. Nineteen
leases expire during the current and next four calendar years and Pathmark has
options to renew 14 of them.
Certain distribution facilities that supply Pathmark supermarkets and drug
stores were transferred to Plainbridge in connection with the Plainbridge
Spin-Off. Certain of these facilities are leased and some are owned. See
"Business of Pathmark--Supply and Distribution" in Item 1 of this report.
Pathmark maintains administrative and accounting offices in Carteret, New
Jersey in leased premises totalling approximately 150,000 square feet in size.
Pathmark also currently leases or owns additional office space totaling
approximately 128,000 square feet in various locations that are used as the
Pathmark headquarters and regional offices for its operating divisions.
Most of the facilities owned by Pathmark are owned subject to mortgages.
Pathmark plans to acquire leasehold or fee interests in any property on which
new stores or other facilities are opened and will consider entering into
sale/leaseback or mortgage transactions with respect to owned properties if
Pathmark believes such transactions are financially advantageous.
ITEM 3. LEGAL PROCEEDINGS
On December 7, 1990, a lawsuit (the "Complaint") was commenced by a holder
of the Exchangeable Preferred Stock, Stanley D. Bernstein, as custodian for
Michelle Bernstein, against the Company, SMG-II Holdings Corp. ("SMG-II"),
Merrill Lynch Capital Partners, Inc. ("MLCP"), Merrill Lynch & Co. ("ML&Co.")
and the directors of the Company in the Chancery Court, New Castle County,
Delaware. The Complaint purported to be a class action and alleged that the
original terms of the Exchangeable Preferred Stock Offer, at $5 per share,
constituted a coercive tender offer and a breach of fiduciary duties owed to
holders of Exchangeable Preferred Stock. The Complaint sought declaratory and
injunctive relief, as well as monetary damages, with respect to the Exchangeable
Preferred Stock Offer, but no motions seeking any such relief on a provisional
or permanent basis were filed either prior or subsequent to the completion of
the Exchangeable Preferred Stock Offer on February 4, 1991. The Delaware
Chancery Court dismissed the case with prejudice on July 7, 1994, and approved a
total payment of $200,000 as attorneys' fees.
- ------------
** Except as otherwise indicated, information contained in this Item is given as
of January 28, 1995.
12
<PAGE>
On March 1, 1993 Pathmark was served with a summons and complaint filed by
Hygrade Milk & Cream Co., Inc., Terminal Dairies, Inc., Sunbeam Farms, Inc.,
Hytest Milk Corp., Gold Metal Farms, Inc., Queens Farms Dairy, Inc., Babylon
Dairy Co., Inc. and Meadowbrook Farms, Inc., in an action being heard in the
United States District Court for the Southern District of New York. In the
complaint the plaintiffs allege, among other things, that Pathmark induced
processors of Tropicana orange juice to provide it with favorable price and
other terms that discriminated against other sellers of orange juice in
violation of the price discrimination provisions of the Robinson-Patman Act. On
February 2, 1995, the Court entered an order approving plaintiffs' dismissal of
Pathmark from the action with prejudice and without costs or fees. Pathmark is
thus no longer a defendant in this action.
In addition to the litigation referred to above, 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 the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(AS OF APRIL 1, 1995)
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.
The authorized preferred stock of the Company consists of 9,000,000 shares
of Exchangeable Preferred Stock (the "Holdings Preferred Stock"), of which
4,890,671 shares were issued and outstanding at January 28, 1995. The
Exchangeable Preferred Stock has a liquidation preference of $25 per share and
its terms provide for cumulative quarterly dividends at an annual rate of $3.52
per share, when, as, and if declared by the Board of Directors of the Company.
No active public trading market currently exists for the Company's Exchangeable
Preferred Stock.
The Exchangeable Preferred Stock is non-voting, except that if an amount
equal to six quarterly dividends is in arrears in whole or in part, the holders
thereof, voting as a class are entitled to elect an additional two members of
the board of directors of the Company. The Company is currently in arrears on
payment of more than six quarterly dividends on the Exchangeable Preferred Stock
and does not expect to receive cash flow sufficient to permit payments of
dividends on the Exchangeable Preferred Stock in the forseeable future. The
holders of the Exchangeable Preferred Stock will vote to elect two persons to
the Holdings' board of directors at Holdings 1995 annual meeting once two
persons have been nominated. See Note 24 to the Company's Consolidated Financial
Statements in Item 8 of this report for additional information.
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 its Exchangeable 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 1995.
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 650,675 and 320,000 shares, respectively, were issued and outstanding at
April 1, 1995, and 4,000,000 shares of SMG-II Preferred Stock, of which
1,500,000 shares are SMG-II Series A Preferred Stock and 1,500,000 shares are
SMG-II Series B Preferred Stock and of which 236,731 and 180,769 shares,
respectively, were issued and outstanding at April 1, 1995.
SMG-II's capital stock is held beneficially as follows: (i) SMG-II Class A
Common Stock by approximately 65 holders, including six affiliates of ML&Co.
(The "ML Common Investors"), CBC Capital Partners, Inc. ("CBC"), an affiliate of
Chemical Bank, and 58 current and former members of
13
<PAGE>
the Company's management (the "Management Investors"); (ii) SMG-II Series A
Preferred Stock by five holders, all affiliates of ML&Co., (the "Merrill Lynch
Investors"); (iii) SMG-II Class B Common Stock held by four holders, including
CBC, The Equitable Life Assurance Society of the United States ("Equitable") and
the Equitable Affiliates (collectively, the "Equitable Investors"); and (iv)
SMG-II Series B Preferred Stock held by four holders, including CBC and the
Equitable Investors. Holders of shares of SMG-II Class A Common Stock are
entitled to one vote per share on all matters to be voted on by stockholders.
Holders of shares of SMG-II Class B Common Stock are not entitled to any voting
rights, except as required by law or as otherwise provided in the Restated
Certificate of Incorporation of SMG-II. Subject to compliance with certain
procedures, holders of shares of SMG-II Class B Common Stock may exchange their
shares for shares of SMG-II Class A Common Stock and holders of shares of SMG-II
Class A Common Stock may exchange their shares for shares of SMG-II Class B
Common Stock, in each case on a share-for-shares basis.
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 at a 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 at a rate of 10% per annum).
Holders of shares of SMG-II Series A 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 is 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, any 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.
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 SMG-II 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" and Note 25 to the Company's Consolidated Financial
Statements in Item 8 for additional information.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table represents selected financial data for the last five
fiscal years and should be read in conjunction with the Company's Consolidated
Financial Statements in Item 8 of this report.
SUPERMARKETS GENERAL HOLDINGS CORPORATION
SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS
(IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEARS(A)
----------------------------------------------------------
1994 1993 1992 1991(B) 1990(B)
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Sales
Pathmark and other......................................... $4,206 $4,244 $4,340 $4,323 $4,418
Purity..................................................... -- -- -- 997 1,287
-------- -------- -------- ------- -------
Total sales................................................. 4,205 4,244 4,340 5,320 5,705
Cost of sales (exclusive of depreciation and amortization
shown separately below).................................... 3,019 3,085 3,184 3,965 4,282
-------- -------- -------- ------- -------
Gross profit................................................ 1,187 1,159 1,156 1,355 1,423
Selling, general and administrative expenses................ 935 926 894 1,067 1,109
Depreciation and amortization............................... 76 70 69 93 94
Recapitalization expenses(c)................................ -- 17 -- -- --
Provision for store closings(d)............................. -- 6 -- -- --
Amortization of goodwill.................................... -- -- 18 23 24
Goodwill write-off.......................................... -- -- 601 -- --
-------- -------- -------- ------- -------
Operating earnings (loss)................................... 176 140 (426) 172 196
Interest expense, net(e).................................... 160 177 185 204 225
Gain on sale of photofinishing plant(f)..................... -- -- -- 4 --
Gain (loss) on disposal of Purity Operations(g)............. -- -- 2 (228 ) --
-------- -------- -------- ------- -------
Earnings (loss) from continuing operations before income
taxes, gain on disposal of home centers segment,
extraordinary items and cumulative effect of accounting
changes..................................................... 16 (37) (609) (256 ) (29 )
Income tax provision (benefit).............................. 4 (21) 7 (30 ) (1 )
-------- -------- -------- ------- -------
Earnings (loss) from continuing operations before gain on
disposal of home centers segment, extraordinary items and
cumulative effect of accounting changes.................... 12 (16) (616) (226 ) (28 )
Loss from discontinued operations........................... (2) (1) (1) (191 )(h) (13 )
-------- -------- -------- ------- -------
Earnings (loss) before gain on disposal of home centers
segment, extraordinary items and cumulative effect of
accounting changes......................................... 10 (17) (617) (417 ) (41 )
Gain on disposal of home centers segment, net of tax(i)..... 17 -- -- -- --
Extraordinary items, net.................................... (4)(j) (106)(k) (5)(l) 15 (m) --
-------- -------- -------- ------- -------
Earnings (loss) before cumulative effect of accounting
changes..................................................... 23 (123) (622) (402 ) (41 )
Cumulative effect of accounting changes, net(n)............. -- (40) -- -- --
-------- -------- -------- ------- -------
Net earnings (loss)......................................... 23 (163) (622) (402 ) (41 )
Less: non-cash preferred stock accretion and
dividend requirements...................................... (19) (19) (18) (14 ) (10 )
-------- -------- -------- ------- -------
Net earnings (loss) attributable to common stockholder(o)... $ 4 $ (182) $ (640) $ (416 ) $ (51 )
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Ratio of earnings to fixed charges(p)....................... 1.09x -- -- -- --
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Deficiency in earnings available to cover fixed
charges(q).................................................. $ -- $ 37 $ 609 $ 256 $ 29
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
AS OF
----------------------------------------------------------
JAN. 28, JAN. 29, JAN. 30, FEB. 1, FEB. 2,
1995 1994 1993 1992 1991
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.................................... $1,044 $1,138 $1,114 $1,736 $2,439
Working capital deficiency...................... 98 104 80 95 138
Obligations under capital leases, long-term..... 127 132 127 136 180
Other long-term debt, net of current
maturities...................................... 1,366 1,415 1,278 1,248 1,449
Cumulative exchangeable redeemable preferred
stock........................................... 102 100 99 85 123
Stockholder's deficit........................... 1,280 1,285 1,103 467 168
</TABLE>
(footnotes on following page)
15
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS
<TABLE>
<S> <C>
(a) The Company's fiscal year ends on the Saturday nearest to January 31 of the following
calendar year. Each fiscal year reported in the Summary of Operations and Financial
Highlights consists of 52 weeks.
(b) Results for Fiscal 1990 and Fiscal 1991 include the Purity Operations through its December
17, 1991 sale date.
(c) In connection with the Recapitalization, the Company recorded a pretax charge of $17 million
related to reorganization and restructuring costs. See Note 3 to the Company's Consolidated
Financial Statements in Item 8 of this report.
(d) During Fiscal 1993, the Company decided to close or dispose of five stores and recorded a
pretax charge of $6 million. See Note 21 to the Company's Consolidated Financial Statements
in Item 8 of this report.
(e) Prior to Fiscal 1994, interest expense was net of interest charged to discontinued
operations. See Notes 14 and 16 to the Company's Consolidated Financial Statements in Item 8
of this report.
(f) During Fiscal 1991, the Company sold its Coastal Photo photofinishing plant to Quality Photo
Systems (East), Inc. (a subsidiary of Konica Corporation) which resulted in a pretax gain on
sale of $4 million.
(g) On December 17, 1991, the Company completed the sale of the Purity Operations for
approximately $257 million (as adjusted) including the assumption of certain indebtedness of
Purity Supreme and Li'l Peach, to a company organized by Freeman Spogli & Co. The Company
recorded a loss of $228 million on the disposal of the Purity Operations. Included in this
loss is a write-off of approximately $214 million of goodwill related to the Purity
Operations. During Fiscal 1992, the Company recorded a gain of $2 million related to the
disposal of the Purity Operations. See Note 27 to the Company's Consolidated Financial
Statements in Item 8 of this report.
(h) Includes a pretax loss of $24 million in connection with the disposition of certain Rickel
Stores and a charge of $170 million accelerating the remaining amortization of the goodwill
related to the home centers segment.
(i) During Fiscal 1994, the Company sold its Rickel Home Centers business to EOS Partners, which
resulted in a net gain on sale of $17 million. See Note 4 to the Company's Consolidated
Financial Statements in Item 8 of this report.
(j) During Fiscal 1994, the Company recorded an extraordinary charge of $4 million, net of an
income tax benefit, related to the early extinguishment of debt. See Note 23 to the
Company's Consolidated Financial Statements in Item 8 of this report.
(k) During Fiscal 1993, in connection with the Recapitalization, the Company recorded an
extraordinary charge of $106 million, net of an income tax benefit, related to the early
extinguishment of debt. See Notes 3 and 23 to the Company's Consolidated Financial
Statements in Item 8 of this report.
(l) During Fiscal 1992, the Company recorded an extraordinary charge of $5 million, net of an
income tax benefit, related to the early extinguishment of debt. See Note 23 to the
Company's Consolidated Financial Statements in Item 8 of this report.
(m) The results for Fiscal 1991 include an extraordinary gain of $15 million, net of an income
tax benefit, related to the early extinguishment of debt.
(n) 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, "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. See Note 5 to the Company's
Consolidated Financial Statements in Item 8 of this report.
</TABLE>
(footnotes continued on following page)
16
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS
<TABLE>
<S> <C>
(o) 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.
(p) 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
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.
(q) 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).
</TABLE>
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion and analysis of the Company's financial
condition and results from continuing operations. The results from discontinued
operations for all periods presented represent the operations of the Company's
home centers segment which was sold during Fiscal 1994. At the time of
Recapitalization, Holdings intended to further spin off Plainbridge to Holdings'
common stockholder. Such further spin-off would have required the satisfaction
of dividend restrictions with respect to Holdings' Exchangeable Preferred Stock,
as well as, obtaining consents from various lenders to Plainbridge and PTK.
During the fourth quarter of Fiscal 1994, as a result of the aforementioned
dividend restrictions, Holdings has concluded that a further spin-off of
Plainbridge to Holdings' common stockholder is not likely to occur. Accordingly,
prior year financial statements which had included the results of Plainbridge's
warehouse, transportation and real estate operations as discontinued operations
have been reclassified to include such results in continuing operations.
Although the discontinued operations have generated positive operating cash
flows, the Company believes that the impact on the Company's liquidity is not
material.
RESULTS OF OPERATIONS
Fiscal 1994 v. Fiscal 1993
Sales. Sales for Fiscal 1994 were $4.21 billion compared to $4.24 billion in
Fiscal 1993. Sales for stores opened in both years, including replacement
stores, decreased 0.4%. During Fiscal 1994, the Company opened four
supermarkets, enlarged 11 supermarkets and completed major renovations in 14
supermarkets. At Fiscal 1994 year end, the Company operated 143 supermarkets,
including 135 Pathmark Super Centers compared with the end of Fiscal 1993 when
the Company operated 143 supermarkets, including 136 Pathmark Super Centers. The
Company also operated 30 freestanding Pathmark drug stores and six "deep
discount" drug stores at Fiscal 1994 year end compared with the end of Fiscal
1993 when the Company operated 31 freestanding Pathmark drug stores and two
"deep discount" drug stores. In order to improve sales while continuing to
improve profitability, the Company is continuing its focus on its store
enlargement and renovation program.
Gross Profit. Gross profit for Fiscal 1994 was $1.19 billion or 28.2% of
sales compared with $1.16 billion or 27.3% of sales in Fiscal 1993. This
improvement in gross profit as a percentage of sales for Fiscal 1994 is
attributable primarily to the Company's increased focus on merchandising
programs as well as continuing emphasis on large super stores allowing expanded
variety in all departments, particularly higher margin perishables. The cost of
goods comparisons were affected by a pretax LIFO credit in Fiscal 1994 of $0.7
million compared to a $2.4 million credit in Fiscal 1993.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for Fiscal 1994 increased $9.3 million or 1.0% compared
to Fiscal 1993. As a percentage of sales, selling, general and administrative
expenses were 22.2% for Fiscal 1994, up from 21.8% for Fiscal 1993. The increase
as a percentage of sales during Fiscal 1994 was due to higher computer
development costs, labor and labor related expenses and occupancy expenses,
partially offset by lower promotional costs this year compared to the additional
promotional programs implemented last year to regain sales level subsequent to
the strike and lockouts and lower claims expense related to customer accidents,
medical and workers compensation.
Depreciation and Amortization. Depreciation and amortization expense of
$75.6 million for Fiscal 1994 was $5.5 million more than the prior year's $70.1
million. The increase in depreciation and amortization expense is primarily due
to the impact of increased capital spending levels. Depreciation and
amortization excludes video tape amortization of $2.6 million in both Fiscal
1994 and Fiscal 1993 recorded in cost of goods sold (see Note 2).
Operating Earnings. Operating earnings for Fiscal 1994 were $175.9 million
compared to $140.2 million in Fiscal 1993. The increase in operating earnings
was primarily due to the impact of the strike and lockouts in Fiscal 1993, the
recapitalization expenses of $16.6 million in Fiscal 1993 and the
18
<PAGE>
provision for store closings of $6.0 million in Fiscal 1993. Operating earnings
were also affected by a pretax LIFO credit of $0.7 million in Fiscal 1994,
compared to a $2.4 million credit in Fiscal 1993.
Interest Expense. Interest expense for Fiscal 1994 was $170.8 million, a
decrease of $19.3 million from the $190.1 million in Fiscal 1993. Interest
charged to discontinued operations in Fiscal 1994 was $11.0 million compared to
$13.1 million in Fiscal 1993. The lower interest expense, net of interest
charged to discontinued operations, was primarily due to the benefit of lower
interest rates on the debt incurred in connection with the Recapitalization.
Income Taxes. The income tax provision was $4.1 million in Fiscal 1994
compared to an income tax benefit of $20.8 million in Fiscal 1993. At January
28, 1995, the Company has a net deferred tax asset of approximately $32.8.
Although the Company has generated pretax earnings in Fiscal 1994, the Company
was unable to conclude that realization of such deferred tax assets was more
likely than not due to pretax losses experienced in prior years. Accordingly,
the Company has provided a valuation allowance of $26.8 million at January 28,
1995 to fully reserve its net deferred tax assets, except for its alternative
minimum tax credit carryforwards which do not expire. Management will continue
to assess the likelihood of realizing its deferred tax assets and will adjust
the valuation allowance when and if, in the opinion of management, significant
positive evidence exists which indicates that it is more likely than not that
the Company will be able to realize such deferred tax assets. Such reductions in
the valuation allowance, if any, will be reflected as a component of income tax
expense. Refer to Note 19 to the Company's Consolidated Financial Statements for
a further discussion of income taxes.
Summary of Continuing Operations. Earnings from continuing operations before
gain on disposal of home centers segment, extraordinary items and cumulative
effect of accounting changes were $12.0 million in Fiscal 1994 compared to a
$16.1 million loss in Fiscal 1993. The increase in earnings was primarily due to
the impact of the strike and lockouts in Fiscal 1993, the recapitalization
expenses of $16.6 million in Fiscal 1993, and the provision for store closings
of $6.0 million in Fiscal 1993, as well as the lower interest expense during
Fiscal 1994 as a result of the Recapitalization.
Net Earnings (Loss). Net earnings were $23.2 in Fiscal 1994 compared to a
net loss of $163.2 million in Fiscal 1993. During Fiscal 1994, the Company
completed the sale of its home centers segment , recognizing a gain of $17.0
million, net of an income tax provision of $2.3 million. Fiscal 1994 and Fiscal
1993 included extraordinary items related to the net loss on early
extinguishment of debt of $3.7 million and $106.2 million, respectively, and
Fiscal 1993 included the cumulative effect of accounting changes of $40.4
million. Refer to Notes 4, 5 and 23 to the Company's Consolidated Financial
Statements for a discussion of the home centers segment sale, the extraordinary
items and the cumulative effect of accounting changes.
Fiscal 1993 v. Fiscal 1992
Sales. Sales for Fiscal 1993 were $4.24 billion compared to $4.34 billion in
Fiscal 1992. The sales decrease for the year is primarily due to the impact of
the strike and lockouts in the second quarter of Fiscal 1993 and the exclusion
from reported results of the sales since the beginning of the second quarter of
Fiscal 1993 of the three stores anticipated to be closed or sold as part of the
provision for store closings. During Fiscal 1993, the Company opened four
supermarkets, enlarged five supermarkets, and completed major renovations in
twelve supermarkets. Five supermarkets were closed during Fiscal 1993. Sales for
stores opened in both periods decreased by 2.4%. At Fiscal 1993 year end, the
Company operated 143 supermarkets, including 136 Pathmark Super Centers, and 33
Pathmark freestanding drug stores. This compares with the end of Fiscal 1992
when the Company operated 146 supermarkets, including 139 Pathmark Super
Centers, and 33 Pathmark freestanding drug stores.
Gross Profit. Gross profit for Fiscal 1993 was $1.16 billion or 27.3% of
sales compared with $1.16 billion or 26.6% of sales in Fiscal 1992. This
improvement in gross profit as a percentage of sales for Fiscal 1993 is
attributable primarily to the Company's increased focus on merchandising
programs as well as a continuing emphasis on large super stores allowing
expanded variety in all departments, particularly higher margin perishables and
service departments. The gross profit comparisons were
19
<PAGE>
affected by a pretax LIFO credit in Fiscal 1993 of $2.4 million compared with a
pretax LIFO provision of $2.2 million in Fiscal 1992.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for Fiscal 1993 increased $31.9 million or 3.6% compared
to Fiscal 1992. As a percentage of sales, selling, general and administrative
expenses were 21.8% for Fiscal 1993, up from 20.6% in Fiscal 1992. The increase
as a percentage of sales during Fiscal 1993 was primarily attributable to higher
promotional expenses and the lower sales volume and increased costs resulting
from the strike and lockouts.
Recapitalization Expenses. In connection with the Plainbridge Spin-Off and
Recapitalization, the Company recorded a pretax charge of approximately $23.7
million in the third quarter of Fiscal 1993 to record estimated reorganization
and restructuring costs, including an early retirement program offered to
certain Company associates. During the fourth quarter of Fiscal 1993, the
Company determined that the estimated costs related to the reorganization and
restructuring were less than originally estimated and recorded a pretax credit
of approximately $7.1 million. Of the total net pretax charge of $16.6 million
for Fiscal 1993, $6.4 million related to the early retirement program and
severance costs incurred to reduce the Company's workforce, $8.1 million related
to additional technical information systems costs incurred in order to
accomplish the Plainbridge Spin-Off and $2.1 million related to warehouse and
consulting costs associated therewith. Through January 29, 1994, the Company had
expended $11.9 million related to these reorganization and restructuring costs.
The remaining $4.7 million was paid during Fiscal 1994.
Provision for Store Closings. Effective with the beginning of the second
quarter of Fiscal 1993, the Company originally made a decision to close or to
dispose of five stores which the Company believed would continue to be
unprofitable. As a result, the Company recorded a pretax charge in the second
quarter of Fiscal 1993 of approximately $6.0 million. Operating results for the
five stores had previously been excluded from the consolidated statements of
operations since the beginning of the second quarter of Fiscal 1993. However,
the Company decided on December 31, 1994 that two of the five stores would
continue to be operated and, therefore, the operating results for these two
stores have been included in the Fiscal 1994 and Fiscal 1993 statements of
operations. The inclusion of these two stores had no effect on the Fiscal 1994
or 1993 reported results. The remaining three stores were closed during the
fourth quarter of Fiscal 1994 and the related leases have been assigned or
sublet subsequent to January 28, 1995.
Depreciation and Amortization. Depreciation and amortization expense of
$70.1 million for Fiscal 1993 was $0.9 million more than the prior year's $69.2
million. The increase in depreciation and amortization expense is primarily due
to the impact of the assets transferred to Plainbridge as part of the
Plainbridge Spin-Off.
Goodwill Write-Off. During Fiscal 1992, the Company wrote off its remaining
goodwill balance of $600.7 million. As a result of the write-off, there was no
amortization of goodwill for Fiscal 1993 compared with $17.5 million for Fiscal
1992.
Operating Earnings. Operating earnings for Fiscal 1993 were $140.2 million
compared to an operating loss of $425.8 million in Fiscal 1992. The increase in
operating earnings is due to the goodwill write-off of $600.7 million and the
amortization of goodwill in Fiscal 1992, partially offset in Fiscal 1993 by the
impact of the strike and lockouts and the subsequent promotional programs
implemented in order to regain sales levels, the recapitalization expenses of
$16.6 million and the provision for store closings of $6.0 million. Operating
earnings were also affected by a pretax LIFO credit of $2.4 million in Fiscal
1993 compared to a pretax LIFO provision of $2.2 million in Fiscal 1992.
Interest Expense. Interest expense for Fiscal 1993 was $190.1 million, a
decrease of $7.7 million from the $197.8 million in Fiscal 1992. Interest
charged to discontinued operations for Fiscal 1993 was $13.1 million compared to
$13.0 million in Fiscal 1992. The lower interest expense, net of interest
charged to discontinued operations, was primarily due to the benefit of lower
interest rates on the debt
20
<PAGE>
incurred in connection with the Recapitalization partially offset by additional
interest on the accreted principal of Holdings 13.125% Discount Debentures.
Income Taxes. As a result of the Company's net operating tax loss, the
Company recorded income taxes receivable of approximately $22.4 million
resulting from the carryback of such losses. The carryforward of those losses
not carried back resulted in a net deferred tax asset of approximately $41.3
million at January 29, 1994. Since the Company has experienced pretax losses in
each of Fiscal 1993, Fiscal 1992 and Fiscal 1991, the Company was unable to
conclude that realization of such deferred tax assets was more likely than not.
Accordingly, the Company has provided a valuation allowance of $38.4 million to
fully reserve its net deferred tax assets, except for its alternative minimum
tax credit carryforwards which do not expire (see Note 19 to the Company's
Consolidated Financial Statements).
The Omnibus Budget Reconciliation Act of 1993 was signed into law on August
10, 1993, which, among other things, increased the federal income tax rates for
corporations to 35% from 34%, effective January 1, 1993. Deferred tax
liabilities and assets have been adjusted to reflect the 1% increase in federal
income tax rates.
Summary of Continuing Operations. The loss from continuing operations before
gain on disposal of home centers segment, extraordinary items and cumulative
effect of accounting changes was $16.1 million in Fiscal 1993 compared to $17.1
million (excluding the write-off of the remaining goodwill balance of $600.7
million and the Purity Operations gain of $2.0 million) in Fiscal 1992. The
decrease in the loss is primarily due to lower interest expense as a result of
the Recapitalization, increased operating earnings as discussed above and the
elimination of goodwill amortization, partially offset by the impact of the
strike and lockouts and the subsequent promotional programs implemented in order
to regain sales levels, the recapitalization expenses, and the provision for
store closings.
Net Loss. Net loss was $163.2 million in Fiscal 1993 compared to $621.7
million in Fiscal 1992. Fiscal 1993 included extraordinary items related to the
net loss on early extinguishment of debt of $106.2 million and the cumulative
effect of accounting changes of $40.4 million. Refer to Notes 5 and 23 to the
Company's Consolidated Financial Statements for a discussion of the
extraordinary items and the cumulative effect of accounting changes. Fiscal 1992
included the goodwill write-off of $600.7 million.
FINANCIAL CONDITION
Debt Service. During Fiscal 1994, total debt decreased $49.6 million from
the prior year end primarily due to the paydown of the PTK DIBs as a result of
the home centers segment sale and the scheduled Term Loan repayments, partially
offset by an increase in borrowings under the Pathmark Working Capital Facility
and by debt accretion on Pathmark Deferred Coupon Notes and PTK DIBs. Borrowings
under the Pathmark Working Capital Facility were $63.0 million at January 28,
1995 and have decreased to $33.5 million at April 24, 1995. There were no
borrowings under the Plainbridge Working Capital Facility at January 28, 1995
and April 24, 1995.
Under the Pathmark Working Capital Facility, which expires in Fiscal 1998,
Pathmark can borrow or obtain letters of credit in an aggregate amount not to
exceed $175.0 million (of which the maximum of $100.0 million can be in letters
of credit) subject to an annual cleandown provision. Under the terms of the
Pathmark cleandown provision, in each fiscal year loans cannot exceed $50.0
million under the Pathmark Working Capital Facility for a period of 30
consecutive days. The Company has satisfied the terms of the Pathmark cleandown
provision for Fiscal 1994 and Fiscal 1995. Under the Plainbridge Working Capital
Facility, which expires in Fiscal 1997, Plainbridge can borrow or obtain letters
of credit in an aggregate amount not to exceed $40.0 million subject to an
annual cleanup provision, commencing in Fiscal 1994. Under the terms of the
Plainbridge cleanup provision, in each fiscal year, loans cannot be made for a
period of 30 consecutive days. The Company has satisfied the terms of the
Plainbridge cleanup provisions for Fiscal 1994 and Fiscal 1995.
21
<PAGE>
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 Fiscal
1999.
The indebtedness under the Pathmark and Plainbridge Working Capital
Facilities 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 when deemed appropriate.
As a result of the Recapitalization, 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 DIBs) are as follows (dollars in
thousands):
PRINCIPAL
FISCAL YEARS PAYMENTS
- ---------------------------------------------------------- ------------------
1995.................................................... $ 46,310
1996.................................................... 48,081
1997.................................................... 58,147
1998.................................................... 169,522
1999.................................................... 138,726
2000.................................................... 50,644
2001.................................................... 50,000
2002.................................................... 195,750
2003.................................................... 654,701
Liquidity: The consolidated financial statements of the Company indicates
that at January 28, 1995, current liabilities exceeded its current assets by
$98.0 million and the Company's stockholder's deficit was $1.3 billion.
Management believes that cash flows generated from operations, supplemented by
the unused borrowing capacity under the Pathmark and Plainbridge Working Capital
Facilities (see Note 12 of the Company's Consolidated Financial Statements) 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 seasonal cash requirements. Further, the Company believes it will
be in compliance throughout the upcoming fiscal year with its various debt
covenants, which includes certain levels of operating cash flow (as defined),
minimum interest coverage and a maximum leverage ratio.
Holdings 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 the Company's borrowing facilities. Future refinancing
may be necessary if cash flow from operations is not sufficient to meet its debt
service requirements related to the maturity of the Plainbridge Working Capital
Facility in Fiscal 1997, the maturity of 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 DIBs due in Fiscal 2003. The Company may undertake a
refinancing of some or all of such indebtedness sometime prior to its maturity.
The Company's ability to make scheduled payments or to refinance 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
22
<PAGE>
continue to be sufficient or that future borrowing facilities will be available
for payment or refinancing of Pathmark's and PTK's indebtedness. While it is the
Company's intention to enter into 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.
Prior to the Recapitalization, the Old Working Capital Facility 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 cash flow
ratios of Holdings. Prior to the Recapitalization, Holdings had not met the
conditions permitting cash dividend payments on the Exchangeable Preferred
Stock. Subsequent to the Recapitalization, the Company does not expect to
receive cash flow sufficient to permit further 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 of January 28, 1995, unpaid dividends of
$38.7 million were accrued.
Capital Expenditures. Capital expenditures related to Pathmark supermarkets
and drug stores for Fiscal 1994, including property acquired under capital
leases, were approximately $90.5 million compared to approximately $74.0 million
for Fiscal 1993 and $74.3 million for Fiscal 1992. In Fiscal 1994, Pathmark
opened four new Super Centers, three of which replaced smaller stores, and
completed 14 major renovations and 11 enlargements.
Cash Flows. Net cash provided by operating activities amounted to $116.6
million in Fiscal 1994 compared to $66.9 million in Fiscal 1993. The increase in
net cash provided by operating activities in Fiscal 1994 compared to Fiscal 1993
is primarily due to the increased earnings in Fiscal 1994. Cash used for
investing activities in Fiscal 1994 was $1.6 million, primarily due to
expenditures of property and equipment of $84.0 million, partially offset by the
disposal of the home centers segment of $81.1 million, compared to $69.4 million
in Fiscal 1993, primarily reflecting the expenditures for property and
equipment. Cash used for financing activities in Fiscal 1994 was $97.9 million,
primarily due to the repayment of the PTK DIBs, the scheduled reductions in the
Pathmark Term Loan and reductions in capital lease obligations, partially offset
by the increase in Working Capital Facilities borrowings, compared to $4.8
million cash provided by financing activities in Fiscal 1993 primarily due to
the net impact of the Recapitalization.
Net cash provided by operating activities amounted to $66.9 million in
Fiscal 1993, compared to $132.2 million in Fiscal 1992. Cash used for investing
activities in Fiscal 1993 was $69.4 million, compared to $63.1 million in Fiscal
1992, primarily reflecting the expenditures for property and equipment in each
year. Cash provided by financing activities in Fiscal 1993 was $4.8 million
compared to cash used for financing activities of $69.4 million in Fiscal 1992.
The increase in cash provided by financing activities in Fiscal 1993 was
primarily due to the net impact of the Recapitalization. The cash used for
financing activities in Fiscal 1992 primarily reflected the sale of the Holdings
Subordinated Notes, partially offset by greater use of cash to repay the Old
Working Capital Facility.
23
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS.
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS ENDED
---------------------------------------
JANUARY 28, JANUARY 29, JANUARY 30,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Sales $ 4,205,536 $ 4,243,627 $ 4,339,834
Cost of sales (exclusive of depreciation and amortization
shown separately below).................................. 3,018,484 3,084,666 3,183,951
----------- ----------- -----------
Gross profit............................................. 1,187,052 1,158,961 1,155,883
Selling, general and administrative expenses............. 935,486 926,164 894,261
Depreciation and amortization............................ 75,632 70,055 69,243
Recapitalization expenses................................ -- 16,612 --
Provision for store closings............................. -- 5,975 --
Amortization of goodwill................................. -- -- 17,459
Goodwill write-off....................................... -- -- 600,714
----------- ----------- -----------
Operating earnings (loss)................................ 175,934 140,155 (425,794)
Interest expense......................................... (170,848) (190,110) (197,773)
Interest charged to discontinued operations.............. 11,035 13,136 12,953
Gain on disposal of Purity Operations.................... -- -- 2,000
----------- ----------- -----------
Earnings (loss) from continuing operations before income
taxes, gain on disposal of home centers segment,
extraordinary items and cumulative effect of accounting
changes.................................................. 16,121 (36,819) (608,614)
Income tax provision (benefit)........................... 4,146 (20,752) 7,176
----------- ----------- -----------
Earnings (loss) from continuing operations before gain on
disposal of home centers segment, extraordinary items
and cumulative effect of accounting changes.............. 11,975 (16,067) (615,790)
Loss from discontinued operations........................ (2,099) (647) (1,165)
----------- ----------- -----------
Earnings (loss) before gain on disposal of home centers
segment, extraordinary items and cumulative effect of
accounting changes....................................... 9,876 (16,714) (616,955)
Gain on disposal of home centers segment, net of an
income tax provision of $2,324......................... 17,044 -- --
Extraordinary items, net of an income benefit of $-- in
Fiscal 1994, $9,354 in Fiscal 1993 and $3,276 in Fiscal
1992..................................................... (3,687) (106,155) (4,763)
----------- ----------- -----------
Earnings (loss) before cumulative effect of accounting
changes.................................................. 23,233 (122,869) (621,718)
Cumulative effect of accounting changes
Postretirement benefits other than pensions, net of
an income tax benefit of $11,289..................... -- (15,636) --
Postemployment benefits, net of an income tax
benefit of $1,813.................................... -- (2,488) --
Change in the determination of the discount rate
utilized to record the present value of certain
noncurrent liabilities, net of an income tax benefit
of $8,430................................................ -- (11,570) --
Change in the method utilized to calculate last-in,
first-out (LIFO) inventories, net of an income tax
benefit of $7,770.................................... -- (10,664) --
----------- ----------- -----------
Net earnings (loss)...................................... 23,233 (163,227) (621,718)
Less: non-cash preferred stock accretion and
dividend requirements.................................. (18,828) (18,771) (18,025)
----------- ----------- -----------
Net earnings (loss) attributable to common stockholder... $ 4,405 $ (181,998) $ (639,743)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 29,
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and marketable securities..................................... $ 23,247 $ 6,168
Accounts receivable, net........................................... 13,380 15,428
Merchandise inventories............................................ 255,631 316,629
Income taxes receivable............................................ 7,756 22,422
Prepaid expenses................................................... 26,580 21,838
Due from suppliers................................................. 18,256 20,600
Other current assets............................................... 29,541 12,432
----------- -----------
Total Current Assets........................................... 374,391 415,517
Property and Equipment, Net......................................... 598,801 645,843
Deferred Financing Costs, Net....................................... 40,446 46,497
Deferred Income Taxes............................................... 5,969 2,890
Investment in Purity Supreme (net of valuation allowance of $24,100
at January 28, 1995 and $21,900 at January 29, 1994)............... -- --
Other Assets........................................................ 23,951 27,736
----------- -----------
$ 1,043,558 $ 1,138,483
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Accounts payable................................................... $ 239,752 $ 282,771
Current maturities of long-term debt............................... 46,310 46,244
Accrued payroll and payroll taxes.................................. 53,638 60,204
Current portion of obligations under capital leases................ 18,298 18,844
Accrued interest payable........................................... 19,672 16,633
Accrued expenses and other current liabilities..................... 94,630 94,431
----------- -----------
Total Current Liabilities...................................... 472,300 519,127
----------- -----------
Long-Term Debt...................................................... 1,365,571 1,415,236
----------- -----------
Obligations Under Capital Leases, Long-Term......................... 127,122 131,506
----------- -----------
Other Noncurrent Liabilities........................................ 256,911 256,978
----------- -----------
Redeemable Securities
Exchangeable Preferred Stock, $.01 par value....................... 101,959 100,346
Authorized: 9,000,000 shares
Issued and outstanding: 4,890,671 shares at January 28, 1995 and
January 29, 1994
Liquidation preference, $25 per share: $122,267 at January 28,
1995 and
January 29, 1994
----------- -----------
Total Redeemable Securities.................................... 101,959 100,346
----------- -----------
Commitments and Contingencies (Notes 15 and 20)
Stockholder's Deficit
Class A Common Stock, $.01 par value............................... 7 7
Authorized: 1,075,000 shares
Issued and outstanding: 650,675 shares at January 28, 1995 and
January 29, 1994
Class B Common Stock, $.01 par value............................... 3 3
Authorized: 1,000,000 shares
Issued and outstanding: 320,000 shares at January 28, 1995 and
January 29, 1994
Paid-in Capital.................................................... 199,135 200,748
Accumulated Deficit................................................ (1,479,450) (1,485,468)
----------- -----------
Total Stockholder's Deficit.................................... (1,280,305) (1,284,710)
----------- -----------
$ 1,043,558 $ 1,138,483
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CLASS A CLASS B TOTAL
COMMON COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK STOCK CAPITAL DEFICIT DEFICIT
------- ------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, February 1, 1992................... $ 7 $ 3 $199,792 $ (666,790) $ (466,988)
Net loss.................................. -- -- -- (621,718) (621,718)
Dividends on preferred stock
(.0352 share per share of preferred
stock) ..................................... -- -- -- (12,214) (12,214)
Accrued dividends on preferred stock
($.88 per share)........................ -- -- -- (4,303) (4,303)
Accretion on preferred stock.............. -- -- (1,508) -- (1,508)
Capital contribution from SMG-II of
Company senior notes, including accrued
interest.................................... -- -- 4,019 -- 4,019
------- ------- -------- ----------- -------------
Balance, January 30, 1993................... 7 3 202,303 (1,305,025) (1,102,712)
Net loss.................................. -- -- -- (163,227) (163,227)
Accrued dividends on preferred stock
($.88 per share)........................ -- -- -- (17,216) (17,216)
Accretion on preferred stock.............. -- -- (1,555) -- (1,555)
------- ------- -------- ----------- -------------
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
($.88 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)
------- ------- -------- ----------- -------------
------- ------- -------- ----------- -------------
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------------------
JANUARY 28, JANUARY 29, JANUARY 30,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities
Net gain (loss).................................................... $ 23,233 $(163,227) $(621,718)
Adjustments to reconcile net gain (loss) to net cash provided by
operating activities
Extraordinary loss on early extinguishment of debt.............. 3,687 106,155 4,763
Gain on disposal of home centers segment........................ (17,044) -- --
Depreciation and amortization................................... 78,220 72,650 71,917
Deferred income tax benefit..................................... (3,815) (28,895) (12,228)
Interest accruable but not payable.............................. 13,541 3,312 18,480
Amortization of original issue discount......................... 12,855 4,593 18,295
Amortization of debt issuance costs............................. 7,028 4,767 4,369
(Gain) loss on disposal of property and equipment............... (252) (93) 1,637
Loss from discontinued operations............................... 2,099 647 1,165
Cumulative effect of accounting changes......................... -- 40,358 --
Amortization of goodwill........................................ -- -- 17,459
Goodwill write-off.............................................. -- -- 600,714
Gain on disposal of Purity Operations........................... -- -- (2,000)
Cash provided by (used for) operating assets and liabilities
Accounts receivable, net...................................... 1,627 (3,246) (580)
Merchandise inventories....................................... 2,551 14,355 441
Income taxes receivable....................................... 14,666 (19,898) (2,673)
Prepaid expenses.............................................. (10,724) 2,078 (2,117)
Due from suppliers............................................ 482 4,702 (6,156)
Other current assets.......................................... (18,150) (1,875) (1,013)
Other assets.................................................. 5,818 (4,775) (126)
Accounts payable.............................................. (16,527) 19,291 26,032
Accrued payroll and payroll taxes............................. (944) (348) 1,367
Accrued interest payable...................................... 3,039 (24,041) 14,090
Other current liabilities..................................... 1,595 7,305 (27,104)
Other noncurrent liabilities.................................. 13,598 33,117 27,164
----------- ----------- -----------
Cash provided by operating activities....................... 116,583 66,932 132,178
----------- ----------- -----------
Investing Activities
Net proceeds from disposal of home centers segment................. 81,147 -- --
Property and equipment expenditures................................ (83,981) (70,853) (65,622)
Proceeds from disposition of property and equipment................ 1,262 1,486 519
Proceeds from disposal of Purity Operations........................ -- -- 2,000
----------- ----------- -----------
Cash used for investing activities.......................... (1,572) (69,367) (63,103)
----------- ----------- -----------
Financing Activities
Borrowings from Pathmark Term Loan................................. -- 400,000 --
Increase (decrease) in Working Capital Facilities borrowings....... 25,500 (16,000) --
Decrease in Pathmark Term Loan..................................... (36,750) (15,000) --
Increase in other borrowings....................................... 3,676 2,581 3,969
Repayment of other long-term borrowings............................ (5,527) (9,768) (5,912)
Reduction in obligations under capital leases...................... (17,275) (15,031) (14,182)
Deferred financing fees............................................ (977) (47,538) --
Repayment of PTK Exchangeable Guaranteed Debentures................ (62,892) -- --
Premiums incurred in redemption of PTK Exchangeable Guaranteed
Debentures......................................................... (3,687) -- --
Proceeds from issuance of Pathmark Senior Subordinated Notes....... -- 436,625 --
Proceeds from issuance of Pathmark Deferred Coupon Notes........... -- 120,000 --
Proceeds from issuance of PTK Exchangeable Guaranteed Debentures... -- 126,100 --
Proceeds from Working Capital Facilities borrowings in connection
with the Recapitalization.......................................... -- 53,500 --
Purchase of Holdings Senior Subordinated Notes..................... -- (388,192) (72,208)
Purchase of Holdings Subordinated Debentures....................... -- (319,229) --
Purchase of Holdings Discount Debentures........................... -- (184,752) --
Repayment of Old Working Capital Facility in connection with the
Recapitalization................................................... -- (80,000) --
Premiums and other fees in connection with the Recapitalization.... -- (98,499) --
Increase (decrease) in Old Working Capital Facility borrowings
prior to the Recapitalization...................................... -- 40,000 (53,280)
Old Working Capital Facility borrowings related to the sale of the
Holdings Subordinated Notes and purchase of Holdings Senior
Subordinated Notes............................................... -- -- 16,280
Proceeds from the issuance of the Holdings Subordinated Notes...... -- -- 200,000
Premium on purchase of Holdings Senior Subordinated Notes.......... -- -- (5,394)
Fees associated with the issuance of Holdings Subordinated Notes... -- -- (6,678)
Repayment of Holdings Term Loan.................................... -- -- (132,000)
----------- ----------- -----------
Cash provided by (used for) financing activities............ (97,932) 4,797 (69,405)
----------- ----------- -----------
Increase (decrease) in cash and marketable securities............... 17,079 2,362 (330)
Cash at beginning of period......................................... 6,168 3,806 4,136
----------- ----------- -----------
Cash and marketable securities at end of period..................... $ 23,247 $ 6,168 $ 3,806
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
Supermarkets General Holdings Corporation ("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
(the "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 an amended and restated Plan of
Liquidation pursuant to which it was liquidated into three wholly owned
subsidiaries of Supermarkets General Holdings Corporation. 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. were sold (see Note 27). Supermarkets General Holdings
Corporation and its respective subsidiaries are hereafter collectively referred
to as "Holdings" or the "Company".
On November 15, 1990, SMG-II Holdings Corporation, (see Note 16), a 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 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 the 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
28
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION--(CONTINUED)
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 24).
During Fiscal 1993, the Board of Directors of Holdings authorized management
of Holdings to proceed with 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 newly formed indirect wholly owned subsidiary of Holdings and
the shares of Plainbridge were then distributed to PTK Holdings, Inc. ("PTK"), a
newly formed wholly owned subsidiary of Holdings (the "Plainbridge Spin-Off").
As a result of the Plainbridge Spin-Off, PTK holds 100% of the capital stock of
both Plainbridge and Pathmark. At the time of Recapitalization, Holdings
intended to further spin off Plainbridge to Holdings' common stockholder. Such
further spin-off would have required the satisfaction of dividend restrictions
with respect to Holdings' Exchangeable Preferred Stock, as well as, obtaining
consents from various lenders to Plainbridge and PTK. Holdings has concluded
that this further spin-off of Plainbridge is not likely to occur (see Note 2).
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 4).
The accompanying consolidated financial statements of the Company indicate
that, at January 28, 1995, current liabilities exceeded current assets by $98.0
million and stockholder's deficit was $1.3 billion. Management believes that
cash flows generated from operations, supplemented by the unused borrowing
capacity under the Pathmark and the Plainbridge Working Capital Facilities (see
Note 12) 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 seasonal cash requirements. Further, the Company believes
it will be in compliance throughout the upcoming fiscal year with its various
debt covenants (see Note 12).
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.
29
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
During the fourth quarter of Fiscal 1994, as a result of the aforementioned
dividend restrictions, Holdings has concluded that a further spin off of
Plainbridge to Holdings' common stockholder is not likely to occur. Accordingly,
prior year financial statements, which had included the results of Plainbridge's
warehouse, transportation and real estate operations as discontinued operations,
have been reclassified to include such results in continuing operations.
The results from discontinued operations for all periods presented represent
the operations of the Company's home centers segment which was sold during
Fiscal 1994 (see Note 4).
Fiscal Year:
The Company's fiscal year ends on the Saturday nearest to January 31 of the
following calendar year. Normally each fiscal year consists of 52 weeks, but
every five or six years the fiscal year consists of 53 weeks.
Statements of Cash Flows:
All investments and marketable securities with a maturity of three months or
less are considered to be cash equivalents. The Company had $14.8 million of
cash equivalent investments as of January 28, 1995 and no such investments as of
January 29, 1994.
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 life as part of cost of goods sold. The amortization of
video tapes included in cost of goods sold approximate $2.6 million, $2.6
million and $2.7 million in Fiscal 1994, Fiscal 1993 and Fiscal 1992,
respectively.
Property and Equipment:
Property and equipment are stated at cost. Depreciation and amortization
expense on owned property and equipment is computed on the straight-line method
over their estimated useful lives. 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.
Depreciable lives of owned property and equipment are as follows:
<TABLE>
<S> <C>
Buildings............................. 40 years
Building/leasehold improvements:
Structural.......................... Remaining life of building or lease term,
whichever is shorter
Other improvements.................. 8 to 15 years
Fixtures and equipment................ 3 to 10 years
Transportation equipment.............. 3 to 8 years
</TABLE>
30
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Income Taxes:
The Company's income tax expense is computed based on a tax sharing
agreement with its ultimate parent, 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.
Deferred Financing Costs:
Deferred financing costs are amortized on the straight-line method over the
life of the related indebtedness.
Net Earnings (Loss) Per Common Share:
Since the Company is a wholly owned subsidiary, earnings (loss) per share
information is not presented.
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 utilizing a risk
free discount rate when management makes such decision to close a store.
Self-Insured Liabilities:
Self-insured liabilities represent an estimate of incurred but unpaid claims
relating to customer, employee and vehicle accidents and covered employee
medical benefits as of the balance sheet date. The liabilities for customer and
employee accident claims are recorded at present value, utilizing a risk free
discount rate, due to the long-term payout of these claims (see Note 11).
Reclassifications:
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the Fiscal 1994 presentation.
NOTE 3--FISCAL 1993 RECAPITALIZATION
On October 26, 1993, the Recapitalization was consummated. Pathmark Stores,
Inc. (formerly Supermarkets General Corporation, hereinafter referred to as
"Pathmark") borrowed $450.0 million under a bank credit agreement (the "Bank
Credit Agreement"), consisting of $400.0 million under a term loan facility
("the Pathmark Term Loan") and $50.0 million under a $175.0 million working
capital facility (the "Pathmark Working Capital Facility"), borrowed $436.6
million through the issuance of its 9.625% Senior Subordinated Notes due 2003
(the "Pathmark Senior Subordinated Notes"), issued $120.0 million initial
principal amount of its 10.75% Junior Subordinated Deferred Coupon Notes due
2003 (the "Pathmark Deferred Coupon Notes"), exchanged $95.8 million principal
amount of its 12.625% Subordinated Debentures due 2002 (the "Pathmark
Subordinated Debentures") for $95.8 million principal amount outstanding of
Holdings Subordinated Debentures and exchanged $198.5 million principal amount
of its 11.625% Subordinated Notes due 2002 (the "Pathmark Subordinated Notes")
for $198.5 million principal amount outstanding of the Holdings Subordinated
Notes. As part of the Recapitalization, PTK borrowed $126.1 million through the
issuance of its $130.0 million aggregate
31
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--FISCAL 1993 RECAPITALIZATION--(CONTINUED)
principal amount 10.25% Exchangeable Guaranteed Debentures due 2003 (the "PTK
DIBs") in a private placement, which bonds the Company has guaranteed. The
proceeds from the aforementioned borrowings were used to redeem the Old Working
Capital Facility, Holdings 14.5% Senior Subordinated Notes due 1997 (the
"Holdings Senior Subordinate Notes") and Holdings 13.125% Junior Subordinated
Discount Debentures due 2003 (the "Holdings Discount Debentures") and to
purchase $185.0 million aggregate principal amount of the Holdings 12.625%
Subordinated Debentures due 2002 (the "Holdings Subordinated Debentures") from
the Equitable Affiliates. On October 26, 1993, Plainbridge, Inc.
("Plainbridge"), a newly formed indirectly wholly owned subsidiary of the
Company, borrowed $3.5 million under a $50.0 million bank revolving credit
agreement (the "Plainbridge Working Capital Facility"). On April 30, 1993, the
Company repaid $5.7 million of indebtedness, which was secured by a mortgage on
the distribution center of the home centers segment transferred to Plainbridge
and on May 14, 1993, the Company repaid $2.5 million of indebtedness, which was
secured by mortgages on two Pathmark retail properties transferred to
Plainbridge.
In conjunction with the Plainbridge Spin-Off, Pathmark entered into a
10-year logistical services agreement (the "Logistical Services Agreement") with
Plainbridge. The terms of the Logistical Services Agreement were designed to
require Plainbridge to continue to provide Pathmark with substantially the same
level of supply and other logistical services as was available from the
warehouse, distribution and processing facilities prior to the Plainbridge
Spin-Off at substantially the same or a lower cost (see Note 16).
In connection with the Plainbridge Spin-Off and the Recapitalization, the
Company recorded a pretax charge of approximately $23.7 million in the third
quarter of Fiscal 1993 to record estimated reorganization and restructuring
costs, including an early retirement program offered to certain Company
associates. During the fourth quarter of Fiscal 1993, the Company determined
that the estimated costs related to the reorganization and restructuring were
less than originally estimated and recorded a pretax credit of approximately
$7.1 million. Of the total net pretax charge of $16.6 million for Fiscal 1993,
$6.4 million related to the early retirement program and to the severance costs
incurred to reduce the Company's workforce, $8.1 million related to the
additional technical information systems costs incurred in order to accomplish
the Plainbridge Spin-Off (see Note 20) and $2.1 million related to the warehouse
and consulting costs associated therewith.
NOTE 4--GAIN ON DISPOSAL OF HOME CENTERS SEGMENT
On November 4, 1994, the Company's Plainbridge subsidiary completed the sale
of its home centers segment 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 the reduction in the deferred tax valuation allowance
of $5.1 million, resulting from the utilization of the capital tax loss
carryforward which had previously been reserved for (see Note 19). The Company
used net cash proceeds of $66.6 million before January 28, 1995 and $4.7 million
after January 28, 1995 to pay down the PTK DIBs, including accrued interest and
debt premium.
32
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--GAIN ON DISPOSAL OF HOME CENTERS SEGMENT--(CONTINUED)
As of the date of sale, the net assets of the home centers segment were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current assets................................................................... $ 67,713
Property and equipment........................................................... 60,062
Other assets..................................................................... 3,244
--------
Total assets..................................................................... 131,019
--------
Current liabilities.............................................................. 39,841
Noncurrent liabilities........................................................... 22,219
--------
Total liabilities................................................................ 62,060
--------
Net assets....................................................................... $ 68,959
--------
--------
</TABLE>
Through the date of the sale, the Company reported the home centers segment
as discontinued operations. Operating results of such discontinued operations
were as follows (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------
1994(A) 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Sales....................................................... $271,989 $343,643 $344,279
-------- -------- --------
-------- -------- --------
Loss before income taxes(b)................................. $ (2,383) $ (1,169) $ (2,069)
Income tax benefit.......................................... (284) (522) (904)
-------- -------- --------
Net loss from discontinued operations....................... $ (2,099) $ (647) $ (1,165)
-------- -------- --------
-------- -------- --------
</TABLE>
- ------------
<TABLE>
<S> <C>
(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. These charges amounted to $11.0 million,
$13.1 million, and $13.0 million in Fiscal 1994, Fiscal 1993 and Fiscal 1992,
respectively, and are included in the results of the discontinued operations.
</TABLE>
NOTE 5--CUMULATIVE EFFECT OF FISCAL 1993 ACCOUNTING CHANGES
The Company made the following accounting changes in Fiscal 1993:
Inventory:
Effective January 31, 1993, the Company changed its method utilized to
calculate LIFO inventories. Prior to Fiscal 1993, the Company utilized a retail
approach to determine current cost and a general warehouse purchase index to
measure inflation in the cost of its merchandise inventories in its stores. The
Company's change arose from the development and utilization in Fiscal 1993 of
internal cost indices based on the specific identification of merchandise in its
stores to measure inflation in the prices, thereby eliminating the averaging and
estimation inherent in the retail and general warehouse purchase index methods.
The Company believes the use of such specific costs and internal indices results
in a more accurate measurement of the impact of inflation in the costs of its
store merchandise. The effect of this change resulted in a charge to income of
$10.7 million, net of an income tax benefit of $7.8 million, and has been
presented as a cumulative effect of a change in accounting method in the
accompanying Fiscal 1993 consolidated statement of operations.
33
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--CUMULATIVE EFFECT OF FISCAL 1993 ACCOUNTING CHANGES--(CONTINUED)
Postretirement Benefits other than Pensions:
Effective January 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
other than Pensions" which resulted in a charge to income of $15.6 million, net
of an income tax benefit of $11.3 million, immediately upon adoption.
Postemployment Benefits:
Effective January 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" which resulted in a charge to income of $2.5 million, net of an income
tax benefit of $1.8 million, immediately upon adoption.
Income Taxes:
Effective January 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which had no effect
on the consolidated statements of operations, but resulted in a reclassification
of the current and noncurrent deferred taxes.
Present Value Discount Rate Determination:
Effective January 31, 1993, the Company made a change in the determination
of the discount rate utilized to record the present value of certain noncurrent
liabilities (self-insured liabilities and closed store liabilities) and reduced
such rate from 12%, representing the Company's effective interest rate, to a
risk free rate, estimated at 4%. The cumulative effect of this accounting change
as of January 31, 1993 totalled $11.6 million, net of an income tax benefit of
$8.4 million.
NOTE 6--ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 29,
1995 1994
----------- -----------
<S> <C> <C>
Prescription plans.................................................... $11,623 $13,377
Other................................................................. 2,669 3,842
----------- -----------
Accounts receivable................................................... 14,292 17,219
Less: allowance for doubtful accounts(a).............................. 912 1,791
----------- -----------
Accounts receivable, net.............................................. $13,380 $15,428
----------- -----------
----------- -----------
</TABLE>
- ------------
(a) The allowance for doubtful accounts reflects a provision of $2.2 million and
$3.2 million, as well as a write off of $3.1 million and $3.2 million in
Fiscal 1994 and Fiscal 1993, respectively.
NOTE 7--MERCHANDISE INVENTORIES
Merchandise inventories are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 29,
1995 1994
----------- -----------
<S> <C> <C>
Merchandise inventories at FIFO cost.............................. $ 298,812 $ 365,246
Less: LIFO reserve................................................ 43,181 48,617
----------- -----------
Merchandise inventories at LIFO cost.............................. $ 255,631 $ 316,629
----------- -----------
----------- -----------
</TABLE>
34
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--MERCHANDISE INVENTORIES--(CONTINUED)
Liquidation of LIFO layers in the periods reported did not have a
significant effect on the results of continuing operations. The LIFO reserve
decreased to $43.2 million at January 28, 1995 from $48.6 million at January 29,
1994 primarily due to the disposal of the home centers segment.
NOTE 8--OTHER ASSETS
Prepaid expenses increased to $26.6 million at January 28, 1995 from $21.8
million at January 29, 1994 due to the timing of rent and real estate tax
payments. Other current assets increased to $29.5 million at January 28, 1995
from $12.4 million at January 29, 1994 principally due to an increase in assets
held for sale. Other assets decreased to $24.0 million at January 28, 1995 from
$27.7 million at January 29, 1994 primarily due to the utilization of the asset
related to the Company's corporate owned life insurance policy of $7.5 million
and the collection of certain notes receivable of $4.0 million, partially offset
by an increase in the prepaid pension asset (see Note 17).
NOTE 9--PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 29,
1995 1994
----------- -----------
<S> <C> <C>
Land.................................................................. $ 65,142 $ 65,840
Buildings and building improvements................................... 201,553 196,212
Fixtures and equipment................................................ 200,015 225,582
Leasehold costs and improvements...................................... 268,165 309,995
Transportation equipment.............................................. 19,828 19,771
Construction in progress.............................................. -- 680
----------- -----------
Property and equipment, owned......................................... 754,703 818,080
Property and equipment under capital leases........................... 173,175 176,496
----------- -----------
Property and equipment, at cost....................................... 927,878 994,576
Less: accumulated depreciation and amortization....................... 329,077 348,733
----------- -----------
Property and equipment, net........................................... $ 598,801 $ 645,843
----------- -----------
----------- -----------
</TABLE>
NOTE 10--DEFERRED FINANCING COSTS
Deferred financing costs, primarily related to the Recapitalization, are
comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 29,
1995 1994
----------- -----------
<S> <C> <C>
Deferred financing costs.............................................. $50,063 $49,086
Less: accumulated amortization........................................ 9,617 2,589
----------- -----------
Deferred financing costs, net......................................... $40,446 $46,497
----------- -----------
----------- -----------
</TABLE>
35
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 29,
1995 1994
----------- -----------
<S> <C> <C>
Self-insured liabilities............................................ $ 70,736 $ 85,943
Pension and deferred compensation................................... 15,001 15,975
Disposal of Purity Operations....................................... 55,220 52,694
Other postretirement and postemployment benefits.................... 40,600 43,972
Accrued dividends................................................... 38,734 21,519
Other............................................................... 36,620 36,875
----------- -----------
Other noncurrent liabilities........................................ $ 256,911 $ 256,978
----------- -----------
----------- -----------
</TABLE>
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 in Fiscal 1994 and Fiscal 1993, based on the projected payout of
these claims.
NOTE 12--LONG-TERM DEBT
Long-term debt is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 29,
1995 1994
----------- -----------
<S> <C> <C>
Pathmark Term Loan................................................. $ 348,250 $ 385,000
Pathmark Working Capital Facility.................................. 63,000 29,000
Plainbridge Working Capital Facility............................... -- 8,500
10.25% PTK Exchangeable Guaranteed Debentures due 2003............. 79,257 129,649
9.625% Pathmark Senior Subordinated Notes due 2003................. 437,072 436,718
10.75% Pathmark Deferred Coupon Notes due 2003..................... 136,853 123,312
12.625% Pathmark Subordinated Debentures due 2002.................. 95,750 95,750
11.625% Pathmark Subordinated Notes due 2002....................... 199,017 198,517
11.625% Holdings Subordinated Notes due 2002....................... 983 1,483
Industrial Revenue Bonds........................................... 6,375 6,375
Other Debt (primarily mortgages)................................... 45,324 47,176
----------- -----------
Total debt......................................................... 1,411,881 1,461,480
Less: current maturities........................................... 46,310 46,244
----------- -----------
Long-term portion.................................................. $ 1,365,571 $ 1,415,236
----------- -----------
----------- -----------
</TABLE>
36
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--LONG-TERM DEBT--(CONTINUED)
Scheduled Maturities of Debt:
Long-term debt principal payments are as follows (dollars in thousands):
PRINCIPAL
FISCAL YEARS PAYMENTS
- ------------------------------------------------------ ----------
1995................................................ $ 46,310
1996................................................ 48,081
1997................................................ 58,147
1998................................................ 169,522
1999................................................ 138,726
Thereafter.......................................... 951,095
----------
$1,411,881
----------
----------
Bank Credit Agreements:
Under the Bank Credit Agreements, the Pathmark and the Plainbridge Working
Capital Facilities and the Pathmark Term Loan bear interest at floating rates.
At January 28, 1995, the interest rates for the Pathmark Term Loan and Pathmark
Working Capital Facility were 8.9% and 9.5%, respectively. At January 29, 1994,
the interest rates for the Pathmark Term Loan and Pathmark Working Capital
Facility were 5.9% and 7.4%, respectively. At January 28, 1995, Plainbridge had
no borrowings under its Working Capital Facility. At January 29, 1994, the
interest rate for the Plainbridge Working Capital Facility was 7.4%. 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.
Under the Pathmark Working Capital Facility, which expires on July 31, 1998,
Pathmark can borrow or obtain letters of credit in an aggregate amount not to
exceed $175.0 million (of which the maximum of $100.0 million can be in letters
of credit) subject to an annual cleandown provision. Under the terms of the
Pathmark cleandown provision, in each fiscal year, loans cannot exceed $50.0
million under the Pathmark Working Capital Facility for a period of 30
consecutive days. Pathmark has satisfied its cleandown provision for Fiscal 1994
and Fiscal 1995. Under the Plainbridge Working Capital Facility, which expires
in Fiscal 1997, Plainbridge can borrow or obtain letters of credit in an
aggregate amount not to exceed $40.0 million subject to an annual cleanup
provision. Under the terms of the Plainbridge cleanup provision, in each fiscal
year, loans cannot be made for a period of 30 consecutive days. Plainbridge
satisfied its cleanup provision for Fiscal 1994 and Fiscal 1995. Holdings
believes that Pathmark and Plainbridge each have sufficient unused borrowing
capacity under their respective working capital facilities, which can be
utilized for unforeseen or for seasonal cash requirements. At January 28, 1995,
Pathmark and Plainbridge, in the aggregate, had approximately $76.6 million in
unused borrowing capacity under their working capital facilities.
At January 28, 1995, the Company was in compliance with all of its debt
financial covenants, as amended. Based upon projected results for the upcoming
fiscal year, the Company believes it will be in compliance with its various debt
financial covenants, which includes certain levels of operating cash flow (as
defined), minimum interest coverage and a maximum leverage ratio, throughout the
upcoming fiscal year. The Pathmark Term Loan, the Pathmark and Plainbridge
Working Capital Facilities and the indentures for certain debt also contain
covenants, including, but not limited to, covenants with respect to the
following matters: (i) limitation on indebtedness; (ii) limitation on restricted
payments; (iii) limitation on transactions with affiliates; (iv) limitation on
liens; (v) limitation on the issuance of
37
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--LONG-TERM DEBT--(CONTINUED)
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 DIBs were originally formulated to accrete to a maturity value of
$218.3 million in Fiscal 2003. The Company used the net cash proceeds of $66.6
million before January 28, 1995 and $4.7 million after January 28, 1995 to
paydown PTK DIBs, including accrued interest and debt premium. The PTK DIBs
begin paying cash interest on a semiannual basis on June 30, 1999 and have no
sinking fund requirements. At January 28, 1995 the maturity value of the
outstanding debentures is $120.5 million.
Pathmark Senior Subordinated Notes:
The Pathmark Senior Subordinated Notes accrete to a maturity value of $440.0
million in Fiscal 2003. These notes began paying cash interest on a semiannual
basis on May 1, 1994 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 and began paying
cash interest on a semiannual basis on December 15, 1993. These debentures have
no sinking fund requirements.
Pathmark Subordinated Notes:
The Pathmark Subordinated Notes mature in Fiscal 2002 and contain a sinking
fund provision that requires Pathmark to deposit $49.4 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.
11.625% Holdings Subordinated Notes due 2002:
On October 26, 1993, as part of the Recapitalization, $198.5 million
principal amount of the Holdings Subordinated Notes were exchanged for $198.5
million principal amount of Pathmark Subordinated Notes. Approximately $1.0
million principal amount of the Subordinated Notes remain outstanding. Interest
on the Holdings Subordinated Notes is payable semi-annually.
Industrial Revenue Bonds:
Interest rates for the industrial revenue bonds range from 10.5%-10.9%. The
industrial revenue bonds are payable in installments ending in Fiscal 2003. The
industrial revenue bonds outstanding at January 28, 1995 and January 29, 1994
are unsecured.
Other Debt:
Other debt includes mortgage notes which are secured by property and
equipment having a net book value of $71.2 million at January 28, 1995 and $72.9
million at January 29, 1994. These borrowings, whose interest rates averaged
10.5%, are payable in installments ending in Fiscal 2000.
38
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and fair values of the Company's financial instruments
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
JANUARY 28, 1995 JANUARY 29, 1994
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and marketable securities............. $ 23,247 $ 23,247 $ 6,168 $ 6,168
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Investment in Purity....................... $ -- $ -- $ -- $ --
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Liabilities:
Debt:
Pathmark Term Loan......................... $ 348,250 $ 348,250 $ 385,000 $ 385,000
Pathmark Working Capital Facility.......... 63,000 63,000 29,000 29,000
Plainbridge Working Capital Facility....... -- -- 8,500 8,500
10.25% PTK Exchangeable Guaranteed
Debentures due 2003........................ 79,257 79,257 129,649 129,649
9.625% Pathmark Senior Subordinated Notes
due 2003................................... 437,072 393,103 436,718 447,287
10.75% Pathmark Deferred Coupon Notes due
2003....................................... 136,853 123,077 123,312 114,855
12.625% Pathmark Subordinated Debentures
due 2002................................... 95,750 97,119 95,750 105,449
11.625% Pathmark Subordinated Notes due
2002....................................... 199,017 195,335 198,517 212,830
11.625%Holdings Subordinated Notes due
2002....................................... 983 963 1,483 1,628
Industrial Revenue Bonds................... 6,375 6,375 6,375 6,375
Other Debt (primarily mortgages)........... 45,324 45,324 47,176 47,176
---------- ---------- ---------- ----------
Total debt........................... $1,411,881 $1,351,803 $1,461,480 $1,487,749
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Redeemable Preferred Stock:
Cumulative Exchangeable Redeemable
Preferred Stock............................ $ 101,959 $ 122,267 $ 100,346 $ 136,900
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The Company believes the fair value of its cash and marketable securities
due to their short term maturities approximates their carrying value. There is
no quoted market prices for the securities representing the Company's investment
in Purity and it is not practicable considering the materiality of this
investment to the Company to obtain an estimate of its fair value (see Notes 27
and 29).
The fair value of the Pathmark Term Loan and the Pathmark and Plainbridge
Working Capital Facilities 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 January
28, 1995 and January 29, 1994, since such instruments are publicly traded. The
Company has evaluated its 10.25% PTK Exchangeable Guaranteed Debentures, other
debt (primarily mortgages), 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.
39
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--INTEREST EXPENSE
Interest expense is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Pathmark Term Loan.......................................... $ 27,281 $ 6,471 $ --
Pathmark Working Capital Facility........................... 4,458 978 --
Plainbridge Working Capital Facility........................ 538 118 --
Pathmark Senior Subordinated Notes
Amortization of original issue discount................... 354 93 --
Currently payable......................................... 42,350 11,176 --
Pathmark Deferred Coupon Notes, accruable but not payable... 13,541 3,312 --
Pathmark Subordinated Debentures............................ 12,088 3,156 --
Pathmark Subordinated Notes................................. 23,136 6,068 --
Amortization of PTK Exchangeable Guaranteed Debentures
original issue discount..................................... 12,501 3,549 --
Amortization of debt issuance costs......................... 7,028 4,870 4,369
Obligations under capital leases............................ 15,694 14,957 15,500
Mortgages payable........................................... 4,398 4,579 4,853
Holdings Subordinated Notes................................. 149 17,253 15,629
Other, net.................................................. 7,332 7,164 10,562
Old bank credit agreement................................... -- 4,337 7,595
Holdings Senior Subordinated Notes.......................... -- 41,573 60,550
Holdings Subordinated Debentures
Accruable but not payable................................. -- -- 18,480
Currently payable......................................... -- 38,711 32,744
Holdings Discount Debentures................................ -- 20,794 9,196
Amortization of Holdings original issue discount............ -- 951 18,295
-------- -------- --------
Interest expense............................................ $170,848 $190,110 $197,773
-------- -------- --------
-------- -------- --------
</TABLE>
The Company made cash interest payments of $129.6 million in Fiscal 1994,
$196.5 million in Fiscal 1993 and $132.8 million in Fiscal 1992.
40
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--LEASES
At January 28, 1995, the Company was liable under terms of noncancellable
leases for the following minimum lease commitments (dollars in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1995................................................................... $ 33,357 $ 31,590
1996................................................................... 30,043 29,404
1997................................................................... 27,203 26,673
1998................................................................... 23,599 24,838
1999................................................................... 18,956 22,952
Later years............................................................ 147,184 212,518
-------- ---------
Total minimum lease payments(a)........................................ 280,342 $ 347,975
---------
---------
Less: executory costs (such as taxes, maintenance and insurance)....... 2,647
--------
Net minimum lease payments............................................. 277,695
Less: amounts representing interest.................................... 132,275
--------
Present value of net minimum lease payments (including current
installments of $18,298)............................................... $145,420
--------
--------
</TABLE>
- ------------
(a) Net of sublease income of $12,037 and $186,962 for capital and operating
leases, respectively.
During Fiscal 1994, Fiscal 1993 and Fiscal 1992, the Company incurred
capital lease obligations of $21.3 million, $25.7 million and $8.7 million,
respectively, in connection with lease agreements to acquire property and
equipment.
Rent expense included in continuing operations under all operating leases
having noncancellable terms of more than one year is summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------
<S> <C> <C> <C>
1994 1993 1992
-------- -------- --------
Minimum rentals.............................................. $ 49,694 $ 45,586 $ 37,894
Contingent rentals(b)........................................ 318 193 196
Less: rentals from subleases................................. (13,092) (5,725) (3,831)
-------- -------- --------
Rent expense................................................. $ 36,920 $ 40,054 $ 34,259
-------- -------- --------
-------- -------- --------
</TABLE>
- ------------
(b) Primarily based on sales.
NOTE 16--RELATED PARTY TRANSACTIONS
The following is a summary of related party agreements and transactions
between Pathmark and Plainbridge, the effects of which have been eliminated in
consolidation.
1) Spin-off:
A) Services Agreements:
Pathmark, Plainbridge and the Company are parties to agreements pursuant to
which Pathmark will continue to provide certain administrative services relating
to the warehouse, distribution and home
41
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--RELATED PARTY TRANSACTIONS--(CONTINUED)
centers operations of Plainbridge and certain administrative services to
Chefmark. Such services include, among other things, legal, human resources,
data processing, insurance, accounting, tax, treasury and property management
services. Each of the agreements have an initial term of five years, with
renewal options at the end of such term. The cost of the services charged to
Plainbridge and Chefmark under these agreements in the aggregate was
approximately $13.7 million and $4.2 million for the fiscal year ended January
28, 1995 and for the period from the date of the Plainbridge Spin-Off through
January 29, 1994, respectively.
B) The Logistical Services Agreement:
In connection with the Plainbridge Spin-Off, Pathmark and Plainbridge
entered into the Logistical Services Agreement to provide for the supply by
Plainbridge to Pathmark of most of the merchandise sold in Pathmark's retail
stores and for the provision of warehousing, distribution and other logistical
services relating to the supply of such merchandise. Pursuant to the Logistical
Services Agreement, Pathmark directs the purchase of the merchandise to be
provided to it by Plainbridge. Pathmark negotiates directly with vendors
regarding the types of merchandise required, the quantities needed, the delivery
schedules, the pricing, and all the other terms and conditions of sale. All
merchandise is ordered by Pathmark for the account of Plainbridge, which will
pay for and will retain title to such merchandise until it has been delivered to
Pathmark. If requested by a vendor, Pathmark, in its sole discretion, may
guarantee payment of such orders by Plainbridge. Pathmark guaranteed
approximately $37.3 million and $42.8 million of such orders at January 28, 1995
and January 29, 1994, respectively. In general, the Logistical Services
Agreement also requires Plainbridge to perform the same services in
substantially the same manner as they were performed by Pathmark's warehouse and
distribution group prior to the Plainbridge Spin-Off.
The Logistical Services Agreement requires that, with certain exceptions and
subject to certain termination rights, Plainbridge is to sell to Pathmark, for a
period of ten years, to the extent requested by Pathmark, all of Pathmark's
merchandise requirements for both its existing and future stores. In addition,
Pathmark has five one-year renewal options following the expiration of the
original ten-year term. The Logistical Services Agreement does not limit
Pathmark's ability to purchase goods from other suppliers. For the fiscal year
ended January 28, 1995 and for the period from the date of the Plainbridge
Spin-Off through January 29, 1994, the Company purchased 81% and 83%,
respectively, of its total merchandise purchases from Plainbridge. Merchandise
that Pathmark customarily obtains directly from vendors is excluded from the
Logistical Services Agreement.
The Logistical Services Agreement requires Plainbridge to store and deliver
to Pathmark all merchandise purchased at Pathmark's direction. Pathmark is
required in good faith to designate Plainbridge as its carrier with respect to
merchandise customarily shipped directly from vendors to Pathmark's stores.
Plainbridge may be required to maintain inventory with a book value of at least
$130.0 million for the exclusive use of Pathmark, and to the extent that the
inventory value falls below such level, Plainbridge may be asked by Pathmark to
purchase sufficient merchandise to maintain such level to the extent such
merchandise is ordered by Pathmark. Plainbridge is also required to accommodate
physical annual increases of up to five percent in the volume of Pathmark
directed purchases of merchandise to be handled by Plainbridge. Pathmark is to
reimburse Plainbridge for all reasonable incremental out-of-pocket costs (but
not capital costs) incurred by Plainbridge for the storage and the handling of
merchandise that is in excess of the five percent annual capacity increase,
provided that such out-of-pocket costs do not exceed the costs of storage and of
handling at local independent warehouses.
42
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--RELATED PARTY TRANSACTIONS--(CONTINUED)
Upon the delivery of merchandise to Pathmark's stores by Plainbridge,
Pathmark will owe Plainbridge for the cost of the merchandise plus a specified
variable payment. This payment will vary according to the type and to the value
of the merchandise. A minimum annual fee will be payable by Pathmark to the
extent that the aggregate of the variable fees described above payable in any
year does not exceed the minimum annual fee. The minimum annual payment for
Fiscal 1995 is $134.9 million and such fee is adjusted upward (but not downward)
each fiscal year by the rate of inflation. This minimum payment was based upon
the historical cost to Pathmark of operating the warehouse, distribution and
transportation facilities. Pathmark is obligated to pay the minimum annual fee
to Plainbridge irrespective of whether Pathmark purchases merchandise from other
suppliers, except in cases of force majeure or when Plainbridge shall have
materially breached the Logistical Services Agreement or shall have failed to
obtain or to maintain the licenses and the permits needed to operate its
business. The minimum annual fee will be reduced to the extent that the volume
of merchandise purchases decreases as a result of any store dispositions by
Pathmark and will also be reduced if the volume of Pathmark-directed merchandise
falls below 90% of the actual volume achieved in Fiscal 1992, to the extent that
Plainbridge is, as a result, able to realize reductions in its operating costs.
Under this agreement, Pathmark paid Plainbridge approximately $139.4 million
during Fiscal 1994 and $36.1 million during the period from the date of the
Plainbridge Spin-Off to January 29, 1994. Plainbridge grants Pathmark an
allowance, which is based on the amount of merchandise purchased by Plainbridge
at Pathmark's direction. The allowance is credited against the variable fees and
the minimum annual fee obligation. In Fiscal 1994 and for the period from the
date of the Plainbridge Spin-Off through January 29, 1994, an allowance of
approximately $25.5 and $6.6 million, respectively, was received by Pathmark. In
addition, certain cost benefits, which were derived from increases in the volume
or value of merchandise purchased from Plainbridge by Pathmark or by third
parties, are to be shared equally between Pathmark and Plainbridge. Estimated
fees are payable in weekly installments, and an annual reconciliation is
performed for the amount of fees that are actually payable for such year.
Pathmark will pay to Plainbridge the costs of the merchandise at the time a
vendor requires payment from Plainbridge.
The Logistical Services Agreement allows Plainbridge to sell merchandise and
to provide logistical services to third parties, although it is not permitted to
sell merchandise to supermarkets, drug stores and to other retail stores
stocking merchandise carried by Pathmark in Pathmark's current market areas. An
exception is made for retail stores that do not, in the ordinary course of
business, engage to a significant degree in the sale of food or of pharmacy
related products, without Pathmark's prior written consent which consent may not
be unreasonably withheld. Plainbridge is also permitted to "piggyback" such
third parties' orders onto Pathmark's orders from vendors, so long as they do
not interfere with Pathmark's delivery schedules, quantity needs or other
requirements.
Plainbridge and Pathmark are allowed to terminate the Logistical Services
Agreement if the other (i) materially breaches its terms and fails to cure such
breach for 60 days after written notice has been provided by the other party or
(ii) experiences certain insolvency events. Additionally, following the fourth
anniversary of the date of the Logistical Services Agreement, the Company has
the option of terminating it at will on six months notice. If Pathmark
terminates the Logistical Services Agreement because of a material breach by, or
insolvency of, Plainbridge, Pathmark has the right to purchase, within 30 days
of the termination, that portion of the assets of Plainbridge which is essential
to the support of Plainbridge's obligations to Pathmark under the Logistical
Services Agreement (the "Pathmark Distribution Assets") at the lower of (i)
their net book value or (ii) their fair market value. If the Company exercises
its at will option to terminate the Logistical Services Agreement, the
43
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--RELATED PARTY TRANSACTIONS--(CONTINUED)
Company is required to offer to purchase the Pathmark Distribution Assets at
their fair market value. If Plainbridge terminates the Logistical Services
Agreement because of a material breach by, or insolvency of Pathmark,
Plainbridge has the right to sell to Pathmark (and Pathmark will have the
obligation to buy) the Pathmark Distribution Assets at their fair market value
within 30 days of such termination.
Other than in the ordinary course of business, Plainbridge is not permitted
to sell any of the Pathmark Distribution Assets without Pathmark's prior written
consent. Additionally, in the event of a change in the ultimate beneficial
ownership of Plainbridge's voting stock such that a person, other than ML & Co.
or an affiliate of ML & Co. (the majority shareholder of Holdings), holds a
majority of such stock, the Company has for a period of two years, the
irrevocable and exclusive right to purchase any or all of the Pathmark
Distribution Assets at their fair market value.
Other provisions of the Logistical Services Agreement include (i) that
Plainbridge passes on to Pathmark all discounts and all allowances made
available to it by vendors in respect of merchandise purchased for Pathmark,
unless such discounts or allowances were made available solely as a result of
actions taken or not taken by Plainbridge, (ii) that Plainbridge must ensure
that merchandise quality meets or exceeds the standards established by Pathmark
for such merchandise, and that Pathmark may place its representatives at the
Distribution Facilities to ensure that such quality is maintained, (iii) that
Plainbridge deliver merchandise to Pathmark at a 98% or better level of service,
as measured in accordance with Pathmark's practices prior to the Plainbridge
Spin-Off, (iv) that Pathmark pay Plainbridge for any use of trailers for storage
and (v) that each of Pathmark and Plainbridge cooperate to reduce costs and to
improve service levels.
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.
2) Other:
In conjunction with the Plainbridge Spin-Off, certain real property was
transferred to Plainbridge and is being leased to Pathmark at rentals which the
Company believes approximate fair value. During Fiscal 1994 and for the period
from the date of the Plainbridge Spin-Off through January 29, 1994, such rentals
amounted to $4.4 million and $1.1 million, respectively.
In addition, Pathmark is leasing six store properties to Plainbridge, with a
net book value of $9.0 million at January 28, 1995. The Company believes that
the rentals received from Plainbridge approximate fair value. During Fiscal 1994
and for the period from the date of the Plainbridge Spin-Off through January 29,
1994, such rentals amounted to $3.8 million and $1.0 million, respectively.
As discussed in Note 25, 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 January 28, 1995 and January 29, 1994.
44
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--RELATED PARTY TRANSACTIONS--(CONTINUED)
During Fiscal 1994, the Company paid ML & Co. fees of approximately $1.0
million related to the disposal of the home centers segment. During Fiscal 1993,
in conjunction with the Recapitalization, the Company paid ML & Co. fees of
$12.8 million.
NOTE 17--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 nonunion and certain union associates of Pathmark and Plainbridge. 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.
The following table sets forth the funded status of the pension plans and
the amounts recognized in the Company's financial statements (dollars in
thousands):
<TABLE>
<CAPTION>
JANUARY 28, 1995 JANUARY 29, 1994
-------------------------- --------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated
benefit obligation:
Vested.................................. $ (80,405) $ (16,131) $ (93,214) $ (15,852)
Unvested................................ (4,050) (349) (6,194) (149)
----------- ----------- ----------- -----------
Total................................... (84,455) (16,480) (99,408) (16,001)
Plan assets at fair value................... 130,552 251 147,329 508
----------- ----------- ----------- -----------
Plan assets higher (lower) than accumulated
benefit obligation.......................... $ 46,097 $ (16,229) $ 47,921 $ (15,493)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Actuarial present value of projected
benefit obligation........................ $ (97,064) $ (17,991) $(131,877) $ (17,657)
Plan assets at fair value................... 130,552 251 147,329 508
----------- ----------- ----------- -----------
Plan assets higher (lower) than projected
benefit obligation.......................... 33,488 (17,740) 15,452 (17,149)
Unrecognized net loss (gain) from past
experience different from that assumed and
effects of changes in assumptions........... (22,345) (883) (13,034) 535
Unrecognized prior service cost............. (83) 2,051 1,086 392
----------- ----------- ----------- -----------
Prepaid (accrued) pension cost.............. $ 11,060 $ (16,572) $ 3,504 $ (16,222)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Assets of the Company's pension plans are invested in marketable securities,
comprised, primarily of equities of domestic corporations, U.S. Government
instruments and money market investments.
The increase in the prepaid pension cost at January 28, 1995 is primarily
due to the pension plan curtailment gain related to the sale of the home centers
segment (see Notes 4 and 8).
45
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17--RETIREMENT AND BENEFIT PLANS--(CONTINUED)
The following table provides the assumptions used in determining the
actuarial present value of the projected benefit obligation:
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 29,
1995 1994
----------- -----------
<S> <C> <C>
Weighted average discount rate...................................... 8.5% 7.25%
Rate of increase in future compensation levels...................... 5.5 5.5
Expected long-term rate of return on plan assets.................... 9.5 9.5
</TABLE>
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 for Fiscal
1995.
The net periodic pension cost included in continuing operations is comprised
of the following components (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Service cost of benefits earned during the period........... $ 4,425 $ 3,915 $ 4,018
Interest cost on projected benefit obligation............... 9,103 8,530 8,499
Actual gain on plans' assets................................ (61) (10,352) (9,221)
Net amortization and deferral............................... (10,884) 55 (583)
-------- -------- --------
Net periodic pension cost................................... $ 2,583 $ 2,148 $ 2,713
-------- -------- --------
-------- -------- --------
</TABLE>
The Company also contributes to many multi-employer plans which provide
defined benefits to certain union associates. The Company's contributions to
these multi-employer plans were $18.0 million in Fiscal 1994, $17.9 million in
Fiscal 1993 and $17.7 million in Fiscal 1992.
The Company sponsors a savings plan for eligible nonunion associates.
Contributions under the plan are based on specified percentages of associate
contributions. The Company's contributions to the savings plan were $3.5 million
in Fiscal 1994, $4.0 million in Fiscal 1993 and $3.0 million in Fiscal 1992.
The Company maintains a Voluntary Employee Benefit Association ("VEBA") to
provide for certain employee health benefits. The Company's tax-deductible
contributions to the VEBA were $19.9 million in Fiscal 1994, $25.8 million in
Fiscal 1993 and $21.3 million in Fiscal 1992.
NOTE 18--OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company provides to its associates postretirement benefits, principally
health care and life insurance benefits. The accumulated postretirement benefit
obligation was determined utilizing an assumed discount rate of 8.5% at January
28, 1995 and 7.75% at January 29, 1994 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 10.0% and which grade down to 5.75% in Fiscal 1999. The effect of a
1% change in the assumed cost trend rate would change the accumulated
postretirement benefit obligation by approximately $2.3 million as of January
28, 1995 and would change the net periodic postretirement benefit cost by $0.2
million for Fiscal 1994.
46
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS--(CONTINUED)
The net postretirement benefit costs related to continuing operations
consisted of the following components (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
----------------
1994 1993
------ ------
<S> <C> <C>
Service cost of benefits earned during the year............................ $ 700 $1,004
Interest cost on accumulated postretirement benefit obligation............. 1,870 2,257
------ ------
Net postretirement benefit cost............................................ $2,570 $3,261
------ ------
------ ------
</TABLE>
The annual charges recorded by the Company on a pay-as-you-go (cash basis)
amounted to $1.2 million in Fiscal 1992.
The following table provides information on the status of the plans (dollars
in thousands):
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 29,
1995 1994
----------- -----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................................ $14,018 $13,057
Other active plan participants...................................... 18,325 22,528
----------- -----------
Total................................................................. $32,343 $35,585
----------- -----------
----------- -----------
</TABLE>
The Company also provides to 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
claimant remaining on disability to maximum duration. These liabilities are
recorded at their present value utilizing a discount rate of 4%.
The accumulated postemployment benefit obligation as of January 28, 1995 and
January 29, 1994 was $8.3 million and $8.4 million, respectively. The net
postemployment benefit cost for continuing operations consisted of the following
components (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
----------------
1994 1993
------ ------
<S> <C> <C>
Service cost of benefits earned during the year............................ $1,644 $1,292
Interest cost on accumulated postemployment obligation..................... 304 295
------ ------
Net postemployment benefit cost............................................ $1,948 $1,587
------ ------
------ ------
</TABLE>
The annual charges recorded by the Company on a pay-as-you-go (cash basis)
amounted to $1.4 million in Fiscal 1992.
47
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--INCOME TAXES
The income tax provision (benefit) from continuing operations is comprised
of the following (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Current
Federal.................................................... $ 3,079 $ 1,098 $ 8,948
State...................................................... 4,882 7,045 10,456
Deferred
Federal.................................................... 2,534 (14,539) (9,814)
State...................................................... 1,613 (5,406) (2,414)
Change in valuation allowance................................ (7,962) (8,950) --
-------- -------- --------
Income tax provision (benefit)............................... $ 4,146 $(20,752) $ 7,176
-------- -------- --------
-------- -------- --------
</TABLE>
The effective tax rate applicable to continuing operations differs from the
federal statutory tax rate as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
---------------------------
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Federal income tax provision (benefit) at statutory tax rate... 35.0% (35.0)% (34.0)%
State income taxes............................................. 40.3 4.5 .9
Tax credits.................................................... (6.3) (2.0) (.1)
Change in valuation allowance.................................. (49.4) (21.8) --
Other.......................................................... 6.1 (2.9) (.2)
Effect of loss carryback at 34% rate........................... -- 1.0 --
Amortization of goodwill....................................... -- -- 1.0
Goodwill write off............................................. -- -- 33.6
----- ----- -----
Effective tax rate............................................. 25.7% (56.2)% 1.2%
----- ----- -----
----- ----- -----
</TABLE>
Deferred tax assets and liabilities consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
JANUARY 28, 1995 JANUARY 29, 1994
------------------------ ------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Depreciation.................................... $ -- $ 80,301 $ -- $ 107,924
Merchandise inventory and gross profit.......... -- 19,059 -- 16,946
Prepaid expenses................................ -- 6,914 -- 7,234
Self-insured liabilities........................ 46,020 -- 56,158 --
Benefit plans................................... 9,034 -- 21,404 --
Lease capitalization............................ 17,284 -- 18,960 --
Closed store reserves........................... 10,520 -- 15,586 --
Alternative minimum taxes....................... 5,969 -- 2,890 --
General business credits........................ 10,600 -- 9,029 --
Net operating loss carryforwards................ 12,179 -- 19,156 --
Other postretirement and postemployment
benefits........................................ 17,359 -- 18,880 --
Capital loss carryforward....................... -- -- 5,084 --
Other........................................... 13,191 3,130 10,825 4,542
--------- ----------- --------- -----------
Subtotal........................................ 142,156 109,404 177,972 136,646
Less: valuation allowance....................... 26,783 -- 38,436 --
--------- ----------- --------- -----------
Total........................................... $ 115,373 $ 109,404 $ 139,536 $ 136,646
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
48
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--INCOME TAXES--(CONTINUED)
The Company has a net deferred tax asset of approximately $32.8 and $41.3
million at January 28, 1995 and January 29, 1994, respectively. Although the
Company generated pretax earnings in Fiscal 1994, the Company was unable to
conclude that realization of such deferred tax assets was more likely than not,
due to pretax losses experienced in prior years. Accordingly, the Company has
provided a valuation allowance of $26.8 million and $38.4 million at January 28,
1995 and January 29, 1994, respectively, to fully reserve its net deferred tax
assets, except for the alternative minimum tax credit carryforwards which do not
expire. Management will continue to assess the likelihood of realizing its
deferred tax assets and will adjust the valuation allowance when and if, in the
opinion of management, significant positive evidence exists which indicates that
it is more likely than not that the Company will be able to realize such
deferred tax assets. Such reductions in the valuation allowance, if any, will be
reflected as a component of income tax expense.
The capital loss carryforward at January 29, 1994 was utilized during Fiscal
1994 offsetting the capital gain generated by the sale of the home centers
segment. The net operating loss carryforwards, including state net operating
loss carryforwards, expire from Fiscal 1998 to Fiscal 2008.
The Company's state income tax provision, net of the change in the valuation
allowance in Fiscal 1994, includes the recording of state taxes for certain
issues related to prior years and the inability to utilize loss carryforwards in
certain states. The Fiscal 1993 and Fiscal 1992 state income tax provisions
resulted primarily from taxable income generated in New Jersey due to the
nondeductibility of a significant portion of intercompany interest expense.
The income tax receivable of $7.8 million at January 28, 1995 includes a
carryback refund claim related to the Fiscal 1993 net operating tax loss. The
refund was received during the first quarter of Fiscal 1995.
In Fiscal 1994, Fiscal 1993, and Fiscal 1992, the Company made income tax
payments of $6.5 million, $3.1 million and $21.0 million, respectively, and
received income tax refunds of $25.9 million, $10.1 million and $5.9 million,
respectively.
The Internal Revenue Service has completed its audits through Fiscal 1989
and is currently auditing Fiscal 1990 through Fiscal 1993.
49
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 20--COMMITMENTS AND CONTINGENCIES
In August 1991, the Company entered into a long-term agreement with
Integrated Systems Solutions Corporation ("ISSC"), a subsidiary of IBM, to
provide a wide range of information systems services. Under the agreement, ISSC
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,
and which are included in selling, general and administrative expenses in the
accompanying consolidated statements of operations, were $16.0 million, $12.6
million and $12.9 million during Fiscal 1994, Fiscal 1993 and Fiscal 1992,
respectively. Further, in Fiscal 1993, the Company expensed an additional $8.1
million of technical information costs in connection with the Plainbridge
Spin-Off (see Note 3).
The Company is contingently liable for certain obligations of the Purity
Operations primarily consisting of approximately 60 leases for real property, in
the event of default thereunder by the purchaser of the Purity Operations. As of
January 28, 1995, the estimated present value of such lease obligations
approximated $109.5 million. The Company is also contingently liable for certain
obligations of the recently sold home centers segment primarily consisting of 19
leases for real property, in the event of default thereunder by the purchaser of
the recently sold home centers segment. As of January 28, 1995, the estimated
present value of such lease obligations approximated $27.6 million.
In addition to the litigation referred to above, 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, the
results of operations or the business of the Company.
NOTE 21--PROVISION FOR STORE CLOSINGS
Effective with the beginning of the second quarter of Fiscal 1993, the
Company originally made a decision to close or to dispose of five stores which
the Company believed would continue to be unprofitable. As a result, the Company
recorded a pretax charge in the second quarter of Fiscal 1993 of approximately
$6.0 million. Operating results for the five stores had previously been excluded
from the consolidated statements of operations since the beginning of the second
quarter of Fiscal 1993. However, the Company decided on December 31, 1994 that
two of the five stores would continue to be operated and, therefore, the
operating results for these two stores have been included in the Fiscal 1994 and
Fiscal 1993 consolidated statements of operations. The inclusion of these two
stores had no significant effect on the Fiscal 1994 or 1993 reported results.
The remaining three stores were closed during the fourth quarter of Fiscal 1994
and the related leases have been assigned or sublet subsequent to January 28,
1995.
NOTE 22--LABOR DISPUTE
The Company's pretax earnings in the second quarter of Fiscal 1993 were
adversely impacted by a labor dispute and by the related promotional programs
implemented subsequent to such labor dispute. The related promotional programs
were implemented in order to regain sales levels. The Company, with three other
major supermarket companies (ShopRite, Foodtown and Grand Union), conducted
separate but simultaneous negotiations with respect to an expired labor
contract. The major issues of the contract concerned health care and related
benefits. On May 7, 1993, the union began selective strikes
50
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 22--LABOR DISPUTE--(CONTINUED)
against one of the Company's competitors. Over the course of the next three
weeks, the labor dispute expanded until, on May 28, 1993, union members at over
250 supermarkets, including 53 Pathmark supermarkets, were either on strike or
locked out. On May 29, 1993, the labor dispute was settled and, in June, the
union membership ratified a new four-year contract, and the membership returned
to work.
NOTE 23--EXTRAORDINARY ITEMS
The extraordinary items reflected in the consolidated statements of
operations are comprised of (dollars in thousands):
<TABLE>
<CAPTION>
INCOME
TAX NET
FISCAL 1994 LOSS BENEFIT LOSS
- ---------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Loss on early extinguishment of indebtedness.............. $ (3,687) $ -- $ (3,687)
--------- --------- ---------
--------- --------- ---------
<CAPTION>
FISCAL 1993
- ----------------------------------------------------------
<S> <C> <C> <C>
Loss on early extinguishment of indebtedness.............. $(115,509) $ (9,354) $(106,155)
--------- --------- ---------
--------- --------- ---------
<CAPTION>
FISCAL 1992
- ----------------------------------------------------------
<S> <C> <C> <C>
Loss on acceleration of Old Term Loan paydown............. $ (1,087) $ (455) $ (632)
Loss on early extinguishment of Holdings Senior
Subordinated Notes........................................ (6,952) (2,821) (4,131)
--------- --------- ---------
Extraordinary items....................................... $ (8,039) $ (3,276) $ (4,763)
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 DIBs. The
premium paid, including original issue discount, resulted in a net loss on early
extinguishment of indebtedness of $3.7 million.
During Fiscal 1993, in connection with the Recapitalization, the Company
repaid or exchanged $1.3 billion of indebtedness through the issuance of new
Pathmark and PTK indebtedness. This repayment of outstanding indebtedness and
this origination of new indebtedness included premiums and other expenses and
included the write off of existing deferred financing fees associated with
indebtedness which was extinguished. This resulted in a net loss on early
extinguishment of indebtedness which totalled $106.0 million. The Company also
repaid $2.5 million principal amount of indebtedness, which was secured by
mortgages on two retail properties which were transferred to Plainbridge. This
repayment resulted in a net loss on early extinguishment of indebtedness of
$0.06 million. In addition, the Company repaid $5.7 million aggregate principal
amount of indebtedness, which was secured by a mortgage on the distribution
center of the home centers segment transferred to Plainbridge. This repayment
resulted in a net loss on early extinguishment of indebtedness of $0.1 million.
During Fiscal 1992, the Company paid the remaining $132.0 million principal
outstanding of the Old Term Loan by utilizing a portion of the proceeds from the
sale of the Holdings Subordinated Notes resulting in the accelerated
amortization of the deferred financing costs related to the Old Term Loan of
$1.1 million, before applicable income tax benefit of $0.5 million.
During Fiscal 1992, utilizing a portion of the proceeds from the sale of the
Holdings Subordinated Notes, as well as utilizing additional Old Working Capital
Facility borrowings, the Company, through open market purchases, purchased $71.0
million principal amount of Holdings Senior Subordinated Notes at a cost of
$76.0 million. The premium paid of $5.0 million, as well as the accelerated
amortization of deferred financing costs and of transaction expenses of $1.5
million related to the
51
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 23--EXTRAORDINARY ITEMS--(CONTINUED)
repurchased Holdings Senior Subordinated Notes, resulted in a loss of $6.5
million, before an applicable income tax benefit of $2.6 million.
During Fiscal 1992, SMG-II purchased, and subsequently contributed to the
Company, $4.8 million principal amount of Holdings Senior Subordinated Notes.
The Company, through open market purchases, purchased an additional $1.2 million
principal amount of Holdings Senior Subordinated Notes. The premium paid on the
contributed and on the purchased Holdings Senior Subordinated Notes of $0.3
million, as well as the amount paid for the accelerated amortization of deferred
financing costs and for the transaction expenses of $0.1 million related to the
repurchased Holdings Senior Subordinated Notes, resulted in a loss of $0.4
million, before an applicable income tax benefit of $0.2 million.
NOTE 24--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 January 28, 1995. 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.
If an amount equal to six quarterly dividends is in arrears in whole or in
part, the holders of the Exchangeable Preferred Stock, voting as a class, may
elect two members of the Board of Directors of the Company at a special meeting
called by the Company until such time as all accrued dividends on the
Exchangeable Preferred Stock shall have been paid for all dividend periods.
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
52
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 24--CUMULATIVE EXCHANGEABLE REDEEMABLE PREFERRED STOCK--(CONTINUED)
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.
During Fiscal 1991, SMG-II made a capital contribution to the Company of 2.8
million shares of Exchangeable Preferred Stock, which were purchased pursuant to
the Exchangeable Preferred Stock Offer and to the open market transactions. The
Company has retired these shares (see Note 1).
Exchangeable Preferred Stock activity for the three years ended January 28,
1995 was as follows (dollars in thousands):
<TABLE>
<CAPTION>
NUMBER OF
SHARES AMOUNT
---------- --------
<S> <C> <C>
Balance, February 1, 1992........................................... 4,408,605 $ 85,069
Non-cash dividends................................................ 482,066 12,214
Accretion......................................................... -- 1,508
---------- --------
Balance, January 30, 1993........................................... 4,890,671 98,791
Accretion......................................................... -- 1,555
---------- --------
Balance, January 29, 1994........................................... 4,890,671 100,346
Accretion......................................................... -- 1,613
---------- --------
Balance, January 28, 1995........................................... 4,890,671 $101,959
---------- --------
---------- --------
</TABLE>
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 January 28, 1995, the unpaid dividends of $38.7 million were accrued and
included in other noncurrent liabilities.
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.
53
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 25--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 January 28, 1995 and at January 29, 1994.
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. Under the terms of the Bank Credit Agreement, there are
limitations in the amount of repurchases from Management Investors: $2 million
during any fiscal year and $5 million in the aggregate. Prior to the Exchange
Offer, all of the Class A common stock held by Management Investors was
classified as Redeemable Securities. In Fiscal 1991, prior to the Exchange
Offer, the Company repurchased 3,490 shares from Management Investors at an
aggregate cost of $0.4 million.
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 16). 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. In
connection with the repurchases of common stock from Management Investors, no
payments of Recourse Notes were made during Fiscal 1994, Fiscal 1993 and Fiscal
1992. Recourse Notes in the amount of approximately $1.7 million were
outstanding at January 28, 1995 and January 29, 1994. The Recourse Notes were
included in other assets at January 28, 1995 and January 29, 1994.
54
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 26--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 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 27--DISPOSAL OF PURITY OPERATIONS AND INVESTMENT IN PURITY SUPREME
On December 17, 1991, the Company completed the sale of two subsidiaries,
Purity Supreme, Inc. ("Purity Supreme") and Li'l Peach Corp. ("Li'l Peach", and
together with Purity Supreme, the "Purity Operations"), for approximately $257.0
million (as adjusted), including the assumption of certain indebtedness of the
Purity Operations, to a Company organized by Freeman Spogli & Co. In connection
with the disposal of the Purity Operations, the Company retained a 10% common
equity interest in Purity Supreme with a net book value of $8.9 million (as of
sale date), a new issue of Purity Supreme exchangeable preferred stock (the
"Purity Preferred Stock") with an aggregate stated value of $18.0 million and a
convertible subordinated note of Purity Supreme (the "Purity Note") in the
principal amount of $2.0 million. During Fiscal 1992, the Company collected the
principal amount of the Purity Note and recorded a gain of $2.0 million, which
reflected the reversal of the valuation reserve recorded upon the disposal of
the Purity Operations.
The Purity Preferred Stock matures December 17, 2003 and accrues dividends
at $1.3 million per annum on a semiannual basis each June 17 and December 17.
The Purity Preferred Stock is subordinate to Purity Supreme's Series B Preferred
Stock, redeemable at the option of Purity Supreme at stated discount rates and
convertible into Purity Supreme debentures at the option of Purity Supreme. The
Purity Preferred Stock has a redemption price, including unpaid dividends, of
$15.2 million at January 28, 1995.
Due to the Company's inability to readily convert these securities into
cash, as there exists no current trading market, and as there is uncertainty of
future cash flows from these securities, a valuation allowance for the
redemption value of these securities has been recorded at January 28, 1995 and
January 29, 1994.
55
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 28--GOODWILL
Since the Acquisition in Fiscal 1987, the Company, as constituted prior to
the Recapitalization, did not achieve the sales and earnings projections
prepared at the time of the Acquisition due to the economic recession in the
Company's geographic trading area, the increased competitive pressures (from new
and enlarged supermarkets, discount stores and warehouse club stores), the
related weak retail environment and the lower than were projected food inflation
rates. These conditions resulted in higher than expected losses and in a
significant deficiency in equity and negatively impacted the real estate and
financial markets so that the Company was not able to achieve the new store
growth, enlargements and remodeling anticipated in the projections. The Company
determined, based on the trend of operating results for Fiscal 1988 through
Fiscal 1992, and without anticipating the effects of the Recapitalization and
Spin-Offs on future projections, that its projected results, as of January 30,
1993, would not support the future amortization of the Company's remaining
goodwill balance of $600.7 million.
The methodology that management used to assess the recoverability of
goodwill was to project results of operations forward 35 years, which
represented the remaining life of the goodwill as of January 30, 1993. The
methodology was based on a five year historical trend line of actual results.
Management believed that the projected future results, based on this historical
trend, were the most likely scenario assuming a recapitalization was not
consummated. Management evaluated the recoverability of goodwill based on this
forecast of future operations and income. Management also evaluated
recoverability based on the discounted value of this same forecast using a
discount rate that reflected the Company's average cost of funds. Accordingly,
in the fourth quarter of Fiscal 1992, the Company wrote off its remaining
goodwill balance of $600.7 million.
NOTE 29--SUBSEQUENT EVENT (UNAUDITED)
On April 24, 1995, a strategic buyer announced its plans to purchase Purity,
subject to completion of regulatory approval and compliance with terms and
conditions of the purchase agreement. The sale is expected to close later in
1995, with the Company expecting to receive approximately $16 million based upon
the announced price. Until the proposed transaction is consummated, no
adjustment will be made to the valuation allowance related to the securities
representing the Company's investment in Purity. Further, based on the announced
price, if the proposed transaction is consummated, a capital tax loss
carryforward of approximately $70 million will be generated. The benefit of such
capital tax loss carryforward will only be realized to the extent the Company
generates capital gains.
56
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 30--QUARTERLY FINANCIAL DATA (UNAUDITED)
Financial data for the interim periods of Fiscal 1994 and Fiscal 1993 is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
13 WEEKS ENDED 52 WEEKS
--------------------------------------------------- ENDED
APRIL 30, JULY 30, OCTOBER 29, JANUARY 28, JANUARY 28,
1994 1994 1994 1995 1995
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
52 WEEKS ENDED JANUARY 28, 1995
Sales...................................... $1,033,091 $1,040,645 $ 1,035,079 $ 1,096,721 $ 4,205,536
Gross profit(a)............................ 287,736 292,057 287,868 319,391 1,187,052
Selling, general and administrative
expenses................................... 235,391 228,683 228,672 242,740 935,486
Depreciation and amortization.............. 18,303 18,499 18,714 20,116 75,632
Operating earnings......................... 34,042 44,875 40,482 56,535 175,934
Interest expense, net...................... 37,643 39,291 39,491 43,388 159,813
Earnings (loss) from continuing operations
before income taxes, gain on disposal of
home centers segment and extraordinary
item....................................... (3,601) 5,584 991 13,147 16,121
Income tax provision....................... 42 1,450 920 1,734 4,146
Earnings (loss) from continuing operations
before gain on disposal of home centers
segment and extraordinary item............ (3,643) 4,134 71 11,413 11,975
Earnings (loss) from discontinued
operations................................. (4,705) 2,802 (480) 284 (2,099)
Earnings (loss) before gain on disposal of
home centers segment and extraordinary
item....................................... (8,348) 6,936 (409) 11,697 9,876
Gain on disposal of home centers segment,
net........................................ -- -- -- 17,044 17,044
Extraordinary item, net of income tax
benefit.................................... -- -- -- (3,687) (3,687)
Net earnings (loss)........................ $ (8,348) $ 6,936 $ (409) $ 25,054 $ 23,233
<CAPTION>
13 WEEKS ENDED 52 WEEKS
--------------------------------------------------- ENDED
MAY 1, JULY 31, OCTOBER 30, JANUARY 29, JANUARY 29,
1993 1993 1993 1994 1994
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
52 WEEKS ENDED JANUARY 29, 1994
Sales...................................... $1,071,307 $1,012,917 $ 1,060,970 $ 1,098,433 $ 4,243,627
Gross profit(b)............................ 295,653 275,918 280,671 306,719 1,158,961
Selling, general and administrative
expenses................................... 238,539 229,838 225,660 232,127 926,164
Depreciation and amortization.............. 17,160 17,644 17,883 17,368 70,055
Recapitalization expenses.................. -- -- 23,737 (7,125) 16,612
Provision for stores closings.............. -- 5,975 -- -- 5,975
Operating earnings......................... 39,954 22,461 13,391 64,349 140,155
Interest expense, net...................... 45,713 46,807 45,168 39,286 176,974
Earnings (loss) from continuing operations
before income taxes, extraordinary items
and cumulative effect of accounting
changes.................................... (5,759) (24,346) (31,777) 25,063 (36,819)
Income tax provision (benefit)............. (1,192) (9,129) (11,597) 1,166 (20,752)
Earnings (loss) from continuing operations
before extraordinary items and cumulative
effect of accounting changes.............. (4,567) (15,217) (20,180) 23,897 (16,067)
Earnings (loss) from discontinued
operations................................. (1,959) 1,984 890 (1,562) (647)
Earnings (loss) before extraordinary items
and cumulative effect of accounting
changes.................................... (6,526) (13,233) (19,290) 22,335 (16,714)
Extraordinary items, net of income tax
benefit.................................... (99) (39) (106,017) -- (106,155)
Earnings (loss) before cumulative effect of
accounting changes......................... (6,625) (13,272) (125,307) 22,335 (122,869)
Cumulative effect of accounting changes,
net of an income tax benefit of $29,302... (40,358) -- -- -- (40,358)
Net earnings (loss)........................ $ (46,983) $ (13,272) $ (125,307) $ 22,335 $ (163,227)
</TABLE>
- ------------
(a) The pretax LIFO inventory credit for the 52 weeks ended January 28, 1995 was
estimated to be a $0.825 million provision in each of the first three fiscal
quarters. The annual credit was $3.2 million, and resulted in a $0.7 million
credit in the fourth quarter.
(b) The pretax LIFO inventory credit for the 52 weeks ended January 29, 1994 was
estimated to be a $0.65 million provision in each of the first three fiscal
quarters. The annual credit was $2.4 million, and resulted in a $0.45
million credit in the fourth quarter.
57
<PAGE>
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 January
28, 1995 and January 29, 1994, and the related consolidated statements of
operations, stockholder's deficit and cash flows for each of the three years in
the period ended January 28, 1995. 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 Supermarkets General Holdings
Corporation and its subsidiaries as of January 28, 1995 and January 29, 1994,
and the results of their operations and their cash flows for each of the three
years in the period ended January 28, 1995 in conformity with generally accepted
accounting principles.
As discussed in Note 5 to the consolidated financial statements, the Company
changed its method of accounting for postretirement benefits other than
pensions, postemployment benefits, income taxes, LIFO inventories and the
determination of the discount rate utilized to record certain noncurrent
liabilities as of January 31, 1993.
Deloitte & Touche LLP
Parsippany, New Jersey
April 17, 1995 (April 24, 1995 as to Note 29)
58
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (AS OF APRIL 15, 1995)
(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. Each individual named below is a director of both
the Company and Pathmark, except for Mr. Rubenstein, who is a director of the
Company only.
<TABLE>
<CAPTION>
DIRECTOR OF THE
COMPANY
NAME, AGE, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS SINCE(1)
- ------------------------------------------------------------------------------ ---------------
<S> <C>
JACK FUTTERMAN, 61, Chairman and Chief Executive Officer of the Company.(2) 1986
ANTHONY J. CUTI, 49, President of the Company.(2) 1993
JAMES J. BURKE, JR., 43, Partner and a Director of Stonington Partners, Inc. 1988
("SPI"), a private investment firm, since July 1994, and a Director of
Merrill Lynch Capital Partners, Inc. ("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 Merrill Lynch & Co. ("ML
& Co.") until 1994. Mr. Burke is also a Director of Amstar Corp., Ann Taylor
Stores Corp., Borg-Warner Security Corp., Education Management Corp., United
Artists Theatre Circuit, Inc., Wherehouse Entertainment, Inc. and World
Color Press, Inc.
ALEXIS P. MICHAS, 37, Partner and a Director of SPI since July 1994, and a 1994
Director of MLCP since 1989; Partner of MLCP from 1993 to 1994; Senior Vice
President of MLCP from 1989 to 1993; Managing Director of Investment Banking
Division of ML & Co. from 1991 to 1994; Director in the Investment Banking
Division of ML & Co. from 1990 to 1991. Mr. Michas is also a Director of
Amstar Corporation, Blue Bird Corporation, Borg-Warner Automotive, Inc.,
Borg-Warner Security Corp. and Eckerd Corporation.
STEPHEN M. McLEAN, 37, Partner and a Director of SPI since July 1994; Partner 1987
of MLCP from 1993 to 1994; Senior Vice President of MLCP from 1987 to 1993;
Managing Director of the Investment Banking Division of ML & Co. until 1994.
Mr. McLean is also a Director of CMI Industries, Inc. and Ithaca Holdings,
Inc.
SUNIL C. KHANNA, 38, Principal of SPI since July 1994; Principal of MLCP from 1987
1993 to 1994; Vice President of MLCP until 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 Ithaca
Holdings, Inc.
JERRY G. RUBENSTEIN, 64, Managing Partner, Omni Management Associates. Mr. 1988
Rubenstein is also a director of Esstar, Inc.; Consultant to MLCP since
1988.
SUSAN C. PENNY, 45, Senior Vice President, Alliance Corporate Finance Group 1994
Incorporated--Investment Advisors (since July 1993); Senior Vice President,
Equitable Capital Management Corp.--Investment Advisors prior thereto. Ms.
Penny is also a Director of Selmer Industries, Inc.
</TABLE>
- ------------
(1) Includes service with Pathmark's predecessor.
(2) Prior positions are reflected under "--Executive Officers".
59
<PAGE>
Pursuant to the SMG-II Stockholders Agreement, the Merrill Lynch 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, five of the
persons serving as directors were designated by the Merrill Lynch Investors
(Messrs. Burke, Michas, Khanna, McLean and Rubenstein), two were designated by
the Management Investors (Messrs. Futterman and Cuti) and one was designated by
the Equitable Investors (Ms. Penny). Under the terms of the SMG-II Stockholders
Agreement, SMG-II is obligated to re-elect the current directors to the Board.
No family relationship exists between any director or nominee and any other
director or nominee or executive officer of the Company.
(B) EXECUTIVE OFFICERS
The following table sets forth the name, principal occupation or employment
at the present time and during the last five years, and the name of any
corporation or other organization in which such occupation or employment is or
was conducted, of the executive officers of the Company, all of whom are
citizens of the United States unless otherwise indicated and serve at the
discretion of the Board of Directors of the Company. The executive officers of
the Company listed below were elected to office for an indefinite period of
time. No family relationship exists between any executive officer and any other
executive officer or director of the Company. All current executive officers now
hold identical positions with the Company and Pathmark, except for Messrs.
Crowley and Rallo, who are executive officers of Pathmark only.
<TABLE>
<CAPTION>
OFFICER OF THE
COMPANY
NAME AGE POSITIONS AND OFFICE SINCE(1)
- -------------------- --- --------------------------------------------- --------------
<S> <C> <C> <C>
JACK FUTTERMAN 61 Chairman and Chief Executive Officer (since 1986
September 1989); President from September
1989 to August 1993); Vice Chairman prior
thereto. Mr. Futterman joined the Company in
1973.(2)
ANTHONY J. CUTI 49 President (since August 1993) and Chief 1990
Financial Officer (from October 1990 to
September 1994); Executive Vice President
(from October 1990 to August 1993); Vice
President--Bristol-Myers Squibb Co. (from
January 1990 to September 1990); Vice
President of Finance Operations and Chief
Financial Officer, Bristol-Myers
International Group, a division of
Bristol-Myers Co., prior thereto.(2)
NEILL CROWLEY 52 Executive Vice President--Marketing since May 1994
1994; Executive Vice President-- Marketing
and Store Support, The Vons Companies, Inc.
(a supermarket chain) from 1991 to 1994;
President, Skaggs Alpha Beta (a supermarket
chain), Texas division, prior thereto.
RON MARSHALL 41 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) from 1991 to September 1994. Vice
President and Chief Financial Officer of
Barnes and Noble Bookstores, Inc., prior
thereto.
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
OFFICER OF THE
COMPANY
NAME AGE POSITIONS AND OFFICE SINCE(1)
- -------------------- --- --------------------------------------------- --------------
<S> <C> <C> <C>
HARVEY M. GUTMAN 49 Senior Vice President--Retail Development of 1990
the Company (since December 1991); Vice
President--Retail Development of the Company
(from October 1990 to December 1991); Vice
President--Grocery/Frozen Sales &
Merchandising, Pathmark division (from
January 1990 to September 1990); Vice
President--Non-Foods/Pharmacy Sales &
Merchandising, Pathmark division prior
thereto. Mr. Gutman joined the Company in
1976.
ROBERT JOYCE 49 Senior Vice President--Operations (Since 1989
March 1995); Senior Vice President--
Administration (from October 1990 to
February 1995); Senior Vice President Human
Resources (from April 1990 to October 1990);
Vice President--Human Resources (from
October 1989 to April 1990); Mr. Joyce
joined the Company in 1963.
RONALD RALLO 57 Senior Vice President--Merchandising (since 1993
July 1993); Senior Vice President--
Merchandising Pathmark division (from
September 1992 to July 1993); Senior Vice
President--Perishable Merchandising,
Pathmark division (from February 1991 to
September 1992); Vice President--Dairy, Deli
and Bakery Sales and Merchandising, Pathmark
division prior thereto. Mr. Rallo joined the
Company in 1962.
JOSEPH W. ADELHARDT 48 Vice President and Controller (since March 1987
1990); Controller prior thereto. Mr.
Adelhardt joined the Company in 1976.
MAUREEN MCGURL 47 Vice President--Human Resources. Ms. McGurl 1984
joined the Company in 1973.
MARC A. STRASSLER 46 Vice President, Secretary and General Counsel 1987
(since December 1991); Secretary and General
Counsel prior thereto. Mr. Strassler joined
the Company in 1974.
MYRON D. WAXBERG 61 Vice President and General Counsel--Real 1991
Estate (since December 1991); General
Counsel--Real Estate prior thereto. Mr.
Waxberg joined the Company in 1976.
</TABLE>
- ------------
(1) Includes service with Pathmark's predecessor.
(2) Member of the Company's Board of Directors.
61
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
----------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION FY SALARY ($) BONUS ($) ($)(1) SARS (2) ($)(3)
- ------------------------------------ ------ ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jack Futterman...................... 1994 491,346 92,127 -- -- 5,250
Chairman and Chief Executive 1993 462,539 138,762 -- -- 8,254
Officer 1992 431,385 419,510 -- 3,000 8,010
Anthony J. Cuti..................... 1994 306,750 57,516 -- -- 5,250
President 1993 280,250 76,260 -- 3,000 8,254
1992 255,000 198,450 -- 1,000 8,010
Ronald Rallo(4)..................... 1994 200,385 30,058 4,265 -- 5,250
Senior Vice President-- 1993 177,500 42,600 4,311 750 8,098
Merchandising
Robert Joyce........................ 1994 169,125 21,141 2,133 -- 5,250
Senior Vice President-- 1993 151,350 30,270 2,156 750 7,559
Operations 1992 135,000 87,075 1,999 1,300 6,871
Harvey Gutman....................... 1994 168,712 21,089 3,733 -- 5,250
Senior Vice President-- 1993 150,126 30,025 3,774 750 7,467
Retail Development 1992 132,600 85,995 3,500 1,300 6,798
Jules Borshadel(5).................. 1994 236,741 1,400,000 -- -- 5,250
President of Rickel division of 1993 286,750 216,583 -- 500 8,254
Plainbridge 1992 246,827 148,096 -- 1,000 8,010
</TABLE>
- ------------
(1) Represents payments as reimbursement for interest paid to Holdings for a
loan of less than $60,000 from Holdings in connection with the purchase of
SMG-II Class A Common Stock and includes an amount sufficient to pay any
income taxes resulting therefrom after taking into account the value of any
deduction available as a result of the payment of such interest and taxes.
(2) Stock options shown were granted pursuant to the Management Investors 1987
Stock Option Plan of SMG-II (the "Plan") and relate to shares of Class A
Common Stock of SMG-II.
(3) Represents Pathmark's matching contribution to the SGC Savings Plan (the
"Savings Plan").
(4) Mr. Rallo became an executive officer of Pathmark in October 1993.
(5) Mr. Borshadel left the Company's employ on November 4, 1994 in connection
with the sale of the Rickel Home Centers segment. Pursuant to an agreement
with Mr. Borshadel, the Company paid him a bonus of $1,400,000 upon the
completion of said sale.
None of the executive officers named in the above Compensation table were
granted stock options in the fiscal year ended January 28, 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS/SARS
AT FY-END (#)
EXERCISABLE/
NAME UNEXERCISABLE
- ----------------------------------------------------------------------------- -------------
<S> <C>
Jack Futterman............................................................... 13,000/0
Anthony J. Cuti.............................................................. 5,383/417
Robert Joyce................................................................. 2,000/250
Ronald Rallo................................................................. 2,600/250
Harvey Gutman................................................................ 2,350/250
Jules Borshadel.............................................................. 2,640/0
</TABLE>
- ------------
(1) Options shown were granted pursuant to the Plan and relate to shares of
Class A Common Stock of SMG-II. No options were exercised in Fiscal 1994.
62
<PAGE>
PENSION PLAN TABLE(1)
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------------------------
FINAL AVERAGE PAY 10 15 20 25 30 35
- ----------------------------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$150,000..................... $20,000 $ 30,000 $ 40,000 $ 50,000 $ 60,000 $ 60,000
200,000..................... 26,667 40,000 53,333 66,667 80,000 80,000
225,000..................... 30,000 45,000 60,000 75,000 90,000 90,000
250,000..................... 33,333 50,000 66,667 83,333 100,000 100,000
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
450,000..................... 60,000 90,000 120,000 150,000 180,000 180,000
500,000..................... 66,667 100,000 133,333 166,667 200,000 200,000
550,000..................... 73,333 110,000 146,667 183,333 220,000 220,000
600,000..................... 80,000 120,000 160,000 200,000 240,000 240,000
650,000..................... 86,667 130,000 173,333 216,667 260,000 260,000
700,000..................... 93,333 140,000 186,667 233,333 280,000 280,000
750,000..................... 100,000 150,000 200,000 250,000 300,000 300,000
</TABLE>
- ------------
(1) The table above illustrates the aggregate annual pension benefits payable
under the SGC Pension Plan and Excess Benefit Plan (collectively, the
"Pension Plans"). The retirement benefit for individuals with 30 years of
credited service is 40% of the individual's average compensation during his
or her highest five compensation years in the last ten years before
retirement, less one-half of the social security benefit received. The
retirement benefit is reduced by 3.33% for every year of credited service
less than 30. Covered compensation under the Pension Plans includes all cash
compensation subject to withholding plus amounts deferred under the Savings
Plan pursuant to Section 401(k) of the Internal Revenue Code of 1986, as
amended, and as to individuals identified in the Summary Compensation Table,
would be the amount set forth in that table under the headings "Salary" and
"Bonus". The table shows the estimated annual benefits an individual would
be entitled to receive if normal retirement at age 65 occurred in January
1995 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
equalled 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 1995. As of December 31, 1994, the
following individuals had the number of years of credited service indicated
after their names: Mr. Futterman, 21.6; Mr. Cuti, 3.0; Mr. Joyce, 30; Mr.
Rallo, 30 and Mr. Gutman, 18.8. All of Mr. Borshadel's credited service was
transferred to his new employer which is responsible for Mr. Borshadel's
pension. As described below in "Compensation Plans and
Arrangements--Supplemental Retirement Agreements", each of the named
executives is party to a Supplemental Retirement Agreement with Pathmark
except for Mr. Borshadel whose Supplemental Retirement Agreement has been
fully assumed by the purchaser of the Rickel business.
COMPENSATION PLANS AND ARRANGEMENTS
Supplemental Retirement Agreements. The Company has entered into
supplemental retirement agreements with certain key executives, including the
current executive officers named in the Summary Compensation Table, which
provide that the executive 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 (i) $475,000 or (ii) his
base salary on the date of his retirement, death or disability, whichever is
greater, (b) in the case of Mr. Cuti equal to 30% of his final average
Compensation (as hereinafter defined) 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
and (c) in the cases of Messrs. Rallo, Joyce and Gutman, equal to (i) 30% of his
final average Compensation (as hereinafter defined) 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. "Compensation" includes
base salary and payments under the Executive Incentive Plan, but excludes
Company matching contributions under the Savings Plan and cash awards under Old
63
<PAGE>
Supermarkets' former Long-Term Incentive Plan. If the executive leaves the
Company prior to completing 20 years of service (other than for disability), the
supplemental benefit would be reduced proportionately. Should the executive die,
the surviving spouse then receiving or, if he or she was not then receiving a
supplemental pension benefit, the spouse would be entitled to a benefit equal to
two-thirds of the benefit to which the executive would have been entitled,
provided the executive has attained at least ten years of service with the
Company. Mr. Cuti's agreement credits him with ten years of service over and
above his actual service.
Employment Agreements. As of August 1, 1993, the Company and Pathmark
entered into an employment agreement with Mr. Futterman (the "1993 Employment
Agreement"). The 1993 Employment Agreement is for an initial term of three
years, which term is automatically extended for an additional year on the second
anniversary of the commencement of the term and on each successive anniversary
thereafter. Under the 1993 Employment Agreement, Mr. Futterman is entitled to a
minimum annual base salary of $500,000. The 1993 Employment Agreement also
provides that Mr. Futterman shall be eligible to receive an annual bonus of up
to 75% of his annual base salary and shall be provided the opportunity to
participate in pension and welfare plans, programs and arrangements that are
generally made available to executives of Pathmark, or as may be deemed
appropriate by the Compensation Committee of the Board of Directors of SMG-II.
As of August 1, 1993, the Company entered into an employment agreement (the
"August Agreement", together with the 1993 Employment Agreement, the "Employment
Agreements") with Mr. Cuti. The August Agreement is for an initial term of three
years, which term is automatically extended for an additional year on the second
anniversary of the commencement of the term and on each successive anniversary
thereafter. Under the August Agreement, Mr. Cuti is entitled to a minimum annual
base salary of $313,500. The August Agreement also provides that he shall be
eligible to receive an annual bonus of up to 75% of his annual base salary and
shall be provided the opportunity to participate in pension and welfare plans,
programs and arrangements that are generally made available to executives of
Pathmark or as may be deemed appropriate by the Compensation Committee of the
Board of Directors of SMG-II.
In the event one of the 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, plus bonus (if earned) and
continued coverage under health and insurance plans for the two year period
commencing on the date of such 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. In
addition, if Mr. Futterman's employment is terminated by the Company without
Cause or by him for Good Reason on or after a Change in Control, he will then be
entitled to receive such benefits for a three year period, and his base salary
shall be the greater of his base salary at the annual rate in effect immediately
prior to such termination of resignation of $500,000.
Under the 1993 Employment Agreement, a Change in Control means (a) the
acquisition by a Third Party (as hereinafter defined) of beneficial ownership of
more than 30% of the issued and outstanding voting common stock of SMG-II,
Holdings or the Company or (b) the acquisition of all or substantially all of
the assets of the Company by a Third Party; provided, however, that no Change in
Control will be deemed to occur as long as (i) the ML Investors, (ii) the
management employees of the Company, or (iii) the ML Investors, in combination
with the management employees of the Company, beneficially own, directly or
indirectly, more than 50% of the voting common stock of the Company. "Third
Party" shall mean any person other than the Company, Holdings or SMG-II, each of
the ML Investors, or The Equitable Life Assurance Society of the United States
and its affiliates. For purposes of the 1993 Employment Agreement, "person" and
"beneficial ownership" shall have the meanings assigned to such terms under
Section 13(d) of the Exchange Act, as amended, and "affiliate" of any first
person shall mean a second person that directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is under common control
with, such first person.
64
<PAGE>
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.
Mr. Borshadel had an employment contract identical in all material respects
to Mr. Cuti's. As part of the sale, the purchaser of the Rickel business has
fully assumed all obligations under Mr. Borshadel's contract.
DIRECTOR'S FEES
Directors of the Company are not currently compensated for their services as
such. However, Mr. Rubenstein receives an annual fee of $20,000 from Plainbridge
for sitting on its Board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Burke, Khanna and McLean comprise 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."
65
<PAGE>
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 1, 1995, the number of shares of (a) SMG-II (i) Class A
Common Stock, (ii) Class B Common Stock, (iii) Series A Preferred Stock, and
(iv) Series B Preferred Stock and (b) Holdings Preferred Stock beneficially
owned by the persons known by management of the Company to be the beneficial
owners of more than 5% of the outstanding shares of any class as "beneficial
ownership" has been defined under Rule 13d-3, as amended, under the Securities
Exchange Act of 1934, are set forth in the following table:
<TABLE>
<CAPTION>
NUMBER % OF
NAME OF SHARES CLASS
- --------------------------------------------------------------------- --------- --------
<S> <C> <C>
SMG-II Class A Common Stock
Merrill Lynch Capital Appreciation Partnership No. IX, L.P.(2)..... 488,704.8 67.5
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 1.7
ML IBK Positions, Inc.(3).......................................... 21,258.9 2.9
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 4.1
270 Park Avenue
New York, NY 10017
Management and other employees (including former employees of
Pathmark)............................................................ 144,947 (1) 20.0
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 Equitable Capital Management Corporation
1285 Avenue of the Americas, 19th Floor
New York, NY 10019
Equitable Deal Flow Fund, L.P.(5).................................. 150,000 46.9
c/o Equitable Capital Management Corporation
1285 Avenue of the Americas, 19th Floor
New York, NY 10019
Equitable Variable Life Insurance Company(5)....................... 36,000 11.3
2 Penn Plaza, 21-C
New York, NY 10121
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
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
NUMBER % OF
NAME OF SHARES CLASS
- --------------------------------------------------------------------- --------- --------
<S> <C> <C>
SMG-II Series B Preferred Stock(6)
CBC Capital Partners, Inc.(4)...................................... 12,500 6.9
Equitable Variable Life Insurance Company(5)....................... 20,192 11.2
The Equitable Life Assurance Society of the United States(5)....... 63,942 35.4
Equitable Deal Flow Fund, L.P.(5).................................. 84,135 46.5
Holdings Preferred Stock(7)
Sun America, Inc................................................. 641,785 13.1
1 Sun America Center
Century City
Los Angeles, CA 90067-6022
</TABLE>
- ------------
(1) Includes presently exercisable options granted under the Plan for 71,772
shares of SMG-II Class A Common Stock held by Management Investors and 500
shares of SMG-II Class A Common Stock that SMG-II has agreed to sell to two
of the Company's employees, including 250 shares to Mr. Cuti. Does not
include 39,120 options to purchase shares of SMG-II Class A Common Stock
granted to non-management employees of the Company, which options are not
exercisable until a public offering of SMG-II Common Stock occurs.
(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
"Merrill Lynch Investors" or 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, Michas, McLean and Khanna) are consultants to MLCP.
(3) Merchant Banking L.P. No. 1, Merchant Banking L.P. No. IV, Merrill Lynch
KECALP L.P. 1987, Merrill Lynch KECALP L.P. 1989, Merrill Lynch KECALP L.P.
1991 and ML IBK Positions, Inc. are indirectly controlled by ML&Co. The
address of such entities is c/o James Caruso, Merrill Lynch & Co., Inc.,
World Financial Center, South Tower, New York, New York 10080-6123.
(4) CBC Capital Partners, Inc. is a wholly owned subsidiary of Chemical Banking
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.
67
<PAGE>
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. The
number of shares of SMG-II Class A Common Stock and Holdings Preferred Stock
beneficially owned by each director, by each nominee for director, by each of
the five highest compensated executive officers and by all directors and all
current and executive officers as a group is as follows:
<TABLE>
<CAPTION>
SMG-II CLASS A
COMMON STOCK HOLDINGS PREFERRED
NAME NUMBER OF SHARES % OF CLASS NUMBER OF SHARES % OF CLASS
- ------------------- ---------------- ---------- ------------------ ----------
<S> <C> <C> <C> <C>
James J. Burke,
Jr.(1) ............ -- -- -- --
Anthony J.
Cuti(2)............ 5,633 * -- --
Jack Futterman(2).. 23,000 3.2 -- --
Harvey Gutman(2)... 2,700 * -- --
Robert Joyce(2).... 2,700 * -- --
Sunil C. Khanna.... 700 * -- --
Stephen M.
McLean(1).......... -- -- -- --
Alexis P.
Michas(1).......... -- -- -- --
Susan C. Penny .... -- -- -- --
Ronald Rallo(2).... 3,000 * 966 *
Jerry G.
Rubenstein(2)...... 2,500 * -- --
Directors and
Executive
Officers as a
group(1)(2)........ 48,016 6.6 966 *
</TABLE>
- ------------
* Less than 1%
(1) Does not include 550,000 shares of SMG-II Class A Common Stock or 236,731.5
shares of SMG-II Series A Preferred Stock owned beneficially by a group of
which MLCP is a part. Messrs. Burke, McLean and Michas, directors of MLCP,
disclaim beneficial ownership in all such shares.
(2) Includes 250 shares of SMG-II Class A Common Stock that SMG-II has agreed to
sell to Mr. Cuti and presently exercisable options granted under the Plan to
purchase shares of SMG-II Class A Common Stock, as follows: Mr. Cuti, 5,383;
Mr. Futterman, 13,000; Mr. Gutman, 2,350; Mr. Joyce, 2,000; Mr. Rallo, 2,600
and Mr. Rubenstein, 1,000, and all directors and officers as a group,
31,466.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 1990, Jerry G. Rubenstein, a Director, borrowed from the Company
$100,000 in order to help finance his purchase of Company Class A Common Stock.
Subsequently, such shares of Company Class A Common Stock were exchanged for
shares of SMG-II Class A Common Stock. The foregoing indebtedness to the Company
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 Company 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 described payment
after taking into account the value of any deduction available to him as a
68
<PAGE>
result of the payment of such interest or taxes (the "Reimbursement Amount"). As
of April 1, 1995, Mr. Rubenstein remained indebted to the Company in the amount
of $100,000.
During Fiscal 1994, the Company retained ML & Co. to advise it in connection
with its sale of its Rickel Home Center business. Also, in the current fiscal
year, the Company has engaged ML & Co. to act as financial adviser in certain
matters. The Company believes that the terms of the transactions referred to
under this paragraph were no less favorable than those obtainable in
transactions with unrelated persons. See Item 12 "Security Ownership of Certain
Owners and Management".
In connection with the sale of its Rickel Home Center business, one of the
Company's subsidiaries used approximately $71.3 million of the sale proceeds to
partially prepay certain indebtedness, including accrued interest and debt
premium, held by the Equitable Investors. Ms. Penny, a director of the Company,
is an executive officer of a subsidiary of the Equitable Life Assurance Society
of the United States. See Item 12 "Security Ownership of Certain Beneficial
Owners and Management".
The holders of SMG-II Preferred Stock are a party with the holders of SMG-II
Common Stock to a stockholders agreement (the "SMG-II 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 SMG-II Stockholders Agreement requires a vote of at least 80% of
the members of the Board of Directors to cause the Company to conduct any
business other than that engaged in by the Company in February of 1991 and the
approval of stockholders representing 66 2/3% of the number of shares of SMG-II
voting capital stock voting together as a single class for SMG-II to enter into
any Significant Transaction (as defined), including certain mergers, sales of
assets, acquisitions, sales or redemptions of stock, the amendment of the
certificate of incorporation or by-laws or the liquidation of SMG-II. The SMG-II
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 SMG-II Stockholders Agreement also contains an agreement of the
stockholders of SMG-II with respect to the composition of SMG-II's and Holdings'
Boards 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' Boards of
Directors. Such agreement furthermore entitles the Merrill Lynch Investors to
designate a majority of Holdings' Board of Directors at all times. Since
Holdings owns all of the outstanding shares of Common Stock, by having the
ability to designate a majority of Holdings' Board of Directors, the Merrill
Lynch Investors will have the ability to control the Company. The Merrill Lynch
Investors are controlled by ML & Co.
In addition to the foregoing, the SMG-II 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.
69
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report.
<TABLE>
<CAPTION>
<S> <C>
1. Financial Statements Schedules: None required
</TABLE>
<TABLE>
<S> <C>
2. Exhibits:
Incorporated herein by reference is a list of the Exhibits contained
in the Exhibit Index on Pages 72 through 74 of this Report.
</TABLE>
(b) Reports on Form 8-K.
(c) Exhibits required by Item 601 of Regulation S-K.
See item 14(a) 3 above.
70
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 27, 1995 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------- ---------------
<S> <C> <C>
/s/ JACK FUTTERMAN Director, Chairman and Chief April 27, 1995
..................................... Executive Officer
(Jack Futterman) (Principal Executive Officer)
/s/ ANTHONY CUTI Director, President April 27, 1995
.....................................
(Anthony Cuti)
/s/ RON MARSHALL Executive Vice President and Chief April 27, 1995
..................................... Financial Officer (Principal
(Ron Marshall) Financial Officer)
/s/ JOSEPH ADELHARDT Vice President and Controller April 27, 1995
..................................... (Principal Accounting Officer)
(Joseph Adelhardt)
JAMES J. BURKE, JR. Director* April 27, 1995
.....................................
(James J. Burke, Jr.)
SUNIL C. KHANNA Director* April 27, 1995
.....................................
(Sunil C. Khanna)
STEPHEN M. MCLEAN Director* April 27, 1995
.....................................
(Stephen M. McLean)
SUSAN C. PENNY Director* April 27, 1995
.....................................
(Susan C. Penny)
ALEXIS P. MICHAS Director* April 27, 1995
.....................................
(Alexis P. Michas)
JERRY G. RUBENSTEIN Director* April 27, 1995
.....................................
(Jerry G. Rubenstein)
/s/ MARC A. STRASSLER
*By: ................................
Marc A. Strassler
Attorney-in-Fact
</TABLE>
71
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. EXHIBIT NO.
- -------- --------------------------------------------------------------------- ----
<S> <C> <C>
2.1 --Distribution and Transfer Agreement among Pathmark, PTK and
Plainbridge (incorporated by reference from the Annual Report on
Form 10-K of the Company for the year ended January 29, 1994.).....
2.2 --Distribution and Transfer Agreement dated as of May 3, 1993 among
Pathmark, the Company and Chefmark. (incorporated by reference from
Exhibit 2.2 to the Registration Statement on Form S-1 of the
Company and Pathmark, File No. 33-59616 the "1993 Registration
Statement") (incorporated by reference from the Annual Report on
Form 10-K of the Company for the year ended January 29, 1994.).....
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 the Company, File No.
33-16963)..........................................................
2.4 --Agreement and Plan of Merger dated as of July 29, 1991 among
Holdings, Purity Supreme, Inc. and PSLP Holding Corporation
(incorporated by reference from Exhibit 10.55 to the Registration
Statement on Form S-1 of the Company, No. 33-16963)................
2.5 --Amendment No. 1 dated as of October 23, 1991 to the Agreement and
Plan of Merger dated as of July 29, 1991 among the Company, Purity
Supreme, Inc. and PSLP Holding Corporation (incorporated by
reference from Exhibit 2.2 to the Current Report on Form 8-K of the
Company dated December 17, 1991)...................................
3.1 --Restated Certificate of Incorporation of the Company, as amended.
(incorporated by reference from Exhibit 3.3 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
Company, as amended. (incorporated by reference from Exhibit 3.2 to
the October Registration Statement)................................
3.3 --By-Laws of the Company, as amended. (incorporated by reference from
Exhibit 3.6 to the 1993 Registration Statement)....................
3.4 --Restated Certificate of Incorporation of the Company, as amended.
(incorporated by reference from Exhibit 3.4 to the 1993
Registration Statement)............................................
3.5 --Certificate of Designation of the $3.52 Cumulative Exchangeable
Redeemable Preferred Stock of Holdings. (incorporated by reference
from Exhibit 3.5 to the 1993 "Registration Statement").............
4.1 --Indenture dated as of May 1, 1992 between the Company and
Wilmington Trust Company, Trustee, relating to the 11 5/8%
Subordinated Notes due 2002 of Holdings (incorporated by reference
from the Annual Report on Form 10-K of the Company for the year
ended January 29, 1994.)...........................................
4.2 --Supplemental Indenture between the Company and Wilmington Trust
Company, Trustee, to the Indenture dated as of May 1, 1992 between
Holdings and Wilmington Trust Company, Trustee, relating to the 11
5/8% Subordinated Notes dues 2002 of Holdings (incorporated by
reference from the Annual Report on Form 10-K of the Company for
the year ended January 29, 1994.)..................................
4.3 --Commitment Letter dated March 12, 1993 between the Company and
Bankers Trust Company. (incorporated by reference from Exhibit 4.4B
to the 1993 Registration Statement)................................
4.4 --Credit Agreement among Pathmark, the Lenders, listed therein, and
Banker's Trust Company as Agent (incorporated by reference from the
Annual Report on Form 10-K of the Company for the year ended
January 29, 1994.).................................................
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. EXHIBIT NO.
- -------- --------------------------------------------------------------------- ----
<S> <C> <C>
4.5 --Credit Agreement among Plainbridge, the Lenders, listed therein,
and Banker's Trust Company as Agent (incorporated by reference from
the Annual Report on Form 10-K of the Company for the year ended
January 29, 1994.).................................................
4.6 --Indenture between Pathmark and United States Trust Company of New
York, Trustee, relating to the Senior Subordinated Notes due 2003
of Pathmark (incorporated by reference from the Annual Report on
Form 10-K of the Company for the year ended January 29, 1994.).....
4.7 --Indenture between Pathmark and NationsBank of Georgia, National
Association, Trustee, relating to the Junior Subordinated Deferred
Coupon Notes due 2003 of Pathmark (incorporated by reference from
the Annual Report on Form 10-K of the Company for the year ended
January 29, 1994.).................................................
4.8 --Indenture between Pathmark and Wilmington Trust Company, Trustee,
relating to the 11 5/8% Subordinated Notes due 2002 of Pathmark
(incorporated by reference from the Annual Report on Form 10-K of
the Company for the year ended January 29, 1994.)..................
4.9 --Indenture between Pathmark and Wilmington Trust Company, Trustee,
relating to the 12 5/8% Subordinated Debentures due 2002 of
Pathmark (incorporated by reference from the Annual Report on Form
10-K of the Company for the year ended January 29, 1994.)..........
10.1 --Logistical Services Agreement between Pathmark and Plainbridge
(incorporated by reference from the Annual Report on Form 10-K of
the Company for the year ended January 29, 1994.)..................
10.2 --Services Agreement between Pathmark and Plainbridge relating to the
Rickel home centers (incorporated by reference from the Annual
Report on Form 10-K of the Company for the year ended January 29,
1994.).............................................................
10.3 --Services Agreement between the Company and Plainbridge relating to
the warehouse and distribution facilities. (incorporated by
reference from Exhibit 10.3 to the October 1993 Registration
Statement).........................................................
10.4 --Services Agreement dated as of May 3, 1993 between the Company and
Chefmark (incorporated by reference from Exhibit 10.4 to the 1993
Registration Statement)............................................
10.5 --Chefmark Supply Agreement, dated May 3, 1993, between the Company
and Chefmark (incorporated by reference from Exhibit 10.5 to the
1993 Registration Statement).......................................
10.6 --Tax Sharing Agreement between the Company and SMG-II (incorporated
by reference from the Annual Report on Form 10-K of the Company for
the year ended January 29, 1994....................................
10.7 --Tax Indemnity Agreement between the Company and Plainbridge
(incorporated by reference from the Annual Report on Form 10-K of
the Company for the year ended January 29, 1994....................
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
Restated effective April 1, 1983) as amended through January 1,
1987 (incorporated by reference from Exhibit 10.22 to the
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)......................................................
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. EXHIBIT NO.
- -------- --------------------------------------------------------------------- ----
<S> <C> <C>
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................................................
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 May 17, 1991 (the "Option Plan")........................
10.16 --Form of Stock Option Agreement under the Option Plan...............
10.17 --SMG-II Holdings Corporation Employees 1987 Stock Option Plan, as
amended May 17, 1991...............................................
10.18 --Employment Agreement dated as of August 1, 1993 among the Company,
Pathmark, SMG-II and Jack Futterman (incorporated by reference from
the Annual Report on Form 10-K of the Company for the year ended
January 29, 1994...................................................
10.20 --Employment Agreement dated as of August 1, 1993 between the
Company, SMG-II and Anthony Cuti (incorporated by reference from
the Annual Report on Form 10-K of the Company for the year ended
January 29, 1994...................................................
10.21 --Stockholders Agreement, dated as of February 4, 1991, among SMG-II
Holdings Corporation and its Stockholders (incorporated by
reference from Exhibit 10.54 to the Registration Statement on Form
S-1 of Holdings, File No. 33-16963)................................
10.22 --Supplemental Retirement Agreements dated as of March 12, 1993
between Pathmark and Anthony Cuti (incorporated by reference from
the Annual Report on Form 10-K of the Company for the year ended
January 29, 1994...................................................
10.23 --Supplemental Retirement Agreement, dated June 1, 1994 between the
Company and Harvey Gutman, Robert Joyce and Ronald Rallo,
respectively (incorporated by reference from Annual Report on Form
10-K of Pathmark for the year ended January 28, 1995)..............
12.1* --Statements regarding computation of ratio of earnings to fixed
charges............................................................
21.1* --List of Subsidiaries of the Company................................
24. * --Power of Attorney of Alexis P. Michas..............................
</TABLE>
- ------------
*Filed herewith.
74
EXHIBIT 12.1
SUPERMARKETS GENERAL HOLDINGS CORPORATION
STATEMENTS REGARDING COMPUTATION OF RATIO
OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS EXCEPT RATIO)
<TABLE>
<CAPTION>
FISCAL YEARS
----------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations before taxes......... $ 16,121 $(36,819) $(608,614) $(255,618) $(29,403)
-------- -------- --------- --------- --------
Fixed charges:
Interest expense.............. 170,848 190,110 197,773 216,508 239,230
Interest portion of rental
expense(1)...................... 12,307 13,351 11,420 14,617 15,385
-------- -------- --------- --------- --------
Total fixed charges..... 183,155 203,461 209,193 231,125 254,615
-------- -------- --------- --------- --------
Adjusted income (loss) before
fixed charges................... $199,276 $166,642 $(399,421) $ (24,493) $225,212
-------- -------- --------- --------- --------
-------- -------- --------- --------- --------
Ratio of earnings to fixed
charges......................... 1.09x -- -- -- --
-------- -------- --------- --------- --------
-------- -------- --------- --------- --------
Deficiency in earnings available
to cover fixed charges........ $ -- $ 36,819 $ 608,614 $ 255,618 $ 29,403
-------- -------- --------- --------- --------
-------- -------- --------- --------- --------
</TABLE>
- ------------
(1) Represents the portion of rentals deemed representative of the interest
included therein.
EXHIBIT 21.1
SUPERMARKETS GENERAL HOLDINGS CORPORATION
LIST OF SUBSIDIARIES
STATE OF
NAME INCORPORATION
- ---------------------------------------------------------------- -------------
Bridge Stuart, Inc. ............................................ New York
Pennsylvania Stuart, Inc. ...................................... Pennsylvania
Jersey Stuart, Inc. ............................................ New Jersey
Bucks Stuart, Inc. ............................................. Pennsylvania
Madison Stuart Corporation...................................... New Jersey
Brick Stuart, Inc. ............................................. New Jersey
AAL Realty Corp. ............................................... New York
GAW Properties Corp. ........................................... New Jersey
Pathmark Stores, Inc. .......................................... Delaware
Plainbridge, Inc. .............................................. Delaware
Pauls Trucking Corp. ........................................... New Jersey
PTK Holdings, Inc. ............................................. Delaware
Chefmark, Inc. ................................................. Delaware
EXHIBIT 24
SUPERMARKETS GENERAL HOLDINGS CORPORATION
POWER OF ATTORNEY
The undersigned, a director of Supermarkets General Holdings Corporation
(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 JACK FUTTERMAN 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 the undersigned, and in any and all capacities, any and
all acts and things whatsoever necessary or appropriate to be done in the
premises, as fully and to 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
25th day of April, 1995.
/s/ ALEXIS P. MICHAS
......................................
ALEXIS P. MICHAS
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Supermarkets
General Holdings Corporation's Consolidated Statements of Operations for the 52
weeks ended January 28, 1995 and Consolidated Balance Sheets as of January 28,
1995 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-28-1995
<PERIOD-END> JAN-28-1995
<CASH> 8,497
<SECURITIES> 14,750
<RECEIVABLES> 14,293
<ALLOWANCES> (913)
<INVENTORY> 255,631
<CURRENT-ASSETS> 374,391
<PP&E> 927,878
<DEPRECIATION> (329,077)
<TOTAL-ASSETS> 1,043,558
<CURRENT-LIABILITIES> 472,300
<BONDS> 1,365,571
<COMMON> 10
0
101,959
<OTHER-SE> (1,280,305)
<TOTAL-LIABILITY-AND-EQUITY> 1,043,558
<SALES> 4,205,536
<TOTAL-REVENUES> 4,205,536
<CGS> 3,018,484
<TOTAL-COSTS> 3,018,484
<OTHER-EXPENSES> 1,008,918
<LOSS-PROVISION> 2,200
<INTEREST-EXPENSE> 159,813
<INCOME-PRETAX> 16,121
<INCOME-TAX> 4,146
<INCOME-CONTINUING> 11,975
<DISCONTINUED> 14,945
<EXTRAORDINARY> (3,687)
<CHANGES> 0
<NET-INCOME> 23,233
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
