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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 31, 1998 0-16404
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SUPERMARKETS GENERAL HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3408704
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Milik Street 07008
Carteret, New Jersey (Zip Code)
(Address of principal executive offices)
(732) 499-3000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: 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
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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, 1998, 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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PART I
ITEM 1. Business*
General
Registrant was incorporated in the State of Delaware in April 1987 as SMG
Holdings Corporation. Subsequently, registrant's name was changed to
Supermarkets General Holdings Corporation (the "Company"). The Company acquired
Supermarkets General Corporation ("Old Supermarkets") in October 1987 (the
"Acquisition"). References to the Company in this Report refer to the Company
and its subsidiaries on a consolidated basis, except where the context requires
otherwise.
In October 1989, Old Supermarkets adopted an amended and restated Plan of
Liquidation pursuant to which it was liquidated into three wholly owned
subsidiaries of the Company. 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").
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., a wholly
owned subsidiary of the Company ("PTK").
During the fiscal year ended February 1, 1997 ("Fiscal 1996"), the Company
reported that it had decided to divest 12 supermarkets located in its southern
region. During the course of the fiscal year ended January 31, 1998 ("Fiscal
1997"), the Company sold or closed 11 of the 12 stores held for divestiture and
decided to continue to operate the remaining store.
On June 30, 1997, the Company, through its Pathmark subsidiary, entered
into a new $500 million bank credit agreement (the "Credit Agreement") with a
group of lenders led by The Chase Manhattan Bank. The Credit Agreement
includes a $300 million term loan (the "Term Loan") and a $200 million
working capital facility (the "Working Capital Facility"). The Company repaid
in full the former term loan and former working capital facility with the
borrowings obtained under the Credit Agreement.
- - Under the Credit Agreement, the Term Loan and Working Capital Facility
bear interest at floating rates, ranging from LIBOR plus 2.25% to LIBOR plus
2.50%. The Company is required to repay a portion of its borrowings under the
Term Loan each year so as to retire such indebtedness in its entirety by
December 15, 2001. Under the Working Capital Facility, which expires on June
15, 2001, the Company can borrow or obtain letters of credit in an aggregate
amount not to exceed $200 million, of which the maximum of $125 million can
be in letters of credit. In addition, pursuant to a Permitted Subordinated
Debt Refinancing (as defined in the Credit Agreement), the Working Capital
Facility and a portion of the Term Loan can be extended up to an additional
two and one-half years and the remainder of the Term Loan can be extended up
to an additional three and one-half years from the original expiration dates.
The Credit Agreement contains certain covenants, including financial
covenants concerning levels of operating cash flow, minimum interest and rent
expense coverage, maximum leverage ratio, maximum senior debt leverage ratio,
maximum consolidated rental payments and maximum capital expenditures. The
Credit Agreement also contains other covenants including, but not limited to,
covenants with respect to the following matters: (i) limitation on indebtedness;
(ii) limitation on liens; (iii) restriction on mergers (iv) restriction on
investments, loans, advances, guarantees and acquisitions; (v) restriction on
assets sales and sale/leaseback transactions; (vi) restriction on certain
payments of indebtedness and incurrence of certain agreements, and (vii)
restriction on transactions with affiliates.
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* Except as otherwise indicated, information contained in this Item is given as
of January 31, 1998.
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On January 29, 1998, the Company sold its Woodbridge, New Jersey
distribution center and office complex and its leasehold interests in its two
distribution centers and its banana ripening facility in North Brunswick, New
Jersey, Dayton, New Jersey and Avenel, New Jersey, respectively (all of the
foregoing buildings are hereinafter referred to as, collectively, the
"Facilities"), to C&S Wholesale Grocers, Inc. ("C&S"), including the fixtures,
equipment and inventory in each of those Facilities, for approximately $104
million (approximately $60 million, excluding inventory) ("the C&S Purchase
Agreement"). The Company used a portion of the net proceeds to partially reduce
borrowings under the Credit Agreement. At the same time, the term of the
Company's 15 year supply agreement with C&S (the "Supply Agreement") commenced,
pursuant to which C&S will supply substantially all of the Company's grocery,
frozen and perishable merchandise requirements, formerly owned and warehoused by
the Company (see Item 1. Business - Supply and Distribution).
Business of the Company
The Company's primary business activity is the management of its interests
in Pathmark and Chefmark, Inc. ("Chefmark"). The Company holds all of the
capital stock of PTK and all of the capital stock of Chefmark. Through PTK, the
Company owns all of the capital stock of Pathmark. Chefmark's primary business
is to supply Pathmark with deli food preparation services.
Business
At January 31, 1998, Pathmark operated 135 supermarkets primarily in the
densely populated New York-New Jersey and Philadelphia metropolitan areas. These
metropolitan areas contain over 10% of the population and grocery sales in the
United States. These supermarkets are located in New Jersey, New York,
Pennsylvania, Delaware and Connecticut and consist of 5.2 million selling square
footage and 7.1 million total square footage.
Business Strategy
Pathmark's business strategy is to increase sales, profitability and market
penetration in its existing markets by focusing on the following five operating
priorities: concentrate on core business, Pathmark "GREAT" service, lower
operating costs, spend capital wisely and have the right management team. By
concentrating on and implementing these five priorities, the Company expects to
accomplish its strategic goals (i) by providing superior perishable and
non-perishable merchandise, value and service to its customers through its
marketing, merchandising and customer service programs; (ii) through increased
operating efficiencies; and (iii) through efficient use of capital to renovate
and enlarge its existing store base.
Marketing and Merchandising
- - Super Center Format. Of Pathmark's 135 stores, 132 are Super Centers. The
average Pathmark Super Center is approximately 39% larger than the average
size supermarket in the United States and offers greater convenience by
providing one-stop shopping and a wider assortment of foods and general
merchandise than is offered by conventional supermarkets. The Pathmark
Super Center format is designed to provide Pathmark customers with a
substantially greater selection of quality perishable products and to be
more "customer friendly", with wider aisles, more accessible customer
service and information departments, improved signs and graphics, and
increased availability of Pathmark associates, particularly in the
perishable departments. All of Pathmark's new supermarkets and enlargements
completed in Fiscal 1997 were Super Centers and Pathmark expects that all
new stores and enlargements thereafter will employ the same concept.
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- - Flexible Merchandising. Pathmark believes that its large-store format gives
it considerable flexibility to respond to changing consumer demands and
competition by varying and enhancing its merchandise selection. Pathmark's
"Big Deals" program, currently consisting of over 500 merchandise items,
offers large-sized merchandise at prices that Pathmark believes are
competitive with those available in "warehouse" and "club" stores. Pathmark
emphasizes competitive pricing plus weekly sales and promotions supported
by extensive advertising, both primarily in print media. Merchandising
flexibility and effectiveness is enhanced through the increased utilization
of a category management approach. In addition, Pathmark offers for sale
over 3,000 items through its private label program.
- - Pharmacy. Pathmark provides full pharmacy services in virtually all of its
stores. Pathmark's broad market coverage within its marketing area has
enabled it to become a leading filler of third-party prescriptions.
Pathmark believes that its well-established pharmacy operations provide a
competitive advantage in attracting and retaining customers.
Store Expansion and Renovation Program
- - New Stores, Enlargements and Renovations. During Fiscal 1997, Pathmark
opened two new Pathmark Super Centers, closed 11 other stores, and
completed five renovations and eight enlargements. During the fiscal year
ending January 30, 1999 ("Fiscal 1998"), Pathmark plans to open up to two
new Super Centers and to complete up to an aggregate of 19 renovations and
enlargements.
- - Pathmark recognizes the importance of keeping its stores looking fresh and
up-to-date; thus, each store typically receives a renovation or enlargement
every five years. At the end of Fiscal 1997, Pathmark derived approximately
77% of its supermarket sales from stores that were opened, enlarged or
renovated during the last five years.
- - Core Market Focus. Pathmark has identified over 50 potential locations for
new supermarkets within its current marketing areas and expects that all
new stores opened during the current and next two fiscal years will be
located in these areas. Pathmark believes that, by opening stores in its
current marketing areas, it can achieve additional operating economies and
other benefits from its store expansion program without the risks and costs
associated with opening stores in new marketing areas.
Operating Efficiencies
- - Technology. Pathmark has made a significant and continuing investment in
information technology. All Pathmark supermarket checkout terminals have
third-generation IBM 4680 scanner systems supported by a RISC 6000
application processor in each store. These systems allow consumer credit
and electronic fund transfer ("EFT") transactions, greatly facilitate
system-wide promotion and merchandising programs, and improve the speed and
control of customer transactions. In addition, all Pathmark supermarkets
utilize radio frequency technology for direct vendor receivings and shelf
labels.
- - Cost Reduction. The Company is continuously evaluating its operations in an
effort to reduce operating costs consistent with its overall objective of
providing a high level of customer service. During Fiscal 1997, the Company
took several steps to accomplish this goal. The Company closed or sold 11
stores, which had experienced unprofitable operating results. The Company
reevaluated its merchandise distribution methods, resulting in decisions to
outsource its trucking business and hire a trucking company to meet its
transportation needs, to outsource its pharmacy merchandise requirements to
a drug wholesaler, and to sell its grocery, frozen and perishable
distribution centers to and enter into a 15 year supply arrangement with
C&S, thereby lowering the Company's distribution costs (see Item 1 -
Business - Supply and Distribution).
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- - Demographic and Geographic Concentration. The Company's stores serve
densely populated communities. In addition, all Pathmark supermarkets are
located within 100 miles of its corporate headquarters in Carteret, New
Jersey and the principal warehousing facilities that serve them. The high
population density, as well as the geographic concentration of stores,
provide substantial economy of scale opportunities.
Pathmark Supermarkets
Pathmark operated 135 supermarkets at January 31, 1998. Super Centers
accounted for approximately 98% of Pathmark's supermarket sales for Fiscal 1997.
The following table presents selected data reflecting supermarket sales and
stores for the last five fiscal years.
<TABLE>
<CAPTION>
Fiscal Years
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1997 1996 1995(a) 1994 1993
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(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Supermarket sales................................. $ 3,692 $ 3,701 $ 3,853 $ 3,785 $ 3,839
Average sales per Supermarket(b).................. 27.5 26.1 26.4 25.9 25.4
Number of Supermarkets:
Renovations(c).............................. 5 16 14 14 12
Enlargements(d)............................. 8 5 4 11 5
Opened...................................... 2 4 5 4 4
Closed...................................... 11 4 4 6 5
Type of Supermarket(e):
Super Center................................ 132 139 139 137 138
Conventional................................ 3 5 5 6 7
Total Supermarkets Open at Year End......... 135 144 144 143 145
</TABLE>
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(a) Fiscal 1995 was a 53-week year.
(b) Computed on the basis of aggregate sales of stores open for the full year,
based on a 52-week period.
(c) Renovations involve an investment of $400,000 or more and in Fiscal 1997
averaged over $1.0 million per store.
(d) Enlargements involve the addition of selling space and in Fiscal 1997
averaged an investment in excess of $3.5 million.
(e) Includes two stores not wholly owned. The sales figures for these stores
are not included above.
By industry standards, Pathmark stores are large and productive, averaging
approximately 52,500 square feet in size and generating high average sales
volume of approximately $27.5 million per store ($712 per selling square foot)
for stores open for all of Fiscal 1997. Pathmark's 135 supermarkets at January
31, 1998 ranged from 26,008 to 66,463 square feet in size and included 126
supermarkets that are 40,000 square feet or larger in size. All Pathmark stores
carry a broad variety of food and drug store products, including an extensive
variety of the Pathmark, No Frills and Pathmark Preferred brands. All but five
supermarkets contained in-store pharmacy departments at the end of Fiscal 1997.
Pathmark pioneered the development of the large "superstore" in the Middle
Atlantic States, opening the first "Pathmark Super Center" in 1977, and
currently operates 132 such stores. The majority of Super Centers were created
through the enlargement or renovation of existing stores. In addition to the
broad variety of food and non-food items carried in conventional Pathmark
stores, a typical Super Center includes a customer service center, videotape
rental, a pharmacy, expanded produce department, meat department, cheese shop,
bakery, seafood, service delicatessen department and expanded health and beauty
care department. All Super Centers have EFT and credit transaction capability at
their checkout terminals, and 77 supermarkets also feature in-store automated
teller machines. During Fiscal 1996, the Company entered into master licensing
agreements with two regional banking institutions to place up to 98 in-store
banks in Pathmark supermarkets over the next two years. Each bank, which
occupies approximately 400 square feet, offers a full array of financial
services and is open seven days a week. The license agreements have an
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initial term of five years with optional renewal periods. At the close of
Fiscal 1997, 58 stores had in-store banks and Pathmark expects to have 36
additional in-store banks by the end of Fiscal 1998.
Over the past several years, Pathmark stores have been designed to be more
"customer friendly", with wider aisles, more accessible customer service and
information departments, improved signs and graphics, and increased availability
of Pathmark associates. For example, Pathmark has introduced "GREAT" service, a
customer service program emphasizing proactive, inter-personal communication
between store associates and customers. All of Pathmark's new supermarkets and a
majority of supermarket enlargements completed in Fiscal 1997 were Super Centers
and Pathmark expects that virtually all new stores and enlargements will employ
the same concept.
Pathmark's supermarket business is generally not seasonal, although sales in
the second and fourth quarters tend to be slightly higher than those in the
first and third quarters.
Store Expansion and Renovation Program
A key to Pathmark's business strategy has been, and will continue to be, the
expansion of the total selling square footage of its operations. Pathmark
believes, that by adding new stores and increasing the selling area of existing
stores, it can improve its competitive position and operating margins by
achieving economies of scale in merchandising, advertising, distribution and
supervision. During the five years ending with Fiscal 1997, Pathmark completed
94 renovations and enlargements and opened 19 new supermarkets. At the close of
Fiscal 1997, sales in these stores accounted for approximately 77% of its total
supermarket sales. Pathmark currently expects to open up to two non-replacement
Pathmark Super Centers and to complete up to 19 renovations and enlargements
during Fiscal 1998.
Advertising and Promotion
As part of its marketing strategy, Pathmark emphasizes value through its
competitive pricing and weekly sales and promotions supported by extensive
advertising. Additional savings are offered each week from Pathmark "super
coupons" in newspapers and circulars. Pathmark's advertising expenditures are
concentrated on print advertising, including advertisements and circulars in
local and area newspapers and advertising flyers distributed in stores, and
radio. Several years ago, Pathmark introduced "Smart Coupons" in its
advertisements. With "Smart Coupons", customers no longer are required to cut
out Pathmark coupons from its advertisement and physically present them at the
cash registers. Rather, when a coupon item is scanned during the check-out
process, the coupon savings is automatically deducted from the price. Pathmark
believes that its "Smart Coupons" greatly convenience its customers and improve
customer service at the checkout.
Consumer Research
Pathmark conducts numerous ongoing and special consumer research projects.
These typically involve customer surveys (both in-store and by telephone) as
well as focus groups. The information derived from these projects is used to
evaluate consumers' attitudes and purchasing patterns and helps shape Pathmark's
marketing programs.
Technology
Pathmark has made a significant and continuing investment in information
technology. All Pathmark supermarket checkout terminals have IBM 4680 scanner
systems supported by a RlSC 6000 application processor in each store. These
systems allow consumer credit and EFT transactions, greatly facilitate
system-wide promotion and merchandising programs, and improve the speed and
control of customer transactions. This technology and the data generated by
scanning have not only led to lower labor costs, improved price control and
shelf allocation, and quicker customer check-out, but have also assisted in the
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analysis of product movement, profit contribution and demographic merchandising.
Pathmark also has a computer-assisted ordering system that enables it to
replenish inventory to avoid "out of stocks" at store level while maintaining
optimum overall inventory levels. In addition, all Pathmark supermarkets utilize
radio frequency technology for direct vendor receivings and shelf labels.
All of the pharmacies are equipped with pharmacy computers. In addition to
improving customer service, these computers aid pharmacists in detecting drug
interactions, improve the collection of third-party receivables and help to
attract third-party businesses, such as health maintenance organizations and
union welfare plans.
In August 1991, Pathmark entered into a ten year facilities management and
systems integration agreement with IBM Company. Under the agreement, IBM has
taken over Pathmark's data center operations, mainframe processing and
information system functions and is providing business applications and systems
designed to enhance Pathmark's customer service and efficiency.
Supply and Distribution
During the third quarter of Fiscal 1997, the Company decided to outsource
its trucking operations and retained a local trucking company to provide the
requisite trucking services. Management believes that the outsourcing
arrangement will result in lower transportation costs to the Company.
Beginning in January 1998, the Supply Agreement with C&S commenced. Under
the Supply Agreement, C&S supplies to the Company and distributes from the
Facilities substantially all of the grocery, frozen and perishable (includes
meat, produce, seafood and delicatessen items) merchandise formerly owned and
warehoused by the Company. Management believes that the Supply Agreement with
C&S enhances the Company's ability to offer consistently fresh and high quality
products to its customers at a reduced distribution cost to the Company. Prior
to the Supply Agreement, products purchased for resale by the Company were
purchased directly from a large group of unaffiliated suppliers, including large
consumer products companies.
The Company continues to operate a 266,000 square foot leased general
merchandise, health and beauty care products and tobacco distribution center in
Edison, New Jersey (the "GMDC"), which opened in 1980. During Fiscal 1997, the
Company outsourced its pharmacy merchandise distribution requirements to a
pharmaceutical wholesaler. In addition, Chefmark Inc., an affiliate of the
Company, owns and operates a 16,000 square foot commissary in Somerset, New
Jersey (the "Chefmark Facility") in which high quality cooked meat products and
salads are prepared for sale and supplied to the Company for sale in the
Company's delicatessen departments. The Chefmark Facility opened in 1976.
Prior to the Supply Agreement with C&S, the Company operated, in addition to
the GMDC and Chefmark Facility, four distribution centers and a banana ripening
facility, aggregating approximately 1.3 million square feet.
In addition to reducing the Company's distribution and transportation costs,
management believes that the logistics outsourcing will enhance its ability to
better concentrate on the core business of the Company.
Competition
The supermarket business is highly competitive and is characterized by high
asset turnover and narrow profit margins. Pathmark's earnings are primarily
dependent on the maintenance of relatively high sales volume per supermarket,
efficient product purchasing and distribution, and cost-effective store
operating and distribution techniques. Pathmark's main competitors are national,
regional and local supermarkets, drug stores, convenience stores, discount
merchandisers, "warehouse" and "club" stores and other local
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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 31, 1998, the Company employed approximately 28,000 people, of
whom approximately 20,500 were employed on a part-time basis.
Approximately 88% of the Company's employees are covered by 18 collective
bargaining agreements (typically having three or four year terms) negotiated
with approximately 15 different local unions. During Fiscal 1998, eight
contracts, covering approximately 13,000 Pathmark associates in approximately
90% of the stores and approximately 130 associates in GMDC, will expire. The
Company does not anticipate any difficulty in renegotiating these contracts.
The Company believes that its relationship with its employees is generally
satisfactory.
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ITEM 2. Properties**
Reference is made to the answer to Item 1, "Business" of this report for
information concerning the states in which the Company's supermarkets and
distribution and processing facilities are located. See "Business of
Pathmark-Supply and Distribution" in Item 1 of this report for information
concerning the Company's remaining distribution and processing facilities.
Pathmark's 135 supermarkets have an aggregate selling area of approximately
5.2 million square feet. Eighteen of the supermarkets are owned by Pathmark and
the remaining 117 are leased. These supermarkets are either freestanding stores
or are located in shopping centers. Twenty-nine leases expire during the current
and next four calendar years and Pathmark has options to renew all of them.
Pathmark leases its corporate headquarters in Carteret, NJ in premises
totaling approximately 150,000 square feet in size.
Most of the facilities owned by Pathmark are owned subject to mortgages.
Pathmark plans to acquire leasehold or fee interests in any property on which
new stores or other facilities are opened and will consider entering into
sale/leaseback or mortgage transactions with respect to owned properties if
Pathmark believes such transactions are financially advantageous.
ITEM 3. Legal Proceedings
The Company is a party to a number of legal proceedings in the ordinary
course of business. Management believes that the ultimate resolution of these
proceedings will not, in the aggregate, have a material adverse impact on the
financial condition, results of operations or business of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
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** Except as otherwise indicated, information contained in this Item is given as
of January 31, 1998.
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PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters (as of April 1, 1998)
Neither the Company's Class A Common Stock nor its Class B Common Stock,
each $0.01 par value, is publicly traded on any market. All of registrant's
outstanding Common Stock is held by SMG-II Holdings Corporation ("SMG-II").
The authorized preferred stock of the Company consists of 9,000,000 shares
of $3.52 Cumulative Exchangeable Redeemable Preferred Stock (the "Holdings
Preferred Stock"), of which 4,890,671 shares were issued and outstanding at
April 1, 1998. The Holdings Preferred Stock has a liquidation preference of $25
per share and its terms provide for cumulative quarterly dividends at an annual
rate of $3.52 per share, when, as, and if declared by the Board of Directors of
the Company. No active public trading market currently exists for the Holdings
Preferred Stock.
The Holdings Preferred Stock is non-voting, except that if an amount equal
to six quarterly dividends is in arrears in whole or in part, the holders
thereof, voting as a class, are entitled to elect an additional two members of
the board of directors of the Company. The Company is currently in arrears on
payment of more than six quarterly dividends on the Holdings Preferred Stock and
does not expect to receive cash flow sufficient to permit payments of dividends
on the Holdings Preferred Stock in the foreseeable future. The holders of the
Holdings Preferred Stock reelected two persons to the Company's Board of
Directors at its 1997 annual meeting.
The payment of dividends to holders of the Company's Common Stock is subject
to restrictions by the Certificate of Designation of Rights, Preferences and
Privileges under which the Holdings Preferred Stock was issued. The Company has
not paid any dividends on its Common Stock and does not anticipate paying cash
dividends on its Common Stock during Fiscal 1998.
The authorized capital stock of SMG-II consists of 3,000,000 shares of
SMG-II Class A Common Stock, 3,000,000 shares of SMG-II Class B Common Stock, of
which 672,476 and 320,000 shares, respectively, were issued and outstanding at
April 1, 1997, and 4,000,000 shares of SMG-II Preferred Stock, of which
1,500,000 shares are designated SMG-II Series A Preferred Stock, 1,500,000
shares are designated SMG-II Series B Preferred Stock, and 33,520 shares are
designated SMG-II Series C Preferred Stock (the three series of Preferred Stock
hereinafter collectively referred to as "SMG-II Preferred Stock").
At April 1, 1998, there were outstanding 236,731 shares of SMG-II Series A
Preferred Stock, 180,769 shares of SMG-II Series B Preferred Stock and 8,520
shares of SMG-II Series C Preferred Stock.
SMG-II's capital stock is held beneficially as follows: (i) SMG-II Class A
Common Stock by approximately 55 holders, including six affiliates of Merrill
Lynch & Co., Inc. (The "ML Common Investors"), Chemical Investments, Inc.
("CII"), an affiliate of Chase Manhattan Corp., and 48 current and former
members of the Company's management or their heirs (the "Management Investors");
(ii) SMG-II Series A Preferred Stock by five affiliates of Merrill Lynch & Co.,
Inc. (the "ML Preferred Investors", the ML Common Investors and ML Preferred
Investors hereinafter collectively referred to as the "ML Investors"); (iii)
SMG-II Class B Common Stock held by three holders, including CII, The Equitable
Life Assurance Society of the United States ("Equitable") and an affiliate of
Equitable (collectively, the "Equitable Investors"); (iv) SMG-II Series B
Preferred Stock held by three holders, including CII and the Equitable
Investors; and (v) SMG-II Series C Preferred Stock held by one Management
Investor. Holders of shares of SMG-II Class A Common Stock are entitled to one
vote per share on all matters to be voted on by stockholders. Holders of shares
of SMG-II Class B Common Stock are not entitled to any voting rights, except as
required by law or as otherwise provided in the Restated Certificate of
Incorporation of SMG-II.
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Subject to compliance with certain procedures, holders of shares of SMG-II Class
B Common Stock may exchange their shares for shares of SMG-II Class A Common
Stock and holders of shares of SMG-II Class A Common Stock may exchange their
shares for shares of SMG-II Class B Common Stock, in each case on a
share-for-shares basis. All holders of SMG-II capital stock are parties to a
Stockholders Agreement dated as of February 4, 1991, as amended, with SMG-II
(the "Stockholders Agreement").
SMG-II Preferred Stock has a stated value and liquidation preference of $200
per share and bears dividends at the rate of 10% of the stated value per annum,
payable annually. At the option of SMG-II, dividends are payable in cash or may
accumulate (and the amount thereof shall compound annually).
Holders of shares of SMG-II Series A Preferred Stock and SMG-II Series C
Preferred Stock are entitled to one vote per share of SMG-II Class A Common
Stock into which such SMG-II Series A Preferred Stock and SMG-II Series C
Preferred Stock are convertible on all matters to be voted on by SMG-II
stockholders, subject to increase to 1.11 votes per share upon the occurrence of
certain events. Holders of shares of SMG-II Series B Preferred Stock are
entitled to one vote per share of SMG-II Class B Common Stock into which such
SMG-II Series B Preferred Stock is convertible for the purpose of voting on any
consolidation or merger, sale, lease or exchange of substantially all of the
assets or any liquidation, dissolution or winding up of SMG-II. Additionally,
holders of SMG-II Preferred Stock have separate voting rights with respect to
alteration in the voting powers, rights and preferences and certain other terms
affecting the SMG-II Preferred Stock. Subject to compliance with certain
procedures, holders of SMG-II Series B Preferred Stock may exchange their shares
for shares of SMG-II Series A Preferred Stock and holders of SMG-II Series A
Preferred Stock may exchange their shares for shares of SMG-II Series B
Preferred Stock, on a share-for-share basis. Each series of SMG-II Preferred
Stock ranks pari passu with each other series.
At the option of the holder, SMG-II Preferred Stock is convertible into
SMG-II Common Stock at any time, on or prior to the occurrence of certain
events, including an initial public offering of in excess of 25% of the number
of outstanding shares of common stock of SMG-II, at a conversion ratio of one
share of the corresponding class of SMG-II Common Stock for each share of SMG-II
Preferred Stock, subject to adjustment upon the occurrence of certain events.
Holders of SMG-II Preferred Stock are party with the holders of SMG-II
Common Stock to the Stockholders Agreement which, among other things, restricts
the transferability of SMG-II capital stock and relates to the corporate
governance of SMG-II. None of SMG-II's capital stock is publicly traded on any
market. See Item 12, "Security Ownership of Certain Beneficial Owners and
Management."
10
<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 at Item 8 of this report.
SUPERMARKETS GENERAL HOLDINGS CORPORATION
SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS
(in millions)
<TABLE>
<CAPTION>
Fiscal Years(a)
--------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Sales..................................................... $3,696 $3,711 $3,972 $3,969 $4,022
Cost of sales (exclusive of depreciation and amortization
shown separately below)................................ 2,652 2,620 2,838 2,866 2,952
------- -------- -------- -------- -------
Gross profit.............................................. 1,044 1,091 1,134 1,103 1,070
Selling, general and administrative expenses.............. 841 857 866 851 837
Depreciation and amortization(b).......................... 84 89 80 76 70
Restructuring charge(c)................................... -- 9 -- -- --
Lease commitment charge(d)................................ -- 9 -- -- --
Gain on disposition of freestanding drug stores(e)........ -- -- 16 -- --
Gain on disposal of Purity Supreme, Inc. ("Purity")(f).... -- -- 16 -- --
Recapitalization expense(g)............................... -- -- -- -- 17
Provision for store closings(h)........................... -- -- -- -- 6
------- -------- -------- -------- -------
Operating earnings........................................ 119 127 220 176 140
Interest expense, net(i).................................. (166) (164) (171) (160) (177)
------- -------- -------- -------- -------
Earnings (loss) from continuing operations before income
taxes, gain on disposal of home centers segment,
extraordinary items and cumulative effect on
accounting changes...................................... (47) (37) 49 16 (37)
Income tax benefit (provision)............................ (2) 18 30 (4) 21
------- -------- -------- -------- -------
Earnings (loss) from continuing operations before gain
on disposal of home centers segment, extraordinary
items and cumulative effect on accounting changes....... (49) (19) 79 12 (16)
Loss from discontinued operations......................... -- -- -- (2) (1)
Gain on disposal of home centers segment, net of tax(j)... -- -- -- 17 --
------- -------- -------- -------- -------
Earnings (loss) before extraordinary items and cumulative
effect on accounting changes............................ -- (19) 79 27 (17)
Extraordinary items, net of tax(k)........................ (8) (1) (2) (4) (106)
------- -------- -------- -------- -------
Earnings (loss) before cumulative effect of accounting
changes................................................. (57) (20) 77 23 (123)
Cumulative effect of accounting changes, net of tax(l).... -- -- -- -- (40)
------- -------- -------- -------- -------
Net earnings (loss)....................................... (57) (20) 77 23 (163)
Less: non-cash preferred stock accretion and dividend
requirements........................................... (19) (19) (19) (19) (19)
------- -------- -------- -------- -------
Net earnings (loss) attributable to common stockholder(m) $ (76) $ (39) $ 58 $ 4 $ (182)
------- -------- -------- -------- -------
------- -------- -------- -------- -------
Ratio of earnings to fixed charges(n)..................... -- -- 1.27x 1.09x --
------- -------- -------- -------- -------
------- -------- -------- -------- -------
Deficiency in earnings available to cover fixed charges(o) $ 47 $ 37 $ -- $ -- $ 37
------- -------- -------- -------- -------
------- -------- -------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
As of
-----------------------------------------------------
Jan. 31, Feb. 1, Feb. 3, Jan. 28, Jan. 29,
1998 1997 1996 1995 1994
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets.............................................. $ 908 $1,017 $1,009 $1,029 $1,138
Working capital deficiency................................ 107 176 164 124 108
Obligations under capital leases, long-term............... 170 176 140 127 132
Long-term debt, net of current maturities................. 1,208 1,213 1,242 1,353 1,415
Cumulative exchangeable redeemable preferred stock........ 107 105 104 102 100
Stockholder's deficiency.................................. 1,334 1,258 1,222 1,280 1,285
</TABLE>
(footnotes on following page)
11
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS
(a) The Company's fiscal year ends on the Saturday nearest to January 31 of the
following calendar year. Fiscal years consist of 52 weeks, except for 53
weeks in Fiscal 1995.
(b) In Fiscal 1996 depreciation and amortization includes a $5 million pretax
charge to write down certain fixed assets held for sale to their estimated
net realizable values. See Note 6 of the Notes to Consolidated Financial
Statements at Item 8, Part II of this Form 10-K.
(c) During Fiscal 1996, the Company recorded a pretax charge of $9 million for
reorganization and restructuring costs related to its administrative
operations. See Note 18 of the Notes to Consolidated Financial Statements
at Item 8, Part II of this Form 10-K.
(d) During Fiscal 1996, the Company recorded a pretax charge of $9 million
related to unfavorable lease commitments of certain unprofitable stores in
the Company's southern region. See Note 19 of the Notes to Consolidated
Financial Statements at Item 8, Part II of this Form 10-K.
(e) During Fiscal 1995, the Company recorded a pretax gain of $16 million
related to the disposition of its freestanding drug stores. See Note 23 of
the Notes to Consolidated Financial Statements at Item 8, Part II of this
Form 10-K.
(f) During Fiscal 1995, the Company sold its remaining investment in Purity for
a gain of $16 million in connection with the sale of Purity to the Stop &
Shop Companies, Inc. See Note 24 of the Notes to Consolidated Financial
Statements at Item 8, Part II of this Form 10-K.
(g) In connection with the Recapitalization in Fiscal 1993, the Company
recorded a pretax charge of $17 million related to reorganization and
restructuring costs.
(h) During Fiscal 1993, the Company closed or disposed of five stores
and recorded a pretax charge of $6 million.
(i) Prior to Fiscal 1995, interest expense was net of interest charged to
discontinued operations. (j) During Fiscal 1994, the Company sold its home
centers segment, which resulted in a gain on sale of $17 million, net of $2
million of income taxes.
(k) During Fiscal 1997, Fiscal 1996 and Fiscal 1995, the Company recorded
extraordinary charges of $8 million, $1 million and $2 million,
respectively, net of an income tax benefit, related to the early
extinguishment of debt. See Note 17 of the Notes to Consolidated Financial
Statements at Item 8, Part II of this Form 10-K. During Fiscal 1994, the
Company recorded an extraordinary charge of $4 million, net of an income
benefit, related to the early extinguishment of debt. During Fiscal 1993,
in connection with the Recapitalization, the Company recorded an
extraordinary charge of $106 million, net of an income tax benefit of $9
million, related to the early extinguishment of debt.
(l) 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.
(m) 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.
(n) For the purpose of this calculation, earnings before fixed charges consist
of earnings from continuing operations before income taxes plus fixed
charges. Fixed charges consist of interest expense on all indebtedness
(including amortization of deferred debt issuance costs) and the portion of
operating lease rental expense that is representative of the interest factor
(deemed to be one-third of operating lease rentals). In addition, for Fiscal
1995, the inclusion of preferred stock dividend requirements results in a
ratio of earnings to fixed charges and preferred stocks dividends of 1.10x.
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.
(o) 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).
12
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The matters discussed herein, with the exception of historical information,
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks, uncertainties and other factors which could cause actual results to
differ materially from future results expressed or implied by such
forward-looking statements. Potential risks and uncertainties include, but are
not limited to, the competitive environment in which the Company operates and
the general economic conditions in the Company's trading areas.
Results of Operations
Fiscal 1997 v. Fiscal 1996
Sales: Sales in Fiscal 1997 were $3.70 billion compared to $3.71 billion
in the prior year, a decrease of 0.4%. Same store sales increased 0.8% for
the year. Sales in Fiscal 1997 compared to Fiscal 1996 were also impacted by
new store openings and remodels, offset by sold and closed stores. During
Fiscal 1997, the Company opened two new Pathmark stores, completed 13 major
renovations and enlargements to existing supermarkets, and sold four and
closed seven stores. The Company operated 135 and 144 supermarkets at the end
of the second quarters of Fiscal 1997 and Fiscal 1996, respectively.
Gross Profit: Gross profit in Fiscal 1997 was $1.04 billion or 28.2% of
sales compared to $1.09 billion or 29.4% of sales for the prior year. The
decrease in gross profit in both dollars and as a percentage of sales for Fiscal
1997 compared to the prior year was primarily due to the promotional pricing
program introduced during the first quarter of Fiscal 1997, as well as the
pre-Thanksgiving holiday promotions during the third quarter of Fiscal 1997. The
cost of goods sold comparisons were impacted by a pretax LIFO credit of $5.4
million and $1.3 million in Fiscal 1997 and Fiscal 1996, respectively. The
pretax LIFO credit for Fiscal 1997 includes a $2.0 million gain on a LIFO
liquidation related to the sale of the Company's pharmaceutical warehouse
inventory and a $0.8 million gain on a LIFO liquidation related to the sale of
the Company's grocery, frozen and perishable merchandise in connection with the
C&S Supply Agreement (see Note 3 of the Notes to the Consolidated Financial
Statements at Item 8, Part II of this Form 10-K).
Selling, General and Administrative Expenses ("SG&A"): SG&A in Fiscal 1997
decreased $16.4 million or 1.9% compared to the prior year. As a percentage of
sales, SG&A was 22.8% in Fiscal 1997, down from 23.1% in the prior year. The
decrease in SG&A as a percentage of sales in Fiscal 1997 compared to the prior
year was primarily due to lower administrative, advertising, claims and
utilities expenses, partially offset by higher store labor expenses.
Depreciation and Amortization: Depreciation and amortization of $83.6
million in Fiscal 1997 was $5.5 million lower than the prior year of $89.1
million. The decrease in depreciation and amortization expense in Fiscal 1997
compared to the prior year was primarily due to a pretax charge of $5.4 million
in Fiscal 1996 to write down fixed assets held for sale, principally in the
Company's southern region, partially offset by capital expenditures in Fiscal
1997. Depreciation and amortization excludes video tape amortization, which is
recorded in cost of goods sold, of $3.4 million and $3.1 million in Fiscal 1997
and Fiscal 1996, respectively.
Operating Earnings: Operating earnings in Fiscal 1997 were $119.5 million
compared to the prior year of $127.2 million. The decrease in operating earnings
in Fiscal 1997 compared to the prior year was primarily due to lower gross
profit, partially offset by lower SG&A and depreciation expense in Fiscal 1997
and the restructuring charge and the lease commitment charge in Fiscal 1996.
13
<PAGE>
Interest Expense: Interest expense was $166.8 million in Fiscal 1997
compared to $164.1 million in the prior year. The increase in interest expense
in Fiscal 1997 compared to the prior year was primarily due to increases in
lease obligations and the debt accretion on the Deferred Coupon Notes, partially
offset by lower amortization of debt issuance costs.
Income Taxes: The income tax provision was $2.2 million and $17.7 million
income tax benefit in Fiscal 1997 and Fiscal 1996, respectively. The 1997
provision is net of a $21.8 million increase in the valuation allowance related
to the Company's deferred income tax assets. The Company believes that it is
more likely than not that the net deferred income tax assets of $54.8 million at
January 31, 1998 will be realized through the implementation of tax strategies
which could generate taxable income.
During Fiscal 1997, the Company made income tax payments of $4.8 million and
received income tax refunds of $5.8 million. During Fiscal 1996, the Company
made income tax payments of $4.7 million and received income tax refunds of $8.1
million.
Extraordinary Items: During the second quarter of Fiscal 1997, in connection
with the Credit Agreement, the Company wrote off deferred financing fees of
$12.8 million related to the former bank credit agreement, resulting in a net
loss on early extinguishment of debt of $7.4 million. In addition, during the
second quarter of Fiscal 1997, in connection with the sale of certain mortgaged
property, the Company made a mortgage paydown of $2.9 million, including accrued
interest and debt premiums, resulting in a net loss on early extinguishment of
debt of $0.1 million.
During the second quarter of Fiscal 1996, in connection with the sale of
certain mortgaged property, the Company made a mortgage paydown of $5.3 million,
including accrued interest and debt premiums, resulting in a net loss on early
extinguishment of debt of $0.2 million. During the first quarter of Fiscal 1996,
in connection with the termination of the Plainbridge, Inc. credit agreement due
to the reacquisition of Plainbridge, Inc. by Pathmark, the Company wrote off
deferred financing fees resulting in a net loss on early extinguishment of debt
of $0.7 million. During the first quarter of Fiscal 1996, the Company also made
a paydown of $3.2 million of PTK Exchangeable Guaranteed Debentures. The premium
paid, including original issue discount, resulted in a net loss on early
extinguishment of debt of $0.1 million.
Summary of Operations: For Fiscal 1997, the Company's net loss was $56.9
million compared to a net loss of $20.1 million for the prior year. The increase
in net loss in Fiscal 1997 compared to the prior year was primarily due to lower
operating earnings, the extraordinary loss on early extinguishment of debt,
higher interest expense and the income tax provision in Fiscal 1997 compared to
the income tax benefit in Fiscal 1996.
EBITDA-FIFO: EBITDA-FIFO was $201.6 million and $236.7 million in Fiscal
1997 and Fiscal 1996, respectively. EBITDA-FIFO represents net earnings before
interest expense, income taxes, depreciation, amortization, the LIFO charge
(credit) and unusual transactions. EBITDA-FIFO is a widely accepted financial
indicator of a company's ability to service and/or incur debt and should not be
construed as an alternative to, or a better indicator of, operating income or
cash flows from operating activities, as determined in accordance with generally
accepted accounting principles.
14
<PAGE>
Fiscal 1996 (52-week year) v. Fiscal 1995 (53-week year)
Sales: Sales in Fiscal 1996 were $3.71 billion compared to $3.97 billion in
Fiscal 1995. Sales comparisons were impacted by the extra week in the prior year
and the disposition of the freestanding drug stores during Fiscal 1995. Sales
generated by the freestanding drug stores were $110.8 million in Fiscal 1995.
Same store sales from supermarkets decreased 2.8% for the year primarily due to
a significant increase in competitive new store openings and remodels,
particularly in the Company's southern region. During Fiscal 1996, the Company
opened four new Pathmark stores, two of which replaced smaller stores, and
completed 21 major renovations and enlargements to existing supermarkets. Two
stores were closed and not replaced during the year. The Company operated 144
supermarkets at the end of both Fiscal 1996 and Fiscal 1995.
Gross Profit: Gross profit in Fiscal 1996 was $1.09 billion or 29.4% of
sales compared with $1.13 billion or 28.6% of sales in Fiscal 1995. Excluding
the impact of the disposition of the freestanding drug stores, gross profit as a
percentage of sales was 28.8% in Fiscal 1995. The improvement in gross profit,
as a percentage of sales in Fiscal 1996 compared to Fiscal 1995, was primarily
due to increased focus on merchandising programs, the impact of the disposition
of the freestanding drug stores, as well as the Company's continuing emphasis on
the Pathmark 2000 format stores which allow expanded variety in all departments
particularly high margin perishables. The decrease in gross profit was primarily
attributable to the lower sales. The cost of goods sold comparisons were
affected by a pretax LIFO credit of $1.3 million and a pretax LIFO charge of
$1.1 million in Fiscal 1996 and Fiscal 1995, respectively.
Selling, General and Administrative Expenses ("SG&A"): SG&A decreased $8.5
million or 1.0% for Fiscal 1996 compared with Fiscal 1995. SG&A, on a proforma
basis eliminating the SG&A impact of the freestanding drug stores, increased
2.0% in Fiscal 1996 compared to Fiscal 1995. As a percentage of sales, SG&A were
23.1% in Fiscal 1996, up from 21.8% in Fiscal 1995 due to the impact of lower
sales, higher labor and labor related expenses, claims expenses and occupancy
costs, partially offset by lower advertising expenses and the impact of the
disposition of the freestanding drug stores in Fiscal 1995. SG&A for Fiscal 1996
also included a first quarter provision of $5.8 million representing the
termination costs for two former executives of the Company, a first quarter gain
of $5.6 million recognized on the sale of certain real estate and a second
quarter curtailment gain of $2.0 million due to the elimination of
postretirement medical coverage for active non-union associates. SG&A for Fiscal
1995 also included a fourth quarter gain of $3.4 million recognized on the sale
of a former warehouse of Purity, a previously divested company.
Depreciation and Amortization: Depreciation and amortization of $89.1 in
Fiscal 1996 was $8.6 million higher than $80.5 million in Fiscal 1995. The
increase for Fiscal 1996 was primarily due to a pretax charge of $5.4 million to
write down certain fixed assets held for sale, principally in the Company's
southern region, to their estimated net realizable values and capital
expenditures. Depreciation and amortization excludes video tape amortization,
which is recorded in cost of goods sold, of $3.1 million and $2.8 million in
Fiscal 1996 and Fiscal 1995, respectively.
Restructuring Charge: During the fourth quarter of Fiscal 1996, the Company
recorded a pretax charge of $9.1 million for reorganization and restructuring
costs related to its administrative operations. The restructuring charge
included $4.2 million for the costs of a voluntary early retirement program and
$1.2 million for severance and termination benefits. The remaining charge of
$3.7 million primarily relates to consulting fees incurred in connection with
the restructuring and exit costs for facility consolidation.
15
<PAGE>
Lease Commitment Charge: During the fourth quarter of Fiscal 1996, the
Company decided to divest a group of its southern region stores, certain of
which have experienced unprofitable operating results. The Company concluded
that the operating losses being experienced by these stores were other than
temporary and that the projected operating results of such stores would not be
sufficient to recover their long-lived assets and their contractual lease
commitments. Further, the Company believes that these lease costs will not be
significantly recoverable through any future sublease. Therefore, the Company
recorded a $8.8 million pretax charge related to these unfavorable lease
commitments, in addition to writing down the long-lived assets of these stores
(see "Depreciation and Amortization" above).
Operating Earnings: Operating earnings for Fiscal 1996 were $127.2 million
compared with $219.9 million for Fiscal 1995. The decrease in operating earnings
during Fiscal 1996 compared to Fiscal 1995 was due to lower sales, higher
depreciation and amortization expense, the restructuring charge and the lease
commitment charge in Fiscal 1996, the gain on disposition of freestanding drug
stores and the gain on disposal of Purity in Fiscal 1995, partially offset by
lower SG&A.
Interest Expense: Interest expense was $164.1 million for Fiscal 1996
compared to $171.0 million in Fiscal 1995 primarily due to reductions in the
Term Loan and the reduction in the amortization of PTK Exchangeable Guaranteed
Debentures original issue discount, as a result of their early paydown, along
with lower interest rates.
Income Taxes: The income tax benefit for Fiscal 1996 was $17.7 million. The
income tax benefit for Fiscal 1995 was $29.8 million, reflecting the reversal of
the valuation allowance of $26.8 million related to the Company's deferred
income tax assets. The reversal was recorded in conjunction with the Company's
continuing evaluation of its net deferred income tax assets.
During Fiscal 1996, the Company made income tax payments of $4.7 million and
received income tax refunds of $8.1 million. During Fiscal 1995, the Company
made income tax payments of $3.9 million and received income tax refunds of
$10.3 million.
Extraordinary Items: During the first quarter of Fiscal 1996, in connection
with the termination of the Plainbridge, Inc. credit agreement due to the
reacquisition of Plainbridge, Inc., by Pathmark, the Company wrote off deferred
financing fees, resulting in a net loss on early extinguishment of debt of $0.7
million. During the first quarter of Fiscal 1996, the Company also made a
paydown of $3.2 million of PTK Exchangeable Guaranteed Debentures, including
premium and original issue discount, resulting in a net loss on early
extinguishment of debt of $0.1 million. During the second quarter of Fiscal
1996, in connection with the proceeds from the sale of certain mortgaged
property, the Company made a mortgage paydown of $5.3 million, including accrued
interest and debt premiums, resulting in a net loss on early extinguishment of
debt of $0.2 million.
Summary of Operations: The Company's net loss in Fiscal 1996 was $20.1
million compared to net earnings of $76.5 million in Fiscal 1995. The decrease
in net earnings for Fiscal 1996 compared to Fiscal 1995 was due to lower
operating earnings in Fiscal 1996 and a higher income tax benefit in Fiscal
1995, partially offset by lower interest expense in Fiscal 1996.
EBITDA-FIFO: EBITDA-FIFO was $236.7 million and $269.1 million in Fiscal
1996 and Fiscal 1995, respectively.
16
<PAGE>
Financial Condition
Debt Service: During Fiscal 1997, total long-term debt decreased $35.7
million from Fiscal 1996 year end primarily due to a net decrease in borrowings
under the Credit Agreement compared to the former credit agreement and a
decrease in certain mortgages, partially offset by debt accretion on the
Pathmark Deferred Coupon Notes and the PTK Exchangeable Guaranteed Debentures.
In addition, during Fiscal 1997, total lease obligations decreased $3.9 million
from Fiscal 1996.
On January 29, 1998, the Company sold its fee and leasehold interests in
the Facilities to C&S for approximately $104 million (approximately $60
million, excluding inventory) in connection with the C&S Purchase Agreement.
Simultaneously, Pathmark and C&S commenced the 15 year Supply Agreement,
pursuant to which C&S will supply Pathmark with substantially all of its
grocery, frozen and perishable merchandise requirements. In conjunction with
the C&S Purchase Agreement, the Company used $32.5 million of the net
proceeds to pay down a portion of the Term Loan. The remainder of the net
proceeds were used to pay down the Working Capital Facility and invest in
marketable securities of $52.0 million at January 31, 1998. As a result,
there were no borrowings under the Working Capital Facility at January 31,
1998. However, subsequent to Fiscal 1997, the Company utilized its marketable
securities and borrowings under the Working Capital Facility, which have
increased to $15.0 million at April 21, 1998, primarily to paydown trade
accounts payable related to the inventory sold in connection with the C&S
Purchase Agreement and other liabilities.
During the second quarter of Fiscal 1997, the Company sold four supermarkets
that it announced for divestiture at the end of Fiscal 1996 for $14.9 million
and sold two former drug stores for $11.1 million. There was no gain or loss
recognized on these transactions. The proceeds were used to paydown a portion of
the former working capital facility and related mortgages.
On June 30, 1997, the Company, through its Pathmark subsidiary, entered into
the Credit Agreement with a group of lenders led by The Chase Manhattan Bank.
The Credit Agreement includes a $300 million Term Loan and a $200 million
Working Capital Facility. In connection with this refinancing, the Company
repaid in full the former Pathmark term loan ($230.5 million) and the former
Pathmark working capital facility ($57.5 million) with the borrowings obtained
under the Credit Agreement.
Under the Credit Agreement, the Term Loan and Working Capital Facility bear
interest at floating rates, ranging from LIBOR plus 2.25% to LIBOR plus 2.50%.
The Company is required to repay a portion of its borrowings under the Term Loan
each year, so as to retire such indebtedness in its entirety by December 15,
2001. Under the Working Capital Facility, which expires on June 15, 2001, the
Company can borrow or obtain letters of credit in an aggregate amount not to
exceed $200 million, of which the maximum of $125 million can be in letters of
credit. In addition, pursuant to a Permitted Subordinated Debt Refinancing (as
defined in the Credit Agreement), the Working Capital Facility and a portion of
the Term Loan can be extended up to an additional two and one-half years and the
remainder of the Term Loan can be extended up to an additional three and
one-half years from the original expiration dates.
The Company is required to make sinking fund payments on the Subordinated
Notes (as defined in Note 9 of the Notes to Consolidated Financial Statements at
Item 8, Part II of this Form 10-K) in the amount of 25% of the original
aggregate principal amount of the Subordinated Notes on each of June 15, 2000
and June 15, 2001. The Subordinated Debentures (as defined in Note 9 of the
Notes to Consolidated Financial Statements at Item 8, Part II of this Form 10-K)
and the remaining Subordinated Notes mature on June 15, 2002. The Senior
Subordinated Notes (as defined in Note 9 of the Notes to Consolidated Financial
Statements at Item 8, Part II of this Form 10-K) and the Deferred Coupon Notes
mature in Fiscal 2003. The Company has no payment obligations, through
intercompany notes or otherwise, with respect to its parent's indebtedness.
17
<PAGE>
The majority of the cash interest payments are scheduled in the second and
fourth quarters.
The amounts of principal payments required each year on outstanding
long-term debt (excluding the original issue discount with respect to the
Pathmark Deferred Coupon Notes and the PTK Exchangeable Guaranteed Debentures)
are as follows (dollars in millions):
<TABLE>
<CAPTION>
Principal
Fiscal Years Payments
- ------------ --------
<S> <C>
1998................................................................. $ 43.5
1999................................................................. 14.9
2000................................................................. 78.2
2001................................................................. 263.8
2002................................................................. 195.8
2003................................................................. 655.6
</TABLE>
Liquidity: The consolidated financial statements of the Company indicate
that, at January 31, 1998, current liabilities exceeded current assets by $107.3
million and stockholder's deficiency was $1.3 billion. Management believes that
cash flows generated from operations, supplemented by the unused borrowing
capacity under the Working Capital Facility (refer to Notes 1 and 9 of the Notes
to Consolidated Financial Statements at Item 8, Part II of this Form 10-K) and
the availability of capital lease financing will be sufficient to pay the
Company's debts as they come due, provide for its capital expenditure program
and meet its other cash requirements.
The Company believes that it will be able to make the scheduled payments or
refinance its obligations with respect to its indebtedness through a combination
of operating funds and borrowing facilities. Future refinancing will be
necessary if cash flow from operations is not sufficient to meet its debt
service requirements related to the maturity of a portion of the Pathmark Term
Loan and the Pathmark Working Capital Facility in Fiscal 2001, and the maturity
of the Pathmark Subordinated Notes and Pathmark Subordinated Debentures in
Fiscal 2002. The Company expects that it will be necessary to refinance all or a
portion of the Pathmark Senior Subordinated Notes, the Pathmark Deferred Coupon
Notes due in Fiscal 2003 and the PTK Exchangeable Guaranteed Debentures due in
Fiscal 2003. The Company may undertake a refinancing of some or all of such
indebtedness sometime prior to its maturity. The Company was in compliance with
its various debt covenants at January 31, 1998 and, based on management's
operating projections for Fiscal 1998, the Company believes that it will
continue to be in compliance with its various debt covenants. The Company's
ability to make scheduled payments, to refinance or otherwise meet its
obligations with respect to its indebtedness depends on its financial and
operating performance, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors beyond its control.
Although the Company's cash flow from its operations and borrowings has been
sufficient to meet its debt service obligations, there can be no assurance that
the Company's operating results will continue to be sufficient or that future
borrowing facilities will be available for payment or refinancing of Pathmark's
and PTK's indebtedness or that future borrowing facilities will be available.
While it is the Company's intention to enter into other refinancings that it
considers advantageous, there can be no assurances that the prevailing market
conditions will be favorable to the Company. In the event the Company obtains
any future refinancing on less than favorable terms, the holders of outstanding
indebtedness could experience increased credit risk and could experience a
decrease in the market value of their investment, because the Company might be
forced to operate under terms that would restrict its operations and might find
its cash flow reduced.
Preferred Stock Dividends: The terms of the Exchangeable Preferred Stock
provide for cumulative quarterly dividends at an annual rate of $3.52 per share
when, and if, declared by the Board of Directors of
18
<PAGE>
Holdings. Dividends for the first 20 quarterly dividend periods (through October
15, 1992) were paid at the Company's option in additional shares of Exchangeable
Preferred Stock. Since January 15, 1993, dividends not paid in cash cumulate at
the rate of $3.52 per share per annum, without interest, until declared and
paid. As of January 31, 1998, unpaid dividends of $90.4 million were accrued and
included in other noncurrent liabilities.
Capital Expenditures: Capital expenditures for Fiscal 1997, including
property acquired under capital leases, were $58.0 million compared to $94.7
million for Fiscal 1996 and $110.7 million for Fiscal 1995. During Fiscal 1997,
the Company opened two new Pathmark stores, completed 13 major renovations and
enlargements to existing supermarkets, and sold four and closed seven stores.
During Fiscal 1998, the Company plans to open up two new Pathmark stores, close
one store and to complete up to an aggregate of 19 major renovations and
enlargements. Capital expenditures for Fiscal 1998, including property to be
acquired under capital leases, are estimated to be $70.0 million. Management
believes that cash flows generated from operations, supplemented by the unused
borrowing capacity under the Working Capital Facility and the availability of
capital lease financing will be sufficient to provide for the Company's capital
expenditure program.
Cash Flows: Cash provided by operating activities amounted to $58.2 million
in Fiscal 1997 compared to $77.6 million in the prior year. The decrease in net
cash provided by operating activities was primarily due to an increase in the
net loss and an increase in cash used for operating assets and liabilities. Cash
provided by investing activities was $95.7 million in Fiscal 1997 compared to
cash used for investing activities of $47.0 million in the prior year. The
increase in cash provided by investing activities was primarily due to an
increase in proceeds related to the C&S Purchase Agreement, property
dispositions and a decrease in expenditures of property and equipment. Cash used
for financing activities was $101.9 million in Fiscal 1997 compared to $32.1
million in the prior year. The increase in cash used for financing activities
was primarily due to a decrease in borrowings in conjunction with the Credit
Agreement, net of repaying in full the former Pathmark term loan and former
Pathmark working capital facility in Fiscal 1997, the proceeds from the lease
financing of three supermarkets in Fiscal 1996, a decrease in bank overdrafts
and an increase in deferred financing fees related to the Credit Agreement,
partially offset by the repayment of PTK Exchangeable Guaranteed Debentures in
Fiscal 1996.
Cash provided by operating activities amounted to $77.6 million in Fiscal
1996 compared to $136.6 million in Fiscal 1995. The decrease in net cash
provided by operating activities was primarily due to a decline in net earnings
and by a decrease in cash provided by operating assets and liabilities. Cash
used for investing activities in Fiscal 1996 was $47.0 million due to
expenditures of property and equipment, partially offset by proceeds from
property dispositions. Cash provided by investing activities in Fiscal 1995 was
$15.6 million, primarily due to the net proceeds from the disposition of the
freestanding drug stores of $59.9 million, the net proceeds from the disposal of
Purity of $16.4 million, the net proceeds from the sale of real estate of $3.4
million and the proceeds of $4.7 million related to the disposal of the home
centers segment, partially offset by expenditures of property and equipment of
$69.6 million. Cash used for financing activities in Fiscal 1996 was $32.1
million compared to $162.9 million in the prior-year period. The decrease in
cash used for financing activities is primarily due to an increase in borrowings
under the former working capital facility, the proceeds from the lease financing
of three supermarket locations, a decrease in the repayment of PTK Exchangeable
Guaranteed Debentures and a paydown of $25.0 million on the Term Loan in Fiscal
1995 in conjunction with the disposition of the freestanding drug stores.
Year 2000 Compliance: The Company has initiated a program to prepare the
Company's computer systems and applications for the year 2000. This is necessary
because computer programs have been written using two digits rather than four to
define the applicable year. Any of the Company's computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This
19
<PAGE>
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
normal business transactions.
The Company expects that the principal costs will be those associated
with the remediation and testing of its computer applications. Through IBM,
this effort is under way across the Company, and is following a process of
inventory, scoping and analysis, modification, testing and certification, and
implementation. A major portion of these costs will be met under the existing
agreement with IBM through a reprioritization of technology development
initiatives, with the remainder representing incremental costs (refer to Note
26 of the Notes to the Consolidated Financial Statements at Item 8, Part II
of this Form 10-K). The Company does not believe that the total cost of such
compliance will be material. Additionally, the Company believes, based on
available information, that it will be able to manage its total year 2000
transition without any material adverse effect on its operations.
In addition, the Company is communicating with major vendors to determine
the extent to which the Company is vulnerable to third-party year 2000
compliance issues.
New Accounting Standards Not Yet Adopted
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is not expected
to have an effect on the Company's financial statements currently being
presented because the Company, at this time, has no items of comprehensive
income other than net income.
In June 1997, "FASB" issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS No. 131"), which will be effective for financial statements beginning
after December 15, 1997. SFAS No. 131 redefines how operating segments are
determined and requires expanded quantitative disclosures relating to a
company's operating statements. SFAS No. 131, which the Company is
evaluating, will impact the financial statements to the extent that it is
necessary to provide additional disclosure about the Company's segments.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits ("SFAS No. 132"), which will be effective for financial
statements beginning after December 15, 1997. SFAS No. 132 revises employers'
disclosure about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. The Company will adopt
SFAS No. 132 in Fiscal 1998 and believes it will impact the financial statements
to the extent that it is necessary to provide additional disclosure about the
Company's pensions and other postretirement benefits.
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company due to
adverse changes in financial rates. The Company is exposed to market risk in the
area of interest rates. This exposure is directly related to its Term Loan and
borrowing activities under the Working Capital Facility. The Company does not
currently maintain any interest rate hedging arrangements due to the reasonable
risk that near-term interest rates will not rise significantly. The Company is
continuously evaluating this risk and will implement interest rate hedging
arrangements when deemed appropriate.
20
<PAGE>
ITEM 8. Consolidated Financial Statements.
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
January 31, February 1, February 3,
1998 1997 1996
--------- ----------- ------------
<S> <C> <C> <C>
Sales...................................................... $ 3,696,040 $ 3,710,990 $ 3,972,070
Cost of sales (exclusive of depreciation and
amortization shown separately below).................... 2,652,028 2,619,329 2,837,687
------------ ----------- ------------
Gross profit............................................... 1,044,012 1,091,661 1,134,383
Selling, general and administrative expenses............... 840,942 857,374 865,851
Depreciation and amortization.............................. 83,585 89,139 80,535
Restructuring charge....................................... -- 9,137 --
Lease commitment charge.................................... -- 8,763 --
Gain on disposition of freestanding drug stores............ -- -- 15,535
Gain on disposal of Purity................................. -- -- 16,381
------------ ----------- ------------
Operating earnings......................................... 119,485 127,248 219,913
Interest expense........................................... (166,780) (164,118) (170,969)
------------ ----------- ------------
Earnings (loss) before income taxes and
extraordinary items..................................... (47,295) (36,870) 48,944
Income tax (provision) benefit............................. (2,164) 17,723 29,763
------------ ----------- ------------
Earnings (loss) before extraordinary items................. (49,459) (19,147) 78,707
Extraordinary items, net of an income tax benefit of
$5,456 in Fiscal 1997, $695 in Fiscal 1996 and
$1,506 in Fiscal 1995................................... (7,488) (997) (2,180)
------------ ----------- ------------
Net earnings (loss)........................................ (56,947) (20,144) 76,527
Less: non-cash preferred stock accretion and dividend
requirements............................................ (19,026) (18,954) (18,889)
------------ ----------- ------------
Net earnings (loss) attributable to common stockholder..... $ (75,973) $ (39,098) $ 57,638
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
See notes to consolidated financial statements
21
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.................................................. $ 62,914 $ 10,967
Accounts receivable, net................................................... 11,519 12,799
Merchandise inventories.................................................... 148,983 217,440
Income taxes receivable.................................................... -- 2,120
Deferred income taxes, net................................................. 8,492 9,969
Prepaid expenses........................................................... 21,455 24,970
Due from suppliers......................................................... 13,027 13,950
Other current assets....................................................... 11,480 5,942
------------ ------------
Total Current Assets..................................................... 277,870 298,157
Property and Equipment, Net................................................... 530,716 604,955
Deferred Financing Costs, Net................................................. 18,547 28,743
Deferred Income Taxes, Net.................................................... 46,279 39,530
Other Assets.................................................................. 34,342 45,200
------------ ------------
$ 907,754 $ 1,016,585
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current Liabilities
Accounts payable........................................................... $ 129,372 $ 167,446
Book overdrafts............................................................ 26,330 41,086
Current maturities of long-term debt....................................... 43,478 74,431
Income taxes payable....................................................... 372 --
Accrued payroll and payroll taxes.......................................... 49,599 56,414
Current portion of lease obligations....................................... 24,417 23,208
Accrued interest payable................................................... 18,300 20,712
Accrued expenses and other current liabilities............................. 93,336 90,629
------------ ------------
Total Current Liabilities................................................ 385,204 473,926
------------ ------------
Long-Term Debt................................................................ 1,208,327 1,213,081
------------ ------------
Lease Obligations, Long-Term.................................................. 170,471 175,628
------------ ------------
Other Noncurrent Liabilities.................................................. 370,697 306,733
------------ ------------
Redeemable Securities
Exchangeable Preferred Stock, $.01 par value............................... 107,183 105,372
------------ ------------
Authorized: 9,000,000 shares
Issued and outstanding: 4,890,671 shares
Liquidation preference, $25 per share: $122,267
Commitments and Contingencies (Notes 3, 12 and 26)
Stockholder's Deficiency
Class A Common Stock $.01 par value........................................... 7 7
Authorized: 1,075,000 shares
Issued and outstanding: 650,675 shares
Class B Common Stock $.01 par value........................................... 3 3
Authorized: 1,000,000 shares
Issued and outstanding: 320,000 shares
Paid-in Capital............................................................... 197,521 199,332
Accumulated Deficit........................................................... (1,531,659) (1,457,497)
------------ ------------
Total Stockholder's Deficiency........................................... (1,334,128) (1,258,155)
------------ ------------
$ 907,754 $ 1,016,585
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Class A Class B Total
Common Common Paid-in Accumulated Stockholder's
Stock Stock Capital Deficit Deficiency
--- --- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 28, 1995...................... $ 7 $ 3 $ 199,135 $(1,479,450) $(1,280,305)
Net earnings................................ -- -- -- 76,527 76,527
Accrued dividends on preferred stock
($3.52 per share)......................... -- -- -- (17,215) (17,215)
Accretion on preferred stock................ -- -- (1,674) -- (1,674)
Capital contribution from SMG-II
Holdings Corporation..................... -- -- 210 -- 210
--- --- --------- ----------- -----------
Balance, February 3, 1996...................... 7 3 197,671 (1,420,138) (1,222,457)
Net loss.................................... -- -- -- (20,144) (20,144)
Accrued dividends on preferred stock
($3.52 per share)......................... -- -- -- (17,215) (17,215)
Accretion on preferred stock................ -- -- (1,739) -- (1,739)
Capital contribution from SMG-II
Holdings Corporation...................... -- -- 3,400 -- 3,400
--- --- --------- ----------- -----------
Balance, February 1, 1997...................... 7 3 199,332 (1,457,497) (1,258,155)
Net loss.................................... -- -- -- (56,947) (56,947)
Accrued dividends on preferred stock
($3.52 per share)......................... -- -- -- (17,215) (17,215)
Accretion on preferred stock................ -- -- (1,811) -- (1,811)
--- --- --------- ----------- -----------
Balance, January 31, 1998...................... $ 7 $ 3 $ 197,521 $(1,531,659) $(1,334,128)
--- --- --------- ----------- -----------
--- --- --------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
January 31, February 1, February 3,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Operating Activities
Net earnings (loss)......................................................... $ (56,947) $ (20,144) $ 76,527
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Extraordinary loss on early extinguishment of debt....................... 7,488 997 2,180
Depreciation and amortization............................................ 87,513 92,668 83,390
Deferred income tax benefit.............................................. (5,272) (14,674) (30,726)
Interest accruable but not payable....................................... 18,509 16,678 15,028
Amortization of original issue discount.................................. 3,341 3,124 6,646
Amortization of debt issuance costs...................................... 5,542 7,426 7,140
(Gain) loss on disposal of property and equipment........................ 127 (5,347) 200
Gain on disposition of freestanding drug stores.......................... -- -- (15,535)
Gain on disposal of Purity............................................... -- -- (16,381)
Gain on sale of real estate.............................................. -- -- (3,371)
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net............................................... 1,280 (1,959) 2,540
Merchandise inventories................................................ 22,471 8,340 15,671
Income taxes........................................................... 7,948 (262) 8,099
Prepaid expenses....................................................... (849) (2,886) (1,630)
Due from suppliers..................................................... 923 (772) 5,078
Other current assets................................................... (4,864) (1,789) 6,362
Other assets........................................................... 9,710 1,351 (4,535)
Accounts payable....................................................... (38,074) (17,882) (9,038)
Accrued payroll and payroll taxes...................................... (6,815) 1,987 789
Accrued interest payable............................................... (2,289) 1,403 (363)
Accrued expenses and other current liabilities......................... 2,707 (1,919) (6,972)
Other noncurrent liabilities........................................... 5,733 11,222 (4,487)
-------- -------- --------
Cash provided by operating activities................................ 58,182 77,562 136,612
-------- -------- --------
Investing Activities
Property and equipment expenditures......................................... (34,327) (55,184) (69,615)
Proceeds from disposition of property and equipment......................... 26,132 8,170 896
Net proceeds in connection with the C&S Purchase Agreement.................. 103,858 -- --
Net proceeds from disposition of freestanding drug stores................... -- -- 59,876
Net proceeds from disposal of Purity........................................ -- -- 16,381
Net proceeds from sale of real estate....................................... -- -- 3,371
Net proceeds from disposal of home centers segment.......................... -- -- 4,706
-------- -------- --------
Cash provided by (used for) investing activities..................... 95,663 (47,014) 15,615
-------- -------- --------
Financing Activities
Borrowings under Pathmark Term Loan in connection with new Credit Agreement. 300,000 -- --
Repayments of Pathmark term loans........................................... (279,877) (44,828) (60,295)
Increase (decrease) in Pathmark working capital facilities borrowings....... (73,500) 27,500 (17,000)
Decrease in book overdrafts................................................. (14,756) (2,903) (1,397)
Increase in other borrowings................................................ 1,956 2,052 895
Repayment of other long-term borrowings..................................... (6,136) (8,085) (5,207)
Reduction in lease obligations.............................................. (21,409) (20,090) (18,224)
Premiums incurred in redemption of PTK Exchangeable Guaranteed
Debentures and other borrowings........................................... (132) (554) (3,686)
Deferred financing fees..................................................... (8,044) (3,597) (374)
Proceeds from lease financing............................................... -- 21,405 --
Repayment of PTK Exchangeable Guaranteed Debentures......................... -- (3,007) (57,870)
Capital contribution from SMG II Holdings Corporation....................... -- -- 210
-------- -------- --------
Cash used for financing activities................................... (101,898) (32,107) (162,948)
-------- -------- --------
Increase (decrease) in cash and cash equivalents.............................. 51,947 (1,559) (10,721)
Cash and cash equivalents at beginning of period.............................. 10,967 12,526 23,247
-------- -------- --------
Cash and cash equivalents at end of period.................................... $ 62,914 $ 10,967 $ 12,526
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Business
Organization and Basis of Presentation:
Supermarkets General Holdings Corporation (the "Company" or "Holdings"),
through its indirect wholly owned subsidiary Pathmark Stores, Inc. ("Pathmark"),
operated 135 supermarkets as of January 31, 1998, primarily in the New York-New
Jersey and Philadelphia metropolitan areas, and is a wholly owned subsidiary of
SMG-II Holdings Corporation ("SMG-II").
Holdings and its wholly owned subsidiary, SMG Acquisition Corporation
("SMG"), were formed by Merrill Lynch Capital Partners, Inc., a wholly owned
subsidiary of Merrill Lynch & Co., Inc., ("ML&Co."), to effect the
acquisition (the "Acquisition") of Supermarkets General Corporation ("Old
Supermarkets"). On June 15, 1987, Holdings completed the first step in the
Acquisition when it acquired 32.8 million shares (approximately 85%) of Old
Supermarkets' common stock through a tender offer by SMG. The remaining
outstanding common stock of Old Supermarkets was acquired by Holdings on
October 5, 1987 when SMG was merged with and into Old Supermarkets, pursuant
to a merger agreement dated April 22, 1987, as amended. The Acquisition was
accounted for as a purchase and, accordingly, Holdings recorded the assets
and liabilities of Old Supermarkets at their fair values at the date of the
Acquisition. The tax basis for the assets and liabilities acquired was
retained.
In October 1989, Old Supermarkets adopted a plan of liquidation pursuant to
which it was liquidated into three wholly owned subsidiaries of Holdings. In
November 1989, pursuant to such plan, Old Supermarkets transferred substantially
all of the assets of its Purity Supreme division to two of the three
above-mentioned wholly owned subsidiaries, Purity Supreme, Inc. and Li'l Peach
Corp., and said subsidiaries assumed substantially all of the liabilities of Old
Supermarkets related to such division. Old Supermarkets completed the
liquidation just prior to the year ended February 3, 1990, by merging with the
third of the above-mentioned wholly owned subsidiaries, which retained the name
Supermarkets General Corporation ("Supermarkets"). On December 17, 1991, Purity
Supreme, Inc. and Li'l Peach Corp. (collectively, "Purity") were sold. The
Company retained a 10% common equity in Purity and a new issue of Purity
exchangeable preferred stock, and such securities, were sold in Fiscal 1995 (see
Note 24).
On November 15, 1990, SMG-II Holdings Corporation, a then newly incorporated
Delaware corporation ("SMG-II"), commenced offers to purchase for cash up to
$155.5 million principal amount of the Company's Junior Subordinated Discount
Debentures (the "Discount Debenture Offer") and up to 1.7 million shares of the
Company's Cumulative Exchangeable Redeemable Preferred Stock (the "Exchangeable
Preferred Stock Offer"). Concurrently with the Discount Debenture Offer and the
Exchangeable Preferred Stock Offer, SMG-II commenced an exchange offer (the
"Exchange Offer", together with the Discount Debenture Offer and the
Exchangeable Preferred Stock Offer, the "Offers") pursuant to which the then
existing common stockholders of the Company could exchange, on a one-for-one
basis, shares of the Company's common stock for shares of SMG-II's common stock.
The Offers were subsequently amended to provide for offers to purchase up to
$110.0 million principal amount of the Company's Junior Subordinated Discount
Debentures (the "Discount Debentures") and up to 3.4 million shares of the
Company's Cumulative Exchangeable Redeemable Preferred Stock (the "Exchangeable
Preferred Stock").
In February 1991, SMG-II purchased approximately $74.1 million principal
amount of the Discount Debentures at 33% of their principal amount and 2.7
million shares of Exchangeable Preferred Stock at $7.00 net per share, pursuant
to the Discount Debenture Offer and the Exchangeable Preferred Stock Offer,
respectively. In addition, all outstanding shares of the Company's common stock
were exchanged pursuant
25
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1--Business--(Continued)
to the Exchange Offer. As a result of the Exchange Offer, SMG-II owns all of the
Company's common stock and is effectively a holding company for the operations
of the Company. SMG-II financed these purchases by selling 417,500 shares of its
Cumulative Convertible Preferred Stock (the "SMG-II Preferred Stock") for an
aggregate purchase price of $83.5 million to various institutional investors.
The holders of SMG-II's voting and non-voting common stock and SMG-II Preferred
Stock include certain limited partnerships controlled directly or indirectly by
Merrill Lynch Capital Partners, Inc. and certain indirectly wholly owned
subsidiaries of ML & Co. ML & Co. beneficially owns approximately 88.6% of the
outstanding stock of SMG-II, and accordingly, controls SMG-II and, indirectly,
the Company.
Subsequent to the completion of the Offers in Fiscal 1991, SMG-II acquired,
through open market transactions, approximately $21.3 million principal amount
of Discount Debentures, $9.8 million principal amount of the Company's 14.5%
Senior Subordinated Notes due 1997 (the "Senior Subordinated Notes") and 94,900
shares of Exchangeable Preferred Stock, and made a capital contribution to the
Company of such securities together with the amounts of the Discount Debentures
and the Exchangeable Preferred Stock purchased, pursuant to the Discount
Debenture Offer and the Exchangeable Preferred Stock Offer, respectively, as
well as cash sufficient to pay associated taxes. The Company has retired the
Senior Subordinated Notes, the Discount Debentures and the Exchangeable
Preferred Stock contributed by SMG-II (see Note 20).
During Fiscal 1993, the Board of Directors of Holdings authorized management
of Holdings to proceed with a recapitalization plan (the "Recapitalization"),
which included a refinancing of Holdings' debt. In conjunction with the
recapitalization, the assets, liabilities and related operations of the home
centers segment, as well as certain assets and liabilities of the warehouse,
distribution and processing facilities which service the Pathmark supermarkets
and drug stores, and certain inventories and real property were contributed to
Plainbridge, Inc. ("Plainbridge"), a then newly formed indirect wholly owned
subsidiary of Holdings and the shares of Plainbridge were then distributed to
PTK Holdings, Inc. ("PTK"), a then newly formed wholly owned subsidiary of
Holdings (the "Plainbridge Spin-Off"). Following the Plainbridge Spin-Off, PTK
held 100% of the capital stock of both Plainbridge and Pathmark. On May 3, 1993,
Pathmark contributed total assets of $1.7 million and total liabilities of $1.8
million, which represented the Chefmark deli food preparation operations and the
related warehouse and a leased banana ripening warehouse to Chefmark, Inc.
("Chefmark"), a then newly formed Delaware corporation, and distributed the
shares of Chefmark to Holdings. On March 1, 1996, Pathmark reacquired all of the
outstanding capital stock of Plainbridge by means of a capital contribution from
PTK.
Management's Plan:
The consolidated financial statements of the Company indicated that, at
January 31, 1998, current liabilities exceeded current assets by $107.3 million
and the stockholder's deficiency was $1.3 billion. Management believes that cash
flows generated from operations, supplemented by the unused borrowing capacity
under its Pathmark working capital facility (the "Working Capital Facility") and
the availability of capital lease financing, will be sufficient to pay the
Company's debts as they come due, provide for its capital expenditure program
and meet its other cash requirements.
On June 30, 1997, the Company, through its Pathmark Subsidiary, entered
into a new $500 million bank credit agreement (the "Credit Agreement") with a
group of lenders led by The Chase Manhattan Bank. The Credit Agreement
includes a $300 million term loan (the "Term Loan") and a $200 million
Working Capital Facility. The Company repaid in full the former term loan and
former working capital facility with the borrowings obtained under the Credit
Agreement (see Note 9).
26
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Summary of Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All intercompany
transactions have been eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The accompanying consolidated balance sheets include reserves for
self-insured claims relating to customer, employee and vehicle accidents and
covered employee medical benefits. The liabilities for customer and employee
accident claims are recorded at present value, due to the long-term payout of
these claims (see Note 8). While the Company believes that the amounts provided
are adequate to cover its self-insured liabilities, it is reasonably possible
that the final resolution of these claims may differ from the amounts provided.
Fiscal Year:
The Company's fiscal year ends on the Saturday nearest to January 31 of the
following calendar year. Normally, each fiscal year consists of 52 weeks, but
every five or six years the fiscal year consists of 53 weeks. Fiscal 1995
consists of 53 weeks.
Statements of Cash Flows:
All investments and marketable securities with a maturity of three months or
less are considered to be cash equivalents. The Company had $52.0 million of
cash equivalent investments as of January 31, 1998 and $1.1 million of cash
equivalent investments as of February 1, 1997.
Merchandise Inventories:
Merchandise inventories are valued at the lower of cost or market. Cost for
substantially all merchandise inventories is determined on a last-in, first-out
("LIFO") basis.
Rental Video Tapes:
Video tapes purchased for rental purposes are capitalized and amortized over
their estimated useful lives. The amortization of video tapes, included in cost
of goods sold, approximated $3.4 million, $3.1 million and $2.8 million in
Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively.
Software:
Externally purchased software is capitalized and amortized over a three year
period. The amortization of capitalized software included in selling, general
and administrative expenses approximated $0.5 million, $0.4 million and $0.1
million in Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively. Internally
developed software, including software developed by IBM (see Note 26), is
expensed as incurred.
27
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Summary of Significant Accounting Policies--(Continued)
Property and Equipment:
Property and equipment are stated at cost. Depreciation and amortization
expense on owned property and equipment is computed on the straight-line method
over the following useful lives: buildings, 40 years; fixtures and equipment,
3-10 years; and leasehold improvements, 8-15 years or lease term, whichever is
shorter. Capital leases are recorded at the present value of minimum lease
payments or fair market value of the related property, whichever is less.
Amortization of property under capital leases is computed on the straight-line
method over the term of the lease or the leased property's estimated useful
life, whichever is shorter.
Long-Lived Assets:
Effective February 4, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of ("SFAS No. 121"). SFAS No. 121
establishes accounting standards for the measurement of the impairment of
long-lived assets, certain intangibles and goodwill related to those assets.
SFAS No. 121 requires that an asset to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The carrying value of
long-lived assets, which are being used in the Company's operations, are
assessed for recoverability based upon groups of assets and the related cash
flow generated by such assets. Assets held for sale are reviewed for impairment
based upon the estimated net realizable value of such assets. The adoption of
SFAS No. 121, on February 4, 1996, had no effect on the Company's
financial condition or results of operations.
Deferred Financing Costs:
Deferred financing costs are amortized utilizing the interest method over
the life of the related indebtedness.
Book Overdraft:
Under the Company's cash management system, checks issued but not presented
to banks result in overdraft balances for accounting purposes and are classified
as book overdrafts.
Revenue Recognition:
Revenue is recognized at the point of sale to the customer.
Advertising Costs:
Advertising costs, net of vendor reimbursements, are expensed as incurred
and were $18.9 million, $23.7 million and $30.6 million in Fiscal 1997, Fiscal
1996 and Fiscal 1995, respectively.
Store Preopening and Closing Costs:
Store preopening costs are expensed as incurred. Store closing costs, such
as future rent and real estate taxes subsequent to the actual store closing, net
of expected sublease recovery, are recorded at present value when management
makes a decision to close a store (see Note 8).
28
<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 taxes are computed based on a tax sharing agreement
with its ultimate parent, SMG-II Holdings Corporation ("SMG-II"), in which the
Company computes a hypothetical tax return as if the Company was not joined in a
consolidated or combined return with SMG-II. The Company must pay SMG-II the
positive amount of any such hypothetical tax. If the hypothetical tax return
shows entitlement to a refund, including any refund attributable to a carryback,
then SMG-II will pay to the Company the amount of such refund.
Earnings (Loss) Per Common Share:
Since the Company is a wholly owned subsidiary, earnings (loss) per share is
not presented.
Reclassifications:
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the Fiscal 1997 presentation.
New Accounting Standards Not Yet Adopted:
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is not expected
to have an effect on the Company's financial statements currently being
presented because the Company, at this time, has no items of comprehensive
income other than net income.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS No. 131"), which will be effective for financial statements beginning
after December 15, 1997. SFAS No. 131 redefines how operating segments are
determined and requires expanded quantitative disclosures relating to a
company's operating statements. SFAS No. 131, which the Company is evaluating,
will impact the financial statements to the extent that it is necessary to
provide additional disclosure about the Company's segments.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits ("SFAS No. 132"), which will be effective for financial
statements beginning after December 15, 1997. SFAS No. 132 revises employers'
disclosure about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. The Company will adopt
SFAS No. 132 in Fiscal 1998 and believes it will impact the financial statements
to the extent that it is necessary to provide additional disclosure about the
Company's pensions and other postretirement benefits.
29
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Supply and Distribution Agreements
On January 29, 1998, the Company sold its Woodbridge, New Jersey
distribution center and office complex and its leasehold interests in its two
distribution centers and its banana ripening facility in North Brunswick, New
Jersey, Dayton, New Jersey and Avenel, New Jersey, respectively (all of the
foregoing buildings are hereinafter referred to as, collectively the
"Facilities"), to C&S Wholesale Grocers, Inc. ("C&S"), including the fixtures,
equipment and inventory in each of those Facilities, for $104.5 million (the
"C&S Purchase Agreement"). The Company used $32.5 million of the net proceeds to
pay down a portion of the Term Loan. A portion of the net proceeds were used to
pay down the Working Capital Facility at the end of Fiscal 1997. The remainder
of the proceeds were invested in marketable securities and subsequent to year
end were utilized to pay down accounts payable related to the inventory sold in
connection with the C&S Purchase Agreement and other liabilities.
Simultaneously, the Company and C&S entered into a 15 year supply agreement (the
"Supply Agreement") pursuant to which C&S will supply substantially all of the
Company's grocery, frozen and perishable merchandise requirements, formerly
owned and warehoused by the Company. As a result of these agreements, the
Company recorded deferred income of $60.8 million. Such deferred income consists
of (i) $25.0 million received by the Company for future trade discounts and
rebates, which will be amortized to operations by the Company as it is earned,
and (ii) $35.8 million in net proceeds received in excess of the fair value of
the assets sold; such excess has been deferred and will be amortized to
operations over the life of the Supply Agreement. In addition, current year
results include a $0.8 million gain on a LIFO liquidation related to the sale of
such inventory.
In addition, the Company outsourced its trucking operations to a third party
trucking company, pursuant to a ten year trucking services agreement effective
October 5, 1997, in which the trucking company will deliver merchandise to all
of the Company's stores.
Note 4--Accounts Receivable
Accounts receivable are comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
--------- ---------
<S> <C> <C>
Prescription plans.............................................................. $ 10,074 $ 10,397
Other........................................................................... 2,639 3,673
--------- ---------
Accounts receivable............................................................. 12,713 14,070
Less: allowance for doubtful accounts(a)........................................ 1,194 1,271
--------- ---------
Accounts receivable, net........................................................ $ 11,519 $ 12,799
--------- ---------
--------- ---------
</TABLE>
- ---------
(a) Fiscal 1997 includes a credit of $0.2 million and a recovery of $0.1
million. Fiscal 1996 includes a provision of $0.1 million and a
recovery of $0.3 million.
Note 5--Merchandise Inventories
Merchandise inventories are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
--------- ---------
<S> <C> <C>
Merchandise inventories at FIFO cost............................................ $ 185,070 $ 258,926
Less: LIFO reserve.............................................................. 36,087 41,486
--------- ---------
Merchandise inventories at LIFO cost............................................ $ 148,983 $ 217,440
--------- ---------
--------- ---------
</TABLE>
30
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--Merchandise Inventories--(Continued)
The decrease in the merchandise inventories and the LIFO reserve was
primarily due to the sale of the Company's warehouse inventory related to its
grocery, frozen and perishable merchandise (see Note 3). In addition, the
Company sold its warehouse pharmaceutical inventory to a pharmaceutical
wholesaler. For Fiscal 1997, the liquidation of LIFO layers resulted in a $2.8
million gain related to such inventory. Liquidation of LIFO layers in Fiscal
1996 and Fiscal 1995 did not have a significant effect on the results of
operations.
Note 6--Property and Equipment
Property and equipment are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
--------- ---------
<S> <C> <C>
Land............................................................................ $ 54,318 $ 61,512
Buildings and building improvements............................................. 169,923 201,804
Fixtures and equipment.......................................................... 176,934 203,602
Leasehold costs and improvements................................................ 279,428 293,697
Transportation equipment........................................................ 19,820 19,706
--------- ---------
Property and equipment, owned................................................... 700,423 780,321
Property and equipment under capital leases..................................... 213,503 207,227
--------- ---------
Property and equipment, at cost................................................. 913,926 987,548
Less: accumulated depreciation and amortization................................. 383,210 382,593
--------- ---------
Property and equipment, net..................................................... $ 530,716 $ 604,955
--------- ---------
--------- ---------
</TABLE>
The decrease in the owned property and equipment was primarily due to the
sale of the distribution facilities (see Note 3). During the fourth quarter of
Fiscal 1996, the Company recorded a pretax charge of $5.4 million to write down
fixed assets held for sale, principally in its southern region, to their
estimated net realizable values. This charge is included in depreciation and
amortization expense in the accompanying consolidated statement of operations
for Fiscal 1996.
Note 7--Deferred Financing Costs, Net
Deferred financing costs are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
--------- ---------
<S> <C> <C>
Deferred financing costs......................................................... $ 28,599 $ 51,378
Less: accumulated amortization................................................... 10,052 22,635
--------- ---------
Deferred financing costs, net.................................................... $ 18,547 $ 28,743
--------- ---------
--------- ---------
</TABLE>
In connection with the Credit Agreement, the Company incurred deferred
financing costs of $8.0 million. Also, in connection therewith, the Company
wrote off, as part of the extraordinary items, $12.8 million of net deferred
financing costs associated with debt which was extinguished (see Note 17).
31
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8--Other Noncurrent Liabilities
Other noncurrent liabilities are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
--------- ---------
<S> <C> <C>
Deferred income related to the C&S transaction (see Note 3)...................... $ 60,837 $ --
Self-insured liabilities......................................................... 58,569 62,526
Pension and deferred compensation................................................ 20,296 20,227
Other postretirement and postemployment benefits................................. 39,942 41,399
Accrued dividends................................................................ 90,380 73,164
Closed stores.................................................................... 13,798 20,117
Lease commitments................................................................ 6,810 7,107
Other............................................................................ 80,065 82,193
--------- ---------
Other noncurrent liabilities..................................................... $ 370,697 $ 306,733
--------- ---------
--------- ---------
</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 based on the projected payout of these claims.
Note 9--Long-Term Debt
Long-term debt is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
----------- ------------
<S> <C> <C>
Pathmark term loans.............................................................. $ 263,250 $ 243,127
Pathmark working capital facilities.............................................. -- 73,500
9.625% Pathmark Senior Subordinated Notes due 2003
("Pathmark Senior Subordinated Notes")........................................ 438,134 437,780
11.625% Pathmark Subordinated Notes due 2002
("Pathmark Subordinated Notes")............................................... 199,017 199,017
11.625% Holdings Subordinated Notes due 2002
("Holdings Subordinated Notes")............................................... 983 983
12.625% Pathmark Subordinated Debentures due 2002
("Pathmark Subordinated Debentures").......................................... 95,750 95,750
10.75% Pathmark Deferred Coupon Notes due 2003
("Pathmark Deferred Coupon Notes")............................................ 187,068 168,559
10.25% PTK Exchangeable Guaranteed Debentures due 2003
("PTK Exchangeable Guaranteed Debentures").................................... 30,429 27,442
Industrial revenue bonds......................................................... 6,375 6,375
Other debt (primarily mortgages)................................................. 30,799 34,979
----------- ------------
Total debt....................................................................... 1,251,805 1,287,512
Less: current maturities......................................................... 43,478 74,431
----------- ------------
Long-term portion................................................................ $ 1,208,327 $ 1,213,081
----------- ------------
----------- ------------
</TABLE>
32
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--Long-Term Debt--(Continued)
Scheduled Maturities of Debt:
Long-term debt principal payments are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Principal
Fiscal Years Payments
- ------------ --------
<C> <C>
1998.......................................................................... $ 43,478
1999.......................................................................... 14,858
2000.......................................................................... 78,238
2001.......................................................................... 263,849
2002.......................................................................... 195,750
2003.......................................................................... 655,632
-----------
$ 1,251,805
-----------
-----------
</TABLE>
Bank Credit Agreement:
On June 30, 1997, the Company, through its Pathmark subsidiary, entered into
the Credit Agreement with a group of lenders led by The Chase Manhattan Bank.
The Credit Agreement includes a $300 million Term Loan and a $200 million
Working Capital Facility. The Company repaid in full the former term loan and
former working capital facility with the borrowings obtained under the Credit
Agreement.
Under the Credit Agreement, the Term Loan and Working Capital Facility bear
interest at floating rates, ranging from LIBOR plus 2.25% to LIBOR plus 2.50%.
The Company is required to repay a portion of its borrowings under the Term Loan
each year, so as to retire such indebtedness in its entirety by December 15,
2001. Under the Working Capital Facility, which expires on June 15, 2001, the
Company can borrow or obtain letters of credit in an aggregate amount not to
exceed $200 million, of which the maximum of $125 million can be in letters of
credit. In addition, pursuant to Permitted Subordinated Debt Refinancing (as
defined in the Credit Agreement), the Working Capital Facility and a portion of
the Term Loan can be extended up to an additional two and one-half years and the
remainder of the Term Loan can be extended up to an additional three and
one-half years from the original expiration dates.
At January 31, 1998, the Company was in compliance with all of its debt
covenants. Based upon projected results for the upcoming fiscal year, the
Company believes it will be in compliance with its debt covenants which include
financial covenants concerning levels of operating cash flow, minimum interest
and rent expense coverage, maximum leverage ratio, maximum senior debt leverage
ratio, maximum consolidated rental payments and maximum capital expenditures.
The Credit Agreement also contains other covenants including, but not limited
to, covenants with respect to the following matters: (i) limitation on
indebtedness; (ii) limitation on liens; (iii) restriction on mergers; (iv)
restriction on investments, loans, advances, guarantees and acquisitions; (v)
restriction on assets sales and sale/leaseback transactions; (vi) restriction on
certain payments of indebtedness and incurrence of certain agreements and (vii)
restriction on transactions with affiliates.
The Company believes it has sufficient unused borrowing capacity under the
Pathmark Working Capital Facility, which can be utilized for unforeseen or for
seasonal cash requirements. At January 31, 1998, the Company had $92.8 million
in outstanding letters of credit and $107.2 million in unused borrowing capacity
under its Pathmark Working Capital Facility.
33
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--Long-Term Debt--(Continued)
Pathmark Senior Subordinated Notes:
The Pathmark Senior Subordinated Notes accrete to a maturity value of $440.0
million in Fiscal 2003. These notes pay cash interest on a semiannual basis and
have no sinking fund requirements.
Pathmark Subordinated Notes:
The Pathmark Subordinated Notes mature in Fiscal 2002 and pay cash interest
on a semiannual basis. These notes contain a sinking fund provision that
requires Pathmark to deposit $49.8 million (25% of the original aggregate
principal amount) with the trustee of the Pathmark Subordinated Notes on June 15
in each of Fiscal 2000 and Fiscal 2001 for the redemption of the Pathmark
Subordinated Notes, at a redemption price equal to 100% of the principal amount
thereof, plus accrued interest to the redemption date and providing for the
redemption of 50% of the original aggregate principal amount of such notes prior
to maturity.
Holdings Subordinated Notes:
As a result of the Recapitalization, $199.0 million principal amount of the
Holdings Subordinated Notes have been exchanged for $199.0 million principal
amount of Pathmark Subordinated Notes. Approximately $1.0 million principal
amount of the Holdings Subordinated Notes remain outstanding. Interest on the
Holdings Subordinated Notes is payable semi-annually.
Pathmark Subordinated Debentures:
The Pathmark Subordinated Debentures mature in Fiscal 2002. These debentures
pay cash interest on a semiannual basis and have no sinking fund requirements.
Pathmark 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.
PTK Exchangeable Guaranteed Debentures:
The PTK Exchangeable Guaranteed Debentures were originally formulated to
accrete to a maturity value of $218.3 million in Fiscal 2003. The Company
used the net cash proceeds of $3.2 million in Fiscal 1996 and $56.5 million in
Fiscal 1995 to paydown PTK Exchangeable Guaranteed Debentures, including
accrued interest and debt premium (see Note 17). The PTK Exchangeable
Guaranteed Debentures begin paying cash interest on a semiannual basis on
June 30, 1999 and have no sinking fund requirements. At January 31, 1998, the
maturity value of the outstanding debentures is $34.2 million.
Industrial Revenue Bonds:
Interest rates for the industrial revenue bonds range from 10.5% to 10.9%.
The industrial revenue bonds are payable in Fiscal 2003.
34
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--Long-Term Debt--(Continued)
Other Debt:
Other debt includes mortgage notes, which are secured by property and
equipment, having a net book value of $51.7 million at January 31, 1998 and
$54.5 million at February 1, 1997. These borrowings, whose interest rates
averaged 10.5%, are payable in installments ending in Fiscal 2000, including a
scheduled payment of $27.4 million in Fiscal 1998.
Note 10--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 31, 1998 February 1, 1997
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Debt:
Pathmark term loans............................... $ 263,250 $ 263,250 $ 243,127 $ 243,127
Pathmark working capital facilities............... -- -- 73,500 73,500
Pathmark Senior Subordinated Notes................ 438,134 421,344 437,780 415,015
Pathmark Subordinated Notes....................... 199,017 181,782 199,017 202,340
Holdings Subordinated Notes....................... 983 898 983 999
Pathmark Subordinated Debentures.................. 95,750 88,846 95,750 96,353
Pathmark Deferred Coupon Notes.................... 187,068 133,596 168,559 142,471
PTK Exchangeable Guaranteed Debentures............ 30,429 30,429 27,442 27,442
Industrial revenue bonds.......................... 6,375 6,375 6,375 6,375
Other debt (primarily mortgages).................. 30,799 30,799 34,979 34,979
---------- ----------- ----------- ----------
Total debt................................... $ 1,251,805 $ 1,157,319 $ 1,287,512 $ 1,242,601
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Redeemable Preferred Stock:
Cumulative Exchangeable
Redeemable Preferred Stock...................... $ 107,183 $ 68,469 $ 105,372 $ 117,376
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
The fair value of the Pathmark term loans and Pathmark working capital
facilities at January 31, 1998 and February 1, 1997 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 31, 1998 and February 1, 1997, since such instruments are
publicly traded. The Company has evaluated its PTK Exchangeable Guaranteed
Debentures, other debt (primarily mortgages) and industrial revenue bonds and
believes, based on interest rates, related terms and maturities, that the fair
value of such instruments approximates their respective carrying amounts. As of
January 31, 1998 and February 1, 1997, the carrying values of cash and cash
equivalents, accounts receivable and accounts payable approximated their fair
values due to the short-term maturities of these instruments.
35
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11--Interest Expense
Interest expense is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Years
--------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Pathmark term loans............................................. $ 22,884 $ 22,616 $ 29,067
Pathmark working capital facility............................... 4,969 5,444 5,601
Pathmark Senior Subordinated Notes
Amortization of original issue discount.................... 354 354 354
Currently payable.......................................... 42,350 42,350 42,350
Pathmark Subordinated Notes..................................... 23,151 23,136 23,136
Holdings Subordinated Notes..................................... 114 114 114
Pathmark Subordinated Debentures................................ 12,088 12,088 12,088
Pathmark Deferred Coupon Notes
Accrued but not payable.................................... 18,509 16,678 15,028
PTK Exchangeable Guaranteed Debentures
Amortization of original issue discount.................... 2,987 2,770 6,292
Amortization of debt issuance costs............................. 5,542 7,426 7,140
Lease obligations............................................... 22,126 19,399 16,647
Mortgages payable............................................... 3,462 3,736 4,210
Other, net...................................................... 8,244 8,007 8,942
--------- --------- ---------
Interest expense................................................ $ 166,780 $ 164,118 $ 170,969
========= ========= =========
The Company made cash interest payments of $141.6 million, $135.4 million and $142.6 million in Fiscal 1997,
Fiscal 1996 and Fiscal 1995, respectively.
Note 12--Leases
At January 31, 1998, the Company was liable under terms of noncancellable
leases for the following minimum lease commitments (dollars in thousands):
Capital Operating
Fiscal Years Leases Leases
--------- ---------
1998............................................................................. $ 43,442 $ 28,865
1999............................................................................. 38,051 29,116
2000............................................................................. 35,494 29,164
2001............................................................................. 26,182 27,489
2002............................................................................. 22,312 26,131
Later years...................................................................... 249,473 297,742
--------- ---------
Total minimum lease payments(a).................................................. 414,954 $ 438,507
--------- ---------
--------- ---------
Less: executory costs (such as taxes, maintenance and insurance)................. 2,440
--------
Net minimum lease payments....................................................... 412,514
Less: amounts representing interest.............................................. 217,626
---------
Present value of net minimum lease payments (including current
installments of $24,417)...................................................... $ 194,888
---------
---------
</TABLE>
- ----------
(a) Net of sublease income of $0.8 million and $74.4 million for capital and
operating leases, respectively.
36
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12--Leases--(Continued)
During Fiscal 1997, Fiscal 1996 and Fiscal 1995, the Company incurred
capital lease obligations of $23.6 million, $39.6 million and $41.1 million,
respectively, in connection with property and equipment lease agreements. These
capital lease amounts are noncash and, accordingly, have been excluded from the
consolidated statements of cash flows.
During the third quarter of Fiscal 1996, the Company sold three of its
supermarket properties for $19.3 million, net of fees of $1.4 million and income
taxes of $0.7 million, and simultaneously leased back such properties. The net
proceeds were used to paydown debt, primarily the former working capital
facility. Due to the Company's continuing involvement in such properties, no
gain has been recorded and the transaction has been accounted for as a
financing, with the associated liability of $21.0 million and $21.1 million
included in lease obligations in the consolidated balance sheet at January 31,
1998 and February 1, 1997, respectively.
Rent expense, under all operating leases having noncancellable terms of more
than one year, is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Years
--------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Minimum rentals................................................. $ 44,525 $ 42,610 $ 42,704
Less: rentals from subleases.................................... (8,131) (9,691) (10,917)
-------- -------- --------
Rent expense.................................................... $ 36,394 $ 32,919 $ 31,787
-------- -------- --------
-------- -------- --------
</TABLE>
Note 13--Related Party Transactions
As discussed in Note 21, 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 31, 1998 and February 1, 1997.
During Fiscal 1996, in conjunction with the hiring of a Chief Executive
Officer (the "CEO"), SMG-II granted the CEO an equity package (the "Equity
Strip") independently valued at $3.4 million and consisting of restricted shares
of SMG-II Preferred Stock and restricted shares and options of SMG-II Common
Stock. The Company recorded the Equity Strip as deferred compensation by the
means of a capital contribution from SMG-II (see Note 25).
In addition, the Company retained John W. Boyle, a Director of the Company,
to act as its interim Chairman & Chief Executive Officer for the period of March
20, 1996 through October 7, 1996 (the "Transition Period"). Under the terms of
the consulting arrangement between the Company and Mr. Boyle, the Company paid
Mr. Boyle a consulting fee of $41,667 per month ($288,980 in the aggregate) plus
living and travel expenses during the Transition Period. In addition, Mr. Boyle
received a completion bonus of $100,000 when the CEO commenced employment with
the Company.
During Fiscal 1995, the Company paid ML & Co. fees of approximately $0.6
million related to the sale of the freestanding drug stores.
In March 1990, Jerry G. Rubenstein, a Director of the Company, borrowed from
Holdings $100,000 in order to help finance his purchase of Holdings' Class A
Common Stock. Subsequently, such shares of Holdings' Class A Common Stock were
exchanged for shares of SMG-II Class A Common Stock. The foregoing indebtedness
to Holdings is evidenced by a full recourse promissory note (the "Recourse
Note").
37
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13--Related Party Transactions--(Continued)
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 for such Recourse Note. Under the terms
of the agreement pursuant to which the shares of Holdings' Class A Common Stock
were exchanged for shares of SMG-II Class A Common Stock, the Company is
obligated to pay to each Management Investor who pays interest on his Recourse
Note (except under certain circumstances) an amount equal to such interest, plus
an amount sufficient to pay any income taxes resulting from the above prescribed
payment after taking into account the value of any deduction available to him as
a result of the payment of such interest or taxes. As of April 1, 1998, Mr.
Rubenstein remained indebted to Holdings in the amount of $100,000.
Note 14--Retirement and Benefit Plans
The Company has several noncontributory defined benefit pension plans, the
most significant of which is the SGC Pension Plan, which covers substantially
all non-union and certain union associates. Pension benefits to retired and to
terminated vested associates are primarily based upon their length of service
and upon a percentage of qualifying compensation. The Company's funding policy,
which is consistent with federal funding requirements, is intended to provide
not only for benefits attributed to service to date, but also for those benefits
expected to be earned in the future. Due to the overfunding status of the SGC
Pension Plan, no contributions were required during the last three fiscal years.
The Company also maintains an unfunded supplemental retirement plan for
participants in the SGC Pension Plan to provide benefits in excess of amounts
permitted to be paid under the provisions of the tax law. Additionally, the
Company has entered into individual retirement agreements with certain
current and retired executives providing for unfunded supplemental pension
benefits upon their retirement after attainment of age 60.
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 31, 1998 February 1, 1997
---------------------------- -----------------------------
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Exceed Accumulated Benefits Exceed
Benefits Assets Benefits Assets
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested.................................. $ (100,514) $ (20,573) $ (84,116) $ (20,922)
Unvested................................ (1,985) -- (6,018) (215)
----------- ----------- ----------- ----------
Total................................... (102,499) (20,573) (90,134) (21,137)
Plan assets at fair value.................... 214,131 -- 171,549 447
----------- ----------- ----------- ----------
Plan assets higher (lower) than
accumulated benefit obligation............. $ 111,632 $ (20,573) $ 81,415 $ (20,690)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Actuarial present value of projected
benefit obligation......................... $ (124,607) $ (22,461) $ (115,009) $ (23,200)
Plan assets at fair value.................... 214,131 -- 171,549 447
----------- ----------- ----------- ----------
Plan assets higher (lower) than
projected benefit obligation............... 89,524 (22,461) 56,540 (22,753)
Unrecognized net gain from past experience
different from that assumed and effects
of changes in assumptions.................. (72,254) (274) (43,371) (90)
Unrecognized prior service cost.............. (13) 702 1,117 955
----------- ----------- ----------- ----------
Prepaid (accrued) pension cost............... $ 17,257 $ (22,033) $ 14,286 $ (21,888)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
38
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14--Retirement and Benefit Plans--(Continued)
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 following table provides the assumptions used in determining the
actuarial present value of the projected benefit obligation at January 31, 1998
and February 1, 1997:
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
--------- ---------
<S> <C> <C>
Weighted average discount rate.................................................... 7.0% 7.5%
Rate of increase in future compensation levels.................................... 4.0 4.5
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 in Fiscal
1998.
The net periodic pension cost (income) is comprised of the following
components (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Years
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost of benefits earned during the year................. $ 3,224 $ 3,787 $ 3,416
Interest cost on projected benefit obligation................... 9,866 10,204 9,551
Actual return on plans' assets.................................. (49,434) (28,174) (40,622)
Net amortization and deferral................................... 35,160 16,019 27,811
-------- -------- --------
Net periodic pension (income) cost.............................. $ (1,184) $ 1,836 $ 156
-------- -------- --------
-------- -------- --------
</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 $20.4 million, $20.1 million and $18.9 million
in Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively.
The Company sponsors a savings plan for eligible non-union associates.
Contributions under the plan are based on specified percentages of associate
contributions. The Company's contributions to the savings plan were $3.1
million, $3.6 million and $3.7 million in Fiscal 1997, Fiscal 1996 and Fiscal
1995, respectively.
Note 15--Other Postretirement and Postemployment Benefits
The Company provides its associates other postretirement benefits,
principally health care and life insurance benefits. The accumulated
postretirement benefit obligation was determined utilizing an assumed discount
rate of 7.0% at January 31, 1998 and 7.5% at February 1, 1997 and by applying
the provisions of the Company's medical plans, the established maximums and
sharing of costs, the relevant actuarial assumptions and the health-care cost
trend rates, which are projected at 6.25% and grade down to 4.0% in Fiscal 2002.
The effect of a 1% increase in the assumed cost trend rate would change the
accumulated postretirement benefit obligation by approximately $1.2 million as
of January 31, 1998 and would increase the net periodic postretirement benefit
income by $0.1 million for Fiscal 1997.
39
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15--Other Postretirement and Postemployment Benefits--(Continued)
The net postretirement benefit cost (income) is comprised of the following
components (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Years
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost of benefits earned during the year................... $ 399 $ 546 $ 614
Interest cost on accumulated postretirement benefit
obligation..................................................... 1,139 1,640 2,268
Net amortization and deferral..................................... (1,866) (931) (460)
Curtailment gain.................................................. -- (2,026) --
------- ------- -------
Net postretirement benefit cost (income).......................... $ (328) $ (771) $ 2,422
------- ------- -------
------- ------- -------
</TABLE>
During the second quarter of Fiscal 1996, the Company eliminated
postretirement medical coverage for active non-union associates who retire after
December 31, 1997. This change resulted in a pretax curtailment gain of $2.0
million.
The following table provides information on the status of the postretirement
plans (dollars in thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
-------- --------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees...................................................................... $ 7,231 $ 9,678
Other active plan participants................................................ 10,077 10,180
-------- --------
Total......................................................................... 17,308 19,858
Unrecognized prior service cost................................................... 5,748 7,026
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions............................... 8,690 6,798
-------- --------
Accrued postretirement cost....................................................... $ 31,746 $ 33,682
-------- --------
-------- --------
</TABLE>
The decrease in the accumulated postretirement benefit obligation and the
unrecognized prior service cost was due to actual benefit payments made and
amortization gains recognized from the elimination of postretirement medical
coverage for active non-union associates in Fiscal 1996.
The Company also provides its associates postemployment benefits, primarily
long-term disability and salary continuation. The obligation for these benefits
was determined by application of the provisions of the Company's long-term
disability plan and includes the age of active claimants at disability and at
valuation, the length of time on disability and the probability of the claimant
remaining on disability to maximum duration. These liabilities are recorded at
their present value utilizing a discount rate of 4%.
The accumulated postemployment benefit obligation as of January 31, 1998 and
February 1, 1997 was $8.9 million and $8.5 million, respectively. The net
postemployment benefit cost consisted of the following components (dollars in
thousands):
<TABLE>
<CAPTION>
Fiscal Years
-------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost of benefits earned during the year................ $ 1,412 $ 1,314 $ 997
Interest cost on accumulated postemployment obligation......... 409 316 296
------- -------- -------
Net postemployment benefit cost................................ $ 1,821 $ 1,630 $ 1,293
------- -------- -------
------- -------- -------
</TABLE>
40
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 16--Income Taxes
The income tax benefit (provision) is comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
Fiscal Years
--------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current
Federal..................................................... $ (4,643) $ 2,357 $ 4,018)
State....................................................... (2,793) 692 (4,981)
Deferred
Federal..................................................... 19,639 9,808 (1,233)
State....................................................... 7,433 3,178 1,238
Change in valuation allowance............................... (21,800) 1,688 30,721
-------- -------- -------
Income tax benefit (provision).................................. $ (2,164) $ 17,723 $ 29,763
-------- -------- -------
-------- -------- -------
</TABLE>
The effective tax rate for the income tax benefit (provision) differs from
the federal statutory tax rate as follows:
<TABLE>
<CAPTION>
Fiscal Years
-----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate..................................... 35.0% 35.0% (35.0)%
State income taxes............................................. 6.4 6.8 (5.0)%
Change in valuation allowance.................................. (46.1) 4.6 62.8%
Utilization of capital loss.................................... -- -- 32.8%
Tax credits.................................................... -- -- 1.2%
Other.......................................................... 0.1 1.7 4.0%
------ ------ ------
Effective tax rate............................................. (4.6)% 48.1% 60.8%
------ ------ ------
------ ------ ------
</TABLE>
Deferred income tax assets and liabilities consist of the following (dollars
in thousands):
<TABLE>
<CAPTION>
January 31, 1998 February 1, 1997
--------------------------- ----------------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Depreciation and amortization................ $ -- $ 50,362 $ -- $ 65,599
Merchandise inventory and gross profit....... -- 11,834 -- 20,443
Prepaid expenses............................. -- 6,135 -- 6,999
Self-insured liabilities..................... 36,830 -- 39,596 --
Benefit plans................................ 6,277 -- 10,039 --
Lease capitalization......................... 19,300 -- 17,933 --
Closed store reserves........................ 10,018 -- 15,459 --
Alternative minimum taxes.................... 9,544 -- 9,108 --
General business credits..................... 9,020 -- 9,019 --
Net operating loss carryforwards............. 27,140 -- 19,821 --
Other postretirement and
postemployment benefits.................... 17,306 -- 17,791 --
Deferred income.............................. 26,909 -- -- --
Capital loss carryforward.................... 29,732 -- 52,455 --
Other........................................ 10,694 5,413 8,097 4,323
--------- --------- --------- --------
Subtotal..................................... 202,770 73,744 199,318 97,364
Less: valuation allowance.................... 74,255 -- 52,455 --
--------- --------- --------- --------
Total........................................ $ 128,515 $ 73,744 $ 146,863 $ 97,364
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>
41
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 16--Income Taxes--(Continued)
The balance sheet classification of the deferred income tax assets and
liabilities is as follows (dollars in thousands):
<TABLE>
<CAPTION>
January 31, 1998 February 1, 1997
--------------------------- ----------------------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Assets....................................... $ 45,668 $ 157,102 $ 39,304 $ 160,014
Liabilities.................................. (25,664) (48,080) (29,335) (68,029)
---------- --------- ---------- ---------
Subtotal..................................... 20,004 109,022 9,969 91,985
Less: valuation allowance.................... (11,512) (62,743) -- (52,455)
---------- --------- ---------- ---------
Total........................................ $ 8,492 $ 46,279 $ 9,969 $ 39,530
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
The Company's net deferred income tax assets were $54.8 million and $49.5
million, net of a valuation allowance of $74.3 million and $52.5 million at
January 31, 1998 and February 1, 1997, respectively. The Company believes that
it is more likely than not that the net deferred tax assets will be realized
through the implementation of tax strategies which could generate taxable
income.
During Fiscal 1997, the net increase in the valuation allowance was $21.8
million. This change reflects an increase in the valuation allowance related to
those deferred tax assets which the Company has concluded are not likely to be
realized, partially offset by a decrease in the valuation allowance related to
the utilization of the Company's capital loss carryforwards due to generation of
capital gains from the C&S transaction.
The Company will continue to assess the recoverability of its deferred
income tax assets and further adjustments to the valuation allowance may be
necessary based on the evidence available at that time.
During Fiscal 1995, in conjunction with the Company's evaluation of its
deferred income tax assets, the Company reversed the valuation allowance related
to its net deferred income tax assets. Such reversal of the valuation allowance
totaled $30.7 million and has been included as a component of the Fiscal 1995
income tax benefit.
In Fiscal 1997, Fiscal 1996 and Fiscal 1995, the Company made income tax
payments of $4.8 million, $4.7 million and $3.9 million, respectively, and
received income tax refunds of $5.8 million, $8.1 million and $10.3 million,
respectively.
Note 17--Extraordinary Items
The extraordinary items, representing losses on early extinguishment of
debt, consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Years
--------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Loss before income taxes....................................... $ (12,944) $ (1,692) $ (3,686)
Income tax benefit............................................. 5,456 695 1,506)
---------- ---------- ----------
Extraordinary items, net of a tax benefit...................... $ (7,488) $ (997) $ (2,180)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
During the second quarter of Fiscal 1997, in connection with the Credit
Agreement, the Company wrote off deferred financing fees of $12.8 million
related to the former bank credit agreement, resulting in a net loss on early
extinguishment of debt of $7.4 million, net of an income tax benefit of $5.4
million. In addition, during the second quarter of Fiscal 1997, in connection
with the sale of certain mortgaged property, the Company made a mortgage paydown
of $2.9 million, including accrued interest and debt premiums, resulting in a
net loss on early extinguishment of debt of $0.1 million, net of an income tax
benefit of $0.1 million.
42
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 17--Extraordinary Items--(Continued)
During the second quarter of Fiscal 1996, in connection with the proceeds
from the sale of certain mortgaged property, the Company made a mortgage paydown
of $5.3 million, including accrued interest and debt premiums, resulting in a
net loss on early extinguishment of debt of $0.2 million, net of an income tax
benefit of $0.1 million. During the first quarter of Fiscal 1996, in connection
with the termination of the Plainbridge credit agreement due to the
reacquisition of Plainbridge by Pathmark, the Company wrote off deferred
financing fees, resulting in a net loss on early extinguishment of debt of $0.7
million, net of an income tax benefit of $0.5 million. During the first quarter
of Fiscal 1996, the Company also made a paydown of $3.2 million of PTK
Exchangeable Guaranteed Debentures, including premium and original issue
discount, resulting in a net loss on early extinguishment of debt of $0.1
million, net of an income tax benefit of $0.1 million.
During the first quarter of Fiscal 1995, in connection with the final
proceeds received related to the disposition of the home centers segment, the
Company was required to paydown $4.7 million of PTK Exchangeable Guaranteed
Debentures; the premium paid, including original issue discount, resulted in a
net loss on early extinguishment of debt of $0.2 million. During the second
quarter of Fiscal 1995, in connection with the proceeds received related to the
sale of 30 of its freestanding drug stores, the Company was required to paydown
$21.8 million of PTK Exchangeable Guaranteed Debentures; the premium paid,
including original issue discount, resulted in a net loss on early
extinguishment of debt of $0.7 million. During the fourth quarter of Fiscal
1995, in connection with the proceeds received from the sale of the Purity
investment and the sale of 30 of its freestanding drug stores, the Company was
required to paydown $30.0 million of PTK Exchangeable Guaranteed Debentures; the
premium paid, including original issue discount, resulted in a net loss on early
extinguishment of debt of $1.3 million.
Note 18--Restructuring Charge
During the fourth quarter of Fiscal 1996, the Company recorded a pretax
charge of $9.1 million for reorganization and restructuring costs related to its
administrative operations. The restructuring charge included $4.2 million for
the costs of a voluntary early retirement program, which was accepted by 142
employees, and $1.2 million for severance and termination benefits for 80
employees. The remaining charge of $3.7 million primarily relates to consulting
fees incurred in connection with the restructuring and exit costs for facility
consolidation.
As of January 31, 1998, $7.7 million have been expended, of which $4.2
million related to the early retirement program and severance benefits and $3.5
million related to consulting costs and the facility consolidation. The Company
estimates it will expend $0.2 million in Fiscal 1998. The remaining balance of
$1.2 million relates to early retirement benefits which will be expended over
time; such balance is included in the respective pension and postretirement
liability accounts.
Note 19--Lease Commitment Charge
During the fourth quarter of Fiscal 1996, the Company decided to divest a
group of its southern region stores, certain of which have experienced
unprofitable operating results. The Company concluded that the operating losses
being experienced by these stores were other than temporary and that the
projected operating results of such stores would not be sufficient to recover
their long-lived assets and their contractual lease commitments. Further, the
Company believes that these lease costs will not be significantly recoverable
through any future sublease. Therefore, the Company recorded a $8.8 million
pretax charge related to these unfavorable lease commitments, in addition to
writing down the long-lived assets of these stores (see Note 6).
43
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 19--Lease Commitment Charge--(Continued)
During Fiscal 1997, the Company sold four and closed seven stores that it
announced for divestiture at the end of Fiscal 1996. The results of operations
for these 11 stores were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Years
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales........................................................... $ 42,877 $ 152,599 $ 160,133
---------- --------- ----------
---------- --------- ----------
Operating loss.................................................. $ 10,590 $ 10,663 $ 8,364
---------- --------- ----------
---------- --------- ----------
</TABLE>
Note 20--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 31, 1998 and February 1, 1997. The
fair market value of the Exchangeable Preferred Stock, at date of original
issuance of October 5, 1987, was $20 per share and the liquidation preference is
$25 per share. Due to its mandatory redemption requirements, the Exchangeable
Preferred Stock has been stated on the balance sheet as redeemable securities.
The difference between fair market value at date of issue and liquidation
preference is being accreted quarterly.
In the event of any liquidation, dissolution or winding up of the Company,
holders of the Exchangeable Preferred Stock will be entitled to receive their
full liquidation preference per share, together with accrued and unpaid
dividends, before the distribution of any assets of the Company to the holders
of shares of the Company's common stock or other shares, which would rank junior
to the Exchangeable Preferred Stock.
The Exchangeable Preferred Stock may be redeemed at the option of the
Company, in whole or in part, at liquidation preference, together with all
accrued and unpaid dividends to the redemption date. Optional redemption of the
Exchangeable Preferred Stock will be subject to restricted payments and other
similar provisions of the Company's debt instruments.
Commencing December 31, 2004, the Company is required to redeem in each year
20% of the highest amount at any time outstanding of the Exchangeable Preferred
Stock. The redemption process is calculated to retire 60% of the issue prior to
final maturity, with the remaining amount of the issue to be redeemed at
maturity.
The Company has the option to require holders to exchange the Exchangeable
Preferred Stock on any dividend payment date, in whole or in part, for exchange
debentures (the "Exchange Debentures") of the Company. Such option is available
at any time if (a) no event of default exists under any of the Company's loan
agreements and (b) the exchange is allowed under the provisions of the
limitation on the Company's indebtedness and other applicable provisions of the
Company's loan agreements. Any such exchange will result in the issuance of
Exchange Debentures in an amount equal to the aggregate liquidation preference
of all shares of Exchangeable Preferred Stock being exchanged into Exchange
Debentures and in an amount equal to all accrued but unpaid dividends.
44
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 20--Cumulative Exchangeable Redeemable Preferred Stock--(Continued)
Exchangeable Preferred Stock activity for the three years ended January 31,
1998 was as follows (dollars in thousands):
<TABLE>
<CAPTION>
Number of Shares Amount
---------------- ------
<S> <C> <C>
Balance, January 28, 1995......................................................... 4,890,671 $ 101,959
Accretion.................................................................... -- 1,674
---------- ---------
Balance, February 3, 1996......................................................... 4,890,671 103,633
Accretion.................................................................... -- 1,739
---------- ---------
Balance, February 1, 1997......................................................... 4,890,671 105,372
Accretion.................................................................... -- 1,811
---------- ---------
Balance, January 31, 1998......................................................... 4,890,671 $ 107,183
---------- ---------
---------- ---------
</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 31, 1998, the unpaid dividends of $90.4 million were accrued and
included in other noncurrent liabilities.
Pursuant to the Certificate of Stock Designation for the Exchangeable
Preferred Stock (the "Certificate of Designation"), the Company was required to
pay cash dividends to the Exchangeable Preferred Stockholders at an annual rate
of $3.52 per share beginning on January 15, 1993. The Certificate of Designation
provides that the Exchangeable Preferred Stock is non-voting except that if an
amount equal to six quarterly dividends is in arrears in whole, or in part, the
Exchangeable Preferred Stockholders voting as a class are entitled to elect an
additional two members to the Board of Directors of the Company. The Company is
currently in arrears on the payment of 21 quarterly dividends. Accordingly, the
holders of the Exchangeable Preferred Stock reelected two members of the
Company's Board of Directors at its 1997 annual meeting.
Dividends on the Exchangeable Preferred Stock must be paid in full for all
prior periods as of the most recent dividend payment date before any dividends,
other than dividends payable in shares of the Company's common stock or in any
other class of the Company's capital stock ranking junior to the Exchangeable
Preferred Stock, can be paid or can be set apart for payment to holders of
common stock or to holders of any other shares ranking 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 ranking
junior to the Exchangeable Preferred Stock.
Note 21--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 31, 1998 and February 1, 1997.
45
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 21--Common Stock--(Continued)
Holders of shares of Class A common stock are entitled to one vote per share
on all matters to be voted on by stockholders. Holders of shares of Class B
common stock are not entitled to any voting rights, except as required by law or
as otherwise provided in the Restated Certificate of Incorporation of the
Company. Subject to compliance with certain procedures, holders of Class B
common stock may exchange their shares for shares of Class A common stock and
holders of Class A common stock may exchange their shares for shares of Class B
common stock on a share-for-share basis. Upon liquidation or dissolution of the
Company, holders of the Company's common stock are entitled to share ratably in
all assets available for distribution to stockholders. Payment of all prior
claims, including liquidation rights of any Exchangeable Preferred Stock
outstanding, must be made before the holders of the Company's common stock are
entitled to any distribution. Holders of the Company's common stock have no
preemptive or subscription rights.
On February 4, 1991, as a result of the consummation of the Exchange Offer,
all shares of the Company's Class A common stock and Class B common stock were
owned directly by SMG-II. SMG-II is effectively a holding company for the
operations of the Company (see Note 1).
The Company and certain executives of Supermarkets (collectively,
"Management Investors") entered into a management subscription agreement under
which, on October 5, 1987, the Management Investors purchased an aggregate of
100,000 shares of Class A common stock for consideration of $100 per share. In
connection with the Exchange Offer, the Management Investors entered into an
agreement (the "Management Investors Exchange Agreement") with respect to the
SMG-II common stock which was received in exchange for the Company's Class A
common stock. Prior to the Exchange Offer, all of the Class A common stock held
by Management Investors was classified as Redeemable Securities.
Certain Management Investors, who purchased shares of Class A common stock,
borrowed a portion of the purchase price from the Company and were required to
deliver a note to the Company ("Recourse Note") in the principal amount of the
loan (see Note 13). Interest on the Recourse Note is to be paid annually and the
principal is to be paid on the tenth anniversary of the date of issue. Each
Management Investor who issued a Recourse Note was required to enter into a
stock pledge agreement ("Stock Pledge Agreement") with the Company, pursuant to
which the Management Investor pledged shares of Class A common stock to secure
the repayment of the Recourse Note. In connection with the Exchange Offer, each
Management Investor who issued a Recourse Note was required to execute an
amendment to the Stock Pledge Agreement, which provided for the substitution of
the SMG-II common stock received in the Exchange Offer for the Company Class A
common stock, in order to secure the repayment of the Recourse Note. Recourse
Notes in the amount of approximately $1.7 million were outstanding at January
31, 1998 and February 1, 1997. The Recourse Notes were included in other assets
at January 31, 1998 and February 1, 1997.
Note 22--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.
46
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 23--Disposition of Freestanding Drug Stores
During the second quarter of Fiscal 1995, the Company made a decision to
dispose of its 36 freestanding drug stores and, on July 28, 1995, through its
Pathmark subsidiary, completed the sale of 30 of its freestanding drug stores,
including merchandise inventory, to Rite Aid Corporation for $59.9 million. The
Company used $25.0 million of the proceeds to repay a portion of its existing
Pathmark Term Loan and $21.8 million of the proceeds to repay a portion of its
PTK Exchangeable Guaranteed Debentures.
In Fiscal 1995, the Company recorded a pretax gain on the disposition of its
freestanding drug stores of $15.5 million, net of a $19.0 million charge related
to the estimated exit costs of the remaining six freestanding drug stores. Five
of the remaining six freestanding drug stores closed during Fiscal 1995 and the
sixth store closed during the second quarter of Fiscal 1996.
The following summarizes the activity related to the exit costs (dollars in
thousands):
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Balance, January 28, 1995................................................................ $ --
To record estimated exit costs........................................................ 18,955
Activity.............................................................................. (804)
----------
Balance, February 3, 1996................................................................ 18,151
Activity.............................................................................. (2,306)
----------
Balance, February 1, 1997................................................................ 15,845
Activity.............................................................................. (3,007)
----------
Balance, January 31, 1998................................................................ $ 12,838
----------
----------
</TABLE>
During Fiscal 1997, two of the closed drug stores were sold and one lease
was terminated. The remaining balance of $12.8 million at January 31, 1998
reflects the future rent and real estate taxes, net of expected sublease
recoveries, related to the remaining three closed drug stores which have not
been subleased.
Note 24--Disposal of Purity
During Fiscal 1995, in connection with the sale of Purity to the Stop & Shop
Companies, Inc., the Company sold its remaining investment in Purity for $16.4
million, the proceeds of which were used to repay a portion of its PTK
Exchangeable Guaranteed Debentures. As a result of the sale, a capital tax loss
of approximately $69.5 million was generated. This transaction resulted in a
pretax gain of $16.4 million.
Note 25--Chief Executive Officer 1996 Employment Agreement
On October 8, 1996, the Company hired a CEO pursuant to a five-year
employment agreement (the "Employment Agreement"). In conjunction with his
employment, SMG-II granted to the CEO an Equity Strip consisting of 8,520
restricted shares of a new series of SMG-II Preferred Stock and 19,851
restricted shares of SMG-II Common Stock and options to purchase 100,000 shares
of SMG-II Common Stock at an initial exercise price of $100 per share (the
"Options") with the said exercise price increasing over time. The Equity Strip
was valued at $3.4 million at the date of issuance, based upon an independent
appraisal, and will vest over the term of the employment agreement or earlier
with the occurrence of an employment-related event, as defined, and will be
forfeited in its entirety upon the occurrence of a termination event, as
defined. The Equity Strip is being amortized as compensation expense in the
Company's statement of operations over the term of the Employment Agreement. The
Options were accounted for by SMG-II using the methods prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
as a result, no compensation expense was recorded. The Options will vest over
four years
47
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 25--Chief Executive Officer 1996 Employment Agreement--(Continued)
and expire one year after being fully vested, except for the portion of the
Options that vest on the day before the fifth year and has not yet become
exercisable, the expiration of which will be extended to year seven. If
employment with the Company should end as a result of a termination event, the
Options (whether or not then vested) will be immediately and irrevocably
forfeited, except in certain circumstances. Vested Options do not become
exercisable until the occurrence of certain events related generally to the
realization of a third-party sale of SMG-II Common Stock. The CEO also received
(a) a one-time signing bonus of $1 million, which is being amortized as
compensation expense in the Company's statement of operations over the term of
the Employment Agreement, and (b) a $4.5 million loan evidenced by sixteen
separate promissory notes. Under the terms of each note, if he is in full
employment of the Company on a quarterly anniversary of his hiring date, his
obligation to pay such note maturing on such date will be forgiven as to
principal, but not any then accrued and unpaid interest. The Company has and
will continue to record compensation expense upon the forgiveness of each note.
In the event his employment ends, as a result of a termination event, prior to a
change in control, as defined, each note will become immediately due and payable
as to all outstanding principal and all accrued and unpaid interest. These
notes, which bear interest at a blended rate of approximately 6%, are on a
full-recourse basis and secured by the Equity Strip, the Options and any shares
acquired upon exercise of such Options.
Note 26--Commitments and Contingencies
Rickel:
In connection with the sale of its home centers segment in Fiscal 1994, the
Company, as lessor, entered into nine leases for certain of the Company's owned
real estate properties with Rickel, as tenant. In addition, the Company assigned
to Rickel twenty-six third party leases.
In January 1996, Rickel filed for bankruptcy protection under Chapter 11
of the United States Bankruptcy Code. Subsequent to the filing, Rickel
assigned two leases, terminated two leases and rejected nine leases returning
these nine leases back to the Company. Of these nine rejected leases, two
have been settled with the landlord, one has been assigned to a large
retailer, one of the properties has been sold and the other five properties
are being actively marketed by the Company to other prospective tenants.
In September 1997, Rickel announced that it was terminating its retail
operations and liquidating its retail inventory. In February 1998, Rickel
entered into an agreement to assign thirteen of the Company's leases to Staples,
Inc. and additionally, allow Staples, Inc. until May 1, 1998 to decide whether
to lease an additional seven properties.
With respect to the remaining two locations, Rickel has not yet determined
whether they will reject or assign such leases.
Management has assessed its exposure with respect to this matter and has
concluded that it has sufficient reserves to cover any resulting liability
which may occur, including the future rent and real estate taxes, net of
expected sublease recoveries, of the five properties that have been returned
to the Company, as well as the nine other properties that could be returned
to the Company.
48
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 26--Commitments and Contingencies--(Continued)
Information Services Outsourcing:
In August 1991, the Company entered into a ten year agreement with IBM, to
provide a wide range of information systems services. Under the agreement, IBM
has taken over the Company's data center operations and mainframe processing and
information system functions and is providing business applications and systems
designed to enhance the Company's customer service and efficiency. The charges
under this agreement are based upon the services requested at predetermined
rates. The Company may terminate the agreement upon 90 days notice with payment
of a specified termination charge. The amounts expensed under this agreement in
the accompanying consolidated statements of operations were $23.7 million, $22.1
million and $21.0 million during Fiscal 1997, Fiscal 1996 and Fiscal 1995,
respectively.
Other:
The Company is also a party to a number of legal proceedings in the ordinary
course of business. Management believes that the ultimate resolution of these
proceedings will not, in the aggregate, have a material adverse impact on the
financial condition, results of operations or business of the Company.
49
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 27--Quarterly Financial Data (Unaudited)
Financial data for the interim periods of Fiscal 1997 and Fiscal 1996 is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
13 Weeks Ended
-------------------------------------------------------
May 3, August 2, November 1, January 31, Fiscal
1997 1997 1997 1998 1997
------ ------ --------- -------- ----
<S> <C> <C> <C> <C> <C>
52 Weeks Ended January 31, 1998
Sales............................... $ 922,398 $ 931,909 $ 901,006 $ 940,727 $3,696,040
Gross profit(a)..................... 259,480 262,443 248,482 273,607 1,044,012
Selling, general and administrative
expenses.......................... 212,348 213,130 205,318 210,146 840,942
Depreciation and amortization....... 20,216 19,984 21,407 21,978 83,585
Operating earnings.................. 26,916 29,329 21,757 41,483 119,485
Interest expense.................... (41,885) (41,903) (41,034) (41,958) (166,780)
Loss before income taxes and
extraordinary items............... (14,969) (12,574) (19,277) (475) (47,295)
Income tax benefit (provision)...... 5,866 5,022 7,815 (20,867) (2,164)
Loss before extraordinary items..... (9,103) (7,552) (11,462) (21,342) (49,459)
Extraordinary items, net of an income
tax benefit...................... -- (7,488) -- -- (7,488)
Net loss............................ $ (9,103) $ (15,040) $ (11,462) $ (21,342) $ (56,947)
</TABLE>
<TABLE>
<CAPTION>
13 Weeks Ended
-------------------------------------------------------
May 4, August 3, November 2, February 1, Fiscal
1996 1996 1996 1997 1996
------ ------ --------- -------- ----
<S> <C> <C> <C> <C> <C>
52 Weeks Ended February 1, 1997
Sales............................... $ 912,972 $ 931,363 $ 911,221 $ 955,434 $3,710,990
Gross profit(b)..................... 266,023 274,951 266,801 283,886 1,091,661
Selling, general and administrative
expenses(c)....................... 213,710 214,987 211,821 216,856 857,374
Depreciation and amortization....... 20,674 21,458 20,536 26,471 89,139
Restructuring charge................ -- -- -- 9,137 9,137
Lease commitment charge............. -- -- -- 8,763 8,763
Operating earnings.................. 31,639 38,506 34,444 22,659 127,248
Interest expense.................... (40,589) (41,106) (40,951) (41,472) (164,118)
Loss before income taxes and
extraordinary items............... (8,950) (2,600) (6,507) (18,813) (36,870)
Income tax benefit.................. 3,625 878 2,567 10,653 17,723
Loss before extraordinary items..... (5,325) (1,722) (3,940) (8,160) (19,147)
Extraordinary items, net of an income
tax benefit...................... (793) (204) -- -- (997)
Net loss............................ $ (6,118) $ (1,926) $ (3,940) $ (8,160) $ (20,144)
</TABLE>
- -----------
(a) The pretax LIFO credit for Fiscal 1997 was $5.4 million consisting of
provisions of $0.4 million and $0.5 million in the first and second
quarters, respectively, and credits of $1.7 million and $4.6 million in the
third and fourth quarters, respectively.
(b) The pretax LIFO credit for Fiscal 1996 was $1.3 million consisting of
provisions of $0.85 million in the first and second quarters, no provision
in the third quarter and a $3.0 million credit in the fourth quarter.
(c) Selling, general and administrative expenses for Fiscal 1996 included a
first quarter provision of $5.8 million representing the termination costs
of two former executives of the Company, a first quarter gain of $5.6
million recognized on the sale of certain real estate and a second quarter
curtailment gain of $2.0 million due to the elimination of postretirement
medical coverage for active non-union associates.
50
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
Supermarkets General Holdings Corporation
Carteret, New Jersey
We have audited the accompanying consolidated balance sheets of Supermarkets
General Holdings Corporation and its subsidiaries (the "Company") as of January
31, 1998 and February 1, 1997, and the related consolidated statements of
operations, stockholder's deficiency and cash flows for each of the three years
in the period ended January 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of January 31,
1998 and February 1, 1997, and the results of their operations and their cash
flows for each of the three years in the period ended January 31, 1998 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
April 16, 1998
51
<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, 1998)
(a) Directors of the Company
The following table sets forth the name, principal occupation or employment
at the present time and during the last five years, and the name and principal
business of any corporation or other organization in which such occupation or
employment is or was conducted, of the directors of the Company, all of whom are
citizens of the United States unless otherwise indicated. Each individual named
below is a director of both the Company and Pathmark, except for Messrs.
Upchurch and Volla.
<TABLE>
<CAPTION>
Director of the
Company
Name, Age, Principal Occupation and Other Directorships Since
-------------------------------------------------- ---------------
<S> <C>
MATTHIAS BOWMAN, 49, Director of Merrill Lynch Capital Partners, Inc., 1997
("MLCP"), an investment firm affiliated with Merrill Lynch & Co., ("ML& Co."), the
financial services concern, since 1998; Chief Executive Officer of MLCP from 1994 to
1998; Vice Chairman of Investment Banking with ML&Co. since 1993; Managing Director
of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPFS") since at least
1992. Mr. Bowman is also a Director of U.S. Foodservice Corp.
JOHN W. BOYLE, 69, Chairman and Chief Executive Officer of the Company from March 1996 to 1996
October 1996 (Retired); Vice Chairman (retired), Eckerd Corporation, a drug store
chain, between 1983 and 1995. Mr. Boyle is also Chairman of United Artists Theater
Circuit, Inc.
JAMES J. BURKE, JR., 46, Partner and a Director of Stonington Partners, Inc. ("SPI"), a 1988
private investment firm, since 1993, and a Director of MLCP since 1987; Partner of
MLCP from 1993 to 1994; President and Chief Executive Officer of MLCP from 1987 to
1993. Mr. Burke was also a Managing Director of ML&Co. until 1994. Mr. Burke is also
a Director of Ann Taylor Stores Corp., Borg-Warner Security Corp., Education
Management Corp. and United Artists Theater Circuit, Inc.
JAMES DONALD, 44, Chairman, President and Chief Executive Officer of the Company (since 1996
October 1996); Senior Vice President and General Manager, Safeway, Inc., Eastern
Division from February 1994 until October 1996; Vice President-Marketing, Wal-mart
Corp. prior thereto(3).
U. PETER C. GUMMESON, 39, Senior Vice President, Albion Alliance LLC, an asset manager 1996
specializing in private debt and equity securities (since 1996). Mr. Gummeson has
also been Managing Director of Alliance Corporate Finance Group Incorporated, an asset
manager specializing in private debt and equity securities since 1984. Both firms are
affiliated with the Equitable Investors.
STEPHEN M. McLEAN, 40, Partner and a Director of SPI since 1993; Partner of MLCP from 1993 1987
to 1994; Senior Vice President of MLCP from 1987 to 1993; Director of MLCP since 1987;
Managing Director of the Investment Banking Division of ML&Co. until 1994. Mr.
McLean is also a Director of CMI Industries, Inc., Dictaphone Corporation, Merisel,
Inc. and Packard Bio Science Company.
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Director of the
Company
Name, Age, Principal Occupation and Other Directorships Since
-------------------------------------------------- ---------------
<S> <C>
ROBERT G. MILLER, 54, Chief Executive Officer of Fred Meyer, Inc., a diversified 1997
retailer. Mr. Miller is also a Director of PacifiCorp.
ROBERT J. MYLOD, JR., 31, Principal of SPI since 1996; Associate of SPI from November 1993 1998
to December 1995; Associate of MLCP prior thereto. Mr. Mylod was also an associate of
the Investment Banking Division of MLPFS from 1993 to 1994. Mr. Mylod is also a
Director of Goss Graphic Systems, Inc.
JERRY G. RUBENSTEIN, 68, Managing Partner, Omni Management Associates; Consultant to MLCP 1988
since 1988.
JAMES B. UPCHURCH, 39, President and Chief Operating Officer of Libra Investments, Inc., 1995
an NASD licensed broker/dealer.
STEVEN L. VOLLA, 51, Chairman of Primary Health Systems, L.P., a hospital management 1995
company, since June 1994; Co-Chairman, Interactive Health Computing, Inc., since
January 1994; Chairman, President and Chief Executive Officer of American Health Care
Management, Inc., prior thereto.
</TABLE>
Pursuant to the Stockholders Agreement, the ML Investors are entitled to
designate seven directors, the Management Investors are entitled to designate
three directors and The Equitable Investors are entitled to designate one
director to Holdings' Board of Directors. By having the ability to designate a
majority of Holdings' Board of Directors, the Merrill Lynch Investors have the
ability to control the Company. Currently, six of the persons serving as
directors were designated by the Merrill Lynch Investors (Messrs. Bowman, Boyle,
Burke, McLean, Mylod and Rubenstein), one was designated by the Management
Investors (Mr. Donald) and one was designated by the Equitable Investors (Mr.
Gummeson). Mr. Miller was designated by the three investor groups. Messrs.
Upchurch and Volla were elected by the holders of Holdings Preferred Stock. No
family relationship exists between any director and any other director or
executive officer of the Company.
(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.
<TABLE>
<CAPTION>
Officer of
the Company
Name Age Positions and Office Since
---- ---- -------------------- ----------
<S> <C> <C> <C>
JAMES DONALD 44 Chairman, President and Chief Executive Officer since 1996
October 1996 (1)
RON MARSHALL 44 Executive Vice President and Chief Financial Officer since 1994
October 1994. Senior Vice President and Chief Financial
Officer of Dart Group Corporation (a diversified retailer)
prior thereto.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Officer of
the Company
Name Age Positions and Office Since
---- ---- -------------------- ----------
<S> <C> <C> <C>
JOHN SHEEHAN 40 Executive Vice President--Operations (since January 1998); 1996
Senior Vice President--Operations (October 1996 to December
1997); Director of Operations, Albertsons, Inc., prior
thereto.
JOSEPH W. ADELHARDT 51 Senior Vice President and Controller since January 1996; 1987
Vice President and Controller prior thereto.
Mr. Adelhardt joined Pathmark in 1976.
HARVEY M. GUTMAN 52 Senior Vice President--Retail Development. 1990
Mr. Gutman joined Pathmark in 1976.
ROBERT JOYCE 52 Senior Vice President--Administration (since October 1996); 1989
Executive Vice President--Operations (from January 1996 to
October 1996); Senior Vice President--Operations--from
March 1995 to January 1996; Senior Vice President
Administration prior thereto. Mr. Joyce joined Pathmark
in 1963.
MARC A. STRASSLER 49 Vice President, Secretary and General Counsel. Mr. 1987
Strassler joined Pathmark in 1974.
FRANK VITRANO 42 Vice President and Treasurer since December 1996; 1996
Treasurer from July 1995 to December 1996; Director--Risk
Management prior thereto. Mr. Vitrano joined Pathmark in
1972.
MYRON D. WAXBERG 64 Vice President and General Counsel--Real Estate. Mr. 1991
Waxberg joined Pathmark in 1976.
</TABLE>
- -----------
(1) Member of the Company's Board of Directors.
54
<PAGE>
ITEM 11. Executive Compensation.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
---------------------------------------- -----------------------
Securities
Other Annual Restricted Underlying All Other
Compensation Stock Awards Options/SARs Compensation
Name and Principal Position Year Salary ($) Bonus ($)(1) ($) (2) ($) (#) ($) (3)
---- -------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
James L. Donald.................... 1997 600,000 425,000 1,179,390 -- -- 3,632
Chairman, President and Chief 1996 193,846 1,175,000 340,021 3,400,000 100,000 16,821
Executive Officer
Ron Marshall....................... 1997 306,750 202,455 -- -- -- 4,750
Executive Vice President 1996 300,000 36,000 49,177 -- -- 5,250
and Chief Financial Officer 1995 280,289 168,173 -- -- -- --
John Sheehan....................... 1997 186,312 52,537 80,793 -- -- --
Executive Vice President - 1996 51,923 81,231 9,733 -- -- --
Operations
Robert Joyce....................... 1997 230,062 63,267 2,195 -- -- 5,600
Senior Vice President - 1996 223,846 26,862 2,195 -- -- 5,250
Administration 1995 205,437 97,334 2,200 -- 250 5,250
Marc A. Strassler.................. 1997 163,600 81,800 3,841 -- -- 5,600
Vice President, Secretary and 1996 143,950 10,796 3,841 -- -- 5,250
General Counsel 1995 135,850 42,793 3,849 -- -- 5,250
Neill Crowley(4)................... 1997 219,746 -- -- -- -- 242,043
Executive Vice President- 1996 253,750 30,450 -- -- -- 5,250
Retail Services 1995 247,212 112,241 15,000 -- -- 4,341
Ronald Rallo(4).................... 1997 197,131 -- 4,023 -- -- 183,215
Senior Vice President- 1996 245,000 29,400 4,389 -- -- 5,250
Merchandising 1995 227,500 113,585 4,399 -- -- 5,250
</TABLE>
- ------------
(1) The amounts with respect to Fiscal 1997 paid to Mr. Donald was the minimum
amount payable pursuant to the Donald Agreement (as hereinafter defined).
The amounts with respect to Fiscal 1997 in this column represent bonuses
awarded to the other named executives in recognition of their efforts in
connection with Pathmark's distribution outsourcing with C&S and
refinancing of its outstanding bank indebtedness.
(2) Represents in Fiscal 1997 (i) with respect to Mr. Donald, payment of
$54,390 as reimbursement for relocation expenses and forgiveness of loan
payments due to Pathmark of $1,125,000; (ii) with respect to Mr. Sheehan,
reimbursement of relocation expenses; and (iii) with respect to Messrs.
Rallo, Joyce and Strassler, payments as reimbursement for interest paid to
Holdings for loans, each of less than $60,000 from Holdings in connection
with the purchase of SMG-II Class A Common Stock and includes an amount
sufficient to pay any income taxes resulting therefrom after taking into
account the value of any deductions available as a result of the payment of
such interest and taxes.
(3) Represents in Fiscal 1997 (i) with respect to Mr. Donald, payments of
$3,632 for a term life insurance premium on Mr. Donald's life; (ii) with
respect to Mr. Rallo, payments of $5,600 representing Pathmark's matching
contribution to the SGC Savings Plan and $177,615 paid to Mr. Rallo
pursuant to a Resignation Agreement dated November 4, 1997 among Mr. Rallo,
Pathmark and SMG-II (the "Rallo Agreement"); (iii) with respect to Mr.
Crowley, payments of $5,600, representing Pathmark's matching contribution
to the SGC Savings Plan and $236,443 pursuant to a Resignation Agreement
dated November 4, 1997 among Mr. Crowley, SMG-II and Pathmark (the "Crowley
Agreement"); and (iv) with respect to the other named executive officers,
Pathmark's matching contribution under the SGC Savings Plan.
(4) Messrs. Rallo and Crowley each retired on November 4, 1997.
55
<PAGE>
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>
Neill Crowley............................................................................. 1,000/0
James Donald.............................................................................. 0/100,000
Robert Joyce.............................................................................. 2,420/0
Ron Marshall.............................................................................. 2,000/0
Ronald Rallo.............................................................................. 2,850/0
John Sheehan.............................................................................. 0/0
Marc Strassler............................................................................ 1,080/0
</TABLE>
- ----------
(1) Options shown were granted pursuant to the SMG-II 1987 Management Investors
Stock Option Plan (except with respect to Mr. Donald) and relate to shares
of Class A Common Stock of SMG-II. No options were either granted to or
exercised by any of the above named executives in Fiscal 1997.
<TABLE>
<CAPTION>
Pension Plan Table(1)
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
400,000............. 53,333 80,000 106,667 133,333 160,000 160,000
450,000............. 60,000 90,000 120,000 150,000 180,000 180,000
500,000............. 66,667 100,000 133,333 166,667 200,000 200,000
550,000............. 73,333 110,000 146,667 183,333 220,000 220,000
600,000............. 80,000 120,000 160,000 200,000 240,000 240,000
650,000............. 86,667 130,000 173,333 216,667 260,000 260,000
700,000............. 93,333 140,000 186,667 233,333 280,000 280,000
750,000............. 100,000 150,000 200,000 250,000 300,000 300,000
</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 1998 after the indicated number of years of
covered employment and if the average of the participant's covered
compensation for the five years out of the last ten years of such
employment yielding the highest such average equaled the amounts indicated.
The estimated annual benefits are based on the assumption that the
individual will receive retirement benefits in the form of a single life
annuity (married participants may elect a joint survivorship option) and
are before applicable deductions for social security benefits in effect as
of January 1998. As of December 31, 1997, the following individuals had the
number of years of credited service indicated after their names: Mr.
Donald, 1.2;
56
<PAGE>
Mr. Crowley, 3.6; Mr. Rallo, 30; Mr. Joyce, 27.7; Mr.
Marshall, 3.2; Mr. Sheehan, 1.2; and Mr. Strassler, 23.8. As described
below in "Compensation Plans and Arrangements--Supplemental Retirement
Agreements", certain of the named executives is party to a Supplemental
Retirement Agreement with Pathmark.
Compensation Plans and Arrangements
Supplemental Retirement Agreements. Pathmark has entered into supplemental
retirement agreements with certain key executives, including certain of the
executive officers named in the Summary Compensation Table, which provide that
said executive officers will be paid upon termination of employment after
attainment of age 60 a supplemental pension benefit in such an amount as to
assure him or her an annual amount of pension benefits payable under the
supplemental retirement agreement, Pathmark's qualified pension plans and
certain other plans of Pathmark, including Savings Plan balances as of March 31,
1983, (a) in the case of Messrs. Joyce, Strassler and Rallo equal to (i) 30% of
his final average Compensation based on ten years of service with Pathmark 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
($100,000 for Mr. Strassler), whichever is less, and (c) in the case of Messrs.
Crowley and Marshall, equal to 12.5% of his final average Compensation based on
five years of service with the Company and increasing 2.5% per year for each
year of service thereafter to a maximum of 35% of his final average Compensation
based on 14 years of service. "Compensation" includes base salary and bonus
payments under the Executive Incentive Plan, but excludes Pathmark company
matching contributions under the Savings Plan. If the executive leaves Pathmark
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 Pathmark.
Employment Agreements:
Employment Agreement Among Pathmark, SMG-II and James L. Donald. On October
8, 1996 (the "Effective Date"), Pathmark and SMG-II entered into an employment
agreement with Mr. James L. Donald (the "Donald Agreement") pursuant to which
Mr. Donald was elected Chairman, President and Chief Executive Officer for a
term of five years. The Donald Agreement provides Mr. Donald with an initial
annual base salary of $600,000 and provides that he shall participate in the
Pathmark Executive Incentive Plan, under which Mr. Donald may earn an annual
bonus of up to 125% of his annual salary based on performance targets that are
set by the Board. For the first full fiscal year during the term of the Donald
Agreement, Mr. Donald shall receive a minimum annual bonus of $425,000.
Furthermore, under the Donald Agreement, Mr. Donald is guaranteed an annual
bonus for each of the second, third and fourth full fiscal years of the term of
at least 25% of his base salary. The Donald Agreement provides Mr. Donald with
the right to defer up to 50% of his annual bonus and salary, which shall be held
in a grantor trust established by Pathmark. During the term of the Donald
Agreement, in addition to the base salary, bonus eligibility and other customary
annual benefits and perquisites that Pathmark generally provides to its
executive officers, Pathmark will provide Mr. Donald with a company car and term
life insurance in the amount of $4.5 million during the first year and $3.2
million thereafter. Pathmark also reimbursed Mr. Donald for the legal expenses
incurred by him in the negotiation of the Donald Agreement. Mr. Donald also
received a one-time signing bonus of $1 million, which is being amortized over
the term of the Donald Agreement.
57
<PAGE>
Furthermore, Mr. Donald received an equity package (the "Equity Strip"),
consisting of 8,520 restricted shares of a new series of SMG-II Preferred Stock
with a stated value of $200 per share and 19,851 restricted shares of SMG-II
Class A Common Stock, the terms of which are set forth in the stock award
agreement (the "Stock Award Agreement"). The Equity Strip, which as of the
Effective Date was valued by the Company at $3.4 million based upon an
independent appraisal, will vest in its entirety upon the occurrence of an
Employment-Related Event, as defined in the Stock Award Agreement, and will be
forfeited in its entirety upon the occurrence of a Termination Event, as defined
in the Donald Agreement. The valuation of $3.4 million is being amortized by the
Company over the term of the Donald Agreement. The Preferred Stock ranks pari
passu with the existing SMG-II convertible preferred stock and will accrue
dividends at a rate of 10% per annum. The Preferred Stock will be convertible
into Common Stock on a one-for-one basis. As of the Effective Date, the
Preferred Stock had accumulated dividends of approximately $122 per share.
In addition, Mr. Donald received a stock option (the "Option") to purchase
an aggregate of 100,000 shares of SMG-II Class A Common Stock. The Option
consists of component A ("Option Component A") covering 50,000 shares of SMG-II
Class A Common Stock and component B ("Option Component B") covering the
remaining 50,000 shares of SMG-II Class A Common Stock. Any terms used herein
not otherwise defined shall have the meanings assigned to them in the Donald
Agreement. Option Component A shall have an initial per share exercise price of
$100 per share. The per share exercise price of Option Component A will increase
to $125 per share on the first day of the Fiscal Year beginning in calendar year
2000 ("Fiscal Year 2000") and to $150 per share on the first day of the Fiscal
Year beginning in calendar year 2001 ("Fiscal Year 2001"). Option Component B
will have an initial per share exercise price of $100 per share. The per share
exercise price of Option Component B will increase to $150 per share on the
first day of the Fiscal Year beginning in calendar year 1999; to $250 per share
on the first day of Fiscal Year 2000; and to $350 per share on the first day of
Fiscal 2001. The Option will expire on the fifth anniversary of the Effective
Date to the extent not previously exercised (the "Expiration Date"); provided,
however, that the Expiration Date for the portion of Option Component A and
Option Component B which is vested (as explained below) immediately prior to
such Expiration Date will be extended until the seventh anniversary of the
Effective Date if such vested portion of Option Component A and Option Component
B, as the case may be, has not become exercisable by such initial Expiration
Date. During the period of such extension, the per share exercise price of
Option Component A and Option Component B, as the case may be (to the extent not
previously exercised), will increase at the end of each month during such
extension period at an annual rate of 10%. Mr. Donald will vest in 25% of Option
Component A and in 25% of Option Component B on the Effective Date and on each
of the first through third anniversaries of the Effective Date, provided that
the Optionee is in the employ of Pathmark on each such date. Upon the occurrence
of a Minimum IPO (as defined below) while the Optionee is in the employ of the
Company, the entire Option shall immediately and fully vest. In addition, the
Option will immediately and fully vest upon the occurrence of a Change in
Control (as defined below) occurring prior to the Termination Event (as defined
below). If Mr. Donald's employment with the Company should end as a result of a
Termination Event, then, as of the applicable date of termination, the entire
Option (whether or not then vested) will be immediately and irrevocably
forfeited.
Except for purposes of tag-along rights under Article V of the Stockholders
Agreement and the piggyback rights under Article VI of the Stockholders
Agreement, the Option shall not be exercisable (even though the Option or a
portion thereof is vested) unless and until it becomes exercisable in accordance
with the following provisions:
(i) The Exercisable Percentage (as defined below) of each component of the
Option will become exercisable if the ML Investors (as defined in the
Stockholders Agreement) have a Realization Event (as defined below) in
respect of the Common Stock at a per share price in excess of the
amounts (the "Target Prices") set forth below :
58
<PAGE>
<TABLE>
<CAPTION>
Period of Time Target Price per Target Price per
Share/Option Share/Option
Component A Component B
---------------- ---------------- -----------------
<S> <C> <C>
Prior to 2/1/00 $ 100 $ 150
2/1/00 to 1/31/01 $ 125 $ 250
2/1/01 and after $ 150 $ 350
</TABLE>
(ii) Notwithstanding the above, if the ML Investors have a Realization Event
for more than 15% of the shares of Common Stock beneficially owned by
them on the date of grant and Option at a per share price in excess of
the Target Price described above applicable to the date when such
Realization Event occurs, then the components of the Option for which
such Target Prices have been achieved shall become immediately vested
and exercisable and the exercise price shall not thereafter increase.
In the event that Mr. Donald becomes entitled to any tag-along rights under
Section 5.6 or registration rights under Section 6.2 of the Stockholders
Agreement, he will be permitted to exercise his sale or transfer rights with
respect to the portion of the Option for which the Target Price has been met.
For purposes of Section 5.6(b) of the Stockholders Agreement, 100% of the
portion of the Option for which the Target Amount has been realized will be
considered exercisable in order to determine the number of shares to be included
under Section 5.6(b) of the Stockholders Agreement. If, prior to the Expiration
Date, the Board determines that it is necessary or desirable to list, register
or qualify the shares of Common Stock subject to the Option, and if such
listing, registration or qualification is delayed beyond the Expiration Date,
the vested and exercisable portion of the Option will remain exercisable until
30 days after such listing, registration, or qualification is accomplished.
Pursuant to the Donald Agreement, Pathmark lent Mr. Donald $4.5 million (the
"Loan") evidenced by 16 separate promissory notes. Under the terms of each note,
if Mr. Donald is in full employment of Pathmark on a quarterly anniversary of
the Effective Date, Mr. Donald's obligation to pay such note maturing on such
date will be forgiven as to principal, but not any then accrued and unpaid
interest. In the event his employment ends at any time during the term of the
Donald Agreement prior to a Change in Control as a result of a Termination
Event, each note will become immediately due and payable as to all outstanding
principal and all accrued and unpaid interest. These notes bear interest at an
effective rate of 6%. The Loan is on a full recourse basis and secured by the
Equity Strip, the Option and any shares acquired upon exercise of the Option.
In the event of Mr. Donald's Involuntary Termination, Pathmark will pay him
(w) the full amount of any accrued but unpaid base salary, plus a cash payment
(calculated on the basis of the base salary then in effect) for all unused
vacation time which Mr. Donald may have accrued as of the date of Involuntary
Termination; (x) the amount of any earned but unpaid Annual Bonus for any Fiscal
Year of Pathmark ended on or prior to the date of Involuntary Termination; (y)
any unpaid reimbursement for business expenses; and (z) a severance amount equal
to four times Mr. Donald's annual rate of salary, based upon the annual rate
then in effect immediately prior to the date of termination, payable in monthly
installments over 24 months. In addition, in the event of an Involuntary
Termination, Mr. Donald and his eligible dependents shall continue to be
eligible to participate in the medical, dental, health and life insurance plans
applicable to Mr. Donald immediately prior to the Involuntary Termination on the
same terms and conditions in effect immediately prior to such Involuntary
Termination until the earliest to occur of (i) the end of the 24-month period
after the date of termination, the date Mr. Donald becomes eligible to be
covered under the benefit plans of a subsequent employer and (iii) the date Mr.
Donald breaches any of the protective covenants described below. Furthermore, in
the event of an Involuntary Termination, the Equity Strip will automatically and
without the need for further action or consent by Pathmark become fully vested
in the manner provided by the Stock Award Agreement, and the Option will
continue to remain outstanding to the extent provided by the Option Agreement.
All notes not previously delivered to Mr. Donald will
59
<PAGE>
automatically and without the need for further action or consent by Pathmark be
delivered by the escrow agent to Mr. Donald marked "Paid in Full" upon payment
by Mr. Donald of any then accrued but unpaid interest on the Loan. During the
30-day period beginning 6 months after a Change in Control, Mr. Donald shall be
eligible to resign from Pathmark for no stated reason and receive all the
amounts listed in clauses (w), (x), (y) and (z) above. Any such resignation in
such 30-day period following a Change in Control shall be treated as an
Involuntary Termination for all purposes of this Agreement.
In the event Mr. Donald's employment ends at any time during the term as a
result of a Termination Event, Pathmark shall pay him only the amounts decried
in clauses (w), (x) and (y) above, and Mr. Donald will immediately forfeit the
Equity Strip and the Option. In addition, each note will become immediately due
and payable as to all outstanding principal and all accrued and unpaid interest
if Mr. Donald's employment ends prior to a Change in Control as a result of a
Termination Event.
Although, in the event of an Involuntary Termination, Mr. Donald has no duty
to mitigate the severance amount by seeking new employment, any severance amount
payable during the second year of the severance period shall be reduced by any
compensation or benefits Mr. Donald earns in connection with any employment by
another employer.
The Donald Agreement includes protective covenants that prohibit Mr. Donald
from engaging (i) in any activity in competition with Pathmark, or any parent or
subsidiary thereof or (ii) in soliciting employees or customers of Pathmark, or
any parent or subsidiary thereof, during his term of employment and up to two
years thereafter. The Donald Agreement also includes a confidentiality clause
which prohibits Mr. Donald from disclosing any confidential information
regarding Pathmark.
The following definitions apply to the terms of the Donald Agreement:
"Cause" means the termination of Mr. Donald's employment with Pathmark
because of (i) his willful and repeated failure (other than by reason of
incapacity due to physical or mental illness) to perform the material
duties of his employment after notice from Pathmark of such failure and
his inability or unwillingness to correct such failure within 30 days of
such notice, (ii) his conviction of a felony or plea of no contest to a
felony or (iii) perpetration by Mr. Donald of a material dishonest act or
fraud against Pathmark or any parent or subsidiary thereof; provided
however, that, before Pathmark may terminate Mr. Donald for Cause, the
Board shall deliver to him a written notice of Pathmark's intent to
terminate him for Cause, including the reasons for such termination, and
Pathmark must provide him an opportunity to meet once with the Board prior
to such termination.
"Change in Control" means the acquisition by a person (other than a person
or group of persons that beneficially owns an equity interest in SMG-II or
Pathmark on the Effective Date or any person controlled thereby) of more
than 50% control of the voting securities of SMG-II as a result of a sale
of voting securities after the Effective Date by the persons who, on the
Effective Date, have a beneficial interest in such voting securities, but
shall not include any change in the ownership of Pathmark or SMG-II
resulting from a public offering.
"Common Stock" means SMG-II Class A Common Stock, par value $0.01 per share.
"Exercisable Percentage" means (i) in connection with a Third Party Sale,
the percentage of the shares of Common Stock subject to the Option that
Mr. Donald is entitled to sell pursuant to the exercise of his "tag-along"
rights under the Stockholders Agreement and (ii) in connection with a
Public Offering, the percentage of the shares of Common Stock then
beneficially owned by the ML Investors (as defined in the Stockholders
Agreement) which are sold in the Public Offering.
60
<PAGE>
"Good Reason" means Mr. Donald's resignation because of (i) the failure of
Pathmark to pay any material amount of compensation to Mr. Donald when
due, (ii) a material adverse reduction or material adverse diminution in
Mr. Donald's titles, duties, positions or responsibilities with Pathmark,
including, but not limited to, failure by Pathmark to elect Mr. Donald to
the office of Chief Executive Officer, or (iii) any other material breach
by Pathmark of the Donald Agreement. In order to assert Good Reason, Mr.
Donald must provide written notification of his intention to resign within
30 business days after he knows or has reason to know the occurrence of
any such event. After Mr. Donald provides such written notice to Pathmark,
Pathmark shall have 15 days from the date of receipt of such notice to
effect a cure of the condition constituting Good Reason.
"Involuntary Termination" means (i) the termination of Mr. Donald's
employment by Pathmark other than for Cause or disability or (ii) Mr.
Donald's resignation of employment with Pathmark for Good Reason.
"Minimum IPO" means a Public Offering of the Common Stock after the Date of
Grant at the conclusion of which the aggregate price for all the shares of
Common Stock having been sold to the public in such Public Offering, plus
the aggregate offering price for all shares of Common Stock sold in all
prior Public Offerings of Common Stock occurring after the date that Mr.
Donald is granted any Option, exceeds $50 million.
"Preferred Stock" shall mean a new series of convertible preferred stock
that will be issued for purposes of the Donald Agreement.
"Public Offering" means a public offering of the Common Stock pursuant to an
effective registration statement under the Securities Act.
"Realization Event" means the receipt by the ML Investors (as defined in the
Stockholders Agreement) of cash or property from an unrelated third party
as consideration for the sale of shares of Common Stock then beneficially
owned by the ML Investors. For purposes of the Donald Agreement, any
property other than cash received by the ML Investors in the Realization
Event shall have the value ascribed to such property by the parties to
such sale.
"Securities Act" means the Securities Act of 1933, as amended.
"Stockholders Agreement" shall mean the Stockholders Agreement, dated as of
February 4, 1991, as amended, among SMG-II and its stockholders.
"Termination Event" shall mean Mr. Donald's resignation without Good Reason
or a termination by Pathmark for Cause.
"Third Party Sale" means a sale of Common Stock subject to Section 5.6 of
the Stockholders Agreement.
Other Executive Agreements
As of April 1, 1997, Pathmark entered into an employment agreement with Mr.
Sheehan. As of September 9, 1994, Pathmark entered into an employment agreement
with Mr. Marshall. As of June 1, 1995, Pathmark entered into an employment
agreement with Mr. Strassler and Mr. Joyce, respectively. The four above
mentioned employment agreements are hereinafter referred to collectively as the
"Employment Agreements". Each of the Employment Agreements is for an initial
term of two years. The
61
<PAGE>
term of each Employment Agreement is automatically extended for an additional
year on (a) April 1, 1999 for Mr. Sheehan and on each successive April 1st
thereafter; (b) February 1, 1999 for Mr. Marshall and on each successive
February 1st thereafter, and (c) June 1, 1998 for Mr. Strassler and Mr. Joyce
and on each successive June 1st thereafter. Under the terms of his respective
Employment Agreement, each executive is entitled to a minimum annual base salary
of (a) $205,000 for Mr. Sheehan; (b) $309,000 for Mr. Marshall, (c) $164,800 for
Mr. Strassler, and (d) $231,750 for Mr. Joyce, which salary is subject to upward
adjustment by Pathmark. The Employment Agreements also provide that each
executive shall be entitled to receive an annual bonus of up to 66% of his
annual base salary with respect to Messrs. Sheehan and Marshall, up to 55% and
50% of his annual base salary with respect to Messrs. Joyce and Strassler,
respectively, and shall be provided the opportunity to participate in pension
and welfare plans, programs and arrangements that are generally made available
to executives of Pathmark or as may be deemed appropriate by the Compensation
Committee of the Board of Directors of SMG-II.
In the event one of the four above named executives' employment is
terminated by Pathmark without Cause (as defined in the Employment Agreements),
or by the executive for Good Reason (as defined in the Employment Agreements)
prior to the termination of the applicable Employment Agreement, such executive
will be entitled to continue to receive his base salary and continued coverage
under health and insurance plans for the period commencing on the date of such
termination or resignation through the date of applicable Employment Agreement
would have expired had it not been automatically renewed but for said
termination or resignation, reduced by any compensation or benefits which the
executive is entitled to receive in connection with his employment by another
employer during said period.
The Employment Agreements contain agreements by the executives not to
compete with Pathmark as long as they are receiving payments under an employment
agreement and an agreement by the executives not to disclose confidential
information.
On November 4, 1997 (the "Retirement Date"), Messrs. Crowley and Rallo each
retired as executive officers of the Company. Pursuant to the Rallo Agreement,
Mr. Rallo will be entitled to receive his base salary at the annual rate of
$252,350 per year during the period commencing November 5, 1997 and ending May
31, 1999, or the date of his death, if earlier (the "Rallo Benefit Period").
Additionally, Mr. Rallo will be entitled to receive continued health coverage
through the Rallo Benefit Period under Pathmark's health and insurance plans
applicable to him immediately prior to the Retirement Date. Each of the above
described payments and benefits shall be reduced by any compensation and
benefits earned by Mr. Rallo for any calendar year during the Rallo Benefit
Period. Additionally, pursuant to the terms of the Rallo Agreement, Pathmark
made a cash lump sum payment to Mr. Rallo of $138,792 on December 15, 1997.
Pursuant to the Crowley Agreement, Mr. Crowley will be entitled to receive his
base salary at the annual rate of $288,399 per year during the period commencing
November 5, 1997 and ending July 31, 1999, or the date of his death, if earlier
(the "Crowley Benefit Period"). Additionally, Mr. Crowley will be entitled to
receive continued health coverage through the Crowley Benefit Period under the
Company's health and insurance plans applicable to him immediately prior to the
Retirement Date. Each of the above described payments and benefits shall be
reduced by any compensation and benefits earned by Mr. Crowley for any calendar
year during the Crowley Benefit Period. Additionally, pursuant to the terms of
the Crowley Agreement, Pathmark made a cash lump sum payment to Mr. Crowley of
$192,074 on April 15, 1998.
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<PAGE>
Compensation Committee Interlocks and Insider Participation
Messrs. Burke, Boyle and McLean comprise the compensation committee of the
Board of Directors of SMG-II and are responsible for decisions concerning
compensation of the executive officers of Pathmark. Messrs. Burke and McLean are
directors of MLCP and have been retained by MLCP as consultants. MLCP is an
indirect wholly-owned subsidiary of ML&Co. See "Security Ownership of Certain
Beneficial Ownership and Management."
Compensation of Directors
Each director who is not employed by Holdings or one of its subsidiaries,
SPI, MLCP or the Equitable Investors or its affiliates receives an aggregate
annual retainer of $20,000 per year, plus travel expenses, for service as a
director on the Board of Directors of SMG-II and its subsidiaries, including the
Company.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
Since February 4, 1991, all shares of the Holdings Common Stock are held by
SMG-II. As of April 15, 1998, the number of shares of Holdings Preferred Stock
and SMG-II (i) Class A Common Stock, (ii) Class B Common Stock, (iii) Series A
Preferred Stock, (iv) Series B Preferred Stock and (v) Series C Preferred Stock,
beneficially owned by the persons known by management of the Company to be the
beneficial owners of more than 5% of the outstanding shares of any class as
"beneficial ownership" has been defined under Rule 13d-3, as amended, under the
Securities Exchange Act of 1934, are set forth in the following table:
<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 66.6
ML Offshore LBO Partnership No. IX(2)............................................ 12,424.7 1.7
Barfield House
St. Julians Avenue
St. Peter Port
Guernsey
Channel Islands
ML Employees LBO Partnership No. I, L.P.(2)...................................... 12,148.6 1.6
ML IBK Positions, Inc.(3)........................................................ 21,258.9 2.9
Merchant Banking L.P. No. 1(3)................................................... 8,119 1.1
Merrill Lynch KECALP L.P. 1987(3)................................................ 7,344 1.0
Chemical Investments, Inc.(4).................................................... 30,000 4.1
270 Park Avenue
New York, NY 10017
Management and other employees (including former employees of Pathmark).......... 153,894 (1) 21.0
200 Milik Street
Carteret, NJ 07008
SMG-II Class B Common Stock
The Equitable Life Assurance Society of the United States(5)..................... 150,000 46.9
c/o Albion Alliance LLC
1345 Avenue of the Americas, 39th Floor
New York, NY 10005
Equitable Deal Flow Fund, L.P.(5)................................................ 150,000 46.9
c/o Albion Alliance LLC
1345 Avenue of the Americas, 39th Floor
New York, NY 10005
Chemical Investments, Inc.(4).................................................... 20,000 6.2
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Number % of
Name of Shares Class
---- --------- -----
<S> <C> <C>
SMG-II Series A Preferred Stock(6)...................................................
Merrill Lynch Capital Appreciation Partnership No. B-X, L.P.(2).................. 133,043 56.2
ML Offshore LBO Partnership No. B-X(2)........................................... 40,950 17.3
MLCP Associates, L.P. No. II(2).................................................. 1,740 .7
ML IBK Positions, Inc.(3)........................................................ 46,344.5 19.6
Merchant Banking L.P. No. IV(3).................................................. 3,779 1.6
Merrill Lynch KECALP L.P. 1989(3)................................................ 7,000 3.0
Merrill Lynch KECALP L.P. 1991(3)................................................ 3,874.5 1.6
SMG-II Series B Preferred Stock(6)
Chemical Investments, Inc.(4).................................................... 12,500 7.0
The Equitable Life Assurance Society of the United States(5)..................... 84,134 46.5
Equitable Deal Flow Fund, L.P.(5)................................................ 84,135 46.5
SMG-II Series C Preferred Stock(6)................................................... 8,520 100.0
James Donald
200 Milik Street
Carteret, NJ 07008
</TABLE>
- ---------
1) Includes presently exercisable options granted under the Plan for
61,418 shares of SMG-II Class A Common Stock held by Management Investors.
2) MLCP and its affiliates are the direct or indirect managing partners of ML
Offshore LBO Partnership No. IX, Merrill Lynch Capital Appreciation
Partnership No. IX, L.P., ML Employees LBO Partnership No. 1, L.P., Merrill
Lynch Capital Appreciation Partnership No. B-x, L.P., ML Offshore LBO
Partnership No. B-X and MLCP Associates, L.P. No. II. Such entities and
those disclosed in footnote (3) below, are referred to herein as the ML
Investors. The address of such entities is c/o Merrill Lynch Capital
Partners, Inc., in care of Stonington Partners, Inc., 767 Fifth Avenue, New
York, New York 10153. MLCP is an indirect wholly owned subsidiary of ML&Co.
The partners and principals of SPI (including Messrs. Burke, McLean and
Mylod) are consultants to MLCP. Mr. Bowman is Chief Executive Officer of
MLCP.
3) Merchant Banking L.P. No. 1, Merchant Banking L.P. No. IV, Merrill Lynch
KECALP L.P. 1987, Merrill Lynch KECALP L.P. 1989, Merrill Lynch KECALP L.P.
1991 and ML IBK Positions, Inc. are indirectly controlled by ML&Co. The
address of such entities is c/o James Caruso, Merrill Lynch & Co., Inc.,
World Financial Center, South Tower, New York, New York, 10080-6123.
4) Chemical Investments, Inc. is an affiliate of Chase Manhattan Corp.
5) The Equitable Investors are separate purchasers who are affiliates of each
other.
6) SMG-II Preferred stock may be converted into an equivalent number of shares
of common stock of SMG-II in accordance with its terms.
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<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, except
Mr. Donald who claims beneficial ownership of 8,520 (100%) shares of SMG-II
Series C Preferred Stock. As of April 15, 1998, the number of shares of SMG-II
Class A Common Stock and Holdings Preferred Stock beneficially owned by each
director, by each of the executive officers named in the Summary Compensation
Table and by all directors and executive officers as a group is as follows:
<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>
Mathias Bowman(1)...................... -- -- -- --
John W. Boyle(2)....................... 3,000 * -- --
James J. Burke, Jr.(1)................. -- -- -- --
James Donald........................... 19,851 2.7 -- --
Robert Miller.......................... -- -- -- --
Neill Crowley(2)....................... 1,000 * -- --
U. Peter C. Gummeson................... -- -- -- --
Robert J. Mylod, Jr.................... -- -- -- --
Stephen M. McLean(1)................... -- -- -- --
Ron Marshall(2)........................ 2,000 * -- --
Ronald Rallo(2)........................ 3,250 * 966 *
Jerry G. Rubenstein(2)................. 2,500 * -- --
Robert Joyce(2)........................ 3,200 * -- --
Marc Strassler(2)........................ 1,430 *
John Sheehan.............................
James B. Upchurch...................... -- -- -- --
Steven L. Volla........................ -- -- -- --
Directors and named executive officers
as a group(1)(2)....................... 36,151 4.9 966 *
</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 Bowman,
directors of MLCP, disclaim beneficial ownership in all such shares.
(2) Includes presently exercisable options granted under the Plan to purchase
shares of SMG-II Class A Common Stock, as follows: Mr. Crowley, 1,000; Mr.
Marshall, 2,000; Mr. Joyce, 2,420; Mr. Rallo, 2,850; Mr. Rubenstein, 1,000;
Mr. Strassler, 1,080 and Mr. Boyle, 3,000 and all directors and executive
officers as a group, 42,311.
ITEM 13. Certain Relationships and Related Transactions
The holders of SMG-II Preferred Stock are a party with the holders of SMG-II
Common Stock to the Stockholders Agreement, which, among other things, restricts
the transferability of SMG-II capital stock and relates to the corporate
governance of SMG-II and Holdings. Among other provisions, the Stockholders
Agreement requires a vote of at least 80% of the members of the Board of
Directors to cause the 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
65
<PAGE>
certain mergers, sales of assets, acquisitions, sales or redemptions of stock,
the amendment of the certificate of incorporation or by-laws or the liquidation
of SMG-II. The Stockholders Agreement also provides that SMG-II must obtain the
prior written consent of the Equitable Investors with respect to certain of
these transactions and that the Equitable Investors have certain preemptive
rights with respect to the sale of capital stock of SMG-II or the Company.
The Stockholders Agreement also contains an agreement of the stockholders of
SMG-II with respect to the composition of SMG-II's and Holdings' Board of
Directors. Under this agreement, the Merrill Lynch Investors will be entitled to
designate up to seven directors, the Management Investors will be entitled to
designate up to three directors and the Equitable Investors will be entitled to
designate one director to both of SMG-II's and Holdings' Board of Directors.
Such agreement furthermore entitles the ML Investors to designate a majority of
Holdings' Board of Directors at all times. The ML Investors are controlled by
ML&Co.
In addition to the foregoing, the Stockholders Agreement contains terms
restricting the transfer of SMG-II Common Stock and SMG-II Preferred Stock
(collectively, the "SMG-II Stock") by the stockholders of SMG-II, and providing
to the stockholders of SMG-II rights of first offer with respect to resales of
SMG-II Stock, rights of first refusal with respect to certain issuances of
shares of SMG-II Stock, certain rights to demand or participate in registrations
of shares of SMG-II Stock under the Securities Act and certain "tag-along"
rights.
In October 1996, pursuant to the Donald Agreement, James L. Donald, an
Officer and Director, was provided by Pathmark with a four-year loan of $4.5
million. The foregoing indebtedness to Pathmark is evidenced by 16 full recourse
promissory notes for $281,250 each bearing interest at the short-term or
intermediate-term federal rate in effect as of the date of each note (effective
rate of 6%) and secured by the Equity Strip and the Option. Under the Donald
Agreement, one promissory note will be forgiven at the end of each quarter of a
year during which Mr. Donald remains employed by Pathmark. In the event that Mr.
Donald resigns his employment without Good Reason or is terminated for Cause or
in the event of his death, the outstanding portion of the loan will become
immediately due and payable. As of April 1, 1998, Mr. Donald remained indebted
to Pathmark in the amount of $3,093,750
In March 1990, Jerry G. Rubenstein, a Director, borrowed from Holdings
$100,000 in order to help finance his purchase of Holdings' Class A Common
Stock. Subsequently, such shares of Holdings' Class A Common Stock were
exchanged for shares of SMG-II Class A Common Stock. The foregoing indebtedness
to Holdings is evidenced by a full recourse promissory note (the "Recourse
Note"). The Recourse Note is for a term of ten years and bears interest at the
rate of 8.02% per annum, payable annually. Except as otherwise provided in the
Recourse Note, no principal on such recourse loan shall be due and payable until
the tenth anniversary of the date of issue of such Recourse Note. Under the
terms of the agreement pursuant to which the shares of Holdings' Class A Common
Stock were exchanged for shares of SMG-II Class A Common Stock, the Company is
obligated to pay to each Management Investor who pays interest on his Recourse
Note (except under certain circumstances) an amount equal to such interest, plus
an amount sufficient to pay any income taxes resulting from the above prescribed
payment after taking into account the value of any deduction available to him as
a result of the payment of such interest or taxes. As of April 1, 1998, Mr.
Rubenstein remained indebted to Holdings in the amount of $100,000.
66
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this Report.
1. Financial Statement Schedules: None required
2. Exhibits:
Incorporated herein by reference is a list of the Exhibits
contained in the Exhibit Index on Pages 69 through 71 of this
Report.
(b) Reports on Form 8-K.
None
(c) Exhibits required by Item 601 of Regulation S-K.
See item 14(a) above.
67
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 28, 1998 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/ JAMES DONALD Director, Chairman, President and April 28, 1998
- ---------------- Chief Executive Officer
(James Donald) (Principal Executive Officer)
/s/ RON MARSHALL Executive Vice President and Chief April 28, 1998
- ----------------- Financial Officer
(Ron Marshall) (Principal Executive Officer)
/s/ JOSEPH ADELHARDT Senior Vice President and Controller April 28, 1998
- -------------------- (Principal Accounting Officer)
(Joseph Adelhardt)
/s/ MATTHIAS BOWMAN Director* April 28, 1998
- --------------------
(Matthias Bowman)
/s/ JOHN W. BOYLE Director* April 28, 1998
- --------------------
(John W. Boyle)
/s/ JAMES J. BURKE, JR. Director* April 28, 1998
- --------------------
(James J. Burke, Jr.)
/s/ STEPHEN M. McLEAN Director* April 28, 1998
- --------------------
(Stephen M. McLean)
/s/ ROBERT G. MILLER Director* April 28, 1998
- --------------------
(Robert G. Miller)
/s/ ROBERT MYLOD, JR. Director* April 28, 1998
- --------------------
(Robert Mylod, Jr.)
/s/ U. PETER C. GUMMESON Director* April 28, 1998
- ---------------------
(U. Peter C. Gummeson)
/s/ JERRY G. RUBENSTEIN Director* April 28, 1998
- ----------------------
(Jerry G. Rubenstein)
/s/ JAMES B. UPCHURCH Director* April 28, 1998
- ----------------------
(James B. Upchurch)
/s/ STEVEN L. VOLLA Director* April 28, 1998
- -----------------------
(Steven L. Volla)
*By:/s/ MARC A. STRASSLER
- -------------------------
Marc A. Strassler
Attorney-in-Fact
</TABLE>
68
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
No. Exhibit No.
-------- -------- ------
<S> <C> <C>
2.1 --Distribution and Transfer Agreement among Pathmark, PTK and Plainbridge...................
2.2 --Distribution and Transfer Agreement dated as of May 3, 1993 among Pathmark, Holdings and
Chefmark (incorporated by reference from Exhibit 2.2 to the Registration Statement on
Form S-1 of Pathmark and Holdings, File No. 33-59616).....................................
2.3 --Agreement and Plan of Merger dated as of April 22, 1987 by and among Old Supermarkets, SMG
Acquisition Corporation and Holdings, as amended and restated (incorporated by reference
from Exhibit 2 to the Registration Statement on Form S-1 of Holdings, File No. 33-16963)..
3.1 --Restated Certificate of Incorporation of the Registrant, as amended (incorporated by
reference from Exhibit 3.4 to the Registration Statement on Form S-1 of Pathmark, File
No. 33-59612, the "October 1993 Registration Statement")..................................
3.2 --Certificate of Designation of the $3.52 Cumulative Exchangeable Redeemable Preferred Stock
of Registrant (incorporated by reference to the October 1993 Registration Statement)......
3.3 --By-Laws of the Registrant (incorporated by reference from Exhibit 3.3 to the October 1993
Registration Statement....................................................................
4.1 --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 Pathmark for the year ended January 2, 1994 (the "1994
10-K")....................................................................................
4.1A --Senior Subordinated Note due 2003 of Pathmark (contained in the Indenture filed as Exhibit
4.1) (incorporated by reference from the 1994 10-K).......................................
4.2 --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 1994 contained in the Indenture filed as Exhibit 4.2)
(incorporated by reference from the 1994 10-K)............................................
4.2B --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 1994 10-K)....
4.3 --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 1994
10-K).....................................................................................
4.4 --Credit Agreement dated as of June 30, 1997 ("the Credit Agreement") among Pathmark, the
Lenders listed therein, and Chase Manhattan Bank as Agent (incorporated by reference from
Pathmark's Form 10-Q for the period ended August 2, 1997)...............................
10.1 --Services Agreement dated as of May 3, 1993 between Pathmark and Chefmark (incorporated by
reference from Exhibit 10.4 to the Registration Statement on Form S-1 of the Registrant
and Holdings, File No. 33-59616)..........................................................
10.2 --Chefmark Supply Agreement, dated May 3, 1993, between Pathmark and Chefmark (incorporated by
reference from Exhibit 10.5 to the Registrant Statement on Form S-1 of the Registrant,
and Holdings, File No. 33-59616)..........................................................
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
No. Exhibit No.
-------- -------- ------
<S> <C> <C>
10.3 --Tax Sharing Agreement between Pathmark and SMG-II (incorporated by reference from the 1994
10-K).....................................................................................
10.4 --Tax Indemnity Agreement between Pathmark and Plainbridge (incorporated by reference from the
1994 10-K)................................................................................
10.5 --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)....................
10.6 --Supermarkets General Corporation Savings Plan (as Amended and Registration Statement on Form
S-1 of Holdings, File No. 33-16963).......................................................
10.7 --Supermarkets General Corporation Management Incentive Plan effective June 17, 1971
(incorporated by reference from Exhibit 10.23 to the Registration Statement on Form S-1
of Holdings, File No. 33-16963............................................................
10.8 --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).....................................
10.9 --Excess Benefit Plan of Supermarkets General Corporation, effective as of March 9,
1987 (incorporated by reference from Exhibit 10.12 to the October 1993 Registration
Statement)................................................................................
10.10 --Recourse Secured Promissory Note, dated October 5, 1987, given to Holdings from each
Management Investor listed therein (incorporated by reference from Exhibit 10.43 to
Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 of Holdings,
File No. 33-16963)........................................................................
10.11 --Stock Pledge Agreement dated October 5, 1987, between Holdings and each Management Investor
listed therein (incorporated by reference from Exhibit 10.44 to Post-Effective Amendment
No. 1 to the Registration Statement on Form S-1 of Holdings, File No. 33-16963)...........
10.12 --SMG-II Holdings Corporation Management Investors Stock Option Plan, as amended and restated
May 17, 1991 (the "Option Plan") (incorporated by reference from Exhibit 10.15 to the
October 1993 Registration Statement)......................................................
10.13 --Form of Stock Option Agreement under the Option Plan (incorporated by reference from Exhibit
10.16 to the October 1993 Registration Statement).........................................
10.14 --SMG-II Holdings Corporation Employees 1987 Stock Option Plan, as amended and restated May
17, 1991 (incorporated by reference from Exhibit 10.17 to the October 1993 Registration
Statement)................................................................................
10.15 --Management Investors Exchange Agreement dated as of February 4, 1991 among SMG-II Holdings
Corporation, Holdings and each of the Management Investors party thereto (incorporated by
reference from Exhibit 10.53 to the Registration Statement on Form S-1 of Holdings, No.
33-16963).................................................................................
10.16 --Employment Agreement dated as of June 1, 1995 among Pathmark, Robert Joyce and SMG-II
(incorporated by reference from Exhibit 10.19 to the Annual Report on Form 10-K of
Pathmark for the year ended January 31, 1998 (the "1997 10-K")............................
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
No. Exhibit No.
-------- -------- ------
<S> <C> <C>
10.17 --Employment Agreement dated as of June 1, 1995 among Pathmark, Marc Strassler and SMG-II
(incorporated by reference from Exhibit 10.20 to the 1997 10-K)...........................
10.18 --Supplemental Retirement Agreement dated June 1, 1994, between Pathmark and Neill Crowley
(incorporated by reference from Exhibit 10.21 to Pathmark's Annual Report on Form 10-K
for the year ended February 3, 1996)......................................................
10.19 --Supplemental Retirement Agreement dated October 3, 1994 between Pathmark and Ron Marshall
(incorporated by reference from Exhibit 10.22 to Pathmark's Annual Report on Form 10-K
for the year ended February 3, 1996)......................................................
10.20 --Employment Agreement dated April 1, 1997 among Pathmark, John Sheehan and SMG-II
(incorporated by reference to Exhibit 10.23 to the 1997 10-K).............................
10.21 --Resignation Agreement dated as of November 4, 1997 among Pathmark, Neill Crowley and SMG-II
(incorporated by reference to Exhibit 10.24 to the 1997 10-K).............................
10.22 --Employment Agreement dated as of September 9, 1994 between Pathmark and Ron Marshall
(incorporated by reference from Pathmark's Annual Report on Form 10-K for the year ended
February 3, 1996).........................................................................
10.23 --Resignation Agreement dated as of November 4, 1997 among Pathmark, Ron Rallo and SMG-II
(incorporated by reference to Exhibit 10.26 to the 1997 10-K).............................
10.24 --Employment Agreement dated as of October 8, 1996 among Pathmark, SMG-II and James Donald
(incorporated by reference from Pathmark's Annual Report on Form 10-K for the year ended
February 1, 1997).........................................................................
10.25 --First Amended and Restated Supply Agreement among Pathmark, Plainbridge and C&S Wholesale
Grocers, Inc. dated as of January 29, 1998 (incorporated by reference from Exhibit 10.3
to the 1997 10-K).........................................................................
12.1* --Statements Regarding Computation of Ratio of Earnings to Fixed Charges....................
22.1* --List of Subsidiaries of the Registrant....................................................
24.1* --Power of Attorney of Robert J. Mylod, Jr..................................................
</TABLE>
- ------------
* Filed herewith.
71
<PAGE>
EXHIBIT 12.1
SUPERMARKETS GENERAL HOLDINGS CORPORATION
STATEMENTS REGARDING COMPUTATION OF RATIO
OF EARNINGS TO FIXED CHARGES
(in thousands)
<TABLE>
<CAPTION>
Fiscal Years
------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Earnings (loss) from continuing
operations before taxes........ $ (47,295) $ (36,870) $ 48,944 $ 16,121 $ (36,819)
---------- --------- -------- --------- ----------
Fixed charges:
Interest expense............. 166,780 164,118 170,969 170,848 190,110
Interest portion of rental
expense(1)................. 12,131 10,973 10,596 12,307 13,351
---------- --------- -------- --------- ----------
Total fixed charges..... 178,911 175,091 181,565 183,155 203,461
---------- --------- -------- --------- ----------
Adjusted earnings before
fixed charges.................. $ 131,616 $ 138,221 $ 230,509 $ 199,276 $ 166,642
---------- --------- -------- --------- ----------
---------- --------- -------- --------- ----------
Ratio of earnings to fixed
charges(2)..................... -- -- 1.27x 1.09x --
---------- --------- -------- --------- ----------
---------- --------- -------- --------- ----------
Deficiency in earnings
available to cover fixed
charges........................ $ 47,295 $ 36,870 $ -- $ -- $ 36,819
---------- --------- -------- --------- ----------
---------- --------- -------- --------- ----------
</TABLE>
- -----------
(1) Represents the portion of rentals deemed representative of the interest
included therein.
(2) For Fiscal 1995, the inclusion of preferred stock dividend requirements
results in a ratio of earnings to fixed charges and preferred stocks
dividends of 1.10x. For Fiscal 1994, the inclusion of preferred stock
dividend requirements results in a deficiency in earnings available to cover
fixed charges and preferred stock dividends of approximately $7.0 million.
<PAGE>
EXHIBIT 22.1
SUPERMARKETS GENERAL HOLDINGS CORPORATION
List of Subsidiaries
<TABLE>
<CAPTION>
Name State of Incorporation
---- ----------------------
<S> <C>
AAL Realty Corp.............................. New York
Bridge Stuart, Inc........................... New York
Bucks Stuart, Inc............................ Pennsylvania
Chefmark, Inc................................ Delaware
Eatontown Stuart, Inc........................ New Jersey
GAW Properties Corp.......................... New Jersey
Jersey Stuart, Inc........................... New Jersey
Madison Stuart Corporation................... New Jersey
Pathmark Risk Management Corporation......... New Jersey
Pathmark Stores, Inc......................... Delaware
Pauls Trucking Corp.......................... New Jersey
Pennsylvania Stuart, Inc..................... Pennsylvania
Plainbridge, Inc............................. Delaware
PTK Holdings, Inc............................ Delaware
</TABLE>
<PAGE>
Exhibit 24.1
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 Joseph W. Adelhardt and Marc A.
Strassler, and each of them, severally, as true and lawful attorney or
attorneys, with full power of substitution and resubstitution, for him and in
his name, place and stead, to sign in any and all capacities and file or cause
to be filed said Annual Report on Form 10-K, and any and all amendments thereto,
and all instruments necessary or incidental in connection therewith, and hereby
grants to the said attorneys, and each of them, severally, full power and
authority to do and perform in the name and on behalf of 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 15th day of April, 1998.
/s/ Robert J. Mylod, Jr.
--------------------------
Robert J. Mylod, Jr.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Supermarkets
General Holdings Corporation's Consolidated Statement of Operations for the 52
weeks ended January 31, 1998 and Consolidated Balance Sheet as of January 31,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 62,914
<SECURITIES> 0
<RECEIVABLES> 12,713
<ALLOWANCES> (1,194)
<INVENTORY> 148,983
<CURRENT-ASSETS> 277,870
<PP&E> 913,926
<DEPRECIATION> (383,210)
<TOTAL-ASSETS> 907,754
<CURRENT-LIABILITIES> 385,204
<BONDS> 1,208,327
107,183
0
<COMMON> 10
<OTHER-SE> (1,334,138)
<TOTAL-LIABILITY-AND-EQUITY> 907,754
<SALES> 3,696,040
<TOTAL-REVENUES> 3,696,040
<CGS> 2,652,028
<TOTAL-COSTS> 2,652,028
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (190)
<INTEREST-EXPENSE> (166,780)
<INCOME-PRETAX> (47,295)
<INCOME-TAX> 2,164
<INCOME-CONTINUING> (49,459)
<DISCONTINUED> 0
<EXTRAORDINARY> (7,488)
<CHANGES> 0
<NET-INCOME> (56,947)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
