-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HxhmK4ErEHR7XTXHr28IMxvtX+aHTXY41uQwM5LlsisYRmhlrUFcWh1iWFNXN8oW 1NECL5BDSflRZThyTu7dKQ== 0001047469-98-016779.txt : 19980430 0001047469-98-016779.hdr.sgml : 19980430 ACCESSION NUMBER: 0001047469-98-016779 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980428 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUPERMARKETS GENERAL HOLDINGS CORP CENTRAL INDEX KEY: 0000821139 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 133408704 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16404 FILM NUMBER: 98602932 BUSINESS ADDRESS: STREET 1: 301 BLAIR RD STREET 2: P.O. BOX 5301 CITY: WOODBRIDGE STATE: NJ ZIP: 07095-0915 BUSINESS PHONE: 9084993000 MAIL ADDRESS: STREET 1: 301 BLAIR RD STREET 2: P.O. BOX 5301 CITY: WOODBRIDGE STATE: NJ ZIP: 07095-0915 10-K 1 FORM 10-K =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 -------------- For the Fiscal Year Ended Commission File Number January 31, 1998 0-16404 -------------- SUPERMARKETS GENERAL HOLDINGS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-3408704 (State of other jurisdiction of (I.R.S. Employer 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) ------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: $3.52 Cumulative Exchangeable Redeemable Preferred Stock (Title of Class) ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of April 1, 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 =============================================================================== 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. - -------------- * Except as otherwise indicated, information contained in this Item is given as of January 31, 1998. 1 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. 2 - - 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). 3 - - 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.
Fiscal Years ------------------------------------------------------------ 1997 1996 1995(a) 1994 1993 ---- ---- ------- ---- ---- (Dollars in millions) 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
- ---------------- (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 4 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 5 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 6 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. 7 ITEM 2. Properties** Reference is made to the answer to Item 1, "Business" of this report for information concerning the states in which the Company's supermarkets and distribution and processing facilities are located. See "Business of Pathmark-Supply and Distribution" in Item 1 of this report for information concerning the Company's 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. - ------------------ ** Except as otherwise indicated, information contained in this Item is given as of January 31, 1998. 8 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. 9 Subject to compliance with certain procedures, holders of shares of SMG-II Class B Common Stock may exchange their shares for shares of SMG-II Class A Common Stock and holders of shares of SMG-II Class A Common Stock may exchange their shares for shares of SMG-II Class B Common Stock, in each case on a share-for-shares basis. All holders of SMG-II capital stock are parties to a Stockholders Agreement dated as of February 4, 1991, as amended, with SMG-II (the "Stockholders Agreement"). SMG-II Preferred Stock has a stated value and liquidation preference of $200 per share and bears dividends at the rate of 10% of the stated value per annum, payable annually. At the option of SMG-II, dividends are payable in cash or may accumulate (and the amount thereof shall compound annually). Holders of shares of SMG-II Series A Preferred Stock and SMG-II Series C Preferred Stock are entitled to one vote per share of SMG-II Class A Common Stock into which such SMG-II Series A Preferred Stock and SMG-II Series C Preferred Stock are convertible on all matters to be voted on by SMG-II stockholders, subject to increase to 1.11 votes per share upon the occurrence of certain events. Holders of shares of SMG-II Series B Preferred Stock are entitled to one vote per share of SMG-II Class B Common Stock into which such SMG-II Series B Preferred Stock is convertible for the purpose of voting on any consolidation or merger, sale, lease or exchange of substantially all of the assets or any liquidation, dissolution or winding up of SMG-II. Additionally, holders of SMG-II Preferred Stock have separate voting rights with respect to alteration in the voting powers, rights and preferences and certain other terms affecting the SMG-II Preferred Stock. Subject to compliance with certain procedures, holders of SMG-II Series B Preferred Stock may exchange their shares for shares of SMG-II Series A Preferred Stock and holders of SMG-II Series A Preferred Stock may exchange their shares for shares of SMG-II Series B Preferred Stock, on a share-for-share basis. Each series of SMG-II Preferred Stock ranks pari passu with each other series. At the option of the holder, SMG-II Preferred Stock is convertible into SMG-II Common Stock at any time, on or prior to the occurrence of certain events, including an initial public offering of in excess of 25% of the number of outstanding shares of common stock of SMG-II, at a conversion ratio of one share of the corresponding class of SMG-II Common Stock for each share of SMG-II Preferred Stock, subject to adjustment upon the occurrence of certain events. Holders of SMG-II Preferred Stock are party with the holders of SMG-II Common Stock to the Stockholders Agreement which, among other things, restricts the transferability of SMG-II capital stock and relates to the corporate governance of SMG-II. None of SMG-II's capital stock is publicly traded on any market. See Item 12, "Security Ownership of Certain Beneficial Owners and Management." 10 ITEM 6. Selected Financial Data The following table represents selected financial data for the last five fiscal years and should be read in conjunction with the Company's Consolidated Financial Statements at Item 8 of this report. SUPERMARKETS GENERAL HOLDINGS CORPORATION SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS (in millions)
Fiscal Years(a) -------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- 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 ------- -------- -------- -------- ------- ------- -------- -------- -------- -------
As of ----------------------------------------------------- Jan. 31, Feb. 1, Feb. 3, Jan. 28, Jan. 29, 1998 1997 1996 1995 1994 ------- -------- -------- -------- ------- 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
(footnotes on following page) 11 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS (a) The Company's fiscal year ends on the Saturday nearest to January 31 of the following calendar year. Fiscal years consist of 52 weeks, except for 53 weeks in Fiscal 1995. (b) 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 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 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 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 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 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 The majority of the cash interest payments are scheduled in the second and fourth quarters. The amounts of principal payments required each year on outstanding long-term debt (excluding the original issue discount with respect to the Pathmark Deferred Coupon Notes and the PTK Exchangeable Guaranteed Debentures) are as follows (dollars in millions):
Principal Fiscal Years Payments - ------------ -------- 1998................................................................. $ 43.5 1999................................................................. 14.9 2000................................................................. 78.2 2001................................................................. 263.8 2002................................................................. 195.8 2003................................................................. 655.6
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 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 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 ITEM 8. Consolidated Financial Statements. SUPERMARKETS GENERAL HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
52 Weeks 52 Weeks 53 Weeks Ended Ended Ended January 31, February 1, February 3, 1998 1997 1996 --------- ----------- ------------ 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 ------------ ----------- ------------ ------------ ----------- ------------
See notes to consolidated financial statements 21 SUPERMARKETS GENERAL HOLDINGS CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands except share amounts)
January 31, February 1, 1998 1997 ------------ ------------ 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 ------------ ------------ ------------ ------------
See notes to consolidated financial statements. 22 SUPERMARKETS GENERAL HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY (in thousands except per share amounts)
Class A Class B Total Common Common Paid-in Accumulated Stockholder's Stock Stock Capital Deficit Deficiency --- --- --------- ----------- ----------- 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) --- --- --------- ----------- ----------- --- --- --------- ----------- -----------
See notes to consolidated financial statements. 23 SUPERMARKETS GENERAL HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
52 Weeks 52 Weeks 53 Weeks Ended Ended Ended January 31, February 1, February 3, 1998 1997 1996 -------- -------- -------- 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 -------- -------- -------- -------- -------- --------
See notes to consolidated financial statements. 24 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1--Business Organization and Basis of Presentation: Supermarkets General Holdings Corporation (the "Company" or "Holdings"), through its indirect wholly owned subsidiary Pathmark Stores, Inc. ("Pathmark"), operated 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 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 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 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 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 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):
January 31, February 1, 1998 1997 --------- --------- 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 --------- --------- --------- ---------
- --------- (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):
January 31, February 1, 1998 1997 --------- --------- 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 --------- --------- --------- ---------
30 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):
January 31, February 1, 1998 1997 --------- --------- 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 --------- --------- --------- ---------
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):
January 31, February 1, 1998 1997 --------- --------- Deferred financing costs......................................................... $ 28,599 $ 51,378 Less: accumulated amortization................................................... 10,052 22,635 --------- --------- Deferred financing costs, net.................................................... $ 18,547 $ 28,743 --------- --------- --------- ---------
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 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):
January 31, February 1, 1998 1997 --------- --------- 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 --------- --------- --------- ---------
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):
January 31, February 1, 1998 1997 ----------- ------------ 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 ----------- ------------ ----------- ------------
32 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):
Principal Fiscal Years Payments - ------------ -------- 1998.......................................................................... $ 43,478 1999.......................................................................... 14,858 2000.......................................................................... 78,238 2001.......................................................................... 263,849 2002.......................................................................... 195,750 2003.......................................................................... 655,632 ----------- $ 1,251,805 ----------- -----------
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 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 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):
January 31, 1998 February 1, 1997 --------------------------- --------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ----------- ----------- ---------- 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 ---------- ----------- ----------- ---------- ---------- ----------- ----------- ----------
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 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 11--Interest Expense Interest expense is comprised of the following (dollars in thousands):
Fiscal Years -------------------------------------------- 1997 1996 1995 ---- ---- ---- 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 --------- ---------
- ---------- (a) Net of sublease income of $0.8 million and $74.4 million for capital and operating leases, respectively. 36 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):
Fiscal Years -------------------------------------------- 1997 1996 1995 ---- ---- ---- 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 -------- -------- -------- -------- -------- --------
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 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):
January 31, 1998 February 1, 1997 ---------------------------- ----------------------------- Assets Exceed Accumulated Assets Exceed Accumulated Accumulated Benefits Exceed Accumulated Benefits Exceed Benefits Assets Benefits Assets ----------- ----------- ----------- ---------- 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) ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------
38 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:
January 31, February 1, 1998 1997 --------- --------- 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
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):
Fiscal Years ------------------------------------------ 1997 1996 1995 ---- ---- ---- 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 -------- -------- -------- -------- -------- --------
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 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):
Fiscal Years ------------------------------------------ 1997 1996 1995 ---- ---- ---- 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 ------- ------- ------- ------- ------- -------
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):
January 31, February 1, 1998 1997 -------- -------- 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 -------- -------- -------- --------
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):
Fiscal Years ------------------------------------------- 1997 1996 1995 ---- ---- ---- 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 ------- -------- ------- ------- -------- -------
40 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):
Fiscal Years -------------------------------------------- 1997 1996 1995 ---- ---- ---- 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 -------- -------- ------- -------- -------- -------
The effective tax rate for the income tax benefit (provision) differs from the federal statutory tax rate as follows:
Fiscal Years ----------------------------------------- 1997 1996 1995 ---- ---- ---- 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% ------ ------ ------ ------ ------ ------
Deferred income tax assets and liabilities consist of the following (dollars in thousands):
January 31, 1998 February 1, 1997 --------------------------- ---------------------------- Assets Liabilities Assets Liabilities ------ ----------- ------ ----------- 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 --------- --------- --------- -------- --------- --------- --------- --------
41 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):
January 31, 1998 February 1, 1997 --------------------------- ---------------------------- Current Noncurrent Current Noncurrent ------- ---------- ------- ---------- 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 ---------- --------- ---------- --------- ---------- --------- ---------- ---------
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):
Fiscal Years -------------------------------------------- 1997 1996 1995 ---- ---- ---- 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) ---------- ---------- ---------- ---------- ---------- ----------
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 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 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):
Fiscal Years --------------------------------------------- 1997 1996 1995 ---- ---- ---- Sales........................................................... $ 42,877 $ 152,599 $ 160,133 ---------- --------- ---------- ---------- --------- ---------- Operating loss.................................................. $ 10,590 $ 10,663 $ 8,364 ---------- --------- ---------- ---------- --------- ----------
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 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):
Number of Shares Amount ---------------- ------ 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 ---------- --------- ---------- ---------
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 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 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):
Amount ------ 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 ---------- ----------
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 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 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 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):
13 Weeks Ended ------------------------------------------------------- May 3, August 2, November 1, January 31, Fiscal 1997 1997 1997 1998 1997 ------ ------ --------- -------- ---- 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)
13 Weeks Ended ------------------------------------------------------- May 4, August 3, November 2, February 1, Fiscal 1996 1996 1996 1997 1996 ------ ------ --------- -------- ---- 52 Weeks Ended February 1, 1997 Sales............................... $ 912,972 $ 931,363 $ 911,221 $ 955,434 $3,710,990 Gross profit(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)
- ----------- (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 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 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.
Director of the Company Name, Age, Principal Occupation and Other Directorships Since -------------------------------------------------- --------------- 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.
52
Director of the Company Name, Age, Principal Occupation and Other Directorships Since -------------------------------------------------- --------------- 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.
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.
Officer of the Company Name Age Positions and Office Since ---- ---- -------------------- ---------- 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.
53
Officer of the Company Name Age Positions and Office Since ---- ---- -------------------- ---------- 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.
- ----------- (1) Member of the Company's Board of Directors. 54 ITEM 11. Executive Compensation. Summary Compensation Table
Long Term Compensation Annual Compensation Awards ---------------------------------------- ----------------------- Securities Other Annual Restricted Underlying All Other Compensation Stock Awards Options/SARs Compensation Name and Principal Position Year Salary ($) Bonus ($)(1) ($) (2) ($) (#) ($) (3) ---- -------- ------------ ------------ ------------- ------------ ------------ 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
- ------------ (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 Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values(1)
Number of Securities Underlying Unexercised Options/SARs at FY-End (#) Exercisable/ Name Unexercisable ------ -------------------------- 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
- ---------- (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.
Pension Plan Table(1) Years of Service ------------------------------------------------------------------------------------- Final Average Pay 10 15 20 25 30 35 ----------------- -- -- -- -- -- -- $ 150,000............. $ 20,000 $ 30,000 $ 40,000 $ 50,000 $ 60,000 $ 60,000 200,000............. 26,667 40,000 53,333 66,667 80,000 80,000 225,000............. 30,000 45,000 60,000 75,000 90,000 90,000 250,000............. 33,333 50,000 66,667 83,333 100,000 100,000 300,000............. 40,000 60,000 80,000 100,000 120,000 120,000 350,000............. 46,667 70,000 93,333 116,667 140,000 140,000 400,000............. 53,333 80,000 106,667 133,333 160,000 160,000 450,000............. 60,000 90,000 120,000 150,000 180,000 180,000 500,000............. 66,667 100,000 133,333 166,667 200,000 200,000 550,000............. 73,333 110,000 146,667 183,333 220,000 220,000 600,000............. 80,000 120,000 160,000 200,000 240,000 240,000 650,000............. 86,667 130,000 173,333 216,667 260,000 260,000 700,000............. 93,333 140,000 186,667 233,333 280,000 280,000 750,000............. 100,000 150,000 200,000 250,000 300,000 300,000
- ---------- (1) The table above illustrates the aggregate annual pension benefits payable under the SGC Pension Plan and Excess Benefit Plan (collectively, the "Pension Plans"). The retirement benefit for individuals with 30 years of credited service is 40% of the individual's average compensation during his or her highest five compensation years in the last ten years before retirement, less one-half of the social security benefit received. The retirement benefit is reduced by 3.33% for every year of credited service less than 30. Covered compensation under the Pension Plans includes all cash compensation subject to withholding plus amounts deferred under the Savings Plan pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended, and as to individuals identified in the Summary Compensation Table, would be the amount set forth in that table under the headings "Salary" and "Bonus". The 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 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 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
Period of Time Target Price per Target Price per Share/Option Share/Option Component A Component B ---------------- ---------------- ----------------- Prior to 2/1/00 $ 100 $ 150 2/1/00 to 1/31/01 $ 125 $ 250 2/1/01 and after $ 150 $ 350
(ii) Notwithstanding the above, if the ML Investors have a Realization Event for more than 15% of the shares of Common Stock beneficially owned by them on the date of grant and Option at a per share price in excess of the Target Price described above applicable to the date when such Realization Event occurs, then the components of the Option for which such Target Prices have been achieved shall become immediately vested and exercisable and the exercise price shall not thereafter increase. In the event that Mr. Donald becomes entitled to any tag-along rights under Section 5.6 or registration rights under Section 6.2 of the Stockholders Agreement, he will be permitted to exercise his sale or transfer rights with respect to the portion of the Option for which the Target Price has been met. For purposes of Section 5.6(b) of the Stockholders Agreement, 100% of the portion of the Option for which the Target Amount has been realized will be considered exercisable in order to determine the number of shares to be included under Section 5.6(b) of the Stockholders Agreement. If, prior to the Expiration Date, the Board determines that it is necessary or desirable to list, register or qualify the shares of Common Stock subject to the Option, and if such listing, registration or qualification is delayed beyond the Expiration Date, the vested and exercisable portion of the Option will remain exercisable until 30 days after such listing, registration, or qualification is accomplished. Pursuant to the Donald Agreement, Pathmark lent Mr. Donald $4.5 million (the "Loan") evidenced by 16 separate promissory notes. Under the terms of each note, if Mr. Donald is in full employment of 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 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 "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 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. 62 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:
Number % of Name of Shares Class ---- --------- ----- SMG-II Class A Common Stock Merrill Lynch Capital Appreciation Partnership No. IX, L.P.(2)................... 488,704.8 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
63
Number % of Name of Shares Class ---- --------- ----- 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
- --------- 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. 64 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:
SMG-II Class A Common Stock Holdings Preferred Name Number of Shares % of Class Number of Shares % of Class ---- ---------------- ---------- ---------------- ---------- 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 *
- ---------- * 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 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 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 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.
Signature Title Date --------- ----- ---- /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
68 EXHIBIT INDEX
Exhibit Page No. Exhibit No. -------- -------- ------ 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)..........................................................
69
Exhibit Page No. Exhibit No. -------- -------- ------ 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")............................
70
Exhibit Page No. Exhibit No. -------- -------- ------ 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..................................................
- ------------ * Filed herewith. 71 EX-12.1 2 EXHIBIT 12.1 EXHIBIT 12.1 SUPERMARKETS GENERAL HOLDINGS CORPORATION STATEMENTS REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (in thousands)
Fiscal Years ------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ---------- --------- -------- --------- ---------- 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 ---------- --------- -------- --------- ---------- ---------- --------- -------- --------- ----------
- ----------- (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. EX-22.1 3 EXHIBIT 22.1 EXHIBIT 22.1 SUPERMARKETS GENERAL HOLDINGS CORPORATION List of Subsidiaries
Name State of Incorporation ---- ---------------------- AAL Realty Corp.............................. New York Bridge Stuart, Inc........................... New York Bucks Stuart, Inc............................ Pennsylvania Chefmark, Inc................................ Delaware Eatontown Stuart, Inc........................ New Jersey GAW Properties Corp.......................... New Jersey Jersey Stuart, Inc........................... New Jersey Madison Stuart Corporation................... New Jersey Pathmark Risk Management Corporation......... New Jersey Pathmark Stores, Inc......................... Delaware Pauls Trucking Corp.......................... New Jersey Pennsylvania Stuart, Inc..................... Pennsylvania Plainbridge, Inc............................. Delaware PTK Holdings, Inc............................ Delaware
EX-24.1 4 POWER OF ATTORNEY 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. EX-27.1 5 FDS
5 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. 1,000 12-MOS JAN-31-1998 JAN-31-1998 62,914 0 12,713 (1,194) 148,983 277,870 913,926 (383,210) 907,754 385,204 1,208,327 107,183 0 10 (1,334,138) 907,754 3,696,040 3,696,040 2,652,028 2,652,028 0 (190) (166,780) (47,295) 2,164 (49,459) 0 (7,488) 0 (56,947) 0 0
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