ITEM 1. BUSINESS*
Registrant was incorporated in the State of Delaware in April 1987 as SMG Holdings Corporation. Subsequently, registrant's name was changed to Supermarkets General Holdings Corporation (the "Company"). The Company acquired Supermarkets General Corporation ("Old Supermarkets"), in October 1987 (the "Acquisition"). References to the Company in this Report refer to the Company and its subsidiaries on a consolidated basis, except where the context requires otherwise.
In October 1989, Old Supermarkets adopted an amended and restated Plan of Liquidation pursuant to which it was liquidated into three wholly owned subsidiaries of the Company. In November 1989, pursuant to such Plan, Old Supermarkets transferred substantially all of the assets of its Purity Supreme division to two of the three above mentioned wholly owned subsidiaries of the Company, Purity Supreme, Inc. ("Purity") and Li'l Peach Corp. ("Li'l Peach", and together with Purity, the "Purity Operations"), and said subsidiaries assumed substantially all of the liabilities of Old Supermarkets related to such division. Old Supermarkets completed the liquidation just prior to the year ended February 3, 1990 by merging with the third of the above mentioned wholly owned subsidiaries of the Company, which retained the name Supermarkets General Corporation. In connection with the Recapitalization referred to below, Supermarkets General Corporation changed its name to Pathmark Stores, Inc. ("Pathmark").
On December 17, 1991, the Company completed the sale of the Purity Operations for approximately $257.0 million (as adjusted), including the assumption of certain indebtedness of Purity and Li'l Peach. The Company recognized a loss of $228.0 million on the sale of the Purity Operations. Included in the loss was a write-off of approximately $214.0 million of goodwill related to the Purity Operations. The Company retains a 10% common equity interest in Purity Supreme and a new issue of Purity Supreme exchangeable preferred stock with an aggregate stated value of approximately $18.0 million. These retained investments in Purity Supreme are carried on the Company's books at zero value. Pathmark is contingently liable for certain obligations of the Purity Operations under certain instruments, primarily 60 leases for real property, in the event of default thereunder by the Purity Operations, and is subject to a non-compete agreement with the Purity Operations restricting Pathmark's ability to operate supermarkets in Massachusetts, New Hampshire and part of Connecticut until July, 1994. Prior to the sale of the Purity Operations, three properties of Purity Supreme were transferred to Pathmark. See "Properties".
THE RECAPITALIZATION
The Company consummated a recapitalization plan (the "Recapitalization") on October 26, 1993. In connection with the Recapitalization, the Company transferred all of the capital stock of Pathmark to PTK Holdings, Inc. ("PTK"), a newly formed, wholly owned subsidiary of the Company. The Recapitalization reduced Pathmark's interest expense and will allow Pathmark to devote its capital to growing its core supermarket and drug store business.
The Recapitalization involved the following transactions (dollar amounts are as of October 26, 1993):
The Creation of PTK. The incorporation in the State of Delaware of PTK and the transfer to PTK of all the capital stock of Pathmark. PTK owns 100% of the capital stock of Pathmark and also owns 100% of the capital stock of Plainbridge, Inc., a newly formed Delaware corporation ("Plainbridge"). Pathmark distributed the capital stock of Plainbridge to PTK in the Plainbridge Spin-Off (as defined below).
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* Except as otherwise indicated, information contained in this Item is given as of January 29, 1994.
The Spin-Offs. The contribution by Pathmark to Plainbridge of the Rickel home center business, the warehouse, distribution and transportation operations and the inventory therein that service the Pathmark supermarkets and drug stores and certain other assets and the distribution of the shares of Plainbridge to PTK (the "Plainbridge Spin-Off") and the contribution by Pathmark to Chefmark, Inc., a newly formed Delaware corporation ("Chefmark"), of the Chefmark deli food preparation operations and a related warehouse and a leased banana ripening warehouse and the distribution of the shares of Chefmark to the Company (the "Chefmark Spin-Off", and, together with the Plainbridge Spin-Off, the "Spin-Offs"). In connection with the Plainbridge Spin-Off, Pathmark entered into a logistical services agreement with Plainbridge (the "Logistical Services Agreement") that provides for the continuing supply of merchandise to the Pathmark supermarkets and drug stores and for the provision of warehousing, distribution and logistical services relating to the supply of such merchandise. Pursuant to such agreement, Pathmark directs the purchase of such merchandise and negotiates the terms and conditions of its sale directly with the applicable vendors. For a further description of the terms of the Logistical Services Agreement see "--Business of Pathmark-Logistical Services Agreement". The Company intends to further spin off Plainbridge to its common stockholder within the next year, although there can be no assurance that such spin-off will be consummated. Any such spin-off would require satisfying the dividend restrictions with respect to the Company's $3.52 cumulative Exchangeable Redeemable Preferred Stock (the "Exchangeable Preferred Stock"), as well as, obtaining consents from various lenders to Plainbridge and PTK.
New Borrowings. (a) Borrowings by Pathmark from banks of $400.0 million under a new term loan facility (the "Term Loan") and $50 million under a new $175.0 million working capital facility (the "Working Capital Facility", and, together with the Term Loan, the "Bank Credit Agreement").
(b) The issuance by Pathmark of $440.0 million aggregate principal amount of its 9 5/8% Senior Subordinated Notes due 2003 (the "Senior Subordinated Notes").
(c) The consummation of the offer by Pathmark to exchange (the "11 5/8% Exchange Offer") a new issue of its 11 5/8% Subordinated Notes due 2002 (the "Subordinated Notes") for up to the $200.0 million aggregate principal amount outstanding of the Company's 11 5/8% Subordinated Notes due 2002 (the "Holdings Subordinated Notes") and, in connection with the 11 5/8% Exchange Offer, the solicitation by the Company of consents from the holders of the Holdings Subordinated Notes to certain proposed amendments to delete certain restrictions in the indenture under which the Holdings Subordinated Notes were issued (the "Holdings Subordinated Note Indenture") and payment of related consent fees. Holders of over 98% of the outstanding aggregate principal amount of such Notes accepted the 11 5/8% Exchange Offer and consented to the proposed amendments. Accordingly, Pathmark issued $198.5 million of its Subordinated Notes and the Company executed a supplemental indenture to the Holdings Subordinated Note Indenture reflecting the proposed amendments. Approximately $1.5 million aggregate principal amount of Holdings Subordinated Notes not tendered and accepted for exchange in the 11 5/8% Exchange Offer remains outstanding. An equivalent amount of subordinated Intercompany Notes with terms corresponding to the terms of the Holdings Subordinated Notes also remains outstanding.
(d) The consummation of the offer by Pathmark and the Company (the "12 5/8% Exchange Offer") pursuant to which Pathmark issued $95.8 million aggregate principal amount of its 12 5/8% Subordinated Debentures due 2002 (the "Subordinated Debentures") in exchange for $95.8 million aggregate principal amount of the $415.0 million aggregate principal amount outstanding of the Company's 12 5/8% Subordinated Debentures due 2002 (the "Holdings Subordinated Debentures") held by persons other than certain affiliates of The Equitable Life Assurance Society of the United States (the "Equitable Affiliates"). The Company also purchased $4.2 million aggregate principal amount of such Debentures for cash
at a price of 112.125% of the aggregate principal amount thereof, together with accrued interest to the date of purchase (the "Tender Offer", and, together with the 12 5/8% Exchange Offer, the "Tender and Exchange Offer"), solicited consents from all holders of the Holdings Subordinated Debentures to certain proposed amendments to delete certain restrictions in the indenture under which the Holdings Subordinated Debentures were issued (the "Holdings Subordinated Debenture Indenture") and paid related consent fees. Holders of Holdings Subordinated Debentures (other than the Equitable Affiliates) tendered $95.8 million aggregate principal amount of Holdings Subordinated Debentures for Subordinated Debentures pursuant to the Tender and Exchange Offer, and holders representing over 99% of the aggregate outstanding principle amount of the Holdings Subordinated Debentures consented to the proposed amendments. Accordingly, Pathmark issued its Subordinated Debentures and the Company executed a supplemental indenture to the Holdings Subordinated Debenture Indenture reflecting the proposed amendments. In addition, as part of the Recapitalization, the Company also purchased for cash $185.0 million aggregate principal amount of the Holdings Subordinated Debentures from the Equitable Affiliates at the same price offered in the Tender Offer and sold PTK's Exchangeable Guaranteed Debentures due 2003 (the "PTK DIBs") with an issue price of $130.0 million to the Equitable Affiliates in exchange for the remaining $130.0 million of Holdings Subordinated Debentures held by the Equitable Affiliates as described below.
(e) The issuance (the "Deferred Coupon Notes Offering", and, together with the Senior Subordinated Notes Offering, the "Debt Offerings") by Pathmark of $225.25 million aggregate principal amount at maturity of its Junior Subordinated Deferred Coupon Notes due 2003 (the "Deferred Coupon Notes") at an issue price of $532.74 per $1,000 principal amount at maturity.
(f) The issuance by PTK to the Company of $130.0 million aggregate principal amount of PTK DIBs that the Company sold to the Equitable Affiliates in a private placement (the "Private Placement") in exchange for $130.0 million aggregate principal amount of the Holdings Subordinated Debentures held by the Equitable Affiliates. The Company also paid in cash to the Equitable Affiliates the Tender Offer premium and consent fees with respect to such Holdings Subordinated Debentures. Such Holdings Subordinated Debentures were cancelled and the related intercompany indebtedness of Pathmark to the Company (the "Intercompany Notes") was forgiven resulting in a $130.0 million capital contribution to the Company.
Debt Repayment. (a) The repayment of the full amount of indebtedness outstanding under Pathmark's old working capital facility (the "Old Working Capital Facility"), which amounted to $80.0 million at the date of the Recapitalization.
(b) The payment by Pathmark to the Company of $894.4 million (which reflects that holders of $4.2 million aggregate principal amount of Holdings Subordinated Debentures tendered for cash pursuant to the Tender Offer) of the proceeds from the Debt Offerings and the other borrowings described above and the transfer by Pathmark to the Company of (i) $198.5 million aggregate principal amount of Holdings Subordinated Notes acquired by Pathmark in the 11 5/8% Exchange Offer and (ii) $95.8 million aggregate principal amount of Holdings Subordinated Debentures acquired by Pathmark in the Tender and Exchange Offer in order to retire Intercompany Notes. The Holdings Subordinated Debentures acquired in the Private Placement were also used to retire Intercompany Notes as described above. The Company used the cash proceeds it received (i) to fund the redemptions of the Holdings' 14 1/2% Senior Subordinated Notes due 1997 (the "Holdings Senior Subordinated Notes") and the Holdings' 13 1/8% Junior Subordinated Discount Debentures due 2003 (the "Holdings Discount Debentures"), (ii) to purchase $4.2 million aggregate principal amount of Holdings Subordinated Debentures tendered pursuant to the Tender Offer from holders other than the
Equitable Affiliates, (iii) to purchase $185.0 million aggregate principal amount of Holdings Subordinated Debentures from the Equitable Affiliates as described above and (iv) to pay consent fees and expenses of the Company related to the Recapitalization.
The Company believes that if a recapitalization had not been consummated, Pathmark's total capital expenditures would have been limited to $125.0 million over the next three fiscal years and would have resulted in approximately 30 renovations as well as the funding of ongoing projects for Fiscal 1993, which would not have materially altered Pathmark's total selling square footage. Due primarily to such limitation on investment, the Company believes that Pathmark's growth would have been restricted to approximately 0.5% per year if a recapitalization had not been consummated. Improvements in Pathmark's operating results also are significantly dependent upon Pathmark's store expansion and renovation program which in turn depended on a recapitalization. Moreover, without a recapitalization, the Company believes that its interest costs would have exceeded its projected operating earnings resulting in additional losses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations" for a discussion of the basis for such projections and further information on the impact on the Company if a recapitalization had not been consummated.
BUSINESS OF THE COMPANY
The Company's primary business activity is the management of its interests in Pathmark, Plainbridge and Chefmark. The Company holds all of the capital stock of PTK and all of the capital stock of Chefmark. Through PTK, the Company owns all of the capital stock of Pathmark and Plainbridge.
The primary business activity of Plainbridge is to operate the Rickel home center business in New Jersey, New York, Pennsylvania and Delaware and the warehouse distribution and transportation operations that service the Pathmark supermarkets and drug stores. Chefmark's primary business is to supply Pathmark will deli food preparation services and merchandise from the banana ripening facility. The Company intends to further spin off Plainbridge to its common stockholders within the next year, although there can be no assurance that such spin-off will be consummated.
BUSINESS OF PATHMARK
Pathmark is the leading supermarket retailer, based on sales volume, operating under a single trade name in the northeast United States and the thirteenth largest in the United States. At January 29, 1994, Pathmark operated 143 supermarkets, primarily in the New York-New Jersey and Philadelphia metropolitan areas. These metropolitan areas contain over 10% of the population and grocery sales in the United States. At January 29, 1994, Pathmark also operated 33 freestanding drug stores, primarily in the New York City metropolitan area, and 136 pharmacies in its supermarkets, making it one of the leading drug store retailers, based on sales volume, in the northeast United States.
The following table presents the market area, number of stores and selling and total square footage for Pathmark's supermarkets and drug stores as of January 29, 1994.
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(1) Reflects the Company's decision in the second quarter of the fiscal year ended January 29, 1994 ("Fiscal 1993") to close or dispose of five stores (the "Five Stores").
BUSINESS STRATEGY
Pathmark's business strategy is to increase profitability and market penetration in its existing markets (i) by providing superior value to its customers through its marketing and merchandising programs, (ii) through store openings, enlargements and renovations and (iii) through increased operating efficiencies. In implementing this strategy, Pathmark has used a large-store format to increase operating efficiencies and to expand its offering of higher margin merchandise and services, most notably, perishable products.
Marketing and Merchandising
. Super Center Format. The average Pathmark Super Center is over 50% larger than the average size supermarket in the United States and offers greater convenience by providing one-stop shopping and a wider assortment of foods and general merchandise than is offered by conventional supermarkets. Pathmark expects that its new stores opened during the current and next two fiscal years will average approximately 62,000 square feet.
. Pathmark 2000. Pathmark 2000 is a new, larger Super Center format designed to provide Pathmark customers with a substantially greater selection of perishable products, particularly produce. Pathmark 2000 stores are also designed to be more "customer friendly", with wider aisles, more accessible customer service and information departments, improved signs and graphics, and increased availability of Pathmark associates. Implementation of elements of this format in certain stores has significantly enhanced sales and operating margins in these stores. A majority of Pathmark's new supermarkets and supermarket enlargements completed in Fiscal 1993 employed the Pathmark 2000 concept, and Pathmark expects that virtually all new stores and enlargements thereafter will employ the same concept. By Fiscal 1996, Pathmark expects that approximately 50% of its supermarket sales will be derived from stores that employ this concept.
. 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 400 merchandise items offers large-sized merchandise at prices which Pathmark believes are competitive with those available in "warehouse" and "club" stores. Pathmark emphasizes competitive pricing plus weekly sales and promotions supported by extensive advertising, primarily in print media. Merchandising flexibility and effectiveness is enhanced through the increased utilization of a category management approach.
. Pathmark Label. Pathmark believes that it is one of the leading supermarket retailers of private label merchandise in the United States. During Fiscal 1993, approximately 23% of Pathmark's sales of grocery and frozen merchandise was derived from private label items (the Pathmark and No Frills brands). Over 3,300 items are currently offered through the complete private label program.
. Pharmacy. Pathmark, which is the leading filler of prescriptions in the New York metropolitan area, provides full pharmacy services in virtually all of its Super Center stores and in all of its drug stores. Pathmark's broad market coverage within its marketing area has enabled it to become a leading filler of third-party prescriptions in this area. Pathmark believes that its well-established pharmacy operations provide a competitive advantage in attracting and retaining customers.
Store Expansion and Renovation Program
. New Stores, Enlargements and Renovations. With the completion of the Recapitalization, Pathmark plans to accelerate the expansion of its total selling square footage. During Fiscal 1994, Fiscal 1995 and Fiscal 1996, Pathmark plans to open an aggregate of 18 new Pathmark Super Centers, nine of which will replace smaller Pathmark stores, and to complete up to an aggregate of 85 major renovations and enlargements, at a total investment of approximately $340.0 million. Realization of this plan would increase supermarket selling square footage by more than 14% over the three-year
period. Expansion of selling square footage also may occur as a result of the acquisition of new stores. The Company believes that if a recapitalization had not been consummated, Pathmark's total capital expenditures would have been limited to approximately $125.0 million over the same period and would have resulted in approximately 30 renovations as well as the funding of ongoing projects for Fiscal 1993, which would not have materially altered Pathmark's total selling square footage.
Pathmark recognizes the importance of keeping its stores looking fresh and up-to-date; thus, each store typically receives a major renovation or enlargement every five years. At the end of Fiscal 1993, Pathmark derived approximately 73% of its supermarket sales from stores that were opened or enlarged or underwent major renovations during the last five years.
. Core Market Focus. Pathmark has identified approximately 90 potential locations for new supermarkets within its current marketing areas and expects that all new stores opened during Fiscal 1994, Fiscal 1995 and Fiscal 1996 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 and believes it is a leader in the supermarket industry in this area. All Pathmark supermarket checkout terminals have recently installed, third-generation "state of the art" IBM 4680 scanner systems supported by a RISC 6000 application processor in each store. These systems allow consumer credit and EFT transactions, greatly facilitate system-wide promotion and merchandising programs, and improve the speed and control of customer transactions.
. "Outsourcing" Agreement. In Fiscal 1991, Pathmark entered into a long-term facilities management and systems integration agreement with a subsidiary of IBM. This contract offers significant advantages to Pathmark in controlling computer hardware and software costs and providing ongoing access to "state of the art" information technology.
. Geographic Concentration. Approximately 99% of the Pathmark supermarkets and drug stores are located within 100 miles of the Pathmark headquarters and principal warehousing facilities that service them. This allows for more efficient management supervision, increased speed of delivery and reduced transportation costs. All of the stores which Pathmark expects to open in Fiscal 1994, Fiscal 1995 and Fiscal 1996 will be within this 100 mile radius.
PATHMARK SUPERMARKETS AND DRUG STORES
Pathmark operated 143 supermarkets at January 29, 1994. Supermarkets accounted for approximately 96% of Pathmark's sales for Fiscal 1993. The following table presents selected data respecting supermarket sales and stores for the last five fiscal years.
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(a) 53-week fiscal year.
(b) Does not include sales from the Five Stores after the first quarter of Fiscal 1993.
(c) Major renovations involve an investment of $350,000 or more and average nearly $1.0 million per store.
(d) Enlargements involve the addition of selling space and average an investment in excess of $2.2 million.
(e) Includes the Five Stores.
(f) Includes two stores not wholly owned, one of which opened in Fiscal 1990. The sales figures for these stores are not included above.
By industry standards, Pathmark stores are large and productive, averaging approximately 49,100 square feet in size and generating high average sales volume of approximately $28.7 million per store ($809 per selling square foot) for stores open for all of Fiscal 1993. Pathmark's 143 supermarkets at January 29, 1994 ranged from 20,000 to 66,000 square feet in size and included 128 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 and No Frills brands.
Pathmark pioneered the development of the large "superstore" in the northeast United States, opening the first "Pathmark Super Center" in 1977, and currently operates 136 such stores, including 10 "Pathmark 2000" stores. Super Centers represented 96% of Pathmark supermarket sales for Fiscal 1993. The majority of Super Centers were created through the enlargement or renovation of existing stores. Super Centers average approximately 50,000 square feet in size, approximately 50% larger than the average size supermarket in the United States. In addition to the broad variety of food and non-food items carried in conventional Pathmark stores, a typical Super Center includes a customer service center, pharmacy, additional food selections (including expanded perishables departments, cheese shops, bakeries, fresh fish-on-ice and service delicatessen departments), videotape rentals, book departments and expanded health and beauty care departments. At April 1, 1994, all Super Centers had EFT and credit transaction capability at their checkout terminals and 130 Super Centers also featured in-store automated teller machines.
Pathmark has recently developed a new, larger Super Center format called "Pathmark 2000" designed to provide Pathmark customers with a substantially greater selection of perishable products, particularly produce. Pathmark 2000 stores are also designed to be more "customer friendly", with wider aisles, more accessible customer service and information departments, improved signs and
graphics, and increased availability of Pathmark associates. Implementation of elements of this format in certain stores has significantly enhanced sales and operating margins in these stores. A majority of Pathmark's new supermarkets and supermarket enlargements completed in Fiscal 1993 employed the Pathmark 2000 concept and Pathmark expects that virtually all new stores and enlargements thereafter will employ the same concept. By Fiscal 1996, Pathmark expects that 50% of its supermarket sales will be derived from stores that employ this concept.
Pathmark was the leader in its market areas in extending the operation of supermarkets to 24 hours a day. Currently, almost all Pathmark supermarkets are open seven days a week, 24 hours a day. Pathmark believes that these hours of operation increase both customer convenience and operating efficiency.
Pathmark also operated 31 freestanding conventional drug stores at January 29, 1994 primarily in the New York City metropolitan area and two "deep-discount" drug stores in Connecticut. These stores, which accounted for approximately 4% of Pathmark's sales for Fiscal 1993, average 9,600 square feet in size and offer the full variety of products customarily offered by drug stores. In Fiscal 1993, Pathmark pharmacies, in both supermarkets and drug stores, filled approximately ten million prescriptions, making Pathmark one of the leading drugstore retailers, based on sales volume, in the northeast United States and the leading filler of prescriptions in the New York metropolitan area. In Fiscal 1993, Pathmark renovated a total of four drug stores. Pathmark plans to open four additional "deep-discount" drug stores in former Pathmark supermarkets during Fiscal 1994. Pathmark's free-standing drug stores are generally open seven days a week during conventional hours.
Pathmark's supermarket and drug store business is generally not seasonal, although sales in the second and fourth quarters tend to be slightly higher than those in the first and third quarters.
STORE EXPANSION AND RENOVATION PROGRAM
A key feature of Pathmark's business strategy has been and will continue to be the expansion of the total selling square footage of its operations. Pathmark believes that by adding new stores and increasing the selling area of existing stores, it can improve its competitive position and widen operating margins by achieving economies of scale in merchandising, advertising, distribution and supervision. During the five years ending with Fiscal 1993, Pathmark completed 102 major renovations and enlargements and opened 13 new supermarkets. At the close of Fiscal 1993, sales in these stores accounted for 73% of its total supermarket sales.
Over the past five years, Pathmark has spent approximately $240.0 million on store openings, enlargements and major renovations including properties acquired under capital leases. In Fiscal 1993, Pathmark opened four new Super Centers and completed 12 major renovations and five enlargements of its existing supermarkets. Pathmark currently expects to open up to four new Pathmark Super Centers during Fiscal 1994. During Fiscal 1994, Fiscal 1995 and Fiscal 1996, Pathmark plans to open an aggregate of 18 new Pathmark Super Centers, nine of which will replace smaller stores, and to complete an aggregate of up to 85 major renovations and enlargements, at a total investment of approximately $340.0 million, including properties acquired under capital leases. Realization of this plan would increase supermarket selling square footage by more than 14% over the three-year period, although no assurance can be given that Pathmark will be able to successfully complete the number of store openings, renovations and enlargements planned for each year during this period. Expansion of selling square footage may also occur as a result of the acquisition of new stores.
ADVERTISING AND PROMOTION
As part of its marketing strategy, Pathmark emphasizes its competitive pricing through weekly sales and promotions supported by extensive advertising. Additional savings are offered each week through Pathmark "super coupons" in newspapers and circulars. Pathmark's advertising expenditures are concentrated on print advertising, including advertisements and circulars in local and area newspapers and advertising flyers distributed by shopping malls. Most of the remaining advertising expenses are for television and radio advertisements.
CONSUMER RESEARCH
Pathmark conducts numerous ongoing and special consumer research projects. These typically involve customer surveys (both in-store and by telephone) as well as focus groups. The information derived from these projects is used to evaluate consumers' attitudes and purchasing patterns and helps shape Pathmark's marketing programs. Pathmark conducts approximately 300,000 customer interviews per year.
TECHNOLOGY
Pathmark has made a significant and continuing investment in information technology and believes it is a leader in the supermarket industry in this area. All Pathmark supermarket checkout terminals have recently installed, third-generation "state of the art" IBM 4680 scanner systems supported by a RlSC 6000 application processor in each store. These systems allow consumer credit and EFT transactions, greatly facilitate system-wide promotion and merchandising programs, and improve the speed and control of customer transactions. This technology and the data generated by scanning not only have led to lower labor costs, improved price control and shelf allocation and quicker customer check-out, but also have assisted in the analysis of product movement, profit contribution and demographic merchandising. Pathmark also has a computer-assisted ordering system which enables it to replenish inventory to avoid "out of stocks" at store level while maintaining optimum overall inventory levels.
All of the pharmacies are equipped with pharmacy computers. In addition to improving customer service, these computers aid pharmacists in detecting drug interaction, improve the collection of third-party receivables and help to attract third-party businesses such as health maintenance organizations and union welfare plans.
In August 1991, Pathmark entered into a long-term facilities management and systems integration agreement with Integrated Systems Solutions Corporation ("ISSC"), a subsidiary of IBM. Under the agreement, ISSC has taken over Pathmark's data center operations and mainframe processing and information system functions (formerly performed by approximately 150 employees) and is providing business applications and "state of the art" systems designed to enhance Pathmark's customer service and efficiency. ISSC developed Pathmark's recently installed scanner and checkout terminals. Additionally, over the next several years, ISSC has contracted to develop an integrated purchasing application, a new financial system, and electronic data interchange capabilities that will streamline communications between Pathmark and its primary suppliers.
SUPPLY AND DISTRIBUTION
Pursuant to the Logistical Services Agreement and subject to Pathmark's direction, Plainbridge now supplies Pathmark with most of the merchandise sold in Pathmark's supermarkets and drug stores through Plainbridge distribution facilities located in New Jersey, together with warehousing, distribution and logistical services relating to the supply of such merchandise. See "--Logistical Services Agreement". During Fiscal 1993, the Plainbridge distribution facilities supplied approximately 83% of the merchandise sold in Pathmark's supermarkets and drug stores. In addition, pursuant to a supply agreement between Chefmark and Pathmark (the "Chefmark Supply Agreement"), Chefmark now supplies Pathmark with merchandise from its banana ripening and deli food preparation operations. The Chefmark Supply Agreement provides that, for a period of seven years, such services are to be performed by Chefmark in substantially the same manner as they have been performed by Pathmark's banana ripening and deli food preparation operations prior to the Chefmark Spin-Off.
Approximately 99% of Pathmark's stores are located within 100 miles of the principal Plainbridge and Chefmark distribution centers. The following table presents information concerning the distribution and processing facilities through which Plainbridge and Chefmark will supply Pathmark, and the product lines relevant to each as of January 29, 1994:
DISTRIBUTION FACILITIES (1)
PROCESSING FACILITIES
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(1) Pathmark also stores and ships certain products from independent warehouses, including a food storage facility in North Brunswick, New Jersey.
(2) Owned by Plainbridge.
(3) Leased by Plainbridge.
(4) Owned by Chefmark.
(5) Leased by Chefmark.
LOGISTICAL SERVICES AGREEMENT
In connection with the Plainbridge Spin-Off, Pathmark and Plainbridge entered into the Logistical Services Agreement to provide for the supply by Plainbridge to Pathmark of most of the merchandise sold in Pathmark's retail stores and for the provision of warehousing, distribution and other logistical services relating to the supply of such merchandise. Pursuant to the Logistical Services Agreement, Pathmark directs the purchase of the merchandise to be provided to it by Plainbridge. Pathmark negotiates directly with vendors regarding the types of merchandise required, the quantities needed, delivery schedules, pricing, and all other terms and conditions of sale. All merchandise is ordered by Pathmark for the account of Plainbridge, which pays for, and retains title to, such merchandise until it has been delivered to Pathmark. If requested by a vendor, Pathmark, in its sole discretion, may guarantee payment of such orders by Plainbridge. In general, the Logistical Services Agreement also requires Plainbridge to perform the same services, in substantially the same manner, that were performed by Pathmark's warehouse and distribution group prior to the Plainbridge Spin-Off.
The Logistical Services Agreement requires, with certain exceptions and subject to certain termination rights, Plainbridge to sell to Pathmark, for a period of ten years, to the extent requested by Pathmark, all of Pathmark's merchandise requirements for both its existing and future stores. In addition, Pathmark has five one-year renewal options following the expiration of the original ten-year
term. The Logistical Services Agreement does not limit Pathmark's ability to purchase goods from other suppliers and merchandise that Pathmark customarily obtains directly from vendors is excluded from the Logistical Services Agreement.
The Logistical Services Agreement requires Plainbridge to store and deliver to Pathmark all merchandise purchased at Pathmark's direction. Pathmark is required in good faith to designate Plainbridge as its carrier with respect to merchandise customarily shipped directly from vendors to the Pathmark stores. Plainbridge is required to maintain inventory with a book value of at least $130.0 million (which amount represents the approximate book value of inventory contributed by Pathmark to Plainbridge in connection with the Plainbridge Spin-Off) for the exclusive use of Pathmark, and to the extent that the inventory value falls below such level, Plainbridge must purchase sufficient merchandise to maintain such level to the extent such merchandise is ordered by Pathmark. Plainbridge is also required to accommodate physical annual increases of up to five percent in the volume of the Pathmark-directed purchases of merchandise to be handled by Plainbridge. Pathmark reimburses Plainbridge for all reasonable incremental out-of-pocket costs (but not capital costs) incurred by Plainbridge for the storage and handling of merchandise that is in excess of the five percent annual capacity increase, provided that such out-of-pocket costs do not exceed the costs of storage and handling at local independent warehouses.
Upon the delivery of merchandise to the Pathmark stores by Plainbridge, Pathmark will owe Plainbridge for the cost of the merchandise plus a specified variable payment. This payment will vary according to the type and value of the merchandise. A minimum guaranteed payment is payable by Pathmark to the extent that the aggregate of the variable payments described above payable in any year does not exceed the minimum guaranteed payment. The minimum guaranteed payment for Fiscal 1994 is $134.9 million and such payment is adjusted upward (but not downward) each fiscal year by the rate of inflation. Pathmark is obligated to pay the minimum annual fee to Plainbridge irrespective of whether Pathmark purchases merchandise from other suppliers, except in cases of force majeure or when Plainbridge shall have materially breached the Logistical Services Agreement or shall have failed to obtain or maintain the licenses and permits needed to operate its business. The minimum guaranteed payment will be reduced to the extent that the volume of merchandise purchases decreases as a result of any store dispositions by Pathmark and will also be reduced if the volume of Pathmark-directed merchandise falls below 90% of the actual volume achieved in Fiscal 1992, to the extent that Plainbridge is, as a result, able to realize reductions in its operating costs. Plainbridge will grant Pathmark an allowance, based on the amount of merchandise purchased by Plainbridge at Pathmark's direction, which will be credited against the variable fees and minimum guaranteed payment obligation. In addition, certain cost benefits derived from increases in the volume of merchandise purchased from Plainbridge by Pathmark or third parties will be shared equally between Pathmark and Plainbridge. Estimated payments are payable in weekly installments with an annual reconciliation for the amount of payments that are actually payable for such year. Pathmark will pay to Plainbridge the costs of the merchandise at the time a vendor requires payment from Plainbridge.
The Logistical Services Agreement allows Plainbridge to sell merchandise and provide logistical services to third parties, although it is not permitted to sell merchandise to supermarkets, drug stores and other retail stores stocking merchandise carried by Pathmark in Pathmark's current market areas, except for retail stores that do not in the ordinary course of business engage to a significant degree in the sale of food or pharmacy-related products, without Pathmark's prior written consent, which consent may not be unreasonably withheld. Plainbridge is also permitted to "piggyback" such third parties' orders onto Pathmark's orders from vendors, so long as they do not interfere with Pathmark's delivery schedules, quantity needs or other requirements.
Each of Pathmark and Plainbridge is allowed to terminate the Logistical Services Agreement if the other (i) materially breaches its terms and fails to cure such breach for 60 days after written notice has been provided by the other party or (ii) experiences certain insolvency events. Additionally, following
the fourth anniversary of the date of the Logistical Services Agreement, Pathmark will have the option of terminating it at will on six months' notice. If Pathmark terminates the Logistical Services Agreement because of a material breach by, or insolvency of, Plainbridge, Pathmark will have the right to purchase, within 30 days of the termination, that portion of the assets of Plainbridge which is essential to the support of Plainbridge's obligations to Pathmark under the Logistical Services Agreement (the "Pathmark Distribution Assets") at the lower of (i) their net book value or (ii) their fair market value. If Pathmark exercises its at will option to terminate the Logistical Services Agreement, Pathmark will be required to offer to purchase the Pathmark Distribution Assets at their fair-market value. If Plainbridge terminates the Logistical Services Agreement because of a material breach by, or insolvency of, Pathmark, Plainbridge will have the right to sell to Pathmark (and Pathmark will have the obligation to buy) the Pathmark Distribution Assets at their fair market value within 30 days of such termination.
Other than in the ordinary course of business, Plainbridge is not permitted to sell any of the Pathmark Distribution Assets without Pathmark's prior written consent. Additionally, in the event of a change in the ultimate beneficial ownership of Plainbridge voting stock such that a person, other than ML&Co. or an affiliate of ML&Co., holds a majority of such stock, Pathmark has, for a period of two years, the irrevocable and exclusive right to purchase any or all of the Pathmark Distribution Assets at their fair market value.
Other provisions of the Logistical Services Agreement include (i) that Plainbridge will pass on to Pathmark all discounts and allowances made available to it by vendors in respect of merchandise purchased for Pathmark, unless such discounts or allowances were made available solely as a result of actions taken or not taken by Plainbridge, (ii) that Plainbridge must ensure that merchandise quality meets or exceeds the standards established by Pathmark for such merchandise, and that Pathmark may place its representatives at the Distribution Facilities to ensure that such quality is maintained, (iii) that Plainbridge will deliver merchandise to Pathmark at a 98% or better level of service measured in accordance with Pathmark's practices prior to the Plainbridge Spin-Off, (iv) that Pathmark will pay Plainbridge for any use of trailers for storage and (v) that each of Pathmark and Plainbridge will cooperate to reduce costs and improve service levels.
Disputes between Pathmark and Plainbridge under the Logistical Services Agreement will be submitted to an arbitration panel made up of representatives of both parties. The President of Pathmark shall act as chairman of the dispute panel and each party shall appoint two other members to the dispute panel, the decision of which will be subject to the approval of the boards of directors of each party. If the decision of the dispute panel is not approved by each board of directors, the dispute will be required to be submitted to independent arbitration.
The Logistical Services Agreement is a result of a related party negotiation between Pathmark and Plainbridge. Pathmark believes that the payments provided for under the terms of the Logistical Services Agreement represent a reasonable allocation of the costs and benefits for both companies. In addition, Pathmark believes that the terms of the Logistical Services Agreement are no less favorable to Pathmark than those which could be obtained from unaffiliated parties and enable Pathmark to obtain substantially the same level of supply and other logistical services as was available from the Distribution Facilities prior to the Spin-Offs at substantially the same or a lower cost.
COMPETITION
The supermarket and drug store businesses are highly competitive and are characterized by high asset turnover and narrow profit margins. Pathmark's earnings are primarily dependent on the maintenance of relatively high sales volume per supermarket, efficient product purchasing and distribution and cost-effective store operating techniques. Pathmark's main competitors are national and regional supermarkets, drug stores, convenience stores, discount merchandisers, "warehouse" and
"club" stores and other local retailers in the areas served. Principal competitive factors include price, store location, advertising and promotion, product mix, quality and service.
TRADE NAMES, SERVICE MARKS AND TRADEMARKS
Pathmark has registered a variety of trade names, service marks and trademarks with the United States Patent and Trademark Office, each for an initial period of 20 years, renewable for as long as the use thereof continues. Pathmark considers its Pathmark service marks to be of material importance to its business and actively defends and enforces such service marks.
REGULATION
Pathmark's food and drug business requires it to hold various licenses and to register certain of its facilities with state and federal health, drug and alcoholic beverage regulatory agencies. By virtue of these licenses and registration requirements, Pathmark is obligated to observe certain rules and regulations, and a violation of such rules and regulations could result in a suspension or revocation of the licenses or registrations. In addition, most of Pathmark's licenses require periodic renewals. Pathmark has experienced no material difficulties with respect to obtaining, effecting or retaining its licenses and registrations.
EMPLOYEES
At January 29, 1994, Pathmark employed approximately 28,000 people, of whom approximately 20,000 were employed on a part-time basis.
Approximately 90% of Pathmark's associates are covered by 36 collective bargaining agreements (typically having three or four year terms) negotiated with approximately 21 different local unions. During May 1993, approximately 7,000 associates belonging to one union struck Pathmark and three of its major competitors. On May 29, 1993, the labor dispute was settled and subsequently, a new four year agreement was ratified. During Fiscal 1994, nine contracts covering approximately 10,000 Pathmark associates and six contracts covering approximately 1,100 associates at the warehouse, distribution and transportation operations that service the Pathmark supermarkets and drugstores will expire. The Company does not anticipate any difficulty renegotiating these contracts.
The Company believes that its relationship with its associates is generally satisfactory.
ITEM 2.
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, drug stores and home centers are located.
THE COMPANY
The Company's primary subsidiary, Pathmark, leases and owns a large group of properties, as described below. In addition, Chefmark owns a 16,000 square foot delicatessen products processing and distribution facility in Somerset, New Jersey and leases a 30,000 foot banana ripening facility in Avenel, New Jersey. These facilities supply Pathmark's supermarkets with delicatessen and produce products.
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** Except as otherwise indicated, information contained in this Item is given as of January 29, 1994.
PATHMARK
Pathmark's 143 supermarkets have an aggregate selling area of approximately 5.1 million square feet. The ownership interest in the buildings and real property of ten supermarket locations (one of which is a closed store location) and the headquarters in Woodbridge, New Jersey were contributed to Plainbridge in the Spin-Offs and, except for the closed store location, were leased to Pathmark. Thirteen of the supermarkets are owned by Pathmark (or its subsidiaries) and the remaining 130 are leased. These supermarkets either are freestanding stores or are located in shopping centers. Forty leases expire during the current and next four calendar years and Pathmark has options to renew 37 of them.
Pathmark's 33 freestanding drug stores (those not located in supermarkets) have an aggregate selling area of approximately 276,000 square feet. Two of the drug stores are owned by Pathmark and the remaining 31 are leased. Nineteen leases expire during the current and next four calendar years and Pathmark has options to renew 13 of them.
Certain distribution facilities that supply Pathmark supermarkets and drug stores were transferred to Plainbridge in connection with the Plainbridge Spin-Off. Certain of these facilities are leased and some are owned. See "Business of Pathmark--Supply and Distribution" in Item 1 of this report.
Pathmark maintains administrative and accounting offices in Carteret, New Jersey in leased premises totalling approximately 150,000 square feet in size. Pathmark also currently leases or owns additional office space totaling approximately 128,000 square feet in various locations that are used as the Pathmark headquarters and regional offices for its operating divisions. Additionally, three Rickel Home Centers are sublet and six Rickel Home Centers are leased to Plainbridge by Pathmark. See "The Recapitalization--Spin-Offs" in Item 1 of this report.
Prior to the sale of the Purity Operations, the following three properties of Purity Supreme were transferred to Pathmark: a closed supermarket leased by Purity Supreme in Dartmouth, Massachusetts, an office building leased by Purity Supreme in Newton, Massachusetts, for which Pathmark has assumed the leases, and a closed distribution center that Purity owned in Woburn, Massachusetts. Pathmark has transferred the properties located in Dartmouth and Woburn to Plainbridge.
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.
ITEM 3. LEGAL PROCEEDINGS
On December 7, 1990, a lawsuit (the "Complaint") was commenced by a holder of the Exchangeable Preferred Stock, Stanley D. Bernstein, as custodian for Michelle Bernstein, against the Company, SMG-II Holdings Corp. ("SMG-II"), Merrill Lynch Capital Partners, Inc. ("ML Capital Partners"), ML&Co. and the directors of the Company in the Chancery Court, New Castle County, Delaware. The Complaint purports to be a class action and alleges that the original terms of the Exchangeable Preferred Stock Offer, at $5 per share, constitute a coercive tender offer and a breach of fiduciary duties owed to holders of Exchangeable Preferred Stock. The Complaint seeks declaratory and injunctive relief, as well as monetary damages, with respect to the Exchangeable Preferred Stock Offer, but no motions seeking any such relief on a provisional or permanent basis were filed either prior to the completion of the Exchangeable Preferred Stock Offer on February 4, 1991 or as of the date hereof. The Company has entered negotiations to settle the Complaint and expects to reach a settlement agreement during the next several months. The Company does not expect the amount of its obligations under any settlement agreement to be material and will defend the Complaint vigorously if a settlement is not reached.
On March 1, 1993 Pathmark was served with a summons and complaint filed by Hygrade Milk & Cream Co., Inc., Terminal Dairies, Inc., Sunbeam Farms, Inc., Hytest Milk Corp., Gold Metal Farms, Inc., Queens Farms Dairy, Inc., Babylon Dairy Co., Inc. and Meadowbrook Farms, Inc., in an action being heard in the United States District Court for the Southern District of New York. Also named as defendants are Tropicana Products, Inc., Tropicana Products Sales, Inc., The Great Atlantic & Pacific Tea Company, Inc., Fleming Foods East, Inc., and Di Giorgio Corporation. The action had been pending against certain of the defendants and wholesale entities since 1988. In the complaint the plaintiffs allege, among other things, that Pathmark induced processors of Tropicana orange juice to provide it with favorable price and other terms that discriminated against other sellers of orange juice in violation of the price discrimination provisions of the Robinson-Patman Act. The prayer for relief does not claim any specific amount of damages. After consultation with counsel, the Company believes that this lawsuit is without merit and intends to defend the action vigorously.
In addition to the litigation referred to above, the Company is a party to a number of legal proceedings in the ordinary course of business. Management believes that the ultimate resolution of these proceedings will not, in the aggregate, have a material adverse impact on the financial condition, results of operations or the business of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (AS OF APRIL 1, 1994)
Neither the Company's Class A Common Stock nor its Class B Common Stock, each $0.01 par value, is publicly traded on any market. All of registrant's outstanding Common Stock is held by SMG-II.
The authorized preferred stock of the Company consists of 9,000,000 shares of Exchangeable Preferred Stock, of which 4,890,671 shares were issued and outstanding at January 29, 1994. The Exchangeable Preferred Stock has a liquidation preference of $25 per share and its terms provide for cumulative quarterly dividends at an annual rate of $3.52 per share, when, as, and if declared by the Board of Directors of the Company. No active public trading market currently exists for the Company's Exchangeable Preferred Stock.
The Exchangeable Preferred Stock is non-voting, except that if an amount equal to six quarterly dividends is in arrears in whole or in part, the holders thereof, voting as a class are entitled to elect an additional two members of the board of directors of the Company. The Company is currently in arrears on payment of five quarterly dividends on the Exchangeable Preferred Stock and does not expect to receive cash flow sufficient to permit payments of dividends on the Exchangeable Preferred Stock in the forseeable future. See Note 15 to the Company's Consolidated Financial Statements in Item 8 of this report for additional information.
The payment of dividends to holders of the Company's Common Stock is subject to restrictions by the Certificate of Designation of Rights, Preferences and Privileges under which its Exchangeable Preferred Stock was issued. The Company has not paid any dividends on its Common Stock and does not anticipate paying cash dividends on its Common Stock during Fiscal 1994.
The authorized capital stock of SMG-II consists of 3,000,000 shares of SMG-II Class A Common Stock, 3,000,000 shares of SMG-II Class B Common Stock, of which 650,675 and 320,000 shares, respectively, were issued and outstanding at April 1, 1994, and 4,000,000 shares of SMG-II Preferred Stock, of which 1,500,000 shares are SMG-II Series A Preferred Stock and 1,500,000 shares are SMG-
II Series B Preferred Stock and of which 236,731 and 180,769 shares, respectively, were issued and outstanding at April 1, 1994.
SMG-II's capital stock is held beneficially as follows: (i) SMG-II Class A Common Stock by approximately 62 holders, including six affiliates of ML&Co. (The "ML Common Investors"), CBC Capital Partners, Inc. ("CBC"), an affiliate of Chemical Bank, and 55 current and former members of the Company's management (the "Management Investors"); (ii) SMG-II Series A Preferred Stock by five holders, all affiliates of ML&Co., (the "Merrill Lynch Investors"); (iii) SMG-II Class B Common Stock held by four holders, including CBC, The Equitable Life Assurance Society of the United States ("Equitable") and the Equitable Affiliates (collectively, the "Equitable Investors"); and (iv) SMG-II Series B Preferred Stock held by four holders, including CBC and the Equitable Investors. Holders of shares of SMG-II Class A Common Stock are entitled to one vote per share on all matters to be voted on by stockholders. Holders of shares of SMG-II Class B Common Stock are not entitled to any voting rights, except as required by law or as otherwise provided in the Restated Certificate of Incorporation of SMG-II. Subject to compliance with certain procedures, holders of shares of SMG-II Class B Common Stock may exchange their shares for shares of SMG-II Class A Common Stock and holders of shares of SMG-II Class A Common Stock may exchange their shares for shares of SMG-II Class B Common Stock, in each case on a share-for-shares basis.
SMG-II Preferred Stock has a stated value and liquidation preference of $200 per share and bears dividends at the rate of 10% of the stated value per annum, payable annually. At the option of SMG-II dividends are payable in cash or may accumulate (and the amount thereof shall compound annually at a rate of 10% of the stated value per annum, payable annually. At the option of SMG-II, dividends are payable in cash or may accumulate (and the amount thereof shall compound annually at a rate of 10% per annum).
Holders of shares of SMG-II Series A Preferred Stock are entitled to one vote per share of SMG-II Class A Common Stock into which such SMG-II Series A Preferred Stock is convertible on all matters to be voted on by SMG-II stockholders, subject to increase to 1.11 votes per share upon the occurrence of certain events. Holders of shares of SMG-II Series B Preferred Stock are entitled to one vote per share of SMG-II Class B Common Stock into which such SMG-II Series B Preferred Stock is convertible for the purpose of voting on any consolidation or merger, any sale, lease or exchange of substantially all of the assets or any liquidation, dissolution or winding up, of SMG-II. Additionally, holders of SMG-II Preferred Stock have separate voting rights with respect to alteration in the voting powers, rights and preferences and certain other terms affecting the SMG-II Preferred Stock. Subject to compliance with certain procedures, holders of SMG-II Series B Preferred Stock may exchange their shares for shares of SMG-II Series A Preferred stock, on a share-for-share basis.
At the option of the holder, SMG-II Preferred Stock is convertible into SMG-II Common Stock at any time on or prior to the occurrence of certain events, including an initial public offering of in excess of 25% of the number of outstanding shares of common stock of SMG-II, at a conversion ratio of one share of the corresponding class of SMG-II Common Stock for each share of SMG-II Preferred Stock, subject to adjustment upon the occurrence of certain events.
Holders of SMG-II Preferred Stock are party with the holders of SMG-II Common Stock to the SMG-II Stockholders Agreement which, among other things, restricts the transferability of SMG-II capital stock and relates to the corporate governance of SMG-II. None of SMG-II's capital stock is publicly traded on any market. See Item 12. "Security Ownership of Certain Beneficial Owners and Management" and Note 16 to the Company's Consolidated Financial Statements in Item 8 for additional information.
The Company intends to further spin-off Plainbridge, which includes the assets of the Rickel homes centers business and the Company's warehouse, transportation and real estate operations contributed to Plainbridge as part of the Recapitalization, to the Company's common stockholder within the next year, although there can be no assurance that such spin-off will be consummated. Any such spin-off would require satisfying the dividend restrictions with respect to the Company's Exchangeable Preferred Stock, as well as obtaining consents from various lenders to Plainbridge and PTK.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SUPERMARKETS GENERAL HOLDINGS CORPORATION SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS (IN MILLIONS)
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the Company's financial condition and results from continuing operations. The Company intends to distribute Plainbridge to its common stockholder. Accordingly, discontinued operations represent the results of operations related to the warehouse, transportation and certain real estate operations subsequent to the Plainbridge Spin-off as well as the home center segment for all years presented. See Notes 1, 2 and 3 to the Company's Consolidated Financial Statements in Item 8
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS.
SUPERMARKETS GENERAL HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
See notes to consolidated financial statements.
SUPERMARKETS GENERAL HOLDINGS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AMOUNTS)
See notes to consolidated financial statements.
SUPERMARKETS GENERAL HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT (IN THOUSANDS EXCEPT SHARE AMOUNTS)
See notes to consolidated financial statements.
SUPERMARKETS GENERAL HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See notes to consolidated financial statements.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
Supermarkets General Holdings Corporation 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., to effect the acquisition (the "Acquisition") of Supermarkets General Corporation ("Old Supermarkets"). On June 15, 1987, Supermarkets General Holdings Corporation completed the first step of the Acquisition when it acquired 32,800,000 shares (approximately 85%) of Old Supermarkets' common stock through a tender offer (the "Tender Offer") by SMG. The remaining outstanding common stock of Old Supermarkets was acquired on October 5, 1987 when SMG was merged with and into Old Supermarkets pursuant to a Merger Agreement dated April 22, 1987, as amended.
The Acquisition was accounted for as a purchase, and accordingly, Holdings recorded the assets and liabilities of Old Supermarkets at their fair values at the date of the Acquisition. The tax basis for the assets and liabilities acquired was retained.
In October 1989, Old Supermarkets adopted an amended and restated Plan of Liquidation pursuant to which it was liquidated into three wholly owned subsidiaries of Supermarkets General Holdings Corporation. In November 1989, pursuant to such Plan, Old Supermarkets transferred substantially all of the assets of its Purity Supreme division to two of the three above-mentioned wholly owned subsidiaries, Purity Supreme, Inc. and Li'l Peach Corp., and said subsidiaries assumed substantially all of the liabilities of Old Supermarkets related to such division. Old Supermarkets completed the liquidation just prior to the year ended February 3, 1990 by merging with the third of the above- mentioned wholly owned subsidiaries which retained the name Supermarkets General Corporation ("Supermarkets"). On December 17, 1991, Purity Supreme, Inc. and Li'l Peach Corp. were sold (see Note 26). Supermarkets General Holdings Corporation and its respective subsidiaries are hereafter collectively referred to as "Holdings" or the "Company".
On November 15, 1990, SMG-II Holdings Corporation, a newly incorporated Delaware corporation ("SMG-II"), commenced offers to purchase for cash up to $155.5 million principal amount of the Company's Junior Subordinated Discount Debentures (the "Discount Debenture Offer") and up to 1.7 million shares of the Company's Cumulative Exchangeable Redeemable Preferred Stock (the "Exchangeable Preferred Stock Offer"). Concurrently with the Discount Debenture Offer and Exchangeable Preferred Stock Offer, SMG-II commenced an exchange offer (the "Exchange Offer", together with the Discount Debenture Offer and Exchangeable Preferred Stock Offer, the "Offers") pursuant to which the then existing common stockholders of the Company could exchange on a one-for-one basis shares of the Company's common stock for shares of SMG-II's common stock. The Offers were subsequently amended to provide for offers to purchase up to $110.0 million principal amount of the Company's Junior Subordinated Discount Debentures (the "Discount Debentures") and up to 3.4 million shares of the Company's Cumulative Exchangeable Redeemable Preferred Stock (the "Exchangeable Preferred Stock").
In February 1991, SMG-II purchased approximately $74.1 million principal amount of the Discount Debentures at 33% of their principal amount and 2.7 million shares of Exchangeable Preferred Stock at $7.00 net per share, pursuant to the Discount Debenture Offer and the Exchangeable Preferred Stock Offer, respectively. In addition, all outstanding shares of the Company's common stock were exchanged pursuant to the Exchange Offer. As a result of the Exchange Offer, SMG-II owns all of the Company's common stock and is effectively a holding company for the operations of the Company. SMG-II financed the Purchases by selling 417,500 shares of its Cumulative Convertible Preferred Stock (the "SMG-II Preferred Stock") for an aggregate purchase price of $83.5 million to various
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION--(CONTINUED) 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 Merrill Lynch & Co., Inc. ("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 Exchangeable Preferred Stock purchased pursuant to the Discount Debenture Offer and Exchangeable Preferred Stock Offer, respectively, as well as cash sufficient to pay associated taxes. The Company has retired the Senior Subordinated Notes, Discount Debentures and Exchangeable Preferred Stock contributed by SMG-II.
The accompanying consolidated financial statements of the Company indicate that at January 29, 1994 current liabilities exceed its current assets by $117.2 million and the Company's stockholder's deficit approximates $1.3 billion. Management believes that cash flows generated from operations, supplemented by the unused borrowing capacity under the Pathmark and Plainbridge Working Capital Facilities (see Note 10) and the availability of capital lease financing will be sufficient to pay the Company's debts as they come due, provide for its capital expenditure program and meet its seasonal cash requirements. Further, the Company believes it will be in compliance throughout the upcoming fiscal year with its various debt covenants.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The financial statements include the accounts of the Company and its subsidiaries, all wholly owned. The Company intends to distribute Plainbridge to certain of the Company's stockholders. Accordingly, discontinued operations represent the results of operations related to the warehouse, transportation and real estate operations subsequent to the Plainbridge Spin-Off as well as the home center segment for all years presented (see Note 3).
Fiscal Year:
The Company's fiscal year ends on the Saturday nearest January 31 of the following calendar year. Normally each fiscal year consists of 52 weeks, but every five or six years, as was the case in Fiscal 1989, the fiscal year consists of 53 weeks.
Reclassifications:
Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the Fiscal 1993 presentation.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Statements of Cash Flows:
All short-term investments with a maturity of three months or less are considered to be cash equivalents. The Company had no such investments during all periods presented.
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. See Note 5 for the change in the method utilized to calculate LIFO store inventories related to the Company's indirect wholly-owned subsidiary, Pathmark Stores, Inc.
Property and Equipment:
Property and equipment are stated at cost. Depreciation and amortization expense on owned property and equipment is computed on the straight-line method over their estimated useful lives. 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.
Income Taxes:
Effective January 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Prior to January 31, 1993, the Company's financial statements had been prepared in accordance with Statement of Financial Accounting Standards No. 96, "Accounting for Income Taxes" ("SFAS No. 96"). SFAS No. 96 and SFAS No. 109 require the calculation of deferred taxes using the asset and liability method. Under this method, deferred tax balances must be adjusted to reflect enacted changes in income tax rates and deferred taxes must be provided on book and tax basis differences. The implementation of SFAS No. 109 had no effect on the consolidated statements of operations, however, it resulted in a reclassification of the current and noncurrent deferred taxes since, in accordance with SFAS No. 109, the classification of such deferred taxes correspond with the classification of the related asset or liability which gave rise to the book and tax basis difference (see Note 23).
Deferred Financing Costs:
Deferred financing costs are amortized on the interest method over the life of the related debt.
Net Loss Per Common Share:
Since the Company is a wholly owned subsidiary, loss per share information is not presented.
Store Preopening and Closing Costs:
Store preopening costs are expensed as incurred. Costs associated with the closing of stores, such as future rent and real estate taxes, net of expected sublease recovery, are expensed when management makes a decision to close such stores.
Postretirement Benefits other than Pensions:
Effective January 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions" ("SFAS No. 106"). In accordance with SFAS No. 106, the Company accrued for the cost of providing
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
postretirement benefits, principally health care and life insurance benefits, over the working careers of the Company's associates. The Company previously expensed the cost of these benefits as claims were paid (see Note 21).
Postemployment Benefits:
Effective January 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS No. 112"). In accordance with SFAS No. 112, the Company accrued for the expected cost of providing postemployment benefits, primarily long-term disability, over the working careers of the Company's associates. The Company previously expensed the cost of these benefits as claims were paid (see Note 22).
NOTE 3--RECAPITALIZATION AND DISCONTINUED OPERATIONS
During Fiscal 1993, the Board of Directors authorized management of the Company to proceed with a recapitalization plan (the "Recapitalization") consisting of a refinancing of the Company's debt.
On October 26, 1993, the Recapitalization was consummated. Pathmark Stores, Inc. (formerly Supermarkets General Corporation, hereinafter referred to as "Pathmark") borrowed $450.0 million under a bank credit agreement, consisting of $400.0 million under a term loan facility ("the Pathmark Term Loan") and $50.0 million under a $175.0 million working capital facility (the "Pathmark Working Capital Facility"), borrowed $436.6 million from the issuance of its 9.625% Senior Subordinated Notes due 2003 (the "Pathmark Senior Subordinated Notes"), issued $120.0 million initial principal amount of its 10.75% Junior Subordinated Deferred Coupon Notes due 2003 (the "Pathmark Deferred Coupon Notes"), exchanged $95.8 million principal amount of its 12.625% Subordinated Debentures due 2002 (the "Pathmark Subordinated Debentures") for $95.8 million principal amount outstanding of Holdings Subordinated Debentures and exchanged $198.5 million principal amount of its 11.625% Subordinated Notes due 2002 (the "Pathmark Subordinated Notes") for $198.5 million principal amount outstanding of the Holdings Subordinated Notes. As part of the Recapitalization, PTK Holdings, Inc. ("PTK"), a newly formed wholly owned subsidiary of Holdings, borrowed $126.1 million through the issuance of its $130.0 million aggregate principal amount 10.25% Exchangeable Guaranteed Debentures due 2003 (the "PTK DIBs") in a private placement, which bonds the Company has guaranteed. The proceeds from the aforementioned borrowings were used to redeem the Old Working Capital Facility, Holdings 14.5% Senior Subordinated Notes due 1997 (the "Holdings Senior Subordinate Notes") and Holdings 13.125% Junior Subordinated Discount Debentures due 2003 (the "Holdings Discount Debentures") and to purchase $185.0 million aggregate principal amount of the Holdings 12.625% Subordinated Debentures due 2002 (the "Holdings Subordinated Debentures") from the Equitable Affiliates. In addition, on October 26, 1993, Plainbridge, Inc. ("Plainbridge"), a newly formed indirectly wholly owned subsidiary of the Company, borrowed $3.5 million under a $50.0 million bank revolving credit agreement (the "Plainbridge Working Capital Facility").
In conjunction with the Recapitalization, the assets, liabilities and related operations of the Company's home centers segment as well as certain assets and liabilities of the warehouse, distribution and processing facilities which service Pathmark's supermarkets and drug stores and certain inventories and real property, were contributed by Pathmark to Plainbridge and the shares of Plainbridge were distributed to PTK (the "Plainbridge Spin-Off"). As a result, PTK holds 100% of the capital stock of both Plainbridge and Pathmark. The Company intends to further spin-off Plainbridge to its common
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--RECAPITALIZATION AND DISCONTINUED OPERATIONS--(CONTINUED)
stockholder within the next year, although there can be no assurance that such spin-off will be consummated. Any such spin-off would require satisfying the dividend restrictions with respect to Holding's Exchangeable Preferred Stock (see Note 15) as well as obtaining consents from various lenders to Plainbridge and PTK. Accordingly, the accompanying consolidated statements of operations for all periods presented include the operating results of the Company's home centers segment as discontinued operations. The results of operations related to the warehouses and distribution facilities are included in the continuing operating results of the Company through the date of the Plainbridge Spin-Off since such operations represented a portion of the supermarkets and drug stores segment. Subsequent to the Plainbridge Spin-Off, the operating results related to the warehouses and distribution facilities are included as discontinued operations. The net assets of Plainbridge as of January 29, 1994 were approximately $223.5 million.
In conjunction with the Recapitalization, Pathmark entered into a 10-year logistical services agreement with Plainbridge. The terms of the logistical services agreement were designed to require Plainbridge to continue to provide Pathmark with substantially the same level of supply and other logistical services as was available from the warehouse, distribution and processing facilities prior to the Plainbridge Spin-Off at substantially the same or a lower cost. Subsequent to the Plainbridge Spin-Off, these intercompany purchases from Plainbridge are included in the Company's continuing operations. The corresponding revenues generated by Plainbridge from such transactions are included in the Company's discontinued operations.
Operating results of the discontinued operations were as follows (dollars in thousands):
- ---------------
(Footnotes continued on following page)
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--RECAPITALIZATION AND DISCONTINUED OPERATIONS--(CONTINUED)
(Footnotes continued from preceding page)
In connection with the Plainbridge Spin-Off and Recapitalization, the Company recorded a pretax charge of approximately $23.7 million in the third quarter of Fiscal 1993 to record estimated reorganization and restructuring costs, including an early retirement program offered to certain Company associates. During the fourth quarter of Fiscal 1993, the Company determined that the estimated costs related to the reorganization and restructuring were less than originally estimated and recorded a pretax credit of approximately $7.1 million. Of the total net pretax charge of $16.6 million for Fiscal 1993, $6.4 million related to the early retirement program and severance costs incurred to reduce the Company's workforce, $8.1 million related to the additional technical information systems costs incurred in order to accomplish the Plainbridge Spin-Off, and $2.1 million related to warehouse and consulting costs associated therewith. Through January 29, 1994, the Company has paid $11.9 million related to these costs. Management expects to pay the remaining $4.7 million included in other accrued expenses by the second quarter of Fiscal 1994.
NOTE 4--ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following (dollars in thousands):
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--MERCHANDISE INVENTORIES
Merchandise inventories are comprised of the following (dollars in thousands):
In the fourth quarter of Fiscal 1993, the Company changed its method utilized to calculate LIFO store inventories related to its indirect wholly owned subsidiary, Pathmark. Prior to Fiscal 1993, the Company utilized a retail approach to determine current cost and a general warehouse purchase index to measure inflation in the cost of its merchandise inventories in its stores. The Company's change arose from the development and utilization in Fiscal 1993 of internal cost indices based on the specific identification of merchandise in its stores to measure inflation in the prices, thereby eliminating the averaging and estimation inherent in the retail and general warehouse purchase index methods. The Company believes the use of such specific costs and internal indices results in a more accurate measurement of the impact of inflation in the cost of its store merchandise. The effect of this change as of January 31, 1993 resulted in a charge to income of $10.7 million, net of an income tax benefit of $7.8 million, and has been presented as a cumulative effect of a change in accounting method in the accompanying consolidated statement of operations for Fiscal 1993. This change of method increased the LIFO credit by $1.3 million, resulting in a total LIFO credit of $2.6 million for Fiscal 1993. The effect of this change on prior periods was not determinable.
Liquidation of LIFO layers in the periods reported did not have a significant effect on the results of continuing operations.
NOTE 6--PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following (dollars in thousands):
NOTE 7--GOODWILL
In the fourth quarter of Fiscal 1992, the Company wrote off its remaining goodwill balance of $600.7 million.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--GOODWILL--(CONTINUED) Since the Acquisition in Fiscal 1987, the Company, as constituted prior to the Recapitalization, did not achieve the sales and earnings projections prepared at the time of the Acquisition due to the economic recession in the Company's geographic trading area, increased competitive pressures (from new and enlarged supermarkets, discount stores and warehouse club stores), the related weak retail environment and lower food inflation rates than were projected. These conditions resulted in higher than expected losses and a significant deficiency in equity and negatively impacted the real estate and financial markets so that the Company was not able to achieve the new store growth, enlargements and remodeling anticipated in the projections. The Company determined, based on the trend of operating results for Fiscal 1988 through Fiscal 1992, and without anticipating the effects of the Recapitalization and Spin-Offs on future projections, that its projected results, as of January 30, 1993, would not support the future amortization of the Company's remaining goodwill balance of $600.7 million.
The methodology that management used to assess the recoverability of goodwill was to project results of operations forward 35 years, which represented the remaining life of the goodwill as of January 30, 1993, based on a five year historical trend line of actual results. Management believed that the projected future results, based on this historical trend, were the most likely scenario assuming a recapitalization was not consummated. Management evaluated the recoverability of goodwill based on this forecast of future operations and income. Management also evaluated recoverability based on the discounted value of this same forecast using a discount rate that reflected the Company's average cost of funds.
Management believed that if a recapitalization was not consummated, Pathmark's total capital expenditures would be limited to approximately $125.0 million between Fiscal 1993 and Fiscal 1996 and would result in approximately 30 renovations as well as the funding of ongoing projects for Fiscal 1993, which would not materially alter Pathmark's total selling square footage. Assuming a recapitalization was not consummated, sales growth would be restricted to approximately 0.5% per year. Management's projection of 0.5% sales growth per year was derived from the Company's five-year historical sales trend and the management's estimate of future sales performance. In the projection, management assumed the five-year historical average rates of inflation, financing costs and competitive conditions to be representative during the projected period. Management believed that these projected future results so derived depict the Company's projected performance without the benefits of a recapitalization. Such projection indicated that operations to Fiscal 2026 yielded a cumulative loss of $155.0 million on an undiscounted basis and $103.0 million on a discounted basis of measurement before the effects of goodwill amortization.
NOTE 8--DEFERRED FINANCING COSTS
Deferred financing costs are comprised of the following (dollars in thousands):
In connection with the Recapitalization, the Company incurred deferred financing costs of approximately $47.5 million. Also in connection therewith, the Company wrote off, as part of the extraordinary items, $16.8 million of deferred financing costs associated with debt which was extinguished (see Notes 3 and 18).
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities are comprised of the following (dollars in thousands):
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 discount rate based on the projected payout of these claims. The Company made a change in the determination of the discount rate utilized to record the present value of certain noncurrent liabilities and reduced such rate from 12%, representing the Company's effective interest rate, to a risk free rate, estimated at 4% in Fiscal 1993. The cumulative effect of this accounting change as of January 31, 1993 totalled $11.6 million, net of an income tax benefit of $8.4 million. While this change increased total liabilities by approximately $20.0 million, the cash outflows to satisfy these liabilities will remain unchanged.
NOTE 10--LONG-TERM DEBT
Long-term debt is comprised of the following (dollars in thousands):
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT--(CONTINUED) Scheduled Maturities of Debt:
Long-term debt principal payments required during the next five fiscal years are as follows (dollars in thousands):
Recapitalization:
On October 26, 1993, the Recapitalization was consummated. Pathmark borrowed $400.0 million under the Pathmark Term Loan and $50.0 million under the Pathmark Working Capital Facility, borrowed $436.6 million through the issuance of Pathmark Senior Subordinated Notes, issued $120.0 million initial principal amount of Pathmark Deferred Coupon Notes, exchanged $95.8 million principal amount of Pathmark Subordinated Debentures for $95.8 million principal amount of Holdings Subordinated Debentures and exchanged $198.5 million principal amount of Pathmark Subordinated Notes for $198.5 million principal amount outstanding of the Holdings Subordinated Notes. As part of the Recapitalization, PTK borrowed $126.1 million through the issuance of PTK DIBs in a private placement which bonds the Company has guaranteed. The proceeds from the aforementioned borrowings were used to redeem the Old Working Capital Facility, Holdings Senior Subordinated Notes and Holdings Discount Debentures and to purchase $189.2 million aggregate principal amount of the Holdings Subordinated Debentures. In addition, on October 26, 1993, Plainbridge borrowed $3.5 million under the $50.0 million Plainbridge Working Capital Facility (see Notes 3 and 18).
The indebtedness under the Pathmark and Plainbridge Working Capital Facilities and the Pathmark Term Loan bear interest at floating rates. Pathmark is required to repay a portion of its borrowings under the Pathmark Term Loan each year, which commenced in January 1994, so as to retire such indebtedness in its entirety by October 31, 1999. Under the Pathmark Working Capital Facility, which expires on July 31, 1998, Pathmark can borrow or obtain letters of credit in an aggregate amount not to exceed $175.0 million subject to an annual cleanup provision commencing in Fiscal 1994. Under the terms of the Pathmark cleanup provision, in each fiscal year loans cannot exceed $50.0 million under the Pathmark Working Capital Facility for a period of 30 consecutive days. Subsequent to January 29, 1994, the Company satisfied its cleanup provision related to the Pathmark Working Capital Facility for Fiscal 1994. Under the Plainbridge Working Capital Facility, which expires in Fiscal 1996, Plainbridge can borrow or obtain letters of credit in an aggregate amount not to exceed $50.0 million subject to annual cleanup provision, commencing in Fiscal 1994. Under the terms of the Plainbridge cleanup provision, in each fiscal year, loans cannot be made for a period of 30 consecutive days. Holdings believes that Pathmark and Plainbridge have sufficient unused borrowing capacity under their respective working capital facilities which can be utilized for unforeseen or seasonal cash requirements. At January 29, 1994 and April 26, 1994, Pathmark and Plainbridge, in the aggregate, had approximately $110.2 million and $112.8 million, respectively, in unused borrowing capacity under their working capital facilities. At January 29, 1994, the Company was in compliance
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT--(CONTINUED) with all of its debt covenants and based upon projected results for the upcoming fiscal year, the Company believes it will be in compliance throughout the upcoming fiscal year with its various debt covenants.
The PTK DIBs accrete to a maturity value of $218.3 million in Fiscal 2003. The PTK DIBs begin paying cash interest semiannually on June 30, 1999 and have no sinking fund requirements.
The Pathmark Senior Subordinated Notes accrete to a maturity value of $440.0 million in Fiscal 2003. These notes begin paying cash interest semiannually on May 1, 1994 and have no sinking fund requirements.
The Pathmark Deferred Coupon Notes accrete to a maturity value of $225.3 million in Fiscal 2003. These notes begin paying cash interest semiannually on May 1, 2000 and have no sinking fund requirements.
The Pathmark Subordinated Debentures mature in Fiscal 2002 and began paying semi-annual cash interest on December 15, 1993. These Debentures have no sinking fund requirements.
The Pathmark Subordinated Notes mature in Fiscal 2002 and contain a sinking fund provision that requires Holdings to deposit $49.4 million (25% of the original aggregate principal amount) with the trustee of the Pathmark Subordinated Notes on June 15 in each of Fiscal 2000 and Fiscal 2001 for the redemption of the Pathmark Subordinated Notes at a redemption price equal to 100% of the principal amount thereof, plus accrued interest to the redemption date, providing for the redemption of 50% of the original aggregate principal amount of such notes prior to maturity.
On April 30, 1993, the Company repaid $5.7 million of indebtedness secured by a mortgage on the distribution center of the home centers segment transferred to Plainbridge and on May 14, 1993, the Company repaid $2.5 million of indebtedness secured by mortgages on two Pathmark retail properties transferred to Plainbridge (see Notes 3 and 18).
Under the Old Working Capital Facility, the Company could borrow or obtain letters of credit in an aggregate amount not to exceed $210.0 million at floating rates. On October 26, 1993, as part of the Recapitalization, the balance of $40.0 million outstanding was paid off.
The Pathmark Term Loan, the Pathmark and Plainbridge Working Capital Facilities and the indentures for the recapitalized debt contain covenants, including, but not limited to, covenants with respect to the following matters: (i) limitation on indebtedness; (ii) limitation on restricted payments; (iii) limitation on transactions with affiliates; (iv) limitation on liens; (v) limitation on the issuance of preferred stock by subsidiaries; (vi) limitation on issuances of guarantees of indebtedness by subsidiaries; (vii) limitation on transfer of assets to subsidiaries; (viii) limitation on dividends and other payment restrictions affecting subsidiaries; and (ix) restriction on mergers and transfers of assets.
14.5% Holdings Senior Subordinated Notes due 1997:
The Holdings Senior Subordinated Notes original maturity date was September 15, 1997. Interest was payable semi-annually in cash. On October 26, 1993, as part of the Recapitalization, the balance of $388.2 million principal amount outstanding was paid off.
During Fiscal 1992, the Company retired $72.2 million principal amount of Holdings Senior Subordinated Notes, which were purchased through open market transactions utilizing a portion of the proceeds from the sale of the $200.0 million principal amount of 11.625% Subordinated Notes due 2002 (the "Subordinated Notes") as well as additional Old Working Capital Facility borrowings. In
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT--(CONTINUED) addition, SMG-II purchased and made a capital contribution to the Company of $4.8 million principal amount of Senior Subordinated Notes, which were retired by the Company.
12.625% Holdings Subordinated Debentures due 2002:
The Holdings Subordinated Debentures mature on June 15, 2002. Interest on the Subordinated Debentures accrued semi-annually, but was not payable to holders thereof until December 15, 1992. Interest accrued but not paid was added to the original principal amount thereof in accordance with the terms of the indenture. On October 26, 1993, as part of the Recapitalization, $189.2 million principal amount of the balance outstanding was paid off, $95.8 million of the balance outstanding was exchanged for $95.8 million of Pathmark Subordinated Debentures and $130.0 million of the balance outstanding was exchanged for $130.0 million aggregate principal amount of the PTK DIBs.
11.625% Holdings Subordinated Notes due 2002:
On May 28, 1992, the Company completed a public offering of $200.0 million principal amount of the Holdings Subordinated Notes. The Subordinated Notes rank junior to indebtedness under the Bank Credit Agreement and the Senior Subordinated Notes, pari passu with the Subordinated Debentures and senior to the Discount Debentures. Interest on the Subordinated Notes is payable semi-annually. On October 26, 1993, as part of the Recapitalization, $198.5 million principal amount of the Holdings Subordinated Notes were exchanged for $198.5 million principal amount of Pathmark Subordinated Notes. Approximately $1.5 million principal amount of the Subordinated Notes remain outstanding.
13.125% Holdings Junior Subordinated Discount Debentures Due 2003.
The Holdings Junior Subordinated Discount Debentures were issued at a fair market value of $122.5 million with a maturity value of $311.0 million at October 5, 2003. The original issue discount (difference between fair market value at date of issue and maturity value) was amortized on the interest method over the life of the Discount Debentures. The Discount Debentures represented unsecured subordinated obligations of the Company and did not require cash interest payments for the first five years. On October 26, 1993, as part of the Recapitalization, the Discount Debentures were redeemed.
Industrial Revenue Bonds:
Interest rates for the industrial revenue bonds range from 10.5%-10.9%. The bonds are payable in installments ending in Fiscal 2003. The industrial revenue bonds outstanding at January 29, 1994 are unsecured.
Other Debt:
Other debt includes mortgage notes which are secured by property and equipment having a net book value of $72.1 million at January 29, 1994 and $88.6 million at January 30, 1993. Rates applied to these borrowings range from 4%-11%. The borrowings are payable in installments ending in Fiscal 2000.
Fair Value of Debt Instruments:
The estimated fair value of the debt instruments referred to above were based on the quoted market prices at January 29, 1994 and January 30, 1993, to the extent such debt instrument were publicly traded. Management has evaluated all non-publicly traded debt instruments and has determined based on interest rates and terms, that the fair value of such instruments approximates carrying value. At
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT--(CONTINUED) January 29, 1994 and January 30, 1993, the fair value of the Company's debt instruments in the aggregate was $1,509.8 million and $1,370.9 million, respectively.
NOTE 11--INTEREST EXPENSE
Interest expense is comprised of the following (dollars in thousands):
The Company made cash interest payments of $196.6 million in Fiscal 1993, $132.8 million in Fiscal 1992 and $135.3 million in Fiscal 1991.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--LEASES
At January 29, 1994 the Company was liable under terms of noncancellable leases for the following minimum lease commitments (dollars in thousands):
- --------------- (a) Net of sublease income of $12,472 and $68,203 for capital and operating leases, respectively.
During Fiscal 1993, Fiscal 1992 and Fiscal 1991 the Company incurred capital lease obligations of $25.7 million, $8.7 million and $19.4 million, respectively, in connection with lease agreements to acquire property and equipment.
Rent expense included in continuing operations under all operating leases having noncancellable terms of more than one year is summarized as follows (dollars in thousands):
- --------------- (b) Primarily based on sales.
NOTE 13--LABOR DISPUTE
The Company's pretax earnings in the second quarter of Fiscal 1993 were adversely impacted by a labor dispute and the related promotional programs implemented subsequent to such labor dispute in order to regain sales levels. The Company, with three other major supermarket companies (ShopRite, Foodtown and Grand Union), conducted separate but simultaneous negotiations with respect to an expired labor contract. The major issues of the contract concerned health care and related benefits. On May 7, 1993, the union began selective strikes against one of the Company's competitors. Over the course of the next three weeks, the labor dispute expanded until, on May 28, 1993, union members at over 250 supermarkets, including 53 Pathmark supermarkets, were either on strike or locked out. On May 29, 1993, the labor dispute was settled and, in June, the union membership ratified a new four-year contract, and the membership returned to work.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--PROVISION FOR STORE CLOSINGS
Effective with the beginning of the second quarter of Fiscal 1993, the Company made a decision to close or dispose of five stores which the Company believes will continue to be unprofitable. As a result, the Company recorded a pretax charge in the second quarter of Fiscal 1993 of approximately $6.0 million. Operating results for these five stores have been excluded from the consolidated statements of operations for the 52 weeks ended January 29, 1994 since the beginning of the second quarter of Fiscal 1993.
NOTE 15--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 29, 1994. 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.
Cumulative dividends at the rate of $3.52 per annum, payable quarterly, accrue on each share of Exchangeable Preferred Stock. The Old Bank Credit Agreement prohibited the payment of cash dividends through April 30, 1993. Dividends in additional shares of Exchangeable Preferred Stock were paid in lieu of cash at the rate of .0352 shares per share and recorded at fair value at the date of dividend issuance through October 15, 1992. As of January 29, 1994, the Company is in arrears on the payment of five quarterly dividends on the Exchangeable Preferred Stock and does not expect to receive cash flow sufficient to permit payments of dividends on the Exchangeable Preferred Stock in the foreseable future.
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, calculated to retire 60% of the issue prior to final maturity with the remaining amount of the issue to be redeemed at maturity.
If an amount equal to six quarterly dividends is in arrears in whole or in part, the holders of the Exchangeable Preferred Stock voting as a class, may elect two members of the Board of Directors of the Company at a special meeting called by the Company until such time as all accrued dividends on the Exchangeable Preferred Stock shall have been paid for all dividend periods.
The Company has the option to require holders to exchange the Exchangeable Preferred Stock on any dividend payment date, in whole or in part, for exchange debentures (the "Exchange Debentures") of the Company. Such option is available at any time if (a) no event of default exists under any of the Company's loan agreements and (b) the exchange is allowed under the provisions of the limitation on
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--CUMULATIVE EXCHANGEABLE REDEEMABLE PREFERRED STOCK--(CONTINUED) 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 an amount equal to all accrued but unpaid dividends.
During Fiscal 1991, SMG-II made a capital contribution to the Company of 2.8 million shares of Exchangeable Preferred Stock purchased pursuant to the Exchangeable Preferred Stock Offer and open market transactions. The Company has retired these shares (see Note 1).
At January 29, 1994, the fair value of the Exchangeable Preferred Stock based on quoted market price was $136.9 million. Exchangeable Preferred Stock activity for the three years ended January 29, 1994 was as follows (dollars in thousands):
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 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. However, these tests were not deemed to be a default under the Old Bank Credit Agreement or Holdings public debt. Holdings does not expect to receive cash flow sufficient to permit payments of dividends on the Holdings 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 29, 1994, the unpaid dividends of $21.5 million was accrued and included in other noncurrent liabilities.
Dividends on the Exchangeable Preferred Stock must be paid in full for all prior periods as of the most recent dividend payment date before any dividends, other than dividends payable in shares of the Company's common stock or any other class of the Company's capital stock ranking junior to the Exchangeable Preferred Stock, can be paid or set apart for payment to holders of common stock or any other shares which would rank junior to the Exchangeable Preferred Stock.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--CUMULATIVE EXCHANGEABLE REDEEMABLE PREFERRED STOCK--(CONTINUED) In addition, dividends on the Exchangeable Preferred Stock must be paid in full for all prior periods before the redemption or purchase by the Company of shares of common stock or any other shares which would rank junior to the Exchangeable Preferred Stock.
NOTE 16--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 29, 1994 and January 30, 1993.
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 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 after payment of all prior claims, including liquidation rights of any Exchangeable Preferred Stock outstanding. 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 ("Management Investors") entered into a management subscription agreement under which, on October 5, 1987, the Management Investors purchased an aggregate of 100,000 shares of Class A common stock for consideration of $100 per share. In connection with the Exchange Offer, the Management Investors entered into an agreement (the "Management Investors Exchange Agreement") with respect to the SMG-II common stock which was received in exchange for the Company's Class A common stock. Under the terms of the Bank Credit Agreement there are limitations in the amount of repurchases from Management Investors to $2 million during any fiscal year and $5 million in the aggregate. Prior to the Exchange Offer, all of the Class A common stock held by Management Investors was classified as Redeemable Securities. In Fiscal 1991, prior to the Exchange Offer, the Company repurchased 3,490 shares from Management Investors at an aggregate cost of $.4 million.
Certain Management Investors who purchased shares of Class A common stock borrowed a portion of the purchase price from the Company and were required to deliver a note to the Company ("Recourse Note") in the principal amount of the loan. Interest on the Recourse Note is to be paid annually and the principal is payable 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 to secure the repayment of the Recourse Note. In connection with the repurchases of common stock from Management Investors, approximately $.1 million of Recourse Notes were repaid during Fiscal 1991. No payments were made
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--COMMON STOCK--(CONTINUED) during Fiscal 1993 and Fiscal 1992. Recourse Notes in the amount of approximately $1.7 million were outstanding at January 29, 1994 and January 30, 1993. The Recourse Notes have been classified as Other Assets.
NOTE 17--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 outstanding on February 4, 1991 became an option for the purchase of an equal number of shares of SMG-II Class A common stock.
NOTE 18--EXTRAORDINARY ITEMS
The extraordinary items reflected in the statements of operations are comprised of (dollars in thousands):
On October 26, 1993, in connection with the Recapitalization, the Company repaid or exchanged $1.3 billion of debt through the issuance of new Pathmark and PTK indebtedness. This repayment of outstanding debt and origination of new debt included premiums and other expenses, including the write off of existing deferred financing fees associated with debt which was extinguished, which resulted in a net loss on early extinguishment of debt of $106.0 million.
On July 31, 1993, in connection with the Recapitalization, the Company repaid $2.5 million principal amount of indebtedness secured by mortgages on two retail properties to be transferred to Plainbridge. This repayment resulted in a net loss on early extinguishment of debt of $0.06 million.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--EXTRAORDINARY ITEMS--(CONTINUED) On May 1, 1993, in connection with the Recapitalization, the Company repaid $5.7 million aggregate principal amount of indebtedness secured by a mortgage on the distribution center of the home centers segment to be transferred to Plainbridge. This repayment resulted in a net loss on early extinguishment of debt of $0.1 million.
In May 1992, the Company paid off the remaining $132.0 million principal outstanding under the Term Loan by utilizing a portion of the proceeds from the sale of the Subordinated Notes resulting in the accelerated amortization of the deferred financing costs related to the Term Loan of $1.1 million, before applicable income tax benefit of $0.5 million.
In June 1992, utilizing a portion of the proceeds from the sale of the Subordinated Notes as well as additional Working Capital Facility borrowings, the Company, through open market purchases, purchased $71.0 million principal amount of Senior Subordinated Notes at a cost of $76.0 million. The premium paid of $5.0 million, as well as the accelerated amortization of deferred financing costs and transaction expenses of $1.5 million related to the repurchased Senior Subordinated Notes, resulted in a loss of $6.5 million, before applicable income tax benefit of $2.6 million.
In October 1992, SMG-II purchased and subsequently contributed to the Company $4.8 million principal amount of Senior Subordinated Notes and the Company, through open market purchases, purchased an additional $1.2 million principal amount of Senior Subordinated Notes. The premium paid on the contributed and purchased Senior Subordinated Notes of $0.3 million, as well as the accelerated amortization of deferred financing costs and transaction expenses of $0.1 million related to the repurchased Senior Subordinated Notes resulted in a loss of $0.4 million, before applicable income tax benefit of $0.2 million.
In March 1991, SMG-II made a capital contribution to the Company of $95.4 million face value of the Company's Discount Debentures which were acquired by SMG-II in February 1991 pursuant to the Discount Debenture Offer and additional open market purchases for an aggregate cost of $33.2 million. The Discount Debentures, which had a net accreted book value of $62.9 million, were retired by the Company resulting in a gain of $27.8 million, net of $1.9 million of transaction expenses, before applicable income tax provision of $11.2 million.
In December 1991, the Company permanently reduced its Term Loan $155 million by applying a portion of the net cash proceeds from the disposal of the Purity Operations resulting in an accelerated amortization of the deferred financing cost related to the Term Loan of $2.3 million, before applicable income tax benefit of $0.9 million.
In January 1992, SMG -II made a capital contribution to the Company of $9.8 million face value of the Company's Senior Subordinated Notes which were acquired by SMG-II through open market purchases in February 1991. The Company has retired the Senior Subordinated Notes resulting in an accelerated amortization of deferred financing costs and transactions expenses of $0.4 million, before applicable income tax benefit of $0.2 million.
Income taxes on the extraordinary items for Fiscal 1992 and Fiscal 1991 have been provided based on statutory income tax rates.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--RELATED PARTY TRANSACTIONS
The following is a summary of the related party agreements and transactions between Pathmark and Plainbridge:
1) Spin-off:
A) Services Agreements:
Pathmark, Plainbridge and the Company have entered into agreements pursuant to which Pathmark will continue to provide certain administrative services relating to the warehouse, distribution and home centers operations of Plainbridge and certain administrative services to Chefmark. Such services include, among other things, legal, human resources, data processing, insurance, accounting, tax, treasury and property management services. Each of the agreements have a term of five years, with renewal options at the end of such term. The cost of the services under the Plainbridge and Chefmark service agreements in the aggregate was approximately $4.2 million for the period ended January 29, 1994.
B) The Logistical Services Agreement:
In connection with Plainbridge Spin-Off, Pathmark Plainbridge have entered into the Logistical Services Agreement to provide for the supply by Plainbridge to Pathmark of most of the merchandise sold in Pathmark's retail stores and for the provision of warehousing, distribution and other logistical services relating to the supply of such merchandise. Pursuant to the Logistical Services Agreement, Pathmark directs the purchase of the merchandise to be provided to it by Plainbridge. Pathmark negotiates directly with vendors regarding the types of merchandise required, the quantities needed, delivery schedules, pricing, and all other terms and conditions of sale. All merchandise is ordered by Pathmark for the account of Plainbridge, which will pay for and will retain title to such merchandise until it has been delivered to Pathmark. If requested by a vendor, Pathmark, in its sole discretion, may guarantee payment of such orders by Plainbridge. At January 29, 1994, Pathmark has guaranteed approximately $42.8 million of such orders. In general, the Logistical Services Agreement also requires Plainbridge to perform the same services in substantially the same manner as they were performed by Pathmark's warehouse and distribution group prior to the Plainbridge Spin-Off.
The Logistical Services Agreement requires that, with certain exceptions and subject to certain termination rights, Plainbridge is to sell to Pathmark, for a period of ten years, to the extent requested by Pathmark, all of Pathmark's merchandise requirements for both its existing and future stores. In addition, Pathmark has five one-year renewal options following the expiration of the original ten-year term. The Logistical Services Agreement does not limit Pathmark's ability to purchase goods from other suppliers, and merchandise that Pathmark customarily obtains directly from vendors is excluded from the Logistical Services Agreement.
The Logistical Services Agreement provides that Plainbridge is to store and deliver to Pathmark all merchandise purchased at Pathmark's directions. Pathmark is required in good faith to designate Plainbridge as its carrier with respect to merchandise customarily shipped directly from vendors to Pathmark's stores. Plainbridge is required to maintain inventory with a book value of at least $130.0 million for the exclusive use of Pathmark, and to the extent that the inventory value falls below such level, Plainbridge must purchase sufficient merchandise to maintain such level to the extent such merchandise is ordered by Pathmark. Plainbridge is also required to accommodate physical annual increases of up to five percent in the volume of Pathmark directed purchases of merchandise to be handled by Plainbridge. Pathmark is to reimburse Plainbridge for all reasonable incremental out-of-
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--RELATED PARTY TRANSACTIONS--(CONTINUED) pocket costs (but not capital costs) incurred by Plainbridge for the storage and handling of merchandise that is in excess of the five percent annual capacity increase, provided that such out-of-pocket costs do not exceed the costs of storage and handling at local independent warehouses.
Upon the delivery of merchandise to Pathmark's stores by Plainbridge, Pathmark will owe Plainbridge for the cost of the merchandise plus a specified variable payment. This payment will vary according to the type and value of the merchandise. A minimum annual fee will be payable by Pathmark to the extent that the aggregate of the variable fees described above payable in any year does not exceed the minimum annual fee. The annual fee for Fiscal 1994 is $134.9 million and such fee is adjusted upward (but not downward) each fiscal year by the rate of inflation. This fee approximates the historical cost to Pathmark of operating the warehouse, distribution and transportation facilities. The initial minimum annual fee was determined by applying the variable fees to 95% of the volume of merchandise purchased in Fiscal 1992 by Pathmark. Pathmark is obligated to pay the minimum annual fee to Plainbridge irrespective of whether Pathmark purchases merchandise from other suppliers, except in cases of force majeure or when Plainbridge shall have materially breached the Logistical Services Agreement or shall have failed to obtain or maintain the licenses and permits needed to operate its business. The minimum annual fee will be reduced to the extent that the volume of merchandise purchases decreases as a result of any store dispositions by Pathmark and will also be reduced if the volume of Pathmark-directed merchandise falls below 90% of the actual volume achieved in Fiscal 1992, to the extent that Plainbridge is, as a result able to realize reductions in its operating costs. Under this agreement, Pathmark paid Plainbridge approximately $36.1 million during the period from the date of the Plainbridge Spin-Off to January 29, 1994. Plainbridge grants Pathmark an allowance, based on the amount of merchandise purchased by Plainbridge at Pathmark's direction, which is credited against the variable fees and minimum annual fee obligation. For the period from the date of the Plainbridge Spin-Off through January 29, 1994, an allowance of approximately $6.6 million was received by Pathmark. In addition, certain cost benefits derived from increases in the volume or value of merchandise purchased from Plainbridge by Pathmark or third parties is to be shared equally between Pathmark and Plainbridge. Estimated fees are payable in weekly installments with an annual reconciliation for the amount of fees that are actually payable for such year. Pathmark will pay to Plainbridge the costs of the merchandise at the time a vendor requires payment from Plainbridge.
The Logistical Services Agreement provides that Plainbridge may sell merchandise and provide logistical services to third parties, although it is not permitted to sell merchandise to supermarkets, drug stores and other retail stores stocking merchandise carried by Pathmark in Pathmark's current market areas, except for retail stores that do not in the ordinary course of business engage to a significant degree in the sale of food or pharmacy related products, without Pathmark's prior written consent which consent may not be unreasonably withheld. Plainbridge is also permitted to "piggyback" such third parties' orders onto Pathmark's orders from vendors, so long as they do not interfere with Pathmark's delivery schedules, quantity needs or other requirements.
Plainbridge and Pathmark are allowed to terminate the Logistical Services Agreement if the other (i) materially breaches its terms and fails to cure such breach for 60 days after written notice has been provided by the other party or (ii) experiences certain insolvency events. Additionally, following the fourth anniversary of the date of the Logistical Services Agreement, the Company has the option of terminating it at will on six months' notice. If Pathmark terminates the Logistical Services Agreement because of a material breach by, or insolvency of, Plainbridge, Pathmark has the right to purchase, within 30 days of the termination, that portion of the assets of Plainbridge which is essential to the support of Plainbridge's obligations to Pathmark under the Logistical Services Agreement (the
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--RELATED PARTY TRANSACTIONS--(CONTINUED) "Pathmark Distribution Assets") at the lower of (i) their net book value or (ii) their fair market value. If the Company exercises its at will option to terminate the Logistical Services Agreement, the Company is required to offer to purchase the Pathmark Distribution Assets at their fair market value. If Plainbridge terminates the Logistical Services Agreement because of a material breach by, or insolvency of Pathmark, Plainbridge has the right to sell (and Pathmark will have the obligation to buy) the Pathmark Distribution Assets at their fair market value within 30 days of such termination.
Other than in the ordinary course of business, Plainbridge is not permitted to sell any of the Pathmark Distribution Assets without Pathmark's prior written consent. Additionally, in the event of a change in the ultimate beneficial ownership of Plainbridge's voting stock such that a person, other than ML & Co. or an affiliate of ML & Co. (the majority shareholder of Holdings), holds a majority of such stock, the Company has for a period of two years, the irrevocable and exclusive right to purchase any or all of the Pathmark Distribution Assets at their fair market value.
Other provisions of the Logistical Services Agreement include (i) that Plainbridge passes on to Pathmark all discounts and allowances made available to it by vendors in respect of merchandise purchased for Pathmark, unless such discounts or allowances were made available solely as a result of actions taken or not taken by Plainbridge, (ii) that Plainbridge must ensure that merchandise quality meets or exceeds the standards established by Pathmark for such merchandise, and that Pathmark may place its representatives at the Distribution Facilities to ensure that such quality is maintained, (iii) that Plainbridge deliver merchandise to Pathmark at a 98% or better level of service measured in accordance with Pathmark's practices prior to the Plainbridge Spin-Off, (iv) that Pathmark pay Plainbridge for any use of trailers for storage and (v) that each of Pathmark and Plainbridge cooperate to reduce costs and improve service levels.
2) Other:
In conjunction with the Plainbridge Spin-Off, certain real property with a net book value of $64.5 million was transferred to Plainbridge and is being leased to Pathmark at rentals which the Company believes approximate fair value. For the period from the date of the Plainbridge Spin-Off through January 29, 1994, such rentals amounted to $1.1 million.
In addition, Pathmark is leasing six store properties to Plainbridge with a net book value of $9.5 million. The Company believes that the rentals received from Plainbridge approximate fair value. For the period from the date of the Plainbridge Spin-Off through January 29, 1994, such rentals amounted to $1.0 million.
As discussed in Note 16, 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 29, 1994 and January 30, 1993.
During Fiscal 1993, in conjunction with the Recapitalization, the Company paid ML & Co. fees of $12.8 million.
The Company engaged ML & Co. to act as dealer-manager in connection with the Discount Debenture Offer and the Exchangeable Preferred Stock Offer for which ML & Co. was paid fees of $1.2 million in Fiscal 1991. During Fiscal 1991, the Company also paid ML & Co. an advisory fee of $2.0 million relating to the sale of the Purity Operations.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--RELATED PARTY TRANSACTIONS--(CONTINUED) SMG-II, the Company's parent, purchased $9.8 million of the Company's Senior Subordinated Notes through open market purchases in February and March 1991. The Senior Subordinated Notes were contributed to the Company by SMG-II on January 10, 1992. Interest expense of approximately $1.5 million was recorded by the Company during the period the $9.8 million of Senior Subordinated Notes were held by SMG-II.
NOTE 20--BENEFIT PLANS
The Company has several noncontributory defined benefit pension plans covering substantially all nonunion and some union associates. Pension benefits to retired and terminated vested associates are primarily based upon their length of service and 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 expected to be earned in the future.
The following table sets forth the funded status of the pension plans and amounts recognized in the Company's financial statements at January 29, 1994 and January 30, 1993 (dollars in thousands):
Assets of the Company's pension plans are invested in marketable securities which are primarily equities of domestic corporations, U.S. Government instruments and money market investments.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 20--BENEFIT PLANS--(CONTINUED)
The following table provides the assumptions used in determining the actuarial present value of the projected benefit obligation at January 29, 1994 and January 30, 1993:
These changes in assumptions used in determining the actuarial present value of the projected benefit obligation will not have a material impact on the Company's net pension cost for Fiscal 1994.
Net periodic pension cost included in continuing operations includes the following components (dollars in thousands):
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 $17.9 million in Fiscal 1993, $17.7 million in Fiscal 1992 and $20.0 million in Fiscal 1991.
The Company sponsors a savings plan for eligible nonunion associates. Contributions under the plan are based on specified percentages of associate contributions. The Company's contribution to the savings plan were $4.0 million in Fiscal 1993, $3.0 million in Fiscal 1992 and $3.3 million in Fiscal 1991.
The Company has established and funded a Voluntary Employee Benefit Association ("VEBA") to provide for certain employee health benefits. The Company's tax-deductible contributions to the VEBA were $25.8 million in Fiscal 1993, $21.3 million in Fiscal 1992 and $24.7 million in Fiscal 1991.
NOTE 21--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 31, 1993, the Company adopted SFAS No. 106. Under SFAS No. 106, the Company is required to accrue the expected cost of providing postretirement benefits, principally health care and life insurance benefits, over the working careers of the Company's associates. The Company previously expensed the cost of these benefits as claims were paid.
SFAS No. 106 allows two methods for recognizing the transition obligation, which is defined as the unfunded and unrecognized accumulated postretirement benefit obligation at the date of adoption. This obligation could be recognized immediately as an earnings charge in the year of the change, as the effect of a change in accounting principles, or deferred and amortized as a component of net periodic postretirement benefits cost. The Company recognized the transition obligation immediately upon adoption.
The operating results for the year ended January 29, 1994 include the effect of adopting the SFAS No. 106 transition obligation as of January 31, 1993 on an immediate recognition basis. The resulting $15.6 million charge represents the accumulated postretirement benefit obligation at January 31, 1993 amounting to $26.9 million, less an income tax benefit of approximately $11.3 million, determined utilizing an assumed discount rate of 7.75%. This obligation was determined by application of the provisions of the Company's medical plans including established maximums and sharing of costs,
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 21--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS--(CONTINUED) relevant actuarial assumptions and health-care cost trend rates projected at 14.25% and grading down to 5.75% which is reached in Fiscal 1999.
The effect of a 1% change in the assumed cost trend rate would change the accumulated postretirement benefit obligation by approximately $4.0 million as of January 29, 1994 and the net periodic postretirement benefit cost by $0.4 million for Fiscal 1993. The assumed discount rate used in determining the postretirement benefit obligation as of January 29, 1994 was 7.25%. This change in assumption used in determining the actuarial present value of the projected benefit obligation will not have a material impact on the Company's net periodic postretirement benefit cost for Fiscal 1994.
The annual charges recorded by the Company on a pay-as-you-go (cash basis) amounted to $1.2 million in Fiscal 1992 and Fiscal 1991. In Fiscal 1993, the effect of adopting SFAS No. 106 reduced the Company's pretax earnings from continuing operations by $1.8 million, representing the difference between the accrual in accordance with SFAS No. 106 and the amount paid with respect to these benefits.
The following table provides information on the status of the plans (dollars in thousands):
Net postretirement benefit cost related to continuing operations for the year ended January 29, 1994 consisted of the following components (dollars in thousands):
NOTE 22--POSTEMPLOYMENT BENEFITS
In the fourth quarter of Fiscal 1993, the Company adopted SFAS No. 112. Under SFAS No. 112, the Company is required to accrue the expected cost of providing postemployment benefits, primarily long-term disability, over the working careers of the Company's associates. The Company previously expensed the cost of these benefits as claims were paid.
The effect of this change as of January 31, 1993 resulted in a charge to income of $2.5 million, net of an income tax benefit of $1.8 million, and has been presented as a cumulative effect of a change in accounting method in the accompanying consolidated statement of operations for Fiscal 1993.
This obligation was determined by application of the provisions of the Company's long-term disability plan including age of active claimants at disability and at valuation, length of time on disability and the probability of claimant remaining on disability to maximum duration. These liabilities are recorded at their present value utilizing a discount rate of 4%.
The annual charges recorded by the Company on a pay-as-you-go (cash basis) amounted to $0.7 million in Fiscal 1992 and $1.0 million in Fiscal 1991. In Fiscal 1993, the effect of adopting SFAS No. 112 increased the Company's pretax earnings from continuing operations by $0.3 million, representing the difference between the accrual and interest charge in accordance with SFAS No. 112 and the amount paid with respect to these benefits.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 22--POSTEMPLOYMENT BENEFITS--(CONTINUED) The accumulated postemployment benefit obligation as of January 29, 1994 is $4.9 million. The net postemployment benefit cost for continuing operations for the year ending January 29, 1994 consisted of the following components (dollars in thousands):
NOTE 23--INCOME TAXES
The income tax provision (benefit) from continuing operations is comprised of the following (dollars in thousands):
Deferred tax assets and liabilities as of January 29, 1994 consist of the following (dollars in thousands):
Effective January 31, 1993, the Company adopted SFAS No. 109. Prior to January 31, 1993 the Company's financial statements had been prepared in accordance with SFAS No. 96. SFAS No. 96 and SFAS No. 109 require the calculation of deferred taxes using the asset and liability method. Under this
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 23--INCOME TAXES--(CONTINUED) method, deferred tax balances must be adjusted to reflect enacted changes in income tax rates and deferred taxes must be provided on book and tax basis differences. The implementation of SFAS No. 109 had no effect on the consolidated statements of operations, however, it resulted in a reclassification of the current and noncurrent deferred taxes since, in accordance with SFAS No. 109, the classification of such deferred taxes correspond with the classification of the related asset or liability which gave rise to the book and tax basis difference.
As a result of the Company's net operating tax loss, the Company recorded income taxes receivable of approximately $22.4 million resulting from the carryback of such losses. The carryforward of those losses not carried back results in a net deferred tax asset of approximately $41.3 million at January 29, 1994. Since the Company has experienced pretax losses in each of Fiscal 1993, Fiscal 1992 and Fiscal 1991, the Company was unable to conclude that realization of such deferred tax assets was more likely than not. Accordingly, the Company has provided a valuation allowance of $38.4 million to fully reserve its net deferred tax assets, except for its alternative minimum tax credit carryforwards which do not expire. The valuation allowance will be adjusted when, in the opinion of management, significant positive evidence exists which indicates that its more likely than not that the Company will be able to realize deferred tax assets. Such reductions in the valuation allowance, if any, will be reflected as a component of income tax expense.
The Omnibus Budget Reconciliation Act of 1993 was signed into law on August 10, 1993, which, among other things, increased the federal income tax rates for corporations to 35% from 34%, effective January 1, 1993. Deferred tax liabilities and assets have been adjusted to reflect the 1% increase in federal income tax rates.
Although the Company reported a pretax loss for Fiscal 1992 and Fiscal 1991, the Company has generated taxable income in Fiscal 1992 and 1991 due to the effect of amounts expensed for tax purposes which were less than amounts used for financial reporting, primarily the goodwill write-off of $600.7 million in Fiscal 1992, the net capital loss related to the disposal of the Purity Operations in Fiscal 1991, the amortization of goodwill related to the Acquisition in the two years, as well as the certain deferred federal income tax items. The Company's state income tax provision in Fiscal 1993 and Fiscal 1992 resulted primarily from taxable income generated in New Jersey. The Company's state income tax benefit in Fiscal 1991 resulted from $10.4 million in state income tax refunds of prior years' taxes partially offset by New Jersey income taxes.
In Fiscal 1993, Fiscal 1992 and Fiscal 1991 the Company made income tax payments of $3.1 million, $21.0 million and $41.2 million, respectively, and received income tax refunds of $10.1 million, $5.9 million and $6.0 million. A federal income tax refund of $20.5 million was received in February, 1994 related to the carryback of the Fiscal 1993 net operating losses.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 23--INCOME TAXES--(CONTINUED) The effective tax rate applicable to continuing operations differs from the federal statutory tax rate as follows:
NOTE 24--COMMITMENTS AND CONTINGENCIES
On December 7, 1990, a lawsuit was commenced by a holder of the Exchangeable Preferred Stock against the Company, SMG-II, Merrill Lynch Capital Partners, Inc., Merrill Lynch & Co., Inc., and the directors of the Company (the "Director Defendants") in the Chancery Court, New Castle County, Delaware. The complaint purports to be a class action and alleges that original terms of the Exchangeable Preferred Stock Offer, at $5 per share, constitute a breach of fiduciary duties owed by the Director Defendants to holders of the Exchangeable Preferred Stock. The complaint seeks declaratory and injuctive relief, as well as monetary damages, with respect to the Exchangeable Preferred Stock Offer, but no motions seeking any such relief on a provisional or permanent basis were filed either prior to the completion of the Exchangeable Preferred Stock Offer on February 4, 1991 or as of the date hereof. The Company has entered negotiations to settle the complaint and expects to reach a settlement agreement during the next several months. The Company does not expect the amount of its obligations under any settlement agreement to be material and will defend the Complaint vigorously if a settlement is not reached.
On March 1, 1993 the Company was served with a summons and complaint which alleges, among other things, that the Company and other co-defendants induced processors of Tropicana orange juice to provide it with a favorable price and other terms that discriminated against other sellers of orange juice in violation of the price discrimination provisions of the Robinson-Patman Act. The prayer for relief does not claim any specific amount of damages. After consultation with counsel, the Company believes that this lawsuit is without merit and intends to defend the action vigorously.
In addition to the litigation referred to above, the Company is a party to a number of legal proceedings in the ordinary course of business. Management believes that the ultimate resolution of these proceedings will not, in the aggregate, have a material adverse impact on the financial condition, results of operations or business of the Company.
The Company is contingently liable for certain obligations of the Purity Operations under certain instruments, primarily approximately 60 leases for real property, in the event of default thereunder by the purchaser of the Purity Operations. As of January 29, 1994, the estimated present value of such lease obligations approximated $115 million. In addition, the Company is bound by a non-compete agreement, expiring in Fiscal 1994, with the purchaser of the Purity Operations restricting the Company from operating supermarkets in Massachusetts, New Hampshire and part of Connecticut.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 24--COMMITMENTS AND CONTINGENCIES--(CONTINUED) In August 1991, the Company entered into a long-term agreement with Integrated Systems Solutions Corporation ("ISSC"), a subsidiary of IBM, to provide a wide range of information systems services. Under the agreement, ISSC has taken over the Company's data center operations and mainframe processing and information system functions and is providing business applications and systems designed to enhance the Company's customer service and efficiency. The charges under this agreement are based upon the services requested at predetermined rates. The Company may terminate the agreement upon 90 days notice in payment of a specified termination charge. The amounts expensed under this agreement and included in selling, general and administrative expenses in the accompanying statements of operations were $12.6 million, $12.9 million and $6.2 million during Fiscal 1993, Fiscal 1992 and Fiscal 1991, respectively. Further, the Company expensed an additional $8.1 million of technical information costs in connection with the Plainbridge Spin-Off (see Note 3).
NOTE 25--GAIN ON SALE OF PHOTOFINISHING PLANT
In Fiscal 1991 the Company sold its Coastal Photo photofinishing plant to Quality Photo Systems (East), Inc. (a subsidiary of Konica Corporation) for $5.7 million, including the assumption of leases, which resulted in a pretax gain on sale of $4.1 million. In addition, the Company entered into a servicing agreement under which Quality Photo Systems (East), Inc. has agreed to supply improved photofinishing services at lower than the Company's previous operating costs.
NOTE 26--GAIN (LOSS) ON DISPOSAL OF PURITY OPERATIONS AND INVESTMENT IN PURITY SUPREME
On December 17, 1991, the Company completed the sale of two subsidiaries, Purity Supreme, Inc. ("Purity Supreme") and Li'l Peach Corp. ("Li'l Peach", and together with Purity Supreme, the "Purity Operations"), for approximately $257.0 million (as adjusted), including the assumption of certain indebtedness of the Purity Operations to a Company organized by Freeman Spogli & Co. In connection with the disposal of the Purity Operations, the Company retained a 10% common equity interest in Purity Supreme with a net book value of $8.9 million (as of sale date), a new issue of Purity Supreme exchangeable preferred stock (the "Purity Preferred Stock") with an aggregate stated value of $18.0 million and a convertible subordinated note of Purity Supreme (the "Purity Note") in the principal amount of $2.0 million.
The Purity Preferred Stock matures December 17, 2003 and accrues dividends at 6.24% per annum on a semi-annual basis each June 17 and December 17. The Purity Preferred Stock is subordinated to Purity Supreme's Series B Preferred Stock, redeemable at the option of Purity Supreme at stated discount rates and convertible into Purity Supreme debentures at the option of Purity Supreme.
Due to the Company's inability to readily convert these securities into cash, as there exists no current trading market, and the uncertainty of the future cash flows from these securities, a valuation allowance for the face value of these securities has been recorded at January 30, 1993 and February 1, 1992.
During Fiscal 1991, the Company recognized a loss of $228.0 million on the disposal of the Purity Operations. Included in this loss is a write-off of $214.0 million of goodwill related to the Purity Operations. During Fiscal 1992, the Company collected the principal amount of the Purity Note and recorded a gain of $2.0 million reflecting the reversal of the valuation reserve recorded upon the disposal of the Purity Operations.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 27--QUARTERLY FINANCIAL DATA (UNAUDITED)
Financial data for the interim periods of Fiscal 1993 and Fiscal 1992 is as follows (dollars in thousands):
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(a) The pretax LIFO inventory credit for the 52 weeks ended January 29, 1994 was estimated to be $0.65 million in each of the four fiscal quarters. The annual credit was $2.6 million.
(b) The pretax LIFO inventory provision for the 52 weeks ended January 30, 1993 was estimated to be $1.6 million in each of the first two fiscal quarters and $1.1 million in the third fiscal quarter. The annual provision was $2.2 million, resulting in a $2.1 million credit in the fourth quarter.
* The quarterly financial data for the 13 weeks ended May 1, 1993, July 31, 1993 and October 30, 1993 have been restated to the reflect the effects of the accounting changes adopted as of January 31, 1993. As a result of these changes, the net loss for the 13 weeks ended May 1, 1993, July 31, 1993 and October 30, 1993 have been adjusted by $25.3 million, $0.1 million and $18.0 million, respectively. For further information with respect to such changes (see Notes 5, 9, 21, 22 and 23).
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder SUPERMARKETS GENERAL HOLDINGS CORPORATION Woodbridge, New Jersey
We have audited the accompanying consolidated balance sheets of Supermarkets General Holdings Corporation and its subsidiaries as of January 29, 1994 and January 30, 1993, and the related consolidated statements of operations, stockholder's deficit and cash flows for each of the three years in the period ended January 29, 1994. Our audits also included the financial statement schedules listed in the Index at Part IV, Item 14(a)(2). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Supermarkets General Holdings Corporation and its subsidiaries as of January 29, 1994 and January 30, 1993, and the results of their operations and their cash flows for each of the three years in the period ended January 29, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Notes 5, 9, 21, 22 and 23 to the consolidated financial statements, the Company changed its method of accounting for postretirement benefits other than pensions, postemployment benefits, income taxes, LIFO inventories and the determination of the discount rate utilized to record certain noncurrent liabilities.
DELOITTE & TOUCHE Parsippany, New Jersey April 28, 1994
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (AS OF APRIL 15, 1994) (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 Mr. Rubenstein, who is a director of the Company only.
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(1) Includes service with Old Supermarkets.
(2) Prior positions are reflected under "--Executive Officers".
Pursuant to the SMG-II Stockholders Agreement, the Merrill Lynch Investors are entitled to designate seven directors, the Management Investors are entitled to designate three directors and The Equitable Life Assurance Society of the United States and the Equitable Affiliates (collectively, the "Equitable Investors") are entitled to designate one director to Holdings' Board of Directors. Currently, four of the persons serving as directors were designated by the Merrill Lynch Investors (Messrs. Burke, Khanna, McLean and Rubenstein), two were designated by the Management Investors (Messrs. Futterman and Cuti) and one was designated by the Equitable Investors (Ms. Penny). 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. All current executive officers now hold identical positions with the Company and Pathmark, except for Messrs. Kenny and Rallo, who are executive officers of Pathmark only and Mr. Borshadel who is an executive officer solely of the Plainbridge subsidiary.
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(1) Includes service with Old Supermarkets.
(2) Officer of holdings since 1987.
(3) Member of the Company's Board of Directors.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
- --------------- (1) Represents amounts paid to Mr. Rallo as Reimbursement Amounts as described in "Certain Relationships and Related Transactions" in Item 13 of this report with respect to a loan to Mr. Rallo of less than $60,000.
(2) Information is provided solely with respect to Fiscal 1993 and Fiscal 1992.
(3) Stock options shown were granted pursuant to the Management Investors 1987 Stock Option Plan of SMG-II (the "Plan") and relate to shares of Class A Common Stock of SMG-II. (4) Represents Pathmark's matching contribution to the Supermarkets General Corporation Savings Plan (the "Savings Plan"). (5) Messrs. Kenny and Rallo became executive officers of Pathmark in October 1993.
OPTION/SAR GRANTS IN LAST FISCAL YEAR(1)(2)
- --------------- (1) Options shown were granted pursuant to the Management Investors 1987 Stock Option Plan of SMG-II, and relate to shares of Class A Common Stock of SMG-II.
(2) Except for 500 options granted to Mr. Kenny, 500 options granted to Mr. Rallo and 833 options granted to Mr. Cuti, options are fully vested and exercisable at the time of grant, provided that no exercise may occur unless a registration statement has been filed under the Securities Act of 1933 with respect to the shares subject to the option or the Compensation Committee of the Board of Directors of SMG-II determines that an exemption from registration is available.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES(1)
- --------------- (1) Options shown were granted pursuant to the Management Investors 1987 Stock Option Plan of SMG-II and relate to shares of Class A Common Stock of SMG-II. No options were exercised in Fiscal 1993.
PENSION PLAN TABLE
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(1) The table above illustrates the aggregate annual pension benefits payable under the Supermarkets General 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 user 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 1994 after the indicated number of years of covered employment and if the average of the participant's covered compensation for the five years out of the last ten years of such employment yielding the highest such average equalled the amounts indicated. The estimated annual benefits are based on the assumption that the individual will receive retirement benefits in the form of a single life annuity (married participants may elect a joint survivorship option) and are before applicable deductions for social security benefits in effect as of January 1994. As of December 31, 1993, the following individuals had the number of years of credited service indicated after their names: (footnotes continued on following page)
(footnotes continued from preceding page) Mr. Futterman, 20.6; Mr. Borshadel, 28.5; Mr. Cuti, 2.0; Mr. Kenny, 30 and Mr. Rallo, 30. As described below in "Compensation Plans and Arrangements--Supplemental Retirement Agreements", each of the named executives (other than Mr. Rallo) is party to a Supplemental Retirement Agreement with Pathmark.
COMPENSATION PLANS AND ARRANGEMENTS
Directors' Fees. Directors of the Company are not currently compensated for their services as such, except for Mr. Rubenstein who receives an annual fee of $20,000.
Supplemental Retirement Agreements. The Company has entered into supplemental retirement agreements with certain key executives, including four of the executive officers named in the Summary Compensation Table, which provide that the executive will be paid upon termination of employment after attainment of age 60 a supplemental pension benefit in such an amount as to assure him or her an annual amount of pension benefits payable under the supplemental retirement agreement, the Company's qualified pension plans and certain other plans of the Company, including Savings Plan balances as of March 31, 1983, (a) in the case of Mr. Futterman, equal to (i) $475,000 or (ii) his base salary on the date of his retirement, death or disability, whichever is greater, and (b) in the cases of Messrs. Borshadel, Cuti and Kenny, equal to 30% of his final average Compensation (as hereinabove defined) based on ten years of service with the Company and increasing 1% per year for each year of service thereafter to a maximum of 40% of his final average Compensation based on 20 years of service. "Compensation" includes base salary and payments under the Executive Incentive Plan, but excludes Company matching contributions under the Savings Plan and cash awards under Old Supermarkets' former Long-Term Incentive Plan. If the executive leaves the Company prior to completing 20 years of service (other than for disability), the supplemental benefit would be reduced proportionately. Should the executive die, the surviving spouse then receiving or, if he or she was not then receiving a supplemental pension benefit, the spouse would be entitled to a benefit equal to two-thirds of the benefit to which the executive would have been entitled, provided the executive has attained at least ten years of service with the Company. Mr. Cuti's agreement credits him with ten years of service over and above his actual service.
Employment Agreements. As of August 1, 1993, the Company and Pathmark entered into an employment agreement with Mr. Futterman (the "1993 Employment Agreement"). The 1993 Employment Agreement is for an initial term of three years, which term is automatically extended for an additional year on the second anniversary of the commencement of the term and on each successive anniversary thereafter. Under the 1993 Employment Agreement, Mr. Futterman is entitled to a minimum annual base salary of $475,000. The 1993 Employment Agreement also provides that Mr. Futterman shall be eligible to receive an annual bonus of up to 75% of his annual base salary and shall be provided the opportunity to participate in pension and welfare plans, programs and arrangements that are generally made available to executives of Pathmark, or as may be deemed appropriate by the Compensation Committee of the Board of Directors of Holdings.
As of August 1, 1993, the Company entered into employment agreements (the "August Agreements", together with the 1993 Employment Agreement, the "Employment Agreements") with Messrs. Cuti and Borshadel. Each August Agreement is for an initial term of three years, which term is automatically extended for an additional year on the second anniversary of the commencement of the term and on each successive anniversary thereafter. Under the August Agreements, Mr. Cuti and Mr. Borshadel are each entitled to a minimum annual base salary of $300,000. The August Agreements also provide that each of them shall be eligible to receive an annual bonus of up to 75% of his annual base salary and shall be provided the opportunity to participate in pension and welfare plans, programs and arrangements that are generally made available to executives of Pathmark, with respect to Mr. Cuti and Rickel, with respect to Mr. Borshadel, or as may be deemed appropriate by the Compensation Committee of the Board of Directors of Holdings.
In the event one of the above named executives' employment is terminated by the Company without Cause (as defined in the Employment Agreements), or by the executive for Good Reason (as defined in the Employment Agreements) prior to the termination of the applicable Employment Agreement, such executive will be entitled to continue to receive his base salary, plus bonus (if earned) and continued coverage under health and insurance plans for the two year period commencing on the date of such termination or resignation, reduced by any compensation or benefits which the executive is entitled to receive in connection with his employment by another employer during said period. In addition, if Mr. Futterman's employment is terminated by the Company without Cause or by him for Good Reason on or after a Change in Control, he will then be entitled to receive such benefits for a three year period, and his base salary shall be the greater of his base salary at the annual rate in effect immediately prior to such termination of resignation or $500,000.
Under the 1993 Employment Agreement, a Change in Control means (a) the acquisition by a Third Party (as hereinafter defined) of beneficial ownership of more than 30% of the issued and outstanding voting common stock of SMG-II, Holdings or the Company or (b) the acquisition of all or substantially all of the assets of the Company by a Third Party; provided, however, that no Change in Control will be deemed to occur as long as (i) the ML Investors, (ii) the management employees of the Company, or (iii) the ML Investors, in combination with the management employees of the Company, beneficially own, directly or indirectly, more than 50% of the voting common stock of the Company. "Third Party" shall mean any person other than the Company, Holdings or SMG-II, each of the ML Investors, or The Equitable Life Assurance Society of the United States and its affiliates. For purposes of the 1993 Employment Agreement, "person" and "beneficial ownership" shall have the meanings assigned to such terms under Section 13(d) of the Exchange Act, as amended, and "affiliate" of any first person shall mean a second person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such first person.
The Employment Agreements contain agreements by the executives not to compete with the Company as long as they are receiving payments under an Employment Agreement and an agreement by the executives not to disclose confidential information.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Burke, Khanna and McLean comprise the compensation committees of the Board of Directors of both Holdings and SMG-II, and were responsible for decisions concerning compensation of the executive officers of the Company. Messrs. Burke, Khanna and McLean are all executive officers of ML&Co. and ML Capital Partners. See "Certain Transactions--Certain Relationships and Related Transactions".
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Since February 4, 1991, all shares of the Company's Common Stock are held by SMG-II. As of April 1, 1994, the number of shares of SMG-II(i) Class A Common Stock, (ii) Class B Common Stock, (iii) Series A Preferred Stock, and (iv) Series B 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:
(footnotes on following page)
(footnotes for preceding page)
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(1) Includes presently exercisable options granted under the Plan for 67,492 shares of SMG-II Class A Common Stock held by Management Investors and 750 shares of SMG-II Class A Common Stock that SMG-II has agreed to sell to three of the Company's employees, including 250 shares to Mr. Cuti. Does not include 39,744 options to purchase shares of SMG-II Class A Common Stock granted to non-management employees of the Company, which options are not exercisable until a public offering of SMG-II Common Stock occurs. The total number of Management Investors is 55.
(2) ML Capital Partners 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 in footnote (3) below, are referred to herein as the "Merrill Lynch Investors". The address of such entities is c/o ML Capital Partners, 767 Fifth Avenue, New York, New York 10153. ML Capital Partners is a wholly owned subsidiary of ML&Co.
(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, North Tower, New York, New York 10281-1326.
(4) CBC Capital Partners, Inc. is a wholly owned subsidiary of Chemical Banking Corp.
(5) The Equitable Investors are separate purchasers who are affiliates of each other.
(6) SMG-II Preferred Stock may be converted into an equivalent number of shares of common stock of SMG-II in accordance with its terms.
No officer or director claims beneficial ownership of any share of the Company's Common Stock, or of SMG-II stock other than SMG-II Class A Common Stock. The number of shares of SMG-II Class A Common Stock beneficially owned by each director, by each of the five highest compensated executive officers and by all directors and all current and executive officers as a group is as follows:
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(1) Includes 250 shares of SMG-II Class A Common Stock that SMG-II has agreed to sell to Mr. Cuti and presently exercisable options granted under the Plan to purchase shares of SMG-II Class A Common Stock as follows: Mr. Borshadel, 2,640; Mr. Cuti, 5,217; Mr. Futterman, 13,000; Mr. Kenny, 1,700; Mr. Rallo, 2,350; Mr. Rubenstein, 1,000, and all directors and executive officers as a group, 33,612.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 1990, Jerry G. Rubenstein, a Director, borrowed from the Company $100,000 in order to help finance his purchase of Company Class A Common Stock. Subsequently, such shares of Company
Class A Common Stock were exchanged for shares of SMG-II Class A Common Stock. The foregoing indebtedness to the Company is evidenced by a full recourse promissory note (the "Recourse Note"). The Recourse Note is for a term of ten years and bears interest at the rate of 8.02% per annum, payable annually. Except as otherwise provided in the Recourse Note, no principal on such recourse loan shall be due and payable until the tenth anniversary of the date of issue of such Recourse Note. Under the terms of the agreement pursuant to which the shares of Company Class A Common Stock were exchanged for shares of SMG-II Class A Common Stock, the Company is obligated to pay to each Management Investor who pays interest on his Recourse Note (except under certain circumstances) an amount equal to such interest, plus an amount sufficient to pay any income taxes resulting from the above described payment after taking into account the value of any deduction available to him as a result of the payment of such interest or taxes (the "Reimbursement Amount"). As of April 1, 1994, Mr. Rubenstein remained indebted to the Company in the amount of $100,000.
During Fiscal 1992, the Company retained Merrill Lynch, of which Messrs. Burke, Khanna and McLean are principals, to act as underwriter in connection with its offering of the Subordinated Notes. In addition, in Fiscal 1993 Merrill Lynch acted as Dealer Manager in connection with the Exchange Offer and related Solicitation, and as underwriter in connection with the Pathmark Senior Subordinated Notes and Junior Subordinated Deferred Coupon Notes Offerings for which it received customary fees. The Company believes that the terms of the transactions referred to under this paragraph were no less favorable than those obtainable in transactions with unrelated persons.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report.
(b) Reports on Form 8-K.
Current report on Form 8-K dated November 1, 1993 (Items 5 and 7).
(c) Exhibits required by Item 601 of Regulation S-K.
See item 14(a) 3 above.
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 29, 1994 SUPERMARKETS GENERAL HOLDINGS CORPORATION
By: /s/ ANTHONY CUTI ..................................
Anthony Cuti 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.
SCHEDULE V
SUPERMARKETS GENERAL HOLDINGS CORPORATION PROPERTY AND EQUIPMENT (IN THOUSANDS)
SCHEDULE VI
SUPERMARKETS GENERAL HOLDINGS CORPORATION ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT (IN THOUSANDS)
Depreciation and amortization expense of owned property and equipment is computed on the straight-line method over their estimated useful lives. Amortization of property under capital leases is computed on the straight-line method over the remaining terms of the leases. Depreciable lives are primarily the following:
SCHEDULE VIII
SUPERMARKETS GENERAL HOLDINGS CORPORATION ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE, TRADE (IN THOUSANDS)
SCHEDULE X
SUPERMARKETS GENERAL HOLDINGS CORPORATION SUPPLEMENTARY INCOME STATEMENT INFORMATION (IN THOUSANDS)
Certain items noted in Rule 12-11 of Regulation S-X have been excluded from the above schedule on the basis that each is less than 1% of net sales as reported in the related Consolidated Statements of Operations.
EXHIBIT INDEX
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*Filed herewith.