ITEM 1. BUSINESS*
Registrant was incorporated in the State of Delaware in April 1987 as SMG Holdings Corporation. Subsequently, registrant's name was changed to Supermarkets General Holdings Corporation (the "Company"). The Company acquired Supermarkets General Corporation ("Old Supermarkets"), in October 1987 (the "Acquisition"). References to the Company in this Report refer to the Company and its subsidiaries on a consolidated basis, except where the context requires otherwise.
In October 1989, Old Supermarkets adopted an amended and restated Plan of Liquidation pursuant to which it was liquidated into three wholly owned subsidiaries of the Company. In November 1989, pursuant to such Plan, Old Supermarkets transferred substantially all of the assets of its Purity Supreme division to two of the three above mentioned wholly owned subsidiaries of the Company, Purity Supreme, Inc. ("Purity") and Li'l Peach Corp. ("Li'l Peach", and together with Purity, the "Purity Operations"), and said subsidiaries assumed substantially all of the liabilities of Old Supermarkets related to such division. Old Supermarkets completed the liquidation just prior to the year ended February 3, 1990 by merging with the third of the above mentioned wholly owned subsidiaries of the Company, which retained the name Supermarkets General Corporation. In connection with the Recapitalization referred to below, Supermarkets General Corporation changed its name to Pathmark Stores, Inc. ("Pathmark").
On December 17, 1991, the Company completed the sale of the Purity Operations for approximately $257.0 million (as adjusted), including the assumption of certain indebtedness of Purity and Li'l Peach. The Company recognized a loss of $228.0 million on the sale of the Purity Operations. Included in the loss was a write-off of approximately $214.0 million of goodwill related to the Purity Operations. The Company retains a 10% common equity interest in Purity Supreme and a new issue of Purity Supreme exchangeable preferred stock with an aggregate stated value of approximately $18.0 million. Such preferred stock has a redemption price, including unpaid dividends, of $14.5 million at January 28, 1995. These retained investments in Purity Supreme are carried on the Company's books at zero value. Pathmark is contingently liable for certain obligations of the Purity Operations under certain instruments, primarily 60 leases for real property, in the event of default thereunder by the Purity Operations. Prior to the sale of the Purity Operations, three properties of Purity Supreme were transferred to Pathmark. See "Properties".
On November 4, 1994, the Company completed the sale of its home centers segment for approximately $88.7 million, plus the assumption of certain indebtedness of Rickel. The Company used approximately $66.6 million before January 28, 1995 and $4.7 million after January 28, 1995 of its net proceeds to pay down the PTK Exchangeable Guaranteed Debentures due 2003 (the "PTK DIB's"), including accrued interest and debt premium.
The Company consummated a recapitalization plan (the "Recapitalization") on October 26, 1993. In connection with the Recapitalization, the Company, transferred all of the capital stock of Pathmark to PTK Holdings, Inc. ("PTK"), a newly formed, wholly owned subsidiary of the Company. The Recapitalization reduced Pathmark's interest expense and has allowed Pathmark to devote its capital to growing its core supermarket and drug store business.
PTK was incorporated in the State of Delaware in Fiscal 1993 and owns 100% of the capital stock of Pathmark and also owns 100% of the capital stock of Plainbridge, Inc., a newly formed Delaware corporation ("Plainbridge"). Pathmark distributed the capital stock of Plainbridge to PTK in the Plainbridge Spin-Off (as defined below).
In connection with the Recapitalization, Pathmark contributed its Rickel home centers segment, the warehouse, distribution and transportation operations and the inventory therein that service the
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* Except as otherwise indicated, information contained in this Item is given as of January 28, 1995.
Pathmark supermarkets and drug stores and certain other assets to Plainbridge and distributed the shares of Plainbridge to PTK (the "Plainbridge Spin-Off"). In addition, Pathmark contributed to Chefmark, Inc., a newly formed Delaware corporation ("Chefmark"), the Chefmark deli food preparation operations and a related warehouse and a leased banana ripening warehouse and distributed the shares of Chefmark to Holdings (the "Chefmark Spin-Off", and, together with the Plainbridge Spin-Off, the "Spin-Offs"). In connection with the Plainbridge Spin-Off, Pathmark entered into a logistical services agreement with Plainbridge (the "Logistical Services Agreement") that provides for the continuing supply of merchandise to the Pathmark supermarkets and drug stores and for the provision of warehousing, distribution and logistical services relating to the supply of such merchandise. Pursuant to such agreement, Pathmark directs the purchase of such merchandise and negotiates the terms and conditions of its sale directly with the applicable vendors. For a further description of the terms of the Logistical Services Agreement see "--Logistical Services Agreement".
Current Borrowings. (a) In 1993 Pathmark borrowed $400.0 million from banks under a term loan facility (the "Term Loan") and $50 million under a $175.0 million working capital facility (the "Working Capital Facility", and, together with the Term Loan, the "Bank Credit Agreement"). Borrowings under the Working Capital Facility were $33.5 million at April 24, 1995.
(b) In 1993 Pathmark issued $440.0 million aggregate principal amount of 9 5/8% Senior Subordinated Notes due 2003 (the "Senior Subordinated Notes").
(c) Pathmark issued $198.5 million of its 11 5/8% Subordinated Notes due 2002 (the "Subordinated Notes") for up to the $200.0 million aggregate principal amount outstanding of Holdings' 11 5/8% Subordinated Notes due 2002 (the "Holdings Subordinated Notes"), in connection with an exchange offer (the "11 5/8% Exchange Offer") in October 1993. During 1994, Pathmark issued an additional $0.5 million of Subordinated Notes in exchange for $0.5 million of Holdings Subordinated Notes. Approximately $1.0 million aggregate principal amount of Holdings Subordinated Notes remain outstanding at January 28, 1995. An equivalent amount of subordinated Intercompany Notes with terms corresponding to the terms of the Holdings Subordinated Notes also remain outstanding.
(d) In 1993, Pathmark also issued $95.8 million aggregate principal amount of its 12 5/8% Subordinated Debentures due 2002 (the "Subordinated Debentures") in connection with an exchange (the "12 5/8% Exchange Offer") for $95.8 million aggregate principal amount of the $415.0 million aggregate principal amount outstanding of Holdings' 12 5/8% Subordinated Debentures due 2002 (the "Holdings Subordinated Debentures") held by persons other than certain affiliates of The Equitable Life Assurance Society of the United States (the "Equitable Affiliates"). Holdings also purchased $4.2 million aggregate principal amount of such Debentures for cash at a price of 112.125% of the aggregate principal amount thereof, together with accrued interest to the date of purchase (the "Tender Offer", and, together with the 12 5/8% Exchange Offer, the "Tender and Exchange Offer"). Holdings solicited consents from all holders of the Holdings Subordinated Debentures to certain proposed amendments to delete certain restrictions in the indenture under which the Holdings Subordinated Debentures were issued (the "Holdings Subordinated Debenture Indenture") and paid related consent fees. Holders of Holdings Subordinated Debentures (other than the Equitable Affiliates) tendered $95.8 million aggregate principal amount of Holdings Subordinated Debentures for Subordinated Debentures pursuant to the Tender and Exchange Offer, and holders representing over 99% of the aggregate outstanding principle amount of the Holdings Subordinated Debentures consented to the proposed amendments. In addition, as part of the Recapitalization, Holdings also purchased for cash $185.0 million aggregate principal amount of the Holdings Subordinated Debentures from the Equitable Affiliates at the same price offered in the Tender Offer and sold PTK's DIBs with an issue price of $130.0 million to the Equitable Affiliates in exchange for the remaining $130.0 million of Holdings Subordinated Debentures held by the Equitable Affiliates as described below.
(e) In 1993, Pathmark issued in (the "Deferred Coupon Notes Offering", and, together with the Senior Subordinated Notes Offering, the "Debt Offerings") $225.25 million aggregate principal amount at maturity of its Junior Subordinated Deferred Coupon Notes due 2003 (the "Deferred Coupon Notes") at an issue price of $532.74 per $1,000 principal amount at maturity.
(f) In 1993, PTK issued $130.0 million aggregate principal amount of PTK DIBs to Holdings that Holdings subsequently sold to the Equitable Affiliates in a private placement (the "Private Placement") in exchange for $130.0 million aggregate principal amount of the Holdings Subordinated Debentures held by the Equitable Affiliates. Such Holdings Subordinated Debentures were cancelled and the related intercompany indebtedness of Pathmark to Holdings (the "Intercompany Notes") was forgiven by Holdings resulting in a $130.0 million capital contribution to Pathmark.
BUSINESS OF THE COMPANY
The Company's primary business activity is the management of its interests in Pathmark, Plainbridge and Chefmark. The Company holds all of the capital stock of PTK and all of the capital stock of Chefmark. Through PTK, the Company owns all of the capital stock of Pathmark and Plainbridge.
The primary business activity of Plainbridge is to operate the warehouse, distribution and transportation operations that service the Pathmark supermarkets and drug stores. Chefmark's primary business is to supply Pathmark with deli food preparation services and merchandise from the banana ripening facility.
BUSINESS OF PATHMARK
Pathmark is the leading supermarket retailer, based on sales volume, operating under a single trade name in the northeast United States and the thirteenth largest in the United States. At January 28, 1995, Pathmark operated 143 supermarkets, primarily in the New York-New Jersey and Philadelphia metropolitan areas. These metropolitan areas contain over 10% of the population and grocery sales in the United States. At January 28, 1995, Pathmark also operated 30 freestanding conventional drug stores, primarily in the New York City metropolitan area, six "deep discount" drug stores in Connecticut and 136 pharmacies in its supermarkets, making it one of the leading drug store retailers, based on sales volume, in the northeast United States.
The following table presents the market area, number of stores and selling and total square footage for Pathmark's supermarkets and drug stores as of January 28, 1995.
BUSINESS STRATEGY
Pathmark's business strategy is to increase profitability and market penetration in its existing markets (i) by providing superior value to its customers through its marketing and merchandising programs, (ii) through store openings, enlargements and renovations and (iii) through increased operating efficiencies. In implementing this strategy, Pathmark has used and will continue to use a large-store format to increase operating efficiencies and to expand its offering of higher margin merchandise and services, most notably, perishable products.
Marketing and Merchandising
. Super Center Format. The average Pathmark Super Center is approximately 50% larger than the average size supermarket in the United States and offers greater convenience by providing one-stop shopping and a wider assortment of foods and general merchandise than is offered by conventional supermarkets. Pathmark expects that its new stores opened during the current and next two fiscal years will average approximately 62,000 square feet.
. Pathmark 2000. Pathmark 2000 is a new, larger Super Center format designed to provide Pathmark customers with a substantially greater selection of perishable products, particularly produce. Pathmark 2000 stores are also designed to be more "customer friendly", with wider aisles, more accessible customer service and information departments, improved signs and graphics, and increased availability of Pathmark associates. Implementation of elements of this format in certain stores has significantly enhanced sales and operating margins in these stores. A majority of Pathmark's new supermarkets and supermarket enlargements completed in Fiscal 1994 employed the Pathmark 2000 concept, and Pathmark expects that virtually all new stores and enlargements thereafter will employ the same concept. At January 28, 1995, 29 of Pathmark's supermarkets were Pathmark 2000s.
. Flexible Merchandising. Pathmark believes that its large-store format gives it considerable flexibility to respond to changing consumer demands and competition by varying and enhancing its merchandise selection. Pathmark's "Big Deals" program, currently consisting of over 500 merchandise items offers large-sized merchandise at prices which Pathmark believes are competitive with those available in "warehouse" and "club" stores. Pathmark emphasizes competitive pricing plus weekly sales and promotions supported by extensive advertising, primarily in print media. Merchandising flexibility and effectiveness is enhanced through the increased utilization of a category management approach.
. Pathmark Label. Pathmark believes that it is one of the leading supermarket retailers of private label merchandise in the United States offering for sale over 3,300 items through its private label program. Pathmark's private label brands are called Pathmark, No Frills and its newest brand, Pathmark Preferred.
. Pharmacy. Pathmark, which is the leading filler of prescriptions in the New York metropolitan area, provides full pharmacy services in virtually all of its Super Center stores and in all of its drug stores. Pathmark's broad market coverage within its marketing area has enabled it to become a leading filler of third-party prescriptions in this area. Pathmark believes that its well-established pharmacy operations provide a competitive advantage in attracting and retaining customers.
Store Expansion and Renovation Program
. New Stores, Enlargements and Renovations. During Fiscal 1994, Pathmark opened four new Pathmark 2000s, closed three smaller stores, converted four supermarkets to "deep discount" drug stores and completed 25 major renovations and enlargments. During Fiscal 1995, Pathmark plans to open an aggregate of up to six new Pathmark 2000s, five of which will replace smaller Pathmark stores, and to complete up to an aggregate of 32 major renovations and enlargements.
Pathmark recognizes the importance of keeping its stores looking fresh and up-to-date; thus, each store typically receives a major renovation or enlargement every five years. At the end of Fiscal 1994, Pathmark derived approximately 80% of its supermarket sales from stores that were opened or enlarged or underwent major renovations during the last five years.
. Core Market Focus. Pathmark has identified approximately 85 potential locations for new supermarkets within its current marketing areas and expects that all new stores opened during the current and next two fiscal years will be located in these areas. Pathmark believes that, by opening stores in its current marketing areas, it can achieve additional operating economies and other benefits from its store expansion program without the risks and costs associated with opening stores in new marketing areas.
Operating Efficiencies
. Technology. Pathmark has made a significant and continuing investment in information technology and believes it is a leader in the supermarket industry in this area. All Pathmark supermarket checkout terminals have third-generation "state of the art" IBM 4680 scanner systems supported by a RISC 6000 application processor in each store. These systems allow consumer credit and electronic fund transfer ("EFT") transactions, greatly facilitate system-wide promotion and merchandising programs, and improve the speed and control of customer transactions.
. "Outsourcing" Agreement. In Fiscal 1991, Pathmark entered into a long-term facilities management and systems integration agreement with a subsidiary of IBM. This contract offers significant advantages to Pathmark in controlling computer hardware and software costs and providing ongoing access to "state of the art" information technology.
. Geographic Concentration. All but one of the Pathmark supermarkets and drug stores are located within 100 miles of the Pathmark headquarters and principal warehousing facilities that service them. This allows for more efficient management supervision, increased speed of delivery and reduced transportation costs. All of the stores which Pathmark expects to open in the current fiscal year will be within this 100 mile radius.
PATHMARK SUPERMARKETS
Pathmark operated 143 supermarkets at January 28, 1995. Supermarkets accounted for approximately 96% of Pathmark's sales for Fiscal 1994. The following table presents selected data respecting supermarket sales and stores for the last five fiscal years.
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(a) Major renovations involve an investment of $350,000 or more and average nearly $1.8 million per store.
(b) Enlargements involve the addition of selling space and average an investment in excess of $2.5 million.
(c) Reflects the Company's decision in the fourth quarter of Fiscal 1994 to reconsider its Fiscal 1993 decision to close or dispose of two stores.
(d) Includes three supermarkets converted to "deep discount" drug stores during Fiscal 1994.
(e) Includes two stores not wholly owned, one of which opened in Fiscal 1990. The sales figures for these stores are not included above.
By industry standards, Pathmark stores are large and productive, averaging approximately 50,400 square feet in size and generating high average sales volume of approximately $28.7 million per store ($781 per selling square foot) for stores open for all of Fiscal 1994. Pathmark's 143 supermarkets at January 28, 1995 ranged from 26,000 to 66,000 square feet in size and included 130 supermarkets that are 40,000 square feet or larger in size. All Pathmark stores carry a broad variety of food and drug store products, including an extensive variety of the Pathmark, No Frills and Pathmark Preferred brands.
Pathmark pioneered the development of the large "superstore" in the northeast United States, opening the first "Pathmark Super Center" in 1977, and currently operates 137 such stores, including 29 "Pathmark 2000" stores. Super Centers represented 96% of Pathmark supermarket sales for Fiscal 1994. The majority of Super Centers were created through the enlargement or renovation of existing stores. Super Centers average approximately 50,000 square feet in size. In addition to the broad variety of food and non-food items carried in conventional Pathmark stores, a typical Super Center includes a customer service center, pharmacy, additional food selections (including expanded perishables departments, cheese shops, bakeries, fresh fish-on-ice and service delicatessen departments), videotape rentals, book departments and expanded health and beauty care departments. All Super Centers have EFT and credit transaction capability at their checkout terminals and 128 supermarkets and drugstores also featured in-store automated teller machines.
Pathmark has developed a new, larger Super Center format called "Pathmark 2000" designed to provide Pathmark customers with a substantially greater selection of perishable products, particularly produce. Pathmark 2000 stores are also designed to be more "customer friendly", with wider aisles, more accessible customer service and information departments, improved signs and graphics, and increased availability of Pathmark associates. Implementation of elements of this format in certain stores has significantly enhanced sales and operating margins in these stores. A majority of Pathmark's new supermarkets and supermarket enlargements completed in Fiscal 1994 employed the Pathmark 2000 concept and Pathmark expects that virtually all new stores and enlargements will employ the same concept.
Pathmark was the leader in its market areas in extending the operation of supermarkets to 24 hours a day. Currently, almost all Pathmark supermarkets are open seven days a week, 24 hours a day. Pathmark believes that these hours of operation increase both customer convenience and operating efficiency.
PATHMARK DRUG STORES
Pathmark also operated 30 freestanding conventional drug stores primarily in the New York City metropolitan area and six "deep-discount" drug stores in Connecticut at January 28, 1995. These stores, which accounted for approximately 4% of Pathmark's sales for Fiscal 1994, average 13,600 square feet in size and offer the full variety of products customarily offered by drug stores. In Fiscal 1994, Pathmark pharmacies, in both supermarkets and drug stores, filled approximately ten million prescriptions, making Pathmark one of the leading drugstore retailers, based on sales volume, in the northeast United States and the leading filler of prescriptions in the New York metropolitan area. In Fiscal 1994, Pathmark renovated a total of five drug stores, four of which were conventional drug stores. Pathmark's free-standing drug stores are generally open seven days a week during conventional hours.
Pathmark's supermarket and drug store business is generally not seasonal, although sales in the second and fourth quarters tend to be slightly higher than those in the first and third quarters.
STORE EXPANSION AND RENOVATION PROGRAM
A key feature of Pathmark's business strategy has been and will continue to be the expansion of the total selling square footage of its operations. Pathmark believes that by adding new stores and increasing the selling area of existing stores, it can improve its competitive position and widen operating margins by achieving economies of scale in merchandising, advertising, distribution and supervision.
During the five years ending with Fiscal 1994, Pathmark completed 104 major renovations and enlargements and opened 16 new supermarkets. At the close of Fiscal 1994, sales in these stores accounted for approximately 80% of its total supermarket sales.
Over the past five years, Pathmark has spent approximately $371.0 million on store openings, enlargements and major renovations including properties acquired under capital leases. In Fiscal 1994, Pathmark opened four new Pathmark 2000 super centers and completed 14 major renovations and 11 enlargements of its existing supermarkets. Pathmark currently expects to open up to six new Pathmark "2000" Super Centers during Fiscal 1995, five of which will replace smaller stores, and to complete up to 32 major renovations and enlargements.
ADVERTISING AND PROMOTION
As part of its marketing strategy, Pathmark emphasizes its competitive pricing through weekly sales and promotions supported by extensive advertising. Additional savings are offered each week through Pathmark "super coupons" in newspapers and circulars. Pathmark's advertising expenditures are concentrated on print advertising, including advertisements and circulars in local and area newspapers and advertising flyers distributed by shopping malls. Most of the remaining advertising expenses are for radio and television advertisements. During Fiscal 1994, Pathmark introduced "Smart Coupons" in its advertisements. With "Smart Coupons", customers no longer are required to actually cut out Pathmark coupons from its advertisement and physically present them at the cash registers. Rather, when a coupon item is scanned during the check-out process, the coupon savings is automatically deducted from the price. Pathmark believes that its "Smart Coupons" greatly convenience its customers and improve customer service at the checkout.
CONSUMER RESEARCH
Pathmark conducts numerous ongoing and special consumer research projects. These typically involve customer surveys (both in-store and by telephone) as well as focus groups. The information derived from these projects is used to evaluate consumers' attitudes and purchasing patterns and helps shape Pathmark's marketing programs. Pathmark conducts approximately 300,000 customer interviews per year.
TECHNOLOGY
Pathmark has made a significant and continuing investment in information technology and believes it is a leader in the supermarket industry in this area. All Pathmark supermarket checkout terminals have third-generation "state of the art" IBM 4680 scanner systems supported by a RlSC 6000 application processor in each store. These systems allow consumer credit and EFT transactions, greatly facilitate system-wide promotion and merchandising programs, and improve the speed and control of customer transactions. This technology and the data generated by scanning not only have led to lower labor costs, improved price control and shelf allocation and quicker customer check-out, but also have assisted in the analysis of product movement, profit contribution and demographic merchandising. Pathmark also has a computer-assisted ordering system which enables it to replenish inventory to avoid "out of stocks" at store level while maintaining optimum overall inventory levels.
All of the pharmacies are equipped with pharmacy computers. In addition to improving customer service, these computers aid pharmacists in detecting drug interaction, improve the collection of third-party receivables and help to attract third-party businesses such as health maintenance organizations and union welfare plans.
In August 1991, Pathmark entered into a long-term facilities management and systems integration agreement with Integrated Systems Solutions Corporation ("ISSC"), a subsidiary of IBM. Under the agreement, ISSC has taken over Pathmark's data center operations and mainframe processing and information system functions (formerly performed by approximately 150 employees) and is providing
business applications and "state of the art" systems designed to enhance Pathmark's customer service and efficiency. ISSC developed Pathmark's recently installed scanner and checkout terminals. Additionally, over the next several years, ISSC has contracted to develop an integrated purchasing application, a new financial system, and electronic data interchange capabilities that will streamline communications between Pathmark and its primary suppliers.
SUPPLY AND DISTRIBUTION
Pursuant to the Logistical Services Agreement and subject to Pathmark's direction, Plainbridge supplies Pathmark with most of the merchandise sold in Pathmark's supermarkets and drug stores through Plainbridge distribution facilities located in New Jersey, together with warehousing, distribution and logistical services relating to the supply of such merchandise. See "--Logistical Services Agreement". During Fiscal 1994, the Plainbridge distribution facilities supplied approximately 81% of the merchandise sold in Pathmark's supermarkets and drug stores. In addition, pursuant to a supply agreement between Chefmark and Pathmark (the "Chefmark Supply Agreement"), Chefmark supplies Pathmark with merchandise from its banana ripening and deli food preparation operations. The Chefmark Supply Agreement provides that, for a period of seven years, such services are to be performed by Chefmark in substantially the same manner as they have been performed by Pathmark's banana ripening and deli food preparation operations prior to the Chefmark Spin-Off.
All but one of Pathmark's stores are located within 100 miles of the principal Plainbridge and Chefmark distribution centers. The following table presents information concerning the distribution and processing facilities through which Plainbridge and Chefmark will supply Pathmark, and the product lines relevant to each as of January 28, 1995:
DISTRIBUTION FACILITIES (1)
SQUARE YEAR LOCATION PRODUCT LINE FOOTAGE OPENED - ----------------------------- --------------------------- ------- ------ Woodbridge, NJ(2)............ Dry Grocery 475,000 1968 Edison, NJ(3)................ General Merchandise, Health 266,000 1980 and Beauty Care Products, Pharmaceuticals, Tobacco Woodbridge, NJ(2)............ Meat, Dairy, Deli, Produce 255,000 1970 Dayton, NJ(3)................ Frozen Food Distribution 112,000 1994 Center
PROCESSING FACILITIES
SQUARE YEAR LOCATION PRODUCTS PROCESSED FOOTAGE OPENED - ----------------------------- --------------------------- ------- ------ Somerset, NJ(4).............. Delicatessen Products 16,000 1976 Avenel, NJ(5)................ Banana Ripening 30,000 1984
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(1) Pathmark also stores and ships certain products from independent warehouses, including a dry grocery storage facility in North Brunswick, New Jersey.
(2) Owned by Plainbridge.
(3) Leased by Plainbridge.
(4) Owned by Chefmark.
(5) Leased by Chefmark.
LOGISTICAL SERVICES AGREEMENT
In connection with the Plainbridge Spin-Off, Pathmark and Plainbridge entered into the Logistical Services Agreement to provide for the supply by Plainbridge to Pathmark of most of the merchandise sold in Pathmark's retail stores and for the provision of warehousing, distribution and other logistical services relating to the supply of such merchandise. Pursuant to the Logistical Services Agreement, Pathmark directs the purchase of the merchandise to be provided to it by Plainbridge. Pathmark negotiates directly with vendors regarding the types of merchandise required, the quantities needed, delivery schedules, pricing, and all other terms and conditions of sale. All merchandise is ordered by Pathmark for the account of Plainbridge, which pays for, and retains title to, such merchandise until it has been delivered to Pathmark. If requested by a vendor, Pathmark, in its sole discretion, may guarantee payment of such orders by Plainbridge. In general, the Logistical Services Agreement also requires Plainbridge to perform the same services, in substantially the same manner, that were performed by Pathmark's warehouse and distribution group prior to the Plainbridge Spin-Off.
The Logistical Services Agreement requires, with certain exceptions and subject to certain termination rights, Plainbridge to sell to Pathmark, for a period of ten years, to the extent requested by Pathmark, all of Pathmark's merchandise requirements for both its existing and future stores. In addition, Pathmark has five one-year renewal options following the expiration of the original ten-year term. The Logistical Services Agreement does not limit Pathmark's ability to purchase goods from other suppliers, and merchandise that Pathmark customarily obtains directly from vendors is excluded from the Logistical Services Agreement.
The Logistical Services Agreement requires Plainbridge to store and deliver to Pathmark all merchandise purchased at Pathmark's direction. Pathmark is required in good faith to designate Plainbridge as its carrier with respect to merchandise customarily shipped directly from vendors to the Pathmark stores. Plainbridge may be required to maintain inventory with a book value of at least $130.0 million for the exclusive use of Pathmark, and to the extent that the inventory value falls below such level, Plainbridge may be asked by Pathmark to purchase sufficient merchandise to maintain such level to the extent such merchandise is ordered by Pathmark. Plainbridge is also required to accommodate physical annual increases of up to five percent in the volume of the Pathmark-directed purchases of merchandise to be handled by Plainbridge. Pathmark reimburses Plainbridge for all reasonable incremental out-of-pocket costs (but not capital costs) incurred by Plainbridge for the storage and handling of merchandise that is in excess of the five percent annual capacity increase, provided that such out-of-pocket costs do not exceed the costs of storage and handling at local independent warehouses.
Upon the delivery of merchandise to the Pathmark stores by Plainbridge, Pathmark will owe Plainbridge for the cost of the merchandise plus a specified variable payment. This payment will vary according to the type and value of the merchandise. A minimum guaranteed payment is payable by Pathmark to the extent that the aggregate of the variable payments described above payable in any year does not exceed the minimum guaranteed payment. The minimum guaranteed payment for Fiscal 1995 is $136.1 million and such payment is adjusted upward (but not downward) each fiscal year by the rate of inflation. Pathmark is obligated to pay the minimum guaranteed payment to Plainbridge irrespective of whether Pathmark purchases merchandise from other suppliers, except in cases of force majeure or when Plainbridge shall have materially breached the Logistical Services Agreement or shall have failed to obtain or maintain the licenses and permits needed to operate its business. The minimum guaranteed payment will be reduced to the extent that the volume of merchandise purchases decreases as a result of any store dispositions by Pathmark and will also be reduced if the volume of Pathmark-directed merchandise falls below 90% of the actual volume achieved in Fiscal 1992, to the extent that Plainbridge is, as a result, able to realize reductions in its operating costs. Plainbridge will grant Pathmark an allowance, based on the amount of merchandise purchased by Plainbridge at Pathmark's direction, which will be credited against the variable fees and minimum guaranteed payment obligation. In addition, certain cost benefits derived from increases in the volume of merchandise purchased from
Plainbridge by Pathmark or third parties will be shared equally between Pathmark and Plainbridge. Estimated payments are payable in weekly installments with an annual reconciliation for the amount of payments that are actually payable for such year. Pathmark will pay to Plainbridge the costs of the merchandise at the time a vendor requires payment from Plainbridge.
The Logistical Services Agreement allows Plainbridge to sell merchandise and provide logistical services to third parties, although it is not permitted to sell merchandise to supermarkets, drug stores and other retail stores stocking merchandise carried by Pathmark in Pathmark's current market areas, except for retail stores that do not in the ordinary course of business engage to a significant degree in the sale of food or pharmacy-related products, without Pathmark's prior written consent, which consent may not be unreasonably withheld. Plainbridge is also permitted to "piggyback" such third parties' orders onto Pathmark's orders from vendors, so long as they do not interfere with Pathmark's delivery schedules, quantity needs or other requirements.
Plainbridge and the Company are allowed to terminate the Logistical Services Agreement if the other (i) materially breaches its terms and fails to cure such breach for 60 days after written notice has been provided by the other party or (ii) experiences certain insolvency events. Additionally, following the fourth anniversary of the date of the Logistical Services Agreement, the Company has the option of terminating it at will on six months notice. If the Company terminates the Logistical Services Agreement because of a material breach by, or insolvency of, Plainbridge, the Company has the right to purchase, within 30 days of the termination, that portion of the assets of Plainbridge which is essential to the support of Plainbridge's obligations to the Company under the Logistical Services Agreement (the "Pathmark Distribution Assets") at the lower of (i) their net book value or (ii) their fair market value. If the Company exercises its at will option to terminate the Logistical Services Agreement, the Company is required to offer to purchase the Pathmark Distribution Assets at their fair market value. If Plainbridge terminates the Logistical Services Agreement because of a material breach by, or insolvency of the Company, Plainbridge has the right to sell to the Company (and the Company will have the obligation to buy) the Pathmark Distribution Assets at their fair market value within 30 days of such termination.
Other than in the ordinary course of business, Plainbridge is not permitted to sell any of the Pathmark Distribution Assets without Pathmark's prior written consent. Additionally, in the event of a change in the ultimate beneficial ownership of Plainbridge voting stock such that a person, other than Merrill Lynch and Co., Inc. ("ML&Co.") or an affiliate of ML&Co., holds a majority of such stock, Pathmark has, for a period of two years, the irrevocable and exclusive right to purchase any or all of the Pathmark Distribution Assets at their fair market value.
Other provisions of the Logistical Services Agreement include (i) that Plainbridge will pass on to Pathmark all discounts and allowances made available to it by vendors in respect of merchandise purchased for Pathmark, unless such discounts or allowances were made available solely as a result of actions taken or not taken by Plainbridge, (ii) that Plainbridge must ensure that merchandise quality meets or exceeds the standards established by Pathmark for such merchandise, and that Pathmark may place its representatives at the Distribution Facilities to ensure that such quality is maintained, (iii) that Plainbridge will deliver merchandise to Pathmark at a 98% or better level of service measured in accordance with Pathmark's practices prior to the Plainbridge Spin-Off, (iv) that Pathmark will pay Plainbridge for any use of trailers for storage and (v) that each of Pathmark and Plainbridge will cooperate to reduce costs and improve service levels.
Disputes between Pathmark and Plainbridge under the Logistical Services Agreement will be submitted to an arbitration panel made up of representatives of both parties. The President of Pathmark shall act as chairman of the dispute panel and each party shall appoint two other members to the dispute panel, the decision of which will be subject to the approval of the boards of directors of each party. If the decision of the dispute panel is not approved by each board of directors, the dispute will be required to be submitted to independent arbitration.
The Logistical Services Agreement is a result of a related party negotiation between Pathmark and Plainbridge. Pathmark believes that the payments provided for under the terms of the Logistical Services Agreement represent a reasonable allocation of the costs and benefits for both companies. In addition, Pathmark believes that the terms of the Logistical Services Agreement are no less favorable to Pathmark than those which could be obtained from unaffiliated parties and enable Pathmark to obtain substantially the same level of supply and other logistical services as was available from the Distribution Facilities prior to the Spin-Offs at substantially the same or a lower cost.
COMPETITION
The supermarket and drug store businesses are highly competitive and are characterized by high asset turnover and narrow profit margins. Pathmark's earnings are primarily dependent on the maintenance of relatively high sales volume per supermarket, efficient product purchasing and distribution and cost-effective store operating techniques. Pathmark's main competitors are national and regional supermarkets, drug stores, convenience stores, discount merchandisers, "warehouse" and "club" stores and other local retailers in the areas served. Principal competitive factors include price, store location, advertising and promotion, product mix, quality and service.
TRADE NAMES, SERVICE MARKS AND TRADEMARKS
Pathmark has registered a variety of trade names, service marks and trademarks with the United States Patent and Trademark Office, each for an initial period of 20 years, renewable for as long as the use thereof continues. Pathmark considers its Pathmark service marks to be of material importance to its business and actively defends and enforces such service marks.
REGULATION
Pathmark's food and drug business requires it to hold various licenses and to register certain of its facilities with state and federal health, drug and alcoholic beverage regulatory agencies. By virtue of these licenses and registration requirements, Pathmark is obligated to observe certain rules and regulations, and a violation of such rules and regulations could result in a suspension or revocation of the licenses or registrations. In addition, most of Pathmark's licenses require periodic renewals. Pathmark has experienced no material difficulties with respect to obtaining, effecting or retaining its licenses and registrations.
EMPLOYEES
At January 28, 1995, the Company employed approximately 30,500 people, of whom approximately 20,400 were employed on a part-time basis.
Approximately 86% of the Company's employees are covered by 31 collective bargaining agreements (typically having three or four year terms) negotiated with approximately 18 different local unions. During Fiscal 1995, six contracts covering approximately 2,100 Pathmark and Chefmark associates will expire. The Company does not anticipate any difficulty in renegotiating these contracts.
The Company believes that its relationship with its employees is generally satisfactory.
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 and drug stores and its distribution facilities are located.
THE COMPANY
The Company's primary subsidiary, Pathmark, leases and owns a large group of properties, as described below. In addition, Chefmark owns a 16,000 square foot delicatessen products processing and distribution facility in Somerset, New Jersey and leases a 30,000 foot banana ripening facility in Avenel, New Jersey. These facilities supply Pathmark's supermarkets with delicatessen and produce products.
PATHMARK
Pathmark's 143 supermarkets have an aggregate selling area of approximately 5.2 million square feet. The ownership interest in the buildings and real property of ten supermarket locations (one of which is a closed store location) and the headquarters in Woodbridge, New Jersey were contributed to Plainbridge in the Spin-Offs and, except for the closed store location, were leased to Pathmark. Thirteen of the supermarkets are owned by Pathmark (or its subsidiaries) and the remaining 130 are leased. These supermarkets either are freestanding stores or are located in shopping centers. Thirty-four leases expire during the current and next four calendar years and Pathmark has options to renew 33 of them.
Pathmark's 36 freestanding drug stores (those not located in supermarkets) have an aggregate selling area of approximately 398,000 square feet. Two of the drug stores are owned by Pathmark and the remaining 34 are leased. Nineteen leases expire during the current and next four calendar years and Pathmark has options to renew 14 of them.
Certain distribution facilities that supply Pathmark supermarkets and drug stores were transferred to Plainbridge in connection with the Plainbridge Spin-Off. Certain of these facilities are leased and some are owned. See "Business of Pathmark--Supply and Distribution" in Item 1 of this report.
Pathmark maintains administrative and accounting offices in Carteret, New Jersey in leased premises totalling approximately 150,000 square feet in size. Pathmark also currently leases or owns additional office space totaling approximately 128,000 square feet in various locations that are used as the Pathmark headquarters and regional offices for its operating divisions.
Most of the facilities owned by Pathmark are owned subject to mortgages. Pathmark plans to acquire leasehold or fee interests in any property on which new stores or other facilities are opened and will consider entering into sale/leaseback or mortgage transactions with respect to owned properties if Pathmark believes such transactions are financially advantageous.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On December 7, 1990, a lawsuit (the "Complaint") was commenced by a holder of the Exchangeable Preferred Stock, Stanley D. Bernstein, as custodian for Michelle Bernstein, against the Company, SMG-II Holdings Corp. ("SMG-II"), Merrill Lynch Capital Partners, Inc. ("MLCP"), Merrill Lynch & Co. ("ML&Co.") and the directors of the Company in the Chancery Court, New Castle County, Delaware. The Complaint purported to be a class action and alleged that the original terms of the Exchangeable Preferred Stock Offer, at $5 per share, constituted a coercive tender offer and a breach of fiduciary duties owed to holders of Exchangeable Preferred Stock. The Complaint sought declaratory and injunctive relief, as well as monetary damages, with respect to the Exchangeable Preferred Stock Offer, but no motions seeking any such relief on a provisional or permanent basis were filed either prior or subsequent to the completion of the Exchangeable Preferred Stock Offer on February 4, 1991. The Delaware Chancery Court dismissed the case with prejudice on July 7, 1994, and approved a total payment of $200,000 as attorneys' fees.
- ------------
** Except as otherwise indicated, information contained in this Item is given as of January 28, 1995.
On March 1, 1993 Pathmark was served with a summons and complaint filed by Hygrade Milk & Cream Co., Inc., Terminal Dairies, Inc., Sunbeam Farms, Inc., Hytest Milk Corp., Gold Metal Farms, Inc., Queens Farms Dairy, Inc., Babylon Dairy Co., Inc. and Meadowbrook Farms, Inc., in an action being heard in the United States District Court for the Southern District of New York. In the complaint the plaintiffs allege, among other things, that Pathmark induced processors of Tropicana orange juice to provide it with favorable price and other terms that discriminated against other sellers of orange juice in violation of the price discrimination provisions of the Robinson-Patman Act. On February 2, 1995, the Court entered an order approving plaintiffs' dismissal of Pathmark from the action with prejudice and without costs or fees. Pathmark is thus no longer a defendant in this action.
In addition to the litigation referred to above, the Company is a party to a number of legal proceedings in the ordinary course of business. Management believes that the ultimate resolution of these proceedings will not, in the aggregate, have a material adverse impact on the financial condition, results of operations or the business of the Company.
ITEM 4.
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, 1995)
Neither the Company's Class A Common Stock nor its Class B Common Stock, each $0.01 par value, is publicly traded on any market. All of registrant's outstanding Common Stock is held by SMG-II.
The authorized preferred stock of the Company consists of 9,000,000 shares of Exchangeable Preferred Stock (the "Holdings Preferred Stock"), of which 4,890,671 shares were issued and outstanding at January 28, 1995. The Exchangeable Preferred Stock has a liquidation preference of $25 per share and its terms provide for cumulative quarterly dividends at an annual rate of $3.52 per share, when, as, and if declared by the Board of Directors of the Company. No active public trading market currently exists for the Company's Exchangeable Preferred Stock.
The Exchangeable Preferred Stock is non-voting, except that if an amount equal to six quarterly dividends is in arrears in whole or in part, the holders thereof, voting as a class are entitled to elect an additional two members of the board of directors of the Company. The Company is currently in arrears on payment of more than six quarterly dividends on the Exchangeable Preferred Stock and does not expect to receive cash flow sufficient to permit payments of dividends on the Exchangeable Preferred Stock in the forseeable future. The holders of the Exchangeable Preferred Stock will vote to elect two persons to the Holdings' board of directors at Holdings 1995 annual meeting once two persons have been nominated. See Note 24 to the Company's Consolidated Financial Statements in Item 8 of this report for additional information.
The payment of dividends to holders of the Company's Common Stock is subject to restrictions by the Certificate of Designation of Rights, Preferences and Privileges under which its Exchangeable Preferred Stock was issued. The Company has not paid any dividends on its Common Stock and does not anticipate paying cash dividends on its Common Stock during Fiscal 1995.
The authorized capital stock of SMG-II consists of 3,000,000 shares of SMG-II Class A Common Stock, 3,000,000 shares of SMG-II Class B Common Stock, of which 650,675 and 320,000 shares, respectively, were issued and outstanding at April 1, 1995, and 4,000,000 shares of SMG-II Preferred Stock, of which 1,500,000 shares are SMG-II Series A Preferred Stock and 1,500,000 shares are SMG-II Series B Preferred Stock and of which 236,731 and 180,769 shares, respectively, were issued and outstanding at April 1, 1995.
SMG-II's capital stock is held beneficially as follows: (i) SMG-II Class A Common Stock by approximately 65 holders, including six affiliates of ML&Co. (The "ML Common Investors"), CBC Capital Partners, Inc. ("CBC"), an affiliate of Chemical Bank, and 58 current and former members of
the Company's management (the "Management Investors"); (ii) SMG-II Series A Preferred Stock by five holders, all affiliates of ML&Co., (the "Merrill Lynch Investors"); (iii) SMG-II Class B Common Stock held by four holders, including CBC, The Equitable Life Assurance Society of the United States ("Equitable") and the Equitable Affiliates (collectively, the "Equitable Investors"); and (iv) SMG-II Series B Preferred Stock held by four holders, including CBC and the Equitable Investors. Holders of shares of SMG-II Class A Common Stock are entitled to one vote per share on all matters to be voted on by stockholders. Holders of shares of SMG-II Class B Common Stock are not entitled to any voting rights, except as required by law or as otherwise provided in the Restated Certificate of Incorporation of SMG-II. Subject to compliance with certain procedures, holders of shares of SMG-II Class B Common Stock may exchange their shares for shares of SMG-II Class A Common Stock and holders of shares of SMG-II Class A Common Stock may exchange their shares for shares of SMG-II Class B Common Stock, in each case on a share-for-shares basis.
SMG-II Preferred Stock has a stated value and liquidation preference of $200 per share and bears dividends at the rate of 10% of the stated value per annum, payable annually. At the option of SMG-II dividends are payable in cash or may accumulate (and the amount thereof shall compound annually at a rate of 10% of the stated value per annum, payable annually. At the option of SMG-II, dividends are payable in cash or may accumulate (and the amount thereof shall compound annually at a rate of 10% per annum).
Holders of shares of SMG-II Series A Preferred Stock are entitled to one vote per share of SMG-II Class A Common Stock into which such SMG-II Series A Preferred Stock is convertible on all matters to be voted on by SMG-II stockholders, subject to increase to 1.11 votes per share upon the occurrence of certain events. Holders of shares of SMG-II Series B Preferred Stock are entitled to one vote per share of SMG-II Class B Common Stock into which such SMG-II Series B Preferred Stock is convertible for the purpose of voting on any consolidation or merger, any sale, lease or exchange of substantially all of the assets or any liquidation, dissolution or winding up, of SMG-II. Additionally, holders of SMG-II Preferred Stock have separate voting rights with respect to alteration in the voting powers, rights and preferences and certain other terms affecting the SMG-II Preferred Stock. Subject to compliance with certain procedures, holders of SMG-II Series B Preferred Stock may exchange their shares for shares of SMG-II Series A Preferred Stock and holders of SMG-II Series A Preferred Stock may exchange their shares for shares of SMG-II Series B Preferred Stock, on a share-for-share basis.
At the option of the holder, SMG-II Preferred Stock is convertible into SMG-II Common Stock at any time on or prior to the occurrence of certain events, including an initial public offering of in excess of 25% of the number of outstanding shares of common stock of SMG-II, at a conversion ratio of one share of the corresponding class of SMG-II Common Stock for each share of SMG-II Preferred Stock, subject to adjustment upon the occurrence of certain events.
Holders of SMG-II Preferred Stock are party with the holders of SMG-II Common Stock to the SMG-II Stockholders Agreement which, among other things, restricts the transferability of SMG-II capital stock and relates to the corporate governance of SMG-II. None of SMG-II's capital stock is publicly traded on any market. See Item 12. "Security Ownership of Certain Beneficial Owners and Management" and Note 25 to the Company's Consolidated Financial Statements in Item 8 for additional information.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table represents selected financial data for the last five fiscal years and should be read in conjunction with the Company's Consolidated Financial Statements in Item 8 of this report.
SUPERMARKETS GENERAL HOLDINGS CORPORATION SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS (IN MILLIONS)
(footnotes on following page)
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS
(footnotes continued on following page)
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 results from discontinued operations for all periods presented represent the operations of the Company's home centers segment which was sold during Fiscal 1994. At the time of Recapitalization, Holdings intended to further spin off Plainbridge to Holdings' common stockholder. Such further spin-off would have required the satisfaction of dividend restrictions with respect to Holdings' Exchangeable Preferred Stock, as well as, obtaining consents from various lenders to Plainbridge and PTK. During the fourth quarter of Fiscal 1994, as a result of the aforementioned dividend restrictions, Holdings has concluded that a further spin-off of Plainbridge to Holdings' common stockholder is not likely to occur. Accordingly, prior year financial statements which had included the results of Plainbridge's warehouse, transportation and real estate operations as discontinued operations have been reclassified to include such results in continuing operations. Although the discontinued operations have generated positive operating cash flows, the Company believes that the impact on the Company's liquidity is not material.
RESULTS OF OPERATIONS
Fiscal 1994 v. Fiscal 1993
Sales. Sales for Fiscal 1994 were $4.21 billion compared to $4.24 billion in Fiscal 1993. Sales for stores opened in both years, including replacement stores, decreased 0.4%. During Fiscal 1994, the Company opened four supermarkets, enlarged 11 supermarkets and completed major renovations in 14 supermarkets. At Fiscal 1994 year end, the Company operated 143 supermarkets, including 135 Pathmark Super Centers compared with the end of Fiscal 1993 when the Company operated 143 supermarkets, including 136 Pathmark Super Centers. The Company also operated 30 freestanding Pathmark drug stores and six "deep discount" drug stores at Fiscal 1994 year end compared with the end of Fiscal 1993 when the Company operated 31 freestanding Pathmark drug stores and two "deep discount" drug stores. In order to improve sales while continuing to improve profitability, the Company is continuing its focus on its store enlargement and renovation program.
Gross Profit. Gross profit for Fiscal 1994 was $1.19 billion or 28.2% of sales compared with $1.16 billion or 27.3% of sales in Fiscal 1993. This improvement in gross profit as a percentage of sales for Fiscal 1994 is attributable primarily to the Company's increased focus on merchandising programs as well as continuing emphasis on large super stores allowing expanded variety in all departments, particularly higher margin perishables. The cost of goods comparisons were affected by a pretax LIFO credit in Fiscal 1994 of $0.7 million compared to a $2.4 million credit in Fiscal 1993.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for Fiscal 1994 increased $9.3 million or 1.0% compared to Fiscal 1993. As a percentage of sales, selling, general and administrative expenses were 22.2% for Fiscal 1994, up from 21.8% for Fiscal 1993. The increase as a percentage of sales during Fiscal 1994 was due to higher computer development costs, labor and labor related expenses and occupancy expenses, partially offset by lower promotional costs this year compared to the additional promotional programs implemented last year to regain sales level subsequent to the strike and lockouts and lower claims expense related to customer accidents, medical and workers compensation.
Depreciation and Amortization. Depreciation and amortization expense of $75.6 million for Fiscal 1994 was $5.5 million more than the prior year's $70.1 million. The increase in depreciation and amortization expense is primarily due to the impact of increased capital spending levels. Depreciation and amortization excludes video tape amortization of $2.6 million in both Fiscal 1994 and Fiscal 1993 recorded in cost of goods sold (see Note 2).
Operating Earnings. Operating earnings for Fiscal 1994 were $175.9 million compared to $140.2 million in Fiscal 1993. The increase in operating earnings was primarily due to the impact of the strike and lockouts in Fiscal 1993, the recapitalization expenses of $16.6 million in Fiscal 1993 and the
provision for store closings of $6.0 million in Fiscal 1993. Operating earnings were also affected by a pretax LIFO credit of $0.7 million in Fiscal 1994, compared to a $2.4 million credit in Fiscal 1993.
Interest Expense. Interest expense for Fiscal 1994 was $170.8 million, a decrease of $19.3 million from the $190.1 million in Fiscal 1993. Interest charged to discontinued operations in Fiscal 1994 was $11.0 million compared to $13.1 million in Fiscal 1993. The lower interest expense, net of interest charged to discontinued operations, was primarily due to the benefit of lower interest rates on the debt incurred in connection with the Recapitalization.
Income Taxes. The income tax provision was $4.1 million in Fiscal 1994 compared to an income tax benefit of $20.8 million in Fiscal 1993. At January 28, 1995, the Company has a net deferred tax asset of approximately $32.8. Although the Company has generated pretax earnings in Fiscal 1994, the Company was unable to conclude that realization of such deferred tax assets was more likely than not due to pretax losses experienced in prior years. Accordingly, the Company has provided a valuation allowance of $26.8 million at January 28, 1995 to fully reserve its net deferred tax assets, except for its alternative minimum tax credit carryforwards which do not expire. Management will continue to assess the likelihood of realizing its deferred tax assets and will adjust the valuation allowance when and if, in the opinion of management, significant positive evidence exists which indicates that it is more likely than not that the Company will be able to realize such deferred tax assets. Such reductions in the valuation allowance, if any, will be reflected as a component of income tax expense. Refer to Note 19 to the Company's Consolidated Financial Statements for a further discussion of income taxes.
Summary of Continuing Operations. Earnings from continuing operations before gain on disposal of home centers segment, extraordinary items and cumulative effect of accounting changes were $12.0 million in Fiscal 1994 compared to a $16.1 million loss in Fiscal 1993. The increase in earnings was primarily due to the impact of the strike and lockouts in Fiscal 1993, the recapitalization expenses of $16.6 million in Fiscal 1993, and the provision for store closings of $6.0 million in Fiscal 1993, as well as the lower interest expense during Fiscal 1994 as a result of the Recapitalization.
Net Earnings (Loss). Net earnings were $23.2 in Fiscal 1994 compared to a net loss of $163.2 million in Fiscal 1993. During Fiscal 1994, the Company completed the sale of its home centers segment , recognizing a gain of $17.0 million, net of an income tax provision of $2.3 million. Fiscal 1994 and Fiscal 1993 included extraordinary items related to the net loss on early extinguishment of debt of $3.7 million and $106.2 million, respectively, and Fiscal 1993 included the cumulative effect of accounting changes of $40.4 million. Refer to Notes 4, 5 and 23 to the Company's Consolidated Financial Statements for a discussion of the home centers segment sale, the extraordinary items and the cumulative effect of accounting changes.
Fiscal 1993 v. Fiscal 1992
Sales. Sales for Fiscal 1993 were $4.24 billion compared to $4.34 billion in Fiscal 1992. The sales decrease for the year is primarily due to the impact of the strike and lockouts in the second quarter of Fiscal 1993 and the exclusion from reported results of the sales since the beginning of the second quarter of Fiscal 1993 of the three stores anticipated to be closed or sold as part of the provision for store closings. During Fiscal 1993, the Company opened four supermarkets, enlarged five supermarkets, and completed major renovations in twelve supermarkets. Five supermarkets were closed during Fiscal 1993. Sales for stores opened in both periods decreased by 2.4%. At Fiscal 1993 year end, the Company operated 143 supermarkets, including 136 Pathmark Super Centers, and 33 Pathmark freestanding drug stores. This compares with the end of Fiscal 1992 when the Company operated 146 supermarkets, including 139 Pathmark Super Centers, and 33 Pathmark freestanding drug stores.
Gross Profit. Gross profit for Fiscal 1993 was $1.16 billion or 27.3% of sales compared with $1.16 billion or 26.6% of sales in Fiscal 1992. This improvement in gross profit as a percentage of sales for Fiscal 1993 is attributable primarily to the Company's increased focus on merchandising programs as well as a continuing emphasis on large super stores allowing expanded variety in all departments, particularly higher margin perishables and service departments. The gross profit comparisons were
affected by a pretax LIFO credit in Fiscal 1993 of $2.4 million compared with a pretax LIFO provision of $2.2 million in Fiscal 1992.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for Fiscal 1993 increased $31.9 million or 3.6% compared to Fiscal 1992. As a percentage of sales, selling, general and administrative expenses were 21.8% for Fiscal 1993, up from 20.6% in Fiscal 1992. The increase as a percentage of sales during Fiscal 1993 was primarily attributable to higher promotional expenses and the lower sales volume and increased costs resulting from the strike and lockouts.
Recapitalization Expenses. In connection with the Plainbridge Spin-Off and Recapitalization, the Company recorded a pretax charge of approximately $23.7 million in the third quarter of Fiscal 1993 to record estimated reorganization and restructuring costs, including an early retirement program offered to certain Company associates. During the fourth quarter of Fiscal 1993, the Company determined that the estimated costs related to the reorganization and restructuring were less than originally estimated and recorded a pretax credit of approximately $7.1 million. Of the total net pretax charge of $16.6 million for Fiscal 1993, $6.4 million related to the early retirement program and severance costs incurred to reduce the Company's workforce, $8.1 million related to additional technical information systems costs incurred in order to accomplish the Plainbridge Spin-Off and $2.1 million related to warehouse and consulting costs associated therewith. Through January 29, 1994, the Company had expended $11.9 million related to these reorganization and restructuring costs. The remaining $4.7 million was paid during Fiscal 1994.
Provision for Store Closings. Effective with the beginning of the second quarter of Fiscal 1993, the Company originally made a decision to close or to dispose of five stores which the Company believed would continue to be unprofitable. As a result, the Company recorded a pretax charge in the second quarter of Fiscal 1993 of approximately $6.0 million. Operating results for the five stores had previously been excluded from the consolidated statements of operations since the beginning of the second quarter of Fiscal 1993. However, the Company decided on December 31, 1994 that two of the five stores would continue to be operated and, therefore, the operating results for these two stores have been included in the Fiscal 1994 and Fiscal 1993 statements of operations. The inclusion of these two stores had no effect on the Fiscal 1994 or 1993 reported results. The remaining three stores were closed during the fourth quarter of Fiscal 1994 and the related leases have been assigned or sublet subsequent to January 28, 1995.
Depreciation and Amortization. Depreciation and amortization expense of $70.1 million for Fiscal 1993 was $0.9 million more than the prior year's $69.2 million. The increase in depreciation and amortization expense is primarily due to the impact of the assets transferred to Plainbridge as part of the Plainbridge Spin-Off.
Goodwill Write-Off. During Fiscal 1992, the Company wrote off its remaining goodwill balance of $600.7 million. As a result of the write-off, there was no amortization of goodwill for Fiscal 1993 compared with $17.5 million for Fiscal 1992.
Operating Earnings. Operating earnings for Fiscal 1993 were $140.2 million compared to an operating loss of $425.8 million in Fiscal 1992. The increase in operating earnings is due to the goodwill write-off of $600.7 million and the amortization of goodwill in Fiscal 1992, partially offset in Fiscal 1993 by the impact of the strike and lockouts and the subsequent promotional programs implemented in order to regain sales levels, the recapitalization expenses of $16.6 million and the provision for store closings of $6.0 million. Operating earnings were also affected by a pretax LIFO credit of $2.4 million in Fiscal 1993 compared to a pretax LIFO provision of $2.2 million in Fiscal 1992.
Interest Expense. Interest expense for Fiscal 1993 was $190.1 million, a decrease of $7.7 million from the $197.8 million in Fiscal 1992. Interest charged to discontinued operations for Fiscal 1993 was $13.1 million compared to $13.0 million in Fiscal 1992. The lower interest expense, net of interest charged to discontinued operations, was primarily due to the benefit of lower interest rates on the debt
incurred in connection with the Recapitalization partially offset by additional interest on the accreted principal of Holdings 13.125% Discount Debentures.
Income Taxes. As a result of the Company's net operating tax loss, the Company recorded income taxes receivable of approximately $22.4 million resulting from the carryback of such losses. The carryforward of those losses not carried back resulted in a net deferred tax asset of approximately $41.3 million at January 29, 1994. Since the Company has experienced pretax losses in each of Fiscal 1993, Fiscal 1992 and Fiscal 1991, the Company was unable to conclude that realization of such deferred tax assets was more likely than not. Accordingly, the Company has provided a valuation allowance of $38.4 million to fully reserve its net deferred tax assets, except for its alternative minimum tax credit carryforwards which do not expire (see Note 19 to the Company's Consolidated Financial Statements).
The Omnibus Budget Reconciliation Act of 1993 was signed into law on August 10, 1993, which, among other things, increased the federal income tax rates for corporations to 35% from 34%, effective January 1, 1993. Deferred tax liabilities and assets have been adjusted to reflect the 1% increase in federal income tax rates.
Summary of Continuing Operations. The loss from continuing operations before gain on disposal of home centers segment, extraordinary items and cumulative effect of accounting changes was $16.1 million in Fiscal 1993 compared to $17.1 million (excluding the write-off of the remaining goodwill balance of $600.7 million and the Purity Operations gain of $2.0 million) in Fiscal 1992. The decrease in the loss is primarily due to lower interest expense as a result of the Recapitalization, increased operating earnings as discussed above and the elimination of goodwill amortization, partially offset by the impact of the strike and lockouts and the subsequent promotional programs implemented in order to regain sales levels, the recapitalization expenses, and the provision for store closings.
Net Loss. Net loss was $163.2 million in Fiscal 1993 compared to $621.7 million in Fiscal 1992. Fiscal 1993 included extraordinary items related to the net loss on early extinguishment of debt of $106.2 million and the cumulative effect of accounting changes of $40.4 million. Refer to Notes 5 and 23 to the Company's Consolidated Financial Statements for a discussion of the extraordinary items and the cumulative effect of accounting changes. Fiscal 1992 included the goodwill write-off of $600.7 million.
FINANCIAL CONDITION
Debt Service. During Fiscal 1994, total debt decreased $49.6 million from the prior year end primarily due to the paydown of the PTK DIBs as a result of the home centers segment sale and the scheduled Term Loan repayments, partially offset by an increase in borrowings under the Pathmark Working Capital Facility and by debt accretion on Pathmark Deferred Coupon Notes and PTK DIBs. Borrowings under the Pathmark Working Capital Facility were $63.0 million at January 28, 1995 and have decreased to $33.5 million at April 24, 1995. There were no borrowings under the Plainbridge Working Capital Facility at January 28, 1995 and April 24, 1995.
Under the Pathmark Working Capital Facility, which expires in Fiscal 1998, Pathmark can borrow or obtain letters of credit in an aggregate amount not to exceed $175.0 million (of which the maximum of $100.0 million can be in letters of credit) subject to an annual cleandown provision. Under the terms of the Pathmark cleandown provision, in each fiscal year loans cannot exceed $50.0 million under the Pathmark Working Capital Facility for a period of 30 consecutive days. The Company has satisfied the terms of the Pathmark cleandown provision for Fiscal 1994 and Fiscal 1995. Under the Plainbridge Working Capital Facility, which expires in Fiscal 1997, Plainbridge can borrow or obtain letters of credit in an aggregate amount not to exceed $40.0 million subject to an annual cleanup provision, commencing in Fiscal 1994. Under the terms of the Plainbridge cleanup provision, in each fiscal year, loans cannot be made for a period of 30 consecutive days. The Company has satisfied the terms of the Plainbridge cleanup provisions for Fiscal 1994 and Fiscal 1995.
Pathmark is required to repay a portion of its borrowings under the Pathmark Term Loan each year, so as to retire such indebtedness in its entirety by Fiscal 1999.
The indebtedness under the Pathmark and Plainbridge Working Capital Facilities and the Pathmark Term Loan bear interest at floating rates and cash interest payments on such indebtedness may vary in future years. The Company does not currently maintain any interest rate hedging arrangements due to the reasonable risk that near term interest rates will not rise significantly. The Company is continuously evaluating this risk and will implement interest rate hedging arrangements when deemed appropriate.
As a result of the Recapitalization, the majority of the cash interest payments are scheduled in the second and fourth quarters.
The amounts of principal payments required each year on outstanding long-term debt (excluding the original issue discount with respect to the Pathmark Deferred Coupon Notes and the PTK DIBs) are as follows (dollars in thousands):
PRINCIPAL FISCAL YEARS PAYMENTS - ---------------------------------------------------------- ------------------ 1995.................................................... $ 46,310 1996.................................................... 48,081 1997.................................................... 58,147 1998.................................................... 169,522 1999.................................................... 138,726 2000.................................................... 50,644 2001.................................................... 50,000 2002.................................................... 195,750 2003.................................................... 654,701
Liquidity: The consolidated financial statements of the Company indicates that at January 28, 1995, current liabilities exceeded its current assets by $98.0 million and the Company's stockholder's deficit was $1.3 billion. Management believes that cash flows generated from operations, supplemented by the unused borrowing capacity under the Pathmark and Plainbridge Working Capital Facilities (see Note 12 of the Company's Consolidated Financial Statements) and the availability of capital lease financing will be sufficient to pay the Company's debts as they come due, provide for its capital expenditure program and meet its seasonal cash requirements. Further, the Company believes it will be in compliance throughout the upcoming fiscal year with its various debt covenants, which includes certain levels of operating cash flow (as defined), minimum interest coverage and a maximum leverage ratio.
Holdings believes that it will be able to make the scheduled payments or refinance its obligations with respect to its indebtedness through a combination of operating funds and the Company's borrowing facilities. Future refinancing may be necessary if cash flow from operations is not sufficient to meet its debt service requirements related to the maturity of the Plainbridge Working Capital Facility in Fiscal 1997, the maturity of the Pathmark Working Capital Facility and certain mortgages in Fiscal 1998, the amortization and subsequent maturity of the Pathmark Term Loan in Fiscal 1999 and the maturity of the Pathmark Subordinated Notes and Pathmark Subordinated Debentures in Fiscal 2002. The Company expects that it will be necessary to refinance all or a portion of the Pathmark Senior Subordinated Notes, the Pathmark Deferred Coupon Notes due in Fiscal 2003 and the PTK DIBs due in Fiscal 2003. The Company may undertake a refinancing of some or all of such indebtedness sometime prior to its maturity. The Company's ability to make scheduled payments or to refinance its obligations with respect to its indebtedness depends on its financial and operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond its control. Although the Company's cash flow from its operations and borrowings has been sufficient to meet its debt service obligations, there can be no assurance that the Company's operating results will
continue to be sufficient or that future borrowing facilities will be available for payment or refinancing of Pathmark's and PTK's indebtedness. While it is the Company's intention to enter into refinancings that it considers advantageous, there can be no assurances that the prevailing market conditions will be favorable to the Company. In the event the Company obtains any future refinancing on less than favorable terms, the holders of outstanding indebtedness could experience increased credit risk and could experience a decrease in the market value of their investment, because the Company might be forced to operate under terms that would restrict its operations and might find its cash flow reduced.
Preferred Stock Dividends. The terms of the Exchangeable Preferred Stock provide for cumulative quarterly dividends at an annual rate of $3.52 per share when, and if declared by the Board of Directors of Holdings. Dividends for the first 20 quarterly dividend periods (through October 15, 1992) were paid at the Company's option in additional shares of Exchangeable Preferred Stock. Prior to the Recapitalization, the Old Working Capital Facility and the terms of the indentures governing the Company's public debt restricted the payment of cash dividends on the Exchangeable Preferred Stock unless certain conditions were met, including tests relating to earnings and cash flow ratios of Holdings. Prior to the Recapitalization, Holdings had not met the conditions permitting cash dividend payments on the Exchangeable Preferred Stock. Subsequent to the Recapitalization, the Company does not expect to receive cash flow sufficient to permit further payments of dividends on the Exchangeable Preferred Stock in the foreseeable future. All dividends not paid in cash will cumulate at the rate of $3.52 per share per annum, without interest, until declared and paid. As of January 28, 1995, unpaid dividends of $38.7 million were accrued.
Capital Expenditures. Capital expenditures related to Pathmark supermarkets and drug stores for Fiscal 1994, including property acquired under capital leases, were approximately $90.5 million compared to approximately $74.0 million for Fiscal 1993 and $74.3 million for Fiscal 1992. In Fiscal 1994, Pathmark opened four new Super Centers, three of which replaced smaller stores, and completed 14 major renovations and 11 enlargements.
Cash Flows. Net cash provided by operating activities amounted to $116.6 million in Fiscal 1994 compared to $66.9 million in Fiscal 1993. The increase in net cash provided by operating activities in Fiscal 1994 compared to Fiscal 1993 is primarily due to the increased earnings in Fiscal 1994. Cash used for investing activities in Fiscal 1994 was $1.6 million, primarily due to expenditures of property and equipment of $84.0 million, partially offset by the disposal of the home centers segment of $81.1 million, compared to $69.4 million in Fiscal 1993, primarily reflecting the expenditures for property and equipment. Cash used for financing activities in Fiscal 1994 was $97.9 million, primarily due to the repayment of the PTK DIBs, the scheduled reductions in the Pathmark Term Loan and reductions in capital lease obligations, partially offset by the increase in Working Capital Facilities borrowings, compared to $4.8 million cash provided by financing activities in Fiscal 1993 primarily due to the net impact of the Recapitalization.
Net cash provided by operating activities amounted to $66.9 million in Fiscal 1993, compared to $132.2 million in Fiscal 1992. Cash used for investing activities in Fiscal 1993 was $69.4 million, compared to $63.1 million in Fiscal 1992, primarily reflecting the expenditures for property and equipment in each year. Cash provided by financing activities in Fiscal 1993 was $4.8 million compared to cash used for financing activities of $69.4 million in Fiscal 1992. The increase in cash provided by financing activities in Fiscal 1993 was primarily due to the net impact of the Recapitalization. The cash used for financing activities in Fiscal 1992 primarily reflected the sale of the Holdings Subordinated Notes, partially offset by greater use of cash to repay the Old Working Capital Facility.
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 ("Holdings") and its wholly owned subsidiary SMG Acquisition Corporation ("SMG") were formed by Merrill Lynch Capital Partners, Inc., a wholly owned subsidiary of Merrill Lynch & Co., Inc., ("ML & Co."), to effect the acquisition (the "Acquisition") of Supermarkets General Corporation ("Old Supermarkets"). On June 15, 1987, Holdings completed the first step in the Acquisition when it acquired 32,800,000 shares (approximately 85%) of Old Supermarkets' common stock through a tender offer (the "Tender Offer") by SMG. The remaining outstanding common stock of Old Supermarkets was acquired by Holdings on October 5, 1987 when SMG was merged with and into Old Supermarkets pursuant to a Merger Agreement dated April 22, 1987, as amended.
The Acquisition was accounted for as a purchase, and accordingly, Holdings recorded the assets and liabilities of Old Supermarkets at their fair values at the date of the Acquisition. The tax basis for the assets and liabilities acquired was retained.
In October 1989, Old Supermarkets adopted an amended and restated Plan of Liquidation pursuant to which it was liquidated into three wholly owned subsidiaries of Supermarkets General Holdings Corporation. In November 1989, pursuant to such Plan, Old Supermarkets transferred substantially all of the assets of its Purity Supreme division to two of the three above-mentioned wholly owned subsidiaries, Purity Supreme, Inc. and Li'l Peach Corp., and said subsidiaries assumed substantially all of the liabilities of Old Supermarkets related to such division. Old Supermarkets completed the liquidation just prior to the year ended February 3, 1990, by merging with the third of the above- mentioned wholly owned subsidiaries which retained the name Supermarkets General Corporation ("Supermarkets"). On December 17, 1991, Purity Supreme, Inc. and Li'l Peach Corp. were sold (see Note 27). Supermarkets General Holdings Corporation and its respective subsidiaries are hereafter collectively referred to as "Holdings" or the "Company".
On November 15, 1990, SMG-II Holdings Corporation, (see Note 16), a newly incorporated Delaware corporation ("SMG-II"), commenced offers to purchase for cash up to $155.5 million principal amount of the Company's Junior Subordinated Discount Debentures (the "Discount Debenture Offer") and up to 1.7 million shares of the Company's Cumulative Exchangeable Redeemable Preferred Stock (the "Exchangeable Preferred Stock Offer"). Concurrently with the Discount Debenture Offer and the Exchangeable Preferred Stock Offer, SMG-II commenced an exchange offer (the "Exchange Offer", together with the Discount Debenture Offer and the Exchangeable Preferred Stock Offer, the "Offers") pursuant to which the then existing common stockholders of the Company could exchange, on a one-for-one basis, shares of the Company's common stock for shares of SMG-II's common stock. The Offers were subsequently amended to provide for offers to purchase up to $110.0 million principal amount of the Company's Junior Subordinated Discount Debentures (the "Discount Debentures") and up to 3.4 million shares of the Company's Cumulative Exchangeable Redeemable Preferred Stock (the "Exchangeable Preferred Stock").
In February 1991, SMG-II purchased approximately $74.1 million principal amount of the Discount Debentures at 33% of their principal amount and 2.7 million shares of Exchangeable Preferred Stock at $7.00 net per share, pursuant to the Discount Debenture Offer and the Exchangeable Preferred Stock Offer, respectively. In addition, all outstanding shares of the Company's common stock were exchanged pursuant to the Exchange Offer. As a result of the Exchange Offer, SMG-II owns all of the Company's common stock and is effectively a holding company for the operations of the Company. SMG-II financed the Purchases by selling 417,500 shares of its Cumulative Convertible Preferred Stock (the "SMG-II Preferred Stock") for an aggregate purchase price of $83.5 million to various institutional investors. The holders of SMG-II's voting and non-voting common stock and SMG-II
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION--(CONTINUED) Preferred Stock include certain limited partnerships controlled directly or indirectly by Merrill Lynch Capital Partners, Inc. and certain indirectly wholly owned subsidiaries of ML & Co. ML & Co. beneficially owns approximately 88.6% of the outstanding stock of SMG-II, and accordingly, controls SMG-II and, indirectly, the Company.
Subsequent to the completion of the Offers in Fiscal 1991, SMG-II acquired through open market transactions approximately $21.3 million principal amount of Discount Debentures, $9.8 million principal amount of the Company's 14.5% Senior Subordinated Notes due 1997 (the "Senior Subordinated Notes") and 94,900 shares of Exchangeable Preferred Stock and made a capital contribution to the Company of such securities together with the amounts of the Discount Debentures and the Exchangeable Preferred Stock purchased pursuant to the Discount Debenture Offer and the Exchangeable Preferred Stock Offer, respectively, as well as cash sufficient to pay associated taxes. The Company has retired the Senior Subordinated Notes, the Discount Debentures and the Exchangeable Preferred Stock contributed by SMG-II (see Note 24).
During Fiscal 1993, the Board of Directors of Holdings authorized management of Holdings to proceed with the Recapitalization, which included a refinancing of Holdings' debt. In conjunction with the Recapitalization, the assets, liabilities and related operations of the home centers segment as well as certain assets and liabilities of the warehouse, distribution and processing facilities which service the Pathmark supermarkets and drug stores and certain inventories and real property, were contributed to Plainbridge, Inc. ("Plainbridge"), a newly formed indirect wholly owned subsidiary of Holdings and the shares of Plainbridge were then distributed to PTK Holdings, Inc. ("PTK"), a newly formed wholly owned subsidiary of Holdings (the "Plainbridge Spin-Off"). As a result of the Plainbridge Spin-Off, PTK holds 100% of the capital stock of both Plainbridge and Pathmark. At the time of Recapitalization, Holdings intended to further spin off Plainbridge to Holdings' common stockholder. Such further spin-off would have required the satisfaction of dividend restrictions with respect to Holdings' Exchangeable Preferred Stock, as well as, obtaining consents from various lenders to Plainbridge and PTK. Holdings has concluded that this further spin-off of Plainbridge is not likely to occur (see Note 2).
On November 4, 1994, the Company completed the sale of its home centers segment for approximately $88.7 million in cash, plus the assumption of certain indebtedness. The Company used the net proceeds to pay down PTK debt, including accrued interest and debt premium (see Note 4).
The accompanying consolidated financial statements of the Company indicate that, at January 28, 1995, current liabilities exceeded current assets by $98.0 million and stockholder's deficit was $1.3 billion. Management believes that cash flows generated from operations, supplemented by the unused borrowing capacity under the Pathmark and the Plainbridge Working Capital Facilities (see Note 12) and the availability of capital lease financing will be sufficient to pay the Company's debts as they come due, provide for its capital expenditure program and meet its seasonal cash requirements. Further, the Company believes it will be in compliance throughout the upcoming fiscal year with its various debt covenants (see Note 12).
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of whom are wholly owned. All intercompany transactions have been eliminated in consolidation.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) During the fourth quarter of Fiscal 1994, as a result of the aforementioned dividend restrictions, Holdings has concluded that a further spin off of Plainbridge to Holdings' common stockholder is not likely to occur. Accordingly, prior year financial statements, which had included the results of Plainbridge's warehouse, transportation and real estate operations as discontinued operations, have been reclassified to include such results in continuing operations.
The results from discontinued operations for all periods presented represent the operations of the Company's home centers segment which was sold during Fiscal 1994 (see Note 4).
Fiscal Year:
The Company's fiscal year ends on the Saturday nearest to January 31 of the following calendar year. Normally each fiscal year consists of 52 weeks, but every five or six years the fiscal year consists of 53 weeks.
Statements of Cash Flows:
All investments and marketable securities with a maturity of three months or less are considered to be cash equivalents. The Company had $14.8 million of cash equivalent investments as of January 28, 1995 and no such investments as of January 29, 1994.
Merchandise Inventories:
Merchandise inventories are valued at the lower of cost or market. Cost for substantially all merchandise inventories is determined on a last-in, first-out ("LIFO") basis.
Rental Video Tapes:
Video tapes purchased for rental purposes are capitalized and amortized over their estimated useful life as part of cost of goods sold. The amortization of video tapes included in cost of goods sold approximate $2.6 million, $2.6 million and $2.7 million in Fiscal 1994, Fiscal 1993 and Fiscal 1992, respectively.
Property and Equipment:
Property and equipment are stated at cost. Depreciation and amortization expense on owned property and equipment is computed on the straight-line method over their estimated useful lives. Capital leases are recorded at the present value of minimum lease payments or fair market value of the related property, whichever is less. Amortization of property under capital leases is computed on the straight-line method over the term of the lease or the leased property's estimated useful life, whichever is shorter.
Depreciable lives of owned property and equipment are as follows:
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Income Taxes:
The Company's income tax expense is computed based on a tax sharing agreement with its ultimate parent, SMG-II, in which the Company computes a hypothetical tax return as if the Company was not joined in a consolidated or combined return with SMG-II. The Company must pay SMG-II the positive amount of any such hypothetical tax. If the hypothetical tax return shows entitlement to a refund, including any refund attributable to a carryback, then SMG-II will pay to the Company the amount of such refund.
Deferred Financing Costs:
Deferred financing costs are amortized on the straight-line method over the life of the related indebtedness.
Net Earnings (Loss) Per Common Share:
Since the Company is a wholly owned subsidiary, earnings (loss) per share information is not presented.
Store Preopening and Closing Costs:
Store preopening costs are expensed as incurred. Store closing costs, such as future rent and real estate taxes subsequent to the actual store closing, net of expected sublease recovery, are recorded at present value utilizing a risk free discount rate when management makes such decision to close a store.
Self-Insured Liabilities:
Self-insured liabilities represent an estimate of incurred but unpaid claims relating to customer, employee and vehicle accidents and covered employee medical benefits as of the balance sheet date. The liabilities for customer and employee accident claims are recorded at present value, utilizing a risk free discount rate, due to the long-term payout of these claims (see Note 11).
Reclassifications:
Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the Fiscal 1994 presentation.
NOTE 3--FISCAL 1993 RECAPITALIZATION
On October 26, 1993, the Recapitalization was consummated. Pathmark Stores, Inc. (formerly Supermarkets General Corporation, hereinafter referred to as "Pathmark") borrowed $450.0 million under a bank credit agreement (the "Bank Credit Agreement"), consisting of $400.0 million under a term loan facility ("the Pathmark Term Loan") and $50.0 million under a $175.0 million working capital facility (the "Pathmark Working Capital Facility"), borrowed $436.6 million through the issuance of its 9.625% Senior Subordinated Notes due 2003 (the "Pathmark Senior Subordinated Notes"), issued $120.0 million initial principal amount of its 10.75% Junior Subordinated Deferred Coupon Notes due 2003 (the "Pathmark Deferred Coupon Notes"), exchanged $95.8 million principal amount of its 12.625% Subordinated Debentures due 2002 (the "Pathmark Subordinated Debentures") for $95.8 million principal amount outstanding of Holdings Subordinated Debentures and exchanged $198.5 million principal amount of its 11.625% Subordinated Notes due 2002 (the "Pathmark Subordinated Notes") for $198.5 million principal amount outstanding of the Holdings Subordinated Notes. As part of the Recapitalization, PTK borrowed $126.1 million through the issuance of its $130.0 million aggregate
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--FISCAL 1993 RECAPITALIZATION--(CONTINUED) principal amount 10.25% Exchangeable Guaranteed Debentures due 2003 (the "PTK DIBs") in a private placement, which bonds the Company has guaranteed. The proceeds from the aforementioned borrowings were used to redeem the Old Working Capital Facility, Holdings 14.5% Senior Subordinated Notes due 1997 (the "Holdings Senior Subordinate Notes") and Holdings 13.125% Junior Subordinated Discount Debentures due 2003 (the "Holdings Discount Debentures") and to purchase $185.0 million aggregate principal amount of the Holdings 12.625% Subordinated Debentures due 2002 (the "Holdings Subordinated Debentures") from the Equitable Affiliates. On October 26, 1993, Plainbridge, Inc. ("Plainbridge"), a newly formed indirectly wholly owned subsidiary of the Company, borrowed $3.5 million under a $50.0 million bank revolving credit agreement (the "Plainbridge Working Capital Facility"). On April 30, 1993, the Company repaid $5.7 million of indebtedness, which was secured by a mortgage on the distribution center of the home centers segment transferred to Plainbridge and on May 14, 1993, the Company repaid $2.5 million of indebtedness, which was secured by mortgages on two Pathmark retail properties transferred to Plainbridge.
In conjunction with the Plainbridge Spin-Off, Pathmark entered into a 10-year logistical services agreement (the "Logistical Services Agreement") with Plainbridge. The terms of the Logistical Services Agreement were designed to require Plainbridge to continue to provide Pathmark with substantially the same level of supply and other logistical services as was available from the warehouse, distribution and processing facilities prior to the Plainbridge Spin-Off at substantially the same or a lower cost (see Note 16).
In connection with the Plainbridge Spin-Off and the Recapitalization, the Company recorded a pretax charge of approximately $23.7 million in the third quarter of Fiscal 1993 to record estimated reorganization and restructuring costs, including an early retirement program offered to certain Company associates. During the fourth quarter of Fiscal 1993, the Company determined that the estimated costs related to the reorganization and restructuring were less than originally estimated and recorded a pretax credit of approximately $7.1 million. Of the total net pretax charge of $16.6 million for Fiscal 1993, $6.4 million related to the early retirement program and to the severance costs incurred to reduce the Company's workforce, $8.1 million related to the additional technical information systems costs incurred in order to accomplish the Plainbridge Spin-Off (see Note 20) and $2.1 million related to the warehouse and consulting costs associated therewith.
NOTE 4--GAIN ON DISPOSAL OF HOME CENTERS SEGMENT
On November 4, 1994, the Company's Plainbridge subsidiary completed the sale of its home centers segment for approximately $88.7 million in cash, plus the assumption of certain indebtedness. During Fiscal 1994, the Company recognized a gain of $17.0 million on the sale of the home centers segment, net of an income tax provision of $2.3 million. Such gain included a pension plan curtailment gain of $6.2 million and the reduction in the deferred tax valuation allowance of $5.1 million, resulting from the utilization of the capital tax loss carryforward which had previously been reserved for (see Note 19). The Company used net cash proceeds of $66.6 million before January 28, 1995 and $4.7 million after January 28, 1995 to pay down the PTK DIBs, including accrued interest and debt premium.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--GAIN ON DISPOSAL OF HOME CENTERS SEGMENT--(CONTINUED) As of the date of sale, the net assets of the home centers segment were as follows (dollars in thousands):
Through the date of the sale, the Company reported the home centers segment as discontinued operations. Operating results of such discontinued operations were as follows (dollars in thousands):
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NOTE 5--CUMULATIVE EFFECT OF FISCAL 1993 ACCOUNTING CHANGES
The Company made the following accounting changes in Fiscal 1993:
Inventory:
Effective January 31, 1993, the Company changed its method utilized to calculate LIFO inventories. Prior to Fiscal 1993, the Company utilized a retail approach to determine current cost and a general warehouse purchase index to measure inflation in the cost of its merchandise inventories in its stores. The Company's change arose from the development and utilization in Fiscal 1993 of internal cost indices based on the specific identification of merchandise in its stores to measure inflation in the prices, thereby eliminating the averaging and estimation inherent in the retail and general warehouse purchase index methods. The Company believes the use of such specific costs and internal indices results in a more accurate measurement of the impact of inflation in the costs of its store merchandise. The effect of this change resulted in a charge to income of $10.7 million, net of an income tax benefit of $7.8 million, and has been presented as a cumulative effect of a change in accounting method in the accompanying Fiscal 1993 consolidated statement of operations.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--CUMULATIVE EFFECT OF FISCAL 1993 ACCOUNTING CHANGES--(CONTINUED) Postretirement Benefits other than Pensions:
Effective January 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions" which resulted in a charge to income of $15.6 million, net of an income tax benefit of $11.3 million, immediately upon adoption.
Postemployment Benefits:
Effective January 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" which resulted in a charge to income of $2.5 million, net of an income tax benefit of $1.8 million, immediately upon adoption.
Income Taxes:
Effective January 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which had no effect on the consolidated statements of operations, but resulted in a reclassification of the current and noncurrent deferred taxes.
Present Value Discount Rate Determination:
Effective January 31, 1993, the Company made a change in the determination of the discount rate utilized to record the present value of certain noncurrent liabilities (self-insured liabilities and closed store liabilities) and reduced such rate from 12%, representing the Company's effective interest rate, to a risk free rate, estimated at 4%. The cumulative effect of this accounting change as of January 31, 1993 totalled $11.6 million, net of an income tax benefit of $8.4 million.
NOTE 6--ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following (dollars in thousands):
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(a) The allowance for doubtful accounts reflects a provision of $2.2 million and $3.2 million, as well as a write off of $3.1 million and $3.2 million in Fiscal 1994 and Fiscal 1993, respectively.
NOTE 7--MERCHANDISE INVENTORIES
Merchandise inventories are comprised of the following (dollars in thousands):
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--MERCHANDISE INVENTORIES--(CONTINUED) Liquidation of LIFO layers in the periods reported did not have a significant effect on the results of continuing operations. The LIFO reserve decreased to $43.2 million at January 28, 1995 from $48.6 million at January 29, 1994 primarily due to the disposal of the home centers segment.
NOTE 8--OTHER ASSETS
Prepaid expenses increased to $26.6 million at January 28, 1995 from $21.8 million at January 29, 1994 due to the timing of rent and real estate tax payments. Other current assets increased to $29.5 million at January 28, 1995 from $12.4 million at January 29, 1994 principally due to an increase in assets held for sale. Other assets decreased to $24.0 million at January 28, 1995 from $27.7 million at January 29, 1994 primarily due to the utilization of the asset related to the Company's corporate owned life insurance policy of $7.5 million and the collection of certain notes receivable of $4.0 million, partially offset by an increase in the prepaid pension asset (see Note 17).
NOTE 9--PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following (dollars in thousands):
NOTE 10--DEFERRED FINANCING COSTS
Deferred financing costs, primarily related to the Recapitalization, are comprised of the following (dollars in thousands):
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities are comprised of the following (dollars in thousands):
Certain noncurrent liabilities, such as self-insured liabilities for incurred but unpaid claims relating to customer, employee and vehicle accidents and closed store liabilities, are recorded at present value, utilizing a 4% discount rate in Fiscal 1994 and Fiscal 1993, based on the projected payout of these claims.
NOTE 12--LONG-TERM DEBT
Long-term debt is comprised of the following (dollars in thousands):
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--LONG-TERM DEBT--(CONTINUED) Scheduled Maturities of Debt:
Long-term debt principal payments are as follows (dollars in thousands):
PRINCIPAL FISCAL YEARS PAYMENTS - ------------------------------------------------------ ---------- 1995................................................ $ 46,310 1996................................................ 48,081 1997................................................ 58,147 1998................................................ 169,522 1999................................................ 138,726 Thereafter.......................................... 951,095 ---------- $1,411,881 ---------- ----------
Bank Credit Agreements:
Under the Bank Credit Agreements, the Pathmark and the Plainbridge Working Capital Facilities and the Pathmark Term Loan bear interest at floating rates. At January 28, 1995, the interest rates for the Pathmark Term Loan and Pathmark Working Capital Facility were 8.9% and 9.5%, respectively. At January 29, 1994, the interest rates for the Pathmark Term Loan and Pathmark Working Capital Facility were 5.9% and 7.4%, respectively. At January 28, 1995, Plainbridge had no borrowings under its Working Capital Facility. At January 29, 1994, the interest rate for the Plainbridge Working Capital Facility was 7.4%. Pathmark is required to repay a portion of its borrowings under the Pathmark Term Loan each year, so as to retire such indebtedness in its entirety by October 31, 1999. Under the Pathmark Working Capital Facility, which expires on July 31, 1998, Pathmark can borrow or obtain letters of credit in an aggregate amount not to exceed $175.0 million (of which the maximum of $100.0 million can be in letters of credit) subject to an annual cleandown provision. Under the terms of the Pathmark cleandown provision, in each fiscal year, loans cannot exceed $50.0 million under the Pathmark Working Capital Facility for a period of 30 consecutive days. Pathmark has satisfied its cleandown provision for Fiscal 1994 and Fiscal 1995. Under the Plainbridge Working Capital Facility, which expires in Fiscal 1997, Plainbridge can borrow or obtain letters of credit in an aggregate amount not to exceed $40.0 million subject to an annual cleanup provision. Under the terms of the Plainbridge cleanup provision, in each fiscal year, loans cannot be made for a period of 30 consecutive days. Plainbridge satisfied its cleanup provision for Fiscal 1994 and Fiscal 1995. Holdings believes that Pathmark and Plainbridge each have sufficient unused borrowing capacity under their respective working capital facilities, which can be utilized for unforeseen or for seasonal cash requirements. At January 28, 1995, Pathmark and Plainbridge, in the aggregate, had approximately $76.6 million in unused borrowing capacity under their working capital facilities.
At January 28, 1995, the Company was in compliance with all of its debt financial covenants, as amended. Based upon projected results for the upcoming fiscal year, the Company believes it will be in compliance with its various debt financial covenants, which includes certain levels of operating cash flow (as defined), minimum interest coverage and a maximum leverage ratio, throughout the upcoming fiscal year. The Pathmark Term Loan, the Pathmark and Plainbridge Working Capital Facilities and the indentures for certain debt also contain covenants, including, but not limited to, covenants with respect to the following matters: (i) limitation on indebtedness; (ii) limitation on restricted payments; (iii) limitation on transactions with affiliates; (iv) limitation on liens; (v) limitation on the issuance of
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--LONG-TERM DEBT--(CONTINUED) preferred stock by subsidiaries; (vi) limitation on issuances of guarantees of indebtedness by subsidiaries; (vii) limitation on transfer of assets to subsidiaries; (viii) limitation on dividends and other payment restrictions affecting subsidiaries; and (ix) restriction on mergers and transfers of assets.
PTK Exchangeable Guaranteed Debentures:
The PTK DIBs were originally formulated to accrete to a maturity value of $218.3 million in Fiscal 2003. The Company used the net cash proceeds of $66.6 million before January 28, 1995 and $4.7 million after January 28, 1995 to paydown PTK DIBs, including accrued interest and debt premium. The PTK DIBs begin paying cash interest on a semiannual basis on June 30, 1999 and have no sinking fund requirements. At January 28, 1995 the maturity value of the outstanding debentures is $120.5 million.
Pathmark Senior Subordinated Notes:
The Pathmark Senior Subordinated Notes accrete to a maturity value of $440.0 million in Fiscal 2003. These notes began paying cash interest on a semiannual basis on May 1, 1994 and have no sinking fund requirements.
Pathmark Deferred Coupon Notes:
The Pathmark Deferred Coupon Notes accrete to a maturity value of $225.3 million in Fiscal 2003. These notes begin paying cash interest on a semiannual basis on May 1, 2000 and have no sinking fund requirements.
Pathmark Subordinated Debentures:
The Pathmark Subordinated Debentures mature in Fiscal 2002 and began paying cash interest on a semiannual basis on December 15, 1993. These debentures have no sinking fund requirements.
Pathmark Subordinated Notes:
The Pathmark Subordinated Notes mature in Fiscal 2002 and contain a sinking fund provision that requires Pathmark to deposit $49.4 million (25% of the original aggregate principal amount) with the trustee of the Pathmark Subordinated Notes on June 15 in each of Fiscal 2000 and Fiscal 2001 for the redemption of the Pathmark Subordinated Notes, at a redemption price equal to 100% of the principal amount thereof, plus accrued interest to the redemption date and providing for the redemption of 50% of the original aggregate principal amount of such notes prior to maturity.
11.625% Holdings Subordinated Notes due 2002:
On October 26, 1993, as part of the Recapitalization, $198.5 million principal amount of the Holdings Subordinated Notes were exchanged for $198.5 million principal amount of Pathmark Subordinated Notes. Approximately $1.0 million principal amount of the Subordinated Notes remain outstanding. Interest on the Holdings Subordinated Notes is payable semi-annually.
Industrial Revenue Bonds:
Interest rates for the industrial revenue bonds range from 10.5%-10.9%. The industrial revenue bonds are payable in installments ending in Fiscal 2003. The industrial revenue bonds outstanding at January 28, 1995 and January 29, 1994 are unsecured.
Other Debt:
Other debt includes mortgage notes which are secured by property and equipment having a net book value of $71.2 million at January 28, 1995 and $72.9 million at January 29, 1994. These borrowings, whose interest rates averaged 10.5%, are payable in installments ending in Fiscal 2000.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and fair values of the Company's financial instruments are as follows (dollars in thousands):
The Company believes the fair value of its cash and marketable securities due to their short term maturities approximates their carrying value. There is no quoted market prices for the securities representing the Company's investment in Purity and it is not practicable considering the materiality of this investment to the Company to obtain an estimate of its fair value (see Notes 27 and 29).
The fair value of the Pathmark Term Loan and the Pathmark and Plainbridge Working Capital Facilities approximated their carrying value due to their floating interest rates. The fair value of the notes, debentures and Exchangeable Preferred Stock are based on the quoted market prices at January 28, 1995 and January 29, 1994, since such instruments are publicly traded. The Company has evaluated its 10.25% PTK Exchangeable Guaranteed Debentures, other debt (primarily mortgages), industrial revenue bonds and believes based on interest rates, related terms and maturities that the fair value of such instruments approximates their respective carrying amounts.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--INTEREST EXPENSE
Interest expense is comprised of the following (dollars in thousands):
The Company made cash interest payments of $129.6 million in Fiscal 1994, $196.5 million in Fiscal 1993 and $132.8 million in Fiscal 1992.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--LEASES
At January 28, 1995, the Company was liable under terms of noncancellable leases for the following minimum lease commitments (dollars in thousands):
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(a) Net of sublease income of $12,037 and $186,962 for capital and operating leases, respectively.
During Fiscal 1994, Fiscal 1993 and Fiscal 1992, the Company incurred capital lease obligations of $21.3 million, $25.7 million and $8.7 million, respectively, in connection with lease agreements to acquire property and equipment.
Rent expense included in continuing operations under all operating leases having noncancellable terms of more than one year is summarized as follows (dollars in thousands):
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(b) Primarily based on sales.
NOTE 16--RELATED PARTY TRANSACTIONS
The following is a summary of related party agreements and transactions between Pathmark and Plainbridge, the effects of which have been eliminated in consolidation.
1) Spin-off:
A) Services Agreements:
Pathmark, Plainbridge and the Company are parties to agreements pursuant to which Pathmark will continue to provide certain administrative services relating to the warehouse, distribution and home
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--RELATED PARTY TRANSACTIONS--(CONTINUED) centers operations of Plainbridge and certain administrative services to Chefmark. Such services include, among other things, legal, human resources, data processing, insurance, accounting, tax, treasury and property management services. Each of the agreements have an initial term of five years, with renewal options at the end of such term. The cost of the services charged to Plainbridge and Chefmark under these agreements in the aggregate was approximately $13.7 million and $4.2 million for the fiscal year ended January 28, 1995 and for the period from the date of the Plainbridge Spin-Off through January 29, 1994, respectively.
B) The Logistical Services Agreement:
In connection with the Plainbridge Spin-Off, Pathmark and Plainbridge entered into the Logistical Services Agreement to provide for the supply by Plainbridge to Pathmark of most of the merchandise sold in Pathmark's retail stores and for the provision of warehousing, distribution and other logistical services relating to the supply of such merchandise. Pursuant to the Logistical Services Agreement, Pathmark directs the purchase of the merchandise to be provided to it by Plainbridge. Pathmark negotiates directly with vendors regarding the types of merchandise required, the quantities needed, the delivery schedules, the pricing, and all the other terms and conditions of sale. All merchandise is ordered by Pathmark for the account of Plainbridge, which will pay for and will retain title to such merchandise until it has been delivered to Pathmark. If requested by a vendor, Pathmark, in its sole discretion, may guarantee payment of such orders by Plainbridge. Pathmark guaranteed approximately $37.3 million and $42.8 million of such orders at January 28, 1995 and January 29, 1994, respectively. In general, the Logistical Services Agreement also requires Plainbridge to perform the same services in substantially the same manner as they were performed by Pathmark's warehouse and distribution group prior to the Plainbridge Spin-Off.
The Logistical Services Agreement requires that, with certain exceptions and subject to certain termination rights, Plainbridge is to sell to Pathmark, for a period of ten years, to the extent requested by Pathmark, all of Pathmark's merchandise requirements for both its existing and future stores. In addition, Pathmark has five one-year renewal options following the expiration of the original ten-year term. The Logistical Services Agreement does not limit Pathmark's ability to purchase goods from other suppliers. For the fiscal year ended January 28, 1995 and for the period from the date of the Plainbridge Spin-Off through January 29, 1994, the Company purchased 81% and 83%, respectively, of its total merchandise purchases from Plainbridge. Merchandise that Pathmark customarily obtains directly from vendors is excluded from the Logistical Services Agreement.
The Logistical Services Agreement requires Plainbridge to store and deliver to Pathmark all merchandise purchased at Pathmark's direction. Pathmark is required in good faith to designate Plainbridge as its carrier with respect to merchandise customarily shipped directly from vendors to Pathmark's stores. Plainbridge may be required to maintain inventory with a book value of at least $130.0 million for the exclusive use of Pathmark, and to the extent that the inventory value falls below such level, Plainbridge may be asked by Pathmark to purchase sufficient merchandise to maintain such level to the extent such merchandise is ordered by Pathmark. Plainbridge is also required to accommodate physical annual increases of up to five percent in the volume of Pathmark directed purchases of merchandise to be handled by Plainbridge. Pathmark is to reimburse Plainbridge for all reasonable incremental out-of-pocket costs (but not capital costs) incurred by Plainbridge for the storage and the handling of merchandise that is in excess of the five percent annual capacity increase, provided that such out-of-pocket costs do not exceed the costs of storage and of handling at local independent warehouses.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--RELATED PARTY TRANSACTIONS--(CONTINUED) Upon the delivery of merchandise to Pathmark's stores by Plainbridge, Pathmark will owe Plainbridge for the cost of the merchandise plus a specified variable payment. This payment will vary according to the type and to the value of the merchandise. A minimum annual fee will be payable by Pathmark to the extent that the aggregate of the variable fees described above payable in any year does not exceed the minimum annual fee. The minimum annual payment for Fiscal 1995 is $134.9 million and such fee is adjusted upward (but not downward) each fiscal year by the rate of inflation. This minimum payment was based upon the historical cost to Pathmark of operating the warehouse, distribution and transportation facilities. Pathmark is obligated to pay the minimum annual fee to Plainbridge irrespective of whether Pathmark purchases merchandise from other suppliers, except in cases of force majeure or when Plainbridge shall have materially breached the Logistical Services Agreement or shall have failed to obtain or to maintain the licenses and the permits needed to operate its business. The minimum annual fee will be reduced to the extent that the volume of merchandise purchases decreases as a result of any store dispositions by Pathmark and will also be reduced if the volume of Pathmark-directed merchandise falls below 90% of the actual volume achieved in Fiscal 1992, to the extent that Plainbridge is, as a result, able to realize reductions in its operating costs. Under this agreement, Pathmark paid Plainbridge approximately $139.4 million during Fiscal 1994 and $36.1 million during the period from the date of the Plainbridge Spin-Off to January 29, 1994. Plainbridge grants Pathmark an allowance, which is based on the amount of merchandise purchased by Plainbridge at Pathmark's direction. The allowance is credited against the variable fees and the minimum annual fee obligation. In Fiscal 1994 and for the period from the date of the Plainbridge Spin-Off through January 29, 1994, an allowance of approximately $25.5 and $6.6 million, respectively, was received by Pathmark. In addition, certain cost benefits, which were derived from increases in the volume or value of merchandise purchased from Plainbridge by Pathmark or by third parties, are to be shared equally between Pathmark and Plainbridge. Estimated fees are payable in weekly installments, and an annual reconciliation is performed for the amount of fees that are actually payable for such year. Pathmark will pay to Plainbridge the costs of the merchandise at the time a vendor requires payment from Plainbridge.
The Logistical Services Agreement allows Plainbridge to sell merchandise and to provide logistical services to third parties, although it is not permitted to sell merchandise to supermarkets, drug stores and to other retail stores stocking merchandise carried by Pathmark in Pathmark's current market areas. An exception is made for retail stores that do not, in the ordinary course of business, engage to a significant degree in the sale of food or of pharmacy related products, without Pathmark's prior written consent which consent may not be unreasonably withheld. Plainbridge is also permitted to "piggyback" such third parties' orders onto Pathmark's orders from vendors, so long as they do not interfere with Pathmark's delivery schedules, quantity needs or other requirements.
Plainbridge and Pathmark are allowed to terminate the Logistical Services Agreement if the other (i) materially breaches its terms and fails to cure such breach for 60 days after written notice has been provided by the other party or (ii) experiences certain insolvency events. Additionally, following the fourth anniversary of the date of the Logistical Services Agreement, the Company has the option of terminating it at will on six months notice. If Pathmark terminates the Logistical Services Agreement because of a material breach by, or insolvency of, Plainbridge, Pathmark has the right to purchase, within 30 days of the termination, that portion of the assets of Plainbridge which is essential to the support of Plainbridge's obligations to Pathmark under the Logistical Services Agreement (the "Pathmark Distribution Assets") at the lower of (i) their net book value or (ii) their fair market value. If the Company exercises its at will option to terminate the Logistical Services Agreement, the
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--RELATED PARTY TRANSACTIONS--(CONTINUED) Company is required to offer to purchase the Pathmark Distribution Assets at their fair market value. If Plainbridge terminates the Logistical Services Agreement because of a material breach by, or insolvency of Pathmark, Plainbridge has the right to sell to Pathmark (and Pathmark will have the obligation to buy) the Pathmark Distribution Assets at their fair market value within 30 days of such termination.
Other than in the ordinary course of business, Plainbridge is not permitted to sell any of the Pathmark Distribution Assets without Pathmark's prior written consent. Additionally, in the event of a change in the ultimate beneficial ownership of Plainbridge's voting stock such that a person, other than ML & Co. or an affiliate of ML & Co. (the majority shareholder of Holdings), holds a majority of such stock, the Company has for a period of two years, the irrevocable and exclusive right to purchase any or all of the Pathmark Distribution Assets at their fair market value.
Other provisions of the Logistical Services Agreement include (i) that Plainbridge passes on to Pathmark all discounts and all allowances made available to it by vendors in respect of merchandise purchased for Pathmark, unless such discounts or allowances were made available solely as a result of actions taken or not taken by Plainbridge, (ii) that Plainbridge must ensure that merchandise quality meets or exceeds the standards established by Pathmark for such merchandise, and that Pathmark may place its representatives at the Distribution Facilities to ensure that such quality is maintained, (iii) that Plainbridge deliver merchandise to Pathmark at a 98% or better level of service, as measured in accordance with Pathmark's practices prior to the Plainbridge Spin-Off, (iv) that Pathmark pay Plainbridge for any use of trailers for storage and (v) that each of Pathmark and Plainbridge cooperate to reduce costs and to improve service levels.
In addition, pursuant to a supply agreement between Chefmark and Pathmark (the "Chefmark Supply Agreement"), Chefmark supplies Pathmark with merchandise from its banana ripening and deli food preparation operations. The Chefmark Supply Agreement provides that, for a period of seven years, such services are to be performed by Chefmark in substantially the same manner as they have been performed by Pathmark's banana ripening and deli food preparation operations prior to the Chefmark Spin-Off.
2) Other:
In conjunction with the Plainbridge Spin-Off, certain real property was transferred to Plainbridge and is being leased to Pathmark at rentals which the Company believes approximate fair value. During Fiscal 1994 and for the period from the date of the Plainbridge Spin-Off through January 29, 1994, such rentals amounted to $4.4 million and $1.1 million, respectively.
In addition, Pathmark is leasing six store properties to Plainbridge, with a net book value of $9.0 million at January 28, 1995. The Company believes that the rentals received from Plainbridge approximate fair value. During Fiscal 1994 and for the period from the date of the Plainbridge Spin-Off through January 29, 1994, such rentals amounted to $3.8 million and $1.0 million, respectively.
As discussed in Note 25, certain Management Investors issued Recourse Notes to the Company related to the purchase of the Company's Class A common stock. These Management Investors have pledged shares of SMG-II Class A common stock to secure the repayment of the Recourse Notes. Recourse Notes in the amount of $1.7 million were outstanding at January 28, 1995 and January 29, 1994.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--RELATED PARTY TRANSACTIONS--(CONTINUED) During Fiscal 1994, the Company paid ML & Co. fees of approximately $1.0 million related to the disposal of the home centers segment. During Fiscal 1993, in conjunction with the Recapitalization, the Company paid ML & Co. fees of $12.8 million.
NOTE 17--RETIREMENT AND BENEFIT PLANS
The Company has several noncontributory defined benefit pension plans, the most significant of which is the SGC Pension Plan, which covers substantially all nonunion and certain union associates of Pathmark and Plainbridge. Pension benefits to retired and to terminated vested associates are primarily based upon their length of service and upon a percentage of qualifying compensation. The Company's funding policy, which is consistent with federal funding requirements, is intended to provide not only for benefits attributed to service to date but also for those benefits expected to be earned in the future. Due to the overfunding status of the SGC Pension Plan, no contributions were required during the last three fiscal years.
The following table sets forth the funded status of the pension plans and the amounts recognized in the Company's financial statements (dollars in thousands):
Assets of the Company's pension plans are invested in marketable securities, comprised, primarily of equities of domestic corporations, U.S. Government instruments and money market investments.
The increase in the prepaid pension cost at January 28, 1995 is primarily due to the pension plan curtailment gain related to the sale of the home centers segment (see Notes 4 and 8).
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17--RETIREMENT AND BENEFIT PLANS--(CONTINUED) The following table provides the assumptions used in determining the actuarial present value of the projected benefit obligation:
The change in the weighted average discount rate, which is used in determining the actuarial present value of the projected benefit obligation, will not have a material impact on the Company's net pension cost for Fiscal 1995.
The net periodic pension cost included in continuing operations is comprised of the following components (dollars in thousands):
The Company also contributes to many multi-employer plans which provide defined benefits to certain union associates. The Company's contributions to these multi-employer plans were $18.0 million in Fiscal 1994, $17.9 million in Fiscal 1993 and $17.7 million in Fiscal 1992.
The Company sponsors a savings plan for eligible nonunion associates. Contributions under the plan are based on specified percentages of associate contributions. The Company's contributions to the savings plan were $3.5 million in Fiscal 1994, $4.0 million in Fiscal 1993 and $3.0 million in Fiscal 1992.
The Company maintains a Voluntary Employee Benefit Association ("VEBA") to provide for certain employee health benefits. The Company's tax-deductible contributions to the VEBA were $19.9 million in Fiscal 1994, $25.8 million in Fiscal 1993 and $21.3 million in Fiscal 1992.
NOTE 18--OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company provides to its associates postretirement benefits, principally health care and life insurance benefits. The accumulated postretirement benefit obligation was determined utilizing an assumed discount rate of 8.5% at January 28, 1995 and 7.75% at January 29, 1994 and by applying the provisions of the Company's medical plans, the established maximums and sharing of costs, the relevant actuarial assumptions and the health-care cost trend rates which are projected at 10.0% and which grade down to 5.75% in Fiscal 1999. The effect of a 1% change in the assumed cost trend rate would change the accumulated postretirement benefit obligation by approximately $2.3 million as of January 28, 1995 and would change the net periodic postretirement benefit cost by $0.2 million for Fiscal 1994.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS--(CONTINUED) The net postretirement benefit costs related to continuing operations consisted of the following components (dollars in thousands):
The annual charges recorded by the Company on a pay-as-you-go (cash basis) amounted to $1.2 million in Fiscal 1992.
The following table provides information on the status of the plans (dollars in thousands):
The Company also provides to its associates postemployment benefits, primarily long-term disability and salary continuation. The obligation for these benefits was determined by application of the provisions of the Company's long-term disability plan and includes the age of active claimants at disability and at valuation, the length of time on disability and the probability of claimant remaining on disability to maximum duration. These liabilities are recorded at their present value utilizing a discount rate of 4%.
The accumulated postemployment benefit obligation as of January 28, 1995 and January 29, 1994 was $8.3 million and $8.4 million, respectively. The net postemployment benefit cost for continuing operations consisted of the following components (dollars in thousands):
The annual charges recorded by the Company on a pay-as-you-go (cash basis) amounted to $1.4 million in Fiscal 1992.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--INCOME TAXES
The income tax provision (benefit) from continuing operations is comprised of the following (dollars in thousands):
The effective tax rate applicable to continuing operations differs from the federal statutory tax rate as follows:
Deferred tax assets and liabilities consist of the following (dollars in thousands):
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--INCOME TAXES--(CONTINUED) The Company has a net deferred tax asset of approximately $32.8 and $41.3 million at January 28, 1995 and January 29, 1994, respectively. Although the Company generated pretax earnings in Fiscal 1994, the Company was unable to conclude that realization of such deferred tax assets was more likely than not, due to pretax losses experienced in prior years. Accordingly, the Company has provided a valuation allowance of $26.8 million and $38.4 million at January 28, 1995 and January 29, 1994, respectively, to fully reserve its net deferred tax assets, except for the alternative minimum tax credit carryforwards which do not expire. Management will continue to assess the likelihood of realizing its deferred tax assets and will adjust the valuation allowance when and if, in the opinion of management, significant positive evidence exists which indicates that it is more likely than not that the Company will be able to realize such deferred tax assets. Such reductions in the valuation allowance, if any, will be reflected as a component of income tax expense.
The capital loss carryforward at January 29, 1994 was utilized during Fiscal 1994 offsetting the capital gain generated by the sale of the home centers segment. The net operating loss carryforwards, including state net operating loss carryforwards, expire from Fiscal 1998 to Fiscal 2008.
The Company's state income tax provision, net of the change in the valuation allowance in Fiscal 1994, includes the recording of state taxes for certain issues related to prior years and the inability to utilize loss carryforwards in certain states. The Fiscal 1993 and Fiscal 1992 state income tax provisions resulted primarily from taxable income generated in New Jersey due to the nondeductibility of a significant portion of intercompany interest expense.
The income tax receivable of $7.8 million at January 28, 1995 includes a carryback refund claim related to the Fiscal 1993 net operating tax loss. The refund was received during the first quarter of Fiscal 1995.
In Fiscal 1994, Fiscal 1993, and Fiscal 1992, the Company made income tax payments of $6.5 million, $3.1 million and $21.0 million, respectively, and received income tax refunds of $25.9 million, $10.1 million and $5.9 million, respectively.
The Internal Revenue Service has completed its audits through Fiscal 1989 and is currently auditing Fiscal 1990 through Fiscal 1993.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 20--COMMITMENTS AND CONTINGENCIES
In August 1991, the Company entered into a long-term agreement with Integrated Systems Solutions Corporation ("ISSC"), a subsidiary of IBM, to provide a wide range of information systems services. Under the agreement, ISSC has taken over the Company's data center operations and mainframe processing and information system functions and is providing business applications and systems designed to enhance the Company's customer service and efficiency. The charges under this agreement are based upon the services requested at predetermined rates. The Company may terminate the agreement upon 90 days notice with payment of a specified termination charge. The amounts expensed under this agreement, and which are included in selling, general and administrative expenses in the accompanying consolidated statements of operations, were $16.0 million, $12.6 million and $12.9 million during Fiscal 1994, Fiscal 1993 and Fiscal 1992, respectively. Further, in Fiscal 1993, the Company expensed an additional $8.1 million of technical information costs in connection with the Plainbridge Spin-Off (see Note 3).
The Company is contingently liable for certain obligations of the Purity Operations primarily consisting of approximately 60 leases for real property, in the event of default thereunder by the purchaser of the Purity Operations. As of January 28, 1995, the estimated present value of such lease obligations approximated $109.5 million. The Company is also contingently liable for certain obligations of the recently sold home centers segment primarily consisting of 19 leases for real property, in the event of default thereunder by the purchaser of the recently sold home centers segment. As of January 28, 1995, the estimated present value of such lease obligations approximated $27.6 million.
In addition to the litigation referred to above, the Company is a party to a number of legal proceedings in the ordinary course of business. Management believes that the ultimate resolution of these proceedings will not, in the aggregate, have a material adverse impact on the financial condition, the results of operations or the business of the Company.
NOTE 21--PROVISION FOR STORE CLOSINGS
Effective with the beginning of the second quarter of Fiscal 1993, the Company originally made a decision to close or to dispose of five stores which the Company believed would continue to be unprofitable. As a result, the Company recorded a pretax charge in the second quarter of Fiscal 1993 of approximately $6.0 million. Operating results for the five stores had previously been excluded from the consolidated statements of operations since the beginning of the second quarter of Fiscal 1993. However, the Company decided on December 31, 1994 that two of the five stores would continue to be operated and, therefore, the operating results for these two stores have been included in the Fiscal 1994 and Fiscal 1993 consolidated statements of operations. The inclusion of these two stores had no significant effect on the Fiscal 1994 or 1993 reported results. The remaining three stores were closed during the fourth quarter of Fiscal 1994 and the related leases have been assigned or sublet subsequent to January 28, 1995.
NOTE 22--LABOR DISPUTE
The Company's pretax earnings in the second quarter of Fiscal 1993 were adversely impacted by a labor dispute and by the related promotional programs implemented subsequent to such labor dispute. The related promotional programs were implemented in order to regain sales levels. The Company, with three other major supermarket companies (ShopRite, Foodtown and Grand Union), conducted separate but simultaneous negotiations with respect to an expired labor contract. The major issues of the contract concerned health care and related benefits. On May 7, 1993, the union began selective strikes
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 22--LABOR DISPUTE--(CONTINUED) against one of the Company's competitors. Over the course of the next three weeks, the labor dispute expanded until, on May 28, 1993, union members at over 250 supermarkets, including 53 Pathmark supermarkets, were either on strike or locked out. On May 29, 1993, the labor dispute was settled and, in June, the union membership ratified a new four-year contract, and the membership returned to work.
NOTE 23--EXTRAORDINARY ITEMS
The extraordinary items reflected in the consolidated statements of operations are comprised of (dollars in thousands):
During Fiscal 1994, in connection with the disposal of the home centers segment, the Company was required to pay down $62.9 million of PTK DIBs. The premium paid, including original issue discount, resulted in a net loss on early extinguishment of indebtedness of $3.7 million.
During Fiscal 1993, in connection with the Recapitalization, the Company repaid or exchanged $1.3 billion of indebtedness through the issuance of new Pathmark and PTK indebtedness. This repayment of outstanding indebtedness and this origination of new indebtedness included premiums and other expenses and included the write off of existing deferred financing fees associated with indebtedness which was extinguished. This resulted in a net loss on early extinguishment of indebtedness which totalled $106.0 million. The Company also repaid $2.5 million principal amount of indebtedness, which was secured by mortgages on two retail properties which were transferred to Plainbridge. This repayment resulted in a net loss on early extinguishment of indebtedness of $0.06 million. In addition, the Company repaid $5.7 million aggregate principal amount of indebtedness, which was secured by a mortgage on the distribution center of the home centers segment transferred to Plainbridge. This repayment resulted in a net loss on early extinguishment of indebtedness of $0.1 million.
During Fiscal 1992, the Company paid the remaining $132.0 million principal outstanding of the Old Term Loan by utilizing a portion of the proceeds from the sale of the Holdings Subordinated Notes resulting in the accelerated amortization of the deferred financing costs related to the Old Term Loan of $1.1 million, before applicable income tax benefit of $0.5 million.
During Fiscal 1992, utilizing a portion of the proceeds from the sale of the Holdings Subordinated Notes, as well as utilizing additional Old Working Capital Facility borrowings, the Company, through open market purchases, purchased $71.0 million principal amount of Holdings Senior Subordinated Notes at a cost of $76.0 million. The premium paid of $5.0 million, as well as the accelerated amortization of deferred financing costs and of transaction expenses of $1.5 million related to the
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 23--EXTRAORDINARY ITEMS--(CONTINUED) repurchased Holdings Senior Subordinated Notes, resulted in a loss of $6.5 million, before an applicable income tax benefit of $2.6 million.
During Fiscal 1992, SMG-II purchased, and subsequently contributed to the Company, $4.8 million principal amount of Holdings Senior Subordinated Notes. The Company, through open market purchases, purchased an additional $1.2 million principal amount of Holdings Senior Subordinated Notes. The premium paid on the contributed and on the purchased Holdings Senior Subordinated Notes of $0.3 million, as well as the amount paid for the accelerated amortization of deferred financing costs and for the transaction expenses of $0.1 million related to the repurchased Holdings Senior Subordinated Notes, resulted in a loss of $0.4 million, before an applicable income tax benefit of $0.2 million.
NOTE 24--CUMULATIVE EXCHANGEABLE REDEEMABLE PREFERRED STOCK
The Company's Exchangeable Preferred Stock, which has a maturity date of December 31, 2007, consists of 9,000,000 authorized shares of which 4,890,671 shares are issued and outstanding at January 28, 1995. The fair market value of the Exchangeable Preferred Stock at date of original issuance of October 5, 1987 was $20 per share and the liquidation preference is $25 per share. Due to its mandatory redemption requirements, the Exchangeable Preferred Stock has been stated on the balance sheet as redeemable securities. The difference between fair market value at date of issue and liquidation preference is being accreted quarterly.
In the event of any liquidation, dissolution or winding up of the Company, holders of the Exchangeable Preferred Stock will be entitled to receive their full liquidation preference per share, together with accrued and unpaid dividends, before the distribution of any assets of the Company to the holders of shares of the Company's common stock or other shares which would rank junior to the Exchangeable Preferred Stock.
The Exchangeable Preferred Stock may be redeemed, at the option of the Company, in whole or in part, at liquidation preference, together with all accrued and unpaid dividends to the redemption date. Optional redemption of the Exchangeable Preferred Stock will be subject to restricted payments and other similar provisions of the Company's debt instruments.
Commencing December 31, 2004, the Company is required to redeem in each year 20% of the highest amount at any time outstanding of the Exchangeable Preferred Stock. The redemption process is calculated to retire 60% of the issue prior to final maturity with the remaining amount of the issue to be redeemed at maturity.
If an amount equal to six quarterly dividends is in arrears in whole or in part, the holders of the Exchangeable Preferred Stock, voting as a class, may elect two members of the Board of Directors of the Company at a special meeting called by the Company until such time as all accrued dividends on the Exchangeable Preferred Stock shall have been paid for all dividend periods.
The Company has the option to require holders to exchange the Exchangeable Preferred Stock on any dividend payment date, in whole or in part, for exchange debentures (the "Exchange Debentures") of the Company. Such option is available at any time if (a) no event of default exists under any of the Company's loan agreements and (b) the exchange is allowed under the provisions of the limitation on the Company's indebtedness and other applicable provisions of the Company's loan agreements. Any such exchange will result in the issuance of Exchange Debentures in an amount equal to the aggregate
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 24--CUMULATIVE EXCHANGEABLE REDEEMABLE PREFERRED STOCK--(CONTINUED) liquidation preference of all shares of Exchangeable Preferred Stock being exchanged into Exchange Debentures and in an amount equal to all accrued but unpaid dividends.
During Fiscal 1991, SMG-II made a capital contribution to the Company of 2.8 million shares of Exchangeable Preferred Stock, which were purchased pursuant to the Exchangeable Preferred Stock Offer and to the open market transactions. The Company has retired these shares (see Note 1).
Exchangeable Preferred Stock activity for the three years ended January 28, 1995 was as follows (dollars in thousands):
The terms of the Exchangeable Preferred Stock provide for cumulative quarterly dividends at an annual rate of $3.52 per share when, as, and if declared by the Board of Directors of the Company. Dividends for the first 20 quarterly dividend periods (through October 15, 1992) were paid at the Company's option in additional shares of Exchangeable Preferred Stock. Prior to the Recapitalization, the Old Bank Credit Agreement and the terms of the indentures governing the Company's public debt restricted the payment of cash dividends on the Exchangeable Preferred Stock unless certain conditions were met, including tests relating to earnings and to cash flow ratios of the Company. Prior to the Recapitalization, the Company had not met the conditions permitting cash dividend payments on the Exchangeable Preferred Stock. Subsequent to the Recapitalization, Holdings does not expect to receive cash flow sufficient to permit payments of dividends on the Exchangeable Preferred Stock in the foreseeable future. All dividends not paid in cash will cumulate at the rate of $3.52 per share per annum, without interest, until declared and paid. As such, at January 28, 1995, the unpaid dividends of $38.7 million were accrued and included in other noncurrent liabilities.
Dividends on the Exchangeable Preferred Stock must be paid in full for all prior periods as of the most recent dividend payment date before any dividends, other than dividends payable in shares of the Company's common stock or in any other class of the Company's capital stock ranking junior to the Exchangeable Preferred Stock, can be paid or can be set apart for payment to holders of common stock or to holders of any other shares which would rank junior to the Exchangeable Preferred Stock. In addition, dividends on the Exchangeable Preferred Stock must be paid in full for all prior periods before the redemption or purchase by the Company of shares of common stock or any other shares which would rank junior to the Exchangeable Preferred Stock.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 25--COMMON STOCK
The Company's authorized common stock, par value $.01 per share, consists of 1,075,000 shares of Class A common stock and 1,000,000 shares of Class B common stock, of which 650,675 shares and 320,000 shares, respectively, were issued and outstanding at January 28, 1995 and at January 29, 1994.
Holders of shares of Class A common stock are entitled to one vote per share on all matters to be voted on by stockholders. Holders of shares of Class B common stock are not entitled to any voting rights, except as required by law or as otherwise provided in the Restated Certificate of Incorporation of the Company. Subject to compliance with certain procedures, holders of Class B common stock may exchange their shares for shares of Class A common stock and holders of Class A common stock may exchange their shares for shares of Class B common stock on a share-for-share basis. Upon liquidation or dissolution of the Company, holders of the Company's common stock are entitled to share ratably in all assets available for distribution to stockholders. Payment of all prior claims, including liquidation rights of any Exchangeable Preferred Stock outstanding, must be made before the holders of the Company's common stock are entitled to any distribution. Holders of the Company's common stock have no preemptive or subscription rights.
On February 4, 1991, as a result of the consummation of the Exchange Offer, all shares of the Company's Class A common stock and Class B common stock were owned directly by SMG-II. SMG-II is effectively a holding company for the operations of the Company (see Note 1).
The Company and certain executives of Supermarkets (collectively, "Management Investors") entered into a management subscription agreement under which, on October 5, 1987, the Management Investors purchased an aggregate of 100,000 shares of Class A common stock for consideration of $100 per share. In connection with the Exchange Offer, the Management Investors entered into an agreement (the "Management Investors Exchange Agreement") with respect to the SMG-II common stock which was received in exchange for the Company's Class A common stock. Under the terms of the Bank Credit Agreement, there are limitations in the amount of repurchases from Management Investors: $2 million during any fiscal year and $5 million in the aggregate. Prior to the Exchange Offer, all of the Class A common stock held by Management Investors was classified as Redeemable Securities. In Fiscal 1991, prior to the Exchange Offer, the Company repurchased 3,490 shares from Management Investors at an aggregate cost of $0.4 million.
Certain Management Investors, who purchased shares of Class A common stock, borrowed a portion of the purchase price from the Company and were required to deliver a note to the Company ("Recourse Note") in the principal amount of the loan (see Note 16). Interest on the Recourse Note is to be paid annually and the principal is to be paid on the tenth anniversary of the date of issue. Each Management Investor who issued a Recourse Note was required to enter into a stock pledge agreement ("Stock Pledge Agreement") with the Company, pursuant to which the Management Investor pledged shares of Class A common stock to secure the repayment of the Recourse Note. In connection with the Exchange Offer, each Management Investor who issued a Recourse Note was required to execute an amendment to the Stock Pledge Agreement which provided for the substitution of the SMG-II common stock received in the Exchange Offer for the Company Class A common stock, in order, to secure the repayment of the Recourse Note. In connection with the repurchases of common stock from Management Investors, no payments of Recourse Notes were made during Fiscal 1994, Fiscal 1993 and Fiscal 1992. Recourse Notes in the amount of approximately $1.7 million were outstanding at January 28, 1995 and January 29, 1994. The Recourse Notes were included in other assets at January 28, 1995 and January 29, 1994.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 26--STOCK OPTION PLANS
The Management Investors 1987 Stock Option Plan (the "Management Plan") and the 1987 Employee Stock Option Plan (the "Employee Plan") were approved by the Board of Directors of the Company on November 24, 1987 and by the Stockholders on December 21, 1987. Under the terms of the Management and the Employee Plans, associates receive either incentive stock options or nonqualified stock options, the duration of which may not exceed ten years from the date of grant, to purchase shares of the Company's Class A common stock. In connection with the Exchange Offer, adjustments to outstanding options under the Management and the Employee Plans were made. As a result of these adjustments, each option under the Management and the Employee Plans, which were outstanding on February 4, 1991, became an option for the purchase of an equal number of shares of SMG-II Class A common stock.
NOTE 27--DISPOSAL OF PURITY OPERATIONS AND INVESTMENT IN PURITY SUPREME
On December 17, 1991, the Company completed the sale of two subsidiaries, Purity Supreme, Inc. ("Purity Supreme") and Li'l Peach Corp. ("Li'l Peach", and together with Purity Supreme, the "Purity Operations"), for approximately $257.0 million (as adjusted), including the assumption of certain indebtedness of the Purity Operations, to a Company organized by Freeman Spogli & Co. In connection with the disposal of the Purity Operations, the Company retained a 10% common equity interest in Purity Supreme with a net book value of $8.9 million (as of sale date), a new issue of Purity Supreme exchangeable preferred stock (the "Purity Preferred Stock") with an aggregate stated value of $18.0 million and a convertible subordinated note of Purity Supreme (the "Purity Note") in the principal amount of $2.0 million. During Fiscal 1992, the Company collected the principal amount of the Purity Note and recorded a gain of $2.0 million, which reflected the reversal of the valuation reserve recorded upon the disposal of the Purity Operations.
The Purity Preferred Stock matures December 17, 2003 and accrues dividends at $1.3 million per annum on a semiannual basis each June 17 and December 17. The Purity Preferred Stock is subordinate to Purity Supreme's Series B Preferred Stock, redeemable at the option of Purity Supreme at stated discount rates and convertible into Purity Supreme debentures at the option of Purity Supreme. The Purity Preferred Stock has a redemption price, including unpaid dividends, of $15.2 million at January 28, 1995.
Due to the Company's inability to readily convert these securities into cash, as there exists no current trading market, and as there is uncertainty of future cash flows from these securities, a valuation allowance for the redemption value of these securities has been recorded at January 28, 1995 and January 29, 1994.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 28--GOODWILL
Since the Acquisition in Fiscal 1987, the Company, as constituted prior to the Recapitalization, did not achieve the sales and earnings projections prepared at the time of the Acquisition due to the economic recession in the Company's geographic trading area, the increased competitive pressures (from new and enlarged supermarkets, discount stores and warehouse club stores), the related weak retail environment and the lower than were projected food inflation rates. These conditions resulted in higher than expected losses and in a significant deficiency in equity and negatively impacted the real estate and financial markets so that the Company was not able to achieve the new store growth, enlargements and remodeling anticipated in the projections. The Company determined, based on the trend of operating results for Fiscal 1988 through Fiscal 1992, and without anticipating the effects of the Recapitalization and Spin-Offs on future projections, that its projected results, as of January 30, 1993, would not support the future amortization of the Company's remaining goodwill balance of $600.7 million.
The methodology that management used to assess the recoverability of goodwill was to project results of operations forward 35 years, which represented the remaining life of the goodwill as of January 30, 1993. The methodology was based on a five year historical trend line of actual results. Management believed that the projected future results, based on this historical trend, were the most likely scenario assuming a recapitalization was not consummated. Management evaluated the recoverability of goodwill based on this forecast of future operations and income. Management also evaluated recoverability based on the discounted value of this same forecast using a discount rate that reflected the Company's average cost of funds. Accordingly, in the fourth quarter of Fiscal 1992, the Company wrote off its remaining goodwill balance of $600.7 million.
NOTE 29--SUBSEQUENT EVENT (UNAUDITED)
On April 24, 1995, a strategic buyer announced its plans to purchase Purity, subject to completion of regulatory approval and compliance with terms and conditions of the purchase agreement. The sale is expected to close later in 1995, with the Company expecting to receive approximately $16 million based upon the announced price. Until the proposed transaction is consummated, no adjustment will be made to the valuation allowance related to the securities representing the Company's investment in Purity. Further, based on the announced price, if the proposed transaction is consummated, a capital tax loss carryforward of approximately $70 million will be generated. The benefit of such capital tax loss carryforward will only be realized to the extent the Company generates capital gains.
SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 30--QUARTERLY FINANCIAL DATA (UNAUDITED)
Financial data for the interim periods of Fiscal 1994 and Fiscal 1993 is as follows (dollars in thousands):
- ------------ (a) The pretax LIFO inventory credit for the 52 weeks ended January 28, 1995 was estimated to be a $0.825 million provision in each of the first three fiscal quarters. The annual credit was $3.2 million, and resulted in a $0.7 million credit in the fourth quarter. (b) The pretax LIFO inventory credit for the 52 weeks ended January 29, 1994 was estimated to be a $0.65 million provision in each of the first three fiscal quarters. The annual credit was $2.4 million, and resulted in a $0.45 million credit in the fourth quarter.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder SUPERMARKETS GENERAL HOLDINGS CORPORATION Woodbridge, New Jersey
We have audited the accompanying consolidated balance sheets of Supermarkets General Holdings Corporation and its subsidiaries (the "Company") as of January 28, 1995 and January 29, 1994, and the related consolidated statements of operations, stockholder's deficit and cash flows for each of the three years in the period ended January 28, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Supermarkets General Holdings Corporation and its subsidiaries as of January 28, 1995 and January 29, 1994, and the results of their operations and their cash flows for each of the three years in the period ended January 28, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 5 to the consolidated financial statements, the Company changed its method of accounting for postretirement benefits other than pensions, postemployment benefits, income taxes, LIFO inventories and the determination of the discount rate utilized to record certain noncurrent liabilities as of January 31, 1993.
Deloitte & Touche LLP Parsippany, New Jersey April 17, 1995 (April 24, 1995 as to Note 29)
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, 1995) (A) DIRECTORS OF THE COMPANY
The following table sets forth the name, principal occupation or employment at the present time and during the last five years, and the name and principal business of any corporation or other organization in which such occupation or employment is or was conducted, of the directors of the Company, all of whom are citizens of the United States. Each individual named below is a director of both the Company and Pathmark, except for Mr. Rubenstein, who is a director of the Company only.
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(1) Includes service with Pathmark's predecessor.
(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 Investors are entitled to designate one director to Holdings' Board of Directors. By having the ability to designate a majority of Holdings' Board of Directors, the Merrill Lynch Investors have the ability to control the Company. Currently, five of the persons serving as directors were designated by the Merrill Lynch Investors (Messrs. Burke, Michas, Khanna, McLean and Rubenstein), two were designated by the Management Investors (Messrs. Futterman and Cuti) and one was designated by the Equitable Investors (Ms. Penny). Under the terms of the SMG-II Stockholders Agreement, SMG-II is obligated to re-elect the current directors to the Board. No family relationship exists between any director or nominee and any other director or nominee or executive officer of the Company.
(B) EXECUTIVE OFFICERS
The following table sets forth the name, principal occupation or employment at the present time and during the last five years, and the name of any corporation or other organization in which such occupation or employment is or was conducted, of the executive officers of the Company, all of whom are citizens of the United States unless otherwise indicated and serve at the discretion of the Board of Directors of the Company. The executive officers of the Company listed below were elected to office for an indefinite period of time. No family relationship exists between any executive officer and any other executive officer or director of the Company. All current executive officers now hold identical positions with the Company and Pathmark, except for Messrs. Crowley and Rallo, who are executive officers of Pathmark only.
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(1) Includes service with Pathmark's predecessor.
(2) Member of the Company's Board of Directors.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
- ------------ (1) Represents payments as reimbursement for interest paid to Holdings for a loan of less than $60,000 from Holdings in connection with the purchase of SMG-II Class A Common Stock and includes an amount sufficient to pay any income taxes resulting therefrom after taking into account the value of any deduction available as a result of the payment of such interest and taxes. (2) Stock options shown were granted pursuant to the Management Investors 1987 Stock Option Plan of SMG-II (the "Plan") and relate to shares of Class A Common Stock of SMG-II. (3) Represents Pathmark's matching contribution to the SGC Savings Plan (the "Savings Plan"). (4) Mr. Rallo became an executive officer of Pathmark in October 1993. (5) Mr. Borshadel left the Company's employ on November 4, 1994 in connection with the sale of the Rickel Home Centers segment. Pursuant to an agreement with Mr. Borshadel, the Company paid him a bonus of $1,400,000 upon the completion of said sale.
None of the executive officers named in the above Compensation table were granted stock options in the fiscal year ended January 28, 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES(1)
- ------------ (1) Options shown were granted pursuant to the Plan and relate to shares of Class A Common Stock of SMG-II. No options were exercised in Fiscal 1994.
PENSION PLAN TABLE(1)
- ------------ (1) The table above illustrates the aggregate annual pension benefits payable under the SGC Pension Plan and Excess Benefit Plan (collectively, the "Pension Plans"). The retirement benefit for individuals with 30 years of credited service is 40% of the individual's average compensation during his or her highest five compensation years in the last ten years before retirement, less one-half of the social security benefit received. The retirement benefit is reduced by 3.33% for every year of credited service less than 30. Covered compensation under the Pension Plans includes all cash compensation subject to withholding plus amounts deferred under the Savings Plan pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended, and as to individuals identified in the Summary Compensation Table, would be the amount set forth in that table under the headings "Salary" and "Bonus". The table shows the estimated annual benefits an individual would be entitled to receive if normal retirement at age 65 occurred in January 1995 after the indicated number of years of covered employment and if the average of the participant's covered compensation for the five years out of the last ten years of such employment yielding the highest such average equalled the amounts indicated. The estimated annual benefits are based on the assumption that the individual will receive retirement benefits in the form of a single life annuity (married participants may elect a joint survivorship option) and are before applicable deductions for social security benefits in effect as of January 1995. As of December 31, 1994, the following individuals had the number of years of credited service indicated after their names: Mr. Futterman, 21.6; Mr. Cuti, 3.0; Mr. Joyce, 30; Mr. Rallo, 30 and Mr. Gutman, 18.8. All of Mr. Borshadel's credited service was transferred to his new employer which is responsible for Mr. Borshadel's pension. As described below in "Compensation Plans and Arrangements--Supplemental Retirement Agreements", each of the named executives is party to a Supplemental Retirement Agreement with Pathmark except for Mr. Borshadel whose Supplemental Retirement Agreement has been fully assumed by the purchaser of the Rickel business.
COMPENSATION PLANS AND ARRANGEMENTS
Supplemental Retirement Agreements. The Company has entered into supplemental retirement agreements with certain key executives, including the current executive officers named in the Summary Compensation Table, which provide that the executive will be paid upon termination of employment after attainment of age 60 a supplemental pension benefit in such an amount as to assure him or her an annual amount of pension benefits payable under the supplemental retirement agreement, the Company's qualified pension plans and certain other plans of the Company, including Savings Plan balances as of March 31, 1983, (a) in the case of Mr. Futterman, equal to (i) $475,000 or (ii) his base salary on the date of his retirement, death or disability, whichever is greater, (b) in the case of Mr. Cuti equal to 30% of his final average Compensation (as hereinafter defined) based on ten years of service with the Company and increasing 1% per year for each year of service thereafter to a maximum of 40% of his final average Compensation based on 20 years of service and (c) in the cases of Messrs. Rallo, Joyce and Gutman, equal to (i) 30% of his final average Compensation (as hereinafter defined) based on ten years of service with the Company and increasing 1% per year for each year of service thereafter, to a maximum of 40% of his final average Compensation based on 20 years of service, or (ii) $150,000, whichever is less. "Compensation" includes base salary and payments under the Executive Incentive Plan, but excludes Company matching contributions under the Savings Plan and cash awards under Old
Supermarkets' former Long-Term Incentive Plan. If the executive leaves the Company prior to completing 20 years of service (other than for disability), the supplemental benefit would be reduced proportionately. Should the executive die, the surviving spouse then receiving or, if he or she was not then receiving a supplemental pension benefit, the spouse would be entitled to a benefit equal to two-thirds of the benefit to which the executive would have been entitled, provided the executive has attained at least ten years of service with the Company. Mr. Cuti's agreement credits him with ten years of service over and above his actual service.
Employment Agreements. As of August 1, 1993, the Company and Pathmark entered into an employment agreement with Mr. Futterman (the "1993 Employment Agreement"). The 1993 Employment Agreement is for an initial term of three years, which term is automatically extended for an additional year on the second anniversary of the commencement of the term and on each successive anniversary thereafter. Under the 1993 Employment Agreement, Mr. Futterman is entitled to a minimum annual base salary of $500,000. The 1993 Employment Agreement also provides that Mr. Futterman shall be eligible to receive an annual bonus of up to 75% of his annual base salary and shall be provided the opportunity to participate in pension and welfare plans, programs and arrangements that are generally made available to executives of Pathmark, or as may be deemed appropriate by the Compensation Committee of the Board of Directors of SMG-II.
As of August 1, 1993, the Company entered into an employment agreement (the "August Agreement", together with the 1993 Employment Agreement, the "Employment Agreements") with Mr. Cuti. The August Agreement is for an initial term of three years, which term is automatically extended for an additional year on the second anniversary of the commencement of the term and on each successive anniversary thereafter. Under the August Agreement, Mr. Cuti is entitled to a minimum annual base salary of $313,500. The August Agreement also provides that he shall be eligible to receive an annual bonus of up to 75% of his annual base salary and shall be provided the opportunity to participate in pension and welfare plans, programs and arrangements that are generally made available to executives of Pathmark or as may be deemed appropriate by the Compensation Committee of the Board of Directors of SMG-II.
In the event one of the above named executives' employment is terminated by the Company without Cause (as defined in the Employment Agreements), or by the executive for Good Reason (as defined in the Employment Agreements) prior to the termination of the applicable Employment Agreement, such executive will be entitled to continue to receive his base salary, plus bonus (if earned) and continued coverage under health and insurance plans for the two year period commencing on the date of such termination or resignation, reduced by any compensation or benefits which the executive is entitled to receive in connection with his employment by another employer during said period. In addition, if Mr. Futterman's employment is terminated by the Company without Cause or by him for Good Reason on or after a Change in Control, he will then be entitled to receive such benefits for a three year period, and his base salary shall be the greater of his base salary at the annual rate in effect immediately prior to such termination of resignation of $500,000.
Under the 1993 Employment Agreement, a Change in Control means (a) the acquisition by a Third Party (as hereinafter defined) of beneficial ownership of more than 30% of the issued and outstanding voting common stock of SMG-II, Holdings or the Company or (b) the acquisition of all or substantially all of the assets of the Company by a Third Party; provided, however, that no Change in Control will be deemed to occur as long as (i) the ML Investors, (ii) the management employees of the Company, or (iii) the ML Investors, in combination with the management employees of the Company, beneficially own, directly or indirectly, more than 50% of the voting common stock of the Company. "Third Party" shall mean any person other than the Company, Holdings or SMG-II, each of the ML Investors, or The Equitable Life Assurance Society of the United States and its affiliates. For purposes of the 1993 Employment Agreement, "person" and "beneficial ownership" shall have the meanings assigned to such terms under Section 13(d) of the Exchange Act, as amended, and "affiliate" of any first person shall mean a second person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such first person.
The Employment Agreements contain agreements by the executives not to compete with the Company as long as they are receiving payments under an Employment Agreement and an agreement by the executives not to disclose confidential information.
Mr. Borshadel had an employment contract identical in all material respects to Mr. Cuti's. As part of the sale, the purchaser of the Rickel business has fully assumed all obligations under Mr. Borshadel's contract.
DIRECTOR'S FEES
Directors of the Company are not currently compensated for their services as such. However, Mr. Rubenstein receives an annual fee of $20,000 from Plainbridge for sitting on its Board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Burke, Khanna and McLean comprise the compensation committee of the Board of Directors of SMG-II, and were responsible for decisions concerning compensation of the executive officers of the Company. Messrs. Burke and McLean are directors of MLCP and they, along with Mr. Khanna, have been retained by MLCP as consultants. MLCP is an indirect wholly-owned subsidiary of ML & Co. See "Security Ownership of Certain Beneficial Ownership and Management."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Since February 4, 1991, all shares of the Holdings Common Stock are held by SMG-II. As of April 1, 1995, the number of shares of (a) SMG-II (i) Class A Common Stock, (ii) Class B Common Stock, (iii) Series A Preferred Stock, and (iv) Series B Preferred Stock and (b) Holdings Preferred Stock beneficially owned by the persons known by management of the Company to be the beneficial owners of more than 5% of the outstanding shares of any class as "beneficial ownership" has been defined under Rule 13d-3, as amended, under the Securities Exchange Act of 1934, are set forth in the following table:
- ------------
(1) Includes presently exercisable options granted under the Plan for 71,772 shares of SMG-II Class A Common Stock held by Management Investors and 500 shares of SMG-II Class A Common Stock that SMG-II has agreed to sell to two of the Company's employees, including 250 shares to Mr. Cuti. Does not include 39,120 options to purchase shares of SMG-II Class A Common Stock granted to non-management employees of the Company, which options are not exercisable until a public offering of SMG-II Common Stock occurs.
(2) MLCP and its affiliates are the direct or indirect managing partners of ML Offshore LBO Partnership No. IX, Merrill Lynch Capital Appreciation Partnership No. IX, L.P., ML Employees LBO Partnership No. 1, L.P., Merrill Lynch Capital Appreciation Partnership No. B-X, L.P., ML Offshore LBO Partnership No. B-X and MLCP Associates, L.P. No. II. Such entities and those disclosed in footnote (3) below, are referred to herein as the "Merrill Lynch Investors" or ML Investors. The address of such entities is c/o Merrill Lynch Capital Partners, Inc., in care of Stonington Partners, Inc., 767 Fifth Avenue, New York, New York 10153. MLCP is an indirect wholly owned subsidiary of ML&Co. The partners and principals of SPI (including Messrs. Burke, Michas, McLean and Khanna) are consultants to MLCP.
(3) Merchant Banking L.P. No. 1, Merchant Banking L.P. No. IV, Merrill Lynch KECALP L.P. 1987, Merrill Lynch KECALP L.P. 1989, Merrill Lynch KECALP L.P. 1991 and ML IBK Positions, Inc. are indirectly controlled by ML&Co. The address of such entities is c/o James Caruso, Merrill Lynch & Co., Inc., World Financial Center, South Tower, New York, New York 10080-6123.
(4) CBC Capital Partners, Inc. is a wholly owned subsidiary of Chemical Banking Corp.
(5) The Equitable Investors are separate purchasers who are affiliates of each other.
(6) SMG-II Preferred stock may be converted into an equivalent number of shares of common stock of SMG-II in accordance with its terms.
(7) Voting rights are limited to the election of two directors to the Board of Holdings.
No officer or director claims beneficial ownership of any share of Holdings Common Stock or of SMG-II stock other than SMG-II Class A Common Stock. The number of shares of SMG-II Class A Common Stock and Holdings Preferred Stock beneficially owned by each director, by each nominee for director, by each of the five highest compensated executive officers and by all directors and all current and executive officers as a group is as follows:
- ------------
* Less than 1%
(1) Does not include 550,000 shares of SMG-II Class A Common Stock or 236,731.5 shares of SMG-II Series A Preferred Stock owned beneficially by a group of which MLCP is a part. Messrs. Burke, McLean and Michas, directors of MLCP, disclaim beneficial ownership in all such shares.
(2) Includes 250 shares of SMG-II Class A Common Stock that SMG-II has agreed to sell to Mr. Cuti and presently exercisable options granted under the Plan to purchase shares of SMG-II Class A Common Stock, as follows: Mr. Cuti, 5,383; Mr. Futterman, 13,000; Mr. Gutman, 2,350; Mr. Joyce, 2,000; Mr. Rallo, 2,600 and Mr. Rubenstein, 1,000, and all directors and officers as a group, 31,466.
ITEM 13.
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, 1995, Mr. Rubenstein remained indebted to the Company in the amount of $100,000.
During Fiscal 1994, the Company retained ML & Co. to advise it in connection with its sale of its Rickel Home Center business. Also, in the current fiscal year, the Company has engaged ML & Co. to act as financial adviser in certain matters. The Company believes that the terms of the transactions referred to under this paragraph were no less favorable than those obtainable in transactions with unrelated persons. See Item 12 "Security Ownership of Certain Owners and Management".
In connection with the sale of its Rickel Home Center business, one of the Company's subsidiaries used approximately $71.3 million of the sale proceeds to partially prepay certain indebtedness, including accrued interest and debt premium, held by the Equitable Investors. Ms. Penny, a director of the Company, is an executive officer of a subsidiary of the Equitable Life Assurance Society of the United States. See Item 12 "Security Ownership of Certain Beneficial Owners and Management".
The holders of SMG-II Preferred Stock are a party with the holders of SMG-II Common Stock to a stockholders agreement (the "SMG-II Stockholders Agreement"), which, among other things, restricts the transferability of SMG-II capital stock and relates to the corporate governance of SMG-II and Holdings. Among other provisions, the SMG-II Stockholders Agreement requires a vote of at least 80% of the members of the Board of Directors to cause the Company to conduct any business other than that engaged in by the Company in February of 1991 and the approval of stockholders representing 66 2/3% of the number of shares of SMG-II voting capital stock voting together as a single class for SMG-II to enter into any Significant Transaction (as defined), including certain mergers, sales of assets, acquisitions, sales or redemptions of stock, the amendment of the certificate of incorporation or by-laws or the liquidation of SMG-II. The SMG-II Stockholders Agreement also provides that SMG-II must obtain the prior written consent of the Equitable Investors with respect to certain of these transactions and that the Equitable Investors have certain preemptive rights with respect to the sale of capital stock of Holdings or the Company.
The SMG-II Stockholders Agreement also contains an agreement of the stockholders of SMG-II with respect to the composition of SMG-II's and Holdings' Boards of Directors. Under this agreement, the Merrill Lynch Investors will be entitled to designate up to seven directors, the Management Investors will be entitled to designate up to three directors and the Equitable Investors will be entitled to designate one director to both of SMG-II's and Holdings' Boards of Directors. Such agreement furthermore entitles the Merrill Lynch Investors to designate a majority of Holdings' Board of Directors at all times. Since Holdings owns all of the outstanding shares of Common Stock, by having the ability to designate a majority of Holdings' Board of Directors, the Merrill Lynch Investors will have the ability to control the Company. The Merrill Lynch Investors are controlled by ML & Co.
In addition to the foregoing, the SMG-II Stockholders Agreement contains terms restricting the transfer of SMG-II Common Stock and SMG-II Preferred Stock (collectively, the "SMG-II Stock") by the stockholders of SMG-II, and providing to the stockholders of SMG-II rights of first offer with respect to resales of SMG-II Stock, rights of first refusal with respect to certain issuances of shares of SMG-II Stock, certain rights to demand or participate in registrations of shares of SMG-II Stock under the Securities Act and certain "tag-along" rights.
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.
(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 27, 1995 SUPERMARKETS GENERAL HOLDINGS CORPORATION
By: /s/ RON MARSHALL ..................................
Ron Marshall Executive Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
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*Filed herewith.