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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
FEBRUARY 1, 1997 0-16404
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SUPERMARKETS GENERAL HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3408704
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
301 BLAIR ROAD, P.O. BOX 5301 07095-0915
WOODBRIDGE, NEW JERSEY (Zip Code)
(Address of principal executive offices)
908-499-3000
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
$3.52 CUMULATIVE EXCHANGEABLE REDEEMABLE PREFERRED STOCK
(TITLE OF CLASS)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of April 1, 1997, there were outstanding 650,675 shares of $0.01 par
value Class A Common Stock (voting) and 320,000 shares of $0.01 par value Class
B Common Stock (non-voting), all of which are privately owned and not traded on
a public market.
Documents Incorporated by Reference: None
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PART I
ITEM 1. BUSINESS*
GENERAL
Registrant was incorporated in the State of Delaware in April 1987 as SMG
Holdings Corporation. Subsequently, registrant's name was changed to
Supermarkets General Holdings Corporation (the "Company"). The Company acquired
Supermarkets General Corporation ("Old Supermarkets"), in October 1987 (the
"Acquisition"). References to the Company in this Report refer to the Company
and its subsidiaries on a consolidated basis, except where the context requires
otherwise.
In October 1989, Old Supermarkets adopted an amended and restated Plan of
Liquidation pursuant to which it was liquidated into three wholly owned
subsidiaries of the Company. 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
retained a 10% common equity interest in Purity Supreme and a new issue of
Purity Supreme exchangeable preferred stock. During the fiscal year ended
February 3, 1996 ("Fiscal 1995"), the Company sold its investment in Purity for
$16.4 million in connection with the sale of Purity to Stop & Shop Companies,
Inc. and used the proceeds of the sale to repay a portion of the PTK Holdings,
Inc. Exchangeable Guaranteed Debentures due 2003 (the "PTK Exchangeable
Guaranteed Debentures"), including accrued interest and debt premiums. PTK
Holdings, Inc. ("PTK") is a wholly owned subsidiary of the Company formed in
1993.
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. Pathmark distributed
the capital stock of Plainbridge, Inc. ("Plainbridge") to PTK in the Plainbridge
Spin-Off (as defined below).
In connection with the Recapitalization, Pathmark contributed warehouse,
distribution and transportation operations and the inventory therein that
service the 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 provided for the continuing supply of
merchandise to Pathmark supermarkets and for the provision of warehousing,
distribution and logistical services relating to the supply of such merchandise.
During the fiscal year ended February 1, 1997 ("Fiscal 1996"), PTK contributed
100% of the capital stock of Plainbridge to Pathmark, making Plainbridge a
wholly owned subsidiary of Pathmark.
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. The Company used approximately $66.6
- ------------------------
* Except as otherwise indicated, information contained in this Item is given as
of February 1, 1997.
1
million before January 28, 1995 and $4.7 million during Fiscal 1995 of its net
proceeds to pay down the PTK Exchangeable Guaranteed Debentures, including
accrued interest and debt premium.
During Fiscal 1996, Pathmark twice amended its existing bank credit
agreement dated as of October 26, 1993, as amended, (the "Bank Credit
Agreement") by prospectively modifying certain of its financial covenants
(interest coverage, leverage and consolidated adjusted earnings before interest,
taxes, depreciation and amortization) and, in connection with the contribution
of Plainbridge shares to Pathmark, by increasing the Pathmark working capital
facility (the "Working Capital Facility") under the Bank Credit Agreement by $25
million to $200 million. Also, Pathmark and Plainbridge terminated the
Logistical Services Agreement.
As part of its continuing policy to examine the productivity of its assets,
Pathmark has decided to divest 12 supermarkets, all but one of which is located
in its southern region.
BUSINESS OF THE COMPANY
The Company's primary business activity is the management of its interests
in Pathmark 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. Chefmark's primary business is to supply Pathmark
with deli food preparation services and merchandise from the banana ripening
facility.
BUSINESS
At February 1, 1997, Pathmark operated 144 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.
The following table presents the market area, number of stores, selling and
total square footage for Pathmark's supermarkets.
SELLING
MARKET NUMBER OF SQ. FT TOTAL SQ. FT
AREA STORES (000'S) (000'S)
- ------------------------ ------------- ----------- -------------
NJ, NY, PA, DE, CT 144 5,475 7,467
BUSINESS STRATEGY
Pathmark's business strategy is to increase sales, profitability and market
penetration in its existing markets by focusing on the following five operating
priorities: concentrate on core business, Pathmark "smart" service, lower
operating costs, spend capital wisely and have the right management team. By
concentrating on and implementing these five priorities, the Company expects to
accomplish its strategic goals (i) by providing superior perishable and
non-perishable merchandise, value and service to its customers through its
marketing, merchandising and customer service programs; (ii) through efficient
use of capital to renovate and enlarge its existing store base; and (iii)
through increased operating efficiencies.
MARKETING AND MERCHANDISING
- SUPER CENTER FORMAT. The average Pathmark Super Center is approximately
39% larger than the average size supermarket in the United States and
offers greater convenience by providing one-stop shopping and a wider
assortment of foods and general merchandise than is offered by
conventional supermarkets.
- PATHMARK 2000. Pathmark 2000 is a new, larger Super Center format designed
to provide Pathmark customers with a substantially greater selection of
quality perishable products. Pathmark 2000 stores are also designed to be
more "customer friendly", with wider aisles, more accessible customer
2
service and information departments, improved signs and graphics, and
increased availability of Pathmark associates, particularly in the
perishable departments. All of Pathmark's new supermarkets and
enlargements completed in Fiscal 1996 employed the Pathmark 2000 concept,
and Pathmark expects that all new stores and enlargements thereafter will
employ the same concept. At February 1, 1997, 53 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, both in print and
electronic media. Merchandising flexibility and effectiveness is enhanced
through the increased utilization of a category management approach. In
addition, Pathmark offers for sale over 3,000 items through its private
label program.
- PHARMACY. Pathmark provides full pharmacy services in virtually all of its
stores. Pathmark's broad market coverage within its marketing area has
enabled it to become a leading filler of third-party prescriptions 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 1996, Pathmark
opened four new Pathmark 2000s (two of which replaced smaller stores),
closed two other smaller stores, and completed 16 renovations and five
enlargements. During the fiscal year ending January 31, 1998 ("Fiscal
1997"), Pathmark plans to open up to three new Pathmark 2000s (one of
which has already opened), and to complete up to an aggregate of ten
renovations and enlargements.
- Pathmark recognizes the importance of keeping its stores looking fresh and
up-to-date; thus, each store typically receives a renovation or
enlargement every five years. At the end of Fiscal 1996, Pathmark derived
approximately 76% of its supermarket sales from stores that were opened,
enlarged or renovated during the last five years.
- CORE MARKET FOCUS. Pathmark has identified over 50 potential locations for
new supermarkets within its current marketing areas and expects that all
new stores opened during the current and next two fiscal years will be
located in these areas. Pathmark believes that, by opening stores in its
current marketing areas, it can achieve additional operating economies and
other benefits from its store expansion program without the risks and
costs associated with opening stores in new marketing areas.
OPERATING EFFICIENCIES
- TECHNOLOGY. Pathmark has made a significant and continuing investment in
information technology. All Pathmark supermarket checkout terminals have
third-generation IBM 4680 scanner systems supported by a RISC 6000
application processor in each store. These systems allow consumer credit
and electronic fund transfer ("EFT") transactions, greatly facilitate
system-wide promotion and merchandising programs, and improve the speed
and control of customer transactions. In addition, all Pathmark
supermarkets utilize radio frequency technology for direct vendor
receivings and shelf labels.
- GEOGRAPHIC CONCENTRATION. All Pathmark supermarkets 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
3
of the stores, which Pathmark expects to open in the current fiscal year,
will be within this 100 mile radius.
- COST REDUCTION. During the fourth quarter of Fiscal 1996, Pathmark, in an
effort to reduce its costs, effectuated a 25% reduction in administrative
headcount and held for divestiture 12 supermarkets, principally in its
southern region.
PATHMARK SUPERMARKETS
Pathmark operated 144 supermarkets at February 1, 1997. Super Centers
accounted for approximately 97% of Pathmark's supermarket sales for Fiscal 1996.
The following table presents selected data respecting supermarket sales and
stores for the last five fiscal years.
FISCAL YEARS
-----------------------------------------------------
1996 1995(A) 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
Supermarket sales................................................ $ 3,701 $ 3,853 $ 3,785 $ 3,839 $ 3,942
Average sales per Supermarket.................................... 26.1 26.4(b) 25.9 25.4 24.7
Number of Supermarkets:
Renovations(c)................................................. 16 14 14 12 8
Enlargements(d)................................................ 5 4 11 5 10
Opened......................................................... 4 5 4 4 3
Closed......................................................... 4 4 6 5 3
Type of Supermarket(e):
Pathmark 2000.................................................. 53 44 29 10 2
Super Center................................................... 86 95 108 128 137
Conventional................................................... 5 5 6 7 7
Total Supermarkets Open at Year End............................ 144 144 143 145 146
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(a) Fiscal 1995 was a 53-week year.
(b) Computed on the basis of aggregate sales of stores open for the full year,
based on a 52-week period.
(c) Renovations involve an investment of $350,000 or more and in Fiscal 1996
averaged nearly $1.5 million per store.
(d) Enlargements involve the addition of selling space and in Fiscal 1996
averaged an investment in excess of $3.7 million.
(e) Includes two stores not wholly owned. The sales figures for these stores are
not included above.
By industry standards, Pathmark stores are large and productive, averaging
approximately 51,900 square feet in size and generating high average sales
volume of approximately $26.1 million per store ($690 per selling square foot)
for stores open for all of Fiscal 1996. Pathmark's 144 supermarkets at February
1, 1997 ranged from 26,000 to 66,500 square feet in size and included 132
supermarkets that are 40,000 square feet or larger in size. All Pathmark stores
carry a broad variety of food and drug store products, including an extensive
variety of the Pathmark, No Frills and Pathmark Preferred brands. All but seven
supermarkets contained in-store pharmacy departments at year end.
Pathmark pioneered the development of the large "superstore" in the Middle
Atlantic States, opening the first "Pathmark Super Center" in 1977, and
currently operates 139 such stores, including 53 "Pathmark 2000" stores. The
majority of Super Centers were created through the enlargement or renovation of
existing stores. In addition to the broad variety of food and non-food items
carried in conventional Pathmark stores, a typical Super Center includes a
customer service center, videotape rental, a pharmacy, expanded produce
department, meat department, cheese shop, bakery, seafood, service delicatessen
4
department, expanded health and beauty care department and book department. All
Super Centers have EFT and credit transaction capability at their checkout
terminals, and 130 supermarkets also feature in-store automated teller machines.
During 1996, the Company entered into master licensing agreements with two
regional banking institutions to place up to 114 in-store banks in Pathmark
supermarkets over the next three years. Each bank, which occupies approximately
400 square feet, offers a full array of financial services and is open seven
days a week. The license agreements have an initial term of five years with
optional renewal periods. At the close of Fiscal 1996, 13 stores had in-store
banks within them and Pathmark expects to have 50 additional in-store banks by
the end of Fiscal 1997.
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. The average weekly sales
for Pathmark 2000 stores in Fiscal 1996 was $28.5 million compared to $25.2
million for the balance of the chain. 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. For example, Pathmark has recently
introduced "GREAT" service, a customer service program emphasizing proactive
inter-personal communication between store associates and customers. All of
Pathmark's new supermarkets and a majority of supermarket enlargements completed
in Fiscal 1996 employed the Pathmark 2000 concept and Pathmark expects that
virtually all new stores and enlargements will employ the same concept.
Pathmark's supermarket business is generally not seasonal, although sales in
the second and fourth quarters tend to be slightly higher than those in the
first and third quarters.
STORE EXPANSION AND RENOVATION PROGRAM
A key 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 operating margins by
achieving economies of scale in merchandising, advertising, distribution and
supervision. During the five years ending with Fiscal 1996, Pathmark completed
99 renovations and enlargements and opened 20 new supermarkets. At the close of
Fiscal 1996, sales in these stores accounted for approximately 76% of its total
supermarket sales. Pathmark currently expects to open up to three new Pathmark
"2000" Super Centers during Fiscal 1997 (one of which has already opened), none
of which will replace smaller stores, and to complete up to ten renovations and
enlargements.
ADVERTISING AND PROMOTION
As part of its marketing strategy, Pathmark emphasizes value through its
competitive pricing and weekly sales and promotions supported by extensive
advertising. Additional savings are offered each week 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 in stores, radio
and television. Several years ago, Pathmark introduced "Smart Coupons" in its
advertisements. With "Smart Coupons", customers no longer are required to cut
out Pathmark coupons from its advertisement and physically present them at the
cash registers. Rather, when a coupon item is scanned during the check-out
process, the coupon savings is automatically deducted from the price. Pathmark
believes that its "Smart Coupons" greatly convenience its customers and improve
customer service at the checkout.
CONSUMER RESEARCH
Pathmark conducts numerous ongoing and special consumer research projects.
These typically involve customer surveys (both in-store and by telephone) as
well as focus groups. The information derived from
5
these projects is used to evaluate consumers' attitudes and purchasing patterns
and helps shape Pathmark's marketing programs.
TECHNOLOGY
Pathmark has made a significant and continuing investment in information
technology. All Pathmark supermarket checkout terminals have third-generation
IBM 4680 scanner systems supported by a RlSC 6000 application processor in each
store. These systems allow consumer credit and EFT transactions, greatly
facilitate system-wide promotion and merchandising programs, and improve the
speed and control of customer transactions. This technology and the data
generated by scanning have not only led to lower labor costs, improved price
control, shelf allocation and quicker customer check-out, but have also 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. In addition, all Pathmark
supermarkets utilize radio frequency technology for direct vendor receivings and
shelf labels.
All of the pharmacies are equipped with pharmacy computers. In addition to
improving customer service, these computers aid pharmacists in detecting drug
interactions, improve the collection of third-party receivables and help to
attract third-party businesses such as health maintenance organizations and
union welfare plans.
In August 1991, Pathmark entered into a long-term facilities management and
systems integration agreement with IBM Company. Under the agreement, IBM has
taken over Pathmark's data center operations, mainframe processing and
information system functions, (formerly performed by approximately 150
employees) and is providing business applications and systems designed to
enhance Pathmark's customer service and efficiency.
SUPPLY AND DISTRIBUTION
Most of the merchandise sold in Pathmark's supermarkets is supplied through
its distribution facilities located in New Jersey. 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 of Pathmark's stores are located within 100 miles of the principal
Pathmark and Chefmark distribution centers. The following table presents
information concerning the distribution and processing facilities through which
Pathmark is supplied, and the product lines relevant to each.
DISTRIBUTION FACILITIES
SQUARE YEAR
LOCATION PRODUCT LINE FOOTAGE OPENED
- --------------------------------------- ---------------------------------------------------- --------- -----------
Woodbridge, NJ(1)...................... Dry Grocery 475,000 1968
Edison, NJ(2).......................... General Merchandise, 266,000 1980
Health and Beauty Care
Products,
Pharmaceuticals, Tobacco
Woodbridge, NJ(1)...................... Meat, Dairy, Deli, Produce 255,000 1970
Dayton, NJ(2).......................... Frozen Food Distribution Center 112,000 1994
No. Brunswick, NJ(2)................... Dry Grocery 425,000 1996
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PROCESSING FACILITIES
SQUARE YEAR
LOCATION PRODUCT LINE FOOTAGE OPENED
- --------------------------------------- ----------------------------------------------------- --------- -----------
Somerset, NJ(3)........................ Delicatessen Products 16,000 1976
Avenel, NJ(4).......................... Banana Ripening 30,000 1984
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(1) Owned by Pathmark.
(2) Leased by Pathmark.
(3) Owned by Chefmark.
(4) Leased by Chefmark.
COMPETITION
The supermarket business is highly competitive and is characterized by high
asset turnover and narrow profit margins. Pathmark's earnings are primarily
dependent on the maintenance of relatively high sales volume per supermarket,
efficient product purchasing and distribution, and cost-effective store
operating and distribution techniques. Pathmark's main competitors are national
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 February 1, 1997, the Company employed approximately 29,700 people, of
whom approximately 20,200 were employed on a part-time basis.
Approximately 89% of the Company's employees are covered by 28 collective
bargaining agreements (typically having three or four year terms) negotiated
with approximately 17 different local unions. During Fiscal 1997, eight
contracts, covering approximately 13,000 Pathmark associates in 92 stores, will
expire. The Company does not anticipate any difficulty in renegotiating these
contracts.
The Company believes that its relationship with its employees is generally
satisfactory.
7
ITEM 2. PROPERTIES**
Reference is made to the answer to Item 1, "Business" of this report for
information concerning the states in which the Company's supermarkets and
distribution and processing facilities are located. See "Business of
Pathmark-Supply and Distribution" in Item 1 of this report for information
concerning the Company's distribution and processing facilities.
Pathmark's 144 supermarkets have an aggregate selling area of approximately
5.5 million square feet. Twenty of the supermarkets are owned by Pathmark and
the remaining 124 are leased. These supermarkets either are freestanding stores
or are located in shopping centers. Thirty leases expire during the current and
next four calendar years and Pathmark has options to renew all of them.
Pathmark owns its corporate headquarters in Woodbridge, NJ and maintains
administrative and accounting offices in Carteret, New Jersey in leased premises
totaling approximately 150,000 square feet in size.
Most of the facilities owned by Pathmark are owned subject to mortgages.
Pathmark plans to acquire leasehold or fee interests in any property on which
new stores or other facilities are opened and will consider entering into
sale/leaseback or mortgage transactions with respect to owned properties if
Pathmark believes such transactions are financially advantageous.
- ------------------------
** Except as otherwise indicated, information contained in this Item is given as
of February 1, 1997.
8
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a number of legal proceedings in the ordinary
course of business. Management believes that the ultimate resolution of these
proceedings will not in the aggregate have a material adverse impact on the
financial condition, results of operations or business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS (AS OF APRIL 1, 1997)
Neither the Company's Class A Common Stock nor its Class B Common Stock,
each $0.01 par value, is publicly traded on any market. All of registrant's
outstanding Common Stock is held by SMG-II Holdings Corporation ("SMG-II").
The authorized preferred stock of the Company consists of 9,000,000 shares
of $3.52 Cumulative Exchangeable Redeemable Preferred Stock (the "Holdings
Preferred Stock"), of which 4,890,671 shares were issued and outstanding at
April 1, 1997. The Holdings Preferred Stock has a liquidation preference of $25
per share and its terms provide for cumulative quarterly dividends at an annual
rate of $3.52 per share, when, as, and if declared by the Board of Directors of
the Company. No active public trading market currently exists for the Holdings
Preferred Stock.
The Holdings Preferred Stock is non-voting, except that if an amount equal
to six quarterly dividends is in arrears in whole or in part, the holders
thereof, voting as a class are entitled to elect an additional two members of
the board of directors of the Company. The Company is currently in arrears on
payment of more than six quarterly dividends on the Holdings Preferred Stock and
does not expect to receive cash flow sufficient to permit payments of dividends
on the Holdings Preferred Stock in the foreseeable future. The holders of the
Holdings Preferred Stock reelected two persons to the Company's Board of
Directors at its 1996 annual meeting.
The payment of dividends to holders of the Company's Common Stock is subject
to restrictions by the Certificate of Designation of Rights, Preferences and
Privileges under which the Holdings Preferred Stock was issued. The Company has
not paid any dividends on its Common Stock and does not anticipate paying cash
dividends on its Common Stock during Fiscal 1997.
The authorized capital stock of SMG-II consists of 3,000,000 shares of
SMG-II Class A Common Stock, 3,000,000 shares of SMG-II Class B Common Stock, of
which 672,476 and 320,000 shares, respectively, were issued and outstanding at
April 1, 1997, and 4,000,000 shares of SMG-II Preferred Stock, of which
1,500,000 shares are designated SMG-II Series A Preferred Stock, 1,500,000
shares are designated SMG-II Series B Preferred Stock, and 8,520 shares are
designated SMG-II Series C Preferred Stock (the three series of Preferred Stock
hereinafter collectively referred to as "SMG-II Preferred Stock").
At April 1, 1997, there were outstanding 236,731 shares of SMG-II Series A
Preferred Stock, 180,769 shares of SMG-II Series B Preferred Stock and 8,520
shares of SMG-II Series C Preferred Stock.
SMG-II's capital stock is held beneficially as follows: (i) SMG-II Class A
Common Stock by approximately 56 holders, including six affiliates of Merrill
Lynch & Co., Inc. (The "ML Common Investors"), CBC Capital Partners, Inc.
("CBC"), an affiliate of Chase Manhattan Corp., and 49 current and former
members of the Company's management (the "Management Investors"); (ii) SMG-II
Series A
9
Preferred Stock by five affiliates of Merrill Lynch & Co., Inc. (the "ML
Preferred Investors", the ML Common Investors and ML Preferred Investors
hereinafter collectively referred to as the "ML Investors"); (iii) SMG-II Class
B Common Stock held by three holders, including CBC, The Equitable Life
Assurance Society of the United States ("Equitable") and an affiliate of
Equitable (collectively, the "Equitable Investors"); (iv) SMG-II Series B
Preferred Stock held by three holders, including CBC and the Equitable
Investors; and (v) SMG-II Series C Preferred Stock held by one Management
Investor. Holders of shares of SMG-II Class A Common Stock are entitled to one
vote per share on all matters to be voted on by stockholders. Holders of shares
of SMG-II Class B Common Stock are not entitled to any voting rights, except as
required by law or as otherwise provided in the Restated Certificate of
Incorporation of SMG-II. Subject to compliance with certain procedures, holders
of shares of SMG-II Class B Common Stock may exchange their shares for shares of
SMG-II Class A Common Stock and holders of shares of SMG-II Class A Common Stock
may exchange their shares for shares of SMG-II Class B Common Stock, in each
case on a share-for-shares basis. All holders of SMG-II capital stock are
parties to a Stockholders Agreement dated as of February 4, 1991, as amended,
with SMG-II (the "Stockholders Agreement").
SMG-II Preferred Stock has a stated value and liquidation preference of $200
per share and bears dividends at the rate of 10% of the stated value per annum,
payable annually. At the option of SMG-II, dividends are payable in cash or may
accumulate (and the amount thereof shall compound annually).
Holders of shares of SMG-II Series A Preferred Stock and SMG-II Series C
Preferred Stock are entitled to one vote per share of SMG-II Class A Common
Stock into which such SMG-II Series A Preferred Stock and SMG-II Series C
Preferred Stock are convertible on all matters to be voted on by SMG-II
stockholders, subject to increase to 1.11 votes per share upon the occurrence of
certain events. Holders of shares of SMG-II Series B Preferred Stock are
entitled to one vote per share of SMG-II Class B Common Stock into which such
SMG-II Series B Preferred Stock is convertible for the purpose of voting on any
consolidation or merger, sale, lease or exchange of substantially all of the
assets or any liquidation, dissolution or winding up of SMG-II. Additionally,
holders of SMG-II Preferred Stock have separate voting rights with respect to
alteration in the voting powers, rights and preferences and certain other terms
affecting the SMG-II Preferred Stock. Subject to compliance with certain
procedures, holders of SMG-II Series B Preferred Stock may exchange their shares
for shares of SMG-II Series A Preferred Stock and holders of SMG-II Series A
Preferred Stock may exchange their shares for shares of SMG-II Series B
Preferred Stock, on a share-for-share basis. Each series of SMG-II Preferred
Stock ranks pari passu with each other series.
At the option of the holder, SMG-II Preferred Stock is convertible into
SMG-II Common Stock at any time, on or prior to the occurrence of certain
events, including an initial public offering of in excess of 25% of the number
of outstanding shares of common stock of SMG-II, at a conversion ratio of one
share of the corresponding class of SMG-II Common Stock for each share of SMG-II
Preferred Stock, subject to adjustment upon the occurrence of certain events.
Holders of SMG-II Preferred Stock are party with the holders of SMG-II
Common Stock to the Stockholders Agreement which, among other things, restricts
the transferability of SMG-II capital stock and relates to the corporate
governance of SMG-II. None of SMG-II's capital stock is publicly traded on any
market. See item 12, "Security Ownership of Certain Beneficial Owners and
Management."
10
ITEM 6. SELECTED FINANCIAL DATA
The following table represents selected financial data for the last five
fiscal years and should be read in conjunction with the Company's Consolidated
Financial Statements in Item 8 of this report.
SUPERMARKETS GENERAL HOLDINGS CORPORATION
SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS
(IN MILLIONS)
FISCAL YEARS(A)
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
STATEMENTS OF OPERATIONS DATA:
Sales(b)................................................................ $ 3,711 $ 3,972 $ 3,969 $ 4,022 $ 4,110
Cost of sales(b) (exclusive of depreciation and amortization shown
separately below)..................................................... 2,620 2,838 2,866 2,952 3,031
--------- --------- --------- --------- ---------
Gross profit............................................................ 1,091 1,134 1,103 1,070 1,079
Selling, general and administrative expenses(b)......................... 857 866 851 837 817
Depreciation and amortization(c)........................................ 89 80 76 70 69
Restructuring charge(d)................................................. 9 -- -- -- --
Lease commitment charge(e).............................................. 9 -- -- -- --
Recapitalization expense(f)............................................. -- -- -- 17 --
Provision for store closings(g)......................................... -- -- -- 6 --
Amortization of goodwill................................................ -- -- -- -- 18
Goodwill write-off...................................................... -- -- -- -- 601
--------- --------- --------- --------- ---------
Operating earnings (loss)............................................... 127 188 176 140 (426)
Interest expense, net(h)................................................ (164) (171) (160) (177) (185)
Gain on disposition of freestanding drug stores(i)...................... -- 16 -- -- --
Gain on disposal of Purity(j)........................................... -- 16 -- -- 2
--------- --------- --------- --------- ---------
Earnings (loss) from continuing operations before income taxes, gain on
disposal of home centers segment, extraordinary items and cumulative
effect on accounting changes.......................................... (37) 49 16 (37) (609)
Income tax benefit (provision).......................................... 18 30 (4) 21 (7)
--------- --------- --------- --------- ---------
Earnings (loss) from continuing operations before gain on disposal of
home centers segment, extraordinary items and cumulative effect on
accounting changes.................................................... (19) 79 12 (16) (616)
Loss from discontinued operations....................................... -- -- (2) (1) (1)
Gain on disposal of home centers segment, net of tax(k)................. -- -- 17 -- --
--------- --------- --------- --------- ---------
Earnings (loss) before extraordinary items and cumulative effect on
accounting changes.................................................... (19) 79 27 (17) (617)
Extraordinary items, net of tax(l)...................................... (1) (2) (4) (106) (5)
--------- --------- --------- --------- ---------
Earnings (loss) before cumulative effect of accounting changes.......... (20) 77 23 (123) (622)
Cumulative effect of accounting changes, net of tax(m).................. -- -- -- (40) --
--------- --------- --------- --------- ---------
Net earnings (loss)..................................................... (20) 77 23 (163) (622)
Less: non-cash preferred stock accretion and dividend requirements...... (19) (19) (19) (19) (18)
--------- --------- --------- --------- ---------
Net earnings (loss) attributable to common stockholder(n)............... $ (39) $ 58 $ 4 $ (182) $ (640)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of earnings to fixed charges(o)................................... -- 1.26x 1.09x -- --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Deficiency in earnings available to cover fixed charges(p).............. $ 37 $ -- $ -- $ 37 $ 609
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
AS OF
---------------------------------------------------------------
FEB. 1, FEB. 3, JAN. 28, JAN. 29, JAN. 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA:
Total assets....................................................... $ 1,017 $ 1,009 $ 1,029 $ 1,138 $ 1,114
Working capital deficiency......................................... 176 164 124 108 83
Obligations under capital leases, long-term........................ 176 140 127 132 127
Other long-term debt, net of current maturities.................... 1,213 1,242 1,353 1,415 1,278
Cumulative exchangeable redeemable preferred stock................. 105 104 102 100 99
Stockholder's deficit.............................................. 1,258 1,222 1,280 1,285 1,103
11
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS
(a) The Company's fiscal year ends on the Saturday nearest to January 31 of the
following calendar year. Fiscal years consist of 52 weeks, except for 53
weeks in Fiscal 1995.
(b) Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the Fiscal 1996 presentation, the most
significant of which was the Company's change in reporting of Pathmark
coupon expenses (excluding manufacturers' coupons). Prior to this change,
Pathmark coupon expenses, net of any vendor reimbursements, were recorded in
selling, general and administrative expenses. As a result of this change,
Pathmark gross coupon expenses have now been recorded as a reduction of
sales with any vendor reimbursements being recorded as a reduction of cost
of goods sold.
(c) In Fiscal 1996, depreciation and amortization includes a $5 million pretax
charge to write down certain fixed assets held for sale to their estimated
net realizable values. See Note 7 of the Notes to Consolidated Financial
Statements at Item 8, Part II of this Form 10-K.
(d) During Fiscal 1996, the Company recorded a pretax charge of $9 million for
reorganization and restructuring costs related to its administrative
operations. See Note 3 of the Notes to Consolidated Financial Statements at
Item 8, Part II of this Form 10-K.
(e) During Fiscal 1996, the Company recorded a pretax charge of $9 million
related to unfavorable lease commitments of certain unprofitable stores in
the Company's southern region. See Note 4 of the Notes to Consolidated
Financial Statements at Item 8, Part II of this Form 10-K.
(f) In connection with the Recapitalization in Fiscal 1993, the Company recorded
a pretax charge of $17 million related to reorganization and restructuring
costs.
(g) During Fiscal 1993, the Company decided to close or dispose of five stores
and recorded a pretax charge of $6 million.
(h) Prior to Fiscal 1995, interest expense was net of interest charged to
discontinued operations.
(i) During Fiscal 1995, the Company decided to dispose of its 36 freestanding
drug stores. See Note 22 of the Notes to Consolidated Financial Statements
at Item 8, Part II of this Form 10-K.
(j) During Fiscal 1995, the Company sold its remaining investment in Purity for
a gain of $16 million in connection with the sale of Purity to the Stop &
Shop Companies, Inc. See Note 23 of the Notes to Consolidated Financial
Statements at Item 8, Part II of this Form 10-K. During Fiscal 1992, the
Company recorded a gain of $2 million related to the disposal of the Purity
Operations.
(k) During Fiscal 1994, the Company sold its home centers segment, which
resulted in a gain on sale of $17 million, net of $2 million of income
taxes. See Note 24 of the Notes to Consolidated Financial Statements at Item
8, Part II of this Form 10-K.
(l) During Fiscal 1996, Fiscal 1995 and Fiscal 1994, the Company recorded
extraordinary charges of $1 million, $2 million and $4 million,
respectively, net of an income tax benefit, related to the early
extinguishment of debt. See Note 18 of the Notes to Consolidated Financial
Statements at Item 8, Part II of this Form 10-K. During Fiscal 1993, in
connection with the Recapitalization, the Company recorded an extraordinary
charge of $106 million, net of an income tax benefit of $9 million, related
to the early extinguishment of debt. During Fiscal 1992, the Company
recorded an extraordinary charge of $5 million, net of an income tax benefit
of $3 million, related to the early extinguishment of debt.
(m) The cumulative effect of accounting changes in Fiscal 1993 of $40 million,
net of an income tax benefit of $29 million, reflects the adoption of
Statement of Financial Accounting Standards No. 106,
12
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS
"Employers' Accounting for Postretirement Benefits other than Pensions"; the
adoption of Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits"; the change in the method utilized
to calculate last-in-first-out (LIFO) inventories; and the change in the
determination of the discount rate utilized to record the present value of
certain noncurrent liabilities. All of the accounting changes were made as
of the beginning of Fiscal 1993.
(n) On February 4, 1991, the Company became a wholly owned subsidiary of SMG-II
through the consummation of an exchange offer whereby the then existing
stockholders exchanged on a one-for-one basis shares of the Company's common
stock for shares of common stock of SMG-II. Since the Company is a wholly
owned subsidiary, earnings (loss) per share information is not presented.
(o) For the purpose of this calculation, earnings before fixed charges consist
of earnings from continuing operations before income taxes plus fixed
charges. Fixed charges consist of interest expense on all indebtedness
(including amortization of deferred debt issuance costs) and the portion of
operating lease rental expense that is representative of the interest factor
(deemed to be one-third of operating lease rentals). In addition, for Fiscal
1995, the inclusion of preferred stock dividend requirements results in a
ratio of earnings to fixed charges and preferred stocks dividends of 1.09x.
For Fiscal 1994, the inclusion of preferred stock dividend requirements
results in a deficiency in earnings available to cover fixed charges and
preferred stock dividends of approximately $7 million.
(p) For purposes of determining the deficiency in earnings available to cover
fixed charges, earnings are defined as earnings (loss) from continuing
operations before income taxes plus fixed charges. Fixed charges consist of
interest expense on all indebtedness (including amortization of deferred
debt issuance costs) and the portion of operating lease rental expense that
is representative of the interest factor (deemed to be one-third of
operating lease rentals).
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The matters discussed herein, with the exception of historical information,
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks, uncertainties and other factors which could cause actual results to
differ materially from future results expressed or implied by such
forward-looking statements. Potential risks and uncertainties include, but are
not limited to, the competitive environment in which the Company operates and
the general economic conditions in the Company's trading areas.
RESULTS OF OPERATIONS
RECLASSIFICATIONS: Certain reclassifications have been made to the prior
years' consolidated financial statements to conform to the Fiscal 1996
presentation, the most significant of which was the Company's change in
reporting of Pathmark coupon expenses (excluding manufacturers' coupons). Prior
to this change, Pathmark coupon expenses, net of any vendor reimbursements, were
recorded in selling, general and administrative expenses. As a result of this
change, Pathmark gross coupon expenses have now been recorded as a reduction of
sales, with any vendor reimbursements being recorded as a reduction of cost of
goods sold. Prior periods have been reclassified to conform to the current
presentation.
FISCAL 1996 (52-WEEK YEAR) V. FISCAL 1995 (53-WEEK YEAR)
SALES: Sales in Fiscal 1996 were $3.71 billion compared to $3.97 billion in
Fiscal 1995. Sales comparisons were impacted by the extra week in the prior year
and the disposition of the freestanding drug stores during Fiscal 1995. Sales
generated by the freestanding drug stores were $110.8 million in Fiscal 1995.
Same store sales from supermarkets decreased 2.8% for the year primarily due to
a significant increase in competitive new store openings and remodels,
particularly in the Company's southern region. During Fiscal 1996, the Company
opened four new Pathmark 2000 format stores, two of which replaced smaller
stores, and completed 21 major renovations and enlargements to existing
supermarkets. Two stores were closed and not replaced during the year. At Fiscal
1996 year end, the Company operated 144 supermarkets, including 53 Pathmark 2000
format stores, compared with the end of Fiscal 1995 when the Company operated
144 supermarkets, including 44 Pathmark 2000 format stores.
GROSS PROFIT: Gross profit in Fiscal 1996 was $1.09 billion or 29.4% of
sales compared with $1.13 billion or 28.6% of sales in Fiscal 1995. Excluding
the impact of the disposition of the freestanding drug stores, gross profit as a
percentage of sales was 28.8% in Fiscal 1995. The improvement in gross profit,
as a percentage of sales in Fiscal 1996 compared to Fiscal 1995, was primarily
due to increased focus on merchandising programs, the impact of the disposition
of the freestanding drug stores, as well as the Company's continuing emphasis on
the Pathmark 2000 format stores which allow expanded variety in all departments
particularly high margin perishables. The decrease in gross profit was primarily
attributable to the lower sales. The cost of goods sold comparisons were
affected by a pretax LIFO credit of $1.3 million and a pretax LIFO charge of
$1.1 million in Fiscal 1996 and Fiscal 1995, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"): SG&A decreased $8.5
million or 1.0% for Fiscal 1996 compared with Fiscal 1995. SG&A, on a proforma
basis eliminating the SG&A impact of the freestanding drug stores, increased
2.0% in Fiscal 1996 compared to Fiscal 1995. As a percentage of sales, SG&A were
23.1% in Fiscal 1996, up from 21.8% in Fiscal 1995 due to the impact of lower
sales, higher labor and labor related expenses, claims expenses and occupancy
costs, partially offset by lower advertising expenses and the impact of the
disposition of the freestanding drug stores in Fiscal 1995. SG&A for Fiscal 1996
also included a first quarter provision of $5.8 million representing the
termination costs for two former executives of the Company, a first quarter gain
of $5.6 million recognized on the sale of certain real estate and a second
quarter curtailment gain of $2.0 million due to the elimination of
postretirement medical coverage for active non-union associates. SG&A for Fiscal
1995 also included a fourth quarter gain of $3.4 million recognized on the sale
of a former warehouse of Purity, a previously divested company.
14
DEPRECIATION AND AMORTIZATION: Depreciation and amortization of $89.1 in
Fiscal 1996 was $8.6 million higher than $80.5 million in Fiscal 1995. The
increase for Fiscal 1996 was primarily due to a pretax charge of $5.4 million to
write down certain fixed assets held for sale, principally in the Company's
southern region, to their estimated net realizable values and capital
expenditures. Depreciation and amortization excludes video tape amortization,
which is recorded in cost of goods sold, of $3.1 million and $2.8 million in
Fiscal 1996 and Fiscal 1995, respectively.
RESTRUCTURING CHARGE: During the fourth quarter of Fiscal 1996, the Company
recorded a pretax charge of $9.1 million for reorganization and restructuring
costs related to its administrative operations. The restructuring charge
included $4.2 million for the costs of a voluntary early retirement program and
$1.2 million for severance and termination benefits. The remaining charge of
$3.7 million primarily relates to consulting fees incurred in connection with
the restructuring and exit costs for facility consolidation.
LEASE COMMITMENT CHARGE: During the fourth quarter of Fiscal 1996, the
Company decided to divest a group of its southern region stores, certain of
which have experienced unprofitable operating results. The Company concluded
that the operating losses being experienced by these stores were other than
temporary and that the projected operating results of such stores would not be
sufficient to recover their long-lived assets and their contractual lease
commitments. Further, the Company believes that these lease costs will not be
significantly recoverable through any future sublease. Therefore, the Company
recorded a $8.8 million pretax charge related to these unfavorable lease
commitments in, addition to writing down the long-lived assets of these stores
(see "DEPRECIATION AND AMORTIZATION" above).
OPERATING EARNINGS: Operating earnings for Fiscal 1996 were $127.2 million
compared with $188.0 million for Fiscal 1995. The decrease in operating earnings
during Fiscal 1996 compared to Fiscal 1995 was due to lower sales, higher
depreciation and amortization expense, the restructuring charge and the lease
commitment charge, partially offset by lower SG&A.
INTEREST EXPENSE: Interest expense was $164.1 million for Fiscal 1996
compared to $171.0 million in Fiscal 1995 primarily due to reductions in the
Term Loan and the reduction in the amortization of PTK Exchangeable Guaranteed
Debentures original issue discount, as a result of their early paydown, along
with lower interest rates.
INCOME TAXES: The income tax benefit for Fiscal 1996 was $17.7 million. The
income tax benefit for Fiscal 1995 was $29.8 million, reflecting the reversal of
the valuation allowance of $26.8 million related to the Company's deferred
income tax assets. The reversal was recorded in conjunction with the Company's
continuing evaluation of its deferred income tax assets. In the opinion of
management, sufficient evidence continues to exists, which indicates that it is
more likely than not, that the Company will be able to realize its deferred
income tax assets.
During Fiscal 1996, the Company made income tax payments of $4.7 million and
received income tax refunds of $8.1 million. During Fiscal 1995, the Company
made income tax payments of $3.9 million and received income tax refunds of
$10.3 million.
EXTRAORDINARY ITEMS: During the first quarter of Fiscal 1996, in connection
with the termination of the Plainbridge credit agreement due to the
reacquisition of Plainbridge by Pathmark, the Company wrote off deferred
financing fees, resulting in a net loss on early extinguishment of debt of $0.7
million. During the first quarter of Fiscal 1996, the Company also made a
paydown of $3.2 million of PTK Exchangeable Guaranteed Debentures, including
premium and original issue discount, resulting in a net loss on early
extinguishment of debt of $0.1 million. During the second quarter of Fiscal
1996, in connection with the proceeds from the sale of certain mortgaged
property, the Company made a mortgage paydown of $5.3 million, including accrued
interest and debt premiums, resulting in a net loss on early extinguishment of
debt of $0.2 million.
15
NET EARNINGS: The Company's net loss in Fiscal 1996 was $20.1 million
compared to net earnings of $76.5 million in Fiscal 1995. The decrease in net
earnings for Fiscal 1996 compared to Fiscal 1995 was due to lower operating
earnings in Fiscal 1996, the gain on disposition of the freestanding drug
stores, the gain on the disposal of Purity and a higher income tax benefit in
Fiscal 1995, partially offset by lower interest expense in Fiscal 1996.
FISCAL 1995 (53-WEEK YEAR) V. FISCAL 1994 (52-WEEK YEAR)
SALES: Sales were $3.97 billion in both Fiscal 1995 and Fiscal 1994. The
decrease in sales, due to the sale of the freestanding drug stores on July 28,
1995, was offset by sales for the extra week in Fiscal 1995. Same store sales
from supermarkets decreased 0.3% for the year. During Fiscal 1995, the Company
opened five supermarkets, of which three replaced older, smaller stores and
completed 18 renovations and enlargements. One store was closed and not replaced
during the year. At Fiscal 1995 year end, the Company operated 144 supermarkets,
including 44 Pathmark 2000 format stores, compared with the end of Fiscal 1994
when the Company operated 143 supermarkets, including 29 Pathmark 2000 format
stores. The Company operated one freestanding drug store at Fiscal 1995 year end
compared to 36 freestanding drug stores at the end of Fiscal 1994 (see
"DISPOSITION OF FREESTANDING DRUG STORES" below).
GROSS PROFIT: Gross profit in Fiscal 1995 was $1.13 billion or 28.6% of
sales compared with $1.10 billion or 27.8% of sales in Fiscal 1994. The
improvement in gross profit, as a percentage of sales for Fiscal 1995 compared
to Fiscal 1994, was primarily due to increased focus on merchandising programs
as well as to the Company's continuing emphasis on the Pathmark 2000 format
stores, which allow expanded variety in all departments, particularly higher
margin perishables and lower inventory shrink. The cost of goods sold
comparisons were affected by a pretax LIFO charge of $1.1 million and a pretax
LIFO credit of $0.7 million for Fiscal 1995 and Fiscal 1994, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"): SG&A increased $14.7
million or 1.7% in Fiscal 1995 compared with Fiscal 1994. SG&A, on a proforma
basis eliminating the SG&A impact of the freestanding drug stores in last year's
third and fourth quarter, increased 4.0% in Fiscal 1995 compared to Fiscal 1994.
As a percentage of sales, SG&A were 21.8% in Fiscal 1995, up from 21.4% in
Fiscal 1994, due to higher claims expenses, occupancy costs and supplies,
partially offset by lower promotional costs and labor and labor related
expenses, along with weather related expenses that adversely affected the first
quarter of Fiscal 1994. SG&A for Fiscal 1995 also included a fourth quarter gain
of $3.4 million recognized on the sale of a former warehouse of Purity, a
previously divested company.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization of $80.5
million in Fiscal 1995 was $4.9 million higher than the $75.6 million in Fiscal
1994. The increase in depreciation and amortization expense for Fiscal 1995 was
primarily due to capital expenditures. Depreciation and amortization excludes
video tape amortization, which is recorded in cost of goods sold, of $2.8
million and $2.6 million in Fiscal 1995 and Fiscal 1994, respectively.
OPERATING EARNINGS: Operating earnings for Fiscal 1995 were $188.0 million
compared with the $175.9 million in Fiscal 1994. The increase in operating
earnings in Fiscal 1995 compared to Fiscal 1994 was due to higher gross profit,
partially offset by higher SG&A and depreciation and amortization expenses.
INTEREST EXPENSE: Interest expense was $171.0 million for Fiscal 1995
compared to $170.8 million in Fiscal 1994 due to the higher interest rates on
the Company's floating rate bank debt and higher interest related to the
Pathmark Deferred Coupon Notes and obligations under capital leases, partially
offset by the reduction in the amortization of PTK Exchangeable Guaranteed
Debentures original issue discount as a result of the paydown of such debt.
During Fiscal 1994, the Company allocated $11.0 million of interest expense to
discontinued operations.
16
DISPOSITION OF FREESTANDING DRUG STORES: During the second quarter of
Fiscal 1995, the Company made a decision to dispose of its 36 freestanding drug
stores and, on July 28, 1995, through its Pathmark subsidiary, completed the
sale of 30 of its freestanding drug stores to Rite Aid Corporation, including
merchandise inventory, for $59.9 million. The Company recorded a pretax gain on
the disposition of its freestanding drug stores of $15.5 million, net of a $19.0
million charge related to the estimated exit costs of the remaining six
freestanding drug stores. Five of the remaining six freestanding drug stores
were closed during Fiscal 1995 and the sixth store closed during the second
quarter of Fiscal 1996.
DISPOSAL OF PURITY SUPREME, INC.: During Fiscal 1995, in connection with
the sale of Purity to the Stop & Shop Companies, Inc., the Company sold its
remaining investment in Purity for $16.4 million, the proceeds of which were
used to repay a portion of its PTK Exchangeable Guaranteed Debentures. This
transaction resulted in a gain of $16.4 million.
INCOME TAXES: The income tax benefit of $29.8 million for Fiscal 1995 is
net of reversals through July 29, 1995 of the deferred income tax valuation
allowance totaling $26.8 million related to the Company's deferred income tax
assets. The reversal was recorded in conjunction with the Company's continuing
evaluation of its deferred income tax assets. In the opinion of management,
sufficient evidence exists, such as the positive trend in earnings, which
indicates that it is more likely than not that the Company will be able to
realize its deferred income tax assets. The income tax provision was $4.1
million for Fiscal 1994.
As a result of the sale of the Company's investment in Purity, the Company
generated a capital loss of approximately $69.5 million, due to a stock basis
differential of its investment. During Fiscal 1995, the Company utilized $42.9
million of these capital losses, primarily from the sale of the freestanding
drug stores, resulting in a capital loss carryforward at February 3, 1996 of
$26.6 million (a $9.3 million tax benefit). The Company has reserved a valuation
allowance of $8.3 million related to the deferred tax capital loss carryforward
of $9.3 million after giving effect to certain tax planning strategies expected
to be implemented in Fiscal 1996.
During Fiscal 1995, the Company made income tax payments of $3.9 million and
received income tax refunds of $10.3 million. During Fiscal 1994, the Company
made income tax payments of $6.5 million and received income tax refunds of
$25.9 million.
SUMMARY OF CONTINUING OPERATIONS: Earnings from continuing operations
before extraordinary items were $78.7 million compared to $12.0 million for
Fiscal 1994. The increase in earnings from continuing operations for Fiscal 1995
was primarily due to the gain on disposition of freestanding drug stores, the
gain on the disposal of Purity, higher operating earnings and the tax benefit
due to the reversal of the valuation allowance related to the Company's net
deferred income tax assets.
EXTRAORDINARY ITEMS: During Fiscal 1995, in connection with the proceeds
from the sale of the remaining Purity investment, the sale of the freestanding
drug stores and the sale of the home centers segment, the Company was required
to make a paydown of PTK DIB's. The premium paid, including original issue
discount, resulted in a net loss on early extinguishment of debt of $2.2
million.
NET EARNINGS: Net earnings were $76.5 million in Fiscal 1995 compared to
$23.2 million in Fiscal 1994. Fiscal 1995 and Fiscal 1994 included an
extraordinary item related to the net loss on early extinguishment of debt of
$2.2 million and $3.7 million, respectively. Fiscal 1994 included the gain on
disposal of home centers segment of $17.0 million and a loss from discontinued
operations of $2.1 million.
FINANCIAL CONDITION
DEBT SERVICE: During Fiscal 1996, total debt decreased $6.6 million from
Fiscal 1995 year end primarily due to Pathmark term loan repayments under the
Bank Credit Agreement (the "Term Loan") of $44.8 million, and the paydown of the
PTK Exchangeable Guaranteed Debentures, partially offset by
17
borrowings under the Pathmark Working Capital Facility and debt accretion on
Pathmark Deferred Coupon Notes (as defined in Note 10 of the Notes of
Consolidated Financial Statements at Item 8, Part II of this Form 10-K) and PTK
Exchangeable Guaranteed Debentures. Borrowings under the Pathmark Working
Capital Facility were $73.5 million at February 1, 1997 and have increased to
$79.0 million at April 29, 1997.
During the third quarter of Fiscal 1996, the Company sold three of its
supermarket properties for $19.3 million, net of fees of $1.4 million and income
taxes of $0.7 million and simultaneously leased back the properties. The net
proceeds were used to paydown debt, primarily the Working Capital Facility.
During Fiscal 1996, Pathmark twice amended its existing Bank Credit
Agreement. In conjunction with the reacquisition of the Plainbridge capital
stock, the outstanding obligations of Plainbridge under its bank credit
agreement were satisfied by the Company and the Plainbridge bank credit
agreement was terminated. Pathmark simultaneously entered into an amendment to
its Bank Credit Agreement with its existing lenders increasing the Pathmark's
Working Capital Facility from $175 million to $200 million (of which the maximum
of $125.0 million can be in letters of credit) to satisfy any additional
liquidity needs and prospectively modifying certain of its financial covenants
to take into account the operations of Plainbridge. In December 1996, Pathmark
amended its Bank Credit Agreement with existing lenders modifying certain of its
covenants, including those concerning the generation of minimum levels of cash
flow (as defined), minimum interest coverage and maximum leverage rates.
The Company is required to repay a portion of its borrowings under the Term
Loan each year, so as to retire such indebtedness in its entirety by Fiscal
1999. The Company is also required to make sinking fund payments on the
Subordinated Notes (as defined in Note 10 of the Notes to Consolidated Financial
Statements at Item 8, Part II of this Form 10-K) in the amount of 25% of the
original aggregate principal amount of the Subordinated Notes on each of June
15, 2000 and June 15, 2001. The Subordinated Debentures (as defined in Note 10
of the Notes to Consolidated Financial Statements at Item 8, Part II of this
Form 10-K) and the remaining Subordinated Notes mature on June 15, 2002. The
Senior Subordinated Notes (as defined in Note 10 of the Notes to Consolidated
Financial Statements at Item 8, Part II of this Form 10-K) and the Deferred
Coupon Notes mature in Fiscal 2003. The Company has no payment obligations,
through intercompany notes or otherwise, with respect to its parent's
indebtedness.
The indebtedness under the Working Capital Facility 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 if
deemed appropriate.
The majority of the cash interest payments are scheduled in the second and
fourth quarters.
The amounts of principal payments required each year on outstanding
long-term debt (excluding the original issue discount with respect to the
Pathmark Deferred Coupon Notes and the PTK Exchangeable Guaranteed Debentures)
are as follows (dollars in millions):
PRINCIPAL
FISCAL YEARS PAYMENTS
- ----------------------------------------------------------------------------------- -----------
1997............................................................................... $ 74.4
1998............................................................................... 155.7
1999............................................................................... 127.2
2000............................................................................... 50.6
2001............................................................................... 50.0
2002............................................................................... 195.8
2003............................................................................... 633.8
18
LIQUIDITY: The consolidated financial statements of the Company indicate
that, at February 1, 1997, current liabilities exceeded current assets by $175.8
million and stockholder's deficit was $1.26 billion. Management believes that
cash flows generated from operations, supplemented by the unused borrowing
capacity under the Working Capital Facility (refer to Notes 1 and 10 of the
Notes to Consolidated Financial Statements at Item 8, Part II of this Form 10-K)
and the availability of capital lease financing will be sufficient to pay the
Company's debts as they come due, provide for its capital expenditure program
and meet its other cash requirements.
The Company believes that it will be able to make the scheduled payments or
refinance its obligations with respect to its indebtedness through a combination
of operating funds and borrowing facilities. Future refinancing will be
necessary if cash flow from operations is not sufficient to meet its debt
service requirements related to the maturity of a portion of the Pathmark Term
Loan, 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
Exchangeable Guaranteed Debentures due in Fiscal 2003. The Company may undertake
a refinancing of some or all of such indebtedness sometime prior to its
maturity. The Bank Credit Agreement includes an annual cleandown provision
requiring borrowings under the Company's Working Capital Facility not to exceed
$60.0 million for a period of 30 consecutive days. The Company was in compliance
with its various debt covenants at February 1, 1997 and, based on management's
operating projections for Fiscal 1997, the Company believes that it will be able
to satisfy this cleandown provision and continue to be in compliance with its
other debt covenants. The Company's ability to make scheduled payments, to
refinance or otherwise meet its obligations with respect to its indebtedness
depends on its financial and operating performance, which, in turn, is subject
to prevailing economic conditions and to financial, business and other factors
beyond its control. Although the Company's cash flow from its operations and
borrowings has been sufficient to meet its debt service obligations, there can
be no assurance that the Company's operating results will continue to be
sufficient or that future borrowing facilities will be available for payment or
refinancing of Pathmark's and PTK's indebtedness or that future borrowing
facilities will be available.
The Company is currently holding discussions with its lenders with respect
to refinancing its Bank Credit Agreement. The Pathmark Working Capital Facility
expires in July 1998 and the Pathmark Term Loan matures in Fiscal 1999.
Management believes it will successfully refinance this debt, however, there can
be no assurances that the refinancing will occur or that the terms associated
with any such new agreement will be more favorable to the Company. While it is
the Company's intention to enter into other refinancings that it considers
advantageous, there can be no assurances that the prevailing market conditions
will be favorable to the Company. In the event the Company obtains any future
refinancing on less than favorable terms, the holders of outstanding
indebtedness could experience increased credit risk and could experience a
decrease in the market value of their investment, because the Company might be
forced to operate under terms that would restrict its operations and might find
its cash flow reduced.
PREFERRED STOCK DIVIDENDS: The terms of the Exchangeable Preferred Stock
provide for cumulative quarterly dividends at an annual rate of $3.52 per share
when, and if declared by the Board of Directors of Holdings. Dividends for the
first 20 quarterly dividend periods (through October 15, 1992) were paid at the
Company's option in additional shares of Exchangeable Preferred Stock. Since
January 15, 1993 dividends not paid in cash will cumulate at the rate of $3.52
per share per annum, without interest, until declared and paid. As of February
1, 1997, unpaid dividends of $73.2 million were accrued and included in other
noncurrent liabilities.
CAPITAL EXPENDITURES: Capital expenditures for Fiscal 1996, including
property acquired under capital leases, were $94.7 million compared to $110.7
million for Fiscal 1995 and $105.3 million for Fiscal 1994. During Fiscal 1996,
the Company opened four new Pathmark 2000 format stores, two of which replaced
19
smaller stores, and completed 21 major renovations and enlargements. During
Fiscal 1997, the Company plans to open up to three new Pathmark 2000 format
stores (one of which has already opened), and to complete up to an aggregate of
ten major renovations and enlargements.
CASH FLOWS: Cash provided by operating activities amounted to $77.6 million
in Fiscal 1996 compared to $136.6 million in Fiscal 1995. The decrease in net
cash provided by operating activities was primarily due to a decline in net
earnings and by a decrease in cash provided by operating assets and liabilities.
Cash used for investing activities in Fiscal 1996 was $47.0 million due to
expenditures of property and equipment, partially offset by proceeds from
property dispositions. Cash provided by investing activities in Fiscal 1995 was
$15.6 million, primarily due to the net proceeds from the disposition of the
freestanding drug stores of $59.9 million, the net proceeds from the disposal of
Purity of $16.4 million, the net proceeds from the sale of real estate of $3.4
million and the proceeds of $4.7 million related to the disposal of the home
centers segment, partially offset by expenditures of property and equipment of
$69.6 million. Cash used for financing activities in Fiscal 1996 was $32.1
million compared to $162.9 million in the prior-year period. The decrease in
cash used for financing activities is primarily due to an increase in borrowings
under the Working Capital Facility, the proceeds from the lease financing of
three supermarket locations, a decrease in the repayment of PTK Exchangeable
Guaranteed Debentures and a paydown of $25.0 million on the Term Loan in Fiscal
1995 in conjunction with the disposition of the freestanding drug stores.
Cash provided by operating activities amounted to $136.6 million in Fiscal
1995 compared to $111.1 million in Fiscal 1994. The increase in net cash
provided by operating activities was primarily due to an increase in net
earnings, partially offset by a decrease in cash provided by operating assets
and liabilities. Cash provided by investing activities in Fiscal 1995 was $15.6
million, primarily due to the net proceeds from the disposition of the
freestanding drug stores of $59.9 million, the net proceeds from the disposal of
Purity of $16.4 million, the net proceeds from the sale of real estate of $3.4
million and the proceeds of $4.7 million related to the disposal of the home
centers segment, partially offset by expenditures of property and equipment of
$69.6 million, compared to cash used for investing activities of $1.6 million in
Fiscal 1994, primarily reflecting the expenditures for property and equipment of
$84.0 million, net of the proceeds of the home centers segment of $81.1 million.
Cash used for financing activities in Fiscal 1995 was $162.9 million compared to
$92.5 million in the prior-year period. The increase in cash used for financing
activities is primarily due to a decrease in borrowings under the Working
Capital Facilities and a paydown of $25.0 million on the Pathmark Term Loan.
20
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS.
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
------------ ------------ ------------
Sales................................................................... $ 3,710,990 $ 3,972,070 $ 3,968,511
Cost of sales (exclusive of depreciation and amortization shown
separately below)..................................................... 2,619,329 2,837,687 2,865,817
------------ ------------ ------------
Gross profit............................................................ 1,091,661 1,134,383 1,102,694
Selling, general and administrative expenses............................ 857,374 865,851 851,128
Depreciation and amortization........................................... 89,139 80,535 75,632
Restructuring charge.................................................... 9,137 -- --
Lease commitment charge................................................. 8,763 -- --
------------ ------------ ------------
Operating earnings...................................................... 127,248 187,997 175,934
Interest expense........................................................ (164,118) (170,969) (170,848)
Interest charged to discontinued operations............................. -- -- 11,035
Gain on disposition of freestanding drug stores......................... -- 15,535 --
Gain on disposal of Purity.............................................. -- 16,381 --
------------ ------------ ------------
Earnings (loss) from continuing operations before income taxes, gain on
disposal of home centers segment and extraordinary items.............. (36,870) 48,944 16,121
Income tax benefit (provision).......................................... 17,723 29,763 (4,146)
------------ ------------ ------------
Earnings (loss) from continuing operations before gain on disposal of
home centers segment and extraordinary items.......................... (19,147) 78,707 11,975
Loss from discontinued operations....................................... -- -- (2,099)
Gain on disposal of home centers segment, net of an income tax provision
of $2,324............................................................. -- -- 17,044
------------ ------------ ------------
Earnings (loss) before extraordinary items.............................. (19,147) 78,707 26,920
Extraordinary items, net of an income tax benefit of $695 in Fiscal
1996, $1,506 in Fiscal 1995 and $-- in Fiscal 1994.................... (997) (2,180) (3,687)
------------ ------------ ------------
Net earnings (loss)..................................................... (20,144) 76,527 23,233
Less: non-cash preferred stock accretion and dividend requirements...... (18,954) (18,889) (18,828)
------------ ------------ ------------
Net earnings (loss) attributable to common stockholder.................. $ (39,098) $ 57,638 $ 4,405
------------ ------------ ------------
------------ ------------ ------------
See notes to consolidated financial statements.
21
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents............................................................. $ 10,967 $ 12,526
Accounts receivable, net.............................................................. 12,799 10,840
Merchandise inventories............................................................... 217,440 225,780
Income taxes receivable............................................................... 2,120 1,163
Deferred income taxes................................................................. 9,969 8,254
Prepaid expenses...................................................................... 24,970 25,211
Due from suppliers.................................................................... 13,950 13,178
Other current assets.................................................................. 5,942 5,868
----------- -----------
Total Current Assets................................................................ 298,157 302,820
Property and Equipment, Net............................................................. 604,955 603,832
Deferred Financing Costs, Net........................................................... 28,743 33,685
Deferred Income Taxes................................................................... 39,530 26,805
Other Assets............................................................................ 45,200 41,628
----------- -----------
$1,016,585 $1,008,770
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Accounts payable...................................................................... $ 167,446 $ 185,328
Book overdrafts....................................................................... 41,086 43,989
Current maturities of long-term debt.................................................. 74,431 51,753
Accrued payroll and payroll taxes..................................................... 56,414 54,427
Current portion of lease obligations.................................................. 23,208 20,684
Accrued interest payable.............................................................. 20,712 19,309
Accrued expenses and other current liabilities........................................ 90,629 91,318
----------- -----------
Total Current Liabilities........................................................... 473,926 466,808
----------- -----------
Long-Term Debt.......................................................................... 1,213,081 1,242,324
----------- -----------
Lease Obligations, Long-Term............................................................ 175,628 140,166
----------- -----------
Other Noncurrent Liabilities............................................................ 306,733 278,296
----------- -----------
Redeemable Securities
Exchangeable Preferred Stock, $.01 par value.......................................... 105,372 103,633
Authorized: 9,000,000 shares
Issued and outstanding: 4,890,671 shares
Liquidation preference, $25 per share: $122,267
----------- -----------
Total Redeemable Securities......................................................... 105,372 103,633
----------- -----------
Commitments and Contingencies (Notes 13 and 26)
Stockholder's Deficit
Class A Common Stock $.01 par value..................................................... 7 7
Authorized: 1,075,000 shares
Issued and outstanding: 650,675 shares
Class B Common Stock $.01 par value..................................................... 3 3
Authorized: 1,000,000 shares
Issued and outstanding: 320,000 shares
Paid-in Capital......................................................................... 199,332 197,671
Accumulated Deficit..................................................................... (1,457,497) (1,420,138)
----------- -----------
Total Stockholder's Deficit......................................................... (1,258,155) (1,222,457)
----------- -----------
$1,016,585 $1,008,770
----------- -----------
----------- -----------
See notes to consolidated financial statements.
22
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
CLASS A CLASS B TOTAL
COMMON COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK STOCK CAPITAL DEFICIT DEFICIT
------------- ------------- ---------- ------------- -------------
Balance, January 29, 1994......................... $ 7 $ 3 $ 200,748 $ (1,485,468) $ (1,284,710)
Net earnings.................................... -- -- -- 23,233 23,233
Accrued dividends on preferred stock ($3.52 per
share)........................................ -- -- -- (17,215) (17,215)
Accretion on preferred stock.................... -- -- (1,613) -- (1,613)
--- --- ---------- ------------- -------------
Balance, January 28, 1995......................... 7 3 199,135 (1,479,450) (1,280,305)
Net earnings.................................... -- -- -- 76,527 76,527
Accrued dividends on preferred stock ($3.52 per
share)........................................ -- -- -- (17,215) (17,215)
Accretion on preferred stock.................... -- -- (1,674) -- (1,674)
Capital contribution from SMG-II Holdings
Corporation................................... -- -- 210 -- 210
--- --- ---------- ------------- -------------
Balance, February 3, 1996......................... 7 3 197,671 (1,420,138) (1,222,457)
Net loss........................................ -- -- -- (20,144) (20,144)
Accrued dividends on preferred stock ($3.52 per
share)........................................ -- -- -- (17,215) (17,215)
Accretion on preferred stock.................... -- -- (1,739) -- (1,739)
Capital contribution from SMG-II Holdings
Corporation................................... -- -- 3,400 -- 3,400
--- --- ---------- ------------- -------------
Balance, February 1, 1997......................... $ 7 $ 3 $ 199,332 $ (1,457,497) $ (1,258,155)
--- --- ---------- ------------- -------------
--- --- ---------- ------------- -------------
See notes to consolidated financial statements.
23
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
----------- ----------- -----------
Operating Activities
Net earnings (loss)............................................................ $ (20,144) $ 76,527 $ 23,233
Adjustments to reconcile net earnings (loss) to net cash provided by operating
activities:
Depreciation and amortization................................................ 92,668 83,390 78,220
Deferred income tax benefit.................................................. (14,674) (30,726) (3,815)
Interest accruable but not payable........................................... 16,678 15,028 13,541
Amortization of original issue discount...................................... 3,124 6,646 12,855
Amortization of debt issuance costs.......................................... 7,426 7,140 7,028
(Gain) loss on disposal of property and equipment............................ (5,347) 200 (252)
Extraordinary loss on early extinguishment of debt........................... 997 2,180 3,687
Gain on disposition of freestanding drug stores.............................. -- (15,535) --
Gain on disposal of Purity................................................... -- (16,381) --
Gain on sale of real estate.................................................. -- (3,371) --
Gain on disposal of home centers segment..................................... -- -- (17,044)
Loss from discontinued operations............................................ -- -- 2,099
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net................................................... (1,959) 2,540 1,627
Merchandise inventories.................................................... 8,340 15,671 2,551
Income taxes............................................................... (262) 8,099 14,666
Prepaid expenses........................................................... (2,886) (1,630) (10,724)
Due from suppliers......................................................... (772) 5,078 482
Other current assets....................................................... (1,789) 6,362 (9,778)
Other assets............................................................... 1,351 (4,535) (2,554)
Accounts payable........................................................... (17,882) (9,038) (21,985)
Accrued payroll and payroll taxes.......................................... 1,987 789 (944)
Accrued interest payable................................................... 1,403 (363) 3,039
Accrued expenses and other current liabilities............................. (1,919) (6,972) 1,595
Other noncurrent liabilities............................................... 11,222 (4,487) 13,598
----------- ----------- -----------
Cash provided by operating activities.................................... 77,562 136,612 111,125
----------- ----------- -----------
Investing Activities
Property and equipment expenditures............................................ (55,184) (69,615) (83,981)
Proceeds from disposition of property and equipment............................ 8,170 896 1,262
Net proceeds from disposition of freestanding drug stores...................... -- 59,876 --
Net proceeds from disposal of Purity........................................... -- 16,381 --
Net proceeds from sale of real estate.......................................... -- 3,371 --
Net proceeds from disposal of home centers segment............................. -- 4,706 81,147
----------- ----------- -----------
Cash provided by (used for) investing activities......................... (47,014) 15,615 (1,572)
----------- ----------- -----------
Financing Activities
Increase (decrease) in Pathmark Working Capital Facility borrowings............ 27,500 (17,000) 25,500
Decrease in Pathmark Term Loan................................................. (44,828) (60,295) (36,750)
Increase (decrease) in book overdrafts......................................... (2,903) (1,397) 5,458
Increase in other borrowings................................................... 2,052 895 3,676
Repayment of other long-term borrowings........................................ (8,085) (5,207) (5,527)
Reduction in lease obligations................................................. (20,090) (18,224) (17,275)
Proceeds from lease financing.................................................. 21,405 -- --
Repayment of PTK Exchangeable Guaranteed Debentures............................ (3,007) (57,870) (62,892)
Premiums incurred in redemption of PTK Exchangeable Guaranteed Debentures and
other borrowings............................................................. (554) (3,686) (3,687)
Deferred financing fees........................................................ (3,597) (374) (977)
Capital contribution from SMG II Holdings Corporation.......................... -- 210 --
----------- ----------- -----------
Cash used for financing activities....................................... (32,107) (162,948) (92,474)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents................................. (1,559) (10,721) 17,079
Cash and cash equivalents at beginning of period................................. 12,526 23,247 6,168
----------- ----------- -----------
Cash and cash equivalents at end of period....................................... $ 10,967 $ 12,526 $ 23,247
----------- ----------- -----------
----------- ----------- -----------
See notes to consolidated financial statements.
24
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BUSINESS
ORGANIZATION AND BASIS OF PRESENTATION:
Supermarkets General Holdings Corporation (the "Company" or "Holdings"),
through its indirect wholly owned subsidiary Pathmark Stores, Inc. ("Pathmark"),
operated 144 supermarkets as of February 1, 1997, primarily in the New York-New
Jersey and Philadelphia metropolitan areas, and is a wholly owned subsidiary of
SMG-II Holdings Corporation ("SMG-II").
Holdings and its wholly owned subsidiary, SMG Acquisition Corporation
("SMG"), were formed by Merrill Lynch Capital Partners, Inc., a wholly owned
subsidiary of Merrill Lynch & Co., Inc., ("ML&Co."), to effect the acquisition
(the "Acquisition") of Supermarkets General Corporation ("Old Supermarkets"). On
June 15, 1987, Holdings completed the first step in the Acquisition when it
acquired 32,800,000 shares (approximately 85%) of Old Supermarkets' common stock
through a tender offer by SMG. The remaining outstanding common stock of Old
Supermarkets was acquired by Holdings on October 5, 1987 when SMG was merged
with and into Old Supermarkets pursuant to a merger agreement dated April 22,
1987, as amended.
The Acquisition was accounted for as a purchase, and accordingly, Holdings
recorded the assets and liabilities of Old Supermarkets at their fair values at
the date of the Acquisition. The tax basis for the assets and liabilities
acquired was retained.
In October 1989, Old Supermarkets adopted a plan of liquidation pursuant to
which it was liquidated into three wholly owned subsidiaries of Holdings. In
November 1989, pursuant to such plan, Old Supermarkets transferred substantially
all of the assets of its Purity Supreme division to two of the three
above-mentioned wholly owned subsidiaries, Purity Supreme, Inc. and Li'l Peach
Corp., and said subsidiaries assumed substantially all of the liabilities of Old
Supermarkets related to such division. Old Supermarkets completed the
liquidation just prior to the year ended February 3, 1990, by merging with the
third of the above-mentioned wholly owned subsidiaries, which retained the name
Supermarkets General Corporation ("Supermarkets"). On December 17, 1991, Purity
Supreme, Inc. and Li'l Peach Corp. (collectively, "Purity") were sold. The
Company retained a 10% common equity in Purity and a new issue of Purity
exchangeable preferred stock, and such securities, were sold in Fiscal 1995 (see
Note 23).
On November 15, 1990, SMG-II Holdings Corporation, a then newly incorporated
Delaware corporation ("SMG-II"), commenced offers to purchase for cash up to
$155.5 million principal amount of the Company's Junior Subordinated Discount
Debentures (the "Discount Debenture Offer") and up to 1.7 million shares of the
Company's Cumulative Exchangeable Redeemable Preferred Stock (the "Exchangeable
Preferred Stock Offer"). Concurrently with the Discount Debenture Offer and the
Exchangeable Preferred Stock Offer, SMG-II commenced an exchange offer (the
"Exchange Offer", together with the Discount Debenture Offer and the
Exchangeable Preferred Stock Offer, the "Offers") pursuant to which the then
existing common stockholders of the Company could exchange, on a one-for-one
basis, shares of the Company's common stock for shares of SMG-II's common stock.
The Offers were subsequently amended to provide for offers to purchase up to
$110.0 million principal amount of the Company's Junior Subordinated Discount
Debentures (the "Discount Debentures") and up to 3.4 million shares of the
Company's Cumulative Exchangeable Redeemable Preferred Stock (the "Exchangeable
Preferred Stock").
In February 1991, SMG-II purchased approximately $74.1 million principal
amount of the Discount Debentures at 33% of their principal amount and 2.7
million shares of Exchangeable Preferred Stock at $7.00 net per share, pursuant
to the Discount Debenture Offer and the Exchangeable Preferred Stock Offer,
respectively. In addition, all outstanding shares of the Company's common stock
were exchanged
25
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--BUSINESS (CONTINUED)
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 these purchases by selling 417,500
shares of its Cumulative Convertible Preferred Stock (the "SMG-II Preferred
Stock") for an aggregate purchase price of $83.5 million to various
institutional investors. The holders of SMG-II's voting and non-voting common
stock and SMG-II Preferred Stock include certain limited partnerships controlled
directly or indirectly by Merrill Lynch Capital Partners, Inc. and certain
indirectly wholly owned subsidiaries of ML & Co. ML & Co. beneficially owns
approximately 88.6% of the outstanding stock of SMG-II, and accordingly,
controls SMG-II and, indirectly, the Company.
Subsequent to the completion of the Offers in Fiscal 1991, SMG-II acquired,
through open market transactions,approximately $21.3 million principal amount of
Discount Debentures, $9.8 million principal amount of the Company's 14.5% Senior
Subordinated Notes due 1997 (the "Senior Subordinated Notes") and 94,900 shares
of Exchangeable Preferred Stock, and made a capital contribution to the Company
of such securities together with the amounts of the Discount Debentures and the
Exchangeable Preferred Stock purchased pursuant to the Discount Debenture Offer
and the Exchangeable Preferred Stock Offer, respectively, as well as cash
sufficient to pay associated taxes. The Company has retired the Senior
Subordinated Notes, the Discount Debentures and the Exchangeable Preferred Stock
contributed by SMG-II (see Note 19).
During Fiscal 1993, the Board of Directors of Holdings authorized management
of Holdings to proceed with a recapitalization plan (the "Recapitalization"),
which included a refinancing of Holdings' debt. In conjunction with the
recapitalization, the assets, liabilities and related operations of the home
centers segment, as well as, certain assets and liabilities of the warehouse,
distribution and processing facilities which service the Pathmark supermarkets
and drug stores and certain inventories and real property, were contributed to
Plainbridge, Inc. ("Plainbridge"), a then newly formed indirect wholly owned
subsidiary of Holdings and the shares of Plainbridge were then distributed to
PTK Holdings, Inc. ("PTK"), a then newly formed wholly owned subsidiary of
Holdings (the "Plainbridge Spin-Off"). Following the Plainbridge Spin-Off, PTK
held 100% of the capital stock of both Plainbridge and Pathmark. On May 3, 1993,
Pathmark contributed total assets of $1.7 million and total liabilities of $1.8
million, which represented the Chefmark deli food preparation operations and the
related warehouse and a leased banana ripening warehouse to Chefmark, Inc.
("Chefmark"), a then newly formed Delaware corporation, and distributed the
shares of Chefmark to Holdings. On March 1, 1996, Pathmark reacquired all of the
outstanding capital stock of Plainbridge by means of a capital contribution from
PTK.
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 24).
MANAGEMENT'S PLAN:
The consolidated financial statements of the Company indicated that, at
February 1, 1997, current liabilities exceeded current assets by $175.8 million
and the stockholder's deficit was $1.26 billion. Management believes that cash
flows generated from operations, supplemented by the unused borrowing capacity
under its Pathmark working capital facility (the "Working Capital Facility") and
the availability of capital lease financing, will be sufficient to pay the
Company's debts as they come due, provide for its capital expenditure program
and meet its other cash requirements.
26
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--BUSINESS (CONTINUED)
The Company was in compliance with its various debt covenants at February 1,
1997. In December 1996, the Company, through its Pathmark subsidiary, amended
its bank credit agreement (the "Bank Credit Agreement") with existing lenders
modifying certain of its covenants, including those concerning the generation of
minimum levels of cash flow (as defined), minimum interest coverage and maximum
leverage rates. Such convenants also include an annual cleandown provision
requiring borrowings under Pathmark's Working Capital Facility not to exceed
$60.0 million for a period of 30 consecutive days. Based on management's
operating projections for Fiscal 1997, the Company believes that it will be able
to satisfy this cleandown provision and continue to be in compliance with its
other debt covenants.
The Company is currently holding discussions with its lenders with respect
to refinancing its Bank Credit Agreement. The Pathmark Working Capital Facility
expires in July 1998 and the Pathmark term loan (the "Term Loan") matures in
Fiscal 1999 (see Note 10). Management believes it will successfully refinance
its debt, however, there can be no assurances that the refinancing will occur or
that the terms associated with any such new agreement will be more favorable to
the Company.
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. The accompanying
consolidated statement of operations for Fiscal 1994 includes the operating
results of the Company's home centers segment as discontinued operations through
the date of disposal.
USE OF ESTIMATES:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The accompanying consolidated balance sheets include reserves for
self-insured claims relating to customer, employee and vehicle accidents and
covered employee medical benefits. The liabilities for customer and employee
accident claims are recorded at present value, due to the long-term payout of
these claims (see Note 9). While the Company believes that the amounts provided
are adequate to cover its self-insured liabilities, it is reasonably possible
that the final resolution of these claims may differ from the amounts provided.
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the Fiscal 1996 presentation, the most
significant of which was the Company's change in reporting of Pathmark coupon
expenses (excluding manufacturers' coupons). Prior to this change, Pathmark
coupon expenses, net of any vendor reimbursements, were recorded in selling,
general and administrative expenses. As a result of this change, Pathmark gross
coupon expenses have now been recorded as a reduction of sales, with any vendor
reimbursements being recorded as a reduction of cost of goods sold.
27
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FISCAL YEAR:
The Company's fiscal year ends on the Saturday nearest to January 31 of the
following calendar year. Normally, each fiscal year consists of 52 weeks, but
every five or six years the fiscal year consists of 53 weeks. Fiscal 1995
consists of 53 weeks.
STATEMENTS OF CASH FLOWS:
All investments and marketable securities with a maturity of three months or
less are considered to be cash equivalents. The Company had $1.1 million of cash
equivalent investments as of February 1, 1997 and $0.4 million of cash
equivalent investments as of February 3, 1996.
MERCHANDISE INVENTORIES:
Merchandise inventories are valued at the lower of cost or market. Cost for
substantially all merchandise inventories is determined on a last-in, first-out
("LIFO") basis.
RENTAL VIDEO TAPES:
Video tapes purchased for rental purposes are capitalized and amortized over
their estimated useful lives. The amortization of video tapes, included in cost
of goods sold, approximate $3.1 million, $2.8 million and $2.6 million in Fiscal
1996, Fiscal 1995 and Fiscal 1994, respectively.
SOFTWARE:
Externally purchased software is capitalized and amortized as part of
selling, general and administrative expenses over a three year period.
Internally developed software, including software developed by IBM (see Note
26), is expensed as incurred.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation and amortization
expense on owned property and equipment is computed on the straight-line method
over the following useful lives: buildings, 40 years; fixtures and equipment,
3-10 years; and leasehold improvements, 8-15 years or lease term, whichever is
shorter. Capital leases are recorded at the present value of minimum lease
payments or fair market value of the related property, whichever is less.
Amortization of property under capital leases is computed on the straight-line
method over the term of the lease or the leased property's estimated useful
life, whichever is shorter.
LONG-LIVED ASSETS:
Effective February 4, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). SFAS No.
121 establishes accounting standards for the measurement of the impairment of
long-lived assets, certain intangibles and goodwill related to those assets.
SFAS No. 121 requires that an asset to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The carrying value of
long-lived assets, which are being used in the Company's operations, are
assessed for recoverability based
28
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
upon groups of assets and the related cash flow generated by such assets. Assets
held for sale are reviewed for impairment based upon the estimated net
realizable value of such assets. The adoption of SFAS No. 121 had no effect on
the Company's financial condition or results of operations.
DEFERRED FINANCING COSTS:
Deferred financing costs are amortized utilizing the interest method over
the life of the related indebtedness.
BOOK OVERDRAFT:
Under the Company's cash management system, checks issued but not presented
to banks result in overdraft balances for accounting purposes and are classified
as book overdrafts.
REVENUE RECOGNITION:
Revenue is recognized at the point of sale to the customer.
ADVERTISING COSTS:
Advertising costs, net of vendor reimbursements, are expensed as incurred
and were $23.7 million, $30.6 million and $32.4 million in Fiscal 1996, Fiscal
1995 and Fiscal 1994, respectively.
STORE PREOPENING AND CLOSING COSTS:
Store preopening costs are expensed as incurred. Store closing costs, such
as future rent and real estate taxes subsequent to the actual store closing, net
of expected sublease recovery, are recorded at present value, when management
makes a decision to close a store (See Note 9).
INCOME TAXES:
The Company's income taxes are computed based on a tax sharing agreement
with its ultimate parent, SMG-II Holdings Corporation ("SMG-II"), in which the
Company computes a hypothetical tax return as if the Company was not joined in a
consolidated or combined return with SMG-II. The Company must pay SMG-II the
positive amount of any such hypothetical tax. If the hypothetical tax return
shows entitlement to a refund, including any refund attributable to a carryback,
then SMG-II will pay to the Company the amount of such refund.
EARNINGS (LOSS) PER COMMON SHARE:
Since the Company is a wholly owned subsidiary, earnings (loss) per share is
not presented.
NOTE 3--RESTRUCTURING CHARGE
During the fourth quarter of Fiscal 1996, the Company recorded a pretax
charge of $9.1 million for reorganization and restructuring costs related to its
administrative operations. The restructuring charge included $4.2 million for
the costs of a voluntary early retirement program which was accepted by 142
employees and $1.2 million for severance and termination benefits for 80
employees. The remaining charge of $3.7 million primarily relates to consulting
fees incurred in connection with the restructuring and
29
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--RESTRUCTURING CHARGE (CONTINUED)
exit costs for facility consolidation. As of February 1, 1997, $3.2 million has
been expended, of which $1.6 million relates to the early retirement program and
severance benefits and $1.6 million relates to consulting costs and the facility
consolidation. The Company estimates that it will expend $4.7 million in Fiscal
1997. The remaining $1.2 million relates to early retirement benefits which will
be expended over time.
NOTE 4--LEASE COMMITMENT CHARGE
During the fourth quarter of Fiscal 1996, the Company decided to divest a
group of its southern region stores, certain of which have experienced
unprofitable operating results. The Company concluded that the operating losses
being experienced by these stores were other than temporary and that the
projected operating results of such stores would not be sufficient to recover
their long-lived assets and their contractual lease commitments. Further, the
Company believes that these lease costs will not be significantly recoverable
through any future sublease. Therefore, the Company recorded a $8.8 million
pretax charge related to these unfavorable lease commitments, in addition to
writing down the long-lived assets of these stores (see Note 7).
NOTE 5--ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following (dollars in thousands):
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
Prescription plans.................................................. $ 10,397 $ 9,250
Other............................................................... 3,673 2,527
----------- -----------
Accounts receivable................................................. 14,070 11,777
Less: allowance for doubtful accounts(a)............................ 1,271 937
----------- -----------
Accounts receivable, net............................................ $ 12,799 $ 10,840
----------- -----------
----------- -----------
- ------------------------
(a) Fiscal 1996 includes a provision of $0.1 million and a recovery of $0.3
million. Fiscal 1995 includes a provision of $1.3 million and a write off of
$1.3 million.
NOTE 6--MERCHANDISE INVENTORIES
Merchandise inventories are comprised of the following (dollars in
thousands):
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
Merchandise inventories at FIFO cost................................ $ 258,926 $ 268,544
Less: LIFO reserve.................................................. 41,486 42,764
----------- -----------
Merchandise inventories at LIFO cost................................ $ 217,440 $ 225,780
----------- -----------
----------- -----------
Liquidation of LIFO layers in the periods reported did not have a
significant effect on the results of continuing operations. The decrease in the
LIFO reserve was primarily due to a decrease in the inventory levels of the
distribution centers.
30
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following (dollars in
thousands):
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
Land................................................................ $ 61,512 $ 62,847
Buildings and building improvements................................. 201,804 200,039
Fixtures and equipment.............................................. 203,602 203,020
Leasehold costs and improvements.................................... 293,697 279,473
Transportation equipment............................................ 19,706 18,448
----------- -----------
Property and equipment, owned....................................... 780,321 763,827
Property and equipment under capital leases......................... 207,227 188,596
----------- -----------
Property and equipment, at cost..................................... 987,548 952,423
Less: accumulated depreciation and amortization..................... 382,593 348,591
----------- -----------
Property and equipment, net......................................... $ 604,955 $ 603,832
----------- -----------
----------- -----------
During the fourth quarter of Fiscal 1996, the Company recorded a pretax
charge of $5.4 million to write down fixed assets held for sale, principally in
its southern region, to their estimated net realizable values. This charge is
included in depreciation and amortization expense in the accompanying
consolidated statement of operations for Fiscal 1996.
NOTE 8--DEFERRED FINANCING COSTS, NET
Deferred financing costs, primarily related to the Recapitalization, are
comprised of the following dollars in thousands):
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
Deferred financing costs............................................ $ 51,378 $ 50,377
Less: accumulated amortization...................................... 22,635 16,692
----------- -----------
Deferred financing costs, net....................................... $ 28,743 $ 33,685
----------- -----------
----------- -----------
31
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities are comprised of the following (dollars in
thousands):
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
Self-insured liabilities............................................ $ 62,526 $ 65,183
Pension and deferred compensation................................... 20,227 17,003
Other postretirement and postemployment benefits.................... 41,399 41,025
Accrued dividends................................................... 73,164 55,949
Closed stores....................................................... 20,117 23,871
Lease commitments................................................... 7,107 --
Other............................................................... 82,193 75,265
----------- -----------
Other noncurrent liabilities........................................ $ 306,733 $ 278,296
----------- -----------
----------- -----------
Certain noncurrent liabilities, such as self-insured liabilities for
incurred but unpaid claims relating to customer, employee and vehicle accidents
and closed store liabilities, are recorded at present value utilizing a 4%
discount rate based on the projected payout of these claims.
NOTE 10--LONG-TERM DEBT
Long-term debt is comprised of the following (dollars in thousands):
FEBRUARY 1, FEBRUARY 3,
1997 1996
------------ ------------
Pathmark Term Loan.................................................................... $ 243,127 $ 287,955
Pathmark Working Capital Facility..................................................... 73,500 46,000
10.25% PTK Exchangeable Guaranteed Debentures due 2003 ("PTK Exchangeable Guaranteed
Debentures")........................................................................ 27,442 27,679
9.625% Pathmark Senior Subordinated Notes due 2003 ("Pathmark Senior Subordinated
Notes")............................................................................. 437,780 437,426
10.75% Pathmark Deferred Coupon Notes due 2003 ("Pathmark Deferred Coupon Notes")..... 168,559 151,881
12.625% Pathmark Subordinated Debentures due 2002 ("Pathmark Subordinated
Debentures")........................................................................ 95,750 95,750
11.625% Pathmark Subordinated Notes due 2002 ("Pathmark Subordinated Notes").......... 199,017 199,017
11.625% Holdings Subordinated Notes due 2002 ("Holdings Subordinated Notes").......... 983 983
Industrial revenue bonds.............................................................. 6,375 6,375
Other debt (primarily mortgages)...................................................... 34,979 41,011
------------ ------------
Total debt............................................................................ 1,287,512 1,294,077
Less: current maturities.............................................................. 74,431 51,753
------------ ------------
Long-term portion..................................................................... $ 1,213,081 $ 1,242,324
------------ ------------
------------ ------------
32
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--LONG-TERM DEBT (CONTINUED)
SCHEDULED MATURITIES OF DEBT:
Long-term debt principal payments are as follows (dollars in thousands):
PRINCIPAL
FISCAL YEARS PAYMENTS
- -------------------------------------------------------------------------------- ------------
1997............................................................................ $ 74,431
1998............................................................................ 155,688
1999............................................................................ 127,219
2000............................................................................ 50,643
2001............................................................................ 50,000
Thereafter...................................................................... 829,531
------------
$ 1,287,512
------------
------------
BANK CREDIT AGREEMENT:
Under the Bank Credit Agreement, the Pathmark Working Capital Facility and
the Pathmark Term Loan bear interest at floating rates. At February 1, 1997, the
interest rates for the Pathmark Term Loan and Pathmark Working Capital Facility
were 8.4% and 8.9%, respectively. At February 3, 1996, the interest rates for
the Pathmark Term Loan and Pathmark Working Capital Facility were 8.4% and 9.2%,
respectively and the interest rate on the Plainbridge working capital facility
was 10.3%. 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. In conjunction with the Pathmark reacquisition of the
Plainbridge capital stock by the Company, the outstanding obligations of
Plainbridge under its bank credit agreement were satisfied by Pathmark, and the
Plainbridge bank credit agreement, which allowed for $40.0 million of
availability, was terminated. The Company, through its Pathmark subsidiary,
simultaneously entered into an amendment to its Bank Credit Agreement, with its
existing lenders, increasing Pathmark's Working Capital Facility, from $175
million to $200 million (of which the maximum of $125.0 million can be in
letters of credit), to satisfy any additional liquidity needs and prospectively
modifying certain of its financial covenants to take into account the operations
of Plainbridge. The Pathmark Working Capital Facility is subject to an annual
cleandown provision. Under the terms of the cleandown provision, in each fiscal
year, loans cannot exceed $60.0 million (formerly $50.0 million) under the
Pathmark Working Capital Facility for a period of 30 consecutive days. The
Company satisfied the terms of the cleandown provision through Fiscal 1996. The
Company believes it has sufficient unused borrowing capacity under the Pathmark
Working Capital Facility, which can be utilized for unforeseen or for seasonal
cash requirements. At February 1, 1997, the Company had approximately $70.2
million in outstanding letters of credit and approximately $56.3 million in
unused borrowing capacity under its Pathmark Working Capital Facility.
In December 1996, the Company amended its Bank Credit Agreement with its
existing lenders modifying certain of its covenants, including those financial
covenants concerning levels of operating cash flow (as defined), minimum
interest coverage and maximum leverage ratio. At February 1, 1997, the Company
was in compliance with all of its debt covenants as amended. Based upon
projected results for the upcoming fiscal year, the Company believes it will be
in compliance with its debt covenants which includes certain levels of operating
cash flow (as defined), minimum interest coverage and a maximum leverage ratio,
throughout the upcoming fiscal year, as well as satisfying its cleandown
provision (see above). The Bank Credit Agreement and the indentures for certain
debt also contain covenants, including,
33
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--LONG-TERM DEBT (CONTINUED)
but not limited to, covenants with respect to the following matters: (i)
limitation on indebtedness; (ii) limitation on restricted payments; (iii)
limitation on transactions with affiliates; (iv) limitation on liens; (v)
limitation on the issuance of preferred stock by subsidiaries; (vi) limitation
on issuances of guarantees of indebtedness by subsidiaries; (vii) limitation on
transfer of assets to subsidiaries; (viii) limitation on dividends and other
payment restrictions affecting subsidiaries; and (ix) restriction on mergers and
transfers of assets.
PTK EXCHANGEABLE GUARANTEED DEBENTURES:
The PTK Exchangeable Guaranteed Debentures were originally formulated to
accrete to a maturity value of $218.3 million in Fiscal 2003. The Company used
the net cash proceeds of $3.2 million in Fiscal 1996, $56.5 million in Fiscal
1995 and $66.6 million in Fiscal 1994 to paydown PTK Exchangeable Guaranteed
Debentures, including accrued interest and debt premium. The PTK Exchangeable
Guaranteed Debentures begin paying cash interest on a semiannual basis on June
30, 1999 and have no sinking fund requirements. At February 1, 1997, the
maturity value of the outstanding debentures is $34.2 million.
PATHMARK SENIOR SUBORDINATED NOTES:
The Pathmark Senior Subordinated Notes accrete to a maturity value of $440.0
million in Fiscal 2003. These notes pay cash interest on a semiannual basis and
have no sinking fund requirements.
PATHMARK 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. These debentures
pay cash interest on a semiannual basis and have no sinking fund requirements.
PATHMARK SUBORDINATED NOTES:
The Pathmark Subordinated Notes mature in Fiscal 2002 and pay cash interest
on a semiannual basis. These notes contain a sinking fund provision that
requires Pathmark to deposit $49.8 million (25% of the original aggregate
principal amount) with the trustee of the Pathmark Subordinated Notes on June 15
in each of Fiscal 2000 and Fiscal 2001 for the redemption of the Pathmark
Subordinated Notes, at a redemption price equal to 100% of the principal amount
thereof, plus accrued interest to the redemption date and providing for the
redemption of 50% of the original aggregate principal amount of such notes prior
to maturity.
HOLDINGS SUBORDINATED NOTES:
As a result of the Recapitalization, $199.0 million principal amount of the
Holdings Subordinated Notes have been exchanged for $199.0 million principal
amount of Pathmark Subordinated Notes. Approximately $1.0 million principal
amount of the Holdings Subordinated Notes remain outstanding. Interest on the
Holdings Subordinated Notes is payable semi-annually.
34
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--LONG-TERM DEBT (CONTINUED)
INDUSTRIAL REVENUE BONDS:
Interest rates for the industrial revenue bonds range from 10.5%-10.9%. The
industrial revenue bonds are payable in Fiscal 2003.
OTHER DEBT:
Other debt includes mortgage notes, which are secured by property and
equipment, having a net book value of $54.5 million at February 1, 1997 and
$65.4 million at February 3, 1996. These borrowings, whose interest rates
averaged 10.5%, are payable in installments ending in Fiscal 2000, including a
scheduled payment of $30.1 million in Fiscal 1998.
NOTE 11--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and fair values of the Company's financial instruments
are as follows (dollars in thousands):
FEBRUARY 1, 1997 FEBRUARY 3, 1996
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
Debt:
Pathmark Term Loan....................................... $ 243,127 $ 243,127 $ 287,955 $ 287,955
Pathmark Working Capital Facility........................ 73,500 73,500 46,000 46,000
PTK Exchangeable Guaranteed Debentures................... 27,442 27,442 27,679 27,679
Pathmark Senior Subordinated Notes....................... 437,780 415,015 437,426 419,929
Pathmark Deferred Coupon Notes........................... 168,559 142,471 151,881 135,578
Pathmark Subordinated Debentures......................... 95,750 96,353 95,750 100,959
Pathmark Subordinated Notes.............................. 199,017 202,340 199,017 206,220
Holdings Subordinated Notes.............................. 983 999 983 1,017
Industrial revenue bonds................................. 6,375 6,375 6,375 6,375
Other debt (primarily mortgages)......................... 34,979 34,979 41,011 41,011
------------ ------------ ------------ ------------
Total debt......................................... $ 1,287,512 $ 1,242,601 $ 1,294,077 $ 1,272,723
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Redeemable Preferred Stock:
Cumulative Exchangeable Redeemable Preferred Stock....... $ 105,372 $ 117,376 $ 103,633 $ 113,708
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
The fair value of the Pathmark Term Loan and Pathmark Working Capital
Facility at February 1, 1997 and February 3, 1996 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 February 1, 1997 and February 3, 1996, since such instruments are
publicly traded. The Company has evaluated its PTK Exchangeable Guaranteed
Debentures, other debt (primarily mortgages) and industrial revenue bonds and
believes, based on interest rates, related terms and maturities, that the fair
value of such instruments approximates their respective carrying amounts. As of
February 1, 1997 and February 3, 1996, the carrying values of cash and cash
equivalents, accounts receivable and accounts payable approximate fair values
due to the short-term maturities of these instruments.
35
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--INTEREST EXPENSE
Interest expense is comprised of the following (dollars in thousands):
FISCAL YEARS
----------------------------------
1996 1995 1994
---------- ---------- ----------
Pathmark Term Loan........................................................... $ 22,616 $ 29,067 $ 27,281
Pathmark Working Capital Facility............................................ 5,444 5,601 4,996
Pathmark Senior Subordinated Notes
Amortization of original issue discount.................................... 354 354 354
Currently payable.......................................................... 42,350 42,350 42,350
Pathmark Deferred Coupon Notes
Accrued but not payable.................................................... 16,678 15,028 13,541
Pathmark Subordinated Debentures............................................. 12,088 12,088 12,088
Pathmark Subordinated Notes.................................................. 23,136 23,136 23,136
PTK Exchangeable Guaranteed Debentures
Amortization of original issue discount.................................... 2,770 6,292 12,501
Amortization of debt issuance costs.......................................... 7,426 7,140 7,028
Obligations under capital leases............................................. 18,027 16,647 15,694
Mortgages payable............................................................ 3,736 4,210 4,398
Holdings Subordinated Notes.................................................. 114 114 149
Other, net................................................................... 9,379 8,942 7,332
---------- ---------- ----------
Interest expense............................................................. $ 164,118 $ 170,969 $ 170,848
---------- ---------- ----------
---------- ---------- ----------
The Company made cash interest payments of $130.5 million, $135.2 million
and $129.6 million in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively.
36
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--LEASES
At February 1, 1997, the Company was liable under terms of noncancellable
leases for the following minimum lease commitments (dollars in thousands):
CAPITAL OPERATING
FISCAL YEARS LEASES LEASES
- ------------------------------------------------------------------------------------------ ---------- ----------
1997...................................................................................... $ 42,657 $ 30,732
1998...................................................................................... 40,983 30,268
1999...................................................................................... 34,294 29,659
2000...................................................................................... 32,269 29,430
2001...................................................................................... 23,006 27,727
Later years............................................................................... 245,108 311,106
---------- ----------
Total minimum lease payments(a)........................................................... 418,317 $ 458,922
----------
----------
Less: executory costs (such as taxes, maintenance and insurance).......................... 2,221
----------
Net minimum lease payments................................................................ 416,096
Less: amounts representing interest....................................................... 217,260
----------
Present value of net minimum lease payments (including current installments of $23,208)... $ 198,836
----------
----------
- ------------------------
(a) Net of sublease income of $1,147 and $134,010 for capital and operating
leases, respectively.
During Fiscal 1996, Fiscal 1995 and Fiscal 1994, the Company incurred
capital lease obligations of $39.6 million, $41.1 million and $21.3 million,
respectively, in connection with property and equipment lease agreements. These
capital lease amounts are non-cash and, accordingly, have been excluded from the
consolidated statements of cash flows.
During the third quarter of Fiscal 1996, the Company sold three of its
supermarket properties for $19.3 million, net of fees of $1.4 million and income
taxes of $0.7 million, and simultaneously leased back such properties. The net
proceeds were used to paydown debt, primarily the Working Capital Facility. Due
to the Company's continuing involvement in such properties, no gain has been
recorded and the transaction has been accounted for as a financing, with the
associated liability of $21.4 million included in lease obligations in the
consolidated balance sheet.
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):
FISCAL YEARS
-------------------------------
1996 1995 1994
--------- --------- ---------
Minimum rentals.................................................................. $ 47,495 $ 47,589 $ 49,694
Contingent rentals(b)............................................................ -- -- 318
Less: rentals from subleases..................................................... (14,576) (15,802) (13,092)
--------- --------- ---------
Rent expense..................................................................... $ 32,919 $ 31,787 $ 36,920
--------- --------- ---------
--------- --------- ---------
- ------------------------
(b) Primarily based on sales.
37
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--RELATED PARTY TRANSACTIONS
As discussed in Note 20, 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 February 1, 1997 and February 3, 1996.
During Fiscal 1995, the Company paid ML & Co. fees of approximately $0.6
million related to the sale of the freestanding drug stores. During Fiscal 1994,
the Company paid ML & Co. fees of approximately $1.0 million related to the
disposal of the home centers segment.
NOTE 15--RETIREMENT AND BENEFIT PLANS
The Company has several noncontributory defined benefit pension plans, the
most significant of which is the SGC Pension Plan, which covers substantially
all non-union and certain union associates. Pension benefits to retired and to
terminated vested associates are primarily based upon their length of service
and upon a percentage of qualifying compensation. The Company's funding policy,
which is consistent with federal funding requirements, is intended to provide
not only for benefits attributed to service to date but also for those benefits
expected to be earned in the future. Due to the overfunding status of the SGC
Pension Plan, no contributions were required during the last three fiscal years.
38
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--RETIREMENT AND BENEFIT PLANS (CONTINUED)
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):
FEBRUARY 1, 1997 FEBRUARY 3, 1996
-------------------------- --------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------ ------------ ------------ ------------
Actuarial present value of accumulated benefit obligation:
Vested........................................................ $ (84,116) $ (20,922) $ (94,802) $ (17,929)
Unvested...................................................... (6,018) (215) (5,779) (250)
------------ ------------ ------------ ------------
Total......................................................... (90,134) (21,137) (100,581) (18,179)
Plan assets at fair value....................................... 171,549 447 164,684 265
------------ ------------ ------------ ------------
Plan assets higher (lower) than accumulated benefit
obligation.................................................... $ 81,415 $ (20,690) $ 64,103 $ (17,914)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Actuarial present value of projected benefit obligation......... $ (115,009) $ (23,200) $ (119,152) $ (20,894)
Plan assets at fair value....................................... 171,549 447 164,684 265
------------ ------------ ------------ ------------
Plan assets higher (lower) than projected benefit obligation.... 56,540 (22,753) 45,532 (20,629)
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions................. (43,371) (90) (33,250) (90)
Unrecongized prior service cost................................. 1,117 955 1,215 1,671
------------ ------------ ------------ ------------
Prepaid (accrued) pension cost.................................. $ 14,286 $ (21,888) $ 13,497 $ (19,048)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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.
During the fourth quarter of Fiscal 1996, the Company recorded a
restructuring charge (see Note 3) which included $2.1 million for the costs of a
voluntary early retirement program. The liability related to this charge is
included as part of the net accrued pension cost.
The decrease in the vested benefit obligation in Fiscal 1996 compared to
Fiscal 1995 was primarily due to the recognition of the lump sum payment option
in the voluntary early retirement program, which also resulted in a
corresponding offset in the plan assets.
The following table provides the assumptions used in determining the
actuarial present value of the projected benefit obligation:
FEBRUARY 1, FEBRUARY 3,
1997 1996
--------------- -------------
Weighted average discount rate...................................... 7.5% 7.25%
Rate of increase in future compensation levels...................... 4.5 4.25%
Expected long-term rate of return on plan assets.................... 9.5 9.5
39
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--RETIREMENT AND BENEFIT PLANS (CONTINUED)
The change in the weighted average discount rate, which is used in
determining the actuarial present value of the projected benefit obligation,
will not have a material impact on the Company's net pension cost in Fiscal
1997.
The net periodic pension cost (income) included in continuing operations is
comprised of the following components (dollars in thousands):
FISCAL YEARS
----------------------------------
1996 1995 1994
---------- ---------- ----------
Service cost of benefits earned during the year............................... $ 3,787 $ 3,416 $ 4,425
Interest cost on projected benefit obligation................................. 10,204 9,551 9,103
Actual gain on plans' assets.................................................. (28,174) (40,622) (61)
Net amortization and deferral................................................. 16,019 27,811 (10,884)
---------- ---------- ----------
Net periodic pension cost..................................................... $ 1,836 $ 156 $ 2,583
---------- ---------- ----------
---------- ---------- ----------
The Company also contributes to many multi-employer plans which provide
defined benefits to certain union associates. The Company's contributions to
these multi-employer plans were $20.1 million, $18.9 million and $18.0 million
in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively.
The Company sponsors a savings plan for eligible non-union associates.
Contributions under the plan are based on specified percentages of associate
contributions. The Company's contributions to the savings plan were $3.6
million, $3.7 million and $3.5 million in Fiscal 1996, Fiscal 1995 and Fiscal
1994, respectively.
NOTE 16--OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company provides its associates other postretirement benefits,
principally health care and life insurance benefits. The accumulated
postretirement benefit obligation was determined utilizing an assumed discount
rate of 7.5% at February 1, 1997 and 7.25% at February 3, 1996 and by applying
the provisions of the Company's medical plans, the established maximums and
sharing of costs, the relevant actuarial assumptions and the health-care cost
trend rates, which are projected at 6.75% and grade down to 4.5% in Fiscal 2000.
The effect of a 1% change in the assumed cost trend rate would change the
accumulated postretirement benefit obligation by approximately $1.2 million as
of February 1, 1997 and would change the net periodic postretirement benefit
income by $0.2 million for Fiscal 1996.
The net postretirement benefit cost (income) included in continuing
operations is comprised of the following components (dollars in thousands):
FISCAL YEARS
-------------------------------
1996 1995 1994
--------- --------- ---------
Service cost of benefits earned during the year..................................... $ 546 $ 614 $ 700
Interest cost on accumulated postretirement benefit obligation...................... 1,640 2,268 2,052
Net amortization and deferral....................................................... (931) (460) (182)
Curtailment gain.................................................................... (2,026) -- --
--------- --------- ---------
Net postretirement benefit cost (income)............................................ $ (771) $ 2,422 $ 2,570
--------- --------- ---------
--------- --------- ---------
40
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
During the second quarter of Fiscal 1996, the Company eliminated
postretirement medical coverage for active non-union associates who retire after
December 31, 1997. This change resulted in a pretax curtailment gain of $2.0
million.
The following table provides information on the status of the postretirement
plans (dollars in thousands):
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
Accumulated postretirement benefit obligation:
Retirees.......................................................... $ 9,678 $ 14,276
Other active plan participants.................................... 10,180 13,874
----------- -----------
Total......................................................... 19,858 28,150
Unrecognized prior service cost..................................... 7,026 --
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions..................... 6,798 4,675
----------- -----------
Accrued postretirement cost......................................... $ 33,682 $ 32,825
----------- -----------
----------- -----------
During the fourth quarter of Fiscal 1996, the Company recorded a
restructuring charge (see Note 3) which included $2.1 million for the estimated
costs of a voluntary early retirement program. The liability related to this
charge is included as part of the accrued postretirement cost.
The decrease in the accumulated postretirement benefit obligation and the
recording of an unrecognized prior service cost are due to the elimination of
postretirement medical coverage for active non-union associates.
The Company also provides its associates postemployment benefits, primarily
long-term disability and salary continuation. The obligation for these benefits
was determined by application of the provisions of the Company's long-term
disability plan and includes the age of active claimants at disability and at
valuation, the length of time on disability and the probability of the claimant
remaining on disability to maximum duration. These liabilities are recorded at
their present value utilizing a discount rate of 4%.
The accumulated postemployment benefit obligation as of February 1, 1997 and
February 3, 1996 was $8.5 million and $8.3 million, respectively. The net
postemployment benefit cost included in continuing operations consisted of the
following components (dollars in thousands):
FISCAL YEARS
-------------------------------
1996 1995 1994
--------- --------- ---------
Service cost of benefits earned during the year...................................... $ 1,314 $ 997 $ 1,644
Interest cost on accumulated postemployment obligation............................... 316 296 304
--------- --------- ---------
Net postemployment benefit cost...................................................... $ 1,630 $ 1,293 $ 1,948
--------- --------- ---------
--------- --------- ---------
41
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--INCOME TAXES
The income tax benefit (provision) included in continuing operations is
comprised of the following (dollars in thousands):
FISCAL YEARS
-------------------------------
1996 1995 1994
--------- --------- ---------
Current
Federal........................................................................ $ 2,357 $ 4,018 $ (3,079)
State.......................................................................... 692 (4,981) (4,882)
Deferred
Federal........................................................................ 9,808 (1,233) (2,534)
State.......................................................................... 3,178 1,238 (1,613)
Change in valuation allowance.................................................... 1,688 30,721 7,962
--------- --------- ---------
Income tax benefit (provision)................................................... $ 17,723 $ 29,763 $ (4,146)
--------- --------- ---------
--------- --------- ---------
The effective tax rate applicable to continuing operations for the income
tax benefit (provision) differs from the federal statutory tax rate as follows:
FISCAL YEARS
-------------------------------
1996 1995 1994
--------- --------- ---------
Federal statutory tax rate............................................................ 35.0% (35.0)% (35.0)%
State income taxes.................................................................... 6.8 (5.0) (40.3)
Tax credits........................................................................... -- 1.2 6.3
Change in valuation allowance......................................................... 4.6 62.8 49.4
Utilization of capital loss........................................................... -- 32.8 --
Other................................................................................. 1.7 4.0 (6.1)
--- --------- ---------
Effective tax rate.................................................................... 48.1% 60.8% (25.7)%
--- --------- ---------
--- --------- ---------
42
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--INCOME TAXES (CONTINUED)
Deferred income tax assets and liabilities consist of the following (dollars
in thousands):
FEBRUARY 1, 1997 FEBRUARY 3, 1996
----------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
---------- ----------- ---------- ----------
Depreciation and amortization..................................... $ -- $ 65,599 $ -- $ 71,794
Merchandise inventory and gross profit............................ -- 20,443 -- 19,571
Prepaid expenses.................................................. -- 6,999 -- 5,988
Self-insured liabilities.......................................... 39,596 -- 43,399 --
Benefit plans..................................................... 10,039 -- 9,128 --
Lease capitalization.............................................. 17,933 -- 16,990 --
Closed store reserves............................................. 15,459 -- 12,386 --
Alternative minimum taxes......................................... 9,108 -- 8,212 --
General business credits.......................................... 9,019 -- 8,821 --
Net operating loss carryforwards.................................. 19,821 -- 11,193 --
Other postretirement and postemployment benefits.................. 17,791 -- 18,480 --
Capital loss carryforward......................................... 52,455 -- 9,293 --
Other............................................................. 8,097 4,323 8,808 6,005
---------- ----------- ---------- ----------
Subtotal.......................................................... 199,318 97,364 146,710 103,358
Less: valuation allowance......................................... 52,455 -- 8,293 --
---------- ----------- ---------- ----------
Total............................................................. $ 146,863 $ 97,364 $ 138,417 $ 103,358
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
The balance sheet classification of the deferred income tax assets and
liabilities is as follows (dollars in thousands):
FEBRUARY 1, 1997 FEBRUARY 3, 1996
---------------------- ----------------------
CURRENT NONCURRENT CURRENT NONCURRENT
--------- ----------- --------- -----------
Assets............................................................ $ 39,304 $ 160,014 $ 34,513 $ 112,197
Liabilities....................................................... (29,335) (68,029) (26,259) (77,099)
--------- ----------- --------- -----------
Subtotal.................................................... 9,969 91,985 8,254 35,098
Less: valuation allowance......................................... -- 52,455 -- 8,293
--------- ----------- --------- -----------
Total....................................................... $ 9,969 $ 39,530 $ 8,254 $ 26,805
--------- ----------- --------- -----------
--------- ----------- --------- -----------
The Company's net deferred income tax assets were $49.5 million and $35.1
million at February 1, 1997 and February 3, 1996, respectively. At February 1,
1997, management believes that sufficient evidence exists which indicates that
it is more likely than not that the Company will be able to realize these net
deferred income tax assets. In addition, during Fiscal 1996, as a result of a
sale of a minority interest in a special purpose subsidiary of Pathmark to an
unrelated party, the Company recorded a tax capital loss of $131.0 million (a
$45.9 million tax benefit) due to a basis differential in such stock. The
Company also generated a capital loss in Fiscal 1995 of approximately $69.5
million as a result of the sale of the Company's investment in Purity. During
Fiscal 1995, the Company utilized $42.9 million of these capital losses,
primarily from the sale of the freestanding drug stores, and in Fiscal 1996
utilized $2.7 million of capital losses from the sale of property. A valuation
allowance was recorded to fully reserve the deferred income tax capital loss
carryforwards which expire from Fiscal 2000 to Fiscal 2001. Reversal of the
43
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--INCOME TAXES (CONTINUED)
valuation allowance will occur when and if the Company is able to generate
capital gains. Federal and state net operating loss carryforwards expire from
Fiscal 1998 to Fiscal 2012. General business credits consist of federal jobs
credits and expire from Fiscal 2001 to Fiscal 2011.
During Fiscal 1995, in conjunction with the Company's evaluation of its
deferred income tax assets, the Company reversed the valuation allowance related
to its net deferred income tax assets. Such reversals of the valuation allowance
totaled $26.8 million and have been included as a component of the Fiscal 1995
income tax benefit. The Fiscal 1994 state income tax provision includes the
recording of state income taxes for certain issues related to prior years.
In Fiscal 1996, Fiscal 1995 and Fiscal 1994, the Company made income tax
payments of $4.7 million, $3.9 million and $6.5 million, respectively, and
received income tax refunds of $8.1 million, $10.3 million and $25.9 million,
respectively.
NOTE 18--EXTRAORDINARY ITEMS
The extraordinary items, representing the loss on early extinguishment of
indebtedness, consist of the following (dollars in thousands):
FISCAL YEARS
-------------------------------
1996 1995 1994
--------- --------- ---------
Loss before income taxes.......................................................... $ (1,692) $ (3,686) $ (3,687)
Income tax benefit................................................................ 695 1,506 --
--------- --------- ---------
Extraordinary items, net of a tax benefit......................................... $ (997) $ (2,180) $ (3,687)
--------- --------- ---------
--------- --------- ---------
During the first quarter of Fiscal 1996, in connection with the termination
of the Plainbridge credit agreement due to the reacquisition of Plainbridge by
Pathmark, the Company wrote off deferred financing fees, resulting in a net loss
on early extinguishment of debt of $0.7 million, net of an income tax benefit of
$0.5 million. During the first quarter of Fiscal 1996, the Company also made a
paydown of $3.2 million of PTK Exchangeable Guaranteed Debentures, including
premium and original issue discount, resulting in a net loss on early
extinguishment of debt of $0.1 million, net of an income tax benefit of $0.1
million. During the second quarter of Fiscal 1996, in connection with the
proceeds from the sale of certain mortgaged property, the Company made a
mortgage paydown of $5.3 million, including accrued interest and debt premiums,
resulting in a net loss on early extinguishment of debt of $0.2 million, net of
an income tax benefit of $0.1 million.
During the first quarter of Fiscal 1995, in connection with the final
proceeds received related to the disposition of the home centers segment, the
Company was required to paydown $4.7 million of PTK Exchangeable Guaranteed
Debentures; the premium paid, including original issue discount, resulted in a
net loss on early extinguishment of debt of $0.2 million. During the second
quarter of Fiscal 1995, in connection with the proceeds received related to the
sale of 30 of its freestanding drug stores, the Company was required to paydown
$21.8 million of PTK Exchangeable Guaranteed Debentures; the premium paid,
including original issue discount, resulted in a net loss on early
extinguishment of debt of $0.7 million. During the fourth quarter of Fiscal
1995, in connection with the proceeds received from the sale of the Purity
investment and the sale of 30 of its freestanding drug stores, the Company was
required
44
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--EXTRAORDINARY ITEMS (CONTINUED)
to paydown $30.0 million of PTK Exchangeable Guaranteed Debentures; the premium
paid, including original issue discount, resulted in a net loss on early
extinguishment of debt of $1.3 million.
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 Exchangeable
Guaranteed Debentures. The premium paid, including original issue discount,
resulted in a net loss on early extinguishment of indebtedness of $3.7 million.
NOTE 19--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 February 1, 1997 and February 3, 1996. The
fair market value of the Exchangeable Preferred Stock, at date of original
issuance of October 5, 1987, was $20 per share and the liquidation preference is
$25 per share. Due to its mandatory redemption requirements, the Exchangeable
Preferred Stock has been stated on the balance sheet as redeemable securities.
The difference between fair market value at date of issue and liquidation
preference is being accreted quarterly.
In the event of any liquidation, dissolution or winding up of the Company,
holders of the Exchangeable Preferred Stock will be entitled to receive their
full liquidation preference per share, together with accrued and unpaid
dividends, before the distribution of any assets of the Company to the holders
of shares of the Company's common stock or other shares, which would rank junior
to the Exchangeable Preferred Stock.
The Exchangeable Preferred Stock may be redeemed, at the option of the
Company, in whole or in part, at liquidation preference, together with all
accrued and unpaid dividends to the redemption date. Optional redemption of the
Exchangeable Preferred Stock will be subject to restricted payments and other
similar provisions of the Company's debt instruments.
Commencing December 31, 2004, the Company is required to redeem in each year
20% of the highest amount at any time outstanding of the Exchangeable Preferred
Stock. The redemption process is calculated to retire 60% of the issue prior to
final maturity with the remaining amount of the issue to be redeemed at
maturity.
The Company has the option to require holders to exchange the Exchangeable
Preferred Stock on any dividend payment date, in whole or in part, for exchange
debentures (the "Exchange Debentures") of the Company. Such option is available
at any time if (a) no event of default exists under any of the Company's loan
agreements and (b) the exchange is allowed under the provisions of the
limitation on the Company's indebtedness and other applicable provisions of the
Company's loan agreements. Any such exchange will result in the issuance of
Exchange Debentures in an amount equal to the aggregate liquidation preference
of all shares of Exchangeable Preferred Stock being exchanged into Exchange
Debentures and in an amount equal to all accrued but unpaid dividends.
45
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--CUMULATIVE EXCHANGEABLE REDEEMABLE PREFERRED STOCK (CONTINUED)
Exchangeable Preferred Stock activity for the three years ended February 1,
1997 was as follows (dollars in thousands):
NUMBER OF SHARES AMOUNT
----------------- ----------
Balance, January 29, 1994...................................... 4,890,671 $ 100,346
Accretion...................................................... -- 1,613
----------------- ----------
Balance, January 28, 1995...................................... 4,890,671 101,959
Accretion...................................................... -- 1,674
----------------- ----------
Balance, February 3, 1996...................................... 4,890,671 103,633
Accretion...................................................... -- 1,739
----------------- ----------
Balance, February 1, 1997...................................... 4,890,671 $ 105,372
----------------- ----------
----------------- ----------
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 February 1, 1997, the unpaid dividends of $73.2 million were accrued and
included in other noncurrent liabilities.
Pursuant to the Certificate of Stock Designation for the Exchangeable
Preferred Stock (the "Certificate of Designation"), the Company was required to
pay cash dividends to the Exchangeable Preferred Stockholders at an annual rate
of $3.52 per share beginning on January 15, 1993. The Certificate of Designation
provides that the Exchangeable Preferred Stock is non-voting except that if an
amount equal to six quarterly dividends is in arrears in whole, or in part, the
Exchangeable Preferred Stockholders voting as a class are entitled to elect an
additional two members to the Board of Directors of the Company. The Company is
currently in arrears on the payment of 17 quarterly dividends. Accordingly, the
holders of the Exchangeable Preferred Stock reelected two members of the
Company's Board of Directors at its 1996 annual meeting.
Dividends on the Exchangeable Preferred Stock must be paid in full for all
prior periods as of the most recent dividend payment date before any dividends,
other than dividends payable in shares of the Company's common stock or in any
other class of the Company's capital stock ranking junior to the Exchangeable
Preferred Stock, can be paid or can be set apart for payment to holders of
common stock or to holders of any other shares, 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.
46
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20--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 February 1, 1997 and at February 3, 1996.
Holders of shares of Class A common stock are entitled to one vote per share
on all matters to be voted on by stockholders. Holders of shares of Class B
common stock are not entitled to any voting rights, except as required by law or
as otherwise provided in the Restated Certificate of Incorporation of the
Company. Subject to compliance with certain procedures, holders of Class B
common stock may exchange their shares for shares of Class A common stock and
holders of Class A common stock may exchange their shares for shares of Class B
common stock on a share-for-share basis. Upon liquidation or dissolution of the
Company, holders of the Company's common stock are entitled to share ratably in
all assets available for distribution to stockholders. Payment of all prior
claims, including liquidation rights of any Exchangeable Preferred Stock
outstanding, must be made before the holders of the Company's common stock are
entitled to any distribution. Holders of the Company's common stock have no
preemptive or subscription rights.
On February 4, 1991, as a result of the consummation of the Exchange Offer,
all shares of the Company's Class A common stock and Class B common stock were
owned directly by SMG-II. SMG-II is effectively a holding company for the
operations of the Company (see Note 1).
The Company and certain executives of Supermarkets (collectively,
"Management Investors") entered into a management subscription agreement under
which, on October 5, 1987, the Management Investors purchased an aggregate of
100,000 shares of Class A common stock for consideration of $100 per share. In
connection with the Exchange Offer, the Management Investors entered into an
agreement (the "Management Investors Exchange Agreement") with respect to the
SMG-II common stock which was received in exchange for the Company's Class A
common stock. Prior to the Exchange Offer, all of the Class A common stock held
by Management Investors was classified as Redeemable Securities.
Certain Management Investors, who purchased shares of Class A common stock,
borrowed a portion of the purchase price from the Company and were required to
deliver a note to the Company ("Recourse Note") in the principal amount of the
loan (see Note 14). Interest on the Recourse Note is to be paid annually and the
principal is to be paid on the tenth anniversary of the date of issue. Each
Management Investor who issued a Recourse Note was required to enter into a
stock pledge agreement ("Stock Pledge Agreement") with the Company, pursuant to
which the Management Investor pledged shares of Class A common stock to secure
the repayment of the Recourse Note. In connection with the Exchange Offer, each
Management Investor who issued a Recourse Note was required to execute an
amendment to the Stock Pledge Agreement, which provided for the substitution of
the SMG-II common stock received in the Exchange Offer for the Company Class A
common stock, in order to secure the repayment of the Recourse Note. Recourse
Notes in the amount of approximately $1.7 million were outstanding at February
1, 1997 and February 3, 1996. The Recourse Notes were included in other assets
at February 1, 1997 and February 3, 1996.
NOTE 21--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
47
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21--STOCK OPTION PLANS (CONTINUED)
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 22--DISPOSITION OF FREESTANDING DRUG STORES
During the second quarter of Fiscal 1995, the Company made a decision to
dispose of its 36 freestanding drug stores and, on July 28, 1995, through its
Pathmark subsidiary, completed the sale of 30 of its freestanding drug stores,
including merchandise inventory, to Rite Aid Corporation for $59.9 million. The
Company used $25.0 million of the proceeds to repay a portion of its existing
Pathmark Term Loan and $21.8 million of the proceeds to repay a portion of its
PTK Exchangeable Guaranteed Debentures.
The Company recorded a pretax gain on the disposition of its freestanding
drug stores of $15.5 million, net of a $19.0 million charge related to the
estimated exit costs of the remaining six freestanding drug stores. Five of the
remaining six freestanding drug stores closed during Fiscal 1995 and the sixth
store closed during the second quarter of Fiscal 1996.
NOTE 23--DISPOSAL OF PURITY
During Fiscal 1995, in connection with the sale of Purity to the Stop & Shop
Companies, Inc., the Company sold its remaining investment in Purity for $16.4
million, the proceeds of which were used to repay a portion of its PTK
Exchangeable Guaranteed Debentures. As a result of the sale, a capital tax loss
of approximately $69.5 million was generated (see Note 17). This transaction
resulted in a pretax gain of $16.4 million.
NOTE 24--GAIN ON DISPOSAL OF HOME CENTERS SEGMENT AND DISCONTINUED OPERATIONS
On November 4, 1994, the Company's Plainbridge subsidiary completed the sale
of its home centers segment to Rickel Home Centers, Inc. ("Rickel") 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
a reduction in the deferred tax valuation allowance of $5.1 million, resulting
from the utilization of tax loss carryforwards for which reserves had previously
been provided. The Company used net cash proceeds of $66.6 million in Fiscal
1994 and $4.7 million in Fiscal 1995 to pay down the PTK Exchangeable Guaranteed
Debentures, including accrued interest and debt premium.
48
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24--GAIN ON DISPOSAL OF HOME CENTERS SEGMENT AND DISCONTINUED OPERATIONS
(CONTINUED)
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):
FISCAL
1994(A)
----------
Sales............................................................................. $ 271,989
----------
----------
Loss before income taxes(b)....................................................... $ (2,383)
Income tax benefit................................................................ 284
----------
Loss from discontinued operations................................................. $ (2,099)
----------
----------
- ------------------------
(a) Represents the results of operations related to the home centers segment
from January 30, 1994 through November 3, 1994.
(b) The Company charged the home centers segment interest expense, which related
to a proportionate share of certain borrowings. This charge amounted to
$11.0 million in Fiscal 1994 and is included in the results of the
discontinued operations.
NOTE 25--NEW CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
On October 8, 1996, the Company hired a new Chief Executive Officer (the
"CEO") pursuant to a five-year employment agreement (the "Employment
Agreement"). In conjunction with his employment, SMG-II granted to the CEO an
equity package (the "Equity Strip") consisting of 8,520 restricted shares of a
new series of SMG-II Preferred Stock and 19,851 restricted shares of SMG-II
Common Stock and options to purchase 100,000 shares of SMG-II Common Stock at an
initial exercise price of $100 per share (the "Options") with the said exercise
price increasing over time. The Equity Strip was valued at $3.4 million at the
date of issuance, based upon an independent appraisal, and will vest over the
term of the employment agreement or earlier with the occurrence of an
employment-related event, as defined, and will be forfeited in its entirety upon
the occurrence of a termination event, as defined. The Equity Strip is being
amortized as compensation expense in the Company's statement of operations over
the term of the Employment Agreement. The Options were accounted for by SMG-II
using the methods prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and as a result, no compensation
expense was recorded. The Options will vest over four years and expire one year
after being fully vested, except for the portion of the Options that vest on the
day before the fifth year and has not yet become exercisable, the expiration of
which will be extended to year seven. If employment with the Company should end
as a result of a termination event, the Options (whether or not then vested)
will be immediately and irrevocably forfeited, except in certain circumstances.
Vested Options do not become exercisable until the occurrence of certain events
related generally to the realization of a third-party sale of SMG-II Common
Stock. The CEO also received (a) a one-time signing bonus of $1 million, which
is being amortized as compensation expense in the Company's statement of
operations over the term of the Employment Agreement, and (b) a $4.5 million
loan evidenced by sixteen separate promissory notes. Under the terms of each
note, if he is in full employment of the Company on a quarterly anniversary of
his hiring date, his obligation to pay such note maturing on such date will be
forgiven as to principal, but not any then accrued and unpaid interest. The
Company will record compensation expense upon the forgiveness of each note. In
the event his employment ends, as a result of a termination event, prior to a
change in control, as defined, each note will become immediately due and payable
as to all outstanding principal and
49
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25--NEW CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT (CONTINUED)
all accrued and unpaid interest. These notes, which bear interest at a blended
rate of approximately 6%, are on a full-recourse basis and secured by the Equity
Strip, the Options and any shares acquired upon exercise of such Options.
NOTE 26--COMMITMENTS AND CONTINGENCIES
RICKEL:
In connection with the sale of its home centers segment in Fiscal 1994, the
Company, as lessor, entered into leases for certain real estate properties with
Rickel, as tenant (the "Leases"), pursuant to which the Company is entitled to
receive annual aggregate rentals of approximately $4.5 million. In addition, as
part of the sale, the Company assigned to Rickel, and Rickel assumed, various
liabilities of the home centers segment, primarily third party leases (the
"Assumed Liabilities"). As of February 1, 1997, the estimated present value of
obligations under the Assumed Liabilities approximated $29.0 million.
In January 1996, Rickel filed for bankruptcy protection under Chapter 11 of
the United States Bankruptcy Code. In April 1996, the Company filed its proofs
of claim in connection with the bankruptcy proceedings. In August 1996, Rickel
filed an order with the Bankruptcy Court to reject a third party lease. The
estimated present value of this lease obligation is approximately $4.5 million.
In November 1996, Rickel filed an order with the Bankruptcy Court to reject four
Leases related to property owned by the Company, with aggregate annual rentals
of approximately $2.4 million. The Company is actively marketing these
properties to other prospective tenants. In February 1997, Rickel filed an order
with the Bankruptcy Court to reject one additional third party lease, which the
Company has settled with the landlord. Management has evaluated its exposure
with respect to these rejected Leases and has concluded that the Company has
sufficient reserves to cover any resulting liability which may occur with
respect to these rejected Leases. Since the bankruptcy is not concluded, the
Company cannot determine whether Rickel will reject any additional Leases or the
extent to which the Company may become liable with respect to the Assumed
Liabilities in the event of Rickel's nonpayment thereof.
OUTSOURCING:
In August 1991, the Company entered into a long-term agreement with IBM, to
provide a wide range of information systems services. Under the agreement, IBM
has taken over the Company's data center operations and mainframe processing and
information system functions and is providing business applications and systems
designed to enhance the Company's customer service and efficiency. The charges
under this agreement are based upon the services requested at predetermined
rates. The Company may terminate the agreement upon 90 days notice with payment
of a specified termination charge. The amounts expensed under this agreement in
the accompanying consolidated statements of operations were $22.1 million, $21.0
million and $16.0 million during Fiscal 1996, Fiscal 1995 and Fiscal 1994,
respectively.
OTHER:
The Company is also a party to a number of legal proceedings in the ordinary
course of business. Management believes that the ultimate resolution of these
proceedings will not, in the aggregate, have a material adverse impact on the
financial condition, results of operations or business of the Company.
50
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 27--QUARTERLY FINANCIAL DATA (UNAUDITED)
Financial data for the interim periods of Fiscal 1996 and Fiscal 1995 is as
follows (dollars in thousands):
13 WEEKS ENDED
----------------------------------------------
MAY 4, AUGUST 3, NOVEMBER 2, FEBRUARY 1, FISCAL
1996 1996 1996 1997 1996
--------- --------- ----------- ----------- -----------
52 WEEKS ENDED FEBRUARY 1, 1997
Sales............................................................ $ 912,972 $ 931,363 $ 911,221 $ 955,434 $ 3,710,990
Gross profit(a).................................................. 266,023 274,951 266,801 283,886 1,091,661
Selling, general and administrative expenses(b).................. 213,710 214,987 211,821 216,856 857,374
Depreciation and amortization.................................... 20,674 21,458 20,536 26,471 89,139
Restructuring charge............................................. -- -- -- 9,137 9,137
Lease commitment charge.......................................... -- -- -- 8,763 8,763
Operating earnings............................................... 31,639 38,506 34,444 22,659 127,248
Interest expense................................................. (40,589) (41,106) (40,951) (41,472) (164,118)
Loss from operations before income taxes and extraordinary
items.......................................................... (8,950) (2,600) (6,507) (18,813) (36,870)
Income tax benefit............................................... 3,625 878 2,567 10,653 17,723
Loss from operations before extraordinary items.................. (5,325) (1,722) (3,940) (8,160) (19,147)
Extraordinary items, net of an income tax benefit................ (793) (204) -- -- (997)
Net loss......................................................... $ (6,118) $ (1,926) $ (3,940) $ (8,160) $ (20,144)
13 WEEKS ENDED 14 WEEKS
--------------------------------- ENDED
APRIL 29, JULY 29, OCTOBER 28, FEBRUARY 3, FISCAL
1995 1995 1995 1996 1995
--------- --------- ----------- ----------- -----------
53 WEEKS ENDED FEBRUARY 3, 1996
Sales............................................................. $ 982,014 $ 972,363 $ 939,864 $ 1,077,829 $ 3,972,070
Gross profit(c)................................................... 277,637 276,587 261,246 318,913 1,134,383
Selling, general and administrative expenses(b)................... 213,807 215,474 208,173 228,397 865,851
Depreciation and amortization..................................... 19,979 20,117 20,134 20,305 80,535
Operating earnings................................................ 43,851 40,996 32,939 70,211 187,997
Interest expense.................................................. (43,170) (43,750) (41,879) (42,170) (170,969)
Gain on disposition of freestanding drug stores................... -- 15,535 -- -- 15,535
Gain on disposal of Purity........................................ -- -- -- 16,381 16,381
Earnings (loss) from operations before income taxes and
extraordinary items............................................. 681 12,781 (8,940) 44,422 48,944
Income tax benefit (provision).................................... (101) 19,941 4,294 5,629 29,763
Earnings (loss) from operations before extraordinary items........ 580 32,722 (4,646) 50,051 78,707
Extraordinary items, net of an income tax benefit................. (252) (675) -- (1,253) (2,180)
Net earnings (loss)............................................... $ 328 $ 32,047 $ (4,646) $ 48,798 $ 76,527
- ------------------------
(a) The pretax LIFO provision for Fiscal 1996 was $0.85 million in the first and
second quarter with no provision in the third quarter. The annual credit was
$1.3 million, resulting in a $3.0 million credit in the fourth quarter.
(b) Selling, general and administrative expenses ("SG&A") for Fiscal 1996
included a first quarter provision of $5.8 million representing the
termination costs of two former executives of the Company, a first quarter
gain of $5.6 million recognized on the sale of certain real estate and a
second quarter curtailment gain of $2.0 million due to the elimination of
postretirement medical coverage for active non-union associates. SG&A for
Fiscal 1995 also included a fourth quarter gain of $3.4 million recognized
on the sale of a former warehouse of Purity, a previously divested company.
(c) The pretax LIFO provision for Fiscal 1995 was $0.8 million in the first
quarter, $0.5 million in the second quarter and $0.8 million in the third
quarter. The annual provision was $1.1 million, resulting in a $1.0 million
credit in the fourth quarter.
51
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 February
1, 1997 and February 3, 1996, and the related consolidated statements of
operations, stockholder's deficit and cash flows for each of the three years in
the period ended February 1, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of February 1,
1997 and February 3, 1996, and the results of their operations and their cash
flows for each of the three years in the period ended February 1, 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
April 23, 1997
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (AS OF APRIL 15, 1997)
(A) DIRECTORS OF THE COMPANY
The following table sets forth the name, principal occupation or employment
at the present time and during the last five years, and the name and principal
business of any corporation or other organization in which such occupation or
employment is or was conducted, of the directors of the Company, all of whom are
citizens of the United States unless otherwise indicated. Each individual named
below is a director of both the Company and Pathmark, except for Messrs.
Upchurch and Volla.
DIRECTOR OF THE
COMPANY
NAME, AGE, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS SINCE (1)
- ------------------------------------------------------------------------------------------------- ---------------
MATTHIAS BOWMAN, 48, Chief Executive Officer of Merrill Lynch Capital Partners, Inc., ("MLCP"), 1997
an investment firm affiliated with Merrill Lynch & Co., ("ML& Co."), the financial services
concern, since 1994; Vice Chairman of Investment Banking with ML&Co. since 1993; Managing
Director of Merrill Lynch, Pierce, Fenner & Smith Incorporated since at least 1992. Mr. Bowman
is also a Director of Rykoff-Sexton, Inc.
JOHN W. BOYLE, 68, Chairman and Chief Executive Officer of the Company from March 1996 to October 1996
1996 (Retired); Vice Chairman (retired), Eckerd Corporation, a drug store chain, between 1983
and 1995. Mr. Boyle is also a Director of United Artists Theater Circuit, Inc.(2)
JAMES J. BURKE, JR., 45, Managing Partner and a Director of Stonington Partners, Inc. ("SPI"), a 1988
private investment firm, since 1993, and a Director of MLCP since 1987; Partner of MLCP from
1993 to 1994; President and Chief Executive Officer of MLCP from 1987 to 1993. Mr. Burke was
also a Managing Director of ML&Co. until 1994. Mr. Burke is also a Director of Ann Taylor
Stores Corp., Borg-Warner Security Corp., Education Management Corp. and United Artists Theater
Circuit, Inc.
JAMES DONALD, 43, Chairman, President and Chief Executive Officer of the Company (since October 1996
1996); Senior Vice President and General Manager, Safeway, Inc., Eastern Division from February
1994 until October 1996; Vice President-Marketing, Wal-mart Corp. prior thereto(3).
U. PETER C. GUMMESON, 38, Managing Director of Alliance Corporate Finance Group, Incorporated, an 1996
investment firm affiliated with the Equitable Life Assurance Society of the United States (the
"Equitable") and an investment officer of the Equitable.
SUNIL C. KHANNA, 40, Principal of SPI since 1993; Principal of MLCP from 1993 to 1994; Vice 1987
President of MLCP from 1989 to 1993; a Director of the Investment Banking Division of ML&Co.
from 1993 to 1994, and a Vice President thereof prior thereto. Mr. Khanna is also a Director of
Rykoff-Sexton, Inc.
53
DIRECTOR OF THE
COMPANY
NAME, AGE, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS SINCE (1)
- ------------------------------------------------------------------------------------------------- ---------------
STEPHEN M. McLEAN, 39, Partner and a Director of SPI since 1993; Partner of MLCP from 1993 to 1987
1994; Senior Vice President of MLCP from 1987 to 1993; Director of MLCP since 1987; Managing
Director of the Investment Banking Division of ML&Co. until 1994. Mr. McLean is also a Director
of CMI Industries, Inc. and Dictaphone Corporation.
ROBERT G. MILLER, 53, Chairman and Chief Executive Officer of Fred Meyer, Inc., a diversified 1997
retailer. Mr. Miller is also a Director of PacifiCorp.
JERRY G. RUBENSTEIN, 67, Managing Partner, Omni Management Associates; Consultant to MLCP since 1988
1988.
JAMES B. UPCHURCH, 38, President and Chief Operating Officer of Libra Investments, Inc., an NASD 1995
licensed broker/dealer.
STEVEN L. VOLLA, 50, Chairman and Chief Executive Officer of Primary Health Systems, L.P., a 1995
hospital management company, since June 1994; Chairman, President and Chief Executive Officer
of American Health Care Management, Inc., prior thereto.
- ------------------------
(1) Includes service with Pathmark's predecessor.
(2) Mr. Boyle was retained on March 20, 1996 to act as the Company's interim
Chairman and Chief Executive Officer. He resigned said position on October
7, 1996.
(3) Mr. Donald was elected as Chairman, President and Chief Executive Officer of
the Company effective October 8, 1996.
Pursuant to the Stockholders Agreement, the ML Investors are entitled to
designate seven directors, the Management Investors are entitled to designate
three directors and The Equitable Investors are entitled to designate one
director to Holdings' Board of Directors. By having the ability to designate a
majority of Holdings' Board of Directors, the Merrill Lynch Investors have the
ability to control the Company. Currently, six of the persons serving as
directors were designated by the Merrill Lynch Investors (Messrs. Bowman, Boyle,
Burke, Khanna, McLean and Rubenstein), one was designated by the Management
Investors (Mr. Donald) and one was designated by the Equitable Investors (Mr.
Gummeson). Mr. Miller was designated by the three investor groups. Messrs.
Upchurch and Volla were elected by the holders of Holdings Preferred Stock. No
family relationship exists between any director and any other director or
executive officer of the Company.
54
(B) EXECUTIVE OFFICERS
The following table sets forth the name, principal occupation or employment
at the present time and during the last five years, and the name of any
corporation or other organization in which such occupation or employment is or
was conducted, of the executive officers of the Company, all of whom are
citizens of the United States unless otherwise indicated and serve at the
discretion of the Board of Directors of the Company. The executive officers of
the Company listed below were elected to office for an indefinite period of
time. No family relationship exists between any executive officer and any other
executive officer or director of the Company.
OFFICER OF THE
COMPANY
NAME AGE POSITIONS AND OFFICE SINCE(1)
- ---------------------------------------------- --- ---------------------------------------------- ---------------
JAMES DONALD.................................. 43 Chairman, President and Chief Executive 1996
Officer since October 1996(2)
NEILL CROWLEY................................. 54 Executive Vice President--Retail Services 1994
since October 1996; Executive Vice
President--Distribution since May 1995;
Executive Vice President-- Marketing from May
1994 to May 1995; Executive Vice
President--Marketing and Store Support, The
Vons Companies, Inc. (a supermarket chain)
prior thereto.
RON MARSHALL.................................. 43 Executive Vice President and Chief Financial 1994
Officer since October 1994. Senior Vice
President and Chief Financial Officer of Dart
Group Corporation (a diversified retailer)
prior thereto.
JOSEPH W. ADELHARDT........................... 50 Senior Vice President and Controller since 1987
January 1996; Vice President and Controller
prior thereto. Mr. Adelhardt joined the
Company in 1976.
HARVEY M. GUTMAN.............................. 51 Senior Vice President--Retail Development. Mr. 1990
Gutman joined the Company in 1976.
ROBERT JOYCE.................................. 51 Senior Vice President (since October 1996); 1989
Executive Vice President-- Operations (from
January 1996 to October 1996; Senior Vice
President-- Operations--from March 1995 to
January 1996; Senior Vice President--
Administration prior thereto. Mr. Joyce joined
the Company in 1963.
55
OFFICER OF THE
COMPANY
NAME AGE POSITIONS AND OFFICE SINCE(1)
- ---------------------------------------------- --- ---------------------------------------------- ---------------
RONALD RALLO.................................. 59 Senior Vice President--Merchandising (since 1993
October 1996); Executive Vice
President--Merchandising (from May 1995 to
October 1996); Senior Vice
President--Merchandising from July 1993 to May
1995); Senior Vice President--Merchandising
Pathmark division (from September 1992 to July
1993); Senior Vice President--Perishable
Merchandising, Pathmark division prior
thereto. Mr. Rallo joined the Company in 1962.
MARC A. STRASSLER............................. 48 Vice President, Secretary and General Counsel. 1987
Mr. Strassler joined the Company in 1974.
MYRON D. WAXBERG.............................. 63 Vice President and General Counsel-- Real 1991
Estate Mr. Waxberg joined the Company in 1976.
- ------------------------
(1) Includes service with Pathmark's predecessor.
(2) Member of the Company's Board of Directors.
56
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------- ---------------------------
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPENSATION STOCK AWARDS OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) (1) ($)(2) (#) (3) ($) (4)
- ------------------------------- --------- ----------- ---------- ------------- ------------ ------------- -------------
James L. Donald(5)............. 1996 193,846 1,175,000 340,021 3,400,000 100,000 16,821
Chairman, President and Chief
Executive Officer
Jack Futterman(6).............. 1996 70,673 -- -- -- -- 2,545,000
Retired Chairman, President 1995 526,442 332,658 -- -- -- 5,250
and CEO 1994 491,346 92,127 -- -- -- 5,250
John W. Boyle(5)............... 1996 -- -- -- -- 3,000 388,980
Retired Interim Chairman,
President and CEO
Ron Marshall................... 1996 300,000 36,000 49,177 -- -- 5,250
Executive Vice President and 1995 280,289 168,173 -- -- -- --
Chief Financial Officer 1994 89,904 53,942 -- -- 2,000 --
Neill Crowley.................. 1996 253,750 30,450 -- -- -- 5,250
Executive Vice 1995 247,212 112,241 -- -- -- 4,341
President--Retail Services 1994 168,712 21,089 -- -- 1,000 --
Ronald Rallo................... 1996 245,000 29,400 4,389 -- -- 5,250
Senior Vice President-- 1995 227,500 113,585 4,399 -- -- 5,250
Merchandising 1994 200,385 21,141 4,265 -- -- 5,250
Robert Joyce................... 1996 223,846 26,862 2,195 -- -- 5,250
Senior Vice President 1995 205,437 84,650 2,200 -- 250 5,250
1994 169,125 21,141 2,133 -- -- 5,250
- ------------------------
(1) Represents (i) with respect to Mr. Donald, payment of $58,771 to Mr. Donald
as reimbursement of legal expenses in connection with the negotiation of his
employment agreement and forgiveness of a loan payment due to the Company of
$281,250; (ii) with respect to Mr. Marshall, reimbursement of relocation
expenses; and (iii) with respect to Messrs. Rallo and Joyce, payments as
reimbursement for interest paid to Holdings for loans each of less than
$60,000 from Holdings in connection with the purchase of SMG-II Class A
Common Stock, and includes an amount sufficient to pay any income taxes
resulting therefrom after taking into account the value of any deductions
available as a result of the payment of such interest and taxes.
(2) Includes accumulated dividends of $1,039,440 with respect to an award of
8,520 restricted shares of SMG-II Series C Preferred Stock.
(3) Stock options shown were granted (i) to Mr. Donald pursuant to the
Employment Agreement dated October 8, 1996 among the Company, SMG-II and Mr.
Donald (the "Donald Agreement"); and (ii) to Messrs. Boyle, Marshall,
Crowley and Joyce pursuant to the Management Investors 1987 Stock Option
Plan of SMG-II (the "Plan"). All options relate to shares of SMG-II Class A
Common Stock.
57
(4) Represents (i) with respect to Mr. Donald, payments of $11,756 on behalf of
Mr. Donald for temporary housing and $5,065 for a term life insurance
premium on Mr. Donald's life; (ii) with respect to Mr. Futterman, payments
of $4,594 representing the Company's matching contribution to the SGC
Savings Plan, $2,128,150 paid to Mr. Futterman pursuant to a Retirement
Agreement dated March 20, 1996 among Mr. Futterman, the Company and SMG-II
(the "Retirement Agreement"), and $412,256 paid pursuant to Mr. Futterman's
Supplemental Retirement Agreement; (iii) with respect to Mr. Boyle, payments
of $288,980 representing a consulting fee for acting as the Company's
interim Chief Executive Officer payable pursuant to a Consulting Agreement
dated March 20, 1996 between the Company and Mr. Boyle, and a completion
bonus of $100,000 in connection with the identification and hiring of Mr.
Donald as Chief Executive Officer; and (iv) with respect to the other four
named executive officers, the Company's matching contribution under the SGC
Savings Plan.
(5) Mr. Donald was employed by the Company on October 8, 1996 as Chairman,
President and CEO replacing Mr. Boyle who acted as interim Chairman and CEO
from March 20, 1996 to October 7, 1996.
(6) Mr. Futterman retired on March 20, 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM
------------------------------------------------------------ ------------------------
% OF TOTAL
OPTIONS/
SARS GRANTED EXERCISE OR
OPTIONS/SARS TO EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- -------------------------------- ------------- --------------- --------------- ----------- ---------- ------------
James L. Donald................. 100,000 95.7 (1) (2) 6,288,946 15,937,425
John W. Boyle................... 3,000(3) 2.9 100 5/02/06 188,668 478,123
- ------------------------
(1) The stock option to purchase an aggregate of 100,000 shares of SMG-II Class
A Common Stock granted to Mr. Donald by SMG-II consists of component A
("Option Component A") covering 50,000 shares of SMG-II Class A Common Stock
and component B ("Option Component B") covering the remaining 50,000 shares
of Common Stock. Subject to the vesting terms described below, Option
Component A has an initial per share exercise price of $100 per share. The
per share exercise price of Option Component A will increase to $125 per
share on the first day of the Fiscal Year beginning in calendar year 2000
("Fiscal Year 2000") and to $150 per share on the first day of the Fiscal
Year beginning in calendar year 2001 ("Fiscal Year 2001"). Subject to the
vesting terms described below, Option Component B has an initial per share
exercise price of $100 per share. The per share exercise price of Option
Component B will increase to $150 per share on the first day of the Fiscal
Year beginning in calendar year 1999; to $250 per share on the first day of
Fiscal Year 2000; and to $350 per share on the first day of Fiscal Year
2001. Mr. Donald will vest in 25% of the Option Component A and in 25% of
the Option Component B on the Effective Date and on each of the first
through third anniversaries of the Effective Date, provided that the
Optionee is in the employ of the Company on each such date. Upon the
occurrence of a Minimum IPO (as defined below) while the Optionee is in the
employ of the Company, the entire Option shall immediately and fully vest.
In addition, the Option will immediately and fully vest upon the occurrence
of a Change in Control occurring prior to a Termination Event. Except for
purposes of tag-along rights and piggyback rights under the Stockholders
Agreement, the Option shall not be exercisable (even though the Option or a
portion thereof is vested) unless and until it becomes exercisable in
accordance with the following provisions:
58
(i) The Exercisable Percentage as defined below) of each component of the
Option will become exercisable if the ML Investors (as defined in the
Stockholders Agreement) have a Realization Event (as defined below) in
respect of the SMG-II Class A Common Stock at a per share price in excess
of the amounts (the "Target Prices") set forth below:
TARGET PRICE PER TARGET PRICE PER
SHARE/OPTION SHARE/OPTION
PERIOD OF TIME COMPONENT A COMPONENT B
- -------------------------------------------------------- ----------------- -----------------
Prior to 2/1/00......................................... $ 100 $ 150
2/1/00 to 1/31/01....................................... $ 125 $ 250
2/1/01 and after........................................ $ 150 $ 350
(ii) Notwithstanding the above, if the ML Investors have a Realization Event
for more than 15% of the shares of SMG-II Class A Common Stock
beneficially owned by them on the date Mr. Donald is granted an Option
at a per share price in excess of the Target Price described above
applicable to the date when such Realization Event occurs, then the
components of the Option for which such Target Prices have been achieved
shall become immediately vested and exercisable and the exercise price
shall not thereafter increase.
(2) The Option will expire on October 8, 2001 to the extent not previously
exercised (the "Expiration Date"); provided, however, that the Expiration
Date for the portion of Option Component A and Option Component B which is
vested prior to such Expiration Date will be extended until October 8, 2003
if such vested portion of Option Component A and Option Component B, as the
case may be, has not become exercisable by such initial Expiration Date.
During the period of such extension, the per share exercise price of Option
Component A and Option Component B, as the case may be (to the extent not
previously exercised), will increase at the end of each month during such
extension period at an annual rate of 10%.
(3) Options shown were granted pursuant to the Plan, and relate to shares of
Class A Common Stock of SMG-II. Options are fully vested and exercisable at
the time of grant, provided that no exercise may occur unless a registration
statement has been filed under the Securities Act of 1933 with respect to
the shares subject to the option or the Compensation Committee of the Board
of Directors of SMG-II determines that an exemption from registration is
available.
59
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES(1)
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS/SARS
AT FY-END (#)
EXERCISABLE/
NAME UNEXERCISABLE
- ------------------------------------------------------------------------------- -------------
John W. Boyle.................................................................. 3,000/0
Jack Futterman................................................................. 13,000/0
James Donald................................................................... 0/100,000
Neill Crowley.................................................................. 1,000/0
Ron Marshall................................................................... 2,000/0
Ronald Rallo................................................................... 2,850/0
Robert Joyce................................................................... 2,500/0
- ------------------------
(1) Options shown were granted pursuant to the Plan (except with respect to Mr.
Donald) and relate to shares of Class A Common Stock of SMG-II. No options
were exercised in Fiscal 1996 by any of the above named executives.
PENSION PLAN TABLE(1)
YEARS OF SERVICE
----------------------------------------------------------------
FINAL AVERAGE PAY 10 15 20 25 30 35
- ------------------------------------------------ --------- --------- --------- --------- --------- ---------
$150,000........................................ $ 20,000 $ 30,000 $ 40,000 $ 50,000 $ 60,000 $ 60,000
200,000........................................ 26,667 40,000 53,333 66,667 80,000 80,000
225,000........................................ 30,000 45,000 60,000 75,000 90,000 90,000
250,000........................................ 33,333 50,000 66,667 83,333 100,000 100,000
300,000........................................ 40,000 60,000 80,000 100,000 120,000 120,000
350,000........................................ 46,667 70,000 93,333 116,667 140,000 140,000
400,000........................................ 53,333 80,000 106,667 133,333 160,000 160,000
450,000........................................ 60,000 90,000 120,000 150,000 180,000 180,000
500,000........................................ 66,667 100,000 133,333 166,667 200,000 200,000
550,000........................................ 73,333 110,000 146,667 183,333 220,000 220,000
600,000........................................ 80,000 120,000 160,000 200,000 240,000 240,000
650,000........................................ 86,667 130,000 173,333 216,667 260,000 260,000
700,000........................................ 93,333 140,000 186,667 233,333 280,000 280,000
750,000........................................ 100,000 150,000 200,000 250,000 300,000 300,000
- ------------------------
(1) The table above illustrates the aggregate annual pension benefits payable
under the SGC Pension Plan and Excess Benefit Plan (collectively, the
"Pension Plans"). The retirement benefit for individuals with 30 years of
credited service is 40% of the individual's average compensation during his
or her highest five compensation years in the last ten years before
retirement, less one-half of the social security benefit received. The
retirement benefit is reduced by 3.33% for every year of credited service
less than 30. Covered compensation under the Pension Plans includes all cash
compensation subject to withholding plus amounts deferred under the Savings
Plan pursuant to Section 401(k) of the Internal Revenue Code of 1986, as
amended, and as to individuals identified in the Summary Compensation Table,
would be the amount set forth in that table under the headings "Salary" and
"Bonus". The
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
60
(FOOTNOTES CONTINUED FROM PRECEDING PAGE)
table shows the estimated annual benefits an individual would be entitled to
receive if normal retirement at age 65 occurred in January 1997 after the
indicated number of years of covered employment and if the average of the
participant's covered compensation for the five years out of the last ten
years of such employment yielding the highest such average equaled the
amounts indicated. The estimated annual benefits are based on the assumption
that the individual will receive retirement benefits in the form of a single
life annuity (married participants may elect a joint survivorship option)
and are before applicable deductions for social security benefits in effect
as of January 1997. As of December 31, 1996, the following individuals had
the number of years of credited service indicated after their names: Mr.
Futterman, 22.8; Mr. Crowley, 1.5; Mr. Rallo, 30, Mr. Joyce, 26.7 and Mr.
Marshall, 1.0. Neither Mr. Donald nor Mr. Boyle had any credited service. As
described below in "Compensation Plans and Arrangements--SUPPLEMENTAL
RETIREMENT AGREEMENTS", certain of the named executives is party to a
Supplemental Retirement Agreement with Pathmark.
COMPENSATION PLANS AND ARRANGEMENTS
SUPPLEMENTAL RETIREMENT AGREEMENTS. The Company has entered into
supplemental retirement agreements with certain key executives, including
certain of the executive officers named in the Summary Compensation Table, and
set forth below, which provide that said executive officers will be paid upon
termination of employment after attainment of age 60 a supplemental pension
benefit in such an amount as to assure him or her an annual amount of pension
benefits payable under the supplemental retirement agreement, 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 $525,000, (b) in the case of Messrs. Joyce and Rallo equal to (i) 30%
of his final average Compensation 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, and (d) in the case of Messrs. Crowley and
Marshall, equal to 12.5% of his final average Compensation based on five years
of service with the Company and increasing 2.5% per year for each year of
service thereafter to a maximum of 35% of his final average Compensation based
on 14 years of service. "Compensation" includes base salary and payments under
the Executive Incentive Plan, but excludes Company matching contributions under
the Savings 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, provided the executive has attained at
least ten years of service with the Company.
EMPLOYMENT AGREEMENTS:
EMPLOYMENT AGREEMENT AMONG PATHMARK, SMG-II AND JAMES L. DONALD. On October
8, 1996 (the "Effective Date"), the Company entered into the Donald Agreement
with Mr. James L. Donald pursuant to which Mr. Donald was elected Chairman,
President and Chief Executive Officer for a term of five years. The Donald
Agreement provides Mr. Donald with an initial annual base salary of $600,000 and
provides that he shall participate in the Pathmark Executive Incentive Plan,
under which Mr. Donald may earn an annual bonus of up to 125% of his annual
salary based on performance targets that are set by the Board. For the partial
fiscal year commencing on the Effective Date and ending on February 1, 1997, the
Donald Agreement guaranties Mr. Donald a minimum bonus of $175,000 and, for the
first full fiscal year during the term of the Donald Agreement, Mr. Donald shall
receive a minimum annual bonus of $425,000. Furthermore, under the Donald
Agreement, Mr. Donald is guaranteed an annual bonus for each of the second,
third and fourth full fiscal years of the term of at least 25% of his base
salary. The Donald Agreement provides Mr. Donald with the right to defer up to
50% of his annual bonus and salary, which shall be held in a grantor trust
established by the Company. During the term of the Donald Agreement, in
61
addition to the base salary, bonus eligibility and other customary annual
benefits and perquisites that the Company generally provides to its executive
officers, the Company will provide Mr. Donald with a company car and term life
insurance in the amount of $4.5 million during the first year and $3.2 million
thereafter. The Company also reimbursed Mr. Donald for the legal expenses
incurred by him in the negotiation of the Donald Agreement. Mr. Donald also
received a one-time signing bonus of $1 million, which is being amortized over
the term of the Donald Agreement.
Furthermore, Mr. Donald received an equity package (the "Equity Strip"),
consisting of 8,520 restricted shares of a new series of SMG-II Preferred Stock
with a stated value of $200 per share and 19,851 restricted shares of SMG-II
Class A Common Stock, the terms of which are set forth in the stock award
agreement (the "Stock Award Agreement"). The Equity Strip, which as of the
Effective Date was valued by the Company at $3.4 million, based upon an
independent appraisal, will vest in its entirety upon the occurrence of an
Employment-Related Event, as defined in the Stock Award Agreement, and will be
forfeited in its entirety upon the occurrence of a Termination Event, as defined
in the Donald Agreement. The valuation of $3.4 million is being amortized by the
Company over the term of the Donald Agreement. The Preferred Stock ranks pari
passu with the existing SMG-II convertible preferred stock and will accrue
dividends at a rate of 10% per annum. The Preferred Stock will be convertible
into Common Stock on a one-for-one basis. As of the Effective Date, the
Preferred Stock had accumulated dividends of approximately $122 per share.
In addition, Mr. Donald received a stock option (the "Option") to purchase
an aggregate of 100,000 shares of SMG-II Class A Common Stock. The Option
consists of component A ("Option Component A") covering 50,000 shares of SMG-II
Class A Common Stock and component B ("Option Component B") covering the
remaining 50,000 shares of SMG-II Class A Common Stock. Any terms used herein
not otherwise defined shall have the meanings assigned to them in the Donald
Agreement. Option Component A shall have an initial per share exercise price of
$100 per share. The per share exercise price of Option Component A will increase
to $125 per share on the first day of the Fiscal Year beginning in calendar year
2000 ("Fiscal Year 2000") and to $150 per share on the first day of the Fiscal
Year beginning in calendar year 2001 ("Fiscal Year 2001"). Option Component B
will have an initial per share exercise price of $100 per share. The per share
exercise price of Option Component B will increase to $150 per share on the
first day of the Fiscal Year beginning in calendar year 1999; to $250 per share
on the first day of Fiscal Year 2000; and to $350 per share on the first day of
Fiscal 2001. The Option will expire on the fifth anniversary of the Effective
Date to the extent not previously exercised (the "Expiration Date"); provided,
however, that the Expiration Date for the portion of Option Component A and
Option Component B which is vested (as explained below) immediately prior to
such Expiration Date will be extended until the seventh anniversary of the
Effective Date if such vested portion of Option Component A and Option Component
B, as the case may be, has not become exercisable by such initial Expiration
Date. During the period of such extension, the per share exercise price of
Option Component A and Option Component B, as the case may be (to the extent not
previously exercised), will increase at the end of each month during such
extension period at an annual rate of 10%. Mr. Donald will vest in 25% of Option
Component A and in 25% of Option Component B on the Effective Date and on each
of the first through third anniversaries of the Effective Date, provided that
the Optionee is in the employ of Pathmark on each such date. Upon the occurrence
of a Minimum IPO (as defined below) while the Optionee is in the employ of the
Company, the entire Option shall immediately and fully vest. In addition, the
Option will immediately and fully vest upon the occurrence of a Change in
Control (as defined below) occurring prior to the Termination Event (as defined
below). If Mr. Donald's employment with the Company should end as a result of a
Termination Event, then, as of the applicable date of termination, the entire
Option (whether or not then vested) will be immediately and irrevocably
forfeited.
Except for purposes of tag-along rights under Article V of the Stockholders
Agreement and the piggyback rights under Article VI of the Stockholders
Agreement, the Option shall not be exercisable
62
(even though the Option or a portion thereof is vested) unless and until it
becomes exercisable in accordance with the following provisions:
(i) The Exercisable Percentage (as defined below) of each component of
the Option will become exercisable if the ML Investors (as defined in the
Stockholders Agreement) have a Realization Event (as defined below) in
respect of the Common Stock at a per share price in excess of the amounts
(the "Target Prices") set forth below :
TARGET PRICE
TARGET PRICE PER PER
SHARE/OPTION SHARE/OPTION
PERIOD OF TIME COMPONENT A COMPONENT B
- ---------------- ----------------- ---------------
Prior to 2/1/00 $ 100 $ 150
2/1/00 to
1/31/01 $ 125 $ 250
2/1/01 and after $ 150 $ 350
(ii) Notwithstanding the above, if the ML Investors have a Realization
Event for more than 15% of the shares of Common Stock beneficially owned by
them on the date of grant and Option at a per share price in excess of the
Target Price described above applicable to the date when such Realization
Event occurs, then the components of the Option for which such Target Prices
have been achieved shall become immediately vested and exercisable and the
exercise price shall not thereafter increase.
In the event that Mr. Donald becomes entitled to any tag-along rights under
Section 5.6 or registration rights under Section 6.2 of the Stockholders
Agreement, he will be permitted to exercise his sale or transfer rights with
respect to the portion of the Option for which the Target Price has been met.
For purposes of Section 5.6(b) of the Stockholders Agreement, 100% of the
portion of the Option for which the Target Amount has been realized will be
considered exercisable in order to determine the number of shares to be included
under Section 5.6(b) of the Stockholders Agreement. If, prior to the Expiration
Date, the Board determines that it is necessary or desirable to list, register
or qualify the shares of Common Stock subject to the Option, and if such
listing, registration or qualification is delayed beyond the Expiration Date,
the vested and exercisable portion of the Option will remain exercisable until
30 days after such listing, registration, or qualification is accomplished.
Pursuant to the Donald Agreement, the Company lent Mr. Donald $4.5 million
(the "Loan") evidenced by 16 separate promissory notes. Under the terms of each
note, if Mr. Donald is in full employment of the Company on a quarterly
anniversary of the Effective Date, Mr. Donald's obligation to pay such note
maturing on such date will be forgiven as to principal, but not any then accrued
and unpaid interest. In the event his employment ends at any time during the
term of the Donald Agreement prior to a Change in Control as a result of a
Termination Event, each note will become immediately due and payable as to all
outstanding principal and all accrued and unpaid interest. These notes bear
interest at an effective rate of 6%. The Loan is on a full recourse basis and
secured by the Equity Strip, the Option and any shares acquired upon exercise of
the Option.
In the event of Mr. Donald's Involuntary Termination, Pathmark will pay him
(w) the full amount of any accrued but unpaid base salary, plus a cash payment
(calculated on the basis of the base salary then in effect) for all unused
vacation time which Mr. Donald may have accrued as of the date of Involuntary
Termination; (x) the amount of any earned but unpaid Annual Bonus for any Fiscal
Year of Pathmark ended on or prior to the date of Involuntary Termination; (y)
any unpaid reimbursement for business expenses; and (z) a severance amount equal
to four times Mr. Donald's annual rate of salary, based upon the annual rate
then in effect immediately prior to the date of termination, payable in monthly
installments over 24 months. In addition, in the event of an Involuntary
Termination, Mr. Donald and his eligible dependents shall continue to be
eligible to participate in the medical, dental, health and life insurance
63
plans applicable to Mr. Donald immediately prior to the Involuntary Termination
on the same terms and conditions in effect immediately prior to such Involuntary
Termination until the earliest to occur of (i) the end of the 24-month period
after the date of termination, the date Mr. Donald becomes eligible to be
covered under the benefit plans of a subsequent employer and (iii) the date Mr.
Donald breaches any of the protective covenants described below. Furthermore, in
the event of an Involuntary Termination, the Equity Strip will automatically and
without the need for further action or consent by Pathmark become fully vested
in the manner provided by the Stock Award Agreement, and the Option will
continue to remain outstanding to the extent provided by the Option Agreement.
All notes not previously delivered to Mr. Donald will automatically and without
the need for further action or consent by Pathmark be delivered by the escrow
agent to Mr. Donald marked "Paid in Full" upon payment by Mr. Donald of any then
accrued but unpaid interest on the Loan. During the 30-day period beginning 6
months after a Change in Control, Mr. Donald shall be eligible to resign from
the Company for no stated reason and receive all the amounts listed in clauses
(w), (x), (y) and (z) above. Any such resignation in such 30-day period
following a Change in Control shall be treated as an Involuntary Termination for
all purposes of this Agreement.
In the event Mr. Donald's employment ends at any time during the term as a
result of a Termination Event, the Company shall pay him only the amounts
decried in clauses (w), (x) and (y) above, and Mr. Donald will immediately
forfeit the Equity Strip and the Option. In addition, each note will become
immediately due and payable as to all outstanding principal and all accrued and
unpaid interest if Mr. Donald's employment ends prior to a Change in Control as
a result of a Termination Event.
Although, in the event of an Involuntary Termination, Mr. Donald has no duty
to mitigate the severance amount by seeking new employment, any severance amount
payable during the second year of the severance period shall be reduced by any
compensation or benefits Mr. Donald earns in connection with any employment by
another employer.
The Donald Agreement includes protective covenants that prohibit Mr. Donald
from engaging (i) in any activity in competition with Pathmark, or any parent or
subsidiary thereof or (ii) in soliciting employees or customers of Pathmark, or
any parent or subsidiary thereof, during his term of employment and up to two
years thereafter. The Donald Agreement also includes a confidentiality clause
which prohibits Mr. Donald from disclosing any confidential information
regarding Pathmark.
The following definitions apply to the terms of the Donald Agreement:
"CAUSE" means the termination of Mr. Donald's employment with Pathmark
because of (i) his willful and repeated failure (other than by reason of
incapacity due to physical or mental illness) to perform the material duties
of his employment after notice from Pathmark of such failure and his
inability or unwillingness to correct such failure within 30 days of such
notice, (ii) his conviction of a felony or plea of no contest to a felony or
(iii) perpetration by Mr. Donald of a material dishonest act or fraud
against Pathmark or any parent or subsidiary thereof; provided however,
that, before Pathmark may terminate Mr. Donald for Cause, the Board shall
deliver to him a written notice of Pathmark's intent to terminate him for
Cause, including the reasons for such termination, and Pathmark must provide
him an opportunity to meet once with the Board prior to such termination.
"CHANGE IN CONTROL" means the acquisition by a person (other than a
person or group of persons that beneficially owns an equity interest in
SMG-II or Pathmark on the Effective Date or any person controlled thereby)
of more than 50% control of the voting securities of SMG-II as a result of a
sale of voting securities after the Effective Date by the persons who, on
the Effective Date, have a beneficial interest in such voting securities,
but shall not include any change in the ownership of Pathmark or SMG-II
resulting from a public offering.
"COMMON STOCK" means SMG-II Class A Common Stock, par value $0.01 per
share.
"EXERCISABLE PERCENTAGE" means (i) in connection with a Third Party
Sale, the percentage of the shares of Common Stock subject to the Option
that Mr. Donald is entitled to sell pursuant to the
64
exercise of his "tag-along" rights under the Stockholders Agreement and (ii)
in connection with a Public Offering, the percentage of the shares of Common
Stock then beneficially owned by the ML Investors (as defined in the
Stockholders Agreement) which are sold in the Public Offering.
"GOOD REASON" means Mr. Donald's resignation because of (i) the failure
of Pathmark to pay any material amount of compensation to Mr. Donald when
due, (ii) a material adverse reduction or material adverse diminution in Mr.
Donald's titles, duties, positions or responsibilities with Pathmark,
including, but not limited to, failure by Pathmark to elect Mr. Donald to
the office of Chief Executive Officer, or (iii) any other material breach by
Pathmark of the Donald Agreement. In order to assert Good Reason, Mr. Donald
must provide written notification of his intention to resign within 30
business days after he knows or has reason to know the occurrence of any
such event. After Mr. Donald provides such written notice to Pathmark,
Pathmark shall have 15 days from the date of receipt of such notice to
effect a cure of the condition constituting Good Reason.
"INVOLUNTARY TERMINATION" means (i) the termination of Mr. Donald's
employment by Pathmark other than for Cause or disability or (ii) Mr.
Donald's resignation of employment with Pathmark for Good Reason.
"MINIMUM IPO" means a Public Offering of the Common Stock after the Date
of Grant at the conclusion of which the aggregate price for all the shares
of Common Stock having been sold to the public in such Public Offering, plus
the aggregate offering price for all shares of Common Stock sold in all
prior Public Offerings of Common Stock occurring after the date that Mr.
Donald is granted any Option, exceeds $50 million.
"PREFERRED STOCK" shall mean a new series of convertible preferred stock
that will be issued for purposes of the Donald Agreement.
"PUBLIC OFFERING" means a public offering of the Common Stock pursuant
to an effective registration statement under the Securities Act.
"REALIZATION EVENT" means the receipt by the ML Investors (as defined in
the Stockholders Agreement) of cash or property from an unrelated third
party as consideration for the sale of shares of Common Stock then
beneficially owned by the ML Investors. For purposes of the Donald
Agreement, any property other than cash received by the ML Investors in the
Realization Event shall have the value ascribed to such property by the
parties to such sale.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"STOCKHOLDERS AGREEMENT" shall mean the Stockholders Agreement, dated as
of February 4, 1991, as amended, among SMG-II and its stockholders.
"TERMINATION EVENT" shall mean Mr. Donald's resignation without Good
Reason or a termination by Pathmark for Cause.
"THIRD PARTY SALE" means a sale of Common Stock subject to Section 5.6
of the Stockholders Agreement.
65
OTHER EXECUTIVE AGREEMENTS
As of May 23, 1994, the Company entered into an employment agreement with
Mr. Crowley. As of September 9, 1994, the Company entered into an employment
agreement with Mr. Marshall. As of June 1, 1995, the Company entered into an
employment agreement with Mr. Rallo and Mr. Joyce, respectively. The four above
mentioned employment agreements are hereinafter referred to collectively as the
"Employment Agreements". Each of the Employment Agreements is for an initial
term of two years. The term of each Employment Agreement is automatically
extended for an additional year on (a) August 1, 1997 for Mr. Crowley and on
each successive August 1st thereafter; (b) February 1, 1998 for Mr. Marshall and
on each successive February 1st thereafter, and (c) June 1, 1997 for Mr. Rallo
and Mr. Joyce and on each successive June 1st thereafter. Under the terms of his
respective Employment Agreement, each executive is entitled to a minimum annual
base salary of (a) $280,000 for Mr. Crowley; (b) $300,000 for Mr. Marshall, (c)
$245,000 for Mr. Rallo, and (d) $225,000 for Mr. Joyce, which salary is subject
to upward adjustment by the Company. The Employment Agreements also provide that
each executive shall be entitled to receive an annual bonus of up to 66% of his
annual base salary with respect to Messrs. Crowley and Marshall and upto 55% of
his annual base salary with respect to Messrs. Joyce and Rallo, and shall be
provided the opportunity to participate in pension and welfare plans, programs
and arrangements that are generally made available to executives of Pathmark or
as may be deemed appropriate by the Compensation Committee of the Board of
Directors of SMG-II.
In the event one of the four above named executives' employment is
terminated by 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 and
continued coverage under health and insurance plans for the period commencing on
the date of such termination or resignation through the date of applicable
Employment Agreement would have expired had it not been automatically renewed
but for said termination or resignation, reduced by any compensation or benefits
which the executive is entitled to receive in connection with his employment by
another employer during said period.
The Employment Agreements contain agreements by the executives not to
compete with the Company as long as they are receiving payments under an
employment agreement and an agreement by the executives not to disclose
confidential information.
On March 20, 1996 (the "Retirement Date"), Mr. Futterman retired as Chairman
and Chief Executive Officer of the Company. Pursuant to the Retirement
Agreement, Mr. Futterman will be entitled to receive his base salary at the
annual rate of $525,000 per year during the period, commencing on the day
following the Retirement Date and ending on July 31, 1998, or the date of his
death, if earlier (the "Benefit Period"), plus the bonus or bonuses attributable
to the financial targets set forth for the Company under its Executive Incentive
Plan ("EIP") that he would have earned (a maximum of 75% of base salary) had his
employment continued through the Benefit Period, subject to the Company reaching
the applicable financial targets set under the EIP or any other bonus plan;
provided however, that the minimum bonus paid for each fiscal year of the
Company ending during the Benefit Period, subject to the Company reaching the
applicable financial targets set under the EIP or any other bonus plan; shall
not be less than 25% of the 75% target amount. Additionally, Mr. Futterman will
be entitled to receive continued health coverage through the Benefit Period
under the Company's health and insurance plans applicable to him immediately
prior to the Retirement Date. Each of the above described payments and benefits
shall be reduced by any compensation or benefits he is entitled to receive in
connection with any employment by another employer during the Benefit Period;
provided, however, that such reduction shall not apply to the first $100,000 of
compensation and benefits earned by Mr. Futterman for any calendar year during
the Benefit Period. The Retirement Agreement also provides that Mr. Futterman
shall be entitled to be reimbursed by the Company for secretarial and office
expenses incurred by him during the two year period beginning September 1, 1996,
up to $30,000 per year (or an aggregate reimbursement of $60,000). Additionally,
pursuant to the terms of the Retirement Agreement, the Company made a cash lump
sum payment to Mr. Futterman of $1.5 million on April 1, 1996.
66
The Company retained John W. Boyle, a Director of the Company, to act as its
interim Chairman and Chief Executive Officer for the period of March 20, 1996
through October 7, 1996 (the "Transition Period"). Under the terms of the
consulting arrangement between the Company and Mr. Boyle, the Company paid Mr.
Boyle a consulting fee of $41,667 per month plus living and travel expenses
during the Transition Period. In addition, Mr. Boyle received a completion bonus
of $100,000 when Mr. Donald commenced employment with the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to January 10, 1997, Messrs. Burke, Khanna and McLean comprised 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." On January 10, 1997, Mr. Boyle became a member of the Compensation
Committee.
COMPENSATION OF DIRECTORS
Each director who is not employed by the Company or one of its subsidiaries,
SPI, MLCP or the Equitable Investors or its affiliates receives an annual
retainer of $20,000 per year, plus travel expenses.
67
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Since February 4, 1991, all shares of the Holdings Common Stock are held by
SMG-II. As of April 15, 1997, the number of shares of Holdings Preferred Stock
and SMG-II (i) Class A Common Stock, (ii) Class B Common Stock, (iii) Series A
Preferred Stock, (iv) Series B Preferred Stock and (v) Series C Preferred Stock,
beneficially owned by the persons known by management of the Company to be the
beneficial owners of more than 5% of the outstanding shares of any class as
"beneficial ownership" has been defined under Rule 13d-3, as amended, under the
Securities Exchange Act of 1934, are set forth in the following table:
NUMBER % OF
NAME OF SHARES CLASS
- ----------------------------------------------------------------------------------------- --------------- ---------
SMG-II Class A Common Stock
Merrill Lynch Capital Appreciation Partnership No. IX, L.P.(2)......................... 488,704.8 65.2
ML Offshore LBO Partnership No. IX(2).................................................. 12,424.7 1.7
Barfield House
St. Julians Avenue
St. Peter Port
Guernsey
Channel Islands
ML Employees LBO Partnership No. I, L.P.(2)............................................ 12,148.6 1.6
ML IBK Positions, Inc.(3).............................................................. 21,258.9 2.8
Merchant Banking L.P. No. 1(3)......................................................... 8,119 1.1
Merrill Lynch KECALP L.P. 1987(3)...................................................... 7,344 1.0
CBC Capital Partners, Inc.(4).......................................................... 30,000 4.0
270 Park Avenue
New York, NY 10017
Management and other employees (including former employees of Pathmark)................ 169,419(1) 22.6
301 Blair Road
Woodbridge, NJ 07095
SMG-II Class B Common Stock
The Equitable Life Assurance Society of the United States(5)........................... 114,000 35.6
c/o Alliance Corporate Finance Group Incorporated
1345 Avenue of the Americas, 39th Floor
New York, NY 10005
Equitable Deal Flow Fund, L.P.(5)...................................................... 150,000 46.9
c/o Alliance Corporate Finance Group Incorporated
1345 Avenue of the Americas, 39th Floor
New York, NY 10005
Equitable Variable Life Insurance Company(5)........................................... 36,000 11.3
c/o Alliance Corporate Finance Group Incorporated
1345 Avenue of the Americas, 39th Floor
New York, NY 10005
CBC Capital Partners, Inc.(4).......................................................... 20,000 6.2
SMG-II Series A Preferred Stock(6)
Merrill Lynch Capital Appreciation Partnership No. B-X, L.P.(2)........................ 133,043 56.2
ML Offshore LBO Partnership No. B-X(2)................................................. 40,950 17.3
MLCP Associates, L.P. No. II(2)........................................................ 1,740 .7
ML IBK Positions, Inc.(3).............................................................. 46,344.5 19.6
Merchant Banking L.P. No. IV(3)........................................................ 3,779 1.6
Merrill Lynch KECALP L.P. 1989(3)...................................................... 7,000 3.0
Merrill Lynch KECALP L.P. 1991(3)...................................................... 3,874.5 1.6
SMG-II Series B Preferred Stock(6)
CBC Capital Partners, Inc.(4).......................................................... 12,500 7.0
The Equitable Life Assurance Society of the United States(5)........................... 84,134 46.5
Equitable Deal Flow Fund, L.P.(5)...................................................... 84,135 46.5
68
NUMBER % OF
NAME OF SHARES CLASS
- ----------------------------------------------------------------------------------------- --------------- ---------
SMG-II Series C Preferred Stock(6)....................................................... 8,520 100.0
James Donald
301 Blair Road
Woodbridge, NJ 07095
Holdings Preferred Stock(7)(8)
Fidelity Management & Research Company(9).............................................. 978,425 20.0
82 Devonshire Street
Boston, MA 02109
Sun America, Inc....................................................................... 641,785 13.1
1 Sun American Center
Century City
Los Angeles, CA 90067-6022...........................................................
Massachusetts Financial Services Company(10)........................................... 591,925 12.1
500 Boylston Street
Boston, MA 02116
State Street Research & Management Company(11)......................................... 453,540 9.3
One Financial Center, 38th Floor
Boston, MA 02111
IDS Financial Services, Inc.(12)....................................................... 275,000 5.6
80 South 8th Street
Minneapolis, MN 55440
Van Kampen American Capital(13)........................................................ 331,251 6.8
2800 Post Oak Blvd.
Houston, Texas 77056
- ------------------------
(1) Includes presently exercisable options granted under the Plan for 76,943
shares of SMG-II Class A Common Stock held by Management Investors.
(2) MLCP and its affiliates are the direct or indirect managing partners of ML
Offshore LBO Partnership No. IX, Merrill Lynch Capital Appreciation
Partnership No. IX, L.P., ML Employees LBO Partnership No. 1, L.P., Merrill
Lynch Capital Appreciation Partnership No. B-x, L.P., ML Offshore LBO
Partnership No. B-X and MLCP Associates, L.P. No. II. Such entities and
those disclosed in footnote (3) below, are referred to herein as the ML
Investors. The address of such entities is c/o Merrill Lynch Capital
Partners, Inc., in care of Stonington Partners, Inc., 767 Fifth Avenue, New
York, New York 10153. MLCP is an indirect wholly owned subsidiary of ML&Co.
The partners and principals of SPI (including Messrs. Burke, McLean and
Khanna) are consultants to MLCP. Mr. Bowman is Chief Executive Officer of
MLCP.
(3) Merchant Banking L.P. No. 1, Merchant Banking L.P. No. IV, Merrill Lynch
KECALP L.P. 1987, Merrill Lynch KECALP L.P. 1989, Merrill Lynch KECALP L.P.
1991 and ML IBK Positions, Inc. are indirectly controlled by ML&Co. The
address of such entities is c/o James Caruso, Merrill Lynch & Co., Inc.,
World Financial Center, South Tower, New York, New York, 10080-6123.
(4) CBC Capital Partners, Inc. is an affiliate of Chase Manhattan Corp.
(5) The Equitable Investors are separate purchasers who are affiliates of each
other.
(6) SMG-II Preferred stock may be converted into an equivalent number of shares
of common stock of SMG-II in accordance with its terms.
(7) Voting rights are limited to the election of two directors to the Board of
Holdings.
(8) The information with respect to State Street Research & Management Company,
IDS Financial Services, Inc., Massachusetts Financial Services Company, Van
Kampen American Capital and Fidelity Management & Research Company was
derived from investment information filed with the Commission in 1996.
(9) To the best of the Company's knowledge, shares of Holdings Preferred Stock
are owned by five funds managed by Fidelity Management & Research Company.
Such shares are owned of record as follows: 366,933 shares by Fidelity
Capital & Income Fund, 324,488 shares by Fidelity Spartan High Income
69
Fund, 100,562 shares by Fidelity Equity-Income Fund, 70,123 shares by
Fidelity Asset Manager, and 116,319 shares by Fidelity Advisor High Yield
Fund.
(10) To the best of the Company's knowledge, shares of Holdings Preferred Stock
are owned by two funds managed by Massachusetts Financial Services Company.
Such shares are owned of record as follows: 569,098 shares by MFS High
Income Fund and 22,827 shares by MFS Multimarket Income Trust.
(11) To the best of the Company's knowledge, shares of Holdings Preferred Stock
are owned by one fund managed by State Street Research and Management
Company. Such shares are owned of record as follows: 453,540 shares by State
Street Research High Income Fund.
(12) To the best of the Company's knowledge, shares of Holdings Preferred Stock
are owned by one fund managed by American Express Financial Advisors. Such
shares are owned of record as follows: 275,000 shares by IDS Extra Income
Fund.
(13) To the best of the Company's knowledge, shares of Holdings Preferred Stock
are owned by one fund managed by Van Kampen American Capital.
No officer or director claims beneficial ownership of any share of Holdings
Common Stock, or of SMG-II stock other than SMG-II Class A Common Stock, except
Mr. Donald who claims beneficial ownership of 8,520 (100%) shares of SMG-II
Series C Preferred Stock. As of April 15, 1997 the number of shares of SMG-II
Class A Common Stock and Holdings Preferred Stock beneficially owned by each
director, by each of the executive officers named in the Summary Compensation
Table and by all directors and executive officers as a group is as follows:
SMG-II CLASS A
COMMON STOCK HOLDINGS PREFERRED
NAME NUMBER OF SHARES % OF CLASS NUMBER OF SHARES % OF CLASS
- --------------------------------------------------- ----------------- --------------- --------------------- ---------------
Matthias Bowman(1)................................. -- -- -- --
John W. Boyle(2)................................... 3,000 * -- --
James J. Burke, Jr.(1)............................. -- -- -- --
James Donald....................................... 19,851 2.6 -- --
Jack Futterman(2).................................. 23,000 3.0 -- --
Neill Crowley(2)................................... 1,000 * -- --
U. Peter C. Gummeson............................... -- -- -- --
Sunil C. Khanna.................................... 700 * -- --
Stephen M. McLean(1)............................... -- -- -- --
Ron Marshall(2).................................... 2,000 * -- --
Ronald Rallo(2).................................... 3,250 * 966 *
Jerry G. Rubenstein(2)............................. 2,500 * -- --
Robert Joyce(2).................................... 3,200 * -- --
James B. Upchurch.................................. -- -- -- --
Steven L. Volla.................................... -- -- -- --
Directors and named executive officers as a
group(1)(2)...................................... 66,011 8.8 966 *
- ------------------------
* Less than 1%
(1) Does not include 550,000 shares of SMG-II Class A Common Stock or 236,731.5
shares of SMG-II Series A Preferred Stock owned beneficially by a group of
which MLCP is a part. Messrs. Burke, McLean and Bowman, directors of MLCP,
disclaim beneficial ownership in all such shares.
(2) Includes presently exercisable options granted under the Plan to purchase
shares of SMG-II Class A Common Stock, as follows: Mr. Futterman, 13,000;
Mr. Crowley, 1,000; Mr. Marshall, 2,000; Mr. Joyce, 2,500; Mr. Rallo, 2,850,
Mr. Rubenstein, 1,000; and Mr. Boyle, 3,000 and all directors and executive
officers as a group, 31,110.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The holders of SMG-II Preferred Stock are a party with the holders of SMG-II
Common Stock to the Stockholders Agreement, which, among other things, restricts
the transferability of SMG-II capital stock and relates to the corporate
governance of SMG-II and Holdings. Among other provisions, the Stockholders
Agreement requires a vote of at least 80% of the members of the Board of
Directors to cause the
70
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 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 Stockholders Agreement also contains an agreement of the stockholders of
SMG-II with respect to the composition of SMG-II's and Holdings' Board of
Directors. Under this agreement, the Merrill Lynch Investors will be entitled to
designate up to seven directors, the Management Investors will be entitled to
designate up to three directors and the Equitable Investors will be entitled to
designate one director to both of SMG-II's and Holdings' Board of Directors.
Such agreement furthermore entitles the ML Investors to designate a majority of
Holdings' Board of Directors at all times. Since Holdings (through PTK) owns all
of the outstanding shares of the Company's Common Stock, by having the ability
to designate a majority of Holdings' Board of Directors, the ML Investors have
the ability to control the Company. The ML Investors are controlled by ML&Co.
In addition to the foregoing, the Stockholders Agreement contains terms
restricting the transfer of SMG-II Common Stock and SMG-II Preferred Stock
(collectively, the "SMG-II Stock") by the stockholders of SMG-II, and providing
to the stockholders of SMG-II rights of first offer with respect to resales of
SMG-II Stock, rights of first refusal with respect to certain issuances of
shares of SMG-II Stock, certain rights to demand or participate in registrations
of shares of SMG-II Stock under the Securities Act and certain "tag-along"
rights.
In October 1996, pursuant to the Donald Agreement, James L. Donald, an
Officer and Director, was provided by Pathmark with a four-year loan of $4.5
million. The foregoing indebtedness to Pathmark is evidenced by 16 full recourse
promissory notes for $281,250 each bearing interest at the short-term or
intermediate-term federal rate in effect as of the date of each note (effective
rate of 6%) and secured by the Equity Strip and the Option. Under the Donald
Agreement, one promissory note will be forgiven at the end of each quarter of a
year during which Mr. Donald remains employed by Pathmark. In the event that Mr.
Donald resigns his employment without Good Reason or is terminated for Cause or
in the event of his death, the outstanding portion of the loan will become
immediately due and payable. As of April 1, 1997, Mr. Donald remained indebted
to the Company in the amount of $4,218,750.
The Company retained John W. Boyle, a Director of the Company, to act as its
interim Chairman and Chief Executive Officer for the Transition Period. Under
the terms of the consulting arrangement between the Company and Mr. Boyle, the
Company paid Mr. Boyle a consulting fee of $41,667 per month ($288,980 in the
aggregate) plus living and travel expenses during the Transition Period. In
addition, Mr. Boyle received a completion bonus of $100,000 when Mr. Donald
commenced employment with the Company.
In March 1990, Jerry G. Rubenstein, a Director, borrowed from Holdings
$100,000 in order to help finance his purchase of Holdings' Class A Common
Stock. Subsequently, such shares of Holdings' Class A Common Stock were
exchanged for shares of SMG-II Class A Common Stock. The foregoing indebtedness
to Holdings is evidenced by a full recourse promissory note (the "Recourse
Note"). The Recourse Note is for a term of ten years and bears interest at the
rate of 8.02% per annum, payable annually. Except as otherwise provided in the
Recourse Note, no principal on such recourse loan shall be due and payable until
the tenth anniversary of the date of issue of such Recourse Note. Under the
terms of the agreement pursuant to which the shares of Holdings' Class A Common
Stock were exchanged for shares of SMG-II Class A Common Stock, the Company is
obligated to pay to each Management Investor who pays interest on his Recourse
Note (except under certain circumstances) an amount equal to such interest, plus
an amount sufficient to pay any income taxes resulting from the above prescribed
payment after taking into
71
account the value of any deduction available to him as a result of the payment
of such interest or taxes. As of April 1, 1997, Mr. Rubenstein remained indebted
to Holdings in the amount of $100,000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report.
1. Financial Statements Schedules: None required
2. Exhibits:
Incorporated herein by reference is a list of the Exhibits contained in the
Exhibit Index on Pages 75 through 77 of this Report.
(b) Reports on Form 8-K.
None.
(c) Exhibits required by Item 601 of Regulation S-K.
See item 14(a) above.
72
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: May 2, 1997 SUPERMARKETS GENERAL HOLDINGS CORPORATION
By: /s/ RON MARSHALL
-----------------------------------------
Ron Marshall
EXECUTIVE VICE PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Director, Chairman,
/s/ JAMES DONALD President and Chief
- ------------------------------ Executive Officer May 2, 1997
(James Donald) (Principal Executive
Officer)
Executive Vice President
/s/ RON MARSHALL and Chief Financial
- ------------------------------ Officer (Principal May 2, 1997
(Ron Marshall) Financial Officer)
/s/ JOSEPH ADELHARDT Senior Vice President and
- ------------------------------ Controller (Principal May 2, 1997
(Joseph Adelhardt) Accounting Officer)
MATTHIAS BOWMAN Director*
- ------------------------------ May 2, 1997
(Matthias Bowman)
JOHN W. BOYLE Director*
- ------------------------------ May 2, 1997
(John W. Boyle)
JAMES J. BURKE, JR. Director*
- ------------------------------ May 2, 1997
(James J. Burke, Jr.)
SUNIL C. KHANNA Director*
- ------------------------------ May 2, 1997
(Sunil C. Khanna)
STEPHEN M. MCLEAN Director*
- ------------------------------ May 2, 1997
(Stephen M. Mclean)
ROBERT G. MILLER Director*
- ------------------------------ May 2, 1997
(Robert G. Miller)
U. PETER C. GUMMESON Director*
- ------------------------------ May 2, 1997
(U. Peter C. Gummeson)
73
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
JERRY G. RUBENSTEIN Director*
- ------------------------------ May 2, 1997
(Jerry G. Rubenstein)
JAMES B. UPCHURCH Director*
- ------------------------------ May 2, 1997
(James B. Upchurch)
STEVEN L. VOLLA Director*
- ------------------------------ May 2, 1997
(Steven L. Volla)
*By: /s/ MARC A. STRASSLER
------------------------
Marc A. Strassler
ATTORNEY-IN-FACT
74
EXHIBIT INDEX
EXHIBIT PAGE
NO. EXHIBIT NO.
- ---------- ------------------------------------------------------------------------------------------------------- -----
2.1 -- Distribution and Transfer Agreement among the Registrant, PTK and Plainbridge...............
2.2 -- Distribution and Transfer Agreement dated as of May 3, 1993 among the Registrant, Holdings
and Chefmark (incorporated by reference from Exhibit 2.2 to the Registration Statement on
Form S-1 of the Registrant and Holdings, File No. 33-59616).................................
2.3 -- Agreement and Plan of Merger dated as of April 22, 1987 by and among Old Supermarkets, SMG
Acquisition Corporation and Holdings, as amended and restated (incorporated by reference
from Exhibit 2 to the Registration Statement on Form S-1 of Holdings, File No. 33-16963)....
3.1 -- Restated Certificate of Incorporation of the Registrant, as amended (incorporated by
reference from Exhibit 3.1 to the Registration Statement on Form S-1 of Pathmark, File No.
33-59612, the "October 1993 Registration Statement")........................................
3.2 -- Amendment to the Restated Certificate of Incorporation of the Registrant, as amended
(incorporated by reference from Annual Report on Form 10-K of Registrant for the year ended
January 29, 1994 (the "1994 10-K)...........................................................
3.3 -- By-Laws of the Registrant (incorporated by reference from Exhibit 3.3 to the October 1993
Registration Statement).....................................................................
4.1 -- Indenture between the Registrant and United States Trust Company of New York, Trustee,
relating to the Senior Subordinated Notes due 2003 of the Registrant (incorporated by
reference from the 1994 10-K)...............................................................
4.1A -- Senior Subordinated Note due 2003 of the Registrant (contained in the Indenture filed as
Exhibit 4.1) (incorporated by reference from the 1994 10-K).................................
4.2 -- Indenture between the Registrant and NationsBank of Georgia, National Association, Trustee,
relating to the Junior Subordinated Deferred Coupon Notes due 2003 of the Registrant
(incorporated by reference from the 1994 contained in the Indenture filed as Exhibit 4.2)
(incorporated by reference from the 1994 10-K)..............................................
4.2B -- Indenture between the Registrant and Wilmington Trust Company, Trustee, relating to the
115/8% Subordinated Notes due 2002 of the Registrant (incorporated by reference from the
1994 10-K)..................................................................................
4.3 -- Indenture between the Company and Wilmington Trust Company, Trustee, relating to the 125/8%
Subordinated Debentures due 2002 of the Registrant (incorporated by reference from the 1994
10-K).......................................................................................
4.4 -- Credit Agreement dated as of October 26, 1993 ("the Credit Agreement") among the Registrant,
the Lenders listed therein, and Bankers Trust Company as Agent (incorporated by reference
from the 1994 10-K).........................................................................
4.4A -- First Amendment to the Credit Agreement (incorporated by reference from the registrant's
Form 8-K dated March 15, 1996 (the "March 1996 8-K")........................................
4.4B -- Second Amendment to the Credit Agreement (incorporated by reference from the March 1996
8-K)........................................................................................
4.4C -- Third Amendment to the Credit Agreement (incorporated by reference from the March 1996
8-K)........................................................................................
4.4D* -- Fourth Amendment to the Credit Agreement (incorporated by reference from the March 1996
8-K)........................................................................................
4.4E -- Fifth Amendment to the Credit Agreement (incorporated by reference from the March 1996
8-K)........................................................................................
4.4F -- Sixth Amendment to the Credit Agreement (incorporated by reference from the Registrant's
Form 10-Q, as amended, for the period ended November 2, 1996................................
75
EXHIBIT PAGE
NO. EXHIBIT NO.
- ---------- ------------------------------------------------------------------------------------------------------- -----
10.4 -- Services Agreement dated as of May 3, 1993 between the Registrant and Chefmark (incorporated
by reference from Exhibit 10.4 to the Registration Statement on Form S-1 of the Registrant
and Holdings, File No. 33-59616)............................................................
10.5 -- Chefmark Supply Agreement, dated May 3, 1993, between the Registrant and Chefmark
(incorporated by reference from Exhibit 10.5 to the Registrant Statement on Form S-1 of the
Registrant, and Holdings, File No. 33-59616)................................................
10.6 -- Tax Sharing Agreement between the Registrant and SMG-II (incorporated by reference from the
1994 10-K)..................................................................................
10.7 -- Tax Indemnity Agreement between the Registrant and Plainbridge (incorporated by reference
from the 1994 10-K).........................................................................
10.8 -- Supermarkets General Corporation Pension Plan (as Amended and Restated effective January 1,
1979) as amended through May 29, 1987 (incorporated by reference from Exhibit 10.21 to the
Registration Statement on Form S-1 of Holdings, File No. 33-16963)..........................
10.9 -- Supermarkets General Corporation Savings Plan (as Amended and Registration Statement on Form
S-1 of Holdings, File No. 33-16963).........................................................
10.10 -- Supermarkets General Corporation Management Incentive Plan effective June 17, 1971
(incorporated by reference from Exhibit 10.23 to the Registration Statement on Form S-1 of
Holdings, File No. 33-16963.................................................................
10.11 -- Supplemental Retirement Agreements dated as of March 9, 1987 between Old Supermarkets and
Jack Futterman, (incorporated by reference from Exhibit 10.25 to the Registration Statement
on Form S-1 of Holdings, File No. 33-16963).................................................
10.12 -- Excess Benefit Plan of Supermarkets General Corporation, effective as of March 9, 1987
(incorporated by reference from Exhibit 10.12 to the October 1993 Registration Statement)...
10.13 -- Recourse Secured Promissory Note, dated October 5, 1987, given to Holdings from each
Management Investor listed therein (incorporated by reference from Exhibit 10.43 to
Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 of Holdings, File
No. 33-16963)...............................................................................
10.14 -- Stock Pledge Agreement dated October 5, 1987, between Holdings and each Management Investor
listed therein (incorporated by reference from Exhibit 10.44 to Post-Effective Amendment No.
1 to the Registration Statement on Form S-1 of Holdings, File No. 33-16963).................
10.15 -- SMG-II Holdings Corporation Management Investors Stock Option Plan, as amended and restated
May 17, 1991 (the "Option Plan") (incorporated by reference from Exhibit 10.15 to the
October 1993 Registration Statement)........................................................
10.16 -- Form of Stock Option Agreement under the Option Plan (incorporated by reference from Exhibit
10.16 to the October 193 Registration Statement)............................................
10.17 -- SMG-II Holdings Corporation Employees 1987 Stock Option Plan, as amended and restated May
17, 1991 (incorporated by reference from Exhibit 10.17 to the October 1993 Registration
Statement)..................................................................................
10.18 -- Agreement dated as of March 20, 2996 among Registrant, Jack Futterman, Holdings and SMG-II
(incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended
February 3, 1996)...........................................................................
10.20 -- Agreement dated as of April 10, 1996 between the Registrant, Anthony Cuti and SMG-II
(incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended
February 3, 1996)...........................................................................
76
EXHIBIT PAGE
NO. EXHIBIT NO.
- ---------- ------------------------------------------------------------------------------------------------------- -----
10.21 -- Management Investors Exchange Agreement dated as of February 4, 1991 among SMG-II Holdings
Corporation, Holdings and each of the Management Investors party thereto (incorporated by
reference from Exhibit 10.53 to the Registration Statement on Form S-1 of Holdings, No.
33-16963)...................................................................................
10.22 -- Supplemental Retirement Agreement dated as of March 12, 1993 between the Registrant and
Anthony Cuti (incorporated by reference from the Registrant's Annual Report on Form 10-K for
the year ended January 28, 1995)............................................................
10.24 -- Supplemental Retirement Agreement dated June 1, 1994, between the Registrant and Neill
Crowley (incorporated by reference from Registrant's Annual Report on Form 10-K for the year
ended February 3, 1996).....................................................................
10.25 -- Supplemental Retirement Agreement dated October 3, 1994 between the Registrant and Ron
Marshall (incorporated by reference from Registrant's Annual Report on Form 10-K for the
year ended February 3, 1996)................................................................
10.26 -- Interim Agreement dated March 20, 1996 between the Registrant and John W. Boyle
(incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended
February 3, 1996)...........................................................................
10.27 -- Employment Agreement dated as of May 23, 1994 between Registrant and Neill Crowley
(incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended
February 3, 1996)...........................................................................
10.28 -- Employment Agreement dated as of September 9, 1994 between Registrant and Ron Marshall
(incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended
February 3, 1996)...........................................................................
10.29 -- Employment Agreement dated as of June 1, 1995 between Registrant and Ron Rallo (incorporated
by reference from Registrant's Annual Report on Form 10-K for the year ended February 3,
1996).......................................................................................
10.30* -- Employment Agreement dated as of October 8, 1996, among Pathmark Stores, Inc., SMG-II and
James Donald................................................................................
12.1* -- Statements Regarding Computation of Rates of Earnings to Fixed Charges......................
22.1* -- List of Subsidiaries of the Registrant......................................................
24A. * -- Power of Attorney of Matthias Bowman........................................................
24B. * -- Power of Attorney of Robert G. Miller.......................................................
- ------------------------
* Filed herewith.
77