<PAGE>
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
NOVEMBER 1, 1997 0-16404
SUPERMARKETS GENERAL HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3408704
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 BLAIR ROAD, P.O. BOX 5301 07095-0915
WOODBRIDGE, NEW JERSEY (Zip Code)
(Address of principal executive offices)
(732) 499-3000
(Registrant's telephone number, including area code)
-------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
$3.52 CUMULATIVE EXCHANGEABLE REDEEMABLE PREFERRED STOCK
-------------------
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
------- -------
As of November 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.
==============================================================================
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands)
13 WEEKS ENDED 39 WEEKS ENDED
-------------------------- -------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1997 1996 1997 1996
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Sales.............................................. $ 901,006 $ 911,221 $ 2,755,313 $ 2,755,556
Cost of sales (exclusive of depreciation and
amortization shown separately below)............ 652,524 644,420 1,984,908 1,947,781
----------- ------------ ------------ ------------
Gross profit....................................... 248,482 266,801 770,405 807,775
Selling, general and administrative expenses....... 205,318 211,821 630,796 640,518
Depreciation and amortization...................... 21,407 20,536 61,607 62,668
----------- ------------ ------------ ------------
Operating earnings................................. 21,757 34,444 78,002 104,589
Interest expense................................... (41,034) (40,951) (124,822) (122,646)
----------- ------------ ------------ ------------
Loss before income tax benefit and
extraordinary items............................. (19,277) (6,507) (46,820) (18,057)
Income tax benefit................................. 7,815 2,567 18,703 7,070
----------- ------------ ------------ ------------
Loss before extraordinary items.................... (11,462) (3,940) (28,117) (10,987)
Extraordinary items, net of an income tax
benefit of $5,456 in Fiscal 1997 and $695
in Fiscal 1996.................................. -- -- (7,488) (997)
----------- ------------ ------------ ------------
Net loss........................................... (11,462) (3,940) (35,605) (11,984)
Less: non-cash preferred stock accretion and
dividend requirements........................... (4,758) (4,740) (14,262) (14,209)
----------- ------------ ------------ ------------
Net loss attributable to common stockholder........ $ (16,220) $ (8,680) $ (49,867) $ (26,193)
=========== ============ ============ ============
</TABLE>
1
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands except share amounts)
<TABLE>
<CAPTION>
NOVEMBER 1, FEBRUARY 1,
1997 1997
--------- ----------
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents......................................... $ 9,436 $ 10,967
Accounts receivable, net.......................................... 10,985 12,799
Merchandise inventories........................................... 203,236 217,440
Income taxes receivable........................................... 4,241 2,120
Deferred income taxes............................................. 9,568 9,969
Prepaid expenses.................................................. 24,638 24,970
Due from suppliers................................................ 11,206 13,950
Other current assets.............................................. 10,317 5,942
------------ ------------
Total Current Assets........................................... 283,627 298,157
Property and Equipment, Net.......................................... 551,556 604,955
Deferred Financing Costs, Net........................................ 19,734 28,743
Deferred Income Taxes................................................ 64,645 39,530
Other Assets......................................................... 37,423 45,200
------------ ------------
$ 956,985 $ 1,016,585
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Accounts payable.................................................. $ 143,474 $ 167,446
Book overdrafts................................................... 30,511 41,086
Current maturities of long-term debt.............................. 17,493 74,431
Accrued payroll and payroll taxes................................. 51,827 56,414
Current portion of lease obligations.............................. 24,966 23,208
Accrued interest payable.......................................... 37,579 20,712
Accrued expense and other current liabilities..................... 90,316 90,629
------------ ------------
Total Current Liabilities...................................... 396,166 473,926
------------ ------------
Long-Term Debt....................................................... 1,289,342 1,213,081
------------ ------------
Lease Obligations, Long-Term......................................... 167,506 175,628
------------ ------------
Other Noncurrent Liabilities......................................... 305,270 306,733
------------ ------------
Redeemable Securities
Exchangeable Preferred Stock, $.01 par value...................... 106,723 105,372
------------ ------------
Authorized: 9,000,000 shares
Issued and outstanding: 4,890,671
Liquidation preference, $25 per share: $122,267
Commitments and Contingencies (Note 5)
Stockholder's Deficit
Class A Common Stock, $.01 par value.............................. 7 7
Authorized: 1,075,000 shares
Issued and outstanding: 650,675
Class B Common Stock, $.01 par value.............................. 3 3
Authorized: 1,000,000 shares
Issued and outstanding: 320,000
Paid-in Capital...................................................... 197,981 199,332
Accumulated Deficit.................................................. (1,506,013) (1,457,497)
------------ ------------
Total Stockholder's Deficit....................................... (1,308,022) (1,258,155)
------------ ------------
$ 956,985 $ 1,016,585
============ ============
</TABLE>
See notes to consolidated financial statements (unaudited).
2
<PAGE>
<TABLE>
<CAPTION>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT (UNAUDITED)
(in thousands except per share amounts)
CLASS A CLASS B TOTAL
COMMON COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK STOCK CAPITAL DEFICIT DEFICIT
---- ----- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, February 1, 1997................. $ 7 $ 3 $ 199,332 $ (1,457,497) $ (1,258,155)
Net loss.................................. -- -- -- (35,605) (35,605)
Accrued dividends on preferred stock
($2.64 per share)................... -- -- -- (12,911) (12,911)
Accretion on preferred stock.............. -- -- (1,351) -- (1,351)
---- ----- --------- ------------ ------------
Balance, November 1, 1997................. $ 7 $ 3 $ 197,981 $ (1,506,013) $ (1,308,022)
==== ===== ========= ============ ============
Balance, February 3, 1996................. $ 7 $ 3 $ 197,671 $ (1,420,138) $ (1,222,457)
Net loss.................................. -- -- -- (11,984) (11,984)
Accrued dividends on preferred stock
($2.64 per share)................... -- -- -- (12,911) (12,911)
Accretion on preferred stock.............. -- -- (1,298) -- (1,298)
---- ----- --------- ------------ ------------
Balance, November 2, 1996................. $ 7 $ 3 $ 196,373 $ (1,445,033) $ (1,248,650)
==== ===== ========= ============ ============
</TABLE>
See notes to consolidated financial statements (unaudited).
3
<PAGE>
<TABLE>
<CAPTION>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
39 WEEKS ENDED
---------------------------
NOVEMBER 1, NOVEMBER 2,
1997 1996
--------- ---------
Operating Activities
<S> <C> <C>
Net loss................................................................................ $ (35,605) $ (11,984)
Adjustments to reconcile net loss to net cash provided by operating activities:
Extraordinary loss on early extinguishment of debt.................................... 7,488 997
Depreciation and amortization......................................................... 64,624 65,251
Deferred income tax benefit........................................................... (24,159) (4,925)
Interest accruable but not payable.................................................... 13,700 12,344
Amortization of original issue discount............................................... 2,484 2,343
Amortization of debt issuance costs................................................... 4,526 5,555
(Gain) loss on disposal of property and equipment..................................... 117 (5,332)
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net............................................................ 1,814 (533)
Merchandise inventories............................................................. 14,204 (5,411)
Income taxes........................................................................ 3,335 (4,467)
Other current assets................................................................ (3,595) (3,526)
Other assets........................................................................ 6,066 364
Accounts payable.................................................................... (23,972) 2,770
Accrued interest payable............................................................ 15,165 (65)
Accrued expenses and other current liabilities...................................... (3,142) (8,366)
Other noncurrent liabilities........................................................ (17,573) 3,598
--------- ---------
Cash provided by operating activities............................................ 25,477 48,613
--------- ---------
Investing Activities
Property and equipment expenditures..................................................... (20,707) (38,198)
Proceeds from disposition of property and equipment..................................... 25,475 8,059
--------- ---------
Cash provided by (used for) investing activities................................ 4,768 (30,139)
--------- ---------
Financing Activities
Borrowings under Term Loan in connection with the new Credit Agreement................... 300,000 --
Repayments of term loans................................................................. (245,252) (32,890)
Increase (decrease) in working capital facilities borrowings............................. (48,300) 25,000
Increase (decrease) in book overdrafts................................................... (10,575) (5,966)
Increase in other borrowings............................................................. 1,956 2,052
Repayment of other long-term borrowings.................................................. (5,265) (7,342)
Reduction in lease obligations........................................................... (15,955) (15,035)
Deferred financing fees.................................................................. (8,253) (2,926)
Premiums incurred in redemption of PTK Exchangeable Guaranteed Debentures
and other borrowings.................................................................. (132) (554)
Proceeds from lease financing............................................................ -- 21,405
Repayment of PTK Exchangeable Guaranteed Debentures...................................... -- (3,007)
--------- ---------
Cash used for financing activities............................................... (31,776) (19,263)
--------- ---------
Decrease in cash and cash equivalents....................................................... (1,531) (789)
Cash and cash equivalents at beginning of period............................................ 10,967 12,526
--------- ---------
Cash and cash equivalents at end of period.................................................. $ 9,436 $ 11,737
========= =========
Supplemental Disclosures of Cash Flow Information
Interest paid........................................................................... $ 87,138 $ 102,561
========= =========
Income taxes paid....................................................................... $ 3,222 $ 4,028
========= =========
Noncash Investing and Financing Activities
Capital lease obligations............................................................... $ 17,917 $ 24,821
========= =========
</TABLE>
See notes to consolidated financial statements (unaudited).
4
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
Supermarkets General Holdings Corporation (the "Company" or "Holdings"),
through its indirect wholly owned subsidiary Pathmark Stores, Inc. ("Pathmark"),
operated 135 supermarkets as of November 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").
The unaudited consolidated financial statements included herein have been
prepared by the Company in accordance with the same accounting principles
followed in the presentation of the Company's annual financial statements for
the year ended February 1, 1997, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
consolidated financial statements included herein reflect all adjustments which
are of a normal and recurring nature and are necessary to present fairly the
results of operations and financial position of the Company. This report should
be read in conjunction with the financial statements and notes thereto included
in the Company's Form 10-K Annual Report for the year ended February 1, 1997.
Income taxes for the interim period are based on the estimated effective
tax rate expected to be applicable for the full fiscal year.
NOTE 2--SUPPLY AND DISTRIBUTION AGREEMENTS
During the third quarter of Fiscal 1997, the Company entered into a
fifteen year supply agreement with C&S Wholesale Grocers, Inc. ("C&S") which
will supply substantially all of the Company's grocery, frozen and perishable
merchandise. Simultaneously, the Company and C&S entered into an agreement
pursuant to which C&S will purchase Pathmark's Woodbridge, New Jersey
warehouse complex and assume the leases of other distribution facilities in
North Brunswick and Dayton, New Jersey, including the fixtures, equipment and
inventory at each facility. The transactions, which are subject to a number
of conditions, are expected to be closed by the end of the fiscal year. In
addition, the Company outsourced its trucking operations to a third party
trucking company, pursuant to a ten year trucking services agreement
effective October 5, 1997, in which the trucking company will deliver
merchandise to all of the Company's stores.
Also during the third quarter, the Company entered into a three year
agreement with a pharmaceutical wholesaler to supply pharmaceutical products to
the Company on a consignment basis. In connection with such agreement, the
pharmaceutical wholesaler purchased the Company's warehouse pharmaceutical
inventory for $5.2 million and plans to purchase certain store pharmaceutical
products throughout Fiscal 1998. Current year results for the third quarter and
nine-month period include a $2.0 million gain on a LIFO liquidation related to
the sale of such warehouse inventory.
5
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 3--LONG-TERM DEBT
Long-term debt is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
NOVEMBER 1, FEBRUARY 1,
1997 1997
----------- ------------
<S> <C> <C>
Pathmark Term Loan.............................................................. $ 297,875 $ --
Pathmark Working Capital Facility............................................... 25,200 --
Former Pathmark term loan....................................................... -- 243,127
Former Pathmark working capital facility........................................ -- 73,500
9.625% Pathmark Senior Subordinated Notes due 2003
("Pathmark Senior Subordinated Notes")...................................... 438,045 437,780
11.625% Pathmark Subordinated Notes due 2002
("Pathmark Subordinated Notes")............................................. 199,017 199,017
11.625% Holdings Subordinated Notes due 2002
("Holdings Subordinated Notes")............................................. 983 983
12.625% Pathmark Subordinated Debentures due 2002
("Pathmark Subordinated Debentures")........................................ 95,750 95,750
10.75% Pathmark Deferred Coupon Notes due 2003
("Pathmark Deferred Coupon Notes").......................................... 182,259 168,559
10.25% PTK Exchangeable Guaranteed Debentures due 2003
("PTK Exchangeable Guaranteed Debentures").................................. 29,661 27,442
Industrial revenue bonds........................................................ 6,375 6,375
Other debt (primarily mortgages)................................................ 31,670 34,979
----------- ------------
Total debt...................................................................... 1,306,835 1,287,512
Less: current maturities........................................................ 17,493 74,431
----------- ------------
Long-term portion............................................................... $ 1,289,342 $ 1,213,081
=========== ============
</TABLE>
On June 30, 1997, the Company, through its Pathmark subsidiary, entered
into a new $500 million bank credit agreement (the "Credit Agreement") with a
group of lenders led by The Chase Manhattan Bank. The Credit Agreement includes
a $300 million term loan (the "Term Loan") and a $200 million working capital
facility (the "Working Capital Facility"). The Company repaid in full the former
term loan and former working capital facility with the borrowings obtained under
the Credit Agreement.
Under the Credit Agreement, the Term Loan and Working Capital Facility
bear interest at floating rates, ranging from LIBOR plus 2.25% to LIBOR plus
2.50%. The Company is required to repay a portion of its borrowings under the
Term Loan each year, so as to retire such indebtedness in its entirety by
December 15, 2001. Under the Working Capital Facility, which expires on June 15,
2001, the Company can borrow or obtain letters of credit in an aggregate amount
not to exceed $200 million, of which the maximum of $125 million can be in
letters of credit. In addition, pursuant to Permitted Subordinated Debt
Refinancing (as defined in the Credit Agreement), the Working Capital Facility
and a portion of the Term Loan can be extended up to an additional two and
one-half years and the remainder of the Term Loan can be extended up to an
additional three and one-half years from the original expiration dates.
The Credit Agreement contains certain covenants, including financial
covenants concerning levels of operating cash flow, minimum interest and rent
expense coverage, maximum leverage ratio, maximum senior debt leverage ratio,
maximum consolidated rental payments and maximum capital expenditures. The
Credit Agreement also contains other covenants including, but not limited to,
covenants with respect to the following matters: (i) limitation on indebtedness;
(ii) limitation on liens; (iii) restriction on mergers; (iv) restriction on
investments, loans, advances, guarantees and acquisitions; (v) restriction on
assets sales and sale/leaseback transactions; (vi) restriction on certain
payments of indebtedness and incurrence of certain agreements and (vii)
restriction on transactions with affiliates.
6
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 4--INTEREST EXPENSE
Interest expense is comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
---------------------------- ---------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Pathmark term loans................................ $ 6,156 $ 5,519 $ 16,679 $ 17,233
Pathmark working capital facilities................ 671 1,299 4,143 3,955
Pathmark Senior Subordinated Notes
Amortization of original issue discount........ 88 88 265 265
Currently payable.............................. 10,588 10,588 31,763 31,763
Pathmark Subordinated Notes........................ 5,813 5,813 17,438 17,438
Pathmark Subordinated Debentures................... 3,022 3,022 9,066 9,066
Pathmark Deferred Coupon Notes
Accrued but not payable........................ 4,687 4,222 13,700 12,344
PTK Exchangeable Guaranteed Debentures
Amortization of original issue discount........ 764 689 2,219 2,078
Amortization of debt issuance costs................ 1,016 1,918 4,526 5,555
Lease obligations.................................. 5,398 4,750 16,487 13,995
Other, net......................................... 2,831 3,043 8,536 8,954
--------- --------- --------- ---------
Interest expense................................... $ 41,034 $ 40,951 $ 124,822 $ 122,646
========= ========= ========= =========
</TABLE>
The majority of the cash interest payments are scheduled in the second and
fourth quarters.
NOTE 5--CONTINGENCIES
RICKEL:
In connection with the sale of its home centers segment in Fiscal 1994,
the Company, as lessor, entered into leases for certain of the Company's owned
real estate properties with Rickel, as tenant (the "Leases"), pursuant to which
the Company is entitled to receive annual aggregate rentals of approximately
$4.2 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 November 1, 1997, the
estimated present value of obligations under the Assumed Liabilities
approximated $25.6 million.
In January 1996, Rickel filed for bankruptcy protection under Chapter 11
of the United States Bankruptcy Code. Since the inception of Rickel's
bankruptcy, Rickel has rejected five Leases and two third party leases. The five
rejected Leases had annual rentals of approximately $2.7 million. One of the
rejected third party leases has been settled with the landlord and the estimated
present value of the other third party lease obligation is approximately $4.6
million at November 1, 1997. The Company is actively marketing these properties
to other prospective tenants. In addition to the above leases, Rickel has also
assigned one of its third party leases to a large retailer. Management has
concluded that the Company has sufficient reserves to cover any resulting
liability which may occur with respect to these matters. In September 1997,
Rickel announced that it is terminating its retail operations and is
liquidating its retail inventory. Since Rickel's bankruptcy is not concluded,
the Company cannot determine whether Rickel will reject any additional Leases
or the extent to which the Company will become liable with respect to the
Assumed Liabilities in the event of Rickel's nonpayment thereof.
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.
7
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
ITEM 2. 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
SALES:
Sales in the third quarter of Fiscal 1997 were $901.0 million compared to
$911.2 million in the prior year, a decrease of 1.1%. For the nine-month period
of Fiscal 1997, sales were $2,755.3 million compared to $2,755.6 million in the
prior year. Same store sales increased 0.6% and 0.8% for the third quarter and
nine-month period, respectively, primarily from the Company's promotional
pricing program which commenced in the first quarter of Fiscal 1997. Sales in
Fiscal 1997 compared to Fiscal 1996 were also impacted by new store openings and
remodels offset by sold and closed stores. The Company operated 135 and 143
supermarkets at the end of the second quarters of Fiscal 1997 and Fiscal 1996,
respectively.
GROSS PROFIT:
Gross profit in the third quarter of Fiscal 1997 was $248.5 million or
27.6% of sales compared to $266.8 million or 29.3% of sales for the prior year.
For the nine-month period of Fiscal 1997, gross profit was $770.4 million or
28.0% of sales compared to $807.8 million or 29.3% for the prior year. The
decrease in gross profit in both dollars and as a percentage of sales for the
third quarter and nine-month period of Fiscal 1997 compared to the prior year
was primarily due to the promotional pricing program introduced during the first
quarter of Fiscal 1997, as well as the pre-Thanksgiving holiday promotions
during the third quarter of Fiscal 1997. The cost of goods sold comparisons were
impacted by a pretax LIFO credit of $1.7 million in the third quarter of Fiscal
1997 compared to no LIFO adjustment in the third quarter of Fiscal 1996, and by
a pretax LIFO credit of $0.8 million and a pretax LIFO charge of $1.7 million in
the nine-month period of Fiscal 1997 and Fiscal 1996, respectively. The pretax
LIFO credit for the current year third quarter and the nine-month period include
a $2.0 million gain on a LIFO liquidation related to the sale of the Company's
pharmaceutical warehouse inventory (See Note 2 to the Consolidated Financial
Statements).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"):
SG&A in the third quarter of Fiscal 1997 decreased $6.5 million or 3.1%
compared to the prior year and decreased $9.7 million or 1.5% in the nine-month
period of Fiscal 1997 compared to the prior year. As a percentage of sales, SG&A
was 22.8% in the third quarter of Fiscal 1997, down from 23.2% in the prior year
and was 22.9% for the nine-month period of Fiscal 1997, down from 23.2% the
prior year. The decrease in SG&A as a percentage of sales in the third quarter
and nine-month period of Fiscal 1997 compared to the prior year was primarily
due to lower administrative, advertising, claims and utilities expenses,
partially offset by higher store labor expenses.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization of $21.4 million in the third quarter of
Fiscal 1997 was $0.9 million higher than the prior year of $20.5 million. For
the nine-month period of Fiscal 1997, depreciation and amortization of $61.6
million was $1.1 million lower than the prior year of $62.7 million. The
increase in depreciation and amortization expense in the third quarter of Fiscal
1997 compared to the prior year was primarily due to capital expenditures in
Fiscal 1997. The decrease in depreciation and amortization expense
8
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
in the nine-month period of Fiscal 1997 compared to the prior year was primarily
due to the write down in the fourth quarter of Fiscal 1996 of certain fixed
assets held for sale, principally in the Company's southern region, partially
offset by capital expenditures in Fiscal 1997. Depreciation and amortization
excludes video tape amortization, which is recorded in cost of goods sold, of
$0.9 million and $0.8 million in the third quarters of Fiscal 1997 and Fiscal
1996, respectively, and $2.6 million and $2.3 million in the nine-month period
of Fiscal 1997 and Fiscal 1996, respectively.
OPERATING EARNINGS:
Operating earnings in the third quarter of Fiscal 1997 were $21.8 million
compared to the prior year of $34.4 million. For the nine-month period of Fiscal
1997, operating earnings were $78.0 million compared with $104.6 million in the
prior year. The decrease in operating earnings in the third quarter and
nine-month period of Fiscal 1997 compared to the prior year was primarily due to
lower gross profit, partially offset by lower SG&A.
INTEREST EXPENSE:
Interest expense was $41.0 million in both the third quarter of Fiscal 1997
and Fiscal 1996 and $124.8 million for the nine-month period of Fiscal 1997
compared to $122.6 million in the prior year. The increase in interest expense
in the nine-month period of Fiscal 1997 compared to the prior year was
primarily due to increases in lease obligations, the debt accretion on the
Deferred Coupon Notes, and higher interest rates, partially offset by lower
amortization of debt issuance costs.
INCOME TAXES:
Income taxes for the interim period are based on the estimated effective tax
rate expected to be applicable for the full fiscal year. The income tax benefit
in the third quarter and nine-month period of Fiscal 1997 was $7.8 million and
$18.7 million, respectively. The income tax benefit for the third quarter and
nine-month period of Fiscal 1996 was $2.6 million and $7.1 million,
respectively.
During the nine-month period of Fiscal 1997, the Company made income tax
payments of $3.2 million and received income tax refunds of $0.5 million. During
the nine-month period of Fiscal 1996, the Company made income tax payments of
$4.0 million and received income tax refunds of $2.9 million.
EXTRAORDINARY ITEMS:
During the second quarter of Fiscal 1997, in connection with the Credit
Agreement, the Company wrote off deferred financing fees of $12.8 million
related to the former bank credit agreement, resulting in a net loss on early
extinguishment of debt of $7.4 million. In addition, during the second quarter
of Fiscal 1997, in connection with the sale of certain mortgaged property, the
Company made a mortgage paydown of $2.9 million, including accrued interest and
debt premiums, resulting in a net loss on early extinguishment of debt of $0.1
million.
During the second quarter of Fiscal 1996, in connection with the sale of
certain mortgaged property, the Company made a mortgage paydown of $5.3 million,
including accrued interest and debt premiums, resulting in a net loss on early
extinguishment of debt of $0.2 million. During the first quarter of Fiscal 1996,
in connection with the termination of the Plainbridge, Inc. credit agreement due
to the reacquisition of Plainbridge, Inc. by Pathmark, the Company wrote off
deferred financing fees resulting in a net loss on early extinguishment of debt
of $0.7 million. During the first quarter of Fiscal 1996, the Company also made
a paydown of $3.2 million of PTK Exchangeable Guaranteed Debentures. The premium
paid, including original issue discount, resulted in a net loss on early
extinguishment of debt of $0.1 million.
9
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
SUMMARY OF OPERATIONS:
For the third quarter of Fiscal 1997, the Company's net loss was $11.5
million compared to a net loss of $3.9 million for the prior year. For the
nine-month period of Fiscal 1997, the Company's net loss was $35.6 million
compared to a net loss of $12.0 million in the prior year. The increase in net
loss in the nine-month period of Fiscal 1997 compared to the prior year was
primarily due to lower operating earnings, the extraordinary loss on early
extinguishment of debt and higher interest expense, partially offset by a higher
income tax benefit.
EBITDA-FIFO:
EBITDA-FIFO was $42.5 million and $55.9 million in the third quarters of
Fiscal 1997 and Fiscal 1996, respectively, and $141.9 million and $171.7 million
for the nine-month period of Fiscal 1997 and Fiscal 1996, respectively.
EBITDA-FIFO represents net earnings before interest expense, income taxes,
depreciation, amortization, the LIFO charge (credit) and unusual transactions.
EBITDA-FIFO is a widely accepted financial indicator of a company's ability to
service and/or incur debt and should not be construed as an alternative to, or a
better indicator of, operating income or cash flows from operating activities,
as determined in accordance with generally accepted accounting principles.
FINANCIAL CONDITION
DEBT SERVICE:
During the nine-month period of Fiscal 1997, total debt increased $19.3
million from Fiscal 1996 year end primarily due to debt accretion on the
Pathmark Deferred Coupon Notes and the PTK Exchangeable Guaranteed Debentures
and a net increase in borrowings under the Credit Agreement compared to the
former credit agreement. On June 30, 1997, the Company, through its Pathmark
subsidiary, entered into the Credit Agreement with a group of lenders led by The
Chase Manhattan Bank. The Credit Agreement includes a $300 million Term Loan and
a $200 million Working Capital Facility. In connection with this refinancing,
the Company repaid in full the former Pathmark term loan ($230.5 million) and
the former Pathmark working capital facility ($57.5 million) with the borrowings
obtained under the Credit Agreement. Borrowings under the Working Capital
Facility were $25.2 million at November 1, 1997 and have increased to $26.8
million at December 9, 1997.
During the second quarter of Fiscal 1997, the Company sold four of the 12
supermarkets that it announced for divestiture at the end of Fiscal 1996 for
$14.9 million and sold two former operating sites, primarily drug stores, for
$11.1 million. There was no gain or loss recognized on these transactions. The
proceeds were used to paydown a portion of the former working capital facility
and certain mortgages.
The Company does not currently maintain any interest rate hedging
arrangements. 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.
10
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
The amount 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(a)...................................................... $ 10.1
1998......................................................... 37.5
1999......................................................... 16.5
2000......................................................... 81.6
2001......................................................... 315.5
2002......................................................... 195.8
2003......................................................... 650.0
- ----------
(a) Subsequent to November 1, 1997.
LIQUIDITY:
The consolidated financial statements of the Company indicate that, at
November 1, 1997, current liabilities exceeded current assets by $112.5 million
and stockholder's deficit was $1.31 billion. Management believes that cash flows
generated from operations, supplemented by the unused borrowing capacity under
the Pathmark 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 meets 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 the Company's cash flow from operations is not sufficient to
meet its debt service requirements related to the maturity of the Term Loan and
Working Capital Facility in Fiscal 2001 and the maturity of the Pathmark
Subordinated Notes and Pathmark Subordinated Debentures in Fiscal 2002. The
Company expects that it will be necessary to refinance all or a portion of the
Pathmark Senior Subordinated Notes and the Pathmark Deferred Coupon Notes due in
Fiscal 2003 and the PTK Exchangeable Guaranteed Debentures due in Fiscal 2003.
The Company may undertake a refinancing of some or all of such indebtedness
sometime prior to its maturity. The Company was in compliance with its various
debt covenants at November 1, 1997, and, based on management's operating
projections for the remainder of Fiscal 1997, the Company believes that it will
continue to be in compliance with its debt covenants. The Company's ability to
make scheduled payments or 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.
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.
11
<PAGE>
SUPERMARKETS GENERAL HOLDINGS CORPORATION
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 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. Since January 15, 1993, 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 November 1, 1997,
the unpaid dividends of $86.1 million were accrued and included in other
noncurrent liabilities.
CAPITAL EXPENDITURES:
Capital expenditures for the third quarter of Fiscal 1997, including
property acquired under capital leases, were $11.3 million compared to $19.4
million for the prior year and for the nine-month period of Fiscal 1997 were
$38.6 million compared to $63.0 million for the prior year. During the
nine-month period of Fiscal 1997, the Company opened two new Pathmark stores,
completed five major renovations and enlargements to existing supermarkets and
sold four and closed seven of the 12 stores announced for divestiture at the end
of Fiscal 1996. During the remainder of Fiscal 1997, the Company does not plan
to open any new Pathmark stores and expects to complete up to an aggregate of 12
major renovations and enlargements.
CASH FLOWS:
Cash provided by operating activities amounted to $25.5 million in the
nine-month period of Fiscal 1997 compared to $48.6 million in the prior year.
The decrease in net cash provided by operating activities was primarily due to
an increase in the net loss and an increase in cash used for operating assets
and liabilities. Cash provided by investing activities was $4.8 million in the
nine-month period of Fiscal 1997 compared to cash used for investing activities
of $30.1 million in the prior year. The increase in cash provided by investing
activities was primarily due to an increase in proceeds from property
dispositions and a decrease in expenditures of property and equipment. Cash used
for financing activities was $31.8 million in the nine-month period of Fiscal
1997 compared to $19.3 million in the prior year. The increase in cash used for
financing activities was primarily due to a decrease in bank overdrafts and an
increase in deferred financing fees related to the Credit Agreement, partially
offset by a decrease in the repayment of PTK Exchangeable Guaranteed Debentures
and an increase in borrowings in conjunction with the Credit Agreement, net of
repaying in full the former Pathmark term loan and former Pathmark working
capital facility.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
During the third quarter of Fiscal 1997, the Company entered into a
fifteen year supply agreement with C&S Wholesale Grocers, Inc. ("C&S") which
will supply substantially all of the Company's grocery, frozen and perishable
merchandise. Simultaneously, the Company and C&S entered into an agreement
pursuant to which C&S will purchase Pathmark's Woodbridge, New Jersey
warehouse complex and assume the leases of other distribution facilities in
North Brunswick and Dayton, New Jersey, including the fixtures, equipment and
inventory at each facility. The transactions, which are subject to a number
of conditions, are expected to be closed by the end of the fiscal year. In
addition, the Company outsourced its trucking operations to a third party
trucking company, pursuant to a ten year trucking services agreement
effective October 5, 1997, in which the trucking company will deliver
merchandise to all of the Company's stores.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter for which this
report has been filed.
SIGNATURE
Pursuant to the requirements 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.
SUPERMARKETS GENERAL HOLDINGS CORPORATION
BY /S/ RON MARSHALL
---------------------------------
(RON MARSHALL)
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
BY /S/ JOSEPH ADELHARDT
----------------------------------
(JOSEPH ADELHARDT)
SENIOR VICE PRESIDENT AND CONTROLLER,
CHIEF ACCOUNTING OFFICER
DATE: December 16, 1997
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SUPERMARKETS
GENERAL HOLDINGS CORPORATION'S CONSOLIDATED STATEMENT OF OPERATIONS FOR THE 39
WEEKS ENDED NOVEMBER 1, 1997 AND CONSOLIDATED BALANCE SHEET AS OF NOVEMBER 1,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> NOV-01-1997
<CASH> 9,436
<SECURITIES> 0
<RECEIVABLES> 12,385
<ALLOWANCES> (1,400)
<INVENTORY> 203,236
<CURRENT-ASSETS> 283,627
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