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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarter Ended Commission File Number
November 2, 1996 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)
908-499-3000
(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 2, 1996, 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.
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PART 1. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands)
13 Weeks Ended 39 Weeks Ended
------------------------ ------------------------
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
---------- ---------- ---------- ----------
Sales..................................... $973,908 $992,039 $2,929,853 $3,046,012
Cost of sales (exclusive of depreciation and
amortization shown separately below)...... 683,344 709,497 2,057,474 2,171,692
------- ------- --------- ---------
Gross profit.............................. 290,564 282,542 872,379 874,320
Selling, general and administrative expenses 235,584 229,469 705,122 696,304
Depreciation and amortization............. 20,536 20,134 62,668 60,230
------- ------- --------- ---------
Operating earnings........................ 34,444 32,939 104,589 117,786
Gain on disposition of freestanding drug stores -- -- -- 15,535
Interest expense.......................... (40,951) (41,879) (122,646) (128,799)
------- ------- -------- --------
Earnings (loss) before income tax benefit and
extraordinary items...................... (6,507) (8,940) (18,057) 4,522
Income tax benefit........................ 2,567 4,294 7,070 24,134
------- ------- -------- --------
Earnings (loss) before extraordinary items (3,940) (4,646) (10,987) 28,656
Extraordinary items, net of an income tax
benefit................................... -- -- (997) (927)
------- ------- -------- --------
Net earnings (loss)....................... (3,940) (4,646) (11,984) 27,729
Less: non-cash preferred stock accretion and
dividend requirements..................... (4,740) (4,723) (14,209) (14,160)
------- ------- -------- --------
Net income (loss) attributable to common
stockholder.............................. $(8,680) $(9,369) $(26,193) $ 13,569
======= ======= ======== ========
See notes to consolidated financial statements (unaudited).
1
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands except share amounts)
November 2, February 3,
1996 1996
--------- ---------
ASSETS
Current Assets
Cash and cash equivalents................................... 11,737 12,526
Accounts receivable, net ................................... 11,373 10,840
Merchandise inventories..................................... 231,191 225,780
Income taxes receivable..................................... 6,325 1,163
Deferred income taxes....................................... 7,034 8,254
Prepaid expenses............................................ 26,567 25,211
Due from suppliers.......................................... 14,461 13,178
Other current assets........................................ 5,675 5,868
--------- ---------
Total Current Assets..................................... 314,363 302,820
Property and Equipment, Net................................... 598,848 603,832
Deferred Financing Costs, Net................................. 29,941 33,685
Deferred Income Taxes......................................... 30,698 26,805
Other Assets.................................................. 41,990 41,628
--------- ---------
$1,015,840 $1,008,770
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Accounts payable............................................ $ 188,098 $ 185,328
Book overdrafts............................................. 38,023 43,989
Current maturities of long-term debt........................ 69,842 51,753
Accrued payroll and payroll taxes........................... 52,111 54,427
Current portion of lease obligations........................ 21,390 20,684
Accrued interest payable.................................... 19,244 19,309
Accrued expense and other current liabilities............... 92,643 96,084
------------ -----------
Total Current Liabilities.................................. 481,351 471,574
----------- -----------
Long-Term Debt................................................ 1,222,736 1,242,324
----------- -----------
Lease Obligations, Long-Term ................................. 165,433 140,166
----------- -----------
Other Noncurrent Liabilities ................................. 290,039 273,530
----------- -----------
Redeemable Securities
Exchangeable Preferred Stock, $.01 par value ............... 104,931 103,633
Authorized: 9,000,000 shares
Issued and outstanding: 4,890,671 at November 2, 1996 and
February 3, 1996
Liquidation preference, $25 per share: $122,267 at November 2,
1996 and February 3, 1996
----------- -----------
Total Redeemable Securities .............................. 104,931 103,633
----------- -----------
Commitments and Contingencies (Note 7)
Stockholder's Deficit
Class A Common Stock, $.01 par value ....................... 7 7
Authorized: 1,075,000 shares
Issued and outstanding: 650,675 at November 2, 1996 and
February 3, 1996
Class B Common Stock, $.01 par value ....................... 3 3
Authorized: 1,000,000 shares
Issued and outstanding: 320,000 at November 2, 1996 and
February 3, 1996
Paid-in Capital .............................................. 196,373 197,671
Accumulated Deficit .......................................... (1,445,033) (1,420,138)
------------ ------------
Total Stockholder's Deficit ................................ (1,248,650) (1,222,457)
------------ ------------
$ 1,015,840 $ 1,008,770
============ ============
See notes to consolidated financial statements (unaudited).
2
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT (Unaudited)
(in thousands)
Class A Class B Total
Common Common Paid-in Accumulated Stockholder's
Stock Stock Capital Deficit Deficit
---- ------ --------- ----------- ------------
Balance, February 3, 1996 ................ $ 7 $ 3 $ 197,671 $(1,420,138) $(1,222,457)
Net loss............................... -- -- -- (11,984) (11,984)
Accrued dividends on preferred stock
($.88 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)
======= ======= ========== ============ =============
Balance, January 28, 1995 ................ $ 7 $ 3 $ 199,135 $ (1,479,450) $ (1,280,305)
Net earnings ........................... -- -- -- 27,729 27,729
Accrued dividends on preferred stock
($.88 per share)....................... -- -- -- (12,911) (12,911)
Accretion on preferred stock ........... -- -- (1,249) -- (1,249)
------ ------ --------- ----------- ------------
Balance, October 28, 1995 ................ $ 7 $ 3 $ 197,886 $ (1,464,632) $ (1,266,736)
====== ====== ========= =========== ============
See notes to consolidated financial statements (unaudited).
3
SUPERMARKETS GENERAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
39 Weeks Ended
------------------------------
November 2, October 28,
1996 1995
--------- ---------
Operating Activities
Net earnings (loss) ....................................................... $ (11,984) $ 27,729
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Extraordinary loss on early extinguishment of debt ...................... 997 927
Depreciation and amortization ........................................... 65,251 62,180
Deferred income tax benefit ............................................. (4,925) (37,274)
Interest accruable but not payable ...................................... 12,344 11,123
Amortization of original issue discount ................................. 2,343 5,810
Amortization of debt issuance costs ..................................... 5,555 5,341
(Gain) loss on disposal of property and equipment ....................... (5,332) 38
Gain on disposition of freestanding drug stores ......................... -- (15,535)
Cash provided by (used for) operating assets and liabilities:
Accounts receivable, net .............................................. (533) 2,300
Merchandise inventories ............................................... (5,411) 772
Income taxes .......................................................... (4,467) 7,795
Other current assets .................................................. (3,526) 3,100
Other assets .......................................................... 364 (2,588)
Accounts payable ...................................................... 2,770 9,240
Accrued interest payable .............................................. (65) 19,617
Accrued expenses and other current liabilities ........................ (8,366) (14,121)
Other noncurrent liabilities .......................................... 3,598 11,472
--------- ---------
Cash provided by operating activities ............................... 48,613 97,926
--------- ---------
Investing Activities
Property and equipment expenditures ....................................... (38,198) (52,989)
Proceeds from disposition of property and equipment ....................... 8,059 831
Proceeds from disposal of home centers segment ............................ -- 4,706
Proceeds from disposition of freestanding drug stores ..................... -- 59,876
----------- ------------
Cash provided by (used for) investing activities ................... (30,139) 12,424
----------- ------------
Financing Activities
Increase (decrease) in Working Capital Facilities borrowings .............. 25,000 (31,000)
Decrease in Pathmark Term Loan ............................................ (32,890) (50,589)
Decrease in book overdrafts ............................................... (5,966) (10,126)
Increase in other borrowings .............................................. 2,052 6,559
Repayment of other long-term borrowings ................................... (7,342) (3,930)
Reduction in lease obligations ............................................ (15,035) (13,221)
Repayment of PTK Exchangeable Guaranteed Debentures ....................... (3,007) (25,113)
Premiums incurred in redemption of PTK Exchangeable Guaranteed Debentures and
other borrowings ........................................................ (554) (1,392)
Proceeds from lease financing ............................................. 21,405 --
Deferred financing fees ................................................... (2,926) --
----------- ------------
Cash used for financing activities .................................. (19,263) (128,812)
----------- ------------
Decrease in cash and cash equivalents ........................................ (789) (18,462)
Cash and cash equivalents at beginning of period ............................. 12,526 23,247
----------- ------------
Cash and cash equivalents at end of period ................................... $ 11,737 $ 4,785
=========== ============
Supplemental Disclosures of Cash Flow Information
Interest paid ....................................................... $ 98,852 $ 82,554
=========== ============
Income taxes paid ................................................... $ 4,028 $ 2,890
=========== ============
Noncash Investing and Financing Activities
Capital lease obligations ........................................... $ 24,821 $ 21,620
=========== ============
4
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 143 supermarkets as of November 2, 1996, including 52 Pathmark 2000
format stores, primarily in the New York-New Jersey and Philadelphia
metropolitan areas, and is a wholly owned subsidiary of SMG-II Holdings
Corporation ("SMG-II").
On March 1, 1996, Pathmark reacquired all of the outstanding capital stock of
Plainbridge, Inc. ("Plainbridge") by means of a capital contribution from its
parent, PTK, Inc. ("PTK").
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 3, 1996, pursuant to the rules and regulations of the
Securities and Exchange Commission, except for the new accounting standard
adopted effective February 4, 1996 (see Note 2). 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 3,
1996.
The accompanying consolidated financial statements of the Company indicated
that, at November 2, 1996, current liabilities exceed current assets by $167.0
million and stockholder's deficit approximates $1.25 billion. Management
believes that cash flows generated from operations, supplemented by the unused
borrowing capacity under the Working Capital Facility and the availability of
capital lease financing will be sufficient to pay the Company's debts as they
come due, provide for its capital expenditure program and meet its seasonal cash
requirements. The Company was in compliance with its various debt covenants at
the end of the third quarter of Fiscal 1996. In December 1996, the Company
amended its bank credit agreement ("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.
Income taxes for the interim period are based on the estimated effective
tax rate expected to be applicable for the full fiscal year.
Since the Company is a wholly owned subsidiary, earnings (loss) per share
information is not presented.
Note 2--New Accounting Standard
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 identifiable 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 Company has performed its review based upon groups of assets and the
undiscounted estimated future cash flows from such assets and determined that
the carrying value of such assets were recoverable from the respective cash
flows. The adoption of SFAS No. 121 did not have an effect on the financial
position or results of operations of the Company.
5
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Unaudited)-(Continued)
Note 2--New Accounting Standard--(Continued)
Selling, general and administrative expenses for the 39 weeks ended
November 2, 1996 are net of a gain of $5.6 million related to the sale of
certain real estate.
Note 3--Long-Term Debt
Long-term debt is comprised of the following (dollars in thousands):
November 2, February 3,
1996 1996
-------------- -----------
Pathmark Term Loan ....................................................... $ 255,065 $ 287,955
Working Capital Facilities ............................................... 71,000 46,000
10.25% PTK Exchangeable Guaranteed Debentures due 2003 ................... 26,750 27,679
9.625% Pathmark Senior Subordinated Notes due 2003 ....................... 437,692 437,426
10.75% Pathmark Deferred Coupon Notes due 2003 ........................... 164,225 151,881
12.625% Pathmark Subordinated Debentures due 2002 ........................ 95,750 95,750
11.625% Pathmark Subordinated Notes due 2002 ............................. 199,017 199,017
11.625% Holdings Subordinated Notes due 2002 ............................. 983 983
Industrial revenue bonds ................................................. 6,375 6,375
Other debt (primarily mortgages) ......................................... 35,721 41,011
------------- -----------
Total debt ............................................................... 1,292,578 1,294,077
Less: current maturities ................................................. 69,842 51,753
------------- -----------
Long-term portion ........................................................ $ 1,222,736 $ 1,242,324
============== ============
Note 4--Interest Expense
Interest expense is comprised of the following (dollars in thousands):
13 Weeks Ended 39 Weeks Ended
----------------------------- ---------------------------
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
---------- --------- --------- ---------
Pathmark Term Loan ................................. $ 5,519 $ 6,494 $ 17,233 $ 22,149
Working Capital Facilities ......................... 1,299 1,015 3,955 3,995
9.625% Pathmark Senior Subordinated
Notes due 2003
Amortization of original issue discount ......... 88 88 265 265
Currently payable ............................... 10,588 10,588 31,763 31,763
10.75% Pathmark Deferred Coupon Notes
due 2003
Accrued but not payable ........................ 4,222 3,805 12,344 11,123
12.625% Pathmark Subordinated Debentures
due 2002 ......................................... 3,022 3,022 9,066 9,066
11.625% Pathmark Subordinated Notes
due 2002 ......................................... 5,813 5,813 17,438 17,438
10.25% PTK Exchangeable Guaranteed
Debentures due 2003
Amortization of original issue discount ....... 689 1,528 2,078 5,544
Amortization of debt issuance costs ................ 1,918 1,783 5,555 5,341
Obligations under capital leases ................... 4,287 4,116 13,327 12,200
Other, net ......................................... 3,506 3,627 9,622 9,915
--------- --------- --------- ---------
Interest expense ................................... $ 40,951 $ 41,879 $122,646 $128,799
========= ========= ========= =========
6
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Unaudited)-(Continued)
Note 4--Interest Expense--(Continued)
The majority of the cash interest payments are scheduled in the second and
fourth quarters. However, the November 1 semi-annual interest payment of $21.2
million on the 9.625% Senior Subordinated Notes was paid in the third quarter of
Fiscal 1996 and the fourth quarter of Fiscal 1995 due to the timing of the
quarter end dates.
Note 5--Extraordinary Items
The extraordinary items, representing the loss on early extinguishment of
indebtedness, consist of the following (dollars in thousands):
39 Weeks Ended
------------------------------------
November 2, October 28,
1996 1995
------------- ------------
Loss before income taxes .......................................... $(1,692) $(1,392)
Income tax benefit ................................................ 695 465
------- --------
Extraordinary items, net of a tax benefit ......................... $ (997) $ (927)
======= ========
During the second quarter of Fiscal 1996, in connection with the proceeds
from the sale of certain mortgaged property, the Company made a mortgage paydown
of $5.3 million, including accrued interest and debt premiums, resulting in a
net loss on early extinguishment of debt of $0.2 million, net of an income tax
benefit of $0.1 million. During the first quarter of Fiscal 1996, in connection
with the termination of the Plainbridge credit agreement due to the
reacquisition of Plainbridge by Pathmark, the Company wrote off deferred
financing fees, resulting in a net loss on early extinguishment of debt of $0.7
million, net of an income tax benefit of $0.5 million. During the first quarter
of Fiscal 1996, the Company also made a paydown of $3.2 million of PTK
Exchangeable Guaranteed Debentures, including premium and original issue
discount, resulting in a net loss on early extinguishment of debt of $0.1
million, net of an income tax benefit of $0.1 million.
During the second quarter of Fiscal 1995, in connection with the proceeds
received related to the sale of 30 of its freestanding drug stores, the Company
made a paydown of $21.8 million of PTK Exchangeable Guaranteed Debentures,
including premium and original issue discount, resulting in a net loss on early
extinguishment of debt of $0.7 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 made a paydown of $4.7 million of PTK
Exchangeable Guaranteed Debentures, including premium and original issue
discount, resulting in a net loss on early extinguishment of debt of $0.2
million.
Note 6--Lease Financing
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. 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.
7
SUPERMARKETS GENERAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Unaudited)-(Continued)
Note 7--Contingencies
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 Home Centers Inc. ("Rickel"), as tenant (the "Leases"), pursuant to which
the Company is entitled to receive annual aggregate rentals of approximately
$6.9 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 3, 1996, the
estimated present value of obligations under the Assumed Liabilities
approximated $33.0 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
$5.1 million. In November 1996, Rickel filed an order with the Bankruptcy
Court to reject four Leases with aggregate annual rentals of approximately
$2.4 million. The Company is actively marketing these properties to other
prospective tenants. 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.
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.
8
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 for the third quarter of Fiscal 1996 were $973.9 million compared to
$992.0 million in the prior year. For the nine-month period, sales were $2,929.9
million compared to $3,046.0 million in the prior year. Fiscal 1996 sales were
impacted by the disposition of the freestanding drug stores during Fiscal 1995.
Sales generated by the freestanding drug stores were $11.2 million in the third
quarter of Fiscal 1995 and $97.7 million in the nine-month period of Fiscal
1995. Same store sales from supermarkets decreased 1.3% in both the third
quarter and the nine-month period primarily due to a significant increase in
competitive new store openings and remodels.
At quarter end, the Company operated 143 supermarkets, including 52
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 for the third quarter of Fiscal 1996 was $290.6 million or
29.8% of sales compared with $282.5 million or 28.5% of sales for the prior
year and for the nine-month period of Fiscal 1996 was $872.4 million or 29.8%
of sales compared with $874.3 million or 28.7% of sales for the prior year.
Excluding the impact of the disposition of the freestanding drug stores,
gross profit as a percentage of sales was 28.6% for the third quarter and
28.9% for the nine-month period of Fiscal 1995. The improvement in gross
profit as a percentage of sales for the third quarter and nine-month period
of Fiscal 1996 compared to the prior years 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 for the
nine-month period of Fiscal 1996 of $872.4 million compared to the prior year
of $874.3 million was primarily attributable to the lower sales, as discussed
above, in the first quarter of Fiscal 1996. The cost of goods sold
comparisons were affected by a pretax LIFO charge which was zero for the
third quarter of Fiscal 1996 and $0.8 million for the prior year, and a
pretax LIFO charge of $1.7 million and $2.1 million for the nine-month period
of Fiscal 1996 and Fiscal 1995, respectively.
Selling, General and Administrative Expenses ("SG&A"):
SG&A for the third quarter of Fiscal 1996 increased $6.1 million or 2.7%
compared to the prior year and increased $8.8 million or 1.3% for the
nine-month period of Fiscal 1996 compared with the prior year. SG&A, on a
proforma basis eliminating the SG&A impact of the freestanding drug stores,
increased 3.8% and 4.7%, respectively, for the third quarter and nine-month
period compared to the prior year. As a percentage of sales, SG&A were 24.2% for
the third quarter of Fiscal 1996, up from 23.1% in the prior year and were 24.1%
for the nine-month period of Fiscal 1996, up from 22.9% for the prior year. The
increase in SG&A as a percentage of sales for the third quarter and nine-month
period of Fiscal 1996 compared to the prior year was primarily due to the impact
of lower sales, higher labor and labor related expenses, coupon expense, claims
expenses and occupancy costs, partially offset by lower advertising
9
SUPERMARKETS GENERAL HOLDINGS CORPORATION
expenses and the impact of the disposition of the freestanding drug stores in
Fiscal 1995. SG&A for the nine-month period of 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 curtailment gain of $2.0
million due to the elimination of all retiree medical coverage for active
non-union associates in Fiscal 1996.
Depreciation and Amortization:
Depreciation and amortization of $20.5 million for the third quarter of
Fiscal 1996 was $0.4 million higher than the prior year of $20.1 million. For
the nine-month period of Fiscal 1996 depreciation and amortization of $62.7
million was $2.5 million higher than the prior year of $60.2 million. The
increase in depreciation and amortization expense for the third quarter and
nine-month period of Fiscal 1996 compared to the prior years was primarily due
to capital expenditures. Depreciation and amortization excludes video tape
amortization, which is recorded in cost of goods sold, of $0.8 million and $0.65
million in the third quarter of Fiscal 1996 and Fiscal 1995, respectively, and
$2.3 million and $1.95 million for the nine-month period of Fiscal 1996 and
Fiscal 1995, respectively.
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 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
was closed during the second quarter of Fiscal 1996.
Operating Earnings:
Operating earnings for the third quarter of Fiscal 1996 were $34.4 million
compared with the prior year of $32.9 million. For the nine-month period of
Fiscal 1996, operating earnings were $104.6 million compared with $117.8 million
for the prior year. The increase in operating earnings during the third quarter
of Fiscal 1996 compared to the prior year was due to higher gross profit,
partially offset by higher SG&A. The decrease in operating earnings during the
nine-month period of Fiscal 1996 compared to the prior year was due to lower
sales and higher SG&A and depreciation and amortization expense.
Interest Expense:
Interest expense was $41.0 million for the third quarter of Fiscal 1996
compared to $41.9 million in the prior-year and $122.6 million for the
nine-month period of Fiscal 1996 compared to $128.8 million in the prior year
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:
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 for the third quarter and the nine-month period of Fiscal 1996 was
$2.6 million and $7.1 million, respectively. The income tax benefit for the
third quarter and the nine-month period of Fiscal 1995 was $4.3 million and
$24.1 million, respectively. The income tax benefit of $24.1 million in the
prior year reflects the reversal of the valuation allowance of $25.8 million
related to the deferred income tax assets.
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. During
the nine-month period of Fiscal 1995, the Company made income tax payments of
$2.9 million and received income tax refunds of $8.1 million.
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SUPERMARKETS GENERAL HOLDINGS CORPORATION
Extraordinary Items:
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. 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 1995 in connection with the proceeds
received related to the sale of 30 of its freestanding drug stores, the Company
made a paydown of $21.8 million of PTK Exchangeable Guaranteed Debentures,
including premium and original issue discount, resulting in a net loss on early
extinguishment of debt of $0.7 million. During the first quarter of Fiscal 1995,
in connection with the proceeds received related to the disposition of the home
centers segment, the Company made a paydown of $4.7 million of PTK Exchangeable
Guaranteed Debentures, including premium and original issue discount, resulting
in a net loss on early extinguishment of debt of $0.2 million.
Summary of Operations:
For the third quarter of Fiscal 1996, the Company's net loss was $3.9
million compared to a net loss of $4.6 million for the prior year. The decrease
in net loss for the third quarter of Fiscal 1996 compared to the prior year was
due to higher operating earnings and lower interest expense, partially offset by
a lower income tax benefit.
For the nine-month period of Fiscal 1996, the Company's net loss was $12.0
million compared to net earnings of $27.7 million for the prior year. The
decrease in net earnings for the nine-month period of Fiscal 1996 compared to
the prior year was due to lower operating earnings, the gain on disposition of
the freestanding drug stores in Fiscal 1995 and a higher income tax benefit in
Fiscal 1995, partially offset by lower interest expense in Fiscal 1996.
For the month of November 1996, total sales and same store sales were below
the comparable prior year period and the Company expects this trend to continue
throughout the remainder of the fourth quarter. The Company is restructuring its
operations to reduce operating costs, refocus on its core business and improve
customer service. In conjunction with this process, the Company anticipates
recording a restructuring charge in the fourth quarter.
Financial Condition
Debt Service:
During the nine-month period of Fiscal 1996, total debt decreased $1.5
million from Fiscal 1995 year end primarily due to Pathmark Term Loan repayments
of $32.9 million, including repayments of $1.7 million from asset sale proceeds,
and the paydown of the PTK Exchangeable Guaranteed Debentures, partially offset
by borrowings under the Pathmark Working Capital Facility and debt accretion on
Pathmark Deferred Coupon Notes and PTK Exchangeable Guaranteed Debentures.
Borrowings under the Pathmark Working Capital Facility were $71.0 million at
November 2, 1996 and have decreased to $47.0 million at December 12, 1996.
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.
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SUPERMARKETS GENERAL HOLDINGS CORPORATION
In conjunction with the Pathmark reacquisition of the Plainbridge capital
stock, the outstanding obligations of Plainbridge under its credit agreement
were satisfied by Pathmark and the Plainbridge credit agreement was terminated.
The Company, through its Pathmark subsidiary, simultaneously entered into an
amendment to its credit agreement with its existing lenders increasing the
Company'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. Pathmark satisfied the terms of the Fiscal 1996
cleandown provision during the first quarter.
The indebtedness under the Pathmark Working Capital Facility and the
Pathmark Term Loan bear interest at floating rates. To the extent that certain
indebtedness of the Company bears interest at floating rates, cash interest
payments on that 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 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 million):
Principal
Fiscal Years Payments
-------------
1996(a) .............................................. $ 19.3
1997 ................................................. 65.4
1998 ................................................. 155.6
1999 ................................................. 127.2
2000 ................................................. 50.2
2001 ................................................. 50.0
2002 ................................................. 194.8
2003 ................................................. 630.1
---------------
(a) Subsequent to November 2, 1996.
Liquidity:
The consolidated financial statements of the Company indicate that at
November 2, 1996, current liabilities exceed its current assets by $167.0
million and the stockholder's deficit approximates $1.25 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 meet its seasonal cash requirements. The Company was in compliance with
its various debt covenants at the end of the third quarter of Fiscal 1996. 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.
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 the Company's 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 a portion of
the Pathmark Term Loan, the Pathmark Working Capital Facility and certain
mortgages in Fiscal 1998, the amortization and subsequent
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SUPERMARKETS GENERAL HOLDINGS CORPORATION
maturity of the balance 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 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's ability to make scheduled payments
or to refinance its obligations with respect to its indebtedness depends on its
financial and operating performance, which, in turn, is subject to prevailing
economic conditions and to financial, business and other factors beyond its
control. Although the Company's cash flow from its operations and borrowings has
been sufficient to meet its debt service obligations, there can be no assurance
that the Company's operating results will continue to be sufficient or that
future borrowing facilities will be available for payment or refinancing of
Pathmark's and PTK's indebtedness or that future borrowing facilities will be
available. While it is the Company's intention to enter into refinancing 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 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 2, 1996,
the unpaid dividends of $68.9 million were accrued and included in other
noncurrent liabilities.
Capital Expenditures:
Capital expenditures for the third quarter of Fiscal 1996, including
property acquired under capital leases, were approximately $19.4 million
compared to approximately $36.7 million for the prior year and for the
nine-month period of Fiscal 1996 were approximately $63.0 million compared to
$73.7 million for the prior year. During the nine-month period of Fiscal 1996,
the Company opened three new Pathmark 2000 format stores, two of which replaced
smaller stores, and completed 18 major renovations and enlargements to existing
supermarkets. Subsequent to November 2, 1996, the Company opened one new
Pathmark 2000 format store and plans to complete up to four major renovations
and enlargements during the remainder of Fiscal 1996.
Cash Flows:
Cash provided by operating activities amounted to $48.6 million in the
nine-month period of Fiscal 1996 compared to $97.9 million in the prior year.
The decrease in net cash provided by operating activities is primarily due to a
decline in cash provided by operating assets and liabilities and a decrease in
net earnings. Cash used for investing activities in the nine-month period of
Fiscal 1996 was $30.1 million primarily due to expenditures of property and
equipment, partially offset by proceeds from property dispositions. Cash
provided by investing activities in the nine-month period of Fiscal 1995 was
$12.4 million primarily reflecting the proceeds from the disposition of the
freestanding drug stores and the disposal of the home centers segment, partially
offset by the expenditures for property and equipment. Cash used for financing
activities in the nine-month period of Fiscal 1996 was $19.3 million compared to
$128.8 million in the prior year. The decrease in cash used for financing
activities is primarily due to an increase in borrowings under the Working
Capital Facility, 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, partially offset by a
decrease in book overdrafts.
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SUPERMARKETS GENERAL HOLDINGS CORPORATION
PART II. OTHER INFORMATION
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, 1996
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