-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FRnCVD3sWRabisctjWletxzZW8HCrLlqmXdlxC5wpJr6lXuHrhssojdZjKafATAr 73exr7WqcNDqQOTri8qKYw== 0001047469-98-044048.txt : 19981216 0001047469-98-044048.hdr.sgml : 19981216 ACCESSION NUMBER: 0001047469-98-044048 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUPERMARKETS GENERAL HOLDINGS CORP CENTRAL INDEX KEY: 0000821139 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 133408704 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16404 FILM NUMBER: 98769857 BUSINESS ADDRESS: STREET 1: 301 BLAIR RD STREET 2: P.O. BOX 5301 CITY: WOODBRIDGE STATE: NJ ZIP: 07095-0915 BUSINESS PHONE: 9084993000 MAIL ADDRESS: STREET 1: 301 BLAIR RD STREET 2: P.O. BOX 5301 CITY: WOODBRIDGE STATE: NJ ZIP: 07095-0915 10-Q 1 10-Q ================================================================================ 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 OCTOBER 31, 1998 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.) 200 MILIK STREET 07008 CARTERET, 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 October 31, 1998, 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. ================================================================================ 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 -------------------------- ------------------------- OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Sales............................................... $ 899,990 $ 901,006 $2,738,914 $2,755,313 Cost of sales (exclusive of depreciation and amortization shown separately below)............. 644,554 652,524 1,957,547 1,984,908 ---------- ---------- ---------- ---------- Gross profit........................................ 255,436 248,482 781,367 770,405 Selling, general and administrative expenses........ 210,389 205,318 625,922 630,796 Depreciation and amortization....................... 19,597 21,407 59,033 61,607 ---------- ---------- ---------- ---------- Operating earnings.................................. 25,450 21,757 96,412 78,002 Interest expense.................................... (39,774) (41,034) (121,173) (124,822) ---------- ---------- ---------- ---------- Loss before income tax (provision) benefit and extraordinary items.............................. (14,324) (19,277) (24,761) (46,820) Income tax (provision) benefit...................... (39) 7,815 (94) 18,703 ---------- ---------- ---------- ---------- Loss before extraordinary items..................... (14,363) (11,462) (24,855) (28,117) Extraordinary items, net of an income tax benefit.......................................... -- -- -- (7,488) ---------- ---------- ---------- ---------- Net loss............................................ (14,363) (11,462) (24,855) (35,605) Less: non-cash preferred stock accretion and dividend requirements............................ (4,778) (4,758) (14,318) (14,262) ---------- ---------- ---------- ---------- Net loss attributable to common stockholder......... $ (19,141) $ (16,220) $ (39,173) $ (49,867) ========== ========== ========== ==========
See notes to consolidated financial statements (unaudited). 1 SUPERMARKETS GENERAL HOLDINGS CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands except share amounts)
OCTOBER 31, JANUARY 31, 1998 1998 ------------ ------------ ASSETS Current Assets Cash and cash equivalents.......................................... $ 10,087 $ 62,914 Accounts receivable, net........................................... 12,875 11,519 Merchandise inventories............................................ 168,295 148,983 Deferred income taxes, net......................................... 4,505 8,492 Prepaid expenses................................................... 22,378 21,455 Due from suppliers................................................. 49,573 13,027 Other current assets............................................... 10,785 11,480 ------------ ------------ Total Current Assets............................................ 278,498 277,870 Property and Equipment, Net........................................... 492,235 530,716 Deferred Financing Costs, Net......................................... 16,255 18,547 Deferred Income Taxes, Net............................................ 47,363 46,279 Other Assets.......................................................... 39,200 34,342 ------------ ------------ $ 873,551 $ 907,754 ============ ============ LIABILITIES AND STOCKHOLDER'S DEFICIENCY Current Liabilities Accounts payable and book overdrafts............................... $ 118,279 $ 155,702 Current maturities of long-term debt............................... 19,250 43,478 Income taxes payable............................................... 412 372 Accrued payroll and payroll taxes.................................. 47,332 49,599 Current portion of lease obligations............................... 22,138 24,417 Accrued interest payable........................................... 39,255 18,300 Accrued expense and other current liabilities...................... 91,309 93,336 ------------ ------------ Total Current Liabilities....................................... 337,975 385,204 ------------ ------------ Long-Term Debt........................................................ 1,267,073 1,208,327 ------------ ------------ Lease Obligations, Long-Term.......................................... 164,403 170,471 ------------ ------------ Other Noncurrent Liabilities.......................................... 368,268 370,697 ------------ ------------ Redeemable Securities Exchangeable Preferred Stock, $.01 par value...................... 108,590 107,183 ------------ ------------ Authorized: 9,000,000 shares Issued and outstanding: 4,890,671 Liquidation preference, $25 per share: $122,267 Commitments and Contingencies (Note 6) Stockholder's Deficiency 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.................................................... 196,657 197,521 Accumulated Deficit................................................ (1,569,425) (1,531,659) ------------ ------------ Total Stockholder's Deficiency..................................... (1,372,758) (1,334,128) ------------ ------------ $ 873,551 $ 907,754 ============ ============
See notes to consolidated financial statements (unaudited). 2 SUPERMARKETS GENERAL HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY (UNAUDITED) (in thousands)
CLASS A CLASS B TOTAL COMMON COMMON PAID-IN ACCUMULATED STOCKHOLDER'S STOCK STOCK CAPITAL DEFICIT DEFICIENCY ------- ------- ----------- ------------ ------------- Balance, January 31, 1998....................... $ 7 $ 3 $ 197,521 $ (1,531,659) $ (1,334,128) Net loss........................................ -- -- -- (24,855) (24,855) Accrued dividends on preferred stock ($2.64 per share)......................... -- -- -- (12,911) (12,911) Accretion on preferred stock.................... -- -- (1,407) -- (1,407) Capital contributions from SMG-II Holdings Corporation...................... -- -- 543 -- 543 ------- ------- ----------- ------------ ------------- Balance, October 31, 1998....................... $ 7 $ 3 $ 196,657 $ (1,569,425) $ (1,372,758) ======= ======= =========== ============ ============= 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) ======= ======= =========== ============ =============
See notes to consolidated financial statements (unaudited). 3 SUPERMARKETS GENERAL HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
39 WEEKS ENDED --------------------------- OCTOBER 31, NOVEMBER 1, 1998 1997 ----------- ----------- Operating Activities Net loss $ (24,855) $ (35,605) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Extraordinary loss on early extinguishment of debt.............................. -- 7,488 Depreciation and amortization................................................... 61,811 64,624 Deferred income tax benefit..................................................... (581) (24,159) Interest accruable but not payable.............................................. 15,362 13,700 Amortization of original issue discount......................................... 1,008 2,484 Amortization of debt issuance costs............................................. 3,069 4,526 Gain (loss) on disposal of property and equipment............................... (4,560) 117 Cash provided by (used for) operating assets and liabilities: Accounts receivable, net...................................................... (1,356) 1,814 Merchandise inventories....................................................... (19,312) 14,204 Income taxes.................................................................. 3,524 3,335 Due from suppliers............................................................ (36,546) 2,744 Other current assets.......................................................... (2,383) (6,339) Other assets.................................................................. (2,689) 6,066 Accounts payable.............................................................. (17,225) (23,972) Accrued interest payable...................................................... 20,910 15,165 Accrued expenses and other current liabilities................................ (4,380) (3,142) Other noncurrent liabilities.................................................. (24,486) (17,573) ---------- --------- Cash provided by (used for) operating activities............................ (32,689) 25,477 ---------- --------- Investing Activities Property and equipment expenditures................................................ (27,932) (20,707) Proceeds from disposition of property and equipment................................ 28,377 25,475 ---------- --------- Cash provided by investing activities....................................... 445 4,768 ---------- --------- Financing Activities Increase (decrease) in Pathmark working capital facilities borrowings.............. 57,800 (48,300) Repayments of term loans........................................................... (5,674) (245,252) Decrease in book overdrafts........................................................ (20,198) (10,575) Increase in other borrowings....................................................... 26,652 1,956 Repayment of other long-term borrowings............................................ (29,459) (5,265) Reduction in lease obligations..................................................... (18,002) (15,955) Deferred financing fees............................................................ (777) (8,253) Capital contribution from SMG-II Holdings Corporation.............................. 246 -- Repayment of the PTK Exchangeable Guaranteed Debentures............................ (31,171) -- Borrowings under Term Loan in connection with the Credit Agreement................. -- 300,000 Premiums incurred in redemption of PTK Exchangeable Guaranteed Debentures and other borrowings............................................................ -- (132) ---------- --------- Cash used for financing activities.......................................... (20,583) (31,776) ---------- --------- Decrease in cash and cash equivalents................................................. (52,827) (1,531) Cash and cash equivalents at beginning of period...................................... 62,914 10,967 ---------- --------- Cash and cash equivalents at end of period............................................ $ 10,087 $ 9,436 ========== ========= Supplemental Disclosures of Cash Flow Information Interest paid...................................................................... $ 82,933 $ 87,138 ========== ========= Income taxes paid.................................................................. $ 908 $ 3,222 ========== ========= Noncash Investing and Financing Activities Capital lease obligations.......................................................... $ 10,425 $ 17,917 ========== =========
See notes to consolidated financial statements (unaudited). 4 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SUPERMARKETS GENERAL HOLDINGS CORPORATION 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 132 supermarkets as of October 31, 1998, 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 January 31, 1998, 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 January 31, 1998. Income taxes for the interim period are based on the estimated effective tax rate expected to be applicable for the full fiscal year. The Company has recorded a valuation allowance related to the income tax benefit for the third quarter and nine-month period of Fiscal 1998; therefore, no income tax benefit has been recognized. NOTE 2--LONG-TERM DEBT Long-term debt is comprised of the following (dollars in thousands):
OCTOBER 31, JANUARY 31, 1998 1998 ------------ ------------ Pathmark term loan ("Term Loan")..................................................... $ 257,576 $ 263,250 Pathmark working capital facility ("Working Capital Facility")....................... 57,800 -- 9.625% Pathmark Senior Subordinated Notes due 2003 ("Pathmark Senior Subordinated Notes")........................................... 438,400 438,134 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")............................................... 202,430 187,068 10.25% PTK Exchangeable Guaranteed Debentures due 2003 ("PTK Exchangeable Guaranteed Debentures")....................................... -- 30,429 Industrial revenue bonds............................................................. 8,529 6,375 Other debt (primarily mortgages)..................................................... 25,838 30,799 ------------ ------------ Total debt........................................................................... 1,286,323 1,251,805 Less: current maturities............................................................. 19,250 43,478 ------------ ------------ Long-term portion.................................................................... $ 1,267,073 $ 1,208,327 ============ ============
On May 12, 1998, the Company's wholly owned subsidiary PTK Holdings, Inc. ("PTK") repaid, at a discount, the PTK Exchangeable Guaranteed Debentures, totaling $31.2 million. 5 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED) NOTE 2--LONG-TERM DEBT--(CONTINUED) During the third quarter of Fiscal 1998, the Company paid in full $20.1 million of mortgages, due December 1998, on six properties through a $23.3 million refinancing of four of these properties. The new mortgages are payable in installments through Fiscal 2008, including a scheduled final payment of $18.6 million. In connection with the refinancing, $5.0 million was placed in escrow and the Company expects to receive such $5.0 million in the fourth quarter of Fiscal 1998. NOTE 3--STOCKHOLDER'S DEFICIENCY During the second quarter of Fiscal 1998, SMG-II issued restricted stock grants ("Stock Grants") to certain officers and key employees of the Company. The Stock Grants will vest in seven years or earlier with the occurrence of an employment-related event, as defined, and will be forfeited in their entirety upon the occurrence of a termination event, as defined. The Stock Grants were valued at $5.0 million at the date of issuance, based on an independent appraisal, and are being amortized as compensation expense in the Company's consolidated statements of operations over the seven-year vesting period, with a corresponding credit of $0.3 million to paid-in capital. During the second quarter of Fiscal 1998,in conjunction with the paydown of debt by PTK (see Note 2), the Company received a capital contribution from SMG-II of $0.25 million. NOTE 4--SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") SG&A for the nine-month period of Fiscal 1998 are net of a gain of $5.1 million related to the sale of certain real estate. NOTE 5--INTEREST EXPENSE Interest expense is comprised of the following (dollars in thousands):
13 WEEKS ENDED 39 WEEKS ENDED ------------------------- ------------------------- OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1, 1998 1997 1998 1997 --------- --------- --------- --------- Pathmark term loans................................ $ 5,275 $ 6,156 $ 15,940 $ 16,679 Pathmark working capital facilities................ 1,622 671 3,620 4,143 Pathmark Senior Subordinated Notes Amortization of original issue discount........ 88 88 266 265 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........................ 5,307 4,687 15,362 13,700 PTK Exchangeable Guaranteed Debentures Amortization of original issue discount........ -- 764 742 2,219 Amortization of debt issuance costs................ 1,016 1,016 3,069 4,526 Lease obligations.................................. 5,251 5,398 16,174 16,487 Other, net......................................... 1,792 2,831 7,733 8,536 --------- -------- ------- -------- Interest expense................................... $ 39,774 $ 41,034 $ 121,173 $ 124,822 ========= ======== ======= ========
The majority of the cash interest payments are scheduled in the second and fourth quarters. 6 SUPERMARKETS GENERAL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED) NOTE 6--CONTINGENCIES RICKEL: In connection with the sale of its home centers segment in Fiscal 1994, the Company, as lessor, entered into nine leases for certain of the Company's owned real estate properties, including a distribution center, with Rickel Home Centers, Inc. ("Rickel"), as tenant. In addition, the Company assigned to Rickel 26 third party leases. In 1996, Rickel filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. Subsequent to the filing, of the 35 locations leased to Rickel, Rickel entered into an agreement in 1998 to assign the leases of 16 locations to Staples, Inc., 10 leases have either been terminated or assigned to third parties and nine rejected leases are being actively marketed by the Company to other prospective tenants. Subsequent to the end of the third quarter of Fiscal 1998, the Company sold the distribution center, previously leased to Rickel, for $22.9 million. Management has assessed its exposure with respect to this matter and has concluded that it has sufficient reserves to cover any resulting liability, which may occur, including the future rent and real estate taxes, net of expected sublease recoveries and asset sales. 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 SUPERMARKETS GENERAL HOLDINGS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS SALES: Sales in the third quarter of Fiscal 1998 were $900.0 million compared to $901.0 million in the prior year, a decrease of 0.1%. For the nine-month period of Fiscal 1998, sales were $2,738.9 million compared to $2,755.3 million in the prior year, a decrease of 0.6%. However, same store sales increased 1.3% and 1.2% for the third quarter and nine-month period, respectively. Sales in the third quarter of Fiscal 1998 compared to the prior year were impacted by sold and closed stores, partially offset by same store sales increases. Sales in the nine-month period of Fiscal 1998 compared to the prior year were impacted by sold and closed stores, partially offset by new store openings and same store sales increases. The Company operated 132 and 135 supermarkets at the end of the third quarters of Fiscal 1998 and Fiscal 1997, respectively. GROSS PROFIT: Gross profit in the third quarter of Fiscal 1998 was $255.4 million or 28.4% of sales compared with $248.5 million or 27.6% of sales in the prior year. For the nine-month period of Fiscal 1998, gross profit was $781.4 million or 28.5% of sales compared to $770.4 million or 28.0% for the prior year. The increase in gross profit in both dollars and as a percentage of sales for the third quarter and nine-month period of Fiscal 1998 compared to the prior year was primarily due to the savings realized from the Company's outsourcing at the end of Fiscal 1997 of certain of its distribution center operations, lower shrink and improvements in the perishables mix. The cost of goods sold comparisons were affected by a pretax LIFO charge of $0.35 million and a pretax LIFO credit of $1.7 million in the third quarters of Fiscal 1998 and Fiscal 1997, respectively, and a pretax LIFO charge of $1.1 million and a pretax LIFO credit of $0.8 million in the nine-month periods of Fiscal 1998 and Fiscal 1997, respectively. The pretax LIFO credit for the prior year third quarter and nine-month period includes a $2.0 million gain on a LIFO liquidation related to the sale of the Company's pharmaceutical warehouse inventory to a wholesaler. SG&A: SG&A in the third quarter of Fiscal 1998 increased $5.1 million compared to the prior year and decreased $4.9 million in the nine-month period of Fiscal 1998 compared to the prior year. As a percentage of sales, SG&A was 23.4% in the third quarter of Fiscal 1998, up from 22.8% in the prior year and was 22.9% for the nine-month period of Fiscal 1998 and Fiscal 1997. The increase in SG&A in the third quarter of Fiscal 1998 compared to the prior year was primarily due to higher incentive and store labor expenses, partially offset by lower insurance expense. The decrease in SG&A in the nine-month period of Fiscal 1998 compared to the prior year was primarily due to the gain recognized on the sale of certain real estate, lower advertising and insurance expense, along with lower operating costs which resulted from sold and closed stores, partially offset by higher incentive expense. Excluding the gain on the sale of real estate, SG&A as a percentage of sales was 23.0% for the nine-month period of Fiscal 1998. DEPRECIATION AND AMORTIZATION: Depreciation and amortization of $19.6 million in the third quarter of Fiscal 1998 was $1.8 million lower than the prior year of $21.4 million. For the nine-month period of Fiscal 1998, depreciation and amortization of $59.0 million was $2.6 million lower than the prior year of $61.6 million. The decrease in depreciation and amortization expense in the third quarter and nine-month period of Fiscal 1998 compared to the prior year was primarily due to the sale of certain of the Company's distribution center facilities at the end of Fiscal 1997, as part of its transaction with C&S Wholesale Grocers, Inc. ("C&S"), partially offset by capital expenditures. Depreciation and amortization excludes video tape amortization, which is recorded in cost of goods sold, of $0.8 million and $0.9 million in the third quarters of Fiscal 1998 and Fiscal 1997, respectively, and $2.3 million and $2.6 million in the nine-month periods of Fiscal 1998 and Fiscal 1997, respectively. 8 SUPERMARKETS GENERAL HOLDINGS CORPORATION OPERATING EARNINGS: Operating earnings in the third quarter of Fiscal 1998 were $25.5 million compared with the prior year of $21.8 million. For the nine-month period of Fiscal 1998, operating earnings were $96.4 million compared with $78.0 million in the prior year. The increase in operating earnings in the third quarter of Fiscal 1998 compared to the prior year was due to higher gross profit and lower depreciation and amortization expense, partially offset by higher SG&A. The increase in operating earnings in the nine-month period of Fiscal 1998 compared to the prior year was due to higher gross profit, lower SG&A and lower depreciation and amortization expense. INTEREST EXPENSE: Interest expense was $39.8 million in the third quarter of Fiscal 1998 compared to $41.0 million in the prior year and $121.2 million for the nine-month period of Fiscal 1998 compared to $124.8 million in the prior year. The decrease in interest expense in the third quarter of Fiscal 1998 compared to the prior year was primarily due to reductions in the Term Loan, the paydown of certain mortgages, and the repayment of the PTK Exchangeable Guaranteed Debentures, partially offset by higher levels of borrowings under the Working Capital Facility and the debt accretion on the Deferred Coupon Notes. The decrease in interest expense in the nine-month period of Fiscal 1998 compared to the prior year was primarily due to reductions in the Term Loan, lower levels of borrowing under the working capital facilities, lower amortization of debt issuance costs, the paydown of certain mortgages and the repayment of the PTK Exchangeable Guaranteed Debentures, partially offset by the debt accretion on the Deferred Coupon Notes. 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 Company has recorded a valuation allowance related to the income tax benefit for the third quarter and nine-month period of Fiscal 1998; therefore, no income tax benefit has been recognized. The Company believes that it is more likely than not that the net deferred income tax assets of $51.9 million at October 31, 1998 will be realized through the implementation of tax strategies which could generate taxable income. The income tax benefit for the third quarter and nine-month period of Fiscal 1997 was $7.8 million and $18.7 million, respectively. During the nine-month period of Fiscal 1998, the Company made income tax payments of $0.9 million and received income tax refunds of $4.2 million. 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. EXTRAORDINARY ITEMS: During the second quarter of Fiscal 1997, in connection with the then executed $500 million bank credit agreement ("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. 9 SUPERMARKETS GENERAL HOLDINGS CORPORATION SUMMARY OF OPERATIONS: The Company's net loss in the third quarter of Fiscal 1998 was $14.4 million compared to a net loss of $11.5 million for the prior year. For the nine-month period of Fiscal 1998, the Company's net loss was $24.9 million compared to a net loss of $35.6 million in the prior year. The increase in net loss in the third quarter of Fiscal 1998 compared to the prior year was primarily due to a reduction in the income tax benefit, partially offset by higher operating earnings and lower interest expense. The decrease in net loss in the nine-month period of Fiscal 1998 compared to the prior year was primarily due to higher operating earnings and lower interest expense in Fiscal 1998 and the extraordinary loss in Fiscal 1997, partially offset by a reduction in the income tax benefit. EBITDA-FIFO: EBITDA-FIFO was $46.3 million and $42.5 million in the third quarters of Fiscal 1998 and Fiscal 1997, respectively and $154.1 million and $141.9 million for the nine-month periods of Fiscal 1998 and Fiscal 1997, respectively. EBITDA-FIFO represents net earnings before interest expense, income taxes, depreciation, amortization, the gain on sale of real estate and the LIFO charge. EBITDA-FIFO is a widely accepted financial indicator of a company's ability to service and/or incur debt. EBITDA-FIFO should not be construed as an alternative to, or a better indicator of, operating income or to 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 1998, total debt increased $34.5 million from Fiscal 1997 year end due to borrowings under the Working Capital Facility and debt accretion on the Deferred Coupon Notes, partially offset by the repayment of the PTK Exchangeable Debentures, reductions in the Term Loan and a net decrease in certain mortgages. Borrowings under the Working Capital Facility were $57.8 million at October 31, 1998 and $54.2 million at December 9, 1998. In addition, during the nine-month period of Fiscal 1998, total lease obligations decreased $8.3 million from Fiscal 1997 year end. During the third quarter of Fiscal 1998, the Company paid in full $20.1 million of mortgages, due December 1998, on six properties through a $23.3 million refinancing of four of these properties. The new mortgages are payable in installments through Fiscal 2008, including a scheduled final payment of $18.6 million. In connection with the refinancing, $5.0 million was placed in escrow and the Company expects to receive such $5.0 million in the fourth quarter of Fiscal 1998. During the first and second quarters of Fiscal 1998, the Company sold certain real estate for $26.9 million and recognized a gain of $5.1 million. The proceeds were used to pay down the related mortgages and a portion of the Working Capital Facility. Subsequent to the end of the third quarter of Fiscal 1998, the Company sold the distribution center, previously leased to Rickel, for $22.9 million. The proceeds were used to paydown a portion of the Working Capital Facility. The indebtedness under the Working Capital Facility and the Term Loan bear interest at floating rates and, therefore, 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. 10 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 Deferred Coupon Notes) are as follows (dollars in millions): PRINCIPAL FISCAL YEARS PAYMENTS ------------ --------- 1998(a)...................................... $ 7.0 1999......................................... 12.6 2000......................................... 75.5 2001......................................... 330.8 2002......................................... 196.3 2003......................................... 642.6 Thereafter................................... 21.5 --------- Total........................................ $ 1,286.3 ========= - -------------- (a) Subsequent to October 31, 1998 LIQUIDITY: The consolidated financial statements of the Company indicate that, at October 31, 1998, current liabilities exceeded current assets by $59.5 million and stockholder's deficiency was $1.4 billion. Cash used for operating activities was $32.7 million in the nine-month period of Fiscal 1998 compared to cash provided by operating activities of $25.5 million in the prior year. The change in cash flow from operating activities was primarily due to cash used for operating assets and liabilities, resulting from the paydown of trade accounts payable, through the utilization of the proceeds received at the end of Fiscal 1997 related to the C&S transaction, and an increase in due from suppliers related to the C&S transition, partially offset by a decrease in the net loss. Management believes that cash flows generated from operations (excluding the C&S transitional related items), 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 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 Subordinated Notes and Subordinated Debentures in Fiscal 2002. The Company expects that it will be necessary to refinance all or a portion of the Senior Subordinated Notes and the Deferred Coupon Notes 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 October 31, 1998 and, based on management's operating projections for Fiscal 1998, the Company believes that it will continue to be in compliance with its various 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 the Company'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 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, 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. 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 October 31, 1998, the unpaid dividends of $103.3 million were accrued and included in other noncurrent liabilities. CAPITAL EXPENDITURES: Capital expenditures for the third quarter of Fiscal 1998, including property acquired under capital leases, were $11.0 million compared to $11.3 million for the prior year and for the nine-month period of Fiscal 1998 were $38.4 million compared to $38.6 million for the prior year. During the nine-month period of Fiscal 1998, the Company completed nine renovations to existing supermarkets and closed three stores. During the remainder of Fiscal 1998, the Company expects to complete up to an aggregate of seven renovations and enlargements. The one supermarket the Company planned to open in the fourth quarter of Fiscal 1998 is expected to open in the first quarter of Fiscal 1999. Capital expenditures for Fiscal 1998, including property to be acquired under capital leases, are estimated to be $60.0 million. Management believes that cash flows generated from operations (excluding the C&S transitional items), supplemented by the unused borrowing capacity under the Working Capital Facility and the availability of capital lease financing, will be sufficient to provide for the Company's capital expenditure program. CASH FLOWS: Cash used for operating activities was $32.7 million in the nine-month period of Fiscal 1998 compared to cash provided by operating activities of $25.5 million in the prior year. The change in cash flow from operating activities was primarily due to cash used for operating assets and liabilities, resulting from the paydown of trade accounts payable, utilizing the proceeds received at the end of Fiscal 1997 related to the C&S transaction, and an increase in due from suppliers related to the C&S transition, partially offset by a decrease in the net loss. Cash provided by investing activities was $0.4 million in the nine-month period of Fiscal 1998 compared to $4.8 million in the prior year. The decrease in cash provided by investing activities was primarily due to an increase in expenditures of property and equipment, partially offset by an increase in proceeds from property dispositions. Cash used for financing activities was $20.6 million in the nine-month period of Fiscal 1998 compared to $31.8 million in the prior year. The decrease in cash used for financing activities was primarily due to an increase in borrowings under the Working Capital Facility in Fiscal 1998, as compared to the borrowings under the Term Loan, net of repaying in full the former term loan and former working capital facility in conjunction with the Credit Agreement in Fiscal 1997, partially offset by a decrease in book overdrafts related to the C&S transition and the repayment of the PTK Exchangeable Guaranteed Debentures. YEAR 2000 READINESS This disclosure is a Year 2000 Readiness Disclosure within the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998 to the extent that the disclosure relates to Year 2000 processing of the Company. The Company is preparing its computer systems and hardware to deal with the issues related to the year 2000 ("Year 2000"). This is necessary because certain programs have been written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process normal business transactions. In addition, many of the Company's vendors and service providers are also faced with similar issues related to the Year 2000. 12 SUPERMARKETS GENERAL HOLDINGS CORPORATION In order to address the Year 2000 issues, the Company has formed a project team of senior managers. This project team has assessed the Company's information systems, including its hardware, software programs and embedded systems contained in the Company's stores, distribution facilities and corporate headquarters. Based on the findings of this assessment, the Company has commenced a plan to upgrade or replace the Company's hardware and software programs to ensure Year 2000 readiness, as well as to assess the Year 2000 readiness of the Company's vendors and service providers. In addition, the Company's management is currently formulating contingency plans, which, in the event that the Company is unable to fully achieve Year 2000 readiness in a timely manner, or any of the Company's vendors or service providers fail to achieve Year 2000 readiness, may be implemented to minimize the risks of interruptions of the Company's business. The Audit Committee of the Board of Directors is advised periodically on the status of the Company's Year 2000 readiness program. The Company is communicating with its principal vendors to determine the extent to which it will be vulnerable to third-party Year 2000 readiness problems. Based on its assessment to date of the Year 2000 readiness of the Company's key suppliers, including C&S, vendors, service providers and other third parties on which the Company relies for business operations, the Company believes that its principal vendors, service providers and other third parties are taking action related to the Year 2000. The Company plans to test Year 2000 readiness with certain key suppliers; however, the Company has limited ability to test and control such third parties' Year 2000 readiness, and the Company cannot provide assurance that failure of such third parties to address the Year 2000 issue will not cause an interruption of the Company's business. The Company has committed significant resources in connection with resolving its Year 2000 issues. The Company expects that the principal costs will be those associated with the remediation and testing of its computer applications. Through IBM, this effort is under way across the Company and is following a process of inventory, analysis, modification, testing and implementation. A major portion of these costs will be met under the existing agreement with IBM through a repriorization of systems development projects, with the remainder representing incremental costs. Those systems development projects which have been deferred due to the Year 2000 readiness program are not deemed to be critical to the Company's operations. As of December 1, 1998, the Company believes that approximately 30% of its information systems are Year 2000 ready. The Company estimates that the total costs associated with achieving Year 2000 readiness will be approximately $17.0 million (of which approximately $5.0 million has been expended through October 31, 1998), consisting of system remediation costs of $9.0 million and equipment replacement of $8.0 million. The Company anticipates that it will finance the cost of its Year 2000 remediation using its existing sources of liquidity. The Company expects to complete its Year 2000 remediation by August 1999. However, the Company's ability to execute its plan in a timely manner may be adversely affected by a variety of factors, some of which are beyond the Company's control, including turnover of key employees, availability and continuity of IBM consultants and the potential for unforeseen implementation problems. The Company's business could be interrupted if the Year 2000 plan is not implemented in a timely manner, if the Company's vendors, service providers or other third parties are not Year 2000 ready or if the Company's contingency plans are not successful. Any such business interruptions could have a material adverse effect on the Company's results of operation, liquidity or financial condition by impairing its ability to process customer transactions as well as to order and receive merchandise for sale in a timely manner. FORWARD-LOOKING INFORMATION 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, the general economic conditions in the Company's trading areas and the ability of the Company, its key suppliers, vendors and others with whom the Company has significant business relationships to identify and remediate all Year 2000 issues. 13 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)EXHIBITS: none (b)REPORTS ON FORM 8-K: not applicable 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/ FRANK VITRANO -------------------------------- (FRANK VITRANO) SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER BY /s/ JOSEPH ADELHARDT -------------------------------- (JOSEPH ADELHARDT) SENIOR VICE PRESIDENT AND CONTROLLER, CHIEF ACCOUNTING OFFICER DATE: December 15, 1998 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Supermarkets General Holdings Corporation's Consolidated Statement of Operations for the 39 weeks ended October 31, 1998 and Consolidated Balance Sheet as of October 31, 1998 and is qualified in its etirety by reference to such financial statements. 1,000 12-MOS JAN-30-1999 OCT-31-1998 10,087 0 14,111 (1,236) 168,295 278,498 898,025 (405,790) 873,551 337,975 1,267,073 108,590 0 10 (1,372,758) 873,551 2,738,914 2,738,914 1,957,547 1,957,547 0 83 (121,173) (24,761) (94) (24,855) 0 0 0 (24,855) 0 0
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