UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended August 3, 1996
Commission File Number: 33-86690
STAR MARKETS COMPANY, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3243710
( State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
625 MT. AUBURN STREET, CAMBRIDGE, MA 02138
(Address of principal executive offices) (Zip Code)
(617) 528-2550
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
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 and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
Number of shares of the issuer's common stock, outstanding as of September
5, 1996: 5,000 shares.
STAR MARKETS COMPANY, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
The following statements of Star Markets Company, Inc. are included
herein:
Balance sheets - August 3, 1996 and February 3, 1996
Statements of operations - 13 weeks ended August 3, 1996 and July 29,
1995;
26 weeks ended August 3, 1996 and July 29,
1995
Statements of cash flows - 26 weeks ended August 3, 1996 and July 29,
1995
Notes to financial statements - August 3, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Signatures
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
STAR MARKETS COMPANY, INC.
BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
August 3, February 3,
1996 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 751 $ 0
Accounts receivable, net of reserve
for doubtful accounts of $2,058 in
August and $1,779 in February 13,884 13,544
Inventory 62,215 62,915
Prepaid expenses 5,993 5,044
Deferred taxes 14,442 9,946
----------------------
Total current assets 97,285 91,449
Property and equipment at cost:
Land 31,015 32,402
Building 66,595 68,876
Equipment & fixtures 81,296 71,148
Leasehold improvements 36,047 28,670
----------------------
Total property & equipment 214,953 201,096
Less accumulated depreciation and
amortization 26,956 19,423
----------------------
Net property and equipment 187,997 181,673
Other assets, net 34,012 25,885
Goodwill, net 134,957 136,442
----------------------
Total Assets $454,251 $435,449
======================
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 45,168 $ 39,770
Accrued payroll & benefits 10,793 12,509
Current portion self-insurance 9,216 7,967
Accrued interest 4,233 5,133
Other current liabilities 8,469 10,170
----------------------
Total current liabilities 77,879 75,549
Deferred taxes 14,442 9,946
Self-insurance and other liabilities 26,549 23,219
Long-term debt 260,425 257,400
Redeemable preferred stock, redemption
value $11,000 10,182 10,134
Shareholder's equity:
Common stock, $.01 par value, 10,000
shares authorized and 5,000 shares
outstanding 0 0
Additional paid-in-capital 85,309 73,692
Retained earnings (deficit) (20,535) (14,491)
----------------------
Total shareholder's equity 64,774 59,201
----------------------
Total Liabilities and Shareholder's
Equity $454,251 $435,449
======================
</TABLE>
See accompanying notes.
STAR MARKETS COMPANY, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks 26 Weeks 26 Weeks
Ended Ended Ended Ended
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $231,024 $204,015 $448,079 $402,205
Cost of goods sold 173,723 157,599 336,055 312,685
-----------------------------------------------------
Gross profit 57,301 46,416 112,024 89,520
Operating and administrative
expenses 47,932 37,581 93,164 73,434
Depreciation and amortization 5,402 4,538 10,508 9,236
-----------------------------------------------------
Operating profit 3,967 4,297 8,352 6,850
Interest expense 7,267 6,883 14,201 13,579
Other (expenses) income, net (10) (12) (64) 0
-----------------------------------------------------
Loss before income taxes (3,310) (2,598) (5,913) (6,729)
Income taxes 63 62 131 124
-----------------------------------------------------
Net loss $ (3,373) $ (2,660) $ (6,044) $ (6,853)
=====================================================
</TABLE>
See accompanying notes.
STAR MARKETS COMPANY, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
26 Weeks Ended 26 Weeks Ended
August 3, July 29,
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Operating activities
Net loss $ (6,044) $ (6,853)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Amortization of deferred financing costs 772 764
Depreciation and amortization 10,508 9,236
Loss on sale or disposal of property and
equipment 64 5
Changes in operating assets and
liabilities:
Accounts receivable (340) 476
Inventories 700 5,232
Prepaid expenses (949) 526
Accounts payable 5,398 1,587
Accrued payroll and benefits (1,716) (2,608)
Self-insurance reserves 1,249 (963)
Accrued interest (900) 952
Other current liabilities (2,392) 2,692
Other 203 (1,386)
-------------------------
Net cash provided by operating activities 6,553 9,660
Investing activities
Purchases of property and equipment (19,011) (27,084)
Proceeds from sale of property and equipment 4,302 3,931
Decrease in restricted cash 6,028
Purchase of Cape Ann Market, Inc. (5,140)
Acquisition of leasehold interests (19,621)
--------------------------
Net cash used in investing activities (28,302) (28,293)
Financing Activities
Net proceeds from revolving credit facility 3,400 19,700
Proceeds from note payable 4,087
Repayment of long-term debt (375)
Preferred dividends paid (612) (608)
Deposits refunded 4,000
Equity contribution 12,000
Deferred financing costs (181)
--------------------------
Net cash provided by financing activities 22,500 18,911
Net increase in cash and cash equivalents 751 278
Cash and cash equivalents beginning of period 0 0
--------------------------
Cash and cash equivalents end of period $ 751 $ 278
==========================
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 14,580 $ 11,729
Cash paid for income taxes 226 271
</TABLE>
See accompanying notes.
STAR MARKETS COMPANY, INC.
Notes to Financial Statements
August 3, 1996
(Unaudited)
Note 1 - Background
Star Markets Company, Inc., a Massachusetts corporation ("Star" or the
"Company"), is a leading food retailer in the metropolitan Boston area,
operating 46 stores as of August 3, 1996. Additionally, the Company operates
a wholesale business which provides warehousing, distribution and certain
administrative services to independent store locations throughout the New
England area.
The Company is a wholly-owned subsidiary of Star Markets Holdings, Inc., a
Massachusetts corporation ("Holdings"). Both Holdings and the Company were
formed for purposes of acquiring the business and assets of the Star Market
operating division of Jewel Food Stores, Inc. in September 1994. Companies
affiliated with INVESTCORP S.A. ("Investcorp") own all of the currently
outstanding voting stock of Holdings.
Note 2 - Basis of Presentation
The unaudited financial information furnished herein reflects all
adjustments, which in the opinion of management are of a normal recurring
nature, to fairly state the Company's financial position and results of
operations for the periods presented. The results of operations for the 13
week and 26 week periods ended August 3, 1996 are not necessarily indicative
of the results to be expected for the entire year ending February 1, 1997.
For further information, refer to the financial statements and footnotes
thereto included in the Registrant Company's annual report on Form 10-K for
the year ended February 3, 1996.
Note 3 - Accounting Policy
Effective February 4, 1996, the Company adopted the provisions of 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
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amounts. There was no effect on the financial statements
due to the adoption of the provisions of this statement.
STAR MARKETS COMPANY, INC.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Results of Operations
Results of operations for the 13 weeks and 26 weeks ended August 3, 1996 are
referred to herein as "Quarter 1996" and "Interim 1996", respectively and
the 13 weeks and 26 weeks ended July 29, 1995 are referred to as "Quarter
1995" and "Interim 1995", respectively.
Quarter 1996
Revenues
Total revenues increased 13.2% in Quarter 1996 to $231.0 million from $204.0
million in Quarter 1995. Sales from retail operations for Quarter 1996
increased 16.7% to $210.8 million from $180.6 million for Quarter 1995. The
growth in retail sales was attributable both to an increase in the number of
stores operated and a 5.2% increase in comparable store sales in Quarter
1996. Revenues from wholesale operations for Quarter 1996 declined 13.4% to
$20.3 million from $23.4 million for Quarter 1995. The decrease in wholesale
sales was primarily due to the loss of three wholesale accounts which ceased
operations due to increased competition in their respective trading areas.
Gross Profit
Gross profit increased 23.5% in Quarter 1996 to $57.3 million from $46.4
million in Quarter 1995. Gross profit as a percentage of total revenues
increased to 24.8% in Quarter 1996 from 22.8% in Quarter 1995. Gross profit
from retail operations increased 25.4% in Quarter 1996 to $56.1 million from
$44.8 million in Quarter 1995 due to the increase in retail sales and to an
increase in margin rate. Gross profit as a percentage of sales for retail
operations increased to 26.6% in Quarter 1996 from 24.8% in Quarter 1995.
The increase in gross profit as a percentage of sales was primarily due to
improvements in merchandising margin, particularly in perishable categories.
Gross profit from wholesale operations for Quarter 1996 decreased 28.6% to
$1.2 million from $1.7 million in Quarter 1995. Gross profit as a percentage
of wholesale revenues for Quarter 1996 decreased to 5.9% from 7.1% in
Quarter 1995, primarily due to a decrease in margins in non-perishable
categories.
Operating and Administrative Expenses
Operating and administrative expenses increased by 27.5% to $47.9 million in
Quarter 1996 from $37.6 million in Quarter 1995. Operating and
administrative expenses as a percentage of total revenues increased to 20.7%
in Quarter 1996 from 18.4% in Quarter 1995. Operating and administrative
expenses as a percentage of total revenues continue to exceed prior year
rates due to a number of factors, including an increase in retail operations
which incur a higher rate of operating and administrative expenses than
wholesale operations, an increase in rent expense during Quarter 1996 as a
result of sale-leaseback transactions, and additional administrative costs
as the Company continues to grow.
Interest Expense
Net interest expense, primarily related to interest expense on debt incurred
to finance the acquisition of the Company, was $7.3 million in Quarter 1996
and $6.9 million in Quarter 1995.
Interim 1996
Revenues
Total revenues in Interim 1996 increased 11.4% to $448.1 million from $402.2
million in Interim 1995. Sales from retail operations for Interim 1996
increased 14.8% to $409.2 million from $356.4 million for Interim 1995. The
growth in retail sales was attributable both to an increase in the number of
stores operated and a 3.0% increase in comparable store sales. Revenues from
wholesale operations for Interim 1996 declined 15.2% to $38.8 million from
$45.8 million for Interim 1995. The decrease in wholesale sales was
primarily due to the loss of three wholesale accounts which ceased
operations due to increased competition in their respective trading areas.
Gross Profit
Gross profit increased 25.1% in Interim 1996 to $112.0 million from $89.5
million in Interim 1995. Gross profit as a percentage of total revenues
increased to 25.0% in Interim 1996 from 22.3% in Interim 1995. Gross profit
from retail operations increased 26.7% in Interim 1996 to $109.6 million
from $86.5 million in Interim 1995. Gross profit as a percentage of sales
for retail operations increased to 26.8% in Interim 1996 from 24.3% in
Interim 1995. The increase in gross profit as a percentage of sales was
primarily due to improvements in merchandising margin, particularly in
perishable categories. Gross profit from wholesale operations for Interim
1996 decreased by 20.9% to $2.4 million from $3.0 million in Interim 1995.
Gross profit as a percentage of wholesale revenues decreased to 6.2% in
Interim 1996 from 6.6% in Interim 1995.
Operating and Administrative Expenses
Operating and administrative expenses increased by 26.9% to $93.2 million in
Interim 1996 from $73.4 million in Interim 1995. Operating and
administrative expenses as a percentage of total revenues increased to 20.8%
in Interim 1996 from 18.3% in Interim 1995. Operating and administrative
expenses as a percentage of total revenues continue to exceed prior year
rates due to a number of factors, including an increase in retail operations
which incur a higher rate of operating and administrative expenses than
wholesale operations, an increase in rent expense during Interim 1996 as a
result of sale-leaseback transactions, and additional administrative costs
as the Company continues to grow.
Interest Expense
Net interest expense, primarily related to interest expense on debt incurred
to finance the acquisition of the Company, was $14.2 million in Interim 1996
and $13.6 million in Interim 1995.
Liquidity and Capital Resources
The Company's liquidity needs arise primarily from debt service on the
indebtedness incurred in connection with the acquisition of the Company, and
funding of the Company's capital expenditure and working capital
requirements.
As of September 5, 1996 the Company's debt included (i) $108.6 million in
borrowings under the term loan portion of the Senior Credit Facility, (ii)
$39.8 million in borrowings under the revolving credit portion of the Senior
Credit Facility, and (iii) $110.0 million in Senior Subordinated Notes due
2004. At September 5, 1996 the Company had $10.0 million drawn under the
letter of credit facilities of the Senior Credit Facility and $39.8 million
drawn under the revolving credit portion of the Senior Credit Facility,
leaving an aggregate of $25.2 million of unused revolving credit available
under the Senior Credit Facility.
In July 1996, the Company completed the purchase of 10 locations from the
Shop & Stop Companies, Inc. ("Stop & Shop"), for an aggregate purchase price
of $28.0 million excluding related fees and inventory. The acquisitions were
partially funded by an equity contribution of $12.0 million from certain of
the Company's existing shareholders. Nine of the locations opened late
in Quarter 1996. Four of the locations are operated as superstores and five
as conventional stores. One of the new superstores is a replacement store
for a conventional store which closed in Quarter 1996. The Company will
convert the remaining acquired location, and the conventional store which
closed during Quarter 1996 to a new format which emphasizes natural/healthy
foods. The two stores are expected to open later in fiscal 1996.
In addition to the acquisition cost of the 10 locations, the Company
currently plans to make total capital expenditures of approximately $23.2
million in fiscal 1996. Capital expenditures for Quarter 1996 including the
acquisition, were $33.3 million compared with $25.3 million in Quarter 1995.
For Interim 1996, capital expenditures were $38.6 million compared with
$31.5 million in Interim 1995. Capital expenditures include expanding and
remodeling one conventional store, remodeling two superstores, the
acquisition of the 10 Stop & Shop locations and costs to convert the 10
acquired locations to the Star format. The Company's fiscal 1996 capital
expenditure plan also includes spending for maintenance, information
systems, and distribution.
In addition to the equity contribution from certain of its existing
shareholders, the Company believes that funds generated from operations,
proceeds from sale-leaseback transactions of currently owned properties, and
borrowings under the Senior Credit Facility will provide sufficient
resources through fiscal 1996 to permit it to meet its working capital
requirements, to make all interest and principal payments due and payable on
the Subordinated Notes and its existing indebtedness and planned capital
expenditures. However, if the Company's cash flow and capital resources are
insufficient to fund its debt service obligations, the Company may be
required to reduce or delay planned capital expenditures, sell assets,
obtain additional equity capital or restructure debt.
STAR MARKETS COMPANY, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
The following exhibits are included herein:
(27) Financial Data Schedule
The Company did not file any reports on Form 8-K for the 13 weeks ended
August 3, 1996.
STAR MARKETS COMPANY, INC.
Signatures
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.
Star Markets Company, Inc.
(Registrant)
Date: September 16, 1996 By: Robert R. Spellman
Robert R. Spellman
Executive Vice President,
Chief Financial and Accounting
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING BALANCE SHEETS AS OF AUGUST 3, 1996 AND FEBRUARY 3, 1996; THE
ACCOMPANYING STATEMENTS OF OPERATIONS FOR THE 13 WEEK AND 26 WEEK PERIODS ENDED
AUGUST 3, 1996 AND JULY 29, 1995; AND THE ACCOMPANYING STATEMENTS OF CASH FLOWS
FOR THE 26 WEEK PERIODS ENDED AUGUST 3, 1996 AND JULY 29, 1995 FOR STAR MARKETS
COMPANY, INC., AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> AUG-03-1996
<CASH> 751
<SECURITIES> 0
<RECEIVABLES> 13,884
<ALLOWANCES> 2,058
<INVENTORY> 62,215
<CURRENT-ASSETS> 97,285
<PP&E> 214,953
<DEPRECIATION> 26,956
<TOTAL-ASSETS> 454,251
<CURRENT-LIABILITIES> 77,879
<BONDS> 260,425
10,182
0
<COMMON> 0
<OTHER-SE> 85,309
<TOTAL-LIABILITY-AND-EQUITY> 454,251
<SALES> 231,024
<TOTAL-REVENUES> 231,024
<CGS> 173,723
<TOTAL-COSTS> 53,334
<OTHER-EXPENSES> 10
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,267
<INCOME-PRETAX> (3,310)
<INCOME-TAX> 63
<INCOME-CONTINUING> (3,373)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,373)
<EPS-PRIMARY> (674.60)
<EPS-DILUTED> (674.60)
</TABLE>
