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 November 2, 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
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(Registrant's telephone number, including area code)
NONE
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(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 November 29,
1996: 5,000 shares.
<PAGE> 1
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--November 2, 1996 and February 3, 1996
Statements of operations--13 weeks ended November 2, 1996 and October 28, 1995;
39 weeks ended November 2, 1996 and October 28, 1995
Statements of cash flows--39 weeks ended November 2, 1996 and October 28, 1995
Notes to financial statements--November 2, 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
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
STAR MARKETS COMPANY, INC.
BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
November 2, February 3,
1996 1996
----------- -----------
<S> <C> <C>
Assets
Current assets:
Accounts receivable, net of reserve for doubtful accounts
of $2,055 in November and $1,779 in February $ 14,495 $ 13,544
Inventory 69,645 62,915
Prepaid expenses 6,747 5,044
Deferred taxes 17,159 9,946
------------------------
Total current assets 108,046 91,449
Property and equipment at cost:
Land 31,015 32,402
Building 66,915 68,876
Equipment & fixtures 84,233 71,148
Leasehold improvements 38,395 28,670
------------------------
Total property & equipment 220,558 201,096
Less accumulated depreciation and amortization 31,044 19,423
------------------------
Net property and equipment 189,514 181,673
Other assets, net 33,554 25,885
Goodwill, net 134,073 136,442
========================
Total Assets $ 465,187 $ 435,449
========================
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 51,893 $ 39,770
Accrued payroll & benefits 11,866 12,509
Current portion self-insurance 8,653 7,967
Accrued interest 2,360 5,133
Other current liabilities 6,176 10,170
------------------------
Total current liabilities 80,948 75,549
Deferred taxes 17,159 9,946
Self-insurance and other liabilities 26,459 23,219
Long-term debt 267,625 257,400
Redeemable preferred stock, redemption value $11,000 10,206 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 85,101 73,692
Retained earnings (deficit) (22,311) (14,491)
------------------------
Total shareholder's equity 62,790 59,201
========================
Total Liabilities and Shareholder's Equity $ 465,187 $ 435,449
========================
</TABLE>
See accompanying notes.
<PAGE> 3
STAR MARKETS COMPANY, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks 39 Weeks 39 Weeks
Ended Ended Ended Ended
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 252,736 $ 205,423 $ 700,815 $ 607,628
Cost of goods sold 189,600 158,512 525,655 471,197
------------------------------------------------------
Gross profit 63,136 46,911 175,160 136,431
Operating and administrative expenses 51,746 38,495 144,910 111,929
Depreciation and amortization 5,770 4,743 16,278 13,979
------------------------------------------------------
Operating profit 5,620 3,673 13,972 10,523
Interest expense 7,303 6,830 21,504 20,409
Other (expenses) income, net 24 123 (40) 123
------------------------------------------------------
Loss before income taxes (1,659) (3,034) (7,572) (9,763)
Income taxes 117 62 248 186
------------------------------------------------------
Net loss $ (1,776) $ (3,096) $ (7,820) $ (9,949)
======================================================
</TABLE>
See accompanying notes.
<PAGE> 4
STAR MARKETS COMPANY, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
39 Weeks 39 Weeks
Ended Ended
November 2, October 28,
1996 1995
----------- -----------
<S> <C> <C>
Operating activities
Net loss $ (7,820) $ (9,949)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization of deferred financing costs 1,157 1,148
Depreciation and amortization 16,278 13,979
Loss (gain) on sale or disposal of property and equipment 42 (116)
Changes in operating assets and liabilities:
Accounts receivable (951) 2,090
Inventories (6,730) (5,604)
Prepaid expenses (1,703) (519)
Accounts payable 12,123 8,094
Accrued payroll and benefits (643) (1,915)
Self-insurance reserves 686 (419)
Accrued interest (2,773) 3,550
Other current liabilities (4,386) (2,483)
Other 294 (1,124)
-------- --------
Net cash provided by operating activities 5,574 6,732
Investing activities
Purchases of property and equipment (24,982) (45,430)
Proceeds from sale of property and equipment 4,326 34,809
Decrease in restricted cash 6,028
Purchase of Cape Ann Market, Inc. (5,247)
Acquisition of leasehold interests (19,860)
-------- --------
Net cash used in investing activities (34,488) (15,868)
Financing Activities
Net proceeds from revolving credit facility 10,600 14,800
Proceeds from note payable 4,087
Repayment of note payable (168)
Repayment of long-term debt (375) (375)
Preferred dividends paid (1,230) (608)
Deposits refunded (made) 4,000 (4,500)
Equity contribution 12,000
Deferred financing costs (181)
-------- --------
Net cash provided by financing activities 28,914 9,136
Net increase in cash and cash equivalents 0 0
Cash and cash equivalents beginning of period 0 0
======== ========
Cash and cash equivalents end of period $ 0 $ 0
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 23,013 $ 15,545
Cash paid for income taxes 340 336
</TABLE>
See accompanying notes.
<PAGE> 5
STAR MARKETS COMPANY, INC.
Notes to Financial Statements
November 2, 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 47 stores as of November 2, 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 39 week periods ended
November 2, 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.
<PAGE> 6
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 39 weeks ended November 2, 1996 are
referred to herein as "Quarter 1996" and "Interim 1996", respectively and the 13
weeks and 39 weeks ended October 28, 1995 are referred to as "Quarter 1995" and
"Interim 1995", respectively.
Late in Quarter 1996 the Company opened its first freestanding Wild Harvest
location, a new format which emphasizes natural/healthy foods. The Company
currently operates 20 superstores, 26 conventional stores, and one natural food
store. The Company also operates a wholesale food business.
Quarter 1996
- ------------
Revenues
- --------
Total revenues increased 23.0% in Quarter 1996 to $252.7 million from $205.4
million in Quarter 1995. Sales from retail operations for Quarter 1996 increased
27.7% to $233.4 million from $182.8 million for Quarter 1995. The growth in
retail sales was attributable both to an increase in the number of stores
operated and a 6.4% increase in comparable store sales in Quarter 1996. Revenues
from wholesale operations for Quarter 1996 declined 14.6% to $19.3 million from
$22.6 million for Quarter 1995. The decrease in wholesale sales was primarily
due to the loss of certain wholesale accounts which ceased operations due to
increased competition in their respective trading areas.
Gross Profit
- ------------
Gross profit increased 34.6% in Quarter 1996 to $63.1 million from $46.9 million
in Quarter 1995. Gross profit as a percentage of total revenues increased to
25.0% in Quarter 1996 from 22.8% in Quarter 1995. Gross profit from retail
operations increased 36.2% in Quarter 1996 to $61.9 million from $45.5 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
26.5% in Quarter 1996 from 24.9% 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 17.3% to $1.2 million from $1.4 million in
Quarter 1995. Gross profit as a percentage of wholesale revenues for Quarter
1996 decreased to 6.1% from 6.3% in Quarter 1995.
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses increased by 34.4% to $51.7 million in
Quarter 1996 from $38.5 million in Quarter 1995. Operating and administrative
expenses as a percentage of total revenues increased to 20.5% in Quarter 1996
from 18.7% in Quarter 1995.
<PAGE> 7
Operating and administrative expenses as a percentage of total revenues 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 which occurred in October 1995 and January
1996, 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
$6.8 million in Quarter 1995.
Interim 1996
- ------------
Revenues
- --------
Total revenues in Interim 1996 increased 15.3% to $700.8 million from $607.6
million in Interim 1995. Sales from retail operations for Interim 1996 increased
19.2% to $642.6 million from $539.2 million for Interim 1995. The growth in
retail sales was attributable both to an increase in the number of stores
operated and a 4.2% increase in comparable store sales. Revenues from wholesale
operations for Interim 1996 declined 15.0% to $58.2 million from $68.4 million
for Interim 1995. The decrease in wholesale sales was primarily due to the loss
of certain wholesale accounts which ceased operations due to increased
competition in their respective trading areas.
Gross Profit
- ------------
Gross profit increased 28.4% in Interim 1996 to $175.2 million from $136.4
million in Interim 1995. Gross profit as a percentage of total revenues
increased to 25.0% in Interim 1996 from 22.5% in Interim 1995. Gross profit from
retail operations increased 30.0% in Interim 1996 to $171.2 million from $132.0
million in Interim 1995. Gross profit as a percentage of sales for retail
operations increased to 26.7% in Interim 1996 from 24.5% 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 19.7% to
$3.6 million from $4.5 million in Interim 1995. Gross profit as a percentage of
wholesale revenues decreased to 6.2% in Interim 1996 from 6.5% in Interim 1995.
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses increased by 29.5% to $144.9 million in
Interim 1996 from $111.9 million in Interim 1995. Operating and administrative
expenses as a percentage of total revenues increased to 20.7% in Interim 1996
from 18.4% in Interim 1995.
<PAGE> 8
Operating and administrative expenses as a percentage of total revenues 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 which occurred in October 1995 and January
1996, 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 $21.5 million in Interim 1996 and
$20.4 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 November 29, 1996 the Company's debt included (i) $108.6 million in
borrowings under the term loan portion of the Senior Credit Facility, (ii) $53.1
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
November 29, 1996 the Company had $6.9 million drawn under the letter of credit
facilities of the Senior Credit Facility and $53.1 million drawn under the
revolving credit portion of the Senior Credit Facility, leaving an aggregate of
$15.0 million of unused revolving credit available under the Senior Credit
Facility.
The Company currently plans to make total capital expenditures of approximately
$53.3 million in fiscal 1996, which includes the cost of acquiring 10 locations
in the previous quarter. Capital expenditures for Quarter 1996 were $6.2 million
compared with $18.5 million in Quarter 1995. For Interim 1996, capital
expenditures were $44.8 million compared with $50.0 million in Interim 1995.
Capital expenditures include the acquisition of 10 locations from The Stop &
Shop Companies, Inc., costs to convert the 10 acquired locations to Star
formats, expanding and remodeling one conventional store, remodeling two
superstores, and costs to convert a conventional store which closed during the
previous quarter to the new Wild Harvest format. The Company's fiscal 1996
capital expenditure plan also includes spending for maintenance, information
systems, and distribution.
<PAGE> 9
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 1997
to permit it to fund planned capital expenditures and working capital
requirements and make all interest and principal payments due on the
Subordinated Notes and existing indebtedness. 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.
<PAGE> 10
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 November
2, 1996.
<PAGE> 11
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:December 13, 1996 By: Robert R. Spellman
-----------------------------------------
Robert R. Spellman
Executive Vice President,
Chief Financial and Accounting Officer
<PAGE> 12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING BALANCE SHEETS AS OF NOVEMBER 2, 1996 AND FEBRUARY 3, 1996; THE
ACCOMPANYING STATEMENTS OF OPERATIONS FOR THE 13 WEEK AND 39 WEEK PERIODS ENDED
NOVEMBER 2, 1996 AND OCTOBER 28, 1995; AND THE ACCOMPANYING STATEMENTS OF CASH
FLOWS FOR THE 39 WEEK PERIODS ENDED NOVEMBER 2, 1996 AND OCTOBER 28, 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-1-1997
<PERIOD-END> NOV-2-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 14,495
<ALLOWANCES> 2,055
<INVENTORY> 69,645
<CURRENT-ASSETS> 108,046
<PP&E> 220,538
<DEPRECIATION> 31,044
<TOTAL-ASSETS> 465,187
<CURRENT-LIABILITIES> 80,948
<BONDS> 267,625
10,206
0
<COMMON> 0
<OTHER-SE> 85,101
<TOTAL-LIABILITY-AND-EQUITY> 465,187
<SALES> 252,736
<TOTAL-REVENUES> 252,736
<CGS> 189,600
<TOTAL-COSTS> 57,516
<OTHER-EXPENSES> (24)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,303
<INCOME-PRETAX> (1,659)
<INCOME-TAX> 117
<INCOME-CONTINUING> (1,776)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,776)
<EPS-PRIMARY> (355.20)
<EPS-DILUTED> (355.20)
</TABLE>
