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 2, 1997
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
- -------------------------------------------------------------------------------
(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 3,
1997: 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 - August 2, 1997 and February 1, 1997
Statements of operations - 13 weeks ended August 2, 1997 and August
3, 1996; 26 weeks ended August 2, 1997 and August 3, 1996
Statements of cash flows - 26 weeks ended August 2, 1997 and
August 3, 1996
Notes to financial statements - August 2, 1997.
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.
Signature
<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>
August 2, February 1,
1997 1997
--------- -----------
<S> <C> <C>
Assets
Current assets:
Accounts receivable, net of reserve for doubtful accounts
of $1,440 in August and $1,589 in February $ 18,605 $ 21,815
Inventory 65,723 65,550
Prepaid expenses 5,106 4,959
-----------------------
Total current assets 89,434 92,324
Property and equipment at cost:
Land 20,894 31,015
Building 51,781 66,603
Equipment & fixtures 100,443 88,623
Leasehold improvements 56,153 44,024
-----------------------
Total property & equipment 229,271 230,265
Less accumulated depreciation and amortization 43,330 35,569
-----------------------
Net property and equipment 185,941 194,696
Other assets, net 32,428 33,058
Goodwill, net 131,427 133,192
-----------------------
Total Assets $ 439,230 $ 453,270
=======================
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 45,086 $ 46,798
Accrued payroll & benefits 11,367 12,842
Current portion self-insurance 8,914 8,121
Accrued interest 6,066 6,003
Other current liabilities 9,932 13,637
-----------------------
Total current liabilities 81,365 87,401
Other liabilities 23,358 22,732
Long-term debt 269,419 271,827
Redeemable preferred stock, redemption value $11,000 10,278 10,230
Shareholder's equity:
Common stock, $.01 par value, 10,000 shares authorized
and 5,000 shares outstanding 0 0
Additional paid-in-capital 84,522 84,907
Retained earnings (deficit) (29,712) (23,827)
-----------------------
Total shareholder's equity 54,810 61,080
-----------------------
Total Liabilities and Shareholder's Equity $ 439,230 $ 453,270
=======================
</TABLE>
See accompanying notes.
<PAGE> 3
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 2, August 3, August 2, August 3,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues $ 259,943 $ 231,024 $ 504,464 $ 448,079
Cost of goods sold 192,179 173,723 372,598 336,055
------------------------------------------------
Gross profit 67,764 57,301 131,866 112,024
Operating and administrative expenses 56,652 47,932 111,086 93,164
Depreciation and amortization 5,798 5,402 11,564 10,508
------------------------------------------------
Operating profit 5,314 3,967 9,216 8,352
Interest expense 7,563 7,267 14,751 14,201
Other (expenses) income, net 27 (10) (186) (64)
------------------------------------------------
Loss before income taxes (2,222) (3,310) (5,721) (5,913)
Income taxes 83 63 164 131
------------------------------------------------
Net loss $ (2,305) $ (3,373) $ (5,885) $ (6,044)
================================================
</TABLE>
See accompanying notes.
<PAGE> 4
STAR MARKETS COMPANY, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
26 Weeks 26 Weeks
Ended Ended
August 2, August 3,
1997 1996
---------- ----------
<S> <C> <C>
Operating activities
Net loss $ (5,885) $ (6,044)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Amortization of deferred financing costs 807 772
Depreciation and amortization 11,564 10,508
Loss on sale or disposal of property and equipment 185 64
Changes in operating assets and liabilities:
Accounts receivable 3,210 (340)
Inventories (173) 700
Prepaid expenses (147) (949)
Accounts payable (1,712) 5,398
Accrued payroll and benefits (1,475) (1,716)
Self-insurance reserves 793 1,249
Accrued interest 63 (900)
Other current liabilities (3,041) (2,392)
Other 352 203
------------------------
Net cash provided by operating activities 4,541 6,553
Investing activities
Purchases of property and equipment (20,514) (19,011)
Proceeds from sale of property and equipment 20,134 4,302
Decrease in restricted cash 6,028
Acquisition of leasehold interests (19,621)
------------------------
Net cash used in investing activities (380) (28,302)
Financing Activities
Net (repayment) proceeds from revolving credit facility (2,900) 3,400
Proceeds from note payable 4,087
Repayment of long-term debt (1,153) (375)
Preferred dividends paid (608) (612)
Equity contribution 12,000
Deposits refunded 500 4,000
------------------------
Net cash (used in) provided by financing activities (4,161) 22,500
Net increase in cash and cash equivalents 0 751
Cash and cash equivalents beginning of period 0 0
------------------------
Cash and cash equivalents end of period $ 0 $ 751
========================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 13,881 $ 14,580
Cash paid for income taxes 242 226
</TABLE>
See accompanying notes.
<PAGE> 5
STAR MARKETS COMPANY, INC.
Notes to Financial Statements
August 2, 1997
(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 49 stores as of August 2, 1997. The Company operates three store
formats consisting of 22 superstores, 25 conventional supermarkets, and two
Wild Harvest stores (which emphasize natural, healthy foods). 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.
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 2, 1997 are not necessarily indicative of the results to
be expected for the entire year ending January 31, 1998. 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 1, 1997.
<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 26 weeks ended August 2, 1997 are
referred to herein as "Quarter 1997" and "Interim 1997," respectively, and the
13 weeks and 26 weeks ended August 3, 1996 are referred to as "Quarter 1996"
and "Interim 1996," respectively.
During Quarter 1997, the Company opened a new superstore and remodeled three
superstores. Subsequent to the Quarter 1997, the Company acquired one
conventional store. The Company currently operates 22 superstores, 26
conventional supermarkets, and two Wild Harvest stores (which emphasize
natural, healthy foods). The Company also operates a wholesale food business.
Quarter 1997
- ------------
Revenues
- --------
Total revenues increased 12.5% in Quarter 1997 to $259.9 million from $231.0
million in Quarter 1996. Sales from retail operations in Quarter 1997 increased
14.4% to $241.2 million from $210.8 million in Quarter 1996. The growth in
retail sales was primarily attributable to an increase in the number of retail
stores operated. Comparable store sales increased by 0.2% in Quarter 1997.
Revenues from wholesale operations in Quarter 1997 declined 7.4% to $18.8
million from $20.3 million in Quarter 1996.
Gross Profit
- ------------
Gross profit increased 18.3% in Quarter 1997 to $67.8 million from $57.3
million in Quarter 1996. Gross profit as a percentage of total revenues
increased to 26.1% in Quarter 1997 from 24.8% in Quarter 1996. Gross profit
from retail operations increased 18.4% in Quarter 1997 to $66.4 million from
$56.1 million in Quarter 1996 primarily due to the increase in retail revenues.
Gross profit as a percentage of sales for the retail operations increased to
27.5% in Quarter 1997 from 26.6% in Quarter 1996. The increase in gross profit
as a percentage of sales was due primarily to improvements in perishable
margins and leveraged distribution costs. Gross profit from wholesale
operations in Quarter 1997 increased 12.8% to $1.3 million from $1.2 million in
Quarter 1996. Gross profit as a percentage of wholesale revenues in Quarter
1997 increased to 7.1% from 5.9% in Quarter 1996, primarily due to improvement
in product margin, as well as leveraged distribution costs.
<PAGE> 7
STAR MARKETS COMPANY, INC.
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses increased by 18.1% to $56.6 million in
Quarter 1997 from $47.9 million in Quarter 1996. Operating and administrative
expenses as a percentage of total revenues increased to 21.8% in Quarter 1997
from 20.7% in Quarter 1996. The increase in operating and administrative
expenses as a percentage of total revenues was primarily due to an increase in
retail operations which incur a higher rate of operating and administrative
expenses than wholesale operations, and an increase in rent expense, including
both rent expense for new locations and rent associated with the February 1997
sale leaseback of one operating location.
Interest Expense
- ----------------
Net interest expense, primarily related to interest expense on debt incurred to
finance the acquisition of the Company, was $7.6 million in Quarter 1997. Net
interest expense was $7.3 million in Quarter 1996.
Interim 1997
- ------------
Revenues
- --------
Total revenues increased 12.6% in Interim 1997 to $504.5 million from $448.1
million in Interim 1996. Sales from retail operations in Interim 1997 increased
14.6% to $469.1 million from $409.2 million in Interim 1996. The growth in
retail sales was attributable both to an increase in the number of retail
stores operated and a 1.0% increase in comparable store sales. Revenues from
wholesale operations in Interim 1997 declined 8.9% to $35.4 million from $38.8
million in Interim 1996.
Gross Profit
- ------------
Gross profit increased 17.7% in Interim 1997 to $131.9 million from $112.0
million in Interim 1996. Gross profit as a percentage of total revenues
increased to 26.1% in Interim 1997 from 25.0% in Interim 1996. Gross profit
from retail operations increased 17.9% in Interim 1997 to $129.2 million from
$109.6 million in Interim 1996 primarily due to the increase in retail
revenues. Gross profit as a percentage of sales for the retail operations
increased to 27.6% in Interim 1997 from 26.8% in Interim 1996. Gross profit
from wholesale operations in Interim 1997 increased 9.4% to $2.6 million from
$2.4 million in Interim 1996. Gross profit as a percentage of wholesale
revenues in Interim 1997 increased to 7.4% from 6.2% in Interim 1996, primarily
due to leveraged distribution costs.
<PAGE> 8
STAR MARKETS COMPANY, INC.
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses increased by 19.2% to $111.1 million in
Interim 1997 from $93.2 million in Interim 1996. Operating and administrative
expenses as a percentage of total revenues increased to 22.0% in Interim 1997
from 20.8% in Interim 1996. The increase in operating and administrative
expenses as a percentage of total revenues was primarily due to an increase in
retail operations which incur a higher rate of operating and administrative
expenses than wholesale operations, and an increase in rent expense, including
both rent expense for new locations and rent associated with the February 1997
sale leaseback of one operating location.
Interest Expense
- ----------------
Net interest expense, primarily related to interest expense on debt incurred to
finance the acquisition of the Company, was $14.8 million in Interim 1997. Net
interest expense was $14.2 million in Interim 1996.
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.
The Company's total indebtedness as of August 2, 1997 was $270.3 million, which
includes $110.0 million of Subordinated Notes due November 1, 2004, $156.9
million due under the Senior Credit Facility and a $3.4 million note payable.
The Senior Credit Facility provides for a $108.0 million term loan facility and
a $75.0 million revolving credit facility. As of September 3, 1997, the Company
had $47.8 million drawn under the revolving credit portion of the Senior Credit
Facility and $7.3 million drawn under the letter of credit portion of the
Senior Credit Facility leaving an aggregate of $19.9 million of unused
revolving credit availability under the Senior Credit Facility.
The Company currently plans to make total capital expenditures of approximately
$43.2 million in fiscal 1997. Capital expenditures for Quarter 1997 were $14.1
million compared with $33.3 million in Quarter 1996. For Interim 1997, capital
expenditures were $20.5 million compared with $38.6 million in Interim 1996.
Capital expenditures for fiscal 1997 include opening two new superstores,
opening a new superstore to replace an existing conventional store, remodeling
six existing stores and opening two new natural food stores. Planned capital
expenditures for fiscal 1997 include approximately $7.1 million for
maintenance, systems, and distribution.
<PAGE> 9
STAR MARKETS COMPANY, INC.
Liquidity and Capital Resources (Continued)
- -------------------------------------------
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 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.
<PAGE> 10
STAR MARKETS COMPANY, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibit is included herein:
Exhibit (27) - Financial Data Schedule
(b) The Company did not file any reports on Form 8-K for the 26 weeks ended
August 2, 1997.
<PAGE> 11
STAR MARKETS COMPANY, INC.
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.
Star Markets Company, Inc.
------------------------------------------
(Registrant)
Date: September 12, 1997 By: /s/ 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 2, 1997 AND FEBRUARY 1, 1997; THE
ACCOMPANYING STATEMENTS OF OPERATIONS FOR THE 13 WEEK AND 26 WEEK PERIODS ENDED
AUGUST 2, 1997 AND AUGUST 3, 1996; AND THE ACCOMPANYING STATEMENTS OF CASH FLOWS
FOR THE 26 WEEK PERIODS ENDED AUGUST 2, 1997 AND AUGUST 3, 1996 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> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> AUG-02-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 18,605
<ALLOWANCES> 1,440
<INVENTORY> 65,723
<CURRENT-ASSETS> 89,434
<PP&E> 229,271
<DEPRECIATION> 43,330
<TOTAL-ASSETS> 439,230
<CURRENT-LIABILITIES> 81,365
<BONDS> 269,419
10,278
0
<COMMON> 0
<OTHER-SE> 84,522
<TOTAL-LIABILITY-AND-EQUITY> 439,230
<SALES> 259,943
<TOTAL-REVENUES> 259,943
<CGS> 192,179
<TOTAL-COSTS> 62,450
<OTHER-EXPENSES> (27)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,563
<INCOME-PRETAX> (2,222)
<INCOME-TAX> 83
<INCOME-CONTINUING> (2,305)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,305)
<EPS-PRIMARY> (461.00)
<EPS-DILUTED> (461.00)
</TABLE>
