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 October 31, 1998
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 December 1,
1998: 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 - October 31, 1998 and January 31, 1998
Statements of operations - 13 weeks ended October 31, 1998
and November 1, 1997; 39 weeks ended October 31, 1998 and
November 1, 1997
Statements of cash flows - 39 weeks ended October 31, 1998
and November 1, 1997
Notes to financial statements - October 31, 1998.
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
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash $ 861 $ 0
Accounts receivable, net of reserve for
doubtful accounts of $1,547 in October
and $1,391 in January 17,155 21,001
Inventory 70,333 71,524
Prepaid expenses 5,231 4,465
------------------------
Total current assets 93,580 96,990
Property and equipment at cost:
Land 16,156 21,287
Building 33,288 51,452
Equipment & fixtures 121,741 112,010
Leasehold improvements 67,037 61,644
------------------------
Total property & equipment 238,222 246,393
Less accumulated depreciation and
amortization 66,177 52,692
------------------------
Net property and equipment 172,045 193,701
Other assets, net 29,256 31,287
Goodwill, net 127,895 130,564
------------------------
Total Assets $422,776 $452,542
========================
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 39,262 $ 46,091
Accrued payroll & benefits 12,965 13,195
Current portion self-insurance 5,460 8,266
Accrued interest 9,474 6,092
Other current liabilities 15,018 16,503
------------------------
Total current liabilities 82,179 90,147
Other liabilities 25,379 24,210
Long-term debt 260,255 276,327
Redeemable preferred stock, redemption
value $11,000 10,397 10,326
Shareholder's equity:
Common stock, $.01 par value, 10,000 shares
authorized and 5,000 shares outstanding 0 0
Additional paid-in-capital 82,936 83,924
Retained earnings (deficit) (38,370) (32,392)
------------------------
Total shareholder's equity 44,566 51,532
------------------------
Total Liabilities and Shareholder's Equity $422,776 $452,542
========================
</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
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues $266,756 $261,673 $794,641 $766,137
Cost of goods sold 196,551 192,767 580,851 565,365
-----------------------------------------------------
Gross profit 70,206 68,906 213,790 200,772
Operating and administrative expenses 57,817 56,617 178,699 167,703
Depreciation and amortization 6,290 6,048 18,522 17,612
-----------------------------------------------------
Operating profit 6,098 6,241 16,569 15,457
Interest expense 7,361 7,616 22,298 22,367
Other (expenses) income, net 15 37 32 (149)
-----------------------------------------------------
Loss before income taxes (1,248) (1,338) (5,697) (7,059)
Income taxes 104 95 281 259
-----------------------------------------------------
Net loss $ (1,352) $ (1,433) $ (5,978) $ (7,318)
=====================================================
</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
October 31, November 1,
1998 1997
----------- -----------
<S> <C> <C>
Operating activities
Net loss $ (5,978) $ (7,318)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Amortization of deferred financing costs 1,266 1,226
Depreciation and amortization 18,520 17,612
(Gain) loss on sale or disposal of property
and equipment (32) 165
Changes in operating assets and liabilities:
Accounts receivable 3,846 (174)
Inventories 1,193 (4,059)
Prepaid expenses (764) 713
Accounts payable (7,025) (4,270)
Accrued payroll and benefits (229) (1,030)
Self-insurance reserves (2,807) 1,466
Accrued interest 3,381 3,584
Other current liabilities (1,173) 45
Other 1,193 260
-------------------------
Net cash provided by operating activities 11,389 8,220
Investing activities
Purchases of property and equipment (15,073) (26,626)
Proceeds from sale of property and equipment 21,614 20,167
-------------------------
Net cash provided by (used in) investing
activities 6,541 (6,459)
Financing Activities
Net proceeds from revolving credit facility 3,300 300
Repayment of long-term debt (19,147) (536)
Deferred financing costs 0 (799)
Preferred dividends paid (1,222) (1,226)
Deposits refunded 0 500
-------------------------
Net cash used in financing activities (17,069) (1,761)
Net increase in cash and cash equivalents 861 0
Cash and cash equivalents beginning of period 0 0
-------------------------
Cash and cash equivalents end of period $ 861 $ 0
=========================
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 17,651 $ 17,556
Cash paid for income taxes 327 342
</TABLE>
See accompanying notes.
<PAGE> 5
STAR MARKETS COMPANY, INC.
Notes to Financial Statements
October 31, 1998
(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 53 stores as of October 31, 1998. 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 39 week periods ended October 31, 1998 are not necessarily
indicative of the results to be expected for the entire year ending January
30, 1999. 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 January 31, 1998.
Note 3 - Recently Issued Accounting Pronouncements
As of February 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income". Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
the adoption of this Statement had no impact on the Company's financial
statements.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 "Disclosures About Segments of an Enterprise and Related Information"
("Statement 131"). The Company will be required to adopt the provisions of
Statement 131 in the fourth quarter of Fiscal 1998. The Company does not
expect the adoption of Statement 131 to have a material impact on the
Company's financial statement disclosures.
<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 October 31, 1998
are referred to herein as "Quarter 1998" and "Interim 1998," respectively,
and the 13 weeks and 39 weeks ended November 1, 1997 are referred to as
"Quarter 1997" and "Interim 1997," respectively.
The Company currently operates 24 superstores, 25 conventional supermarkets,
and four Wild Harvest stores (which emphasize natural, healthy foods), and a
wholesale food business.
Pursuant to a Stock Purchase Agreement (the "Agreement") by and among Star
Markets Company, Inc., Star Markets Holdings, Inc. ("Holdings"), and J
Sainsbury plc ("Sainsbury") dated as of November 25, 1998, Sainsbury has
agreed to acquire all of the issued and outstanding voting securities of
Holdings (Class D shares) from its shareholders. Pursuant to the
Agreement, all other shares of capital stock of Holdings will also be either
purchased or redeemed. The value of the transaction is approximately $490.0
million (including assumed debt), subject to adjustment. The transaction has
been approved by the boards of directors of both parties. Consummation of
the transaction is subject to customary conditions including regulatory
approvals.
Quarter 1998
Revenues
Total revenues increased 1.9% in Quarter 1998 to $266.8 million from $261.7
million in Quarter 1997. Revenues from retail operations in Quarter 1998
increased 2.6% to $251.1 million from $244.7 million in Quarter 1997. The
increase in revenues from retail operations was attributable to an increase
in the number of retail stores operated. Comparable store sales decreased by
1.1% in Quarter 1998. Revenues from wholesale operations in Quarter 1998
declined 7.8% to $15.7 million from $17.0 million in Quarter 1997.
Gross Profit
Gross profit increased 1.9% in Quarter 1998 to $70.2 million from $68.9
million in Quarter 1997. Gross profit as a percentage of total revenues was
26.3% in Quarter 1998, substantially the same as Quarter 1997. Gross profit
from retail operations increased 1.8% in Quarter 1998 to $69.0 million from
$67.7 million in Quarter 1997 due to the increase in retail revenues. Gross
profit as a percentage of revenues for the retail operations decreased to
27.5% in Quarter 1998 from 27.7% in Quarter 1997. The decrease in gross
profit as a percentage of revenues was due primarily to a decrease in non-
perishable margins offset in part by an increase in perishable margins and
reduced distribution costs.
<PAGE> 8
STAR MARKETS COMPANY, INC.
Gross Profit (continued)
Gross profit from wholesale operations in Quarter 1998 increased 5.0% to
$1.23 million from $1.17 million in Quarter 1997. Gross profit as a
percentage of wholesale revenues in Quarter 1998 increased to 7.9% from 6.9%
in Quarter 1997, primarily due to improvement in product margins, as well as
reduced distribution costs.
Operating and Administrative Expenses
Operating and administrative expenses increased by 2.1% to $57.8 million in
Quarter 1998 from $56.6 million in Quarter 1997. Operating and
administrative expenses as a percentage of total revenues increased to 21.7%
in Quarter 1998 from 21.6% in Quarter 1997. The increase in operating and
administrative expenses as a percentage of total revenues was primarily due
to an increase in store labor attributable to new store formats with
additional service intensive departments, an increase in retail operations
which incur a higher rate of operating and administrative expenses than
wholesale operations, and an increase in rent associated with new locations
and the sale-leaseback of three properties in March 1998. The increases were
substantially offset by reduced self insurance expenses for Worker's
Compensation and General Liability resulting from improvements in claims
management practices.
Interest Expense
Net interest expense, primarily related to interest expense on debt incurred
to finance the acquisition of the Company, was $7.4 million in Quarter 1998.
Net interest expense was $7.6 million in Quarter 1997.
Interim 1998
Revenues
Total revenues increased 3.7% in Interim 1998 to $794.6 million from $766.1
million in Interim 1997. Revenues from retail operations in Interim 1998
increased 4.9% to $748.9 million from $713.7 million in Interim 1997. The
increase in revenues from retail operations was attributable to an increase
in the number of retail stores operated. Comparable store sales decreased by
0.3% in Interim 1998. Revenues from wholesale operations in Interim 1998
declined 12.8% to $45.7 million from $52.4 million in Interim 1997.
Gross Profit
Gross profit increased 6.5% in Interim 1998 to $213.8 million from $200.8
million in Interim 1997. Gross profit as a percentage of total revenues
increased to 26.9% in Interim 1998 from 26.2% in Interim 1997. Gross profit
from retail operations increased 6.8% in Interim 1998 to $210.3 million from
$197.0 million in Interim 1997 primarily due to the increase in retail
revenues. Gross profit as a percentage of revenues for the retail operations
increased to 28.1% in Interim 1998 from 27.6% in Interim 1997. The increase
in gross profit as a percentage of revenues was due primarily to
improvements in perishable margins and reduced distribution costs. Gross
profit from wholesale operations in Interim 1998 decreased 8.2% to $3.5
million from $3.8 million in Interim 1997.
<PAGE> 8
STAR MARKETS COMPANY, INC.
Gross Profit (continued)
Gross profit as a percentage of wholesale revenues in Interim 1998 increased
to 7.6% from 7.2% in Interim 1997, due to improvement in product margins and
reduced distribution costs.
Operating and Administrative Expenses
Operating and administrative expenses increased by 6.6% to $178.7 million in
Interim 1998 from $167.7 million in Interim 1997. Operating and
administrative expenses as a percentage of total revenues increased to 22.5%
in Interim 1998 from 21.9% in Interim 1997. The increase in operating and
administrative expenses as a percentage of total revenues was primarily due
to an increase in store labor attributable to new store formats with
additional service intensive departments, an increase in retail operations
which incur a higher rate of operating and administrative expenses than
wholesale operations, and an increase in rent associated with new locations
and the sale-leaseback of three properties in March 1998. The increases were
offset in part by reduced self insurance expenses for Worker's Compensation
and General Liability resulting from improvements in claims management
practices.
Interest Expense
Net interest expense, primarily related to interest expense on debt incurred
to finance the acquisition of the Company, was $22.3 million in Interim
1998. Net interest expense was $22.4 million in Interim 1997.
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 October 31, 1998 was $261.3 million,
which includes $110.0 million of Subordinated Notes due November 1, 2004,
$148.9 million due under the Senior Credit Facility and a $2.4 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 December 1,
1998, the Company had $60.5 million drawn under the revolving credit portion
of the Senior Credit Facility and $7.2 million drawn under the letter of
credit portion of the Senior Credit Facility leaving an aggregate of $7.3
million of unused revolving credit availability under the Senior Credit
Facility.
Capital expenditures for Quarter 1998 were $3.4 million compared with $6.1
million in Quarter 1997. For Interim 1998, capital expenditures were $15.1
million compared with $26.6 million in Interim 1997. The Company currently
plans to make total capital expenditures of approximately $23.4 million in
fiscal 1998 including approximately $8.9 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 and borrowings
under the Senior Credit Facility will provide sufficient resources through
fiscal 1998 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.
Year 2000
During 1997, the Company began an ongoing review process to address the Year
2000 issue that encompasses operating and administrative areas of the
Company. Information technology professionals are working to identify and
resolve all significant Year 2000 issues in a timely and effective manner.
The Company's executive management monitors the status of the Year 2000
remediation plans, including an assessment of issues and development of
remediation plans as they relate to internally used software, computer
hardware and use of computer applications. The Company will also be
implementing notification of Year 2000 compliance requirements to key
vendors.
While management has not specifically determined the costs of its Year 2000
efforts, the total cost to obtain Year 2000 compliance is not expected to
exceed $1,500,000.
While the Company believes it is taking all appropriate steps to assure Year
2000 compliance, it is dependent on key vendor compliance to some extent.
If, due to unforeseen circumstances, the implementation is not completed on
a timely basis, or key vendors fail to resolve all significant Year 2000
issues in a timely and effective manner, the Year 2000 issue could have an
adverse impact on the Company. The Company is in the process of establishing
contingency plans that would minimize the impact to the Company in the event
that the Company or its major vendors fail to implement a Year 2000 solution
on a timely basis. The cost of implementing the contingency plans, while not
specifically determined, is not expected to be material.
<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 during the 39 weeks
ended October 31, 1998.
<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: December 15, 1998 By: Stephen R. Winslow
Stephen R. Winslow
Senior Vice President, Finance
and chief accounting officer
<PAGE> 12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING BALANCE SHEETS AS OF OCTOBER 31, 1998 AND FEBRUARY 1, 1997; THE
ACCOMPANYING STATEMENTS OF OPERATIONS FOR THE 13 WEEK AND 39 WEEK PERIODS ENDED
OCTOBER 31, 1998 AND NOVEMBER 1, 1997; AND THE ACCOMPANYING STATEMENTS OF CASH
FLOWS FOR THE 39 WEEK PERIODS ENDED OCTOBER 31, 1998 AND NOVEMBER 1, 1997 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> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 861
<SECURITIES> 0
<RECEIVABLES> 18,702
<ALLOWANCES> 1,547
<INVENTORY> 70,333
<CURRENT-ASSETS> 93,580
<PP&E> 238,222
<DEPRECIATION> 66,177
<TOTAL-ASSETS> 422,776
<CURRENT-LIABILITIES> 82,179
<BONDS> 0
10,397
0
<COMMON> 0
<OTHER-SE> 44,566
<TOTAL-LIABILITY-AND-EQUITY> 422,776
<SALES> 266,756
<TOTAL-REVENUES> 266,756
<CGS> 196,551
<TOTAL-COSTS> 64,107
<OTHER-EXPENSES> (15)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,361
<INCOME-PRETAX> (1,248)
<INCOME-TAX> 104
<INCOME-CONTINUING> (1,352)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,352)
<EPS-PRIMARY> (270.46)
<EPS-DILUTED> (270.46)
</TABLE>
