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 1, 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
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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 September 2,
1998: 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 1, 1998 and January 31, 1998
Statements of operations - 13 weeks ended August 1, 1998
and August 2, 1997; 26 weeks ended August 1, 1998 and
August 2, 1997
Statements of cash flows - 26 weeks ended August 1, 1998
and August 2, 1997
Notes to financial statements - August 1, 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
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
STAR MARKETS COMPANY, INC.
BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
August 1, 1998 January 31, 1998
-------------- ----------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Accounts receivable, net of reserve for doubtful accounts
of $1,398 in August and $1,391 in January $ 17,736 $ 21,001
Inventory 67,224 71,524
Prepaid expenses 5,190 4,465
----------------------------
Total current assets 90,150 96,990
Property and equipment at cost:
Land 16,155 21,287
Building 32,951 51,452
Equipment & fixtures 119,230 112,010
Leasehold improvements 66,487 61,644
----------------------------
Total property & equipment 234,823 246,393
Less accumulated depreciation and amortization 61,036 52,692
----------------------------
Net property and equipment 173,787 193,701
Other assets, net 29,885 31,287
Goodwill, net 128,785 130,564
----------------------------
Total Assets $ 422,607 $ 452,542
============================
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 37,471 $ 46,091
Accrued payroll & benefits 11,994 13,195
Current portion self-insurance 8,619 8,266
Accrued interest 5,962 6,092
Other current liabilities 14,877 16,503
----------------------------
Total current liabilities 78,923 90,147
Other liabilities 24,994 24,210
Long-term debt 262,068 276,327
Redeemable preferred stock, redemption value $11,000 10,374 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 83,265 83,924
Retained earnings (deficit) (37,018) (32,392)
----------------------------
Total shareholder's equity 46,248 51,532
----------------------------
Total Liabilities and Shareholder's Equity $ 422,607 $ 452,542
============================
</TABLE>
See accompanying notes.
STAR MARKETS COMPANY, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended 26 Weeks Ended 26 Weeks Ended
August 1, 1998 August 2, 1997 August 1, 1998 August 2, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total revenues $ 268,682 $ 259,943 $ 527,885 $ 504,464
Cost of goods sold 195,771 192,179 384,300 372,598
---------------------------------------------------------------
Gross profit 72,910 67,764 143,585 131,866
Operating and administrative expenses 61,570 56,652 120,882 111,086
Depreciation and amortization 6,185 5,798 12,232 11,564
---------------------------------------------------------------
Operating profit 5,156 5,314 10,471 9,216
Interest expense 7,401 7,563 14,937 14,751
Other (expenses) income, net 17 27 18 (186)
---------------------------------------------------------------
Loss before income taxes (2,228) (2,222) (4,449) (5,721)
Income taxes 96 83 177 164
---------------------------------------------------------------
Net loss $ (2,324) $ (2,305) $ (4,625) $ (5,885)
===============================================================
</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 1, 1998 August 2, 1997
-------------- --------------
<S> <C> <C>
Operating activities
Net loss $ (4,625) $ (5,885)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization of deferred financing costs 844 807
Depreciation and amortization 12,229 11,564
(Gain) loss on sale or disposal of property and equipment (17) 185
Changes in operating assets and liabilities:
Accounts receivable 3,265 3,210
Inventories 4,301 (173)
Prepaid expenses (724) (147)
Accounts payable (8,815) (1,712)
Accrued payroll and benefits (1,201) (1,475)
Self-insurance reserves 352 793
Accrued interest (131) 63
Other current liabilities (1,606) (3,041)
Other 849 352
---------------------------
Net cash provided by operating activities 4,721 4,541
Investing activities
Purchases of property and equipment (11,641) (20,514)
Proceeds from sale of property and equipment 21,577 20,134
---------------------------
Net cash provided by (used in) investing activities 9,936 (380)
Financing Activities
Net (repayment) proceeds from revolving credit facility 4,900 (2,900)
Repayment of long-term debt (18,950) (1,153)
Preferred dividends paid (607) (608)
Deposits refunded 500
---------------------------
Net cash used in financing activities (14,657) (4,161)
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 $ 14,224 $ 13,881
Cash paid for income taxes 232 242
</TABLE>
See accompanying notes.
STAR MARKETS COMPANY, INC.
Notes to Financial Statements
August 1, 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 August 1, 1998. Additionally, the Company operates a
wholesale business which provides warehousing, distribution and certain
administrative services to independent store operators 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 1, 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.
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 1, 1998 are
referred to herein as "Quarter 1998" and "Interim 1998," respectively, and the
13 weeks and 26 weeks ended August 2, 1997 are referred to as "Quarter 1997"
and "Interim 1997," respectively.
During Quarter 1998, the Company opened a new superstore and remodeled one
superstore. The Company currently operates 24 superstores, 25 conventional
supermarkets, four Wild Harvest stores (which emphasize natural, healthy foods)
and a wholesale food business.
Quarter 1997
- ------------
Revenues
- --------
Total revenues increased 3.4% in Quarter 1998 to $268.7 million from $259.9
million in Quarter 1997. Revenues from retail operations in Quarter 1998
increased 5.1% to $253.5 million from $241.2 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 0.5%
in Quarter 1998. Revenues from wholesale operations in Quarter 1998 declined
19.1% to $15.2 million from $18.8 million in Quarter 1997.
Gross Profit
- ------------
Gross profit increased 7.6% in Quarter 1998 to $72.9 million from $67.8 million
in Quarter 1997. Gross profit as a percentage of total revenues increased to
27.1% in Quarter 1998 from 26.1% in Quarter 1997. Gross profit from retail
operations increased 8.1% in Quarter 1998 to $71.8 million from $66.4 million
in Quarter 1997 primarily due to the increase in retail revenues. Gross profit
as a percentage of revenues for the retail operations increased to 28.3% in
Quarter 1998 from 27.5% in Quarter 1997. The increase in gross profit as a
percentage of revenues was due primarily to improvement in product margins and
lower distribution costs as a percentage of revenues. Gross profit from
wholesale operations in Quarter 1998 decreased 15.4% to $1.1 million from $1.3
million in Quarter 1997 due to the decrease in wholesale revenues. Gross profit
as a percentage of wholesale revenues in Quarter 1998 increased to 7.5% from
7.1% in Quarter 1997, primarily due to improvement in perishable product margin
and lower distribution costs as a percentage of revenues.
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses increased by 8.7% to $61.6 million in
Quarter 1998 from $56.7 million in Quarter 1997. Operating and administrative
expenses as a percentage of total revenues increased to 22.9% in Quarter 1998
from 21.8% 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 March 1998
sale-leaseback of three properties.
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 4.6% in Interim 1998 to $527.9 million from $504.5
million in Interim 1997. Revenues from retail operations in Interim 1998
increased 6.1% to $497.9 million from $469.1 million in Interim 1997. The
increase in revenues from retail operations was attributable both to an
increase in the number of retail stores operated and a 0.1% increase in
comparable store sales. Revenues from wholesale operations in Interim 1998
declined 15.3% to $30.0 million from $35.4 million in Interim 1997.
Gross Profit
- ------------
Gross profit increased 8.9% in Interim 1998 to $143.6 million from $131.9
million in Interim 1997. Gross profit as a percentage of total revenues
increased to 27.2% in Interim 1998 from 26.1% in Interim 1997. Gross profit
from retail operations increased 9.6% in Interim 1998 to $141.6 million from
$129.2 million in Interim 1997. The increase in revenues from retail revenues
was primarily due to improvement in perishable margins, a shift in sales mix to
higher margin perishable departments and lower distribution costs as a
percentage of revenues. Gross profit as a percentage of revenues for the retail
operations increased to 28.4% in Interim 1998 from 27.6% in Interim 1997. Gross
profit from wholesale operations in Interim 1998 decreased 15.4% to $2.2
million from $2.6 million in Interim 1997. Gross profit as a percentage of
wholesale revenues in Interim 1998 increased to 7.5% from 7.4% in Interim 1997,
primarily due to lower distribution costs as a percentage of revenues.
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses increased by 8.8% to $120.9 million in
Interim 1998 from $111.1 million in Interim 1997. Operating and administrative
expenses as a percentage of total revenues increased to 22.9% in Interim 1998
from 22.0% 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 March 1998
sale-leaseback of three properties.
Interest Expense
- ----------------
Net interest expense, primarily related to interest expense on debt incurred to
finance the acquisition of the Company, was $14.9 million in Interim 1998. Net
interest expense was $14.8 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 August 1, 1998 was $263.1 million, which
includes $110.0 million of Subordinated Notes due November 1, 2004, $150.5
million due under the Senior Credit Facility and a $2.6 million note payable.
As of September 2, 1998, the Company had $59.5 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 $8.3 million of unused revolving credit availability under the
Senior Credit Facility.
The Company currently anticipates making total capital expenditures of
approximately $26.4 million in fiscal 1998. Capital expenditures for Quarter
1998 were $7.7 million compared with $14.1 million in Quarter 1997. For Interim
1998, capital expenditures were $13.4 million compared with $20.5 million in
Interim 1997. Capital expenditures will include opening one new superstore,
remodeling one existing store, converting one conventional store to a
superstore and opening up to two new Wild Harvest stores. Planned capital
expenditures for fiscal 1998 include approximately $10.1 million for
maintenance, systems, and distribution.
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
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.
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 1, 1998.
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 11, 1998 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 1, 1998 AND JANUARY 31, 1998; THE
ACCOMPANYING STATEMENTS OF OPERATIONS FOR THE 13 WEEK AND 26 WEEK PERIODS ENDED
AUGUST 1, 1998 AND AUGUST 2, 1997; AND THE ACCOMPANYING STATEMENTS OF CASH FLOWS
FOR THE 26 WEEK PERIODS ENDED AUGUST 1, 1998 AND AUGUST 2, 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> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> AUG-01-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 17,736
<ALLOWANCES> 1,398
<INVENTORY> 67,224
<CURRENT-ASSETS> 90,150
<PP&E> 234,823
<DEPRECIATION> 61,036
<TOTAL-ASSETS> 422,607
<CURRENT-LIABILITIES> 78,923
<BONDS> 0
10,374
0
<COMMON> 0
<OTHER-SE> 46,248
<TOTAL-LIABILITY-AND-EQUITY> 422,067
<SALES> 268,682
<TOTAL-REVENUES> 268,682
<CGS> 195,771
<TOTAL-COSTS> 67,755
<OTHER-EXPENSES> (17)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,401
<INCOME-PRETAX> (2,228)
<INCOME-TAX> 96
<INCOME-CONTINUING> (2,324)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,324)
<EPS-PRIMARY> (470.80)
<EPS-DILUTED> (470.80)
</TABLE>
