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 May 2, 1998
Commission File Number: 33-86690
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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 June 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 - May 2, 1998 and January 31, 1998
Statements of operations - 13 weeks ended May 2, 1998 and
May 3, 1997
Statements of cash flows - 13 weeks ended May 2, 1998 and
May 3, 1997
Notes to financial statements - May 2, 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>
May 2, January 31,
1998 1998
--------------------------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Accounts receivable, net of reserve for
doubtful accounts of $1,519 at May 2,
1998 and $1,391 at January 31, 1998 $ 16,735 $ 21,001
Inventory 64,582 71,524
Prepaid expenses 5,496 4,465
------------------------
Total current assets 86,814 96,990
Property and equipment at cost:
Land 16,565 21,287
Building 32,567 51,452
Equipment & fixtures 115,759 112,010
Leasehold improvements 64,455 61,644
------------------------
Total property & equipment 229,347 246,393
Less accumulated depreciation and amortization 55,990 52,692
------------------------
Net property and equipment 173,357 193,701
Other assets, net 30,600 31,287
Goodwill, net 129,674 130,564
------------------------
Total Assets $420,445 $452,542
========================
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 36,599 $ 46,091
Accrued payroll & benefits 11,044 13,195
Current portion self-insurance 8,808 8,266
Accrued interest 2,298 6,092
Other current liabilities 15,192 16,503
------------------------
Total current liabilities 73,941 90,147
Self-insurance reserves, less current portion 18,523 18,523
Other liabilities 6,054 5,687
Long-term debt 262,677 276,327
Redeemable preferred stock, redemption value $11,000 10,349 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 83,595 83,924
Retained earnings (deficit) (34,694) (32,392)
------------------------
Total shareholder's equity 48,901 51,532
------------------------
Total Liabilities and Shareholder's Equity $420,445 $452,542
========================
</TABLE>
See accompanying notes.
STAR MARKETS COMPANY, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks
Ended Ended
May 2, May 3,
1998 1997
--------------------
<S> <C> <C>
Total revenues $259,203 $244,521
Cost of goods sold 188,528 180,419
--------------------
Gross profit 70,675 64,102
Operating and administrative expenses 59,312 54,434
Depreciation and amortization 6,047 5,766
--------------------
Operating profit 5,316 3,902
Interest expense 7,536 7,188
Other (expenses) income, net 0 (213)
--------------------
Loss before income taxes (2,220) (3,499)
Income taxes 81 81
--------------------
Net loss $ (2,301) $ (3,580)
====================
</TABLE>
See accompanying notes.
STAR MARKETS COMPANY, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks
Ended Ended
May 2, May 3,
1998 1997
--------------------
<S> <C> <C>
Operating activities
Net loss $ (2,301) $ (3,580)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization of deferred financing costs 423 395
Depreciation and amortization 6,044 5,766
Loss on sale or disposal of property and equipment 0 213
Changes in operating assets and liabilities:
Accounts receivable 4,266 (832)
Inventories 6,942 (923)
Prepaid expenses (1,031) (189)
Accounts payable (9,492) (5,311)
Accrued payroll and benefits (2,151) (1,859)
Self-insurance reserves 542 322
Accrued interest (3,794) (4,238)
Other current liabilities (970) (3,033)
Other 382 360
--------------------
Net cash used in operating activities (1,140) (12,909)
Investing activities
Purchases of property and equipment (5,771) (6,468)
Proceeds from sale of property and equipment 21,168 20,097
--------------------
Net cash provided by (used in) investing activities 15,397 13,629
Financing Activities
Net proceeds from revolving credit facility 5,300 300
Repayment of long-term debt (18,950) (175)
Preferred dividends paid (607) (608)
Deferred financing costs 0 (737)
Deposits refunded 0 500
--------------------
Net cash provided by (used in) financing activities (14,257) (720)
Net increase (decrease) 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 $ 10,908 $ 11,031
Cash paid for income taxes 162 142
</TABLE>
See accompanying notes.
STAR MARKETS COMPANY, INC.
Notes to Financial Statements
May 2, 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 52 stores as of May 2, 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. 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 period ended May 2, 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.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Results of Operations
- ---------------------
Results of operations for the 13 weeks ended May 2, 1998 are referred to
herein as "Quarter 1998" and the 13 weeks ended May 3, 1997 are referred to
as "Quarter 1997".
The Company currently operates 23 superstores, 25 conventional stores, and
four natural food stores. The Company also operates a wholesale food
business.
Revenues
- --------
Total revenues increased 6.0% in Quarter 1998 to $259.2 million from $244.5
million in Quarter 1997. Revenues from retail operations in Quarter 1998
increased 7.2% to $244.4 million from $227.9 million in Quarter 1997. The
increase in revenues from retail operations was attributable to an increase
in the number of retail stores operated and a 0.8% increase in comparable
store sales. Revenues from wholesale operations in Quarter 1998 declined
10.7% to $14.8 million from $16.6 million in Quarter 1996.
Gross Profit
- ------------
Gross profit increased 10.3% in Quarter 1998 to $70.7 million from $64.1
million in Quarter 1997. Gross profit as a percentage of total revenues
increased to 27.3% in Quarter 1998 from 26.2% in Quarter 1997. Gross profit
from retail operations increased 10.8% in Quarter 1998 to $69.6 million from
$62.8 million in Quarter 1997 primarily due to the increase in revenues.
Gross profit as a percentage of revenues for the retail operations increased
to 28.5% in Quarter 1998 from 27.6% in Quarter 1997. The increase in gross
profit as a percentage of revenues was primarily attributable to
improvements in perishable margins and to decreased distribution costs as a
percentage of revenues. Gross profit from the wholesale operations in
Quarter 1998 decreased 14.7% to $1.1 million from $1.3 million in Quarter
1997. Gross profit as a percentage of wholesale revenues in Quarter 1998
decreased to 7.4% from 7.7% in Quarter 1997 due to an decrease in non-
perishable margins.
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses increased by 9.0% to $59.3 million in
Quarter 1998 from $54.4 million in Quarter 1997. Operating and
administrative expenses as a percentage of total revenues increased to 22.9%
in Quarter 1998 from 22.3% in Quarter 1997. The increase in operating and
administrative expenses as a percentage of total revenues was 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 expense 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 $7.5 million in Quarter 1998.
Net interest expense was $7.2 million in Quarter 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 May 2, 1998 was $263.7 million, which
includes $110.0 million in Senior Subordinated Notes due 2004, $150.9
million due under the Senior Credit Facility and a $2.8 million note
payable. At June 2, 1998, the Company had $56.9 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 $10.9 million of unused revolving credit available
under the Senior Credit Facility.
During Quarter 1998, the Company completed a sale-leaseback transaction
involving three properties for a gross selling price of $21.6 million. Of
the proceeds, $18.4 million was used to pay down principal on term loans and
$3.2 million was applied to revolver paydown and transaction expenses.
The Company currently anticipates making total capital expenditures of
approximately $26.1 million in fiscal 1998. Capital expenditures for Quarter
1998 were $5.7 million compared with $6.4 million in Quarter 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 $10.6 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 to fund 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 13 weeks ended
May 2, 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: June 12, 1998 By: /s/Robert R. Spellman
------------- ---------------------
Robert R. Spellman
Executive Vice President,
Chief Financial and
Accounting Officer
Page 8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING BALANCE SHEETS AS OF MAY 2, 1998 AND THE ACCOMPANYING STATEMENTS OF
OPERATIONS AND CASH FLOWS FOR THE 13 WEEK PERIOD ENDED MAY 2, 1998 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> JAN-30-1999
<PERIOD-END> MAY-02-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 16,735
<ALLOWANCES> 1,519
<INVENTORY> 64,582
<CURRENT-ASSETS> 86,814
<PP&E> 229,347
<DEPRECIATION> 55,990
<TOTAL-ASSETS> 420,445
<CURRENT-LIABILITIES> 73,941
<BONDS> 262,677
10,349
0
<COMMON> 0
<OTHER-SE> 83,595
<TOTAL-LIABILITY-AND-EQUITY> 420,445
<SALES> 259,203
<TOTAL-REVENUES> 259,203
<CGS> 188,528
<TOTAL-COSTS> 65,359
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,536
<INCOME-PRETAX> (2,220)
<INCOME-TAX> 81
<INCOME-CONTINUING> (2,301)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,301)
<EPS-PRIMARY> (460.20)
<EPS-DILUTED> (460.20)
</TABLE>
