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 1, 1999
Commission File Number: 33-86690
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STAR MARKETS COMPANY, INC.
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3243710
--------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of 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 June 1,
1999: 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 1, 1999 and January 30, 1999
Statements of operations - 13 weeks ended May 1, 1999 and May 2, 1998
Statements of cash flows - 13 weeks ended May 1, 1999 and May 2, 1998
Notes to financial statements - May 1, 1999
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 1, January 30,
1999 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Accounts receivable, net of reserve for doubtful accounts of
$1,392 at May 1, 1999 and $1,331 at January 30, 1999 $ 18,452 $ 18,277
Inventory 63,726 64,914
Prepaid expenses 5,335 4,483
------------------------
Total current assets 87,513 87,674
Property and equipment at cost:
Land 13,567 15,256
Building 27,925 31,712
Equipment & fixtures 123,090 123,757
Leasehold improvements 71,494 69,675
------------------------
Total property & equipment 236,075 240,400
Less accumulated depreciation and amortization 74,289 70,645
------------------------
Net property and equipment 161,787 169,755
Other assets, net 27,874 28,537
Goodwill, net 126,116 127,005
------------------------
Total Assets $403,289 $412,971
========================
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 35,569 $ 38,246
Accrued payroll & benefits 11,255 14,399
Current portion self-insurance 5,527 6,286
Accrued interest 9,148 5,762
Other current liabilities 11,746 14,585
------------------------
Total current liabilities 73,245 79,278
Other liabilities 19,692 19,697
Long-term debt 257,252 259,037
Redeemable preferred stock, redemption value $11,000 10,445 10,421
Shareholder's equity:
Common stock, $.01 par value, 10,000 shares authorized and
5,000 shares outstanding 0 0
Additional paid-in-capital 82,276 82,606
Retained earnings (deficit) (39,621) (38,069)
------------------------
Total shareholder's equity 42,655 44,537
------------------------
Total Liabilities and Shareholder's Equity $403,289 $412,971
========================
</TABLE>
See accompanying notes.
STAR MARKETS COMPANY, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks
Ended Ended
May 1, May 2,
1999 1998
-------- --------
<S> <C> <C>
Total revenues $262,676 $259,203
Cost of goods sold 190,393 188,528
---------------------
Gross profit 72,283 70,675
Operating and administrative expenses 60,591 59,312
Depreciation and amortization 6,238 6,047
---------------------
Operating profit 5,454 5,316
Interest expense 6,944 7,536
Other (expenses) income, net 29 0
---------------------
Loss before income taxes (1,462) (2,220)
Income taxes 91 81
---------------------
Net loss $ (1,553) $ (2,301)
=====================
</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 1, May 2,
1999 1998
-------- --------
<S> <C> <C>
Operating activities
Net loss $(1,553) $ (2,301)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of deferred financing costs 422 423
Depreciation and amortization 6,238 6,044
Loss on sale or disposal of property and equipment (14) 0
Changes in operating assets and liabilities:
Accounts receivable (144) 4,266
Inventories 1,188 6,942
Prepaid expenses (906) (1,031)
Accounts payable (2,710) (9,492)
Accrued payroll and benefits (3,143) (2,151)
Self-insurance reserves (704) 542
Accrued interest 3,387 (3,794)
Other current liabilities (2,551) (970)
Other (13) 382
---------------------
Net cash used in operating activities (503) (1,140)
Investing activities
Purchases of property and equipment (2,270) (5,771)
Proceeds from sale of property and equipment 5,152 21,168
---------------------
Net cash provided by investing activities 2,882 15,397
Financing Activities
Net proceeds from revolving credit facility (1,300) 5,300
Repayment of long-term debt (467) (18,950)
Preferred dividends paid (612) (607)
---------------------
Net cash used in financing activities (2,379) (14,257)
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 $ 3,226 $ 10,908
Cash paid for income taxes 114 162
</TABLE>
See accompanying notes.
STAR MARKETS COMPANY, INC.
Notes to Financial Statements
May 1, 1999
(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 May 1, 1999. 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.
Pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement") by
and among the Company, 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. Pursuant to the Stock Purchase
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 the Company, Holdings and Sainsbury. Consummation of the transaction is
subject to customary conditions including regulatory approvals.
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 1, 1999 are not necessarily indicative of the results
to be expected for the entire year ending January 29, 2000. For further
information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
January 30, 1999.
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 adopted the provisions of Statement 131
during 1998. The adoption of Statement 131 had no 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 1, 1999 are referred to
herein as "Quarter 1999" and the 13 weeks ended May 2, 1998 are referred to
as "Quarter 1998".
The Company currently operates 24 superstores, 25 conventional stores, and
four natural food stores. The Company also operates a wholesale food
business. The Company completed the sale of one of its superstores during
the quarter, and plans to close the location in June 1999.
Revenues
- --------
Total revenues increased 1.3% in Quarter 1999 to $262.7 million from $259.2
million in Quarter 1998. Revenues from retail operations in Quarter 1999
increased 1.8% to $248.7 million from $244.4 million in Quarter 1998. The
increase in revenues from retail operations was attributable to an increase
in the number of retail stores operated. For stores open more than one year
("same store sales"), revenues decreased by 0.2% from the prior period.
Revenues from wholesale operations in Quarter 1999 declined 5.8% to $14.0
million from $14.8 million in Quarter 1998.
Gross Profit
- ------------
Gross profit increased 2.3% in Quarter 1999 to $72.3 million from $70.7
million in Quarter 1998. Gross profit as a percentage of total revenues
increased to 27.5% in Quarter 1999 from 27.3% in Quarter 1998. Gross profit
from retail operations increased 2.4% in Quarter 1999 to $71.3 million from
$69.6 million in Quarter 1998 primarily due to the increase in revenues.
Gross profit as a percentage of revenues for the retail operations
increased to 28.7% in Quarter 1999 from 28.5% in Quarter 1998. The increase
in gross profit as a percentage of revenues was primarily attributable to
reduced distribution costs. Gross profit from the wholesale operations in
Quarter 1999 decreased 7.9% to $1.0 million from $1.1 million in Quarter
1998. Gross profit as a percentage of wholesale revenues in Quarter 1999
decreased to 7.2% from 7.4% in Quarter 1998 due to a decrease in product
margins.
Operating and Administrative Expense
- ------------------------------------
Operating and administrative expenses increased by 2.2% to $60.6 million in
Quarter 1999 from $59.3 million in Quarter 1998. Operating and
administrative expenses as a percentage of total revenues increased to
23.1% in Quarter 1999 from 22.9% in Quarter 1998. The increase in operating
and administrative expenses as a percentage of total revenues was due to an
increase in rent associated with a new location and the sale-leaseback of
two store locations in March 1998.
Interest Expense
- ----------------
Net interest expense, primarily related to interest expense on debt
incurred to finance the acquisition of the Company, was $6.9 million in
Quarter 1999. Net interest expense was $7.5 million in Quarter 1998.
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 1, 1999 was $258.4 million,
which includes $110.0 million in Senior Subordinated Notes due 2004,
$146.4 million due under the Senior Credit Facility and a $2.0 million note
payable. At June 1, 1999, the Company had $55.3 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 $12.5 million of unused revolving credit available
under the Senior Credit Facility.
During Quarter 1999, the Company completed the sale of one operating
location for a gross selling price of $5.4 million. In fiscal year 1998,
in connection with the plan of disposal, the Company determined that the
carrying value of the assets exceeded their fair values. Accordingly, a
loss of $2.7 million, which represented the excess of the carrying value of
$7.8 million over the fair value of $5.1 million, was charged to operations
in 1998. The net proceeds of the sale were applied to the revolving credit
facility.
The Company currently anticipates making total capital expenditures of
approximately $15.6 million in fiscal 1999. Capital expenditures for
Quarter 1999 were $2.3 million compared with $5.7 million in Quarter 1998.
Capital expenditures will include converting two conventional stores to
superstores and remodeling two existing stores. Planned capital
expenditures for fiscal 1999 include approximately $5.4 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 1999 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.
Year 2000
- ---------
During 1997, the Company began a review process to address the Year 2000
issue that encompasses the Company's operating and administrative areas.
Information technology professionals are working to identify and resolve
Year 2000 issues in a timely and effective manner. The Company's executive
management monitors the status of the Year 2000 remediation plans as they
relate to internally used software, computer hardware and use of computer
applications. The Company expects to complete remediation of all its
operating and administrative systems by September 1999. The Company has
also notified key vendors of Year 2000 compliance requirements.
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 $1.5 million.
While the Company believes it is taking steps to assure Year 2000
compliance, it is also dependent on key vendor compliance. If 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 a material 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.
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 1, 1999.
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 11, 1999 By: /s/ Stephen R. Winslow
------------- ----------------------
Stephen R. Winslow
Senior Vice President, Finance
and chief accounting officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING BALANCE SHEETS AS OF MAY 1, 1999 AND THE ACCOMPANYING STATEMENTS OF
OPERATIONS AND CASH FLOWS FOR THE 13 WEEK PERIOD ENDED MAY 1, 1999 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-29-2000
<PERIOD-END> MAY-1-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 18,452
<ALLOWANCES> 1,392
<INVENTORY> 63,726
<CURRENT-ASSETS> 87,513
<PP&E> 236,075
<DEPRECIATION> 74,289
<TOTAL-ASSETS> 403,289
<CURRENT-LIABILITIES> 73,245
<BONDS> 257,252
10,445
0
<COMMON> 0
<OTHER-SE> 82,276
<TOTAL-LIABILITY-AND-EQUITY> 403,289
<SALES> 262,676
<TOTAL-REVENUES> 262,676
<CGS> 190,393
<TOTAL-COSTS> 66,829
<OTHER-EXPENSES> (29)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,944
<INCOME-PRETAX> (1,462)
<INCOME-TAX> 91
<INCOME-CONTINUING> (1,553)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,553)
<EPS-BASIC> (310.60)
<EPS-DILUTED> (310.60)
</TABLE>
