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 14, 1999
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
September 18, 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 - August 14, 1999, January 30, 1999 and
February 27, 1999
Statements of operations - 13 and 26 weeks ended
August 14, 1999 and August 1, 1998; 4 weeks ended
February 27, 1999 and February 28, 1998
Statements of cash flows - 26 weeks ended August 14, 1999 and
August 1, 1998; 4 weeks ended February 27, 1999
and February 28, 1998
Notes to financial statements
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 14, February 27, January 30,
1999 1999 1999
---------- ------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 14,217
Accounts receivable, net of reserve
for doubtful accounts of $954 in
August, $1,378 in February and
$1,331 in January 13,985 $ 16,083 $ 18,277
Inventory 58,853 63,154 64,914
Prepaid expenses 4,410 4,920 4,483
-------- -------- --------
Total current assets 91,465 84,157 87,674
Property and equipment at cost:
Land 13,567 13,567 15,256
Building 28,018 28,006 31,712
Equipment & fixtures 110,599 124,074 123,757
Leasehold improvements 72,573 69,778 69,675
-------- -------- --------
Total property & equipment 224,757 235,425 240,400
Less accumulated depreciation
and amortization 67,658 71,326 70,645
-------- -------- --------
Net property and equipment 157,099 164,099 169,755
Other assets, net 27,296 28,311 28,537
Goodwill, net 125,243 126,732 127,005
-------- -------- --------
Total Assets $401,103 $403,299 $412,971
======== ======== ========
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 33,290 $ 6,657 $ 39,247
Accrued payroll & benefits 8,331 15,129 14,399
Current portion self-insurance 4,844 6,907 6,286
Accrued interest 4,162 5,686 5,762
Other current liabilities 13,390 14,108 14,585
-------- -------- --------
Total current liabilities 64,017 78,487 79,279
Other liabilities 20,320 19,363 19,697
Long-term debt 110,000 251,174 259,037
Redeemable preferred stock,
redemption value $11,000 10,460 10,429 10,421
Shareholder's equity:
Common stock, $.01 par value,
10,000 shares authorized and 5,000
shares outstanding 0 0 0
Additional paid-in-capital 263,429 82,505 82,606
Retained earnings (deficit) (67,123) (38,659) (38,069)
-------- -------- --------
Total shareholder's equity 196,306 43,846 44,537
-------- -------- --------
Total Liabilities and Shareholder's Equity $401,103 $403,299 $412,971
======== ======== ========
</TABLE>
See accompanying notes.
STAR MARKETS COMPANY, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks 26 Weeks 26 Weeks 4 Weeks 4 Weeks
Ended Ended Ended Ended Ended Ended
August 14, August 1, August 14, August 1, February 27, February 28,
1999 1998 1999 1998 1999 1998
---------- --------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $268,921 $268,682 $531,597 $527,885 $ 81,324 $ 78,178
Cost of goods sold 197,752 195,771 388,145 384,300 59,095 56,739
-------- -------- -------- -------- -------- --------
Gross profit 71,169 72,911 143,452 143,585 22,229 21,439
Operating and administrative expenses 62,167 61,570 122,758 120,882 18,652 17,474
Transaction expenses (Note 3) 23,585 0 23,585 0 0 0
Depreciation and amortization 6,616 6,185 12,854 12,232 1,917 1,864
-------- -------- -------- -------- -------- --------
Operating profit (21,199) 5,156 (15,745) 10,471 1,660 2,101
Interest expense 5,455 7,401 12,399 14,937 2,192 2,395
Other expenses (income), net 771 (17) 742 (18) 30 1
-------- -------- -------- -------- -------- --------
Loss before income taxes (27,425) (2,228) (28,886) (4,448) (562) (293)
Income taxes 91 96 183 177 28 27
-------- -------- -------- -------- -------- --------
Net loss $(27,516) $ (2,324) $(29,069) $ (4,625) $ (590) $ (320)
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
STAR MARKETS COMPANY, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
26 Weeks 26 Weeks 4 Weeks 4 Weeks
Ended Ended Ended Ended
August 14, August 1, February 27, February 28,
1999 1998 1999 1998
---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Operating activities
Net loss $ (29,069) $ (4,625) $ (590) $ (320)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of deferred financing costs 715 844 130 130
Depreciation and amortization 12,855 12,229 1,917 1,864
Loss (gain) on sale or disposal of property and equipment 601 (17) 30
Changes in operating assets and liabilities:
Accounts receivable 4,294 3,265 2,196 4,463
Inventories 6,063 4,301 1,760 3,919
Prepaid expenses 73 (724) (438) (900)
Accounts payable (3,917) (8,815) (1,589) (10,009)
Accrued payroll and benefits (6,066) (1,201) 730 871
Self-insurance reserves (1,442) 352 621 97
Accrued interest 1,855 (131) (76) (235)
Other current liabilities (1,435) (1,606) (571) (1,445)
Other 351 849 (311) 152
--------- -------- ------- --------
Net cash (used in) provided by operating activities (15,122) 4,721 3,809 (1,413)
Investing activities
Purchases of property and equipment (4,448) (11,641) (1,054) (769)
Proceeds from sale of property and equipment 5,162 21,577 5,109 0
--------- -------- ------- --------
Net cash provided by investing activities 714 9,936 4,055 (769)
Financing Activities
Net (repayment) proceeds from revolving credit facility (7,041) 4,900 (7,600) 2,500
Equity contribution 181,623 0 0 0
Repayment of long-term debt (145,345) (18,950) (264) (318)
Preferred dividends paid (612) (607) 0
--------- -------- ------- --------
Net cash provided by (used in) financing activities 28,625 (14,657) (7,864) 2,182
Net increase in cash and cash equivalents 14,217 0 0 0
Cash and cash equivalents beginning of period 0 0 0 0
--------- -------- ------- --------
Cash and cash equivalents end of period $ 14,217 $ 0 $ 0 $ 0
========= ======== ======= ========
</TABLE>
See accompanying notes.
STAR MARKETS COMPANY, INC.
Notes to Financial Statements
August 14, 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 52 stores as of August 14, 1999.
On June 29, 1999, the previously reported Stock Purchase Agreement by
and among Star Markets Company (the "Company"), Star Market Holdings,
Inc. ("Holdings") and J Sainsbury plc ("Sainsbury") was completed.
Sainsbury acquired all of the issued and outstanding voting securities
of Holdings for $476.0 million.
Note 2 - Change in Fiscal Year
- ------------------------------
On June 29, 1999 the Company changed to a fiscal year ending the
Saturday closest to the end of February from a fiscal year ending the
Saturday closest to the end of January. As a result of the change in
the fiscal year from January 30, 1999 to February 27, 1999, the Company
has reported the 4 week transition period for the period from January
31, 1999 to February 27, 1999 for the 13 and 26 week period ended August
14, 1999; and a transition period of 2 weeks from May 2, 1999 to May
15, 1999. Financial statements for the corresponding periods of the
prior year are included as previously reported; there are no seasonal or
other factors that affect the comparability of the statements. The
financial statements for the 13 and 26 weeks ended August 14, 1999 are
adjusted for the 2 week transition period ended May 15, 1999. The
results of operations for the transition period of the 2 weeks ended May
2, 1999 to May 15, 1999 are as follows:
<TABLE>
<CAPTION>
2 Weeks 2 Weeks
Ended Ended
May 15, May 16,
1999 1998
-------- -------
<S> <C> <C>
Total revenues $40,908 $40,898
Net loss (228) (420)
</TABLE>
Note 2 - Change in Fiscal Year - continued
- ------------------------------------------
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 and 26 weeks ended August 14, 1999 are not
necessarily indicative of the results for the entire year ending
February 26, 2000. The financial statements should be read in connection
with the audited financial statements and footnotes included in the
Registrant Company's annual report on Form 10-K for the year ended
January 30, 1999.
Note 3 - Equity Contribution
- ----------------------------
On June 29, 1999, the Company received an equity contribution of $181.6
million from J Sainsbury plc in connection with their purchase of the
Company. Of the proceeds of the equity contribution, $145.3 million was
used to repay the outstanding debt under the Senior Credit Facility of the
Company and to pay $23.6 million of transaction expenses related to the
closing of the purchase of the Company. Of the $23.6 million, $17.7 million
represented compensation expense attributable to the settlement of employee
stock options and $5.9 million were costs related directly to the closing of
the transaction.
Note 4 - Subsequent Event
- -------------------------
On August 31, 1999, the Company completed the sale of its wholesale
business to C+S Grocers, Inc. of Brattleboro, VT. for $3.4 million.
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition.
Results of Operations
- ---------------------
Results of operations for the 13 and 26 weeks ended August 14, 1999 are
referred to herein as "Quarter 1999" and "Interim 1999," respectively,
and the 13 and 26 weeks ended August 1, 1998 are referred to as "Quarter
1998" and "Interim 1998," respectively.
The Company currently operates 24 superstores, 24 conventional
supermarkets and four Wild Harvest stores, which emphasize natural,
healthy foods.
Quarter 1999
Revenues
- --------
Total revenues increased 0.1% in Quarter 1999 to $268.9 million from
$268.7 million in Quarter 1998. Revenues from retail operations in
Quarter 1999 increased 0.8% to $255.4 million from $253.5 million in
Quarter 1998. The increase in revenues from retail operations was
attributable to an increase in the number of retail stores operated and
an increase in comparable store sales of 3.1%. Revenues from wholesale
operations in Quarter 1999 declined 11.4% to $13.5 million from $15.2
million in Quarter 1998.
Gross Profit
- ------------
Gross profit decreased 2.4% in Quarter 1999 to $71.2 million from $72.9
million in Quarter 1998. Gross profit as a percentage of total revenues
decreased to 26.5% in Quarter 1999 from 27.1% in Quarter 1998. Gross
profit from retail operations decreased 2.0% in Quarter 1999 to $70.3
million from $71.8 million in Quarter 1998. Gross profit as a percentage
of revenues for the retail operations decreased to 27.5% in Quarter 1999
from 28.3% in Quarter 1998. The decrease in gross profit as a percentage
of revenues was due primarily to a decrease in product margins. Gross
profit from wholesale operations in Quarter 1999 decreased 23.5% to $0.9
million from $1.1 million in Quarter 1998 due to the decrease in
wholesale revenues. Gross profit as a percentage of wholesale revenues
in Quarter 1999 decreased to 6.4% from 7.5% in Quarter 1998.
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses increased by 1.0% to $62.2 million
in Quarter 1999 from $61.6 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 primarily due to an increase in rent as a percentage of revenues.
Transaction Expenses
- --------------------
Expenses related to the acquisition of the Company were $23.6 million in
Quarter 1999, of which $17.7 million represented settlement of employee
stock options.
Interest Expense
- ----------------
Net interest expense, primarily related to interest expense on debt
incurred to finance the 1994 acquisition of the Company, was $5.4 million in
Quarter 1999. Net interest expense was $7.4 million in Quarter 1998. The
decrease in interest expense is attributable to the repayment of outstanding
debt under the Senior Credit Facility on June 29, 1999, in connection with
the purchase of the Company by Sainsbury.
Interim 1999
- ------------
Revenues
- --------
Total revenues increased 0.7% in Interim 1999 to $531.6 million from
$527.9 million in Interim 1998. Revenues from retail operations in
Interim 1999 increased 1.3% to $504.1 million from $497.9 million in
Interim 1998. The increase in revenues from retail operations was
attributable both to an increase in the number of retail stores operated
and a 1.5% increase in comparable store sales. Revenues from wholesale
operations in Interim 1999 declined 8.5% to $27.5 million from $30.0
million in Interim 1998.
Gross Profit
- ------------
Gross profit decreased 0.1% in Interim 1999 to $143.5 million from
$143.6 million in Interim 1998. Gross profit as a percentage of total
revenues decreased to 27.0% in Interim 1999 from 27.2% in Interim 1998.
Gross profit from retail operations in Interim 1999 of $141.6 million
remained consistent with $141.6 million in Interim 1998. Gross profit as
a percentage of revenues for the retail operations decreased to 28.1% in
Interim 1999 from 28.4% in Interim 1998. The decrease in gross profit as
a percentage of revenues was due primarily to a decrease in product
margins. Gross profit from wholesale operations in Interim 1999
decreased 16.4% to $1.9 million from $2.2 million in Interim 1998. Gross
profit as a percentage of wholesale revenues in Interim 1999 decreased
to 6.8% from 7.5% in Interim 1998.
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses increased by 1.6% to $122.8
million in Interim 1999 from $120.9 million in Interim 1998. Operating
and administrative expenses as a percentage of total revenues increased
to 23.1% in Interim 1999 from 22.9% in Interim 1998. The increase in
operating and administrative expenses as a percentage of total revenues
was due to an increase in rent.
Transaction Expenses
- --------------------
Expenses related to the acquisition of the Company were $23.6 million,
of which $17.7 million represented settlement of employee stock options.
Interest Expense
- ----------------
Net interest expense, primarily related to interest expense on debt
incurred to finance the 1994 acquisition of the Company, was $12.4 million in
Interim 1999. Net interest expense was $14.9 million in Interim 1998.
The decrease in interest expense is attributable to the repayment of
outstanding debt under the Senior Credit Facility on June 29, 1999, in
connection with the purchase of the Company by Sainsbury.
Liquidity and Capital Resources
- -------------------------------
The Company's total indebtedness as of August 14, 1999 was $110.0
million of Subordinated Notes ("the Notes") due November 1, 2004.
Beginning on November 1, 1999, the Company intends to redeem the Notes
for a price equal to 106.5% of the principal amount of the Notes.
On June 29, 1999, the Company received an equity contribution of $181.6
million from J Sainsbury plc in connection with their purchase of the
Company. Of the proceeds of the equity contribution, $145.3 million was
used to repay term loans, $17.7 million for the settlement of employee
stock options and $5.9 million for expenses related to the closing of
the purchase of the Company.
During the quarter, the Company divested one operating location, as
stipulated by the Federal Trade Commission for approval of the purchase
of the Company by J Sainsbury plc. The Company is required to divest
four additional operating locations as a condition for approval of the
purchase of the Company.
The Company believes that the current cash balances and funds generated
from operations 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 to
fund planned capital expenditures. However, if the Company's cash flow
and capital resources are insufficient to fund its debt service
obligations and working capital requirements, the Company will receive
funding from the parent company, J Sainsbury plc.
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 October
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.
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 filed two reports on Form 8-K during the 26 weeks ended
August 14, 1999:
(1) Form 8-K dated July 14, 1999 reported:
Item 1. Change in Control of Registrant.
On June 29, 1999, J Sainsbury plc acquired all of the
issued and outstanding voting securities of Star Market
Holdings, Inc.
Item 8. Change in Fiscal Year.
On June 29, 1999 the Company has changed to a fiscal year
ending the Saturday closest to the end of February from a
fiscal year ending the Saturday closest to the end of
January.
(2) Form 8-K dated July 30, 1999 reported:
Item 4. Change in Registrant's Certifying Accountant.
On August 16, 1999, the Registrant notified Ernst &
Young, LLP that they were dismissed as the Registrants'
independent auditors as a result of the previously
reported Change in Control
Item 5. Other Events - Issuance of Notice in Change of
Control Relating to Star Markets Company, Inc. to Holders
of 13% Senior Subordinated Notes Due November 1, 2004.
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 28, 1999 By: /s/
------------------ -----------------
John Flaherty
Treasurer,
chief accounting officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING BALANCE SHEETS AS OF AUGUST 14, 1999 AND JANUARY 30, 1999; THE
ACCOMPANYING STATEMENTS OF OPERATIONS FOR THE 13 WEEK AND 26 WEEK PERIODS ENDED
AUGUST 14, 1999 AND AUGUST 1, 1998; AND THE ACCOMPANYING STATEMENTS OF CASH
FLOWS FOR THE 26 WEEK PERIODS AUGUST 14, 1999 AND AUGUST 1,1998 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> 6-MOS
<FISCAL-YEAR-END> FEB-26-2000
<PERIOD-END> AUG-14-1999
<CASH> 14,217
<SECURITIES> 0
<RECEIVABLES> 13,985
<ALLOWANCES> 954
<INVENTORY> 58,853
<CURRENT-ASSETS> 89,715
<PP&E> 224,757
<DEPRECIATION> 67,658
<TOTAL-ASSETS> 422,193
<CURRENT-LIABILITIES> 77,957
<BONDS> 0
10,460
0
<COMMON> 0
<OTHER-SE> 196,306
<TOTAL-LIABILITY-AND-EQUITY> 422,193
<SALES> 268,921
<TOTAL-REVENUES> 268,921
<CGS> 197,752
<TOTAL-COSTS> 92,368
<OTHER-EXPENSES> 771
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,455
<INCOME-PRETAX> (27,425)
<INCOME-TAX> 91
<INCOME-CONTINUING> (27,516)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,516)
<EPS-BASIC> (5,503.40)
<EPS-DILUTED> (5,503.40)
</TABLE>
