UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
625 MT. AUBURN STREET, CAMBRIDGE, MA 02138
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(Address of principal executive offices) (Zip Code)
(617) 528-2550
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant at April 20, 1999: None
Number of shares of the issuer's common stock, outstanding as of April 20,
1999: 5,000 shares
Documents incorporated by reference: None
PART I
Item 1. Business
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Throughout this report, the "Company" or "Star" refers to Star Markets
Company, Inc., which acquired the assets and business of the Star Market
Company operating division of Jewel Food Stores, Inc. ("Predecessor" or
"Star Markets"), a wholly owned subsidiary of American Stores Company (the
"Parent" or "ASC"). Star Markets Company, Inc., a Massachusetts corporation,
is a wholly-owned subsidiary of Star Markets Holdings, Inc., ("Holdings"), a
Massachusetts corporation. Both the Company and Holdings were formed for
purposes of the acquisition.
Historical financial information of Predecessor is presented as if it
existed as a separate entity during the periods presented.
The Company is a leading regional food retailer, with 53 stores (at the end
of fiscal 1998) located in Eastern Massachusetts. Thirty-three of the
Company's 53 stores are located inside Route 128, an area which includes
many of the most densely populated and affluent communities in the
metropolitan Boston area. The Company also operates a wholesale food
business serving locations in New England and New York. The Company employs
approximately 10,000 people.
On September 8, 1994, the Company acquired the business and assets of Star
Markets from ASC (the "Acquisition"). The Company was formed to acquire Star
Markets on behalf of affiliates of INVESTCORP SA ("Investcorp"), management
and certain other investors.
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.
Store formats
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The Company currently operates three food retailing formats: superstores,
conventional stores, and Wild Harvest stores.
Superstores
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The Company's 24 superstores offer a wider range of goods and services than
its conventional stores. In addition to traditional supermarket offerings,
the Company's superstores contain most of the following specialty service
areas: full-service bakeries, delicatessens with prepared foods, self-
service salad bars, floral departments, pharmacies, "Peticulars" pet food
and accessories departments, "Wild Harvest" natural foods departments, and
full-service kitchens offering a variety of freshly prepared meal
selections. Prepared foods include store-cooked meats and poultry, salads
and baked goods.
During 1998, the Company opened one new superstore and remodeled one
existing superstore.
Conventional Stores
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The Company currently operates 25 conventional stores which offer a wide
selection of national brands and private label products as well as high-
quality produce, meat, seafood, and a select line of general merchandise.
Conventional stores typically contain one or more specialty service
departments, such as floral, seafood, bakery or delicatessen.
Wild Harvest Stores
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The Company's four Wild Harvest stores offer an extensive selection of
natural foods, natural meats and seafood, bulk foods, and fresh fruits and
vegetables, including certified organic, pesticide-free, conventional and
locally grown produce. Wild Harvest stores also offer: "Wild Juices," a
California style juice bar; "Harvest Grain," a scratch bakery where bakers
make their own dough from unbleached and unbromated flours; a Granola
Factory where 12 different granolas are made on-site and baked fresh daily;
"Harvest Table," a selection of healthy, prepared foods for time-starved
consumers; and a Wellness Department, which offers a complete assortment of
natural vitamins, nutritional supplements, herbal and homeopathic remedies
and natural personal care products. In addition to the items mentioned
above, Wild Harvest stores feature a selection of the most popular grocery
items sold in traditional supermarkets, allowing consumers one shopping
destination.
Marketing
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The Company's marketing strategy emphasizes its long-standing reputation for
quality perishable goods and superior customer service. The Company's
advertising also highlights its broad selection of national brand and
private label merchandise via weekly circulars and through radio and
television commercials. The Wild Harvest advertising programs emphasize
fresh affordable natural foods as well as the convenience of one-stop
shopping. The Company was the first food retailer in the metropolitan Boston
area to introduce a card-based marketing and merchandising program designed
to increase customer loyalty. The Star Advantage Card offers customers
promotional benefits and eliminates the need to clip Star circular coupons.
Wild Harvest stores offer the Wild Card with benefits similar to the Star
Advantage Card. During 1998, the Company continued to utilize both cards,
which also track customers' purchasing data, to target specific customers
for certain promotional events.
Information Systems
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The Company's management information systems and point-of-sale scanning
technology reduce labor costs attributable to product pricing and customer
check-out, and provide management with information that facilitates
purchasing, receiving and management of inventory and accounts payable. The
Company has point-of-sale scanning technology in all of its stores. All
stores use electronic systems for employee time and attendance records. The
Company believes that its information systems enable management to operate
efficiently in product procurement, store delivery scheduling, inventory
management and pricing accuracy. In conjunction with the Acquisition, the
Company developed a plan to upgrade and/or replace a significant portion of
its information systems architecture to state-of-the-art technology. During
1998, the Company continued the implementation of new core application
software within its purchasing and distribution systems. The project
included the implementation of new buying, merchandising and inventory
management systems for dairy operations, non-perishable categories,
distribution systems and a new pricing system.
Distribution
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The Company operates a warehouse and distribution complex in Norwood,
Massachusetts that supplies both the Company's retail and wholesale
operations with dry grocery, dairy and perishable products. This facility
provides approximately 14.5 million cubic feet of storage space, or capacity
for approximately 1.6 million cases of product. Management believes this
facility has sufficient capacity to support the Company's growth plans over
the next several years. The Norwood complex is conveniently located within
the Company's market area and provides efficient distribution of product
with a fleet of 30 tractors and 380 trailers. The Norwood complex also
includes a corrugated paper recycling facility that reclaims packaging
materials from the stores and prepares it for sale to processors of
corrugated paper products.
Competition
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The retail food industry is highly competitive. It is characterized by
narrow profit margins and, accordingly, earnings are dependent on high sales
volume and operating efficiency. The Company's competitors include regional
and local supermarket chains and natural food stores, independent grocery
stores, specialty food stores, warehouse club stores, other mass
merchandisers, drug stores and convenience stores. Supermarket chains
generally compete on the basis of location, quality of products, service,
price, product variety and store condition. The Company's principal
competitor is Stop & Shop. The Company also competes in certain locations
with B.J.'s Wholesale Club, Bread & Circus, Costco, Demoulas, Johnnie's
Foodmaster, Roche Bros., Shaw's, Wal-Mart and others.
Merchandising Programs
- ----------------------
The Company's merchandising programs are designed to increase gross margins
and optimize product assortment. The key elements of the Company's
merchandising strategy are to (i) provide its superstores with a wider range
of non-grocery items, such as home office products, kitchen and bath items,
books and magazines and other general merchandise, (ii) introduce high-
quality prepared foods departments, (iii) provide an expanded selection of
high-quality perishable products from its existing in-store bakeries,
seafood, floral, and produce departments, (iv) expand the Company's
offerings of natural, organic and ethnic foods, and (v) establish specialty
departments, such as juice bars, prepared foods, "Peticulars" pet food and
accessories departments, and "Wild Harvest" natural food departments, where
space permits. In addition, the Company is implementing strategies to
increase its sales of private label products. The Company intends to
increase sales of private label products by offering a wider range of
private label products and improving the marketing and merchandising of such
products. Further, the Company has exclusive distribution rights within its
trade area for the President's Choice brand of products, a line of high-
quality packaged products.
Wholesale Operations
- --------------------
The Company's wholesale operations principally involve the distribution of
grocery and perishable products to locations in New England and New York.
Seven of these locations are contractually allowed to operate under the
"Star" name, provided that the customer complies with certain operating
covenants intended to protect the value of the "Star" trade name by insuring
that the customer's stores are clean and well-run. The existing contracts
are generally terminable by the Company on 30 days notice. In addition to
providing product distribution, the Company also offers marketing and
advertising programs to wholesale customers for an incremental charge. The
Company does not generally provide financing to its wholesale customers,
other than payment terms for product purchases.
Item 2. Properties
- ------------------
At the end of fiscal 1998, the Company owned five stores and its office in
Cambridge, Massachusetts. In addition, as of the end of fiscal 1998, the
Company owned one property held for development located in Dorchester,
Massachusetts. The Company has granted mortgages on all of its real estate
to the lenders under its Senior Credit Facility to secure the Company's
obligations thereunder. The Company completed a sale-leaseback for two of
its operating properties and its warehouse and distribution complex during
1998. In February 1999, subsequent to fiscal 1998, the Company completed
the sale of one of its operating properties and plans to close the location
in June 1999.
At the end of fiscal 1998, the Company leased 48 stores throughout the
metropolitan Boston area and Cape Cod, Massachusetts. The leases for the 48
stores have an average life of approximately 34 years until final
expiration.
Item 3. Legal Proceedings
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From time to time, the Company has been involved in various legal
proceedings. Management believes that all of such litigation is routine in
nature and incidental to the conduct of the Company's business, and that
none of such litigation, if determined adversely to the Company, would have
a material adverse effect on the financial condition or results of
operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
No matters were submitted to a vote of security holders during the 13-week
period ended January 30, 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters
- ------------------------------------------------------------------------------
There is no established public trading market for the Company's common
equity. The authorized common stock of the Company consists of 10,000 shares
of common stock, par value $.01 per share ("Common Stock"). At April 20,
1999, there were 5,000 shares of Common Stock issued and outstanding, all of
which are held of record by Holdings. All outstanding shares of Common Stock
are pledged to secure the Company's obligations under its Senior Credit
Facility and, pursuant to restrictions contained therein, the Company is not
expected to be able to pay dividends on its Common Stock for the foreseeable
future, other than certain limited dividends permitted under the Senior
Credit Facility.
The Company's 13% Senior Subordinated Notes due 2004 (the "Subordinated
Notes") were issued pursuant to an indenture (the "Indenture") containing
certain covenants that also restrict the payment of dividends, the
repurchase of capital stock and the making of other Restricted Payments (as
defined in the indenture), subject to certain exceptions similar to those
contained in the Senior Credit Facility.
Item 6. Selected Financial Data
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The following table sets forth summary historical financial data of Star
Markets and the Company for the five fiscal years ended January 30, 1999.
For financial statement purposes, the Acquisition was accounted for as a
purchase effective September 10, 1994. As a result, the Company has adopted
a new basis of accounting that reflects estimated fair values for assets and
liabilities at that date.
Predecessor(1) The Company
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(53 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
32-Week Period 20-Week Period Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended Ended
September 10, January 28, February 3, February 1, January 31, January 30,
1994 1995 1996 1997 1998 1999
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(Dollars in thousands)
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Operating Data:
Revenues
Retail $ 427,762 $ 268,617 $ 763,513 $ 877,827 $ 965,845 $1,002,616
Wholesale 69,227 39,687 90,991 76,704 68,343 61,622
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Total revenues 496,989 308,304 854,504 954,531 1,034,188 1,064,237
Gross profit
Retail 104,249 65,293 191,418 234,514 267,350 281,623
Wholesale 4,058 2,230 6,273 4,927 5,040 4,773
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Total gross profit 108,307 67,523 197,691 239,441 272,390 286,396
Depreciation and amortization 8,295 7,218 19,326 22,178 23,792 24,837
Operating income 15,266 6,384 19,642 19,949 21,890 24,098
Interest expense 27 9,781 28,382 28,894 30,177 29,486
Income (loss) before
extraordinary loss 8,592 (3,507) (8,890) (9,336) (8,565) (5,677)
Extraordinary loss (2,094)
Net income (loss) 8,592 (5,601) (8,890) (9,336) (8,565) (5,677)
Store Data (Period End):
Number of stores 33 33 38 48 52 53
Total square footage 1,096,544 1,119,990 1,639,015 2,034,603 2,240,966 2,290,307
Selling square footage 842,146 859,773 1,144,486 1,419,013 1,567,976 1,602,830
Balance Sheet Data (Period End):
Total assets $ 208,084 $ 421,355 $ 425,503 $ 453,270 $ 452,542 $ 412,971
Long-term debt 240,057 257,400 271,827 276,327 259,037
Redeemable preferred stock 10,037 10,134 10,230 10,326 10,421
<FN>
<F1> For financial statement purposes, the Acquisition was accounted for as
a purchase effective September 10, 1994. The acquisition resulted in
a new basis of accounting reflecting estimated fair values for assets
and liabilities at that date. Accordingly, the financial statements
for the periods subsequent to September 10, 1994, are presented on the
Company's new basis of accounting, while the financial statements at
September 10, 1994 and the prior period are presented on the
Predecessor's historical cost basis of accounting. The assets and
business were acquired for an aggregate purchase price of $293.3
million, exclusive of related fees and expenses.
</FN>
Item 7. Management's Discussion and Analysis of the Results of Operations
- -------------------------------------------------------------------------
and Financial Condition
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Fiscal 1998 and Fiscal 1997
Revenues
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Revenues from retail operations for the 52-week period ended January 30,
1999 increased 3.8% to $1,002.6 million from $965.8 million for the 52-week
period ended January 31, 1998. The increase in revenues from retail
operations was due to an increase in the number of stores operated. For
stores open more than one year ("same store sales"), revenues decreased by
0.6% from the prior period. Revenues from wholesale operations for the 52-
week period ended January 30, 1999 declined 9.8% to $61.6 million from $68.3
million for the 52-week period ended January 31, 1998.
Gross Profit
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Gross profit from retail operations for the 52-week period ended January 30,
1999 increased 5.3% to $281.6 million from $267.3 million for the 52-week
period ended January 31, 1998 primarily due to the increase in revenues.
Gross profit as a percentage of revenues for retail operations for the 52-
week period ended January 30, 1999 increased to 28.1% from 27.7% for the
52-week period ended January 31, 1998. The increase in gross profit as a
percentage of revenues was primarily attributable to improvements in
perishable margins and reduced distribution costs. Gross profit from
wholesale operations for the 52-week period ended January 30, 1999 decreased
5.3% to $4.8 million from $5.0 million for the 52-week period ended January
31, 1998. Gross profit as a percentage of revenues for wholesale operations
for the 52-week period ended January 30, 1999 increased to 7.7% from 7.4%
for the 52-week period ended January 31, 1998, primarily due to improvement
in product margins and reduced distribution costs.
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses for the 52-week period ended January
30, 1999 increased by 4.7% to $237.5 million from $226.7 million for the 52-
week period ended January 31, 1998. Operating and administrative expenses as
a percentage of total revenues for the 52-week period ended January 30, 1999
increased to 22.3% from 21.9% for the 52-week period ended January 31,
1998. 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
rent associated with new locations and the sale-leaseback of three
properties in March 1998 and an impairment loss resulting from the intended
sale of an operating location. 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, and an
adjustment to reduce the reserves recorded at the time of the Acquisition
for worker's compensation and general liability.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expense, which includes the amortization of
goodwill, was 2.3% of total revenues for the 52-week period ended January
30, 1999 and the 52-week period ended January 31, 1998.
Non-Operating Expenses
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Interest expense for the 52-week period ended January 30, 1999 decreased to
$29.5 million from $30.2 million for the 52-week period ended January 31,
1998. The Company recorded state income tax expense of $0.4 million for the
52-week period ended January 30, 1999 and the 52-week period ended January
31, 1998. The Company did not record a federal or state tax benefit
associated with the losses recorded in the 52-week period ended January 30,
1999 and the 52-week period ended January 31, 1998.
Fiscal 1997 and Fiscal 1996
Revenues
- --------
Revenues from retail operations for the 52-week period ended January 31,
1998 increased 10.0% to $965.8 million from $877.8 million for the 52-week
period ended February 1, 1997. The increase in revenues from retail
operations was due to both an increase in the number of stores operated and
to increased revenues from existing stores. For stores open more than one
year ("same store sales"), revenues increased by 0.5% from the prior period.
Revenues from wholesale operations for the 52-week period ended January 31,
1998 declined 10.9% to $68.3 million from $76.7 million for the 52-week
period ended February 1, 1997. The decrease in wholesale revenues was
primarily due to the loss of certain wholesale accounts which ceased
operations.
Gross Profit
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Gross profit from retail operations for the 52-week period ended January 31,
1998 increased 14.0% to $267.3 million from $234.5 million for the 52-week
period ended February 1, 1997 primarily due to the increase in revenues.
Gross profit as a percentage of revenues for retail operations for the 52-
week period ended January 31, 1998 increased to 27.7% from 26.7% for the
52-week period ended February 1, 1997. The increase in gross profit as a
percentage of revenues was primarily attributable to improvements in
perishable margins and leveraged distribution costs. Gross profit from
wholesale operations for the 52-week period ended January 31, 1998 increased
2.3% to $5.0 million from $4.9 million for the 52-week period ended February
1, 1997. Gross profit as a percentage of revenues for wholesale operations
for the 52-week period ended January 31, 1998 increased to 7.4% from 6.4%
for the 52-week period ended February 1, 1997, primarily due to an increase
in non-perishable gross margin rates, as well as a decrease in distribution
costs.
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses for the 52-week period ended January
31, 1998 increased by 14.9% to $226.7 million from $197.3 million for the
52-week period ended February 1, 1997. Operating and administrative expenses
as a percentage of total revenues for the 52-week period ended January 31,
1998 increased to 21.9% from 20.7% for the 52-week period ended February 1,
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 and an increase
in rent including both rent for new locations and rent associated with the
February, 1997 sale-leaseback of one operating location.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expense, which includes the amortization of
goodwill, was 2.3% of total revenues for the 52-week period ended January
31, 1998 and the 52-week period ended February 1, 1997.
Non-Operating Expenses
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Interest expense for the 52-week period ended January 31, 1998 increased to
$30.2 million from $28.9 million for the 52-week period ended February 1,
1997. The Company recorded state income tax expense of $0.4 million for the
52-week period ended January 31, 1998 and $0.4 million for the 52-week
period ended February 1, 1997. The Company did not record a federal or state
tax benefit associated with the losses recorded in the 52-week period ended
January 31, 1998 and the 52-week period ended February 1, 1997.
Liquidity and Capital Resources
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The Company's liquidity needs arise primarily from debt service on the
indebtedness incurred in connection with the Acquisition, the funding of the
Company's store acquisitions, capital expenditures and working capital
requirements.
The Company's total indebtedness as of April 20, 1999 was $254.9 million,
which includes $110.0 million of Subordinated Notes due November 1, 2004,
$142.7 million due under the Senior Credit Facility, and a $2.2 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 April 20,
1999, the Company had $7.2 million drawn under the letter of credit
facilities of the Senior Credit Facility and $53.8 million drawn under the
revolving credit portion of the Senior Credit Facility leaving an aggregate
of $14.0 million of unused revolving credit availability under the Senior
Credit Facility. The Company paid $19.6 million in aggregate principal
amount in 1998. The Company will pay $1.1 million in aggregate principal
amount in 1999.
Capital expenditures for fiscal 1998 were $20.6 million as compared to $41.1
million in fiscal 1997 and $54.8 million in fiscal 1996. The Company's
capital expenditures have been funded through cash flow from operations,
proceeds from sale-leaseback transactions, proceeds from the sale of
nonoperating properties, and borrowings under the revolving portion of its
Senior Credit Facility. In February 1999, the Company completed the sale of
one of its operating properties for a gross proceeds of $5.4 million. $5.1
million of such amount will be used to pay down the revolving credit
facility and $0.3 million to pay transaction expenses.
The Company currently anticipates making capital expenditures of
approximately $14.7 million in fiscal 1999. Capital expenditures will
include remodeling two existing stores and converting two conventional
stores to superstores. Planned capital expenditures for fiscal 1999 include
approximately $4.4 million for maintenance, systems, and distribution.
The Company believes that funds generated from operations, proceeds from
additional sale-leaseback transactions, sale of non-operating assets, 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 its debt.
Borrowings under the Senior Credit Facility are subject to variable interest
rates, which could cause the Company to be vulnerable to future increases in
prevailing interest rates. To the extent that the Company is required to
dedicate materially greater amounts of its cash flow from operations and
other capital resources to pay interest on its outstanding indebtedness as a
result of future interest rate increases, it will reduce the funds available
for other purposes.
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 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 $1.5 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.
Item 8. Consolidated Financial Statements and Supplementary Data
- ----------------------------------------------------------------
The consolidated financial statements and supplementary data are included
under Item 14 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
The following table sets forth the name, age and position of each current
director and executive officer of the Company. Each director of the Company
will hold office until the next annual meeting of shareholders of the
Company or until his or her successor has been elected and qualified.
Officers of the Company are elected by the Board of Directors of the Company
and serve at the discretion of the Board of Directors.
Name Age Positions
- ---- --- ---------
Henry J. Nasella 52 Chairman of the Board of Directors,
President and Chief Executive Officer
Edward Albertian 46 Executive Vice President, Operations and
Chief Operating Officer
Carole O'Connor Gates 41 Executive Vice President, Marketing
Stephen R. Winslow 39 Senior Vice President, Finance
William P. Paul 52 Executive Vice President, Merchandising
Henry J. Nasella became Chairman of the Board of Directors, President and
Chief Executive Officer of the Company in September 1994 upon the
consummation of the Acquisition. Prior to joining the Company, Mr. Nasella
was Chief Executive Officer of Staples, the Office Superstore Division of
Staples, Inc., a leading office products retailer, during 1993, and
President of Staples, Inc. from 1988 through 1993. Mr. Nasella is also a
director of Au Bon Pain Co., Inc.
Edward Albertian became Executive Vice President, Operations, and Chief
Operating Officer in May 1996. He joined the Company in May 1995 as Senior
Vice President, Operations. Prior to joining the Company, Mr. Albertian
served as Senior Vice President, Eastern Operations for Staples, Inc. from
1992.
Carole O'Connor Gates became Executive Vice President, Marketing in April
1996. She joined the Company in November 1994 as Senior Vice President,
Marketing. Prior to joining the Company, she served as Senior Vice
President, Advertising of BayBank, Inc. from January 1990.
Stephen R. Winslow became Senior Vice President, Finance in October 1996.
Prior to joining the Company, he served as Vice President,
Finance/Controller, Contract and Commercial Division of Staples, Inc. from
January 1996. Mr. Winslow served as Vice President, Planning, Analysis and
Reporting and Chief Accounting Officer from 1995, and Vice President,
Planning and Analysis from 1993 for Staples, Inc.
William P. Paul became Executive Vice President, Merchandising in April
1996. He joined the Company in May 1995 as Senior Vice President,
Merchandising. Prior to joining the Company, he served as Vice President of
Merchandising of Staples, International from February 1994 to May 1995, and
Vice President of Merchandising of Staples, Inc. from September 1990 to
February 1994.
Director Compensation
- ---------------------
The Company pays no remuneration to its employees for serving as directors.
See "Management--Executive Compensation." There are no family relationships
among any of the directors or executive officers.
Item 11. Executive Compensation
- -------------------------------
The following table sets forth certain information concerning the
compensation of the Company's Chief Executive Officer and the four other
most highly compensated executive officers for fiscal years 1998, 1997 and
1996.
Summary Compensation Table
Long Term
Compensation
----------------
Annual Compensation Awards
-------------------------------------- Number of Shares
Name and Principal Other Annual Underlying All Other
Position Year Salary(2)($) Bonus(2)($) Compensation($) Options/SARs(#) Compensation(3)($)
- ------------------------ ---- ------------ ----------- --------------- ---------------- ------------------
Henry J. Nasella 1998 325,000 390,000 0 0 11,069
Chairman, President and 1997 320,833 148,129 0 0 8,319
Chief Executive Officer 1996 300,000 0 0 0 12,046
- --------------------------------------------------------------------------------------------------------------------------
Edward Albertian 1998 270,833 130,000 0 19,587 8,116
Executive Vice President, 1997 220,833 88,333 0 0 6,375
Operations and Chief 1996 197,583 63,238 0 500 7,998
Operating Officer
- --------------------------------------------------------------------------------------------------------------------------
Carole O'Connor Gates 1998 197,500 94,800 0 8,764 6,113
Executive Vice President, 1997 182,500 73,000 0 0 5,767
Marketing 1996 168,333 51,667 0 0 7,495
- --------------------------------------------------------------------------------------------------------------------------
Stephen R. Winslow 1998 176,253 74,026 0 2,860 4,781
Senior Vice President, 1997 168,334 58,917 0 0 1,004
Finance 1996(1) 46,667 56,000 0 1,500 118
- --------------------------------------------------------------------------------------------------------------------------
William P. Paul 1998 166,000 79,680 0 0 8,321
Executive Vice President, 1997 165,000 48,180 0 0 6,659
Merchandising 1996 159,167 32,142 0 0 8,381
- --------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Date on which employment commenced was October 15, 1996 for Mr.
Winslow.
<F2> Represents amounts paid for the relevant fiscal year. Bonuses are
reported in the fiscal year earned and typically paid during the
following fiscal year.
<F3> The compensation reported represents: amounts contributed by the
Company under the 401(k) Savings Plan and imputed income on the value
of Company provided term life insurance in excess of $50,000.
</FN>
- - Company contributions under the 401(k) Savings Plan for fiscal 1998
were as follows: $5,735 for Mr. Nasella, $5,735 for Mr. Albertian,
$5,013 for Ms. O'Connor Gates, $4,151 for Mr. Winslow and $5,735 for
Mr. Paul. Imputed income on the value of Company provided term life
insurance in excess of $50,000 in fiscal 1998 was as follows: $5,334
for Mr. Nasella, $2,381 for Mr. Albertian, $1,100 for Ms. O'Connor
Gates, $630 for Mr. Winslow and $2,586 for Mr. Paul.
- - Company contributions under the 401(k) Savings Plan for fiscal 1997
were as follows: $5,100 for Mr. Nasella, $5,100 for Mr. Albertian,
$5,100 for Ms. O'Connor Gates, $397 for Mr. Winslow and $5,100 for
Mr. Paul. Imputed income on the value of Company provided term life
insurance in excess of $50,000 in fiscal 1997 was as follows: $3,219
for Mr. Nasella, $1,275 for Mr. Albertian, $667 for Ms. O'Connor
Gates, $607 for Mr. Winslow and $1,559 for Mr. Paul.
- - Company contributions under the 401(k) Savings Plan for fiscal 1996
were as follows: $5,458 for Mr. Nasella, $6,898 for Mr. Albertian,
$6,898 for Ms. O'Connor Gates, $0 for Mr. Winslow and $6,898 for Mr.
Paul. Imputed income on the value of Company provided term life
insurance in excess of $50,000 in fiscal 1996 was as follows: $6,588
for Mr. Nasella, $1,100 for Mr. Albertian, $597 for Ms. O'Connor
Gates, $118 for Mr. Winslow and $1,483 for Mr. Paul.
Option Grants
The Company made stock option grants of 31,211 in respect of Class C Stock
of Star Markets Holdings, Inc. ("Holdings") during the fiscal year ended
January 30, 1999 to the executive officers named in the Summary Compensation
Table.
Option Exercises and Holdings
The following table sets forth certain information related to stock options
in respect of Class C Stock of Holdings for the fiscal year ended January
30, 1999 for each of the executive officers named in the Summary
Compensation Table; and the number and value of options held by each of
these executives on January 30, 1999.
Number of Number of Shares of
Shares Common Stock Underlying Value of Unexercised In-
Common Unexercised Options at The-Money Options at
Stock Fiscal Year End Fiscal Year End(1)
Acquired on Value ---------------------------- ----------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Henry J. Nasella 0 $0 45,744 30,495 $1,429,500 $0
Edward Albertian 0 0 823 23,378 0 0
Carole O'Connor Gates 0 0 1,095 13,146 0 0
Stephen R. Winslow 0 0 0 4,360 0 0
William P. Paul 0 0 666 2,662 0 0
<FN>
<F1> Underlying shares are not publicly traded and are subject to
repurchase by Holdings under certain circumstances at the employee's
cost or at the then current value of the underlying share, as
determined by the Holding's Board of Directors upon the termination of
the employee's employment with the Company. Only those options granted
to Mr. Nasella at an exercise price of $37.50 per share are classified
as in-the-money for purposes of this table based on an estimated value
of such shares of $75.00 per share.
</FN>
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
All of the Company's issued and outstanding capital stock is owned by
Holdings. Class D Stock, par value $.01 per share, is the only class of
Holdings' stock that currently possesses voting rights. At January 30, 1999
there were 5,000 shares of Holdings' Class D Stock issued and outstanding.
Members of the Company's management own 38,374 shares, and have the right to
acquire an additional 54,764 shares subject to presently exercisable
options, of Holdings' Class C Stock, par value $.01 per share, which stock
has no voting rights except in certain limited circumstances. The following
tables set forth the beneficial ownership of each class of issued and
outstanding securities of Holdings by each director of the Company, each of
the executive officers of the Company listed under "Management," the
directors and executive officers of the Company as a group and each person
who beneficially owns more than 5% of the outstanding shares of any class of
voting securities of Holdings.
Number of Voting
Class D Voting Stock: Shares(1) Percentage(1)
- --------------------- --------- -------------
INVESTCORP S.A.(2)(6) 5,000 100.0%
37 rue Notre-Dame,
Luxembourg
SIPCO Limited(3) 5,000 100.0%
P.O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands
CIP Limited(4)(5) 4,600 92.0%
P.O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands
Ballet Limited(4)(5) 460 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Denary Limited(4)(5) 460 9.2%
West Wind Building
George Town, Grand Cayman
Cayman Islands
Gleam Limited(4)(5) 460 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Highlands Limited(4)(5) 460 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Noble Limited(4)(5) 460 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Outrigger Limited(4)(5) 460 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Quill Limited(4)(5) 460 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Radial Limited(4)(5) 460 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Shoreline Limited(4)(5) 460 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Zinnia Limited(4)(5) 460 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
INVESTCORP Investment Equity Limited(6) 400 8.0%
P.O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands
<FN>
<F1> As used in this table, beneficial ownership means the sole or shared
power to vote, or to direct the voting of a security, or the sole or
shared power to dispose, or direct the disposition of, a security.
<F2> Investcorp does not directly own any stock in Holdings. The number of
shares shown as owned by Investcorp includes all of the shares owned
by INVESTCORP Investment Equity Limited (see (6) below). Investcorp
owns no stock in Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited,
Radial Limited, Shoreline Limited, Zinnia Limited, or in the
beneficial owners of these entities. Investcorp may be deemed to share
beneficial ownership of the shares of voting stock held by these
entities because the entities have entered into revocable management
services or similar arrangements with an affiliate of Investcorp
pursuant to which each of such entities has granted such affiliate the
authority to direct the voting and disposition of the Holdings voting
stock owned by such entity for so long as such agreement is in effect.
Investcorp is a Luxembourg corporation.
<F3> SIPCO Limited may be deemed to control Investcorp through its
ownership of a majority of a company's stock that indirectly owns a
majority of Investcorp's shares.
<F4> CIP Limited ("CIP") owns no stock in Holdings. CIP owns less than 0.1%
of the stock in each of Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited,
Radial Limited, Shoreline Limited and Zinnia Limited (see (5) below).
CIP may be deemed to share beneficial ownership of the shares of
voting stock of Holdings held by such entities because CIP acts as a
director of such entities and the ultimate beneficial shareholders of
each of those entities have granted CIP revocable proxies in companies
that own those entities' stock. None of the ultimate beneficial owners
of such entities beneficially owns individually more than 5% of
Holdings' voting stock.
<F5> CIP, Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited,
Noble Limited, Outrigger Limited, Quill Limited, Radial Limited,
Shoreline Limited and Zinnia Limited each is a Cayman Islands
corporation.
<F6> INVESTCORP Investment Equity Limited is a Cayman Islands corporation,
and a wholly-owned subsidiary of Investcorp.
</FN>
Number of
Class C Non-Voting Stock: Shares(1)
- ------------------------- ---------
Henry J. Nasella 72,411(2)
625 Mount Auburn Street
Cambridge, MA 02138
Edward Albertian 1,423(3)
625 Mount Auburn Street
Cambridge, MA 02138
Carole O'Connor Gates 1,735(4)
625 Mount Auburn Street
Cambridge, MA 02138
Stephen R. Winslow 600
625 Mount Auburn Street
Cambridge, MA 02138
William P. Paul 1,266(5)
625 Mount Auburn Street
Cambridge, MA 02138
------
All directors and executive officers
of the Company as a group (5) persons 77,435
======
<FN>
<F1> As used in this table, beneficial ownership means the sole or shared
power to vote, or direct the voting of a security, or the sole or
shared power to dispose, or direct the disposition of, a security.
Each of the persons listed is deemed to beneficially own shares
issuable upon the exercise of stock options that are currently
exercisable ("Presently Exercisable Options").
<F2> Includes 45,744 shares subject to Presently Exercisable Options.
<F3> Includes 823 shares subject to Presently Exercisable Options.
<F4> Includes 1,095 shares subject to Presently Exercisable Options.
<F5> Includes 666 shares subject to Presently Exercisable Options
</FN>
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
In connection with the Acquisition, the Company entered into an agreement
for management advisory and consulting services (the "Management Agreement")
with International pursuant to which the Company agreed to pay International
$750,000 per annum for a five-year term. At the closing of the Acquisition,
the Company paid International approximately $2.3 million for the first
three years in accordance with the terms of the Management Agreement, with
the remaining two years due in quarterly installments. Upon consummation of
the transaction contemplated by the Stock Purchase Agreement, International
and the Company shall terminate the Management Agreement by mutual written
consent.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) 1. The financial statements listed in the List of Financial
Statements on page F-2 are filed as part of this Annual Report on
Form 10-K.
(a) 2. Financial Statement Schedules
All schedules are omitted as the required information is
inapplicable or are presented in the financial statements or
related notes.
(a) 3. List of Exhibits:
Exhibit
Number Description of Exhibits
- ------ -----------------------
3(a) Amended and Restated Articles of Organization of the Company,
dated as of September 6, 1994 (filed as Exhibit 3(a) to the
Registration Statement (No. 33-86690) on Form S-4 (the
"Registration Statement") and incorporated herein by reference).
3(b) By-laws of the Company (filed as Exhibit 3(b) to the Registration
Statement and incorporated herein by reference).
3(c) Certificate of Designation relating to the Preferred Stock of the
Company, dated September 7, 1994 (filed as Exhibit 3(c) to the
Registration Statement and incorporated herein by reference).
4(a) Indenture between the Company and State Street Bank and Trust
Company, as Trustee, dated as of November 1, 1994 (filed as
Exhibit 4(a) to the Registration Statement and incorporated herein
by reference).
4(b) Exchange and Registration Rights Agreement among the Company,
Chemical Securities Inc. and BT Securities Corporation, dated
November 2, 1994 (filed as Exhibit 4(b) to the Registration
Statement and incorporated herein by reference).
10(a) Asset Purchase Agreement between Jewel Food Stores, Inc. and Star
Acquisition Corp., dated July 28, 1994 (filed as Exhibit 10(a) to
the Registration Statement and incorporated herein by reference).
10(b) First Amendment to Asset Purchase Agreement between Jewel Food
Stores, Inc. and Star Acquisition Corp., dated August 3, 1994
(filed as Exhibit 10(b) to the Registration Statement and
incorporated herein by reference).
10(c) Second Amendment to Asset Purchase Agreement between Jewel Food
Stores, Inc. and the Company, dated September 8, 1994 (filed as
Exhibit 10(c) to the Registration Statement and incorporated
herein by reference).
10(d) Purchase Agreement among the Company, Chemical Securities Inc. and
BT Securities Corporation, dated October 26, 1994 (filed as
Exhibit 10(d) to the Registration Statement and incorporated
herein by reference).
10(e) Credit Agreement among the Company, Chemical Bank, as
Administrative Agent, and the lenders party thereto, dated as of
September 8, 1994 (filed as Exhibit 10(e) to the Registration
Statement and incorporated herein by reference).
10(f) Security Agreement made by the Company in favor of Chemical Bank,
as Administrative Agent, dated as of September 8, 1994 (filed as
Exhibit 10(f) to the Registration Statement and incorporated
herein by reference).
10(g) Transition Services Agreement between Jewel Food Stores, Inc. and
the Company, dated as of September 8, 1994 (filed as Exhibit 10(g)
to the Registration Statement and incorporated herein by
reference).
10(h) Interim Limited Management Agreement between the Company and Star
Market Liquors, Inc., dated as of September 8, 1994 (filed as
Exhibit 10(h) to the Registration Statement and incorporated
herein by reference).
10(i) Agreement for Management Advisory and Consulting Services between
Investcorp International, Inc. and the Company, dated as of
September 8, 1994 (filed as Exhibit 10(i) to the Registration
Statement and incorporated herein by reference).
10(j) Employment Agreement between the Company and Henry Nasella, dated
as of September 8, 1994 (filed as Exhibit 10(j) to the
Registration Statement and incorporated herein by reference).
10(k) Trust Agreement between the Company and Fidelity Management Trust
Company, dated as of September 8, 1994 (filed as Exhibit 10(m) to
the Registration Statement and incorporated herein by reference).
10(l) Third Amendment to Asset Purchase Agreement between Jewel Food
Stores, Inc. and Star Acquisition Corp., dated January 13, 1995
(filed as Exhibit 10(n) to the Registration Statement and
incorporated herein by reference).
10(m) Star Markets Retirement Estates plan description dated November 7,
1994 (filed as Exhibit 10(o) to the Registration Statement and
incorporated herein by reference).
10(n) 1994 Stock Incentive Plan of Holdings, dated September 8, 1994
(filed as Exhibit 10(p) to the Registration Statement and
incorporated herein by reference).
10(o) First Amendment to Credit Agreement among the Company, Chemical
Bank, as Administrative Agent, and the lenders party thereto,
dated as of January 16, 1996 (filed as Exhibit 10(q) to the
Company's 1995 Form 10-K and incorporated herein by reference).
10(p) Second Amendment to Credit Agreement among the Company, Chemical
Bank, as Administrative Agent, and the lenders party thereto,
dated as of June 25, 1996 (filed as Exhibit 10(p) to the company's
1996 Form 10-K and incorporated herein by reference).
10(q) Third Amendment to Credit Agreement among the Company, Chase
Manhattan, as Administrative Agent, and the lenders party thereto,
dated as of April 21, 1997 (filed as Exhibit 10(q) to the
company's 1996 Form 10-K and incorporated herein by reference).
10(r)** Fourth Amendment to Credit Agreement among the Company, Chase
Manhattan, as Administrative Agent, and the lenders party thereto,
dated as of August 17, 1998.
10(s)** Stock Purchase Agreement among Star Market Holdings, Inc., Star
Market Company, Inc. and J Sainsbury plc, dated as of November 25,
1998.
27** Financial Data Schedule for the 52 weeks ended January 30, 1999.
(b) No reports were filed on Form 8-K for the 13-week period ended January
30, 1999.
[FN]
<F**> As filed herewith.
</FN>
Signatures
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
DATE: April 30, 1999 BY: /s/ Henry J. Nasella
- ----- ------------------------
Henry J. Nasella
Chairman of the Board of Directors
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Henry J. Nasella Chairman of the Board of Directors April 30, 1999
- -------------------- President and Chief Executive
Henry J. Nasella Officer (Principal Executive Officer)
Signature Title Date
- --------- ----- ----
/s/ Stephen R. Winslow Senior Vice President, Finance April 30, 1999
- ---------------------- chief accounting officer
Stephen R. Winslow
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
Not Applicable. No Annual Report or proxy material has been sent to holders
of the Registrant's securities.
Annual Report on Form 10-K
Item 8, Item 14 (a) 1.
List of Financial Statements
Financial Statements
Exhibit
52 weeks ended January 30, 1999
52 weeks ended January 31, 1998
52 weeks ended February 1, 1997
Star Markets Company, Inc.
Cambridge, MA
Form 10-K - Item 14 (a) 1.
Star Markets Company, Inc.
52 weeks ended January 30, 1999
52 weeks ended January 31, 1998
52 weeks ended February 1, 1997
List of Financial Statements
The following financial statements of Star Markets Company, Inc. ("The
Company") are included herein:
Balance sheets - January 30, 1999 and January 31, 1998
Statements of operations - 52 weeks ended January 30, 1999, 52 weeks
ended January 31, 1998 and 52 weeks ended February 1, 1997
Statements of equity - 52 weeks ended January 30, 1999, 52 weeks ended
January 31, 1998 and 52 weeks ended February 1, 1997
Statements of cash flows - 52 weeks ended January 30, 1999, 52 weeks
ended January 31, 1998 and 52 weeks ended February 1, 1997
Notes to financial statements - January 30, 1999
Report of Ernst & Young LLP, Independent Auditors
Shareholder and Board of Directors
Star Markets Company, Inc.
We have audited the accompanying balance sheets of Star Markets Company,
Inc. (the "Company") as of January 30, 1999 and January 31, 1998 and the
related statements of operations, equity, and cash flows for each of the
three years in the period ended January 30, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Star Markets Company,
Inc. at January 30, 1999 and January 31, 1998 and the results of its
operations and its cash flows for each of the three years in the period
ended January 30, 1999 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 26, 1999
Star Markets Company, Inc.
Balance Sheets
(Amounts in thousands, except share data)
January 30, January 31,
1999 1998
----------- -----------
Assets
Current assets:
Accounts receivable, net of reserve for doubtful accounts of
$1,331 in 1999 and $1,391 in 1998 $ 18,277 $ 21,001
Inventory 64,914 71,524
Prepaid expenses 4,483 4,465
------------------------
Total current assets 87,674 96,990
Property and equipment at cost:
Land 15,256 21,287
Building 31,712 51,452
Equipment & fixtures 123,757 112,010
Leasehold improvements 69,675 61,644
------------------------
Total property & equipment 240,400 246,393
Less accumulated depreciation and amortization 70,645 52,692
------------------------
Net property and equipment 169,755 193,701
Other assets, net 28,537 31,287
Goodwill, net 127,005 130,564
------------------------
Total Assets $412,971 $452,542
========================
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 38,246 $ 46,091
Accrued payroll & benefits 14,399 13,195
Current portion self-insurance 6,286 8,266
Accrued interest 5,762 6,092
Other current liabilities 14,585 16,503
------------------------
Total current liabilities 79,278 90,147
Self-insurance reserves, less current portion 12,243 18,523
Other liabilities 7,454 5,687
Long-term debt 259,037 276,327
Redeemable preferred stock, redemption value $11,000 10,421 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 82,606 83,924
Retained earnings (deficit) (38,069) (32,392)
------------------------
Total shareholder's equity 44,537 51,532
------------------------
Total Liabilities and Shareholder's Equity $412,971 $452,542
========================
See accompanying notes.
Star Markets Company, Inc.
Statements of Operations
(Amounts in thousands)
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
Total revenues $1,064,235 $1,034,188 $954,531
Cost of goods sold 777,842 761,798 715,090
-----------------------------------------
Gross profit 286,393 272,390 239,441
Operating and administrative expenses 237,460 226,708 197,314
Depreciation and amortization 24,837 23,792 22,178
-----------------------------------------
Operating profit 24,096 21,890 19,949
Interest expense 29,486 30,177 28,894
Other income (expenses), net 76 87 (13)
-----------------------------------------
Loss before income taxes (5,314) (8,200) (8,958)
Income taxes 363 365 378
-----------------------------------------
Net loss $ (5,677) $ (8,565) $ (9,336)
=========================================
See accompanying notes.
Star Markets Company, Inc.
Statements of Equity
(Amounts in thousands)
Additional
Common Paid-In- Retained
Stock Capital Earnings Total
------ ---------- -------- -----
Balance at February 3, 1996 $ 0 $73,692 $(14,491) $59,201
Net loss (9,336) (9,336)
Accretion of preferred stock (96) (96)
Preferred stock dividend (1,230) (1,230)
Deferred compensation 556 556
Equity contribution, net of
issuance costs 11,985 11,985
----------------------------------------------
Balance at February 1, 1997 0 84,907 (23,827) 61,080
Net loss (8,565) (8,565)
Accretion of preferred stock (97) (97)
Preferred stock dividend (1,226) (1,226)
Deferred compensation 340 340
----------------------------------------------
Balance at January 31, 1998 0 83,924 (32,392) 51,532
Net loss (5,677) (5,677)
Accretion of preferred stock (96) (96)
Preferred stock dividend (1,222) (1,222)
----------------------------------------------
Balance at January 30, 1999 $ 0 $82,606 $(38,069) $44,537
==============================================
Star Markets Company, Inc.
Statements of Cash Flows
(Amounts in thousands)
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
Operating activities
Net loss $ (5,677) $ (8,565) $ (9,336)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Amortization of deferred financing costs 1,688 1,648 1,543
Depreciation and amortization 24,835 23,792 22,178
Impairment loss 2,700
Loss (gain) on sale or disposal of property and
equipment (69) (87) 15
Changes in operating assets and liabilities:
Accounts receivable 2,721 814 (8,271)
Inventories 6,609 (5,974) (2,636)
Prepaid expenses (16) 494 85
Accounts payable (7,846) (707) 7,028
Accrued payroll and benefits 1,205 353 333
Self-insurance reserves (8,254) (291) (571)
Accrued interest (331) 89 870
Other current liabilities (1,925) 3,491 2,754
Other 1,822 1,267 524
----------------------------------------
Net cash provided by operating activities 17,462 16,324 14,516
Investing activities
Purchases of property and equipment (20,621) (41,058) (34,762)
Proceeds from sale of property and equipment 21,658 22,381 4,365
Decrease in restricted cash 6,028
Acquisition of leasehold interests (20,064)
----------------------------------------
Net cash provided by ( used in) investing activities 1,037 (18,677) (44,433)
Financing Activities
Net proceeds from revolving credit facility 2,299 4,600 12,400
Proceeds from long-term debt 4,087
Repayment of long-term debt (19,576) (722) (1,340)
Preferred dividends paid (1,222) (1,226) (1,230)
Deposits refunded 500 4,000
Equity contribution 12,000
Deferred financing costs (799)
----------------------------------------
Net cash (used in) provided by financing activities (18,499) 2,353 29,917
Net increase in cash and cash equivalents 0 0 0
Cash and cash equivalents beginning of period 0 0 0
----------------------------------------
Cash and cash equivalents end of period $ 0 $ 0 $ 0
========================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 27,124 $ 28,440 $ 26,374
Cash paid for taxes 362 365 370
See accompanying notes.
Star Markets Company, Inc.
Notes to Financial Statements
January 30, 1999
1. Background
Star Markets Company, Inc., a Massachusetts corporation (the "Company"), is
a leading food retailer in the metropolitan Boston area and operated 53
stores as of January 30, 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 the acquisition described below.
2. Sale of Stock
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.
3. Acquisitions
Star Market Company ("Predecessor") was operated as a division of Jewel Food
Stores, Inc. ("Jewel"), a wholly-owned subsidiary of American Stores Company
("ASC"). On September 8, 1994, the Company acquired all of the business and
assets of Predecessor from Jewel and other affiliates of ASC (the
"Acquisition").
For financial statement purposes, the Acquisition was accounted for as a
purchase effective September 10, 1994. The assets and business were acquired
for an aggregate purchase price of $293.3 million, exclusive of related fees
and expenses.
The purchase price, including approximately $11.0 million in related fees
and expenses, has been allocated based upon the fair value of the Company's
assets and liabilities as follows (in millions):
Historical basis of net assets acquired $126.4
Fair value and other adjustments:
Property, plant and equipment 40.9
Inventory 5.6
Accounts receivable (1.1)
Liabilities (5.1)
------
Fair market value of net assets 166.7
Goodwill 137.6
------
Total purchase price $304.3
======
During 1998, the Company adjusted the self-insurance reserves for worker's
compensation and general liability insurance recorded at the time of the
Acquisition by $5.0 million. The $5.0 million, represents the excess
reserve based on current actuarial estimates of unpaid claims related to
losses incurred prior to the Acquisition. The adjustment was recorded in
operating and administrative expenses as an increase to net income.
4. Significant Accounting Policies
Reclassification
Certain amounts in the historical financial statements of the Company have
been reclassified to conform with the Company's current method of
presentation.
Fiscal Year
The fiscal year of the Company ends on the Saturday nearest to January 31.
All references herein to "1998", "1997" and "1996", mean the 52-week fiscal
year ended January 30, 1999, 52-week fiscal year ended January 31, 1998 and
the 52-week fiscal year ended February 1, 1997, respectively.
Revenue Recognition
Revenue from retail operations is recognized at the point of sale. The
Company allows for merchandise to be returned under most circumstances. The
Company does not provide for a reserve for estimated returns, as the amount
does not have a material impact on the financial statements. Revenue from
wholesale operations is recognized upon shipment of merchandise to wholesale
customers. Sales to wholesale customers are considered final upon
acceptance of delivery, however, the Company does allow merchandise returns
under certain circumstances. The Company does not provide for a reserve for
estimated returns, as occurrence is infrequent and the amount does not have
a material impact on the financial statements.
Inventories
Inventories are stated at the lower of cost, using the FIFO (first-in,
first-out) and weighted average cost methods, or market.
Goodwill
Goodwill represents the excess of the cost of the purchased businesses over
the fair value of the net underlying assets and is being amortized using the
straight-line method over 40 years. Accumulated amortization at January 30,
1999 and January 31, 1998 was $15.4 million and $11.8 million,
respectively. At each balance sheet date, management assesses whether there
has been a permanent impairment in the value of goodwill by comparing
anticipated undiscounted future cash flows from operating activities with
the carrying value of the goodwill. The amount of any resulting impairment
is calculated using the same undiscounted cash flows from operating
activities. The factors considered by management in this assessment include
operating results, trends and prospects, as well as the effects of demand,
competition and other economic factors.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Deferred Financing Costs
Deferred financing costs, included in other assets, are amortized over the
term of the related financing. Amortization of deferred financing costs is
included in interest expense in the Statement of Operations. Accumulated
amortization at January 30, 1999 and January 31, 1998 was $7.0 million and
$5.3 million, respectively.
Depreciation and Amortization
Depreciation and amortization is provided on a straight-line basis over the
estimated useful lives of owned assets. Leasehold improvements are amortized
over the estimated useful life of the property or over the term of the
lease, whichever is shorter. Depreciation begins when the asset is placed in
service.
The useful lives of owned assets for purposes of computing depreciation are:
Years
-----
Building 39
Equipment and fixtures 3 - 8
Leasehold improvements Minimum of lease
term or 20 years
Costs of Opening and Closing Stores
The costs of opening new stores are charged against operations as incurred.
When a store is closed, the remaining investment, net of salvage value, is
charged against operations and, for leased stores, a provision is made for
the remaining lease liability, net of expected sublease income.
Recently Issued Accounting Pronouncements
During 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("Statement 130"). The Company
adopted the provisions of Statement 130 during Fiscal 1998. Comprehensive
income is generally defined as all changes in stockholder's equity exclusive
of transactions with owners such as capital investments and dividends. The
adoption of Statement 130 had no impact on the Company's financial statement
disclosures.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("Statement 131"), which is required to be adopted for years beginning after
December 15, 1997. 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.
Advertising Expense
Total advertising expense amounted to $10.7 million, $11.8 million and $10.5
million in 1998, 1997 and 1996, respectively. The Company expenses all
advertising costs as incurred.
5. Financial Instruments
The following methods and assumptions were used by the Company to estimate
the fair value of its financial instruments:
Receivables, and accounts payable and other current liabilities: the
carrying amounts reported in the balance sheet approximate fair value. Long-
term debt: the fair value of the Company's 13% Senior Subordinated Notes is
based on quoted market prices; the fair value of other long-term debt
approximates carrying amounts.
The carrying amounts and fair values of the Company's financial instruments
are as follows (in thousands):
January 30, 1999 January 31, 1998
----------------------- -----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Long-term debt $260,147 $272,247 $277,427 $291,727
6. Long-term Debt
Long-term debt consists of the following (in thousands):
January 30, 1999 January 31, 1998
---------------- ----------------
Senior Credit Facility:
Term Loan: Tranche B $ 32,824 $ 39,750
Tranche C 24,588 29,750
Additional Tranche C 31,789 38,500
Revolving credit facility 58,700 56,400
-----------------------------
Total Senior Credit Facility 147,901 164,400
13% Senior subordinated notes 110,000 110,000
8% Note Payable 2,246 3,027
-----------------------------
Total 260,147 277,427
Less current maturities 1,109 1,100
-----------------------------
$259,038 $276,327
=============================
The following table presents the maturities of the long-term debt for the
next five fiscal years and thereafter (in thousands) as of January 30, 1999:
Fiscal 1999 1,109
2000 9,333
2001 83,968
2002 24,465
2003 and thereafter 141,272
--------
Total $260,147
========
Senior Credit Facility
The Senior Credit Facility provides for a total of $183.0 million of term
and revolving loan credit (the "loans"). In order to reflect the impact of
the sale/leaseback of three properties completed in March, 1998, certain
financial covenants of the Senior Credit Facility were amended on August 17,
1998.
The availability under the revolving credit facility may be utilized to meet
the Company's current working capital requirements, including issuance of
letters of credit. The Company can also utilize the remaining availability
to fund capital expenditures. The revolving credit facility expires on
December 31, 2001. At January 30, 1999, the Company had outstanding letters
of credit totaling $7.2 million as required by certain contracts relating to
inventory and self-insurance, which reduced the amount available under the
revolving credit facility.
The loans are secured by a first priority security interest in substantially
all the assets of the Company and a pledge of all the issued and outstanding
stock of the Company. In addition, the loans are guaranteed by Holdings.
Borrowings under the loans accrue interest at a floating interest rate,
which at the option of the Company is either (a) the greater of (i) the
bank's announced reference rate, (ii) a rate which fluctuates with the
secondary market rate for certificates of deposits, plus 1% or (iii) the
federal funds rate, plus 0.5%, in each case plus a margin varying from 1.25%
to 2.25% depending on the type and maturity of the loan, or (b) LIBOR, plus
a margin varying from 2.50% to 3.50% depending on the type and maturity of
the loan.
At January 30, 1999, the interest rates on the term loan facility ranged
from 8.13% to 8.75% and the weighted average interest rate on amounts
outstanding under the revolving credit facility at January 30, 1999 and
January 31, 1998 were 7.93% and 8.40%, respectively.
13% Senior Subordinated Notes
On November 2, 1994, the Company issued $110 million of Senior Subordinated
Notes ("Notes"), due November 1, 2004. The Notes were offered and sold
pursuant to Rule 144A under the Securities Act and net proceeds were used as
follows: (i) approximately $75.8 million was used to repay the outstanding
indebtedness under the Company's Subordinated Loan Facility and all accrued
and unpaid interest thereon, (ii) approximately $25.1 million was used to
repay outstanding indebtedness under the term loan portion of the Company's
Senior Credit Facility and all accrued and unpaid interest due thereon and
(iii) the remaining proceeds were retained by the Company for general
corporate purposes, including working capital.
8% Note Payable
The Company issued a $4.0 million note payable in connection with the store
locations acquired in 1996. The note payable bears interest at 8.00% per
annum and requires quarterly payments of principal and interest through July
2001.
Capitalized interest totaled $130,165, $161,000 and $55,000 for 1998, 1997
and 1996, respectively.
7. Preferred Stock
The Company is authorized to issue 10,000 shares of preferred stock, par
value $.01 per share. In connection with the 1994 Acquisition, the Company
issued 5,000 preferred shares for $11.0 million, and concurrently paid an
issuance fee of $1.0 million on behalf of Holdings. All of the outstanding
preferred shares are held by Holdings.
Dividends on the preferred stock accrue at a rate of 11% per annum.
Dividends are cumulative and are payable when declared by the Board of
Directors of the Company, out of assets legally available therefor, on April
30 and October 31 of each year, commencing on October 31, 1994. The
Company's Board of Directors declared, and the Company has paid, all
required dividends on the Company's cumulative preferred stock through
January 30, 1999. To the extent that dividends are accrued, but have not
been declared and paid, such undeclared and unpaid dividends will accrue
additional dividends from the date upon which such dividends accrued until
the date upon which they are paid at the rate of 13% per annum.
The shares of preferred stock are redeemable at the option of the Company at
a redemption price of $2,200 per share plus accrued and unpaid dividends
thereon to the date fixed for redemption. On December 31, 2005, the Company
is required to redeem all outstanding shares of preferred stock at $2,200
per share plus accrued and unpaid dividends thereon to the date fixed for
redemption.
8. Leases
The Company leases retail stores and equipment. The store leases have an
average life of approximately 34 years until final expiration. The store
leases generally have renewal options and provide for contingent rent based
on sales levels in excess of specified levels.
In March 1998, the Company entered into a three property sale-leaseback
transaction. The Company sold two of its stores and its distribution complex
in Norwood, MA for a gross selling price of $21.6 million. Concurrent with
the sale, the Company leased the properties back for an initial term of 25
years. No gain or loss was recognized as a result of the transaction.
The summary below shows the aggregate future minimum lease commitments at
January 30, 1999. Operating leases are shown net of an aggregate $8.8
million of minimum rental income under noncancelable subleases.
Operating
Leases
--------------
(In thousands)
1999 30,602
2000 28,788
2001 29,436
2002 28,725
2003 28,175
Thereafter 365,330
-------
Total minimum rent commitments 511,056
=======
Rent expense for real property was as follows:
Minimum Sublease Contingent Total
Rent Rent Net Rent Rent
----------------------------------------------------------
(In thousands)
1998 $27,349 $(1,475) $25,874 $203 $26,077
1997 $22,284 $(1,298) $20,986 $329 $21,315
1996 $16,639 $ (970) $15,669 $338 $16,007
Additionally, rent expense for personal property totaled approximately $4.4
million, $3.5 million and $2.1 million, for 1998, 1997 and 1996,
respectively.
Leasehold interests were acquired in connection with the 10 locations
acquired during 1996 and represent the present value of the excess of market
rents over actual rents payable over the remaining lives of the leases. The
leasehold interests are being amortized on the straight-line method over the
remaining lives of the leases. Accumulated amortization at January 30, 1999
was $2.2 million.
9. Income Taxes
Federal and state income taxes charged to earnings are summarized below:
1998 1997 1996
----------------------
Current:
Federal $ 0 $ 0 $ 0
State 363 365 378
----------------------
Income taxes $363 $365 $378
======================
The effective income tax rate differs from the statutory federal income tax
rate as follows:
1998 1997 1996
------------------------------
Statutory federal income tax rate (34.0%) (34.0%) (34.0%)
State income taxes, net of federal income tax effect 6.4 4.5 4.2
Unbenefitted Losses / Loss Carryforward 34.0 34.0 34.0
------------------------------
Effective income tax rate 6.4% 4.5% 4.2%
==============================
Deferred tax assets and liabilities as of 1998 and 1997 related to the
following temporary differences (in thousands):
January 30, January 31,
1999 1998
---------------------------
Deferred tax liabilities:
Goodwill $ (7,670) $ (4,939)
Basis in fixed assets (5,470) (4,548)
Other, net (1,585) (1,327)
------------------------
Total deferred tax liabilities (14,725) (10,814)
------------------------
Deferred tax assets:
Self-insurance reserves 7,684 10,605
Net operating loss carryforward 26,774 20,435
Compensation and benefits 2,021 2,088
Miscellaneous accruals 852 1,032
Other, net 3,299 2,239
------------------------
Total deferred tax assets 40,630 36,399
Valuation allowance (25,905) (25,585)
------------------------
Net deferred tax assets 14,725 10,814
------------------------
$ 0 $ 0
========================
The Company has tax net operating loss carryforwards of $67.0 million that
expire through 2018. For financial reporting purposes, a valuation allowance
has been recognized to offset deferred tax assets in excess of deferred tax
liabilities since the Company has only incurred losses since inception and
realization of such assets is not probable at January 30, 1999.
10. Retirement Plans
The Company established a defined contribution retirement plan, Star Markets
Retirement Estates ("SMRE"). This plan is authorized by the Board of
Directors for the purpose of providing retirement benefits for associates of
the Company. The plan covers associates meeting age and service eligibility
requirements, except those represented by a labor union, unless the
collective bargaining agreement provides for participation. Contributions to
SMRE are made at the discretion of the Board of Directors.
The Company also contributes to multi-employer defined benefit retirement
plans in accordance with the provisions of the various labor contracts that
govern the plans. The plans cover all associates represented by a labor
union. The multi-employer plan contributions are generally
based on the number of hours worked. Information about these plans as to
vested and nonvested accumulated benefits and net assets available for
benefits is not available.
Retirement plan expense in each period was as follows (in thousands):
1998 1997 1996
----------------------------
Company-sponsored plans $2,345 $1,859 $2,685
Multi-employer plans 2,315 2,457 2,102
----------------------------
$4,660 $4,316 $4,787
============================
11. Related-Party Transactions
During fiscal 1995, the Company entered into two sale-leaseback transactions
with affiliates of INVESTCORP S.A. ("Investcorp"). The Company sold six of
its stores for an aggregate gross selling price of $53.4 million. Concurrent
with the sale, the Company leased the properties back for an initial term of
20 years. No gain or loss was recorded in connection with the sale-leaseback
transactions.
In connection with the Acquisition, the Company entered into an agreement
for management advisory and consulting services (the "Management Agreement")
with Investcorp International Inc. ("International") pursuant to which the
Company agreed to pay International $750,000 per annum for a five-year term.
At the closing of the Acquisition, the Company paid International
approximately $2.3 million for the first three years in accordance with the
terms of the Management Agreement, with the remaining two years due in
quarterly installments.
12. Commitments and Contingencies
The Company has identified environmental contamination sites related
primarily to underground petroleum tanks at various store, warehouse, and
office facilities. At most identified locations, remediation is either
underway or completed. Charges against earnings for environmental
remediation were not significant in any of the periods presented.
Pursuant to the asset purchase agreement, ASC would indemnify the Company
for the costs and expenses related to environmental contamination provided
that the Company paid the first $1 million of such costs. However, for costs
and expenses related to any non-governmental claim filed by a third-party,
ASC was not liable until the aggregate of such costs and expenses exceeded
$6 million. ASC's obligation to indemnify the Company expired on the second
anniversary of the Closing Date, except for those locations and claims for
which ASC has received specific notification from the Company.
Although the ultimate outcome and expense of environmental remediation is
uncertain, the Company believes that required remediation and continuing
compliance with environmental law will not have a material adverse effect on
the financial position or results of operations of the Company.
From time to time, the Company has been involved in various legal
proceedings. Management believes that all of such litigation is routine in
nature and incidental to the conduct of the Company's business, and that
none of such litigation, if determined adversely to the Company, would have
a material adverse effect on the financial condition or results of
operations of the Company.
13. Subsequent Event
During 1998, the Company initiated a plan to dispose of one operating
location. The sale of the assets was completed on February 11, 1999,
subsequent to January 30, 1999. At January 30, 1999, 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 $2,700,000, which
is included as part of operating and administrative expenses, and represents
the excess of the carrying value of $7,800,000 over the fair value of
$5,100,000, has been charged to operations in 1998. The net proceeds of the
sale were applied to the revolving credit facility in fiscal year 1999.