-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mp7xxyyGgrNDIr4u52mm4TXgEBxfO5AmY2BWHGUM1GAyBXhBjwdnL0PLt/WT1ztD glQRjYpo1hyRMYRNLhJiNg== 0000910647-98-000135.txt : 19980504 0000910647-98-000135.hdr.sgml : 19980504 ACCESSION NUMBER: 0000910647-98-000135 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980501 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STAR MARKETS CO INC CENTRAL INDEX KEY: 0000933160 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 043243710 STATE OF INCORPORATION: MA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25262 FILM NUMBER: 98607497 BUSINESS ADDRESS: STREET 1: 625 MT ALBURN ST CITY: CAMBRIDGE STATE: MA ZIP: 02138 BUSINESS PHONE: 6176612200 MAIL ADDRESS: STREET 1: 625 MOUNT AUBURN STREET CITY: CAMBRIDGE STATE: MA ZIP: 02138 10-K 1 BODY OF THE 10-K 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 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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) 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 21, 1998: None Number of shares of the issuer's common stock, outstanding as of April 21, 1998: 5,000 shares Documents incorporated by reference: None PART I Item 1. Business - ---------------- Throughout this report, the "Company" or "Star" refers to Star Markets Company, Inc. ("Successor"), 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 52 stores (at the end of fiscal 1997) located in Eastern Massachusetts. Thirty-two of the Company's 52 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. In connection with the Acquisition, the Company acquired rights to expand into certain adjacent store sites and to acquire and develop certain additional store sites. In addition, management negotiated extensions for a number of its store leases. Store formats - ------------- The Company currently operates three food retailing formats: superstores, conventional stores, and Wild Harvest stores. Superstores - ----------- The Company's 23 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 1997, the Company opened three new superstores, one of which replaced a conventional store which closed in 1997. The Company completed remodels at four of its existing superstores during 1997. Conventional Stores - ------------------- 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. During 1997, the Company replaced a conventional store with a new superstore and completed remodels at three conventional stores. Wild Harvest Stores - ------------------- 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. The Company opened two new Wild Harvest locations in 1997. Marketing - --------- 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 1997, the Company continued to utilize both cards, which also track customers' purchasing data, to target specific customers for certain promotional events. Information Systems - ------------------- 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 1997, the Company successfully completed the implementation of new core application software within its buying, merchandising and inventory management systems for dairy operations and non-perishable categories. The final phase of the project, the implementation of new perishable purchasing and distribution systems and a new pricing system, is scheduled for completion in fiscal 1998. Distribution - ------------ 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 417 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 - ----------- 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, 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 competitors include Stop & Shop, Shaw's, Roche Bros., Bread & Circus, and Demoulas. 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. Approximately 11 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 1997, the Company owned seven stores, its office in Cambridge, Massachusetts and its warehouse and distribution complex in Norwood, Massachusetts. In addition, as of the end of fiscal 1997, 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 transaction for one of its operating properties and sold a non-operating property located in Rhode Island during 1997. In March 1998, subsequent to fiscal 1997, the Company completed a sale-leaseback for two of its operating properties and its warehouse and distribution complex. At the end of fiscal 1997, the Company leased 45 stores throughout the metropolitan Boston area and Cape Cod, Massachusetts. The leases for the 45 stores have an average life of approximately 33 years until final expiration. The Company will continue to evaluate additional sale-leaseback transactions for properties owned to reduce debt and/or partially finance future growth of the Company. Item 3. Legal Proceedings - ------------------------- 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 31, 1998. 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 21, 1998, 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 such indenture), subject to certain exceptions similar to those contained in the Senior Credit Facility. Item 6. Selected Financial Data - ------------------------------- The following table sets forth summary historical financial data of Star Markets and the Company for the five fiscal years ended January 31, 1998. 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 --------------------------- ------------------------------------------------------ (52 Weeks) 32-Week 20-Week (53 Weeks) (52 Weeks) (52 Weeks) Fiscal Year Fiscal Year Fiscal Year Fiscal Year Ended Period Ended Period Ended Ended Ended Ended January 29, September 10, January 28, February 3, February 1, January 31, 1994 1994 1995 1996 1997 1998 ----------- ------------- ------------ ----------- ----------- ----------- (Dollars in thousands) Operating Data: Revenues Retail $ 716,979 $ 427,762 $ 268,617 $ 763,513 $ 877,827 $ 965,845 Wholesale 119,326 69,227 39,687 90,991 76,704 68,343 ------------------------------------------------------------------------------------ Total revenues 836,305 496,989 308,304 854,504 954,531 1,034,188 Gross profit Retail 176,408 104,249 65,293 191,418 234,514 267,350 Wholesale 6,156 4,058 2,230 6,273 4,927 5,040 ------------------------------------------------------------------------------------ Total gross profit 182,564 108,307 67,523 197,691 239,441 272,390 Depreciation and amortization 12,841 8,295 7,218 19,326 22,178 23,792 Operating income 29,705 15,266 6,384 19,642 19,949 21,890 Interest expense 79 27 9,781 28,382 28,894 30,177 Income (loss) before extraordinary loss 17,476 8,592 (3,507) (8,890) (9,336) (8,565) Extraordinary loss (2,094) Net income (loss) 17,476 8,592 (5,601) (8,890) (9,336) (8,565) Store Data (Period End): Number of stores 32 33 33 38 48 52 Total square footage 1,038,211 1,096,544 1,119,990 1,639,015 2,034,603 2,240,966 Selling square footage 797,346 842,146 859,773 1,144,486 1,419,013 1,567,976 Balance Sheet Data (Period End): Total assets $ 209,445 $ 208,084 $ 421,355 $ 425,503 $ 453,270 $ 452,542 Long-term debt 240,057 257,400 271,827 276,327 Redeemable preferred stock 10,037 10,134 10,230 10,326 - -------------------- 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.
Item 7. Management's Discussion and Analysis of the Results of Operations and Financial Condition - ----------------------------------------------------------------------------- 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 - ------------ 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 - ---------------------- 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. Fiscal 1996 and Fiscal 1995 Revenues - -------- Revenues from retail operations for the 52-week period ended February 1, 1997 increased 15.0% to $877.8 million from $763.5 million for the 53-week period ended February 3, 1996. 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"), adjusted to reflect a 52-week comparison, revenues increased by 3.2% from the prior period. Revenues from wholesale operations for the 52-week period ended February 1, 1997 declined 15.7% to $76.7 million from $91.0 million for the 53-week period ended February 3, 1996. The decrease in wholesale revenues was primarily due to the loss of certain wholesale accounts which ceased operations due to increased competition in their respective trading areas. Gross Profit - ------------ Gross profit from retail operations for the 52-week period ended February 1, 1997 increased 22.5% to $234.5 million from $191.4 million for the 53-week period ended February 3, 1996 primarily due to the increase in revenues. Gross profit as a percentage of revenues for retail operations for the 52- week period ended February 1, 1997 increased to 26.7% from 25.1% for the 53- week period ended February 3, 1996. The increase in gross profit as a percentage of revenues was primarily attributable to an increase in the gross margin rate in the perishable categories. Gross profit from wholesale operations for the 52-week period ended February 1, 1997 decreased 21.5% to $4.9 million from $6.3 million for the 53-week period ended February 3, 1996. Gross profit as a percentage of revenues for wholesale operations for the 52-week period ended February 1, 1997 decreased to 6.4% from 6.9% for the 53-week period ended February 3, 1996. Operating and Administrative Expenses - ------------------------------------- Operating and administrative expenses for the 52-week period ended February 1, 1997 increased by 24.3% to $197.3 million from $158.7 million for the 53- week period ended February 3, 1996. Operating and administrative expenses as a percentage of total revenues for the 52-week period ended February 1, 1997 increased to 20.7% from 18.6% for the 53-week period ended February 3, 1996. The increase in operating and administrative expenses as a percentage of total revenues was attributable to a number of factors: continued investment in increased service levels in the stores; an increase in retail operations which incur a higher rate of operating and administrative expenses than wholesale operations; an increase in rent expense as a result of sale-leaseback transactions which occurred in October 1995 and January 1996; the acquisition of 10 locations during the period; the opening of the two new Wild Harvest stores as well as the operating and administrative infrastructure established to support existing and future Wild Harvest locations; and additional administrative costs as the Company continues to grow. 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 February 1, 1997 and the 53-week period ended February 3, 1996. Non-Operating Expenses - ---------------------- Interest expense for the 52-week period ended February 1, 1997 increased to $28.9 million from $28.4 million for the 53-week period ended February 3, 1996. The Company recorded state income tax expense of $0.4 million for the 52-week period ended February 1, 1997 and $0.3 million for the 53-week period ended February 3, 1996. The Company did not record a federal or state tax benefit associated with the losses recorded in the 52-week period ended February 1, 1997 and the 53-week period ended February 3, 1996. Liquidity and Capital Resources - ------------------------------- 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 21, 1998 was $260.3 million, which includes $110.0 million of Subordinated Notes due November 1, 2004, $147.3 million due under the Senior Credit Facility, and a $3.0 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 21, 1998, the Company had $7.2 million drawn under the letter of credit facilities of the Senior Credit Facility and $50.1 million drawn under the revolving credit portion of the Senior Credit Facility leaving an aggregate of $16.9 million of unused revolving credit availability under the Senior Credit Facility. The Company paid $0.7 million in aggregate principal amount in 1997. The Company will pay $1.1 million in aggregate principal amount in 1998. Capital expenditures for fiscal 1997 were $41.1 million as compared to $54.8 million in fiscal 1996 and $65.3 million in fiscal 1995. 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 credit portion of its Senior Credit Facility. Subsequent to the end of fiscal 1997, the Company completed a sale-leaseback transaction for two of its stores and for its warehouse and distribution complex for a gross selling price of $21.6 million. Of the proceeds, $18.4 million will be used to pay down principal on term loans and the balance of $3.2 million will be used for revolver paydown and to pay transaction expenses. The Company currently anticipates making capital expenditures of approximately $24.8 million in fiscal 1998. Capital expenditures will include opening one new superstore, remodeling two existing stores, converting one conventional store to a superstore, and opening up to two new Wild Harvest stores. Planned capital expenditures for fiscal 1998 include approximately $9.7 million for maintenance, systems, and distribution. The Company believes that funds generated from operations, proceeds from additional sale-leaseback transactions and borrowings under the Senior Credit Facility will provide sufficient resources through fiscal 1998 to permit it to meet its working capital requirements, to make all interest and principal payments due and payable on the Subordinated Notes and its existing indebtedness and to fund planned capital expenditures. However, if the Company's cash flow and capital resources are insufficient to fund its debt service obligations, the Company may be required to reduce or delay planned capital expenditures, sell assets, obtain additional equity capital or restructure 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. The Company has conducted a review of its computer systems that could be affected by the "Year 2000" issue and is developing a plan to resolve issues. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize the date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations using existing software and in converting to new software. The Year 2000 problem is not expected to pose a significant problem for the Company. 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. The size of the Board of Directors may be increased from time to time.
Name Age Positions - ---- --- --------- Henry J. Nasella 51 Chairman of the Board of Directors, President and Chief Executive Officer Robert R. Spellman 50 Director, Executive Vice President, Administration, and Chief Financial Officer Edward Albertian 45 Executive Vice President, Operations and Chief Operating Officer Carole O'Connor Gates 40 Executive Vice President, Marketing Stephen R. Winslow 38 Senior Vice President, Finance
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. Robert R. Spellman became a Director, Executive Vice President, Administration, and Chief Financial Officer of the Company in October 1994 upon the consummation of the Acquisition. Prior to joining the Company, he served as Senior Vice President, Finance of Staples, Inc. from September 1988, Secretary of Staples, Inc. from December 1988 through March 1993 and was Treasurer of Staples, Inc. from September 1989 through August 1993. 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. Director Compensation - --------------------- The Company pays no remuneration to its employees or to executives of Investcorp or any of its wholly-owned subsidiaries 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 1997, 1996 and 1995. Summary Compensation Table
Long Term Compensation ---------------- Annual Compensation Awards ------------------------------------ Number of Shares Name and Other Annual Underlying All Other Principal Position Year(1) Salary(2)($) Bonus(2)($) Compensation($) Options/SARs(#) Compensation(3)($) - ------------------------- ------- ------------ ----------- --------------- ---------------- ------------------ Henry J. Nasella 1997 320,833 148,129 0 0 8,319 Chairman, President and 1996 300,000 0 0 0 12,046 Chief Executive Officer 1995 300,000 100,000 0 0 13,140 Robert R. Spellman 1997 262,500 105,000 0 0 7,693 Executive Vice President, 1996 250,000 50,000 0 0 9,334 Administration and Chief 1995 250,000 50,000 0 0 9,368 Financial Officer Edward Albertian 1997 220,833 88,333 0 0 6,375 Executive Vice President, 1996 197,583 63,238 0 500 7,998 Operations and Chief 1995 131,396 26,279 0 4,114 5,868 Operating Officer Carole O'Connor Gates 1997 182,500 73,000 0 0 5,767 Executive Vice President, 1996 168,333 51,667 0 0 7,495 Marketing 1995 160,000 32,000 0 5,477 1,181 Stephen R. Winslow 1997 168,334 58,917 0 0 1,004 Senior Vice President, 1996 46,667 56,000 0 1,500 118 Finance - -------------------- Dates on which employment commenced were May 15, 1995 for Mr. Albertian and October 15, 1996 for Mr. Winslow. Represents amounts paid for the relevant fiscal year. Bonuses are reported in the fiscal year earned and typically paid during the following fiscal year. 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. -- Company contributions under the 401(K) Savings Plan for fiscal 1995 were as follows: $6,332 for Mr. Nasella, $6,932 for Mr. Spellman, $5,095 for Mr. Albertian, $613 for Ms. O'Connor Gates. Imputed income on the value of Company provided term life insurance in excess of $50,000 in fiscal 1995 was as follows: $6,808 for Mr. Nasella, $2,436 for Mr. Spellman, $773 for Mr. Albertian, $568 for Ms. O'Connor Gates. -- Company contributions under the 401(K) Savings Plan for fiscal 1996 were as follows: $5,458 for Mr. Nasella, $6,898 for Mr. Spellman, $6,898 for Mr. Albertian, $6,898 for Ms. O'Connor Gates and $0 for Mr. Winslow. 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, $2,436 for Mr. Spellman, $1,100 for Mr. Albertian, $597 for Ms. O'Connor Gates, and $118 for Mr. Winslow. -- Company contributions under the 401(K) Savings Plan for fiscal 1997 were as follows: $ 5,100 for Mr. Nasella, $5,100 for Mr. Spellman, $5,100 for Mr. Albertian, $5,100 for Ms. O'Connor Gates and $397 for Mr. Winslow. 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, $2,593 for Mr. Spellman, $1,275 for Mr. Albertian, $667 for Ms. O'Connor Gates, and $607 for Mr. Winslow.
Option Grants The Company had no grants of stock options in respect of Class C Stock of Star Markets Holdings, Inc. ("Holdings") during the fiscal year ended January 31, 1998 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 31, 1998 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 31, 1998.
Number of Number of Shares of Shares Common Stock Underlying Value of Unexercised Common Unexercised Options at In-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 Robert R. Spellman 0 0 1,617 6,466 0 0 Edward Albertian 0 0 823 3,791 0 0 Carole O'Connor Gates 0 0 1,095 4,382 0 0 Stephen R. Winslow 0 0 0 1,500 0 0 - -------------------- 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. Neither Holdings nor the Company has established any recent valuations for such shares.
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 31, 1998 there were 5,000 shares of Holdings' Class D Stock issued and outstanding. Members of the Company's management own 37,636 shares, and have the right to acquire an additional 57,269 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. Class D Voting Stock: - ---------------------
Number of Voting 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 - -------------------- 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. 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. 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. 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. 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. INVESTCORP Investment Equity Limited is a Cayman Islands corporation, and a wholly-owned subsidiary of Investcorp.
Class C Non-Voting Stock: - -------------------------
Number of Shares(1) --------- Henry J. Nasella 72,411(2) 625 Mount Auburn Street Cambridge, MA 02138 Robert R. Spellman 4,950(3) 625 Mount Auburn Street Cambridge, MA 02138 Edward Albertian 1,423(4) 625 Mount Auburn Street Cambridge, MA 02138 Carole O'Connor Gates 1,735(5) 625 Mount Auburn Street Cambridge, MA 02138 Stephen R. Winslow 600 625 Mount Auburn Street Cambridge, MA 02138 All directors and executive officers of the Company as a group (5) persons 81,119 - -------------------- 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"). Includes 45,744 shares subject to Presently Exercisable Options. Includes 1,617 shares subject to Presently Exercisable Options. Includes 823 shares subject to Presently Exercisable Options. Includes 1,095 shares subject to Presently Exercisable Options.
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. 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: Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K is identified with an asterisk ("*") below. 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, Chemical Bank, 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). 27** Financial Data Schedule for the 52 weeks ended January 31, 1998. (b) No reports were filed on Form 8-K for the 13-week period ended January 31, 1998 . ** As filed herewith. 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: May 1, 1998 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 - ------------------------- Henry J. Nasella Chairman of the Board of Directors May 1, 1998 President and Chief Executive Officer (Principal Executive Officer) Signature Title Date - ------------------------- ------------------------------------- ------------ /s/ Robert R. Spellman - ------------------------- Robert R. Spellman Director May 1, 1998 Executive Vice President, Administration Chief Financial Officer (Principal Financial and Accounting Officer)
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 31, 1998 52 weeks ended February 1, 1997, 53 weeks ended February 3, 1996 Star Markets Company, Inc. Cambridge, MA Form 10-K - Item 14 (a) 1. Star Markets Company, Inc. 52 weeks ended January 31, 1998 52 weeks ended February 1, 1997, 53 weeks ended February 3, 1996 List of Financial Statements The following financial statements of Star Markets Company, Inc. ("The Company") are included herein: Balance sheets - January 31, 1998 and February 1, 1997 Statements of operations - 52 weeks ended January 31, 1998, 52 weeks ended February 1, 1997 and 53 weeks ended February 3, 1996 Statements of equity - 52 weeks ended January 31,1998, 52 weeks ended February 1, 1997 and 53 weeks ended February 3, 1996 Statements of cash flows - 52 weeks ended January 31, 1998, 52 weeks ended February 1, 1997 and 53 weeks ended February 3, 1996 Notes to financial statements - January 31, 1998. 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 31, 1998 and February 1, 1997 and the related statements of operations, equity, and cash flows for each of the three years in the period ended January 31, 1998. 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 31, 1998 and February 1, 1997 and the results of its operations and its cash flows for each of the three years in the period ended January 31, 1998 in conformity with generally accepted accounting principles. Ernst & Young LLP Boston, Massachusetts March 20, 1998 Star Markets Company, Inc. Balance Sheets (Amounts in thousands, except share data)
January 31, February 1, 1998 1997 ----------- ----------- Assets Current assets: Accounts receivable, net of reserve for doubtful accounts of $1,391 in 1997 and $1,589 in 1996 $ 21,001 $ 21,815 Inventory 71,524 65,550 Prepaid expenses 4,465 4,959 ------------------------ Total current assets 96,990 92,324 Property and equipment at cost: Land 21,287 31,015 Building 51,452 66,603 Equipment & fixtures 112,010 88,623 Leasehold improvements 61,644 44,024 ------------------------ Total property & equipment 246,393 230,265 Less accumulated depreciation and amortization 52,692 35,569 ------------------------ Net property and equipment 193,701 194,696 Other assets, net 31,287 33,058 Goodwill, net 130,564 133,192 ------------------------ Total Assets $ 452,542 $ 453,270 ======================== Liabilities and Shareholder's Equity Current liabilities: Accounts payable $ 46,091 $ 46,798 Accrued payroll & benefits 13,195 12,842 Current portion self-insurance 8,266 8,121 Accrued interest 6,092 6,003 Other current liabilities 16,503 13,637 ------------------------ Total current liabilities 90,147 87,401 Self-insurance reserves, less current portion 18,523 18,960 Other liabilities 5,687 3,772 Long-term debt 276,327 271,827 Redeemable preferred stock, redemption value $11,000 10,326 10,230 Shareholder's equity: Common stock, $.01 par value, 10,000 shares authorized and 5,000 shares outstanding 0 0 Additional paid-in-capital 83,924 84,907 Retained earnings (deficit) (32,392) (23,827) ------------------------ Total shareholder's equity 51,532 61,080 ------------------------ Total Liabilities and Shareholder's Equity $ 452,542 $ 453,270 ========================
See accompanying notes. Star Markets Company, Inc. Statements of Operations (Amounts in thousands)
52 Weeks Ended 52 Weeks Ended 53 Weeks Ended January 31, 1998 February 1, 1997 February 3, 1996 ---------------- ---------------- ---------------- Total revenues $ 1,034,188 $ 954,531 $ 854,504 Cost of goods sold 761,798 715,090 656,813 -------------------------------------------------- Gross profit 272,390 239,441 197,691 Operating and administrative expenses 226,708 197,314 158,723 Depreciation and amortization 23,792 22,178 19,326 -------------------------------------------------- 21,890 19,949 19,642 Interest expense 30,177 28,894 28,382 Other income (expenses), net 87 (13) 100 -------------------------------------------------- Loss before income taxes (8,200) (8,958) (8,640) Income taxes 365 378 250 -------------------------------------------------- Net loss $ (8,565) $ (9,336) $ (8,890) ==================================================
See accompanying notes. Star Markets Company, Inc. Statements of Equity (Amounts in thousands)
Common Additional Retained Stock Paid-In-Capital Earnings Total ------ --------------- ---------- -------- Balance at January 28, 1995 $ 0 $ 74,480 $ (5,601) $ 68,879 Net loss (8,890) (8,890) Accretion of preferred stock (97) (97) Preferred stock dividend (1,248) (1,248) Deferred compensation 557 557 -------------------------------------------------- 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 ==================================================
Star Markets Company, Inc. Statements of Cash Flows (Amounts in thousands)
52 Weeks Ended 52 Weeks Ended 53 Weeks Ended January 31, 1998 February 1, 1997 February 3, 1996 ---------------- ---------------- ---------------- Operating activities Net loss $ (8,565) $ (9,336) $ (8,890) Adjustments to reconcile net loss to net cash provided by operating activities: Amortization of deferred financing costs 1,648 1,543 1,564 Depreciation and amortization 23,792 22,178 19,326 Loss (gain) on sale or disposal of property and equipment (87) 15 (93) Changes in operating assets and liabilities: Accounts receivable 814 (8,271) 2,008 Inventories (5,974) (2,636) (3,529) Prepaid expenses 494 85 (1,888) Accounts payable (707) 7,028 1,139 Accrued payroll and benefits 353 333 1,686 Self-insurance reserves (291) (571) (2,445) Accrued interest 89 870 1,231 Other current liabilities 3,491 2,754 (1,604) Other 1,267 524 (4,263) ------------------------------------------------- Net cash provided by operating activities 16,324 14,516 4,242 Investing activities Purchases of property and equipment (41,058) (34,762) (60,710) Proceeds from sale of property and equipment 22,381 4,365 56,296 Decrease (increase) in restricted cash 6,028 (6,028) Purchase of Cape Ann Market, Inc. (5,293) Acquisition of leasehold interests (20,064) ------------------------------------------------- Net cash used in investing activities (18,677) (44,433) (15,735) Financing Activities Net proceeds from revolving credit facility 4,600 12,400 18,400 Proceeds from long-term debt 4,087 Repayment of long-term debt (722) (1,340) (1,000) Preferred dividends paid (1,226) (1,230) (1,226) Deposits refunded (made) 500 4,000 (4,500) Equity contribution 12,000 Deferred financing costs (799) (181) ------------------------------------------------- Net cash provided by financing activities 2,353 29,917 11,493 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 $ 28,440 $ 26,374 $ 25,382 Cash paid for taxes 365 370 359
See accompanying notes. Star Markets Company, Inc. Notes to Financial Statements January 31, 1998 1. Background Star Markets Company, Inc., a Massachusetts corporation (the "Company"), is a leading food retailer in the metropolitan Boston area and operated 52 stores as of January 31, 1998. Additionally, the Company operates a wholesale business which provides warehousing, distribution and certain administrative services to independent store locations throughout the New England area. The Company is a wholly-owned subsidiary of Star Markets Holdings, Inc., a Massachusetts corporation ("Holdings"). Both Holdings and the Company were formed for purposes of the acquisition described below. 2. Acquisitions Star Market Company ("Predecessor") was operated as a division of Jewel Food Stores, Inc. ("Jewel"), a wholly-owned subsidiary of American Stores Company (the "Parent" or "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 1995, the Company adjusted the amount of goodwill initially recorded by approximately $3.0 million as a result of the resolution of contingencies identified as part of the original purchase price allocation. In May 1995, the Company purchased the operations, which consisted of three conventional supermarkets, and certain assets of Cape Ann Market, Inc. for an aggregate purchase price of $5.0 million, exclusive of related fees and expenses. 3. 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 "1997", "1996" and "1995", mean the 52-week fiscal year ended January 31, 1998, the 52-week fiscal year ended February 1, 1997 and the 53-week fiscal year ended February 3, 1996, respectively. The effect of the additional week on 1995 results of operations was not material. 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 31, 1998 and February 1, 1997 was $11.8 million and $8.3 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 31, 1998 and February 1, 1997 was $5.3 million and $3.6 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. 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 will adopt 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. 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. Management of the Company does not expect the adoption of Statement 131 to have a material impact on the Company's financial statement disclosures. Advertising Expense Total advertising expense amounted to $11.8 million, $10.5 million and $9.8 million in 1997, 1996 and 1995, respectively. The Company expenses all advertising costs as incurred. 4. 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 31, 1998 February 1, 1997 -------------------- -------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- Long-term debt $277,427 $291,727 $273,548 $287,298
5. Long-term Debt Long-term debt consists of the following (in thousands):
January 31, 1998 February 1, 1997 ---------------- ---------------- Senior Credit Facility: Term Loan: Tranche A $ 0 $ 38,500 Tranche B 39,750 39,750 Tranche C 29,750 29,750 Additional Tranche C 38,500 0 Revolving credit facility 56,400 51,800 ----------------------------- Total Senior Credit Facility 164,400 159,800 13% Senior subordinated notes 110,000 110,000 8% Note Payable 3,027 3,748 ----------------------------- Total 277,427 273,548 Less current maturities 1,100 1,721 ----------------------------- $ 276,327 $ 271,827 =============================
The following table presents the maturities of the long-term debt for the next five fiscal years and thereafter (in thousands) as of January 31, 1998: Fiscal 1998 1,100 1999 1,163 2000 11,077 2001 86,803 2002 and thereafter 177,284 --------- Total $ 277,427 =========
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 accommodate continued investment in new store growth, the terms of the Senior Credit Facility were amended on April 21, 1997. This amendment, dated April 21, 1997, provides for a $108.0 million term loan facility and a $75.0 million revolving credit facility, extends certain term loans, extends the revolving credit facility by two years to December 31, 2001, and amends certain financial covenants. 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 31, 1998, 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 require that under certain circumstances, proceeds from the issuance of certain debt or equity or specified asset sales, exchanges or excess cash flow are required to prepay indebtedness under the loan facility. The terms of the Senior Credit Facility have been amended to allow for certain proceeds from the sale of assets to be used to partially fund acquired store locations. 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 .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 31, 1998, the interest rates on the term loan facility ranged from 8.82% to 9.32% and the weighted average interest rate on amounts outstanding under the revolving credit facility at January 31, 1998 and February 1, 1997 were 8.40% and 8.11%, 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 $161,000, $55,000 and $1,839,000 for 1997, 1996 and 1995, respectively. 6. 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 therefore, 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 31, 1998. 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. 7. Leases The Company leases retail stores and equipment. The store leases have an average life of approximately 33 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. The summary below shows the aggregate future minimum lease commitments at January 31, 1998. Operating leases are shown net of an aggregate $8.7 million of minimum rental income under noncancelable subleases.
Operating Leases -------------- (In thousands) 1998 $ 27,974 1999 27,745 2000 25,801 2001 26,371 2002 25,561 Thereafter 329,171 --------- Total minimum rent commitments $ 462,623 =========
Rent expense for real property was as follows:
Minimum Sublease Contingent Total Rent Rent Net Rent Rent ------- -------- ------- ---------- ------- (In thousands) 1997 $22,284 $(1,298) $20,986 $329 $21,315 1996 $16,639 $ (970) $15,669 $338 $16,007 1995 9,876 (560) 9,316 431 9,747
Additionally, rent expense for personal property totaled approximately $3.5 million, $2.1 million and $1.7 million, for 1997, 1996 and 1995, 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 31, 1998 was $1.3 million. 8. Income Taxes Federal and state income taxes charged to earnings are summarized below:
1997 1996 1995 ----- ----- ----- Current: Federal State $ 365 $ 378 $ 250 ----------------------- Income taxes $ 365 $ 378 $ 250 =======================
The effective income tax rate differs from the statutory federal income tax rate as follows:
1997 1996 1995 ------- ------- ------- Statutory federal income tax rate (34.0%) (34.0%) (34.0%) State income taxes, net of federal income tax effect 4.5 4.2 2.9 Unbenefitted Losses / Loss Carryforward 34.0 34.0 34.0 ---------------------------- Effective income tax rate 4.5% 4.2% 2.9% ============================
Deferred tax assets and liabilities as of 1996 and 1995 related to the following temporary differences (in thousands):
January 31, 1998 February 1, 1997 ---------------- ---------------- Deferred tax liabilities: Goodwill $ (4,939) $ (3,393) Basis in fixed assets (4,548) (3,786) Other, net (1,327) (1,489) ---------------------------- Total deferred tax liabilities (10,814) (8,668) Deferred tax assets: Self-insurance reserves 10,605 14,522 Net operating loss carryforward 20,435 13,816 Compensation and benefits 2,088 2,194 Miscellaneous accruals 1,032 575 Other, net 2,239 1,777 ---------------------------- Total deferred tax assets 36,399 32,884 Valuation allowance (25,585) (24,216) ---------------------------- Net deferred tax assets 10,814 8,668 ---------------------------- $ 0 $ 0 ============================
The Company has tax net operating loss carryforwards of $45.0 million that expire through 2013. 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 31, 1998. 9. 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):
1997 1996 1995 ------ ------ ------ Company-sponsored plans $1,859 $2,685 $2,271 Multi-employer plans 2,457 2,102 1,929 -------------------------- $4,316 $4,787 $4,200 ==========================
10. 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. 11. 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. EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING BALANCE SHEET AS OF JANUARY 31, 1998 AND THE ACCOMPANYING STATEMENTS OF OPERATIONS, CHANGES IN EQUITY, AND CASH FLOWS FOR THE 52 WEEK PERIOD ENDED JANUARY 31, 1998 FOR STAR MARKETS COMPANY, INC., AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JAN-31-1998 JAN-31-1998 0 0 21,001 1,391 71,524 96,990 246,393 52,692 452,542 90,147 276,327 10,326 0 0 83,924 452,542 1,034,188 1,304,188 761,798 250,500 (87) 0 30,177 (8,200) 365 (8,565) 0 0 0 (8,565) (1,713.00) (1,713.00)
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