<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended June 23, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition from ____ to ____
Commission file number 001-13222
---------
STATER BROS. HOLDINGS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 33-0350671
-------- ----------
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
21700 Barton Road
Colton, California 92324
------------------ -----
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (909) 783-5000
--------------
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
--- ---
As of July 17, 1996, there were issued and outstanding
50,000 shares of the registrant's Class A Common Stock
1
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STATER BROS. HOLDINGS INC.
JUNE 23, 1996
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION (UNAUDITED) PAGE
- - - ------ --------------------------------- ----
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF SEPTEMBER 24, 1995
AND JUNE 23, 1996 3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 39 WEEKS ENDED
JUNE 25, 1995 AND JUNE 23, 1996 5
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE 13 WEEKS ENDED
JUNE 25, 1995 AND JUNE 23, 1996 6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 39 WEEKS
ENDED JUNE 25, 1995 AND JUNE 23, 1996 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
PART II OTHER INFORMATION
- - - ------- -----------------
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 19
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- - - -------
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
<TABLE>
<CAPTION>
SEPT. 24, JUNE 23,
1995 1996
---------- ---------
<S> <C> <C>
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 26,308 $ 49,859
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,877 18,461
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,146 108,788
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 3,591 4,172
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . 2,792 2,792
Properties held for sale . . . . . . . . . . . . . . . . . . . . . . 2,933 2,795
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 158,647 186,867
Investment in unconsolidated affiliate . . . . . . . . . . . . . . . . . 9,250 8,315
Property and equipment
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,653 16,023
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . 96,653 86,989
Store fixtures and equipment . . . . . . . . . . . . . . . . . . . . 68,338 75,571
Property subject to capital leases . . . . . . . . . . . . . . . . . 14,368 14,368
--------- ---------
200,012 192,951
Less accumulated depreciation and amortization . . . . . . . . . . . 81,385 85,092
--------- ---------
118,627 107,859
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 4,975 4,973
Deferred debt issuance cost, net . . . . . . . . . . . . . . . . . . . . 6,423 5,538
Lease guarantee escrow . . . . . . . . . . . . . . . . . . . . . . . . . 5,584 6,471
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,576 8,523
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 314,082 $ 328,546
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Sept. 24, June 23,
1995 1996
-------- -------
<S> <C> <C>
Current Liabilities
Accounts payable $ 67,604 $ 62,655
Accrued payroll and related expenses 22,289 23,467
Other accrued liabilities 22,653 29,698
Current portion of capital lease obligations 1,087 1,087
--------- ---------
Total current liabilities 113,633 116,907
Long-term debt 165,000 165,000
Capital lease obligations, less current portion 8,099 7,293
Long-term portion of self-insurance reserves 13,031 13,031
Other long-term liabilities 741 2,569
Series B Preferred Stock - 69,365
Stockholders' equity
Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 50,000 in
1995, 0 in 1996 1 -
Class A Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 50,000 1 1
Additional paid-in capital 12,715 12,715
Retained earnings 15,511 (43,685)
Less option to acquire stock (14,650) (14,650)
--------- ---------
Total stockholders'equity 13,578 (45,619)
--------- ---------
Total liabilities and stockholders' equity $ 314,082 $ 328,546
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
39 Weeks Ended
--------------------------
JUNE 25, JUNE 23,
1995 1996
------------ ------------
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,177,288 $1,244,312
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 914,424 959,246
---------- ----------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262,864 285,066
Operating expenses
Selling, general and administrative expenses . . . . . . . . . . . . 229,170 239,252
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 8,622 9,220
Consulting fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,122 1,125
---------- ----------
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . 238,914 249,597
---------- ----------
Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,950 35,469
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 608 1,309
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,227) (14,943)
Equity in earnings (loss) from unconsolidated affiliate . . . . . . . . . (562) (935)
Other income - net . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 (187)
---------- ----------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . 8,858 20,713
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,543 8,390
---------- ----------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,315 $ 12,323
---------- ----------
Less preferred dividends . . . . . . . . . . . . . . . . . . . . . . - 2,155
---------- ----------
Earnings available to common shareholders . . . . . . . . . . . . . . . . $ 5,315 $ 10,168
========== ==========
Earnings per common share: . . . . . . . . . . . . . . . . . . . . . . . $ 53.15 $ 126.75
========== ==========
Average common shares outstanding . . . . . . . . . . . . . . . . . . . . 100,000 80,220
========== ==========
Shares outstanding at end of period . . . . . . . . . . . . . . . . . . . 100,000 50,000
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended
------------------------
JUNE 25, JUNE 23,
1995 1996
---------- ----------
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 396,072 $ 429,349
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 306,088 330,092
--------- ----------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,984 99,257
Operating expenses
Selling, general and administrative expenses . . . . . . . . . . . . 78,024 83,636
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 2,946 3,058
Consulting fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 374 375
--------- ----------
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . 81,344 87,069
--------- ----------
Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,640 12,188
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288 602
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,006) (5,019)
Equity in earnings (loss) from unconsolidated affiliate . . . . . . . . . (298) (387)
Other income - net . . . . . . . . . . . . . . . . . . . . . . . . . . . (19) (11)
--------- ----------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . 3,605 7,373
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,443 2,988
--------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,162 $ 4,385
--------- ----------
Less preferred dividends . . . . . . . . . . . . . . . . . . . . . . - 1,816
--------- ----------
Earnings available to common shareholders . . . . . . . . . . . . . . . . $ 2,162 $ 2,569
========= ==========
Earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . $ 21.62 $ 51.38
========= ==========
Average common shares outstanding . . . . . . . . . . . . . . . . . . . . 100,000 50,000
========= ==========
Shares outstanding at end of period . . . . . . . . . . . . . . . . . . . 100,000 50,000
========= ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
39 Weeks Ended
----------------------
JUNE 25, JUNE 23,
1995 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,315 $ 12,323
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 8,622 9,220
Provision for deferred income taxes . . . . . . . . . . . . . . . . . 670 2
(Gain) loss on disposals of assets . . . . . . . . . . . . . . . . . (89) 187
Net undistributed loss in investment in unconsolidated affiliate . . 562 935
Changes in operating assets and liabilities:
(Increase) decrease in receivables . . . . . . . . . . . . . . . . . (333) (2,584)
(Increase) decrease in inventories . . . . . . . . . . . . . . . . . (2,654) (1,642)
(Increase) decrease in prepaid expenses . . . . . . . . . . . . . . (588) (581)
(Increase) decrease in other assets . . . . . . . . . . . . . . . . (1,324) 1,167
Increase (decrease) in accounts payable . . . . . . . . . . . . . . 876 (4,949)
Increase (decrease) in accrued liabilities and long-term
portion of self-insurance reserves . . . . . . . . . . . . . . . . (380) 7,463
------- --------
Net cash provided by operating activities . . . . . . . . . . . . . . . . 10,677 21,541
------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . (9,734) (13,658)
Proceeds from sale of property and equipment and properties
held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 482 18,629
------- --------
Net cash (used in) provided by investing activities . . . . . . . . . . . (9,252) 4,971
------- --------
FINANCING ACTIVITIES:
Proceeds from notes payable borrowings . . . . . . . . . . . . . . . . . 100 -
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . - (2,155)
Redemption of common stock . . . . . . . . . . . . . . . . . . . . . . . - (69,365)
Issuance of preferred stock . . . . . . . . . . . . . . . . . . . . . . . - 69,365
Principal payments on long-term debt and capital lease obligations . . . (868) (806)
------- --------
Net cash (used by) financing activities . . . . . . . . . . . . . . . . . (768) (2,961)
------- --------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . 657 23,551
Cash and cash equivalents at beginning of period . . . . . . . . . . . . 21,289 26,308
------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . $21,946 $ 49,859
======= ========
SUPPLEMENTARY INFORMATION:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,216 $ 9,938
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,810 $ 7,175
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE> 8
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 23, 1996
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of Stater Bros. Holdings Inc. (the
"Company") and its subsidiaries as of June 25, 1995 and June 23, 1996 and the
results of its operations and cash flows for the thirty-nine weeks ended June
25, 1995 and June 23, 1996. These consolidated financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's latest annual report filed on Form 10-K. The
operating results for the thirty-nine weeks ended June 23, 1996 are not
necessarily indicative of the results of operations for a full year.
NOTE 2 - INCOME TAXES
The provision for income taxes for the thirty-nine weeks ended June 25,
1995 and June 23, 1996 consists of the following:
<TABLE>
<CAPTION>
39 Weeks Ended
--------------
June 25, 1995 June 23, 1996
------------- -------------
(In thousands)
<S> <C> <C>
Federal Income Taxes $3,034 $7,198
State Income Taxes 509 1,192
------ ------
$3,543 $8,390
====== ======
</TABLE>
NOTE 3 - CONVERSION OF COMMON STOCK INTO SERIES B PREFERRED STOCK
In March 1994, the Company acquired, for $14.7 million, an option to
purchase all, but not less than all, shares of the Common Stock held by
Craig for a cash purchase price of $60.0 million plus an adjustment factor
equal to 8.833% per annum from March 8, 1994 to March 8, 1996, compounded
annually and $69,365,000 thereafter, provided the Common Stock of the Company
held by Craig is converted into shares of Series B Preferred Stock of the
Company.
The Option Agreement also included an option available to the Company to
convert the Company's 50,000 shares of Common Stock held by Craig Corporation
into 693,650 shares of 10.5% Series B Preferred Stock on or before March 8,
1996.
Effective March 8, 1996, the Company exercised its option and converted
the Company's 50,000 shares of Common Stock held by Craig Corporation into
693,650 shares of the Company's Series B Preferred Stock. The Series B
Preferred Stock is redeemable by the Company in whole but not in part for $69.4
million plus accrued and unpaid dividends. The holders of the Series B
Preferred Stock can, beginning in the year 2009, cause the Company to redeem
such Preferred Stock. Dividends on the Preferred Stock will be paid quarterly
in arrears at the rate of 10.5% per annum through September 2002, and beginning
in October 2002, will increase to 12% per annum and will increase by 100 basis
points per year thereafter to a maximum rate of 15% per annum.
8
<PAGE> 9
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 23, 1996
NOTE 4 - CONSULTING AGREEMENT AND COVENANT NOT TO COMPETE
Pursuant to the Consulting Agreement dated as of September 3, 1993 (the
"Consulting Agreement"), effective and commencing March 8, 1994, Craig will
render consulting services to the Company for a five-year period. In
consideration for such consulting services, the Company will pay Craig $1.5
million per year, payable quarterly during the term of the Consulting
Agreement. The Company will have the right to terminate its obligations under
the Consulting Agreement in the event it exercises its option to purchase the
Common Stock or Series B Preferred Stock owned by Craig. Additionally, in
accordance with the terms of the Consulting Agreement, Craig has agreed not to
engage in any business that competes with the Company in any of the five
counties in which the Company operates until the end of the five-year period of
the Consulting Agreement. The Company paid Craig $5.0 million March 8, 1994
which is amortized to earnings over the five-year term of the covenant not to
compete included in the Consulting Agreement.
NOTE 5 - UNCONSOLIDATED AFFILIATE
The Company owns 49.6% of Santee Dairies, Inc. ("Santee"), an operator of
a fluid milk processing plant located in Los Angeles, California. The Company
purchases a substantial portion of the fluid milk products offered for sale in
its supermarkets from Santee. The Company does not provide any guarantees
regarding the Santee operations. Accordingly, the Company accounts for its
investment in Santee using the equity method of accounting.
NOTE 6 - RECLASSIFICATIONS
Certain amounts in the prior periods have been reclassified to conform to
the current period financial statement presentation.
9
<PAGE> 10
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART I - FINANCIAL INFORMATION (CONTD.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OWNERSHIP OF THE COMPANY
Effective March 8, 1996, La Cadena Investments ("La Cadena") became the
sole Common Shareholder of the Company and holds all of the shares of
Class A Common Stock which are entitled to 1.1 votes per share. La
Cadena Investments is a California General Partnership whose partners
include Jack H. Brown, Chairman of the Board, President and Chief
Executive Officer of the Company and other members of senior management
of the Company. Jack H. Brown has a majority interest in La Cadena and
is the managing general partner with the power to vote the shares of
the Company held by La Cadena.
RECAPITALIZATION TRANSACTION
In March 1994, the Company completed a Recapitalization Transaction
(the "Recapitalization") which transferred effective voting control of
the Company to La Cadena, reclassified the Company's outstanding
equity, provided for certain cash payments and distributions to Craig
Corporation ("Craig"), previously a shareholder of the Company, and
provided the Company with an option to acquire Craig's remaining equity
in Stater Bros. Holdings Inc. The Recapitalization was funded through
an offering of $165.0 million of 11% Senior Notes due 2001 which are
listed and trade on the American Stock Exchange.
Effective March 8, 1996, pursuant to options available to the Company
included in a certain Option Agreement entered into in March 1994, as
part of the Recapitalization between the Company and Craig Corporation,
the Company exercised its right to convert all of the Common Stock held
by Craig Corporation into 693,650 shares of 10.5% Series B Preferred
Stock. The redemption value of the Series B Preferred Stock is $100
per share for an aggregate value of $69,365,000. Dividends on the
Series B Preferred Stock will be paid quarterly in arrears.
RESULTS OF OPERATIONS
The following table sets forth certain income statement components
expressed as a percent of sales for the thirteen and thirty-nine weeks
ended June 23, 1996 and June 25, 1995.
<TABLE>
<CAPTION>
Thirteen Weeks Thirty-Nine Weeks
------------------ ------------------
1996 1995 1996 1995
------ ------ ----- ------
<S> <C> <C> <C> <C>
Sales 100.00% 100.00% 100.00% 100.00%
Gross profit 23.12 22.72 22.91 22.33
Selling, general and
administrative expense 19.48 19.70 19.23 19.47
Depreciation and amortization .71 .74 .74 .73
Consulting fees .09 .10 .09 .10
Other (income) (net) (.05) .01 (.01) (.01)
Interest expense 1.17 1.26 1.20 1.29
Earnings before income taxes 1.72% .91% 1.66% .75%
</TABLE>
10
<PAGE> 11
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (contd.)
Total sales for the thirteen weeks ended June 23, 1996 increased 8.4%
and amounted to $429.3 million compared to $396.1 million for the like
period in 1995. Total sales for the thirty-nine weeks year to date
ended June 23, 1996 increased 5.7% and amounted to $1,244.3 million
compared to $1,177.3 million for the same period in 1995. Like store
sales increased 8.5% for the quarter and increased 6.1% for the year to
date period. The Company operated 110 supermarkets at June 23, 1996
and at June 25, 1995.
Gross profits for the thirteen weeks ended June 23, 1996, amounted to
$99.3 million or 23.12% of sales compared to $90.0 million or 22.72% of
sales in the same period of the prior year. During the quarter ended
June 23, 1996, the Company continued to introduce higher gross margin
products into its supermarkets, such as prepackaged gourmet vegetables
and fresh cut flowers. For the thirty-nine week year to date period,
gross profits increased to $285.1 million or 22.91% of sales compared
to $262.9 million or 22.33% of sales in the prior year. The increase
in gross profits for the year to date period, is due to increased
efficiencies in the Company's warehousing and transportation
departments and the introduction of higher gross margin products, such
as prepackaged gourmet vegetables and fresh cut flowers, a decrease in
competitive activity in the current year when compared to the prior
year and slight improvements in the Southern California economy.
Operating expenses include selling, general and administrative
expenses, depreciation and amortization expenses and consulting fees.
For the thirteen weeks ended June 23, 1996, selling, general and
administrative expenses amounted to $83.6 million or 19.48% of sales
compared to $78.0 million or 19.70% of sales for the like period of the
prior year. For the year to date period, selling, general and
administrative expenses amounted to $239.3 million or 19.23% of sales
compared to $229.2 million or 19.47% of sales for the like period of
the prior year. Selling, general and administrative expenses for the
thirteen and thirty-nine weeks ended June 23, 1996 reflect reductions
in expenses for employer contributions to collective bargaining
benefits trust of $3.8 million. Such collective bargaining health care
benefits trust was over-funded and employer monthly contributions to
the trust were suspended for the months of December 1995 and January
1996.
Depreciation and amortization expenses amounted to $3.1 million and
$9.2 million for the third quarter and year to date periods ended June
23, 1996, respectively, and included amortization of a prepaid
five-year covenant not to compete between the Company and Craig which
became effective as of March 8, 1994. Depreciation and amortization
expense amounted to $2.9 million and $8.6 million for the quarter and
year to date periods of the prior year.
In conjunction with the March 1994 Recapitalization Transaction, the
Company entered into a five-year consulting and covenant not to compete
agreement (the "Consulting Agreement") with Craig Corporation. The
Consulting Agreement provided for a prepayment of $5.0 million, which
is amortized to expense over the five-year term of the covenant not to
compete. The Consulting Agreement also provides for annual consulting
payments of
11
<PAGE> 12
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (contd.)
$1.5 million, paid quarterly in arrears. The requirement to make
annual consulting payments may, at the election of the Company, be
terminated if the Company acquires Craig's remaining equity in the
Company prior to the expiration date of the Consulting Agreement.
Accordingly, amortization of the prepaid covenant not to compete
amounted to $250,000 and $750,000, respectively, for the thirteen and
thirty-nine weeks ended June 23, 1996 and June 25, 1995 and is included
in depreciation and amortization expense. Additionally, annual
consulting fees paid or accrued to the benefit of Craig amounted to
$375,000 and $374,000, for the thirteen weeks and $1,125,000 and
$1,122,000, for the thirty-nine weeks ended June 23, 1996 and June 25,
1995, respectively.
Operating profits for the third quarter of 1996 amounted to $12.2
million or 2.84% of sales, compared to $8.6 million or 2.18% of sales
in the third quarter of 1995. Operating profits for the thirty-nine
weeks year to date ended June 23, 1996, amounted to $35.5 million or
2.85% of sales, compared to $24.0 million or 2.03% of sales for the
like period in 1995.
Interest expense amounted to $5.0 million for the third quarters of
1996 and 1995. For the year to date periods of 1996 and 1995, interest
expense amounted to $14.9 million and $15.2 million, respectively.
Interest expense in the third quarter and year to date periods of 1996,
includes amortization of $295,000 and $885,000, respectively, from fees
and expenses incurred to acquire debt, compared to $270,000 and
$943,000 for the same period in 1995.
Income before income taxes amounted to $7.3 million and $3.6 million
for the third quarters of 1996 and 1995, respectively, and amounted to
$20.7 million and $8.9 million for the year to date periods of 1996 and
1995, respectively.
Net income for the third quarters of 1996 and 1995 amounted to $4.4
million or 1.02% of sales and $2.2 million or .55% of sales,
respectively, and for the year to date periods for 1996 and 1995,
amounted to $12.3 million or .99% of sales and $5.3 million or .45% of
sales, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its daily cash flow requirements
through funds generated from operations and through borrowings from
short- term revolving credit facilities.
Working capital amounted to $70.0 million at June 23, 1996 and $45.0
million at September 24, 1995 and the Company's current ratios were
1.60:1, and 1.40:1, respectively. Fluctuations in working capital and
current ratios are not unusual in the industry.
Net cash provided by operating activities for the thirty-nine weeks
ended June 23, 1996 amounted to $21.5 million. Fluctuations in
operating assets and liabilities are not unusual in the supermarket
industry. Net cash provided by operating activities amounted to $10.7
million in the 1995 year to date period.
12
<PAGE> 13
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (contd.)
The increase in accrued current liabilities in 1996 when compared to
1995 is due primarily to an increase in unremitted sales taxes of
approximately $5.7 million, which were subsequently paid on their due
dates.
Net cash provided by investing activities for the thirty-nine weeks
ended June 23, 1996, amounted to $4.9 million compared to net cash
used in investing activities of $9.3 million in the like period of
fiscal 1995. The difference in net cash used in investing activities
between the comparable periods in 1996 and 1995 is due to the Company's
capital expenditures during such periods, net of proceeds from asset
dispositions. Capital expenditures for the thirty-nine week year to
date periods amounted to $13.7 million in 1996 and $9.7 million in
1995. On January 31, 1996, the Company completed a sale and leaseback
transaction involving five of its supermarkets with an unrelated third
party. Gross proceeds from the transaction were approximately $18.5
million. As part of the sale and leaseback transaction, the Company
entered into leases for the five supermarkets with initial terms of 20
years. No gain or loss was recognized in conjunction with the sale of
the five supermarkets. Proceeds from the sale and leaseback
transaction will be used to fund an accelerated capital expenditure
program, including the construction of new supermarkets and the
remodeling of existing supermarkets.
Capital expenditures through June 23, 1996, have been financed
primarily from cash provided by operating activities and proceeds from
the sale and leaseback transaction and consist primarily of costs
incurred to build a replacement supermarket, which opened in February
1996, to fund supermarket remodels, and to fund technology improvements
and merchandising enhancements in most of the Company's supermarkets.
Net cash used by financing activities for the thirty-nine weeks ended
June 23, 1996 amounted to $3.0 million compared to $.8 million in the
1995 year to date period. The increase in net cash used by financing
activities in 1996, when compared to 1995, was due primarily to the
accretion of preferred dividends which commenced on March 8, 1996.
Management believes that operating cash flow, funds available to the
Company from its revolving credit facility and funds derived from
leases will be sufficient to meet the Company's currently identified
operating needs and scheduled capital expenditures. However, there can
be no assurance that cash provided through future lease financing will
be available to the Company.
THE BANK FACILITIES
Stater Bros. Markets, the Company's operating subsidiary, and Bank of
America National Trust and Savings Association (the "Bank") entered
into a Credit Agreement in March 1994, as amended and effective June 1,
1996, whereby the Bank provides Stater Bros. Markets with a revolving
operating line of credit (the "Operating Facility") with a maximum
availability of $15.0 million which was available at June 23, 1996 and
a revolving letter of credit facility (the "LC Facility") with a
maximum availability of $25.0 million (collectively, the "Bank
Facilities").
13
<PAGE> 14
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (contd.)
THE BANK FACILITIES (CONTD.)
As of June 23, 1996 approximately $10.2 million of the LC Facility was
available to the Company. The Bank Credit Agreement expires on June 1,
1998.
The Company is subject to certain covenants associated with its 11%
Senior Notes due 2001 and covenants included in the Credit Agreement
between a bank and Stater Bros. Markets, a wholly owned subsidiary of
the Company. As of June 23, 1996, the Company was in compliance with
all such covenants. However, there can be no assurance that the
Company will be able to achieve the expected operating results or
implement the capital expenditure strategy upon which future compliance
with such covenants is based.
THE PREFERRED STOCK CONVERSION
In March 1994, the Company acquired, for $14.7 million, an option to
purchase all, but not less than all, shares of the Common Stock
held by Craig for a cash purchase price of $60.0 million plus an
adjustment factor equal to 8.833% per annum from March 8, 1994 to March
8, 1996, compounded annually and $69,365,000 thereafter, provided the
Common Stock held by Craig is converted into shares of Series B
Preferred Stock of the Company.
The Option Agreement also included an option available to the Company
to convert the Company's 50,000 shares of Common Stock held by Craig
Corporation into 693,650 shares of 10.5% Series B Preferred Stock on or
before March 8, 1996.
Effective March 8, 1996, the Company exercised its option to convert
the Company's 50,000 shares of Common Stock held by Craig Corporation
into 693,650 shares of the Company's Series B Preferred Stock. The
Series B Preferred Stock is redeemable by the Company in whole but not
in part for $69.4 million plus accrued and unpaid dividends. The
holders of the Series B Preferred Stock can, beginning in the year
2009, cause the Company to redeem such Preferred Stock. Dividends on
the Preferred Stock will be paid quarterly in arrears at the rate of
10.5% per annum through September 2002, and beginning in October 2002,
will increase to 12% per annum and will increase by 100 basis points
per year thereafter to a maximum rate of 15% per annum.
LABOR RELATIONS
The Company and other major supermarket employers in Southern
California negotiated a four-year contract, beginning October
1995, with the United Food and Commercial Workers Union. The
Company's collective bargaining agreement with the International
Brotherhood of Teamsters was renewed for four years in September 1994.
Management believes it has good relations with its employees.
14
<PAGE> 15
STATER BROS. HOLDINGS INC.
JUNE 23, 1996
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal actions and claims are pending against the Company in
the ordinary course of business. In the opinion of management and its
general legal counsel, the ultimate resolution of such pending routine
legal actions and claims will not have a material adverse effect on
the Company's consolidated financial position.
For a description of legal proceedings, please refer to the footnote
entitled "Legal Proceedings" contained in the Notes to
Financial Statements section of the Company's Annual Report on Form
10-K for the fiscal year ended September 24, 1995
ITEM 2. CHANGES IN SECURITIES
Effective March 8, 1996, pursuant to options available to the Company
included in a certain Option Agreement entered into as part of the
Recapitalization and between the Company and Craig Corporation, the
Company exercised its right to convert the 50,000 shares of the
Company's Common Stock held by Craig into 693,650 shares of the
Company's Series B Preferred Stock.
The Series B Preferred Stock is redeemable by the Company in whole
but not in part for $69.4 million plus accrued and unpaid dividends.
The holders of the Series B Preferred Stock can, beginning in the year
2009, cause the Company to redeem such Preferred Stock. Holders of
the Series B Preferred Stock will have the right to elect one director
of the Company. In addition, as long as all the shares of Series B
Preferred Stock are beneficially owned by Craig, the holder of the
Series B Preferred Stock will have the right to vote as a single class
with holders of all other voting stock of the Company, and the voting
power of the Series B Preferred Stock will equal 20% of the total
voting power of such combined class. In the event dividends on the
Series B Preferred Stock in respect of any two or more quarterly
dividend periods shall be and remain unpaid, so long as the majority
of the shares of Series B Preferred Stock are beneficially owned by
Craig, the holders of the Series B Preferred Stock will have the right
to elect a majority of the Company's directors. In the event Craig
ceases to be the beneficial owner of a majority of the Series B
Preferred Stock, the right of the holders of the Series B Preferred
Stock to elect one director will be suspended, and if dividends on the
Series B Preferred Stock in respect of any two or more quarterly
dividend periods shall be and remain unpaid, the holders of the Series
B Preferred Stock will have the right to elect only two directors of
the Company.
Dividends on the Series B Preferred Stock commenced to accrue on
March 8, 1996, at the rate of 10.5% per annum for the first 78 months.
Commencing with the 79th month, the dividend rate will increase to 12%
per annum, and will further increase each twelfth month thereafter by
100 basis points per year, to a maximum rate of 15% per annum.
15
<PAGE> 16
STATER BROS. HOLDINGS INC.
JUNE 23, 1996
ITEM 2. CHANGES IN SECURITIES (contd.)
In the event of any liquidation of the Company, the holders of the
Series B Preferred Stock will be entitled to receive $100 per share
before any distribution is made to holders of Junior Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits are as follows:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1 (1) Certificate of Incorporation of the Company.
3.2 (1) By-Laws of the Company.
4.1 (1) Indenture between the Company and IBJ Schroder Bank & Trust Company, as
Trustee, for $165,000,000 11% Senior Notes due 2001, dated as of March 8, 1994 (the
"Indenture").
4.2 (1) Global Notes of the Company issued pursuant to the Indenture.
4.3 (1) Registration Rights Agreement among the Company and PaineWebber Incorporated dated
March 8, 1994.
10.1 (1) Reclassification Agreement dated September 3, 1993, by and among the Company, Craig
and La Cadena.
10.2 (1) Amendment to Reclassification Agreement, dated January 12, 1994, by and among the
Company, Craig and La Cadena.
10.3 (1) Agreement of Stockholders dated May 10, 1989, by and among the Company, Craig and La
Cadena.
</TABLE>
16
<PAGE> 17
STATER BROS. HOLDINGS INC.
JUNE 23,1996
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (contd.)
(a) Exhibits (contd.)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.4 (1) Amendment to Agreement of Stockholders dated September 3, 1993, by and among the
Company, Craig, Craig Management, Inc. ("CMI") and La Cadena.
10.5 (1) Option Agreement dated September 3, 1993, by and between the Company and Craig.
10.6 (1) Amendment to Option Agreement dated January 12, 1994, by and between the Company and
Craig.
10.7 (1) Consulting Agreement dated September 3, 1993, by and between the Company, Craig and
CMI.
10.8 (1) Letter Agreement regarding Consulting Agreement, dated March 8,1994, by and between
the Company, Craig and CMI.
10.9 (1) Second Amended and Restated Stock Agreement dated January 12, 1994, by and among
the Company, Craig, CMI, La Cadena and James J. Cotter.
10.10 (1) Security Agreement dated March 8, 1994, by and between the Company and Craig.
10.12 (1) Credit Agreement dated March 8, 1994, by and between Stater Bros. Markets and Bank
of America Trust and Savings Association.
10.12(a) (2) Amendment dated June 23, 1995 to the Credit Agreement dated March 8, 1994, by and
between Stater Bros. Markets and Bank of America Trust and Savings Association.
10.13 (1) Continuing Guaranty dated March 8, 1994, of Stater Bros. Development, Inc. in favor
of Bank of America Trust and Savings Association.
10.15 (1) Subordination Agreement dated March 8, 1994, by and among the Company, Stater Bros.
Markets and Bank of America Trust and Savings Association.
10.16 (1) Amended and Restated Sublease Agreement dated June 1, 1983, between Wren Leasing
Corp., as Lessor, and Stater Bros. Markets, as Lessee.
10.17 (1) Preferred Stock Agreement dated March 22, 1983, between Stater Bros. Markets and
Petrolane Incorporated.
</TABLE>
17
<PAGE> 18
STATER BROS. HOLDINGS INC.
JUNE 23, 1996
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (contd.)
(a) Exhibits (contd.)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.18 (1) Escrow Agreement dated September 19, 1985, by and among Stater Bros. Markets,
Petrolane Incorporated and First Interstate Bank of California.
11 Calculation of Earnings per common share.
27 Financial Data Schedule
</TABLE>
______________________________________________________________
(1) Previously filed with the Securities and Exchange
Commission as an exhibit to Registration Statement
S-4 No. 33-77296 dated July 21, 1994.
(2) Previously filed with the Securities and Exchange
Commission as an Exhibit to the Registrant's
Quarterly Report on Form 10-Q dated June 25, 1995
and filed on August 8, 1995.
Copies of Exhibits listed herein can be obtained by
writing and requesting such Exhibits from:
Corporate Secretary ,P.O. Box 150, Colton,
California 92324.
(b) Reports on Form 8-K
None
18
<PAGE> 19
STATER BROS. HOLDINGS INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: August 5, 1996 /s/ Jack H. Brown
---------------------------------
Jack H. Brown
Chairman of the Board, President,
and Chief Executive Officer
Date: August 5, 1996 /s/ Dennis N. Beal
---------------------------------
Dennis N. Beal
Vice President, Finance and
Chief Financial Officer
(Chief Accounting Officer)
19
<PAGE> 1
Exhibit 11
STATER BROS. HOLDINGS INC.
Calculation of Earnings Per Common Share
(Unaudited)
(In thousands, except number of shares and per share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
-------------- --------------
June 25, June 23, June 25, June 23,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 2,162 $ 4,385 $ 5,315 $ 12,323
Less preferred dividends - 1,816 - 2,155
------- -------- -------- --------
Net income available to common shareholders $ 2,162 $ 2,569 $ 5,315 $ 10,168
======= ======== ======== ========
Earnings per common share $ 21.62 $ 51.38 $ 53.15 $ 126.75
======= ======== ======== ========
Average common shares outstanding 100,000 50,000 100,000 80,220
======= ======== ======== ========
Common shares outstanding at end of period 100,000 50,000 100,000 50,000
======= ======== ======== ========
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-29-1996
<PERIOD-START> SEP-25-1995
<PERIOD-END> JUN-23-1996
<CASH> 49,859
<SECURITIES> 0
<RECEIVABLES> 18,461
<ALLOWANCES> 0
<INVENTORY> 108,788
<CURRENT-ASSETS> 186,867
<PP&E> 192,951
<DEPRECIATION> 85,092
<TOTAL-ASSETS> 328,546
<CURRENT-LIABILITIES> 116,907
<BONDS> 187,893
0
69,365
<COMMON> 1
<OTHER-SE> (45,620)
<TOTAL-LIABILITY-AND-EQUITY> 328,546
<SALES> 1,244,312
<TOTAL-REVENUES> 1,244,312
<CGS> 959,246
<TOTAL-COSTS> 959,246
<OTHER-EXPENSES> 249,410
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,943
<INCOME-PRETAX> 20,713
<INCOME-TAX> 8,390
<INCOME-CONTINUING> 12,323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,323
<EPS-PRIMARY> 126.75
<EPS-DILUTED> 126.75
</TABLE>
