<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
FORM 10-K
(Mark One)
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: September 29, 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 (IRS 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
--------------
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 (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
--- ----.
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. YES X NO
--- ----.
No voting stock of the registrant is held by non-affiliates of the
registrant.
Number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of December 10, 1996--Class A Common Stock - 50,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE> 2
STATER BROS. HOLDINGS INC.
FORM 10-K
TABLE OF CONTENTS
PART I
------
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . 9
PART II
-------
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . 9
Item 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . 12
Item 8 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . 19
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . 19
PART III
--------
Item 10 Directors and Executive Officers of the Registrant . . . . . . . . . . . . 20
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 12 Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 13 Certain Relationships and Related Transactions . . . . . . . . . . . . . . 25
PART IV
-------
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 26
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Stater Bros. Holdings Inc. was incorporated in Delaware in 1989 and together
with its wholly-owned subsidiaries, Stater Bros. Markets and Stater Bros.
Development, Inc., (collectively "Stater Bros." or the "Company") were founded
in 1936 when the first Stater Bros. Market opened in Yucaipa, California. The
Company is a leading supermarket chain in Southern California, operating 110
supermarkets in the Inland Empire Region of Southern California.
The Company has grown, primarily by constructing supermarkets in its primary
trading areas and through the enlargement of existing supermarkets. The
Company offers its customers a high level of customer service, broad selections
of grocery, meat, produce, liquor and general merchandise. All of the
Company's supermarkets have full-service meat departments and many of the
supermarkets have service delicatessens and service bakery departments. All of
the Company's supermarkets have expanded selections of produce merchandise.
The Company utilizes a central warehouse and distribution facility which
provides the Company's supermarkets with approximately 80% of the merchandise
they offer for sale. The Company's warehouse and distribution facilities
encompass approximately 955,000 square feet and include a 118,000 square foot
modern produce facility that was constructed in 1989 as well as facilities for
grocery, meat, frozen foods, health and beauty aids and bakery products.
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 common shareholder of the Company, and provided the Company with
an option to acquire Craig's remaining equity in Stater Bros. Holdings Inc.
The Recapitalization Transaction was funded through an offering of $165.0
million of 11% Senior Notes due 2001 (the "Initial Notes") under Rule 144A of
the Securities Act of 1933, as amended. Proceeds from the Initial Notes were
used to (a) repay $75.5 million of 9.8% Senior Notes, together with a
prepayment premium, (b) repay outstanding bank loans and mortgages of
approximately $12.0 million, (c) repay an outstanding capital expenditure
revolving credit facility of $9.0 million, (d) fund a $5.0 million five-year
consulting agreement and covenant not to compete with Craig, (e) fund a payment
of $14.6 million to purchase an option to acquire Craig's remaining interest in
the Company, (f) pay $20.0 million in dividends on the Company's Common Stock
(held by Craig) and (g) pay fees and expenses associated with the
Recapitalization.
In August of 1994, all of the Initial Notes were exchanged for a like amount of
New Notes which are listed and trade on the American Stock Exchange.
1
<PAGE> 4
RECAPITALIZATION TRANSACTION (CONTD.)
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 are
paid quarterly in arrears.
BUSINESS STRATEGY
STORE PROFILE AND LOCATIONS
The Company's existing supermarkets have well-established locations and low
overhead expenses, including fixed rent payments in most supermarkets. In
addition, the Company believes that its existing supermarkets are
well-maintained and generally require capital expenditures only for customary
maintenance. An average Stater Bros. supermarket is approximately 28,800 square
feet, while newly constructed Stater Bros. supermarkets range from approximately
35,300 to 40,600 square feet. Stater Bros. supermarkets typically utilize
approximately 72% of total square feet for retail selling space. The Company
operates its supermarkets with minimal back-room storage space because of the
close proximity of its distribution facility to its store locations. Generally,
all Stater Bros. supermarkets are similarly designed and stocked thereby
allowing Stater Bros. customers to find items easily in any of the Company's
supermarkets.
Substantially all of the Company's 110 supermarkets are located in neighborhood
shopping centers in well-populated residential areas. The Company endeavors to
locate its supermarkets in growing areas that will be convenient to potential
customers and will accommodate future supermarket expansion.
Management actively pursues the acquisition of sites for new supermarkets. In
an effort to determine sales potential, new supermarket sites are carefully
researched and analyzed by management for population shifts, zoning changes,
traffic patterns, nearby new construction and competitive locations. Stater
Bros. works with developers to attain the Company's criteria for potential
supermarket sites, and to insure adequate parking and a complementary co-tenant
mix.
STORE EXPANSION AND REMODELING
The Company has historically focused its expansion in the Inland Empire. Such
expansion has been accomplished through improving and remodeling existing
stores and constructing new supermarkets rather than by acquiring other
supermarket operations. The number of supermarkets operated by the Company has
grown from 82 in September 1979 to 110 as of September 29, 1996. The Company
intends to continue to expand its existing supermarket operations by enlarging
and remodeling existing supermarkets and constructing new supermarkets. The
Company may also make selective acquisitions of existing supermarkets within
the Inland Empire, if such opportunities arise.
The Company monitors sales and profitability of its operations on a
store-by-store basis and enlarges, remodels or replaces stores in light of
their performance and management's assessment of their future potential.
Approximately 54% of the Company's supermarkets have been either newly
constructed or remodeled within the last five years. Minor remodels usually
include new fixtures, a change in decor, and the addition of one or more
specialty service departments such as a delicatessen or bakery. Major remodels
typically involve more extensive refurbishment of the store's interior and
often increase the retail selling space per store. Expansions entail
enlargement of the store building. The primary objectives of remodelings and
expansions are to improve the attractiveness of supermarkets, increase sales of
higher margin product categories and, where feasible, to increase selling area.
The Company conducts all of its new construction and remodeling through its
wholly-owned subsidiary, Stater Bros. Development, Inc., which serves as the
general contractor for all Company construction projects.
2
<PAGE> 5
STORE EXPANSION AND REMODELING (CONTD.)
The following table sets forth certain statistical information with respect to
the Company's supermarket expansion and remodeling for the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------------
Sept. 27, Sept. 26, Sept. 25, Sept. 24, Sept. 29,
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Number of supermarkets:
Opened . . . . . . . . . . . . . 4 2 3 - 1
Replaced . . . . . . . . . . . . 3 - 1 - 1
Closed . . . . . . . . . . . . . - - - 1 -
Total at end of year . . . . . . 107 109 111 110 110
Minor Remodel . . . . . . . . . . 10 10 4 8 8
Major Remodel . . . . . . . . . . - - - - 8
Expansion . . . . . . . . . . . . - - - 1 -
</TABLE>
Beyond 1996, the Company plans to open approximately two to four new stores per
year, based upon a number of factors, including customer demand, market
conditions, profitability, costs of opening, and availability of financing for
such new stores. The Company's plans with respect to major and minor remodels,
expansion and new construction are reviewed continually and are revised, if
appropriate, to take advantage of marketing opportunities. The Company finances
its new store construction primarily from cash provided by operating activities
and short-term borrowings under its credit facilities. Long-term financing of
new stores generally will be obtained through either sale/leaseback transactions
or secured long-term financings. However, no assurances can be made as to the
availability of such financings.
WAREHOUSE AND DISTRIBUTION FACILITIES
The Company's warehouse and distribution facilities and administrative offices
are located in Colton, California, and encompass approximately 955,000 square
feet. The facilities include warehouses for grocery, produce and deli products,
meats and frozen products, health and beauty aids and bakery merchandise.
Management believes that its existing warehouse and distribution facilities are
adequate to meet its currently identified expansion plans. Approximately 80% of
the products offered for sale in the Company's supermarkets are processed
through the Company's warehouse and distribution facilities.
The Company's warehouse and distribution facilities are centrally located and
are an average distance of approximately 30 miles from its supermarkets. Most
supermarkets can be reached without using the most congested portions of the
Southern California freeway system.
The Company's transportation fleet consists of modern well-maintained vehicles.
As of September 29, 1996, the Company operated approximately 96 tractors and
273 trailers, approximately 33% of which were leased by the Company. The
Company also operates a repair terminal at the Colton distribution facility.
PURCHASING AND MARKETING
The Company uses an Everyday Low Price ("EDLP") format as an integral part of
its purchasing and marketing strategy to provide its customers with the best
overall supermarket value in its primary market areas. The Company supplements
its everyday low price structure with chain-wide temporary price reductions on
selected food and non-food merchandise. The geographic location of the
Company's supermarkets allows it to reach its target consumers through a variety
of media and the Company aggressively advertises its everyday low prices through
local and regional newspapers, direct mail and printed circulars as well as
advertisements on radio and television.
3
<PAGE> 6
PURCHASING AND MARKETING (CONTD.)
A key factor in the Company's business strategy is to provide its customers
with a variety of quality brand-name merchandise as well as alternative
selections of high-quality private label and generic brands of merchandise. To
meet the needs of customers, most supermarkets are stocked with approximately
35,000 items. The Company places particular emphasis on the freshness and
quality of its meat and produce merchandise and maintains high standards for
these perishables by processing and distributing the merchandise through its
perishable warehouses and distribution facilities.
RETAIL OPERATIONS
The Company's supermarkets are well maintained, have sufficient off-street
parking and generally are open from 7:00 a.m. until 10:00 p.m. or 11:00 p.m.,
seven days a week, including all holidays with the exception of Christmas Day.
Because Stater Bros. operates all its supermarkets under a single format,
management believes it is able to achieve certain operating economies.
Store Management. Each supermarket is managed by a store manager
and an assistant manager, each of whom receives a base salary and may receive a
bonus based on the individual supermarket's overall performance and management
of labor costs within the supermarket. The store manager and assistant manager
are supported by their store management staff who have the training and skills
necessary to provide proper customer service, operate the store and manage
personnel in each department. Additionally, the store manager is supported by
individual department managers for grocery, meat, produce, and where
applicable, bakeries and delicatessens. Store managers report to one of six
district managers, each of whom is responsible for an average of 18
supermarkets. District managers report to one of three Regional Vice
Presidents.
Customer Service. The Company considers customer service and
customer confidence to be critical to the success of its business strategy.
This strategy, to provide courteous and efficient customer service through
specific programs and training, is a focus of the executive officers and is
implemented at all levels of employees. The Company maintains an intensive
checker training school to train prospective checkers and to provide a
refresher program for existing checkers. All of the Company's supermarkets
provide customers with purchase carry-out service and have express check-out
lanes for purchases of 10 items or less.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems and point-of-sale scanning
technology reduce the 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 checkout technology in all of its stores. All stores
use electronic systems for employee time and attendance records, inventory
orderings, and labor scheduling, which assists store management in developing a
more efficient and customer- sensitive work schedule.
During 1995, the Company completed the installation of the Stater Express
system in all of the Company's supermarkets. Stater Express is a combined
supermarket technology platform that includes enhanced systems for check
verification and acceptance and provides alternative pay choices such as most
nationally recognized financial institution debit and credit cards. Stater
Express also provides each supermarket with the technology required to print
in-store advertising signs and connects each supermarket to the Company's host
computer which provides certain efficiencies in data transfers between the
supermarkets and the Company's main office. The Company has an application
pending for a federal copyright for the name "Stater Express".
EMPLOYEES
The Company has approximately 8,900 employees, approximately 500 of whom are
management and administrative employees and approximately 8,400 of whom are
hourly employees. Approximately 70% of the Company's employees work part-time.
Substantially all of the
4
<PAGE> 7
EMPLOYEES (CONTD.)
Company's hourly employees are members of either the Retail Clerks, Meatcutters
or Teamsters labor unions and are represented by several different collective
bargaining agreements. The Company's collective bargaining agreements, with
the Meatcutters and Retail Clerks, which covers the largest number of
employees, were renewed in October 1995 and expire in October 1999. The
Teamsters collective bargaining agreement was renewed in September 1994 and
expires in 1998.
The Company values its employees and believes its relationship with them is
good and that employee loyalty and enthusiasm are key elements of its operating
performance.
COMPETITION
The Company operates in a highly competitive industry characterized by narrow
profit margins. Competitive factors include price, quality and variety of
products, customer service, and store location and condition. The Company
believes that its competitive strengths include its specialty services,
everyday low prices, breadth of product selection, high product quality,
one-stop shopping convenience, attention to customer service, convenient store
locations and a long history of community involvement.
Given the wide assortment of products it offers, the Company competes with
various types of retailers, including local, regional and national supermarket
retailers, convenience stores, retail drug stores, national general
merchandisers and discount retailers, membership clubs and warehouse stores.
The Company's primary competitors include Lucky, Vons, Hughes, Albertson's,
Ralphs, and a number of independent supermarket operators.
GOVERNMENT REGULATION
The Company is subject to regulation by a variety of governmental authorities,
including federal, state and local agencies that regulate trade practices,
building standards, labor, health, safety and environmental matters and
regulate the distribution and sale of alcoholic beverages, tobacco products,
milk and other agricultural products and other food items.
ENVIRONMENTAL
Environmental remediation costs incurred over the past five years have been
approximately $180,000, in the aggregate, including remediation costs of
approximately $30,000 in 1994, $8,000 in 1995 and $80,000 in 1996. Management
believes that any such future remediation costs will not have an adverse
material effect on the financial condition or results of operations of the
Company.
5
<PAGE> 8
ITEM 2. PROPERTIES
The Company leases its warehouse and distribution facilities located in Colton,
California, and management believes that its warehouse and distribution
facilities are well maintained and are adequate to serve the currently
identified expansion plans of the Company. The following schedule presents the
Company's warehouse and distribution facilities by product classification and
the size of each such facility as of December 10, 1996.
<TABLE>
<CAPTION>
Square
Facility Feet
-------- ------
<S> <C>
Grocery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416,000
Forward-buy grocery . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000
Produce/deli . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,000
Meat/frozen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,000
Health and beauty aids . . . . . . . . . . . . . . . . . . . . . . . . . 35,000
Bakery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,000
Support and administrative offices . . . . . . . . . . . . . . . . . . . 74,000
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 955,000
=======
</TABLE>
As of December 10, 1996, the Company owned 22 of its supermarkets and leased
the remaining 88 supermarkets. Management believes that its supermarkets are
well maintained and adequately meet the expectations of its customers. The
Company operates 110 supermarkets in the Southern California counties of San
Bernardino, Riverside, Orange, Los Angeles and Kern. The following schedule
reflects the Company's store counts by size, county, and the number of stores
that are either leased or owned as of December 10, 1996.
<TABLE>
<CAPTION>
No. of Stores Total Square Feet
--------------------------- -----------------------------------------------------------
Under 25,000- 30,001- 35,001- 40,001-
County Total Owned Leased 25,000 30,000 35,000 40,000 45,000
- ------ ----- ----- ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
San Bernardino . . . 45 8 37 6 17 7 12 3
Riverside . . . . . . 35 7 28 10 14 5 5 1
Orange . . . . . . . 14 5 9 3 10 - 1 -
Los Angeles . . . . . 14 2 12 3 10 - 1 -
Kern . . . . . . . . 2 - 2 - - 1 1 -
----- ------ ------ ------- ------- ------- ------- -------
Total . . . . . . . . 110 22 88 22 51 13 20 4
===== ===== ===== ====== ====== ====== ====== ======
</TABLE>
Subsequent to year end, in October 1996, the Company entered into a sale and
leaseback transaction with an unrelated third party for four of its
supermarkets. Of the four supermarkets included in the October 1996 sale and
leaseback transaction, three are located in San Bernardino County and one is
located in Kern County. The schedule of selected store information presented
above is after giving effect for the October 1996 sale and leaseback
transaction.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is party to various legal
actions which the Company believes are incidental to the operation of the
business of the Company and its subsidiaries. The Company has recorded
reserves for loss contingencies based on the specific circumstances of each
case. Such reserves are recorded when the occurrence of loss is probable and
can be reasonably estimated. The Company believes that the outcome of such
legal
6
<PAGE> 9
ITEM 3. LEGAL PROCEEDINGS (CONTD.)
proceedings to which the Company is currently a party will not have a material
adverse effect upon its results of operations or its consolidated financial
condition.
On May 2, 1993, the Company was named as a defendant along with all of the
other major supermarket chains located in the Los Angeles County area in a
class action complaint filed in the California Superior Court in Los Angeles,
California, alleging among other things that the milk pricing policies of each
of the defendants violate certain antitrust laws and regulations under
California law. In this class action lawsuit, Barela et al. v. Ralphs Grocery
Co. et al., plaintiffs seek unspecified damages. The principal allegations of
the complaint are that milk prices of the defendants operating in the Los
Angeles County area are higher than milk prices for the same products in the
San Francisco Bay area and that the prices for such products in Los Angeles
County are higher than the prices charged in Riverside and San Bernardino
counties. Because the Company does not conduct business in the San Francisco
Bay area and its prices for milk are generally consistent throughout all of its
supermarkets in the Los Angeles County area and Riverside and San Bernardino
counties, the Company believes the claim is without merit with respect to the
Company and the Company intends to vigorously defend such litigation. The
Company believes that the ultimate outcome of this litigation will not have a
material adverse effect on the Company's results of operations or its
consolidated financial condition.
ENVIRONMENTAL MATTERS
Environmental remediation costs incurred during the last five years have been
approximately $180,000, in the aggregate, including remediation costs of
approximately $30,000 in 1994, $8,000 in 1995 and $80,000 in 1996. Management
believes that any such future remediation costs will not have an adverse
material effect on the financial condition or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
(a) Market Information
There is no established public trading market for the Company's common equity.
(b) Holders
La Cadena Investments holds 50,000 shares of the Company's Class A Common
Stock.
(c) Dividends
No dividends were paid in fiscals 1996 and 1995 on the common equity of the
Company and the Company does not intend to pay dividends on its common equity
in the foreseeable future. During fiscal 1994, and in accordance with the
Recapitalization Transaction, the Company paid dividends on its common stock of
$20.0 million to Craig Corporation.
7
<PAGE> 10
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth historical financial data derived from the
audited financial statements of the Company as of and for the fiscal years
ended September 27, 1992, September 26, 1993, September 25, 1994, September 24,
1995 and September 29, 1996. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", the Consolidated Financial Statements of the
Company and related notes thereto contained elsewhere herein. The information
included in "Other Operating and Financial Data" and "Store Data" is unaudited.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------------------------------------
SEPT. 27, SEPT. 26, SEPT. 25, SEPT. 24, SEPT. 29,(7)
1992 1993 1994 1995 1996
--------- ---------- ---------- ---------- ------------
(In thousands of dollars except per share and store data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
SALES . . . . . . . . . . . . . . . $1,539,758 $1,526,002 $1,539,717 $1,579,895 $1,705,332
COST OF GOODS SOLD . . . . . . . . 1,201,067 1,195,399 1,199,794 1,227,355 1,315,726
---------- ---------- ---------- ---------- ----------
GROSS PROFIT . . . . . . . . . . . 338,691 330,603 339,923 352,540 389,606
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES . . . . . . . . . . . . 302,547 300,826 297,474 308,332 328,242
DEPRECIATION AND AMORTIZATION . . . 9,230 9,910 11,656 11,756 12,583
CONSULTING FEES(1) . . . . . . . . 4,400 - 830 1,500 1,525
---------- ---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES . . . . . 316,177 310,736 309,960 321,588 342,350
---------- ---------- ---------- ---------- ----------
OPERATING PROFIT . . . . . . . . . 22,514 19,867 29,963 30,952 47,256
INTEREST AND OTHER INCOME . . . . . 454 436 775 1,049 1,757
INTEREST EXPENSE . . . . . . . . . (9,901) (10,292) (15,501) (20,076) (20,258)
EQUITY IN EARNINGS (LOSS) FROM
UNCONSOLIDATED AFFILIATE . . . . 296 107 (592) (980) (1,624)
-------- -------- --------- -------- ----------
INCOME BEFORE INCOME TAXES,
EXTRAORDINARY CHARGE AND
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING FOR INCOME TAXES . 13,363 10,118 14,645 10,945 27,131
INCOME TAXES . . . . . . . . . . . 5,616 4,426 5,856 4,218 11,120
-------- -------- --------- -------- ----------
INCOME BEFORE EXTRAORDINARY CHARGE
AND CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING FOR INCOME TAXES . 7,747 5,692 8,789 6,727 16,011
EXTRAORDINARY (CHARGE)(2) . . . . . (1,470) - (8,036) - -
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING FOR INCOME TAXES(5) . - - 372 - -
-------- -------- --------- -------- ----------
NET INCOME . . . . . . . . . . . . 6,277 5,692 1,125 6,727 16,011
PREFERRED DIVIDENDS . . . . . . . . 553 323 327 - 4,111
-------- -------- --------- -------- ----------
INCOME AVAILABLE TO COMMON
STOCKHOLDERS . . . . . . . . . . $ 5,724 $ 5,369 $ 798 $ 6,727 $ 11,900
======== ======== ========= ======== ==========
EARNINGS PER COMMON SHARE BEFORE
EXTRAORDINARY CHARGE AND
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING FOR INCOME TAXES . $71.94 $53.69 $84.62 $67.27 $165.28
EARNINGS PER COMMON SHARE . . . . . $57.24 $53.69 $ 7.98 $67.27 $165.28
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
8
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA (CONTD.)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------------------------------------------
SEPT. 27, SEPT. 26, SEPT. 25, SEPT. 24, SEPT. 29,(7)
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ------------
(In thousands of dollars except per share and store data)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END OF FISCAL YEAR):
WORKING CAPITAL . . . . . . . . . . $ 25,947 $ 21,596 $ 41,422 $ 45,014 $ 63,473
TOTAL ASSETS . . . . . . . . . . . 262,887 264,484 306,489 314,082 338,294
LONG-TERM NOTES AND MORTGAGES
PAYABLE . . . . . . . . . . . . . 89,750 87,576 165,000 165,000 165,000
LONG-TERM CAPITALIZED LEASE
OBLIGATIONS . . . . . . . . . . . 11,893 10,456 9,187 8,099 6,917
OTHER LONG-TERM LIABILITIES . . . . 13,014 15,736 15,765 13,772 12,858
SERIES A PREFERRED STOCK . . . . . 1,600 3,600 - - -
SERIES B PREFERRED STOCK . . . . . - - - - 69,365
COMMON STOCKHOLDERS' EQUITY . . . . 35,333 40,702 6,851 13,578 (43,887)
DIVIDENDS DECLARED PER SHARE:
COMMON STOCK . . . . . . . . . . - - $400 - -
CLASS A COMMON STOCK . . . . . . - - - - -
10.5% SERIES B PREFERRED STOCK . - - - - $5.93
OTHER OPERATING AND FINANCIAL DATA:
SALES INCREASES (DECREASES):
TOTAL STORES . . . . . . . . . . 1.7% (0.9%) 0.9% 2.6% 7.9%
LIKE STORES (COMPARABLE 52-WEEKS) (2.0%) (1.9%) (0.7%) 1.2% 6.3%
EBITDA(3) . . . . . . . . . . . . . $32,494 $30,320 $45,802 $42,777 $59,972
OPERATING PROFIT . . . . . . . . . $22,514 $19,867 $29,963 $30,952 $47,256
RATIO OF EARNINGS TO FIXED CHARGES(4) 1.47X 1.36X 1.47X 1.36X 1.53X
GROSS PROFITS AS A PERCENTAGE
OF SALES . . . . . . . . . . . . 22.00% 21.66% 22.08% 22.31% 22.85%
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES AS A PERCENTAGE OF SALES 19.65% 19.71% 19.32% 19.52% 19.25%
STORE DATA:
NUMBER OF STORES (AT END OF
FISCAL YEAR) . . . . . . . . . . 107 109 111 110 110
AVERAGE SALES PER STORE (000S) . . $14,458 $14,130 $13,997 $14,298 $15,503
AVERAGE STORE SIZE:
TOTAL SQUARE FEET . . . . . . . . 28,079 28,309 28,617 28,717 28,809
SELLING SQUARE FEET . . . . . . . 20,323 20,484 20,708 20,773 20,845
TOTAL SQUARE FEET (AT END OF
FISCAL YEAR) (000S) . . . . . . . 3,004 3,086 3,177 3,159 3,169
TOTAL SELLING SQUARE FEET (AT END
OF FISCAL YEAR) (000S) . . . . . 2,175 2,233 2,299 2,285 2,293
SALES PER AVERAGE TOTAL SQ. FT. . . $518 $501 $492 $499 $538
SALES PER AVERAGE SELLING SQ. FT. . $715 $692 $680 $689 $744
</TABLE>
(1) Consulting fees were paid pursuant to consulting agreements between the
Company and La Cadena and Craig under which La Cadena and Craig provided
consultation and advice to the Company in connection with general business,
financial, management, real estate acquisition and development, and product
diversification matters. Such Agreements terminated in September 1993.
Effective March 1994, the Company paid consulting fees to Craig
Corporation, subject to a certain five year Consulting Agreement entered
into between the Company and Craig.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
9
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA (CONTD.)
(2) Extraordinary charges in 1992 and 1994 represent the after-tax charge from
the early retirement of debt.
(3) EBITDA represents earnings before extraordinary charge, interest expense,
depreciation and amortization, standstill fees and income tax expense. The
Company has included information concerning EBITDA here as it is relevant
for covenant analysis under the Notes and because it is used by certain
investors as a measure of a company's ability to service its debt. EBITDA
should not be used as an alternative to, or be construed as more meaningful
than, operating profit or cash flows as an indicator of the Company's
operating performance.
(4) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes and the extraordinary
charge, amortization of previously capitalized interest and undistributed
earnings or loss from less than 50% owned subsidiaries and includes fixed
charges. Fixed charges consist of interest expense whether expensed or
capitalized, amortization of deferred debt expense, preferred stock
dividends adjusted to represent pretax earnings requirements and such
portion of rental expense as can be deemed by management to be
representative of the interest factor in the particular case.
(5) The Company adopted SFAS No. 109 ("Accounting for Income Taxes") effective
at the beginning of fiscal 1994 as a cumulative effect of a change in
accounting principle.
(6) Certain amounts in prior periods have been reclassified to conform to the
current period financial statement presentation.
(7) The year ending September 29, 1996 was a 53-week year, whereas fiscal years
1992, 1993, 1994 and 1995 were 52-week years.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparisons between the 1994, 1995 and 1996 fiscal years are difficult due to
the Recapitalization Transaction the Company entered into on March 8, 1994 and
the additional week in the 1996 fiscal year. Fiscal 1996 was a 53-week fiscal
year whereas fiscal years 1995 and 1994 consisted of 52 weeks.
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 are
paid quarterly in arrears.
10
<PAGE> 13
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.
RESULTS OF OPERATIONS
The following table sets forth certain income statement components expressed as
a percent of sales for the 52-week fiscal years ended September 25, 1994,
September 24, 1995, and the 53-week fiscal year ended September 29, 1996.
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------
1994 1995 1996
----------- ---------- ----------
<S> <C> <C> <C>
Sales 100.00% 100.00% 100.00%
Gross profit 22.08 22.31 22.85
Selling, general and
administrative expense 19.32 19.52 19.25
Depreciation and amortization .76 .74 .74
Consulting expense .05 .09 .09
Other (income) (net) (.01) - (.01)
Interest expense 1.01 1.27 1.19
Earnings before income taxes,
cumulative effect of a change
in accounting for income taxes
and extraordinary loss .95% .69% 1.59%
</TABLE>
Total sales amounted to $1.705 billion in 1996, compared to $1.580 billion in
1995 and $1.540 billion in 1994. Like-store sales increased 6.3% in fiscal
1996 (52-week basis), and 1.2% in fiscal 1995 compared to a decrease of 0.7% in
fiscal 1994. The increase in like-store sales in fiscal 1996 compared to
fiscal year 1995 was due to many factors including decreases in competitor
store openings, slight improvements in the Southern California economy and
favorable customer response to the Company's 1996 merchandising expansion and
upgrading program which included expanding product offerings in the deli,
bakery, frozen foods and dairy departments and continuing with the introduction
of fresh cut flowers and prepackaged vegetables into most of the Company's
supermarkets.
Gross profits increased to $389.6 million or 22.85% of sales in 1996 compared
to $352.5 million or 22.31% of sales in 1995 and $339.9 million or 22.08% of
sales in 1994. The increase in gross profits, as a percent of sales in fiscal
years 1996, 1995 and 1994 was due to increased efficiencies in the Company's
warehousing and transportation departments, the introduction of higher gross
margin products such as prepackaged gourmet vegetables and fresh cut flowers
and a decrease in competitive activity when compared to prior years.
Operating expenses include selling, general and administrative expenses,
depreciation and amortization, and consulting fees expenses. In fiscal 1996,
selling, general and administrative expenses amounted to $328.2 million or
19.25% of sales. For fiscal 1995, selling, general and administrative expenses
were $308.3 million or 19.52% of sales. For fiscal 1994, selling, general and
administrative expenses amounted to $297.5 million or 19.32% of sales. During
1996, the increase in selling, general and administrative expenses was due to
the additional week in the 53-week 1996 fiscal year and the additional expenses
required to operate at the higher level of sales. However, due to the increase
in sales in 1996, the Company operated more efficiently and, as a percent of
sales, selling, general and administrative expenses decreased, primarily due to
efficiencies in supermarket payroll expenses and the leverage effect increased
11
<PAGE> 14
RESULTS OF OPERATIONS (CONTD.)
sales had on fixed expenses such as rents, depreciation and other supermarket
occupancy expenses. Selling, general and administrative expenses in 1995
reflect reductions in expense categories such as workers' compensation and
general liability self-insurance expenses of $2.8 million, which was offset by
increases in direct labor, store supplies and advertising expenses. Additional
expenses were incurred in 1995 to operate the new stores opened in June and
August of fiscal 1994. Selling, general and administrative expenses for 1994
included certain non-recurring expenses including a $4.0 million standstill fee
(paid in conjunction with the Recapitalization Transaction) and a one-time
payment of $3.4 million to members of the Retail Clerks collective bargaining
unit. Such non-recurring expenses in 1994 were partially offset by a non-
recurring reduction in employer contributions to a collective bargaining unit
health and welfare benefits trust of $13.6 million.
Depreciation and amortization expenses amounted to $12.6 million in 1996
compared to $11.8 million in 1995 and $11.7 million in 1994 and includes
amortization of $1.0 million in 1996 and 1995 and $558,000 in 1994 from a $5.0
million prepaid five-year covenant not to compete included in a Consulting
Agreement between the Company and Craig, which became effective March 8, 1994
as part of the Recapitalization Transaction.
Since January 1, 1989, the Company has entered into various consulting
agreements with its stockholders, La Cadena and Craig, that required them to
provide consultation and advice to the Company in connection with general
business, financial, management consulting, real estate acquisition and
development, and product diversification matters. These consulting agreements
with its stockholders terminated on September 26, 1993. In March 1994, the
Company entered into a new five-year consulting agreement with Craig
Corporation, whereby the Company pays Craig $1.5 million per year (payable
quarterly in arrears) and Craig provides the Company with consultation and
advice in connection with general business issues, financial management
consulting, real estate acquisition and development and product diversification
matters. Consulting fees expense amounted to $1.5 million in 1996 and 1995 and
$830,000 in 1994.
Operating profits increased to $47.3 million or 2.77% of sales in 1996 compared
to $31.0 million or 1.96% of sales in 1995 and $30.0 million or 1.95% of sales
in 1994.
Interest expense amounted to $20.2 million, $20.1 million and $15.5 million for
the 1996, 1995 and 1994 fiscal years, respectively. The increase in interest
expense in 1995, when compared to 1994 is due to additional debt incurred in
March 1994 to facilitate the Recapitalization Transaction. Such debt was
outstanding during all of fiscal 1995 and was outstanding since March 8, 1994
in fiscal 1994. Interest expense includes amortization of fees and expenses
incurred to acquire debt of $1.2 million in 1996 and 1995 and $721,000 in 1994.
Income before income taxes and the cumulative effect of a change in accounting
for income taxes and extraordinary loss amounted to $27.1 million, $10.9
million and $14.6 million for the 1996, 1995 and 1994 fiscal years,
respectively.
Income before the cumulative effect of a change in accounting for income taxes
and extraordinary item for the 1996, 1995 and 1994 fiscal years amounted to
$16.0 million or .94% of sales, $6.7 million or .43% of sales and $8.8 million
or .57% of sales, respectively.
Effective the beginning of fiscal 1994, the Company adopted Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" and
realized a gain of $.4 million from the cumulative effect of a change in
accounting for income taxes.
12
<PAGE> 15
RESULTS OF OPERATIONS (CONTD.)
In connection with the March 8, 1994 Recapitalization, the Company entered into
a series of transactions that included the sale of $165.0 million of 11% Senior
Notes due 2001, the early retirement of the outstanding 9.8% Senior Notes due
2001 and certain bank financings. The early retirement of debt resulted in an
after-tax extraordinary charge to earnings of $8.0 million in the Company's
1994 second quarter.
Net income amounted to $16.0 million in 1996, $6.7 million in 1995 and $1.1
million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its daily cash flow requirements through
funds generated from operations and from borrowings from short- term revolving
credit facilities. The Company's credit agreement consists of a revolving
credit facility for working capital of $15.0 million, which was available at
September 29, 1996 and a standby letter of credit facility with a maximum
availability of $25.0 million, of which $11.3 million was available at
September 29, 1996. Such standby letter of credit facility is maintained
pursuant to the Company's workers' compensation and general liability
self-insurance requirements.
The Company had no short-term borrowings outstanding at year end 1996, 1995 and
1994. The average daily amount of short-term borrowings outstanding amounted
to $5,420,000 and $129,000 in 1994 and 1995, respectively and the weighted
average interest rates during the periods were 4.40% and 9.68% in 1994 and
1995, respectively. During 1996, the Company did not incur short-term
borrowings.
Working capital amounted to $63.5 million at September 29, 1996, $45.0 million
at September 24, 1995 and $41.4 million at September 25, 1994 and the Company's
current ratios were 1.50:1, 1:40:1 and 1.38:1, respectively. Fluctuations in
working capital and current ratios are not unusual in the industry.
Net cash provided by operating activities amounted to $27.9 million, $18.9
million and $18.6 million for fiscal years 1996, 1995 and 1994, respectively.
Fluctuations in operating assets and liabilities are not unusual in the
supermarket industry. Net cash provided by operating activities in 1994
included certain components of the Recapitalization Transaction in the changes
of operating assets and liabilities. The increase in other assets in 1994
included approximately $8.0 million of fees and expenses incurred to issue debt
and $5.0 million from the prepayment of a five-year covenant not to compete
included in the Consulting Agreement with Craig.
Net cash used in financing activities in fiscal years 1996 and 1995 amounted to
$5.2 million and $1.2 million, respectively. Net cash provided by financing
activities in fiscal year 1994 amounted to $15.6 million. Net cash used in
financing activities in 1996 and 1995 reduced amounts due under capitalized
lease obligations by $1.1 million and $1.2 million, respectively. During March
1994, the Company completed the Recapitalization which included proceeds from
the sale of $165.0 million of 11% Senior Notes due 2001. Such proceeds were
used to fund the early retirement of $75.5 million of 9.8% Senior Notes due
2001, the early retirement of secured financings of $12.2 million, the
prepayment of $9.0 million of capital expenditure financing, the prepayment
premiums from the early retirement of debt of $12.9 million and the redemption
of $3.6 million of the Company's Series A Preferred Stock. In addition, the
1994 debt offering proceeds were used to pay a dividend on the Company's Common
Stock of $20.0 million and $14.7 million of the proceeds were used to acquire
an option to purchase the equity interest in the Company held by Craig.
Effective March 8, 1996, the Company converted its outstanding Common Stock for
693,650 shares of its 10.5% Series B Preferred Stock, stated value $100 per
share. Dividends paid or accrued since March 1996 for the 10.5% Series B
Preferred Stock amounted to $4.1 million in 1996.
13
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
Net cash used in investing activities for the 1996, 1995 and 1994 fiscal years,
amounted to $3.8 million, $12.7 million and $14.4 million, respectively. The
difference in net cash used in investing activities between the comparable
periods in 1996, 1995 and 1994 is due to the Company's capital expenditures
during such periods, net of proceeds from asset dispositions. Capital
expenditures amounted to $22.4 million in 1996, $13.2 million in 1995 and $19.4
million in 1994. In January 1996, the Company completed a sale and leaseback
transaction with an unrelated third party for five of the Company's
supermarkets. Gross proceeds from the sale of the five supermarkets amounted
to approximately $18.5 million, which approximated fair market value. The
Company entered into leases for the five supermarkets with initial terms of 20
years and with options available to the Company which extend the lease terms up
to an additional 20 years. The Company believes the rents due in accordance
with the terms of the leases approximate fair market rents. The gains from the
sale of the supermarkets are deferred and will be amortized into income over
the initial term of the leases. As a result of the additional rent expenses,
net of reductions in depreciation expense, paid on the five supermarkets,
operating expenses increased by approximately $900,000 in fiscal 1996. During
fiscal 1994, and in conjunction with the Recapitalization Transaction, the
Company paid Craig $4.0 million in the form of Craig Common Stock held by the
Company for investment purposes in accordance with the terms of a certain
Standstill Agreement between the Company and Craig.
Capital expenditures for 1996 included costs incurred to construct a
replacement supermarket and to complete eight major remodels and eight minor
remodels and capital expenditures incurred to acquire store equipment to
support the 1996 merchandising expansion and upgrade program. Capital
expenditures for fiscal 1995 included costs incurred to complete eight
supermarket minor remodels, the acquisition and installation of technology and
equipment required to implement the Stater Express choice of payment system and
the completion of a supermarket major remodel and expansion. The Stater
Express system is a combined supermarket technology platform that includes
enhanced systems for check verification and acceptance and alternative pay
choices such as VISA, MasterCard, American Express and direct debit bank cards
issued by most nationally recognized financial institutions. Management
believes the Stater Express system will help the Company reduce its bad check
expense while providing customers with alternative methods of payment. Stater
Express was installed in each of the Company's supermarkets during fiscal 1995.
The Stater Express mark is an intellectual property of Stater Bros. Markets and
an application is pending for a federal copyright for the name "Stater
Express".
Capital expenditures for 1994 included costs incurred to construct three
supermarkets and to complete four supermarket minor remodels.
During 1996, the Company opened one replacement supermarket and in 1994 the
Company opened three new stores, one of which replaced a smaller and less
efficient store. The new stores opened in 1996 and 1994 are located in the
Company's primary trading area.
Capital expenditures in 1995 and 1994 were financed primarily from cash
provided by operating activities while capital expenditures in 1996 were
financed primarily by proceeds from the sale and leaseback of five
supermarkets.
Management believes that operating cash flow, supplemented by capital
expenditures financings obtained through capital and operating leases, will be
sufficient to meet the Company's currently identified operating needs and
scheduled capital expenditures. However, there can be no assurance that such
lease financings will be available to the Company.
The Company operated 110 supermarkets at September 29, 1996 and September 24,
1995 and operated 111 supermarkets at September 25, 1994.
The Company's supermarkets had approximately 3.2 million retail square feet at
September 29, 1996, September 24, 1995 and September 25, 1994.
14
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
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 September 29, 1996 and a revolving letter of credit facility
(the "LC Facility") with a maximum availability of $25.0 million (collectively,
the "Bank Facilities"). As of September 29, 1996, approximately $11.3 million
of the LC Facility was available to the Company. The Bank Credit Agreement
expires on June 1, 1998.
The Bank Facilities also contain certain financial and other covenants
applicable to Stater Bros. Markets, including without limitation, requirements
to (i) maintain a minimum current ratio of at least 1.20:1; (ii) maintain
minimum tangible net worth plus debt subordinated to the Bank (as defined) of
at least $145.0 million; (iii) maintain a ratio of total liabilities to
tangible net worth plus debt subordinated to the Bank of not in excess of
1.30:1; (iv) maintain a minimum fixed charge coverage ratio (as defined) of at
least 1.10:1 for each consecutive four fiscal quarters beginning with the four
fiscal quarters ending on Stater Bros. Markets' 1996 fiscal year end; (v) limit
the sale of assets; (vi) prohibit additional indebtedness except for normal
trade credit and indebtedness secured only by real property constructed or
acquired within the prior twelve months; (vii) prohibit additional liens except
for liens for indebtedness secured by real property pursuant to clause (v);
(viii) prohibit the acquisition of other business entities; (ix) restrict the
payment of dividends (as discussed below); (x) prohibit changes of ownership;
(xi) prohibit the liquidation, consolidation or merger of the business; and
(xii) repay all advances outstanding under the Operating Facility and not draw
any new advances for at least 5 calendar days each month.
As of September 29, 1996, for purposes of the Bank Facilities, Stater Bros.
Markets was in compliance with all restrictive convenants and had (i) a current
ratio of 1.53:1, (ii) tangible net worth and debt subordinated to the Bank of
$195.4 million; (iii) a ratio of total liabilities to tangible net worth and
debt subordinated to the Bank of 0.73:1 and (iv) a fixed charge coverage ratio
(as defined in the Bank Facilities) of 1.70:1. If for any reason Stater Bros.
Markets is unable to comply with the terms of the Bank Facilities, including
the covenants contained therein, such noncompliance would result in an event of
default under the Bank Facilities, and could result in acceleration of the
payment of indebtedness then outstanding under Bank Facilities or, in certain
situations, the prohibition of payments of dividends or advances to the
Company. In addition, no amendment, waiver or supplement may be made to the
Indenture without the prior written consent of the Bank if such amendment,
waiver or supplement adversely affects the rights of the Bank as lender to
Stater Bros. Markets.
The financial and operational covenants contained in the Bank Facilities
significantly limit Stater Bros. Markets' ability to pay dividends and make
loans or advances to the Company, the primary source of anticipated cash for
the Company, and could limit the Company's ability to respond to changing
business and economic conditions, and to finance future operations or capital
needs including the Company's ability to achieve its plans to remodel and
expand existing supermarkets and open new supermarkets.
The Company is also subject to certain covenants associated with its 11% Senior
Notes due 2001. As of September 29, 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.
15
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES (CONTD.)
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 are paid quarterly in arrears at the rate of
10.5% per annum through September 2002, and beginning 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 in 1994 and expires
in 1998. Management believes it has good relations with its employees.
RECENT ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" (SFAS 121), which the
Company is required to adopt in fiscal year 1997. The Company does not expect
that the adoption of SFAS 121 will have a material effect on its financial
position or its results of operations in fiscal 1997.
EFFECT OF INFLATION AND COMPETITION
The Company's performance is affected by inflation. In recent years the impact
of inflation on the operations of the Company has been moderate. As inflation
has increased expenses, the Company has recovered, to the extent permitted by
competition, the increase in expenses by increasing prices over time. However,
the economic environment in Southern California continues to challenge the
Company to become more cost efficient as its ability to recover increases in
expenses through price increases is diminished. The future results of
operations of the Company will depend upon the ability of the Company to adapt
to the current economic environment as well as to the current competitive
conditions.
The Company conducts business in one industry segment, the operation of retail
food supermarkets, which offer for sale to the public most merchandise
typically found in supermarkets. The supermarket industry is highly
competitive and is characterized by low profit margins. The Company's primary
competitors include Lucky, Vons, Hughes, Albertson's, Ralphs, and a number of
independent supermarket operators. Competitive factors typically include the
price, quality and selection of products offered for sale, customer service,
and the convenience and location of retail facilities. The Company monitors
competitive activity and Senior Management regularly reviews the Company's
marketing and business strategy and periodically adjusts them to adapt to
changes in the Company's primary trading area.
16
<PAGE> 19
CAUTIONARY STATEMENT
Except for historical facts, all matters discussed in this report which are
forward looking involve risks and uncertainties and actual results may differ
from any future performance discussed from time to time in the Company's
Securities and Exchange Commission filings.
SUBSEQUENT EVENT
In October 1996, the Company completed a sale and leaseback transaction with an
unrelated third party for four of the Company's supermarkets. The net proceeds
from the sale of the four supermarkets amounted to approximately $16.0 million,
which approximated fair market value. The Company entered into leases for the
four supermarkets with initial terms of 20 years and with options available to
the Company which extend the lease terms up to an additional 20 years. The
Company believes the rents due under the leases approximate fair market rents.
The gains from the sale of the supermarkets were approximately $2.5 million and
will be deferred and amortized into income over the initial term of the leases.
As a result of the additional rent expenses, net of reductions in depreciation
expense, due on the four supermarkets, operating expenses will increase by
approximately $1.2 million in fiscal 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information called for by this item is set forth in the Company's financial
statements and supplementary data contained in this report. Specific financial
statements and supplementary data can be found on the pages listed in the
following index.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Number
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<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at September 25, 1994,
September 24, 1995 and September 29, 1996 . . . . . . . . . . . . . . . . . . . . . F-3
Fiscal years ended September 25, 1994, September 24, 1995 and
September 29, 1996:
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . F-9
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
17
<PAGE> 20
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at September 25, 1994,
September 24, 1995 and September 29, 1996 . . . . . . . . . . . . . . . . . . . . F-3
Fiscal years ended September 25, 1994, September 24, 1995 and
September 29, 1996:
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . F-9
</TABLE>
F-1
<PAGE> 21
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Stater Bros. Holdings Inc.
We have audited the accompanying consolidated balance sheets of Stater
Bros. Holdings Inc. and subsidiaries as of September 25, 1994, September 24,
1995 and September 29, 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the 52-week periods then ended
for 1994 and 1995, and the 53-week period then ended for 1996. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Stater Bros. Holdings Inc. and subsidiaries as of September 25, 1994,
September 24, 1995 and September 29, 1996, and the consolidated results of
their operations and their cash flows for each of the 52-week periods then
ended for 1994 and 1995, and the 53-week period then ended for 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Riverside, California
November 25, 1996
F-2
<PAGE> 22
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
<TABLE>
<CAPTION>
SEPT. 25, SEPT. 24, SEPT. 29,
1994 1995 1996
---------- ---------- ---------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 21,289 $ 26,308 $ 45,279
Receivables . . . . . . . . . . . . . . . . . . . . . . . 16,503 15,877 19,009
Inventories . . . . . . . . . . . . . . . . . . . . . . . 103,655 107,146 117,372
Prepaid expenses . . . . . . . . . . . . . . . . . . . . 3,421 3,591 3,357
Deferred income taxes . . . . . . . . . . . . . . . . . . 3,276 2,792 4,710
Properties held for sale . . . . . . . . . . . . . . . . 2,964 2,933 1,787
---------- --------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . 151,108 158,647 191,514
Investment in unconsolidated affiliate . . . . . . . . . . . 10,230 9,250 7,626
Property and equipment
Land . . . . . . . . . . . . . . . . . . . . . . . . . . 20,678 20,653 18,688
Buildings and improvements . . . . . . . . . . . . . . . 92,808 96,653 89,856
Store fixtures and equipment . . . . . . . . . . . . . . 61,208 68,338 78,570
Property subject to capital leases . . . . . . . . . . . 14,368 14,368 14,368
---------- --------- ---------
189,062 200,012 201,482
Less accumulated depreciation and amortization . . . . . 72,902 81,385 87,267
---------- --------- ---------
116,160 118,627 114,215
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 5,351 4,975 5,295
Deferred debt issuance costs, net . . . . . . . . . . . . . . 7,630 6,423 5,221
Lease guarantee escrow . . . . . . . . . . . . . . . . . . . 4,446 5,584 6,701
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 11,564 10,576 7,722
---------- --------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 306,489 $ 314,082 $ 338,294
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 23
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPT. 25, SEPT. 24, SEPT. 29,
1994 1995 1996
---------- ---------- ---------
<S> <C> <C> <C>
Current Liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 63,538 $ 67,604 $ 79,271
Accrued payroll and related expenses . . . . . . . . . . 21,289 22,289 23,981
Other accrued liabilities . . . . . . . . . . . . . . . . 23,704 22,653 23,607
Current portion of capital lease obligations . . . . . . 1,155 1,087 1,182
---------- --------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . 109,686 113,633 128,041
Long-term debt, less current portion . . . . . . . . . . . . 165,000 165,000 165,000
Capital lease obligations, less current portion . . . . . . . 9,187 8,099 6,917
Long-term portion of self-insurance reserves . . . . . . . . 15,765 13,031 10,332
Other long-term liabilities . . . . . . . . . . . . . . . . . - 741 2,526
10.5% Cumulative Series B Preferred Stock:
(stated value $100 per share)
Authorized shares - 693,650
Issued and outstanding shares -
0 in 1994 and 1995, 693,650 in 1996 . . . . . . . . - - 69,365
Stockholders' equity
Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares -
50,000 in 1994 and 1995, 0 in 1996 . . . . . . . . 1 1 -
Class A Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares -
50,000 in 1994, 1995 and 1996 . . . . . . . . . . . 1 1 1
Additional paid-in capital . . . . . . . . . . . . . . . 12,715 12,715 12,715
Retained earnings . . . . . . . . . . . . . . . . . . . . 8,784 15,511 (41,953)
Less option to acquire stock . . . . . . . . . . . . . . (14,650) (14,650) (14,650)
--------- -------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . . 6,851 13,578 (43,887)
---------- --------- ---------
Total liabilities and stockholders' equity . . . . . . . . . $ 306,489 $ 314,082 $ 338,294
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 24
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------
52 WEEKS 52 WEEKS 53 WEEKS
---------------------------------------
SEPT. 25, SEPT. 24, SEPT. 29,
1994 1995 1996
---------- ---------- ------------
<S> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,539,717 $ 1,579,895 $ 1,705,332
Cost of goods sold . . . . . . . . . . . . . . . . . . . . 1,199,794 1,227,355 1,315,726
----------- ----------- ------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . 339,923 352,540 389,606
Operating expenses:
Selling, general and administrative expenses . . . . . 297,474 308,332 328,242
Depreciation and amortization . . . . . . . . . . . . . 11,656 11,756 12,583
Consulting fees . . . . . . . . . . . . . . . . . . . . 830 1,500 1,525
----------- ----------- ------------
Total operating expenses . . . . . . . . . . . . . . . . . 309,960 321,588 342,350
----------- ----------- ------------
Operating profit . . . . . . . . . . . . . . . . . . . . . 29,963 30,952 47,256
Interest income . . . . . . . . . . . . . . . . . . . . . . 384 952 1,929
Interest expense . . . . . . . . . . . . . . . . . . . . . (15,501) (20,076) (20,258)
Equity in (loss) from unconsolidated affiliate . . . . . . (592) (980) (1,624)
Other income (expense) - net . . . . . . . . . . . . . . . 391 97 (172)
----------- ----------- -----------
Income before income taxes and the cumulative effect of a
change in accounting for income taxes and extraordinary
loss . . . . . . . . . . . . . . . . . . . . . . . . 14,645 10,945 27,131
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 5,856 4,218 11,120
----------- ----------- ------------
Income before cumulative effect of a change in accounting
for income taxes and extraordinary loss . . . . . . . . 8,789 6,727 16,011
Cumulative effect of a change in accounting for income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . 372 - -
----------- ----------- ------------
Income before extraordinary loss . . . . . . . . . . . . . 9,161 6,727 16,011
Extraordinary loss from early extinguishment of debt
($13,856 less tax effect of $5,820) . . . . . . . . . . (8,036) - -
---------- ----------- ------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . 1,125 6,727 16,011
Less preferred dividends . . . . . . . . . . . . . . . 327 - 4,111
----------- ----------- ------------
Net income available to common shareholders . . . . . . . . $ 798 $ 6,727 $ 11,900
=========== =========== ============
Earnings per common share:
Before cumulative effect of a change in accounting for
income taxes and extraordinary loss . . . . . . . . . $84.62 $67.27 $165.28
Cumulative effect of a change in accounting for income
taxes . . . . . . . . . . . . . . . . . . . . . . . . 3.72 - -
Extraordinary loss . . . . . . . . . . . . . . . . . . (80.36) - -
------- ------- ------
Earnings per common share . . . . . . . . . . . . . . . . . $7.98 $67.27 $165.28
===== ====== =======
Average common shares outstanding . . . . . . . . . . . . . 100,000 100,000 72,000
======= ======= ======
Common shares outstanding at end of year . . . . . . . . . 100,000 100,000 50,000
======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 25
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------
52 WEEKS 52 WEEKS 53 WEEKS
-------------------------------------
SEPT. 25, SEPT. 24, SEPT. 29,
1994 1995 1996
---------- ---------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,125 $ 6,727 $ 16,011
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of a change in accounting for
income taxes . . . . . . . . . . . . . . . . . . . . . . (372) - -
Extraordinary loss related to early extinguishment
of debt . . . . . . . . . . . . . . . . . . . . . . . . 13,856 - -
Depreciation and amortization . . . . . . . . . . . . . . 11,656 11,756 12,583
Deferred income taxes . . . . . . . . . . . . . . . . . . (1,303) 860 (2,238)
Loss (gain) on disposals of assets . . . . . . . . . . . (391) (97) 172
Net undistributed loss in unconsolidated affiliate . . . 592 980 1,624
Changes in operating assets and liabilities:
(Increase) decrease in receivables . . . . . . . . . . . (197) 626 (3,132)
(Increase) decrease in inventories . . . . . . . . . . . (4,281) (3,491) (10,226)
(Increase) decrease in prepaid expenses . . . . . . . . 210 (170) 234
(Increase) decrease in other assets . . . . . . . . . . (14,695) (359) 1,738
Increase (decrease) in accounts payable . . . . . . . . 7,502 4,066 11,667
Increase (decrease) in accrued liabilities and long-term
portion of self-insurance reserves . . . . . . . . . . 4,921 (2,044) (514)
--------- ------- --------
Net cash provided by operating activities . . . . . . . . . . 18,623 18,854 27,919
--------- -------- ---------
FINANCING ACTIVITIES:
Proceeds from long-term debt . . . . . . . . . . . . . . . . 165,000 - -
Payment on notes payable . . . . . . . . . . . . . . . . . . (9,000) - -
Redemption of preferred stock . . . . . . . . . . . . . . . . (3,600) - -
Premiums paid on early retirement of debt . . . . . . . . . . (12,893) - -
Common stock exchanged for preferred stock . . . . . . . . . - - (69,365)
Preferred stock issued and exchanged for common stock . . . . - - 69,365
Principal payments on long-term debt and capital
lease obligations . . . . . . . . . . . . . . . . . . . . . (88,967) (1,156) (1,087)
Dividends paid on preferred stock . . . . . . . . . . . . . . (327) - (4,111)
Dividends paid on common stock . . . . . . . . . . . . . . . (20,000) - -
Option to acquire stock . . . . . . . . . . . . . . . . . . . (14,650) - -
--------- -------- ---------
Net cash provided by (used in) financing activities . . . . . $ 15,563 $ (1,156) $ (5,198)
--------- -------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 26
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------
52 WEEKS 52 WEEKS 53 WEEKS
-------------------------------------
SEPT. 25, SEPT. 24, SEPT. 29,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Purchase of property and equipment . . . . . . . . . . . . . $(19,409) $(13,178) $(22,415)
Proceeds from sale of property and equipment and properties
held for sale . . . . . . . . . . . . . . . . . . . . . . . 964 499 18,665
Decrease in investment in stock . . . . . . . . . . . . . . . 4,000 - -
--------- -------- ---------
Net cash (used in) investing activities . . . . . . . . . . . (14,445) (12,679) (3,750)
--------- -------- ---------
Net increase in cash and cash equivalents . . . . . . . . . . 19,741 5,019 18,971
Cash and cash equivalents at beginning of period . . . . . . 1,548 21,289 26,308
--------- -------- ---------
Cash and cash equivalents at end of period . . . . . . . . . $ 21,289 $ 26,308 $ 45,279
========= ======== =========
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . $ 17,120 $ 19,537 $ 21,360
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . $ 1,753 $ 4,633 $ 9,725
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 27
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
OPTION
SERIES A CLASS A ADDITIONAL TO
PREFERRED COMMON COMMON PAID-IN RETAINED ACQUIRE
STOCK STOCK STOCK CAPITAL EARNINGS STOCK
--------- -------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at September 26, 1993 . . . . . . $ 3,600 $ 1 $ - $ 12,715 $ 27,986 $ -
Preferred stock redeemed . . . . . . . (3,600) - - - - -
Common Stock exchanged for Class A
Common Stock . . . . . . . . . . . . - - 1 - - -
Option to acquire stock . . . . . . . . - - - - - (14,650)
Net income for 52 weeks ended
September 25, 1994 . . . . . . . . . - - - - 1,125 -
Preferred stock dividends paid . . . . - - - - (327) -
Common stock dividends paid . . . . . . - - - - (20,000) -
--------- ------ ------ --------- ------- --------
Balances at September 25, 1994 . . . . . . - 1 1 12,715 8,784 (14,650)
Net income for 52 weeks ended
September 24, 1995 . . . . . . . . . - - - - 6,727 -
--------- ------ ------ --------- -------- --------
Balances at September 24, 1995 . . . . . . - 1 1 12,715 15,511 (14,650)
Conversion of Common Stock for
Series B Preferred Stock . . . . . . - (1) - - (69,364) -
Net income for 53 weeks ended
September 29, 1996 . . . . . . . . . - - - - 16,011 -
Preferred stock dividends paid . . . . - - - - (4,111) -
--------- ------ ------ --------- -------- --------
Balances at September 29, 1996 . . . . . . $ - $ - $ 1 $ 12,715 $(41,953) $(14,650)
========= ====== ====== ========= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 28
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 29, 1996
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Stater Bros. Holdings Inc. (the "Company") is engaged primarily in the
operation of retail supermarkets. As of September 29, 1996, the Company
operated 110 retail food supermarkets under the name "Stater Bros." The
Company's supermarkets are located principally in the "Inland Empire" area of
Southern California - San Bernardino, Riverside and the eastern portions of Los
Angeles, Orange and Kern counties. The Company and its predecessor companies
have operated retail grocery stores under the "Stater Bros." name in the Inland
Empire since 1936.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Stater Bros. Markets ("Markets") and Stater
Bros. Development, Inc. All significant inter-company transactions have been
eliminated in consolidation.
Fiscal Year
The Company's fiscal year ends on the last Sunday in September. The fiscal
years ended September 25, 1994 and September 24, 1995 were 52- week years and
the fiscal year ended September 29, 1996 was a 53-week year.
Cash and Cash Equivalents
Cash and cash equivalents are reflected at cost, which approximates their
fair value, and consist primarily of overnight repurchase agreements,
certificates of deposit and money market funds with maturities of less than
three months when purchased.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Receivables
Receivables represents amounts expected to be received during the next
operating cycle of the Company. The carrying amount reported in the balance
sheet for receivables approximates their fair value.
Properties Held for Sale
Properties expected to be sold within one year are classified as current
assets and are stated at the lower of cost or estimated net realizable value
and consist of land, buildings and equipment.
Deferred Debt Issuance Costs
Direct costs incurred as a result of financing transactions are capitalized
and amortized to interest expense over the terms of the applicable debt
agreements.
Self-insurance Reserves
The Company provides reserves, subject to certain retention levels, for
workers' compensation, general and automobile liability claims. Consulting
actuaries assist the Company in developing reserve estimates for its
self-insured liabilities. Such reserves are discounted using an 8% rate. The
Company is self-insured, subject to certain retention levels, for healthcare
costs of eligible non-bargaining unit employees. Such healthcare reserves are
not discounted.
F-9
<PAGE> 29
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTD.)
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", (SFAS 121). The Company
will be required to adopt SFAS 121 in fiscal year 1997. The Company does not
expect that the adoption of SFAS 121 will have a material effect on its
financial position or its results of operations for the fiscal year ended in
September 1997.
Property and Equipment
Property and equipment are stated at cost and are depreciated or amortized,
principally on the straight-line method over the estimated useful lives of the
assets, and for capitalized leases over the initial lease term or the estimated
economic life of the asset.
The average economic lives are as follows:
<TABLE>
<CAPTION>
Range Most Prevalent
--------------- --------------------
<S> <C> <C>
Buildings and improvements . . . . . . . . . . 8 - 30 Years 25 Years
Store furniture and equipment . . . . . . . . 3 - 10 Years 5 Years
Property subject to capital leases . . . . . . Life of Lease 25 Years
</TABLE>
Income Taxes
The Company provides for deferred income taxes as timing differences arise
between income and expenses recorded for financial and income tax reporting
purposes.
Cost of Goods Sold
Costs of goods sold include certain warehousing, transportation and
distribution costs.
Reclassifications
Certain amounts in the prior periods have been reclassified to conform to
the current period financial statement presentation.
Use of Estimates
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2 - DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
Sept. 25, Sept. 24, Sept. 29,
1994 1995 1996
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
11% senior notes payable, due March 1, 2001 . . . . . . . $165,000 $165,000 $165,000
-------- -------- --------
Total long-term debt . . . . . . . . . . . . . . . . . . $165,000 $165,000 $165,000
======== ======== ========
</TABLE>
F-10
<PAGE> 30
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - DEBT (CONTD.)
As of September 29, 1996, no principal payments were due in the next four
years and the Company's 11% Senior Notes are due on March 1, 2001. Interest
is payable semi-annually on September 1 and March 1.
Interest capitalized during fiscal years 1994, 1995 and 1996 amounted to
$437,000, $50,000 and $116,000, respectively. Interest expense incurred,
before the effect of capitalized interest, during 1994, 1995 and 1996 amounted
to $15,938,000, $20,126,000 and $20,374,000, respectively.
The Company did not have short-term borrowings outstanding at September 25,
1994, September 24, 1995 and September 29, 1996. The average daily amount of
short-term borrowings was $5,420,000 and $129,000 during 1994 and 1995,
respectively, and the Company did not incur any short- term borrowings during
1996. The weighted average interest rates were 4.40% and 9.68% for 1994 and
1995, respectively.
The Company is subject to certain covenants associated with its 11% Senior
Notes due 2001. As of September 29, 1996, the Company was in compliance with
all such covenants.
NOTE 3 - 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, and is not the
controlling stockholder. Accordingly, the Company accounts for its investment
in Santee using the equity method of accounting and recognized losses of
$592,000, $980,000, and $1,624,000 for fiscal years 1994, 1995 and 1996
respectively. The Company is a significant customer of Santee which supplies
the Company with a substantial portion of its fluid milk and dairy products.
NOTE 4 - BANK FACILITIES
Stater Bros. Markets and Bank of America National Trust and Savings
Association (the "Bank") have entered into a credit agreement (as amended)
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 on September 29, 1996, and a revolving letter of
credit facility (the "LC Facility") with a maximum availability of $25.0
million, of which $11.3 was available on September 29, 1996 (collectively, the
"Bank Facilities"). The Bank Facilities will expire on June 1, 1998. Interest
on the outstanding principal balance of the Operating Facility is payable
monthly at either the Bank's reference rate plus one percent per annum or at a
fixed rate of interest. Borrowings under the Bank Facilities are unsecured
general obligations of Stater Bros. Markets and are guaranteed by Stater Bros.
Development, Inc. The Bank Facilities contain customary cross- default
provisions with respect to the Company's 11% Senior Notes due 2001.
F-11
<PAGE> 31
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - BANK FACILITIES (CONTD.)
The Bank Facilities also contain certain financial and other covenants
applicable to Stater Bros. Markets, including without limitation, requirements
to (i) maintain a minimum current ratio of at least 1.20:1; (ii) maintain
minimum tangible net worth plus debt subordinated to the Bank (as defined) of
at least $145.0 million; (iii) maintain a ratio of total liabilities to
tangible net worth plus debt subordinated to the Bank of not in excess of
1.30:1; (iv) maintain a minimum fixed charge coverage ratio (as defined) of at
least 1.10:1 for each consecutive four fiscal quarters beginning with the four
fiscal quarters ending on Stater Bros. Markets' 1996 fiscal year end; (v) limit
the sale of assets; (vi) prohibit additional indebtedness except for normal
trade credit and indebtedness secured only by real property constructed or
acquired within the prior twelve months; (vii) prohibit additional liens except
for liens for indebtedness secured by real property pursuant to clause (v);
(viii) prohibit the acquisition of other business entities; (ix) restrict the
payment of dividends (as discussed below); (x) prohibit changes of ownership;
(xi) prohibit the liquidation, consolidation or merger of the business; and
(xii) repay all advances outstanding under the Operating Facility and not draw
any new advances for at least 5 calendar days each month. As of September
29, 1996, for purposes of the Bank Facilities, Stater Bros. Markets was in
compliance with all restrictive convenants and had (i) a current ratio of
1.53:1, (ii) tangible net worth and debt subordinated to the Bank of $195.4
million; (iii) a ratio of total liabilities to tangible net worth and debt
subordinated to the Bank of 0.73:1 and (iv) a fixed charge coverage ratio (as
defined in the Bank Facilities) of 1.70:1. If for any reason Stater Bros.
Markets is unable to comply with the terms of the Bank Facilities, including
the covenants contained therein, such noncompliance would result in an event of
default under the Bank Facilities, and could result in acceleration of the
payment of indebtedness then outstanding under Bank Facilities or, in certain
situations, the prohibition of the payment of dividends or advances to the
Company. In addition, no amendment, waiver or supplement may be made to the
Indenture without the prior written consent of the Bank if such amendment,
waiver or supplement adversely affects the rights of the Bank as lender to
Stater Bros. Markets.
The financial and operational covenants contained in the Bank Facilities
significantly limit Stater Bros. Markets' ability to pay dividends and make
loans or advances to the Company, the primary source of anticipated cash for
the Company, and could limit the Company's ability to respond to changing
business and economic conditions, and to finance future operations or capital
needs including the Company's ability to achieve its plans to remodel and
expand existing supermarkets and open new supermarkets.
F-12
<PAGE> 32
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - LEASES
The Company leases the majority of its retail stores, offices, warehouses
and distribution facilities. Certain leases provide for additional rents based
on sales. Primary lease terms range from 10 to 99 years and substantially all
leases provide for renewal options.
A portion of the Company's lease obligations are guaranteed by Petrolane
Incorporated ("Petrolane") or its successor (see Note 6). The leases
guaranteed by Petrolane had initial terms of 20 years and expire in the year
2003. Lease payments for the properties subject to the Petrolane guarantees
are approximately $10.0 million per year. Under the terms of the agreement
related to the Company's acquisition of Stater Bros. Markets from Petrolane in
1983, as amended in 1985, Stater Bros. Markets is required to make annual
deposits into a lease guarantee escrow account. The amount of each annual
deposit is to be based on (a) a percentage of sales of 20 supermarkets, as
specified in the agreement, to the extent they exceed a defined base; and (b) a
percentage of rents adjusted for increases in the Consumer Price Index for
certain rental property, including the Company's office and warehouse complex.
The Company deposited $844,000, $861,000 and $738,000 into the escrow account
during fiscal years 1994, 1995 and 1996, respectively.
Upon termination of the leases, or the termination of the Petrolane lease
guarantees, all amounts deposited into the lease guarantee escrow account, plus
interest thereon, less any amounts disbursed, will be returned to the Company.
At September 29, 1996, the lease guarantee escrow account had a cumulative
balance of $6,701,000, compared to $5,584,000 and $4,446,000 as of September
24, 1995 and September 25, 1994, respectively.
Petrolane, or its successor, has the right to cause the escrow holder to
disburse funds from the amounts held in the lease guarantee escrow account for
any amounts which Petrolane or its successor may be required to pay as
guarantor of the lease obligations of Stater Bros. Markets.
Following is a summary of future minimum lease payments as of September 29,
1996:
<TABLE>
<CAPTION>
Operating
Leases
Capital Minimum
Fiscal Year Leases Payment
----------- ------- ---------
(In thousands)
<S> <C> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,844 $ 19,071
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,814 18,124
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,760 17,966
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,693 16,493
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,397 15,002
Thereafter . . . . . . . . . . . . . . . . . . . . . . . 2,022 69,996
---------- ----------
Total minimum lease payments . . . . . . . . . . . . . . 10,530 $ 156,652
==========
Less amounts representing interest . . . . . . . . . . . 2,431
----------
Present value of minimum lease payments . . . . . . . . 8,099
Less current portion . . . . . . . . . . . . . . . . . . 1,182
----------
Long-term portion . . . . . . . . . . . . . . . . . . . $ 6,917
==========
</TABLE>
F-13
<PAGE> 33
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - LEASES (CONTD.)
Rental expense and sublease income were as follows:
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks
-------------------------------------------------------
Sept. 25, 1994 Sept. 24, 1995 Sept. 29, 1996
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Minimum rentals . . . . . . . . . . . . $ 19,708 $ 17,906 $ 19,267
Rentals based on sales . . . . . . . . . $ 4,432 $ 5,179 $ 5,072
Sublease income . . . . . . . . . . . . $ 1,066 $ 1,018 $ 1,186
</TABLE>
Aggregate sublease income to be received subsequent to September 29, 1996
is approximately $3,753,000.
In January 1996, the Company completed a sale and leaseback transaction
with an unrelated third party for five of the Company's supermarkets. Gross
proceeds from the sale of the five supermarkets amounted to approximately $18.5
million, which approximated fair market value. The Company entered into leases
for the five supermarkets with initial terms of 20 years and with options
available to the Company which extend the lease terms up to an additional 20
years. The Company believes the rents due in accordance with the terms of the
leases approximate fair market rents. The gains from the sale of the
supermarkets are deferred and will be amortized into income over the initial
term of the leases. Rent expenses paid in fiscal 1996 for the five
supermarkets included in the January 1996 sale and leaseback transaction were
approximately $1.3 million. The future minimum rents due are $1.9 million in
1997, 1998, 1999, 2000, $2.1 million in 2001 and $30.2 million thereafter.
Such amounts are included in the table of future minimum lease payments above.
NOTE 6 - PREFERRED STOCK
Stater Bros. Markets has issued and outstanding 10 shares of its $11.00
Cumulative Redeemable Preferred Stock due in 2003 for $1,000 plus accrued and
unpaid dividends. Dividends are accrued at the rate of $11.00 per share per
annum. The preferred stock was issued in conjunction with a guarantee of
Stater Bros. Markets lease obligations by Petrolane Incorporated or its
successors (see Note 5). For as long as shares of the $11.00 Cumulative
Redeemable Preferred Stock remain outstanding, Stater Bros. Markets is subject
to certain covenants. The most restrictive covenant limits the amount of
dividends that may be paid to amounts that may be legally paid under applicable
state laws. At September 29, 1996, accumulated earnings available for dividend
distributions were approximately $182.7 million. In the event of non-
compliance by Stater Bros. Markets, the holders of the Stater Bros. Markets
preferred stock may elect the Board of Directors of Stater Bros. Markets. At
September 29, 1996, Stater Bros. Markets was in compliance with these
covenants.
Effective March 8, 1996, the Company 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 are 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. There are no preferred dividends in arrears.
F-14
<PAGE> 34
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks
-------------------------------------------------------
Sept. 25, 1994 Sept. 24, 1995 Sept. 29, 1996
-------------- -------------- ------------------
(In thousands)
<S> <C> <C> <C>
Current
Federal . . . . . . . . . . . . . . . $ 5,493 $ 2,991 $ 8,116
State . . . . . . . . . . . . . . . . 1,563 944 2,478
----------- ---------- -----------
7,056 3,935 10,594
----------- ---------- -----------
Deferred
Federal . . . . . . . . . . . . . . . (976) 213 488
State . . . . . . . . . . . . . . . . (224) 70 38
----------- ---------- -----------
(1,200) 283 526
----------- ---------- -----------
Income tax expense $ 5,856 $ 4,218 $ 11,120
=========== ========== ===========
</TABLE>
The current portion of Federal and State income taxes for fiscal year ended
September 25, 1994 does not include the tax benefits associated with the
extraordinary loss from the early extinguishment of debt. Such Federal and
State tax benefits in 1994 amounted to $4,850,000 and $970,000.
A reconciliation of the provision for income taxes to amounts computed at
the federal statutory rate is as follows:
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks
-------------------------------------------------------
Sept. 25, 1994 Sept. 24, 1995 Sept. 29, 1996
-------------- -------------- ------------------
<S> <C> <C> <C>
Statutory federal income tax rate . . . . . 34.3% 35.0% 35.0%
State franchise tax rate, net of
federal income tax benefit . . . . . . . 6.1 6.1 6.1
Other . . . . . . . . . . . . . . . . . . . (.4) (2.6) (.1)
----- ---- ----
40.0% 38.5% 41.0%
==== ==== ====
</TABLE>
Deferred income taxes resulted from timing differences in recognizing
revenue and expense for tax and financial statement purposes. The sources of
these timing differences and the income tax (benefit) of each were as follows:
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks
-------------------------------------------------------
Sept. 25, 1994 Sept. 24, 1995 Sept. 29, 1996
-------------- -------------- ------------------
(In thousands)
<S> <C> <C> <C> <C>
Accrued liabilities . . . . . . . . . . . . $ (1,057) $ 366 $ 364
California franchise tax . . . . . . . . . . 307 (258) (590)
Depreciation . . . . . . . . . . . . . . . . (154) 542 (22)
Other, net . . . . . . . . . . . . . . . . . (296) (367) 774
------------- ------------ -------------
$ (1,200) $ 283 $ 526
============= ============ =============
</TABLE>
F-15
<PAGE> 35
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - INCOME TAXES (CONTD.)
Components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
Sept. 25, 1994 Sept. 24, 1995 Sept. 29, 1996
-------------- -------------- ------------------
(In thousands)
<S> <C> <C> <C>
Deferred income tax assets:
--------------------------
Property and equipment . . . . . . . . . . . $ 2,117 $ 1,542 $ 1,403
Self-insurance reserves . . . . . . . . . . 5,727 4,313 4,533
Pension and vacation liabilities . . . . . . 2,022 2,218 2,453
Inventories . . . . . . . . . . . . . . . . 1,200 1,140 1,213
Other . . . . . . . . . . . . . . . . . . . - - 408
----------- ------------ ------------
Total deferred income tax assets . . . . 11,066 9,213 10,010
Deferred income tax liabilities:
-------------------------------
Investment in unconsolidated affiliate . . . (1,046) (630) (5)
Other . . . . . . . . . . . . . . . . . . . (1,393) (816) -
----------- ------------ ------------
Total deferred income tax liabilities . (2,439) (1,446) (5)
----------- ------------ ------------
Net deferred income tax assets . . . . . . . $ 8,627 $ 7,767 $ 10,005
=========== ============ ============
</TABLE>
Although there can be no assurances as to future taxable income of the
Company, the Company believes that its expectations of future
taxable income, when combined with the income taxes paid in prior years, will
be adequate to realize the deferred income tax assets.
The Company adopted Statement of Financial Accounting Standard No. 109
"Accounting for Income Taxes" (SFAS No. 109) effective at the beginning of
fiscal 1994. Adoption of this statement in fiscal 1994 resulted in a gain of
$372,000 from the cumulative effect of a change in accounting principle and a
corresponding increase to deferred income tax benefit of $372,000.
NOTE 8 - RELATED PARTY TRANSACTIONS
Investment in Stock
During 1989, the Company acquired 311,404 shares of Common Stock of Craig
Corporation (the "Craig Common Stock") for $4.0 million. Craig Corporation
("Craig") was a holder of Common Stock of the Company. The Company had the
right to require Craig to purchase the Craig Common Stock for $4.0 million in
May 1994. In 1993, the Company entered into a series of separate agreements
(the "Recapitalization") with Craig (see Note 13). Upon the earlier of the
completion of the Recapitalization Transaction or March 31, 1994, subject to
applicable California law governing distributions to shareholders, the Company
was obligated to sell, transfer and assign the Common Stock of Craig to Craig
in exchange for Craig's agreement not to exercise its rights under, or be
entitled to certain benefits of the Agreement of Stockholders of Stater Bros.
Holdings Inc. dated as of May 10, 1989, as amended effective September 3, 1993
and to stand still during the time period from October 1, 1993 to the earlier
of the completion of the Recapitalization or March 31, 1994 in order to allow
the Company time to complete the Recapitalization. During fiscal 1994, the
Company transferred to Craig its investment in 311,404 shares of Common Stock
of Craig and recognized an expense of $4.0 million.
F-16
<PAGE> 36
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - RELATED PARTY TRANSACTIONS (CONTD.)
Consulting Agreements and Covenant Not to Compete
Since January 1, 1989, the Company has entered into various consulting
agreements (the "Agreements") with its stockholders, La Cadena Investments, a
California general partnership, and Craig, that required La Cadena and Craig to
provide consultation and advice to the Company in connection with general
business, financial, management consulting, real estate acquisition and
development, and product diversification matters (collectively the "Consulting
Services"). All fees payable under the Agreements were subject to and
subordinate to provisions of the Company's credit agreements. These consulting
agreements terminated in September 1993. Pursuant to a Consulting Agreement
dated as of September 3, 1993 (the "Consulting Agreement"), which became
effective on March 8, 1994, Craig will render consulting services to the
Company for a five-year period and 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. In consideration for such consulting services, the Company will pay
Craig $1.5 million per year thereafter, payable quarterly during the term of
the Consulting Agreement. Expenses of $.8 million, $1.5 million and $1.5
million were incurred under the consulting agreement in 1994, 1995 and 1996,
respectively. Additionally, on March 8, 1994, the Company paid Craig $5.0
million which is amortized to earnings over the five-year term of the covenant
not to compete included in the Consulting Agreement.
NOTE 9 - RETIREMENT PLANS
Pension Plan
The Company has a noncontributory defined benefit pension plan covering
substantially all non-union employees. The plan provides for benefits based on
an employee's compensation during the three years before retirement. The
Company's funding policy for this plan is to contribute annually at a rate that
is intended to provide sufficient assets to meet future benefit payment
requirements.
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks
----------------------------------------------------
Sept. 25, 1994 Sept. 24, 1995 Sept. 29, 1996
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during
the period . . . . . . . . . . . . . . . $ 653 $ 619 $ 752
Interest cost on projected benefit
obligation . . . . . . . . . . . . . . . 762 862 1,000
Actual return on assets . . . . . . . . . . 240 (735) (429)
Net amortization and deferral . . . . . . . (808) 200 (181)
----------- ---------- ----------
Net periodic pension cost . . . . . . . . . $ 847 $ 946 $ 1,142
=========== ========== ==========
Assumptions used for accounting were:
Discount rate . . . . . . . . . . . . . . . . 8.0% 8.0% 7.5%
Rate of increase in compensation levels . . . 5.0% 5.0% 5.0%
Expected long-term rate of return on
assets . . . . . . . . . . . . . . . . . 9.0% 9.0% 9.0%
</TABLE>
F-17
<PAGE> 37
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - RETIREMENT PLANS (CONTD.)
Pension Plan (contd.)
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet at:
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks
----------------------------------------------------
Sept. 25, 1994 Sept. 24, 1995 Sept. 29, 1996
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation . . . . . . . . $ 7,551 $ 9,400 $ 10,591
============ ============ ============
Accumulated benefit obligation . . . . . . $ 7,803 $ 9,717 $ 10,930
============ ============ ============
Projected benefit obligation . . . . . . . . $ (10,845) $ (13,484) $ (14,991)
Plan assets at fair value,
primarily notes and bonds . . . . . . . 6,821 8,138 9,028
------------ ------------ ------------
Projected benefit obligation in
excess of plan assets . . . . . . . . . (4,024) (5,346) (5,963)
Unrecognized net loss . . . . . . . . . . . 2,227 3,407 3,745
Unrecognized prior service cost . . . . . . 29 (76) (71)
Unrecognized net obligations established
October 1, 1987 . . . . . . . . . . . . 270 243 216
------------ ------------ ------------
Pension (liability) recognized in the
balance sheet . . . . . . . . . . . . . $ (1,498) $ (1,772) $ (2,073)
============ ============ ============
</TABLE>
Expenses recognized for this retirement plan were $1,085,000, $967,000 and
$1,290,000 in 1994, 1995 and 1996, respectively.
Profit Sharing Plan
The Company has a noncontributory defined contribution profit sharing plan
covering substantially all non-union employees. Union employees may
participate if their collective bargaining agreement specifically provides for
their inclusion. The Company may contribute up to 7.5% of total compensation
paid or accrued during the year to each plan participant subject to limitations
imposed by the Internal Revenue Code. The Company recognized expenses for this
plan in the amount of $320,000, $357,000 and $347,000 in 1994, 1995 and 1996,
respectively.
Multi-Employer Plans
The Company also contributes to multi-employer defined benefit retirement
plans in accordance with the provisions of the various labor agreements that
govern the plans. Contributions to these plans are generally based on the
number of hours worked. Information for these plans as to vested and
non-vested accumulated benefits and net assets available for benefits is not
available.
F-18
<PAGE> 38
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - RETIREMENT PLANS (CONTD.)
Multi-Employer Plans (contd.)
The Company's expense for these retirement and health and welfare plans
consisted of the following:
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks
----------------------------------------------------
Sept. 25, 1994 Sept. 24, 1995 Sept. 29, 1996
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Multi-Employer Pension Plans . . . . . . $ 7,234 $ 5,688 $ 7,376
Multi-Employer Health and Welfare . . . 20,901 36,320 36,632
----------- ---------- ------------
Total Multi-Employer Benefits . . . . . $ 28,135 $ 42,008 $ 44,008
=========== ========== ============
</TABLE>
In conjunction with a three-year collective bargaining agreement entered
into in 1993, the Company received a $13.7 million credit which was applied
against employer contributions to multi-employer health and welfare benefit
plans which was recovered monthly during fiscal 1994. The Company received an
additional $0.8 million credit applied against employer contributions during
fiscal 1995 and an additional $3.8 million in fiscal 1996.
NOTE 10 - LABOR RELATIONS
The Company entered into a four-year collective bargaining agreement with
the retail clerks and meat cutters collective bargaining units in October 1995
and entered into a four-year collective bargaining agreement in September 1994
with the teamsters collective bargaining units.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short-term
maturity of these instruments.
Receivables
The carrying amount approximates fair value because of the short-term
maturity of these instruments.
Long-Term Debt
The fair value of the 11% Senior Notes due 2001 is based on quoted market
prices. Market quotes for the fair value of the Company's capitalized lease
obligations are not available, and a reasonable estimate of the fair value
could not be made without incurring excessive costs.
F-19
<PAGE> 39
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTD.)
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
As of
September 29, 1996
---------------------------
(In thousands)
Carrying Fair
Amount Value
----------- ------------
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . $ 45,279 $ 45,279
Receivables . . . . . . . . . . . . . . . . . . . . $ 19,009 $ 19,009
Long-term debt for which it is:
# Practicable to estimate fair values . . . . . $ 165,000 $ 155,660
# Not practicable . . . . . . . . . . . . . . . $ 8,099 $ 8,099
</TABLE>
NOTE 12 - LITIGATION MATTERS
In the ordinary course of its business, the Company is party to various
legal actions which the Company believes are incidental to the operation of the
business of the Company and its subsidiaries. The Company has recorded
reserves for loss contingencies based on the specific circumstances of each
case. Such reserves are recorded when the occurrence of loss is probable and
can be reasonably estimated. The Company believes that the outcome of such
legal proceedings to which the Company is currently a party will not have a
material adverse effect upon its results of operations or its consolidated
financial condition.
On May 2, 1993, the Company was named as a defendant along with all of the
other major supermarket chains located in the Los Angeles County area in a
class action complaint filed in the California Superior Court in Los Angeles,
California, alleging among other things that the milk pricing policies of each
of the defendants violate certain antitrust laws and regulations under
California law. In this class action lawsuit, Barela et al. v. Ralphs Grocery
Co. et al., plaintiffs seek unspecified damages. The principal allegations of
the complaint are that milk prices of the defendants operating in the Los
Angeles County area are higher than milk prices for the same products in the
San Francisco Bay area and that the prices for such products in Los Angeles
County are higher than the prices charged in Riverside and San Bernardino
counties. Because the Company does not conduct business in the San Francisco
Bay area and its prices for milk are generally consistent throughout all of its
supermarkets in the Los Angeles County area and Riverside and San Bernardino
counties, the Company believes the claim is without merit with respect to the
Company and the Company intends to vigorously defend such litigation. The
Company believes that the ultimate outcome of this litigation will not have a
material adverse effect on the Company's results of operations or its
consolidated financial condition.
NOTE 13 - 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 common shareholder of the Company, and provided the Company with
an option to acquire Craig's remaining equity in Stater Bros. Holdings Inc.
The Recapitalization Transaction was funded through an offering of
$165.0
F-20
<PAGE> 40
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - RECAPITALIZATION TRANSACTION (CONTD.)
million of 11% Senior Notes due 2001 (the "Initial Notes") under Rule 144A of
the Securities Act of 1933, as amended. Proceeds from the Initial Notes were
used to (a) repay $75.5 million of 9.8% Senior Notes, together with a
prepayment premium, (b) repay outstanding bank loans and mortgages of
approximately $12.0 million, (c) repay an outstanding capital expenditure
revolving credit facility of $9.0 million, (d) fund a $5.0 million five-year
consulting agreement and covenant not to compete with Craig, (e) fund a payment
of $14.6 million to purchase an option to acquire Craig's remaining interest in
the Company, (f) pay $20.0 million in dividends on the Company's Common Stock
(held by Craig) and (g) pay fees and expenses associated with the
Recapitalization.
In August of 1994, all of the Initial Notes were exchanged for a like
amount of New Notes 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 (the "Option") 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 are paid quarterly in arrears.
The Option will remain in effect until March 2006 and will entitle the
Company to purchase all, but not less than all, such shares of Series B
Preferred Stock. With respect to the Series B Preferred Stock, the exercise
price of the Option will be $69.4 million.
Pursuant to the Option Agreement, holders of the Series B Preferred Stock
are entitled to certain registration rights. In addition, holders of Series B
Preferred Stock have the right to require the redemption of all, but not less
than all, the Series B Preferred Stock owned by such holder in the event of
certain changes of control of the Company or in the event Jack H. Brown shall
cease to be the Chief Executive Officer of the Company, other than by reason of
death, disability or retirement in accordance with the Company's normal
retirement policies.
NOTE 14 - EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT
In connection with the Recapitalization, in March 1994, the Company
redeemed its $75.5 million 9.8% Senior Notes due 2001 and retired approximately
$12.2 million of certain notes payable secured by real property, and retired
approximately $9.0 million of amounts due under the Company's then existing
capital expenditures credit facility. The Company paid a pre-tax premium of
$13.9 million in March 1994 due as a result of the early retirement of such
debt.
NOTE 15 - SUBSEQUENT EVENT
In October 1996, the Company completed a sale and leaseback transaction
with an unrelated third party for four of the Company's supermarkets. The net
proceeds from the sale of the four supermarkets amounted to approximately $16.0
million, which approximated fair market value. The Company entered into leases
for the four supermarkets with initial terms of 20 years and with options
available to the Company which extend the lease terms up to an additional 20
years. The Company believes the rents due under the leases approximate fair
market rents. The gains from the sale of the supermarkets were approximately
$2.5 million and are deferred and will be amortized into income over the
initial term of the leases. The approximate future minimum rents due for the
four supermarkets are $1.6 million in 1997, $1.7 million in 1998, 1999, 2000,
2001 and $25.9 million thereafter.
F-21
<PAGE> 41
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - QUARTERLY RESULTS (UNAUDITED)
Quarterly results for fiscal 1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
Income before
cumulative effect
of change in Cumulative
accounting for effect of Extraordinary
income taxes change in loss,
and accounting net of Net
Gross extraordinary for income income tax Income/
Sales Profit loss taxes benefit (Loss)
========= ========= ================ ========== ======== ===========
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1994 Quarters
13 weeks ended 12/26/93 . $ 382,652 $ 83,171 $ 3,419 $ 372 $ - $3,791
13 weeks ended 03/27/94 . 385,765 86,451 2,066 - (8,036) (5,970)
13 weeks ended 06/26/94 . 384,360 84,647 1,913 - - 1,913
13 weeks ended 09/25/94 . 386,940 85,654 1,391 - - 1,391
---------- -------- ------- ------ -------- ------
Total (52 weeks) . . . $1,539,717 $339,923 $ 8,789 $ 372 $ (8,036) $1,125
========== ======== ======= ====== ========= ======
Fiscal 1995 Quarters
13 weeks ended 12/25/94 . $ 390,642 $ 86,685 $ 1,553 $ - $ - $1,553
13 weeks ended 03/26/95 . 390,574 86,195 1,600 - - 1,600
13 weeks ended 06/25/95 . 396,072 89,984 2,162 - - 2,162
13 weeks ended 09/24/95 . 402,607 89,676 1,412 - - 1,412
---------- -------- ------- ------ -------- ------
Total (52 weeks) . . . $1,579,895 $352,540 $ 6,727 $ - $ - $6,727
========== ======== ======= ====== ======== ======
Fiscal 1996 Quarters
13 weeks ended 12/24/95 . $ 408,740 $ 92,261 $ 3,597 $ - $ - $3,597
13 weeks ended 03/24/96 . 406,223 93,548 4,341 - - 4,341
13 weeks ended 06/23/96 . 429,349 99,257 4,385 - - 4,385
14 weeks ended 09/29/96 . 461,020 104,540 3,688 - - 3,688
---------- -------- ------- ------ -------- ------
Total (53 weeks) . . . $1,705,332 $389,606 $16,011 $ - $ - $16,011
========== ======== ======= ====== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE> 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the current
executive officers and directors of the Company, their ages and principal
occupations for at least the past five years. Directors of the Company each
serve for a term of one year, or until their successors are elected. The
officers serve at the discretion of the Board of Directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Jack H. Brown . . . . . . . . 57 Chairman of the Board, President
and Chief Executive Officer
H. Harrison Lightfoot . . . . 58 Group Senior Vice President - Retail Operations
A. Gayle Paden . . . . . . . . 60 Group Senior Vice President - Distribution
Donald I. Baker . . . . . . . 55 Group Senior Vice President - Administration
Dennis N. Beal . . . . . . . . 46 Vice President - Finance and Chief Financial
Officer
Bruce D. Varner . . . . . . . 60 Director and Secretary
James J. Cotter . . . . . . . 58 Director
Thomas W. Field, Jr. . . . . . 63 Director
</TABLE>
BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS
Jack H. Brown has been President and Chief Executive Officer of the Company
since June 1981 and Chairman of the Board since 1986. From September 1978 to
June 1981, Mr. Brown served as President of Pantry Food Markets, Inc. and
American Community Stores Corporation, Inc., both wholly-owned subsidiaries of
Cullum Companies, Inc., a publicly held corporation. From 1972 to 1978, Mr.
Brown served as Corporate Vice President of Marsh Supermarkets, Inc., a
publicly held corporation. Mr. Brown has been employed in various capacities
in the supermarket industry for 44 years. Mr. Brown has a majority interest
and is the managing general partner of La Cadena Investments.
H. Harrison Lightfoot has been Group Senior Vice President-Retail
Operations of the Company since June 1986. Mr. Lightfoot has served the
Company for 42 years in various capacities, including store manager, buyer,
general supervisor and Vice President. Mr. Lightfoot is a general partner of
La Cadena Investments.
A. Gayle Paden has been Group Senior Vice President-Distribution since July
1996. Mr. Paden joined the Company in 1986 as Group Senior Vice
President-Administration and served in that capacity until July 1996. Mr.
Paden was previously with Lucky Stores for 35 years where he served in various
capacities, the most recent of which was President of the Southern California
Food Division.
20
<PAGE> 43
BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS (CONTD.)
Donald I. Baker joined the Company in November 1983 as Vice
President-Warehouse and Transportation and has been Group Senior Vice
President-Administration since July 1996. From July 1992 to July 1996, Mr.
Baker was Group Senior Vice President-Human Resources and Distribution. From
August 1986 to July 1992, Mr. Baker was Senior Vice President-Human Resources
and Distribution. Prior to joining the Company, Mr. Baker was employed by
American Community Stores Corporation, Inc., a subsidiary of Cullum Companies,
Inc., a publicly held corporation, from 1972 to 1983 in various capacities
including Vice President of Retail Operations, and was also employed by Kroger
Company from 1966 to 1972.
Dennis N. Beal has been Vice President of Finance and Chief Financial
Officer of the Company since September 1992. Mr. Beal was Vice President and
Controller of American Stores Company from 1989 to 1992 and Vice President and
Controller of subsidiaries of American Stores Company from 1987 to 1989 and
served in various financial positions since 1981. Mr. Beal, a certified public
accountant, was also a partner in the accounting firm of Bushman, Daines,
Rasmussen & Wisan and served in various capacities with the firm from 1974 to
1981.
Bruce D. Varner has been a director of Stater Bros. Markets since September
1985 and director of Stater Bros. Holdings Inc. since May 1989. Since 1967,
Mr. Varner has been a partner with the law firm of Gresham, Varner, Savage,
Nolan & Tilden where he specializes in business and corporate matters. Mr.
Varner and the law firm of Gresham, Varner, Savage, Nolan & Tilden have
performed legal services in the past for the Company and the Company expects
such services to continue in the future.
James J. Cotter has been a director of Stater Bros. Markets since March
1987 and director of Stater Bros. Holdings Inc. since May 1989. Mr. Cotter has
been Chairman of the Board of Craig since 1988 and a director since 1985. Mr.
Cotter has also been the Chairman of the Board of Reading Entertainment, Inc.
(the corporate successor to Reading Company) since 1991 and has served as a
director of that company since September 1990. Reading Entertainment, Inc.,
through its wholly owned subsidiary, Reading Investment Company, Inc. is the
sole owner of the Company's Series B Preferred Stock. Craig Corporation
together with its wholly owned subsidiary owns approximately 77.4% of the
outstanding voting securities of Reading Entertainment, Inc. Mr. Cotter has
been a director and Chairman of the Board of Citadel Holding Corporation (which
Reading Entertainment, Inc., through its wholly owned subsidiaries, has
approximately 26% of the aggregate voting power) since 1991. From October 1991
to June 1992, Mr. Cotter also served as the acting Chairman and served as a
director of Citadel Holding Corporation's wholly- owned subsidiary, Fidelity
Federal Bank, and Mr. Cotter served as a director from February 1986 to May
1988 and from June 1991 to December 1993. Mr. Cotter is also a director and
Executive Vice President of Pacific Theatres, Inc., a wholly owned subsidiary
of Decurion Corporation.
Thomas W. Field, Jr., has been Chairman of the Board of ABCO Markets since
December 1991, and President of Field and Associates since 1989. From 1988 to
1989, Mr. Field was Chairman of the Board, President and Chief Executive
Officer of McKesson Corporation and was its President since 1984, and President
and Chief Executive Officer from 1986 to 1988. Mr. Field has held various
positions in the Supermarket Industry for over 40 years and serves as a
Director for several companies including, Campbell Soup Company, Bromar Inc.,
Maxicare and ABCO Markets.
21
<PAGE> 44
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation for services rendered during
the prior three fiscal years paid to the CEO and the four most highly
compensated executive officers other than the CEO of the Company:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
=================================================
OTHER ANNUAL ALL OTHER
NAME AND SALARY BONUSES COMPENSATION COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(4)(5) ($) ($)(1)(2)(3)
========================= ==== =========== =========== ============ ============
<S> <C> <C> <C> <C> <C>
Jack H. Brown 1996 $729,500 $ - $ - $ 25,500
Chairman, President and 1995 $683,385 $ 524,000 $ - $ 28,921
Chief Executive Officer 1994 $677,460 1,361,000 $ - $ 27,528
H. Harrison Lightfoot 1996 $281,500 $ - $ - $ -
Group Senior Vice- 1995 $267,077 $ 120,000 $ - $ 2,421
President, Retail 1994 $266,692 $ 95,000 $ - $ 2,028
Operations
A. Gayle Paden 1996 $256,500 $ - $ - $ -
Group Senior Vice- 1995 $244,616 $ 40,000 $ - $ 2,421
President, Distribution 1994 $244,384 $ 25,000 $ - $ 2,028
Donald I. Baker 1996 $187,500 $ - $ - $ -
Group Senior Vice- 1995 $169,615 $ 65,000 $ - $ 2,145
President, Administration 1994 $163,269 $ 45,000 $ - $ 1,404
Dennis N. Beal 1996 $150,500 $ - $ - $ -
Vice-President and 1995 $142,769 $ 50,000 $ - $ 1,826
Chief Financial Officer 1994 $135,000 $ 65,000 $ - $ 1,419
</TABLE>
(1) The dollar value of perquisites and other personal benefits, if any, for
each of the Named Executive Officers was less than the reporting
thresholds established by the Securities and Exchange Commission.
(2) Amounts shown for the Named Executive Officers represent the Company's
contributions to the Company's Profit Sharing Plan, a defined
contribution plan, for the account of each Named Executive Officer.
Plan participants become fully vested in the plan after seven years of
service.
(3) Includes Mr. Brown's Director Fees for 1994, 1995 and 1996 which amounted
to $25,500, $26,500, and $25,500, respectively.
(4) The Board of Directors of Stater Bros. Holdings Inc. unanimously awarded
Mr. Brown a one-time bonus for his expertise in handling the
Recapitalization Transaction. The amount is included in his 1994
Bonus.
(5) Bonuses to be paid to the Named Executive Officers for fiscal 1996 had
neither been calculated nor awarded as of December 20, 1996, the
latest practical date.
STOCK OPTIONS AND SARS
None
22
<PAGE> 45
ITEM 11. EXECUTIVE COMPENSATION (CONTD.)
PENSION PLAN
The Company's Pension Plan for Salaried Employees (the "Pension Plan") is a
non-contributory, defined benefit plan which applies to all salaried employees
who have completed one year of qualified service, including directors who are
employees. For each year of credited service, the annual pension to which an
employee is entitled under the Pension Plan upon normal retirement at age 65 is
an amount equal to three quarters of one percent of the employee's compensation
for each year up to the social security wage base, plus 2.15 percent of the
employee's compensation for each year in excess of the social security wage
base. The Named Executive Officers have the following years of credited
service under the Pension Plan as of September 29, 1996: Jack H. Brown - 15
years, H. Harrison Lightfoot - 42 years; A. Gayle Paden - 10 years; Donald I.
Baker - 13 years and Dennis N. Beal - 3 years.
The amounts shown in the following table are estimated annual retirement
benefits under the Pension Plan (assuming payments are made on the normal life
annuity and not under any of the various survivor forms of benefits) based upon
retirement at age 65, after various years of service at selected salary levels.
Benefits under the Pension Plan do not become fully vested until the employee
has five years of credited service with the Company. The Internal Revenue Code
of 1986, as amended, places certain limitations on pension benefits that can be
paid from a tax-qualified pension plan and trust, as well as the compensation
that may be taken into account in determining such benefits. Such limitations
are not reflected in the table below. The maximum annual benefit for 1996
retirees with ten or more years of service at retirement is $120,000. The
maximum annual compensation that may be considered for 1996 retirees is
$150,000.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
YEARS OF SERVICE
------------------------------------------------------------------------
REMUNERATION 15 20 25 30 35
------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$100,000 . . . . . . . $ 24,123 $ 32,164 $ 40,205 $ 48,246 $ 56,287
150,000 . . . . . . . 40,248 53,664 67,080 80,496 93,912
200,000 . . . . . . . 56,373 75,164 93,955 112,746 131,537
250,000 . . . . . . . 72,498 96,664 120,830 144,996 169,162
300,000 . . . . . . . 88,623 118,164 147,705 177,246 206,787
350,000 . . . . . . . 104,748 139,664 174,580 209,496 244,412
400,000 . . . . . . . 120,873 161,164 201,455 241,746 282,037
450,000 . . . . . . . 136,998 182,664 228,330 273,996 319,662
500,000 . . . . . . . 153,123 204,164 255,205 306,246 357,287
</TABLE>
COMPENSATION OF DIRECTORS
Directors of the Company are paid an annual fee of $25,000 plus $500 for each
board meeting attended.
EMPLOYMENT AND SEVERANCE AGREEMENTS
There are no written employment contracts between the Company and any Named
Executive Officer. The Company's severance policies generally provide for two
weeks, up to a maximum of twelve weeks, severance pay to full-time
non-bargaining unit employees for every year of service to the Company.
23
<PAGE> 46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of December 16, 1996, the number and
percentage of outstanding shares of Class A Common Stock and Series B Preferred
Stock beneficially owned by (a) each person known by the Company to
beneficially own more than 5% of such stock, (b) each director of the Company,
(c) each of the Named Executive Officers, and (d) all directors and executive
officers of the Company as a group:
<TABLE>
<CAPTION>
Shares of Shares of
Class A Common Percentage of Series B Percentage of
Stock Class A Preferred Stock Series B
Name and Address Beneficially Common Stock Beneficially Preferred Stock
of Beneficial Owner Owned Outstanding Owned Outstanding
- ------------------- -------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
La Cadena Investments (1) . . . 50,000 100% -- --
Reading Invesment
Company, Inc. (2) . . . . . . -- -- 693,650 100%
Reading Entertainment, Inc. (2) -- -- 693,650 100%
Craig Corporation (2) (4) . . . -- -- 693,650 100%
Jack H. Brown (1)(3) . . . . . 50,000 100% -- --
H. Harrison Lightfoot (1)(3) . 50,000 100% -- --
Richard C. Moseley (1)(3) . . . 50,000 100% -- --
A. Gayle Paden (3) . . . . . . -- -- -- --
Donald I. Baker (3) . . . . . . -- -- -- --
Dennis N. Beal (3) . . . . . . -- -- -- --
James J. Cotter (2)(4) . . . . -- -- 693,650 100%
Bruce D. Varner (3) . . . . . . -- -- -- --
Thomas W. Field, Jr. (3) . . . -- -- -- --
All directors and executive
officers as a group
(8 persons) (1)(2) . . . . . . 50,000 100% 693,650 100%
</TABLE>
- --------------------
(1) The general partners of La Cadena Investments are Jack H. Brown, Richard C.
Moseley and H. Harrison Lightfoot. Mr. Brown has a majority interest and
is the managing general partner of La Cadena Investments and has the power
to vote the shares of the Company owned by La Cadena Investments, except
with respect to certain fundamental corporate changes of the Company
including the disposition of such shares. Accordingly, Messrs. Brown,
Moseley and Lightfoot may be deemed to have shared voting power or shared
investment power with respect to the shares owned by La Cadena Investments,
and such individuals therefore may be deemed to be the beneficial owners
thereof. The address of La Cadena Investments is 3750 University Avenue,
Suite 610, Riverside, California 92501.
(2) All of the issued and outstanding stock of Reading Investment Company, Inc.
is owned indirectly by Reading Entertainment, Inc. Craig Corporation owns
approximately 77.4% of the outstanding voting securities of Reading
Entertainment, Inc. and, accordingly, Craig Corporation may be deemed to
share beneficial ownership of shares of Series B Preferred Stock owned of
record by Reading Investment Company, Inc. The address of Reading
Investment Company, Inc. is 103 Springer Building, 3411 Silverside Road,
Wilmington, Delaware 19810. As of December 16, 1996, Mr. Cotter
beneficially owned securities representing slightly more than 50% of the
voting power of the equity securities of Craig Corporation. Accordingly,
Mr. Cotter may be deemed to have beneficial ownership with respect to the
shares owned of record by Reading Investment Company, Inc.
(3) The address of Messrs. Brown, Lightfoot, Moseley, Paden, Baker, Beal,
Varner and Field is c/o the Company at 21700 Barton Road, Colton,
California 92324.
(4) The address of Craig Corporation and Mr. Cotter is c/o Craig Corporation,
550 South Hope Street, Suite 1825, Los Angeles, California 90071.
24
<PAGE> 47
CHANGE OF CONTROL ARRANGEMENTS
As of September 3, 1993, the Company, La Cadena, Craig and certain of their
affiliates entered into a series of separate agreements, as subsequently
amended, and took certain actions, for the purpose of reclassifying the
Company's outstanding equity, providing for effective operating control of the
Company by La Cadena, making certain cash payments and distributions to Craig,
and providing the Company with the option to acquire Craig's equity interest in
the Company, all of which were completed simultaneously with the closing of the
Recapitalization Transaction.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1989, the Company has entered into various consulting
agreements (the "Agreements") with its stockholders, La Cadena and Craig, that
required them to provide consultation and advice to the Company in connection
with general business, financial, management consulting, real estate
acquisition and development, and product diversification matters. These
Consulting Agreements with its stockholders terminated on September 26, 1993.
In March 1994, the Company entered into a prepaid five year covenant not to
compete and a new consulting agreement with Craig, pursuant to which the
Company paid Craig an initial payment of $5.0 million at the closing of the
Recapitalization Transaction and will pay an annual consulting fee of $1.5
million for five years thereafter. The covenant not to compete and consulting
arrangements with Craig are unique, based upon the confidential information
available to Craig and its experience with, and relationship to the Company.
Accordingly, the Company has no basis to determine whether comparable services
could be obtained from unaffiliated third parties on similar or more favorable
terms. The Company expects that no consulting fees will be paid to La Cadena
in the foreseeable future and that the payment of any such fees to La Cadena
would be subject to restrictions and covenants governing such distributions
contained in the Company's Credit Agreement with the Bank of America and in the
Senior Note Indenture.
During 1994, the Company, La Cadena, Craig and certain of their affiliates
entered into a series of separate agreements, as subsequently amended, and took
certain actions, for the purpose of reclassifying the Company's outstanding
equity, providing for effective operating control of the Company by La Cadena,
making certain cash payments and distributions to Craig, and providing the
Company with the option to acquire Craig's equity interest in the Company. See
Item 1, "Recapitalization Transaction".
Mr. Cotter is a director of the Company and is a director and the Chairman of
the Board of Craig. As of September 29, 1996, Mr. Cotter beneficially owned
securities representing slightly more than 50% of the voting equity securities
of Craig.
The general partners of La Cadena are Jack H. Brown, Richard C. Moseley and H.
Harrison Lightfoot, and Mr. Brown has a majority interest and is the managing
general partner. Mr. Brown is a director of the Company and Messrs. Brown and
Lightfoot are Named Executive Officers of the Company. Mr. Brown has the power
to vote the shares of the Company owned by La Cadena, except with respect to
certain fundamental corporate changes of the Company, including the disposition
of such shares. Accordingly, Messrs. Brown, Moseley and Lightfoot may be
deemed to have shared voting power with respect to shares of the Company owned
by La Cadena. Mr. Moseley served the Company for over 44 years and in many
executive capacities, most recently and from September 1995 until his
retirement from the Company in January 1996, Mr. Moseley served as Executive
Vice President of the Company.
25
<PAGE> 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTD.)
Mr. Varner is an officer and a director of the Company. Mr. Varner and the law
firm of Gresham, Varner, Savage, Nolan & Tilden, of which Mr. Varner is a
partner, have performed legal services in the past for the Company. The total
cost of such legal services incurred by the Company during fiscal 1996 was
approximately $1.6 million. The Company believes that the terms and costs of
such legal services provided by Mr. Varner and Gresham, Varner, Savage, Nolan &
Tilden were at least as fair to the Company as could have been obtained from
unaffiliated law firms. The Company expects such services to continue in the
future.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) Document list
(1) Financial Statements
See Financial Statement Index included in Item 8 of
Part II of this Form 10-K
(2) Financial Statement Schedules
The Financial Statement Schedules required by Item 14(d)
for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission, are
not required under the related instructions or are
inapplicable and therefore, have been omitted.
(3) Exhibits
Exhibits as required by Item 14(c) 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.
</TABLE>
26
<PAGE> 49
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a)(3) Exhibits (contd.)
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
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.
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.
10.12 (b) Amendment dated July 22, 1996 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.
</TABLE>
27
<PAGE> 50
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a)(3) Exhibits (contd.)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.17 (1) Preferred Stock Agreement dated March 22, 1983, between
Stater Bros. Markets and Petrolane Incorporated.
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.
12 Computation of ratio of earnings to fixed charges.
21 (1) Subsidiaries of the Company.
------------------------------------------------------------------------------------
(1) Previously filed with the Securities and Exchange Commission as an exhibit to
the 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
</TABLE>
28
<PAGE> 51
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.
DECEMBER 20, 1996 STATER BROS. HOLDINGS INC.
- --------------------------
DATE
BY: /S/ JACK H. BROWN
------------------------------
JACK H. BROWN
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
========= ===== ====
<S> <C> <C> <C>
/S/ JACK H. BROWN CHAIRMAN OF THE BOARD, PRESIDENT DECEMBER 20, 1996
- ------------------------------------- AND CHIEF EXECUTIVE OFFICER -----------------
JACK H. BROWN AND DIRECTOR (PRINCIPAL
EXECUTIVE OFFICER)
/S/ BRUCE D. VARNER SECRETARY AND DIRECTOR DECEMBER 20, 1996
- ------------------------------------- -----------------
BRUCE D. VARNER
/S/ DENNIS N. BEAL VICE PRESIDENT - FINANCE DECEMBER 20, 1996
- ------------------------------------- AND CHIEF FINANCIAL OFFICER -----------------
DENNIS N. BEAL (PRINCIPAL ACCOUNTING OFFICER)
/S/ JAMES J. COTTER DIRECTOR DECEMBER 20, 1996
- ------------------------------------- -----------------
JAMES J. COTTER
/S/ THOMAS W. FIELD, JR. DIRECTOR DECEMBER 20, 1996
- ------------------------------------- -----------------
THOMAS W. FIELD, JR.
</TABLE>
29
<PAGE> 1
Exhibit 10.12(b)
NINTH AMENDMENT TO CREDIT AGREEMENT
THIS NINTH AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is
made as of July 22, 1996, between STATER BROS. MARKETS, a California corporation
("Borrower"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a
national banking association ("Bank").
WHEREAS, Borrower and Bank entered into that certain Credit
Agreement dated as of March 8, 1994, as amended by the First Amendment dated as
of September 23, 1994, the Second Amendment dated as of February 6, 1995, the
Third Amendment dated as of March 31, 1995, the Fourth Amendment dated as of May
31, 1995, the Fifth Amendment dated as of June 20, 1995, the Sixth Amendment and
Waiver dated as of June 23, 1995, the Seventh Amendment dated as of June 1, 1996
and the Eighth Amendment dated as of June 15, 1996 (as so amended, the
"Agreement").
WHEREAS, Borrower and Bank desire to further modify and amend
certain of the terms and provisions of the Agreement.
NOW, THEREFORE, in consideration of the premises herein
contained and for other good and valuable consideration, Borrower and Bank do
hereby mutually agree as follows:
AGREEMENT
1. Definitions. Capitalized terms used but not defined
in this Amendment shall have the meaning given to them in the Agreement.
2. Amendments. The Agreement is hereby amended as
follows:
2.1 In Paragraph 1.1 of the Agreement, the
definition of "Availability Period" is amended by substituting the
date "June 1, 1998" for the date "August 1, 1996" appearing therein.
2.2 In Paragraph 1.1 of the Agreement, the
definition of "Dividend Fixed Charge Coverage Ratio" is amended and
restated in its entirety as follows:
" 'Dividend Fixed Charge Coverage Ratio'
means the ratio of: (i) the sum of, without duplication, net
profit before taxes, without giving effect to extraordinary
gains or to Noncash Extraordinary Losses, plus interest
expense, plus depletion, depreciation and amortization
expense, less the difference between Net Capital Expenditures
and Borrower's Excess Cash Flow for the immediately preceding
fiscal year, and less the lesser of (y) Borrower's actual tax
liability or (z) the actual amount of taxes paid in cash
(without giving effect to any refunds
<PAGE> 2
received) by Holdings; to (ii) the sum of interest expense
payable in cash, plus scheduled payments on long term
indebtedness and capitalized leases, plus dividends paid to
Holdings other than for the payment of taxes by Holdings,
plus quarterly increases and less quarterly decreases by
Borrower in all intercompany loans to Holdings, including
payments in lieu of dividends to Holdings for the purposes of
paying Holdings senior note interest expense, consulting fees
to Craig and preferred dividends to Craig. For purposes of
calculating this ratio, the difference between Net Capital
Expenditures and Borrower's Excess Cash Flow for the
immediately preceding fiscal year may not be less than Three
Million Dollars ($3,000,000) in the aggregate in any four (4)
consecutive fiscal quarter period on a rolling four (4) quarter
basis beginning with the fiscal quarter ending December 31,
1994, and, beginning with the fiscal quarter ending
December 31, 1995, to less than Eight Million Dollars
($8,000,000) in the aggregate for any two (2) consecutive
twelve month periods; provided, however, that for the purpose
of this definition, dividends payable to Holdings for the
payment of interest on the Senior Notes shall be accrued on a
monthly basis and intercompany loans to Holdings for such
purposes shall be recognized on a monthly basis."
2.3 In Paragraph 1.1 of the Agreement, the following
definition is added:
" 'Letter of Credit Commitment' means (i) on
any date during the month of August of each calendar year
during the Availability Period, Twenty-Five Million Dollars
($25,000,000), and (ii) at all other times an amount equal to
the lesser of (A) Twenty-Five Million Dollars ($25,000,000)
and (B) the Construction Letter of Credit Sublimit plus an
amount (not less than Nineteen Million Dollars ($19,000,000))
equal to the amount of the letter of credit required at such
time under Borrower's worker's compensation insurance policy."
2.4 Subparagraph 2.1(a) of the Agreement is amended
and restated in full as follows:
"(a) The total of all advances outstanding
at any one time under the Revolving Facility, including those
advances under the Inventory Sublimit, may not exceed Fifteen
Million Dollars ($15,000,000)."
2.5 In Section 2.1(d) of the Agreement, the
phrase "Reference Rate plus three-quarters (0.75) of one percentage
point" is deleted and the phrase "Reference Rate plus one-half (0.5)
of one percentage point" is substituted in its stead.
2.6 Paragraph 2.2 of the Agreement is amended and
restated in full as follows:
<PAGE> 3
"2.2 The Letter of Credit Facility. From
time to time during the Availability Period, Bank will create
and issue commercial and standby letters of credit for
Borrower's account. The total of the undrawn and the drawn
and unreimbursed amount of all commercial and standby letters
of credit outstanding at any time under the Letter of Credit
Facility, including the Construction Letter of Credit
Sublimit, may not exceed the Letter of Credit Commitment at
such time.
2.7 Subparagraph 2.4(a) of the Agreement is amended
and restated in full as follows:
"(a) The total of all advances
outstanding at any one time under the Inventory Sublimit may
not exceed Five Million Dollars ($5,000,000)."
2.8 In Section 2.4(d) of the Agreement, the
phrase "Reference Rate plus three quarters of one (.75) percentage
point" is deleted and the phrase "Reference Rate plus one-half (0.5)
of one percentage point" is substituted in its stead.
2.9 Reference is made to the Sixth Amendment and
Waiver to the Agreement (the "Sixth Amendment") referred to in the
first WHEREAS clause of this Amendment. Paragraph 2.17 of the Sixth
Amendment added a new provision to Paragraph 7.2 of the Agreement, and
designated this provision as "Subparagraph (f)." This provision is
hereby redesignated as Subparagraph (g) to Paragraph 7.2 of the
Agreement.
2.10 Subparagraph 7.2(a) of the Agreement is amended
and restated in full as follows:
"(a) Within ninety (90) days after the
end of each fiscal year, each of Holdings' and Borrower's
consolidated financial statements, consolidated profit and
loss statement, consolidated statements of cash flows and
reconciliation of capital accounts of Holdings and Borrower
for such fiscal year, all in reasonable detail and stating in
comparative form the figures as at the close and for the
previous fiscal year, audited by and with the unqualified
opinion of Ernst & Young or another certified public
accountant selected by Holdings and acceptable to Bank,
together with a Compliance Certificate."
2.11 Paragraph 7.5 of the Agreement is amended and
restated in full as follows:
"7.5 Tangible Net Worth. Maintain as of the
end of each fiscal quarter Tangible Net Worth of at least One
Hundred Forty-Five Million Dollars ($145,000,000) minus an
amount (not in excess of Twenty-Five Million Dollars
($25,000,000)) equal to the amount of any dividend paid by
Borrower as permitted under Subparagraph 7.12(e) of this
Agreement.
<PAGE> 4
2.12 Subparagraph 7.8(a) of the Agreement is
amended and restated in full as follows:
"(a) Repay all advances outstanding under
the Revolving Facility (other than advances under the
Inventory Sublimit) and not draw any new advances (other than
under the Inventory Sublimit in accordance with Subparagraph
(b) below) for a period of at least five (5) calendar days,
which days do not need to be consecutive, in each calendar
month other than March and September during the Availability
Period."
2.13 Subparagraph 7.9(f) of the Agreement is
amended by deleting the phrase "the real property constructed,
acquired or refinanced during such period" where it appears at the end
of such Subparagraph, and by substituting in its place the phrase
"real property of Borrower."
2.14 Paragraph 7.12 of the Agreement is amended
by (i) deleting the word "or" at the end of Subparagraph 7.12(c), (ii)
adding the word "or" to the end of Subparagraph 7.12(d), (iii)
deleting the phrase "(a), (b), (c) and (d)" where it appears in the
last paragraph of Paragraph 7.12 and substituting in its stead the
phrase "(a), (b), (c), (d) and (e)", and (iv) adding the following as
Subparagraph 7.12(e):
"(e) a single dividend to Holdings of up
to Twenty-Five Million Dollars ($25,000,000) for the purchase
by Holdings of a portion of its preferred stock held by Craig
Corporation if, and only if, (i) no Default or Event of
Default has occurred and is continuing, (ii) the holders of
the Notes have approved the payment of such dividend and have
waived the violation of any affected terms and conditions of
the Indenture as provided in Section 9.02 of the Indenture,
and (iii) Bank in its sole discretion has approved a plan by
Holdings for the purchase and redemption by Holdings of all of
the remaining stock of Holdings held by Craig Corporation."
2.15 Paragraph 6 of Exhibit A to the Agreement is
amended by adding the following to the end of such Paragraph:
"The calculations set forth in Exhibit "B" to
this Certificate shall include, without limitation, the
calculation of Fixed Charge Coverage Ratio for the four fiscal
quarters of Borrower immediately prior to the current fiscal
quarter of Borrower."
<PAGE> 5
3. Effect of Amendment. Except as specifically amended
above, the Agreement shall remain in full force and effect and is hereby
ratified and confirmed.
IN WITNESS WHEREOF, this Amendment has been executed by the
parties hereto as of the date first above written.
STATER BROS. MARKET BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
<TABLE>
<S> <C>
By:__________________________ By:
-----------------------------------------
Jack H. Brown, Chairman, W. J. Nietschmann, Vice President and
President & CEO Commercial Banking Manager
By: -------------------------- By: _________________________________________
Bruce D. Varner, Secretary Curt L. McCombs, Vice President
</TABLE>
<PAGE> 1
Exhibit 11
STATER BROS. HOLDINGS INC.
Calculation of Earnings Per Common Share
(in thousands, except number of shares and per share amounts)
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------
1994 1995 1996(1)
-------- --------- --------
<S> <C> <C> <C>
Income before cumulative
effect of a change in
accounting for income taxes
and extraordinary loss $8,789 $6,727 $16,011
Less preferred dividends (327) - 4,111
------ ------ -------
Income available to common
shareholders before cumulative
effect of a change in
accounting for income taxes
and extraordinary loss 8,462 6,727 11,900
Cumulative effect of a change
in accounting for income taxes 372 - -
Extraordinary (loss) (8,036) - -
------ ------ -------
Net income available
to common shareholders $ 798 $ 6,727 $ 11,900
======= ======== ========
Earnings per common share:
Before cumulative effect of a
change in accounting for income
taxes and extraordinary charge $ 84.62 $67.27 $165.28
Cumulative effect of a change
in accounting for income taxes 3.72 - -
Extraordinary (loss) (80.36) - -
------- ------ -------
Earnings per common share $ 7.98 $67.27 $165.28
======= ====== =======
Average common shares outstanding 100,000 100,000 72,000
======= ======= ======
Common shares outstanding
at end of fiscal year 100,000 100,000 50,000
======= ======= ======
</TABLE>
(1) 53-Week Fiscal Year
<PAGE> 1
Exhibit 12
STATER BROS. HOLDINGS INC.
Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------------------------------------------------
Sept. 27, Sept. 26, Sept. 25, Sept. 24, Sept. 29,(1)
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes . . . . $13,363 $10,118 $14,645 $10,945 $27,131
Share of undistributed (income)
loss of less-than-50%-owned
affiliates . . . . . . . . . . . . (297) (107) 592 980 1,624
Amortization of capitalized
interest . . . . . . . . . . . . . 160 169 180 192 190
Interest . . . . . . . . . . . . . 10,194 10,592 15,217 18,946 19,171
Less interest capitalized
during the period . . . . . . . . (393) (417) (437) (50) (116)
Net amortization of debt
discount and premium
and issuance expense . . . . . . 100 117 721 1,180 1,203
Interest portion of rental expense 14,140 14,380 13,985 13,588 13,918
-------- -------- -------- -------- ------
Earnings as adjusted . . . . . . . $37,267 $34,852 $44,903 $ 45,781 $63,121
======= ======= ======= ======== =======
Fixed Charges:
Interest . . . . . . . . . . . . . $10,194 $10,592 $15,217 $18,946 $19,171
Net amortization of debt
discount and premium
and issuance expense . . . . . . 100 117 721 1,180 1,203
Interest portion of rental
expense . . . . . . . . . . . . . 14,140 14,380 13,985 13,588 13,918
Preferred stock dividends . . . . . 954 574 545 - 6,967
-------- ---------- ---------- ------- -------
Fixed Charges . . . . . . . . . . . $25,388 $25,663 $30,468 $33,714 $41,259
======= ======= ======= ======= =======
Ratio of Earnings to
Fixed Charges . . . . . . . . . . 1.47 1.36 1.47 1.36 1.53
==== ==== ==== ==== ====
(1) 53-Week Fiscal Year
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-29-1996
<PERIOD-START> SEP-25-1995
<PERIOD-END> SEP-29-1996
<CASH> 45,279
<SECURITIES> 0
<RECEIVABLES> 19,009
<ALLOWANCES> 0
<INVENTORY> 117,372
<CURRENT-ASSETS> 191,514
<PP&E> 201,482
<DEPRECIATION> 87,267
<TOTAL-ASSETS> 338,294
<CURRENT-LIABILITIES> 128,041
<BONDS> 184,775
69,365
0
<COMMON> 0
<OTHER-SE> (43,888)
<TOTAL-LIABILITY-AND-EQUITY> 338,294
<SALES> 1,705,332
<TOTAL-REVENUES> 1,705,332
<CGS> 1,315,726
<TOTAL-COSTS> 1,315,726
<OTHER-EXPENSES> 342,178
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,258
<INCOME-PRETAX> 27,131
<INCOME-TAX> 11,120
<INCOME-CONTINUING> 16,011
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,011
<EPS-PRIMARY> 165.28
<EPS-DILUTED> 165.28
</TABLE>